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Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Kerri Joseph, Senior Vice President, Investor Relations and Treasury. Mr. Joseph, please begin your conference. Kerri Joseph: Thank you, operator. Good morning, everyone. Thank you for joining our third quarter 2025 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; Ron Bruehlman, Executive Vice President and Chief Financial Officer; Eric Sherbet, Executive Vice President and General Counsel; Mike Fedock, Senior Vice President, Financial Planning and Analysis; and Gustavo Perrone, Senior Director, Investor Relations. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the Events and Presentations section of our IQVIA Investor Relations website at ir.iqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I would now like to turn the call over to our Chairman and CEO, Ari Bousbib. Ari Bousbib: Thank you, Kerri, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. We delivered another strong quarter. Revenue and profit were towards the high end of our guidance, reflecting solid operational performance. Free cash flow was particularly impressive this quarter. It was actually the highest quarterly free cash flow ever, even when you consider the large advances we got during the COVID era for vaccine trials. This strong free cash flow, of course, reflects a good and disciplined working capital management by the team, but also an improved overall industry backdrop. On the clinical side, net bookings in the quarter totaled exactly $2.6 billion, which resulted in a net book-to-bill ratio of 1.15x, also reflecting the improving trends in customer demand that we started seeing in the second quarter as well as, of course, solid execution from our sales teams. In fact, our third quarter net bookings were 5% higher sequentially 13% higher than a year ago and 21% higher than the trough that we experienced in Q1 this year. Key demand metrics were also strong in the quarter. The EBP funding momentum is building this year with each quarter delivering steady sequential growth, reaching $18 billion in Q3 according to BioWorld. Our qualified pipeline was up 6% year-over-year, driven by large pharma and EBP segments. You will recall that in the second quarter, we had high single-digit sequential RFP flow growth and low teens growth year-over-year. This quarter, we saw again high single-digit RFP flow growth sequentially and 20% growth year-over-year with growth across all segments. Importantly, client decision-making time lines have been improving sequentially. Finally, our backlog reached a new record of $32.4 billion at the end of the quarter, showing growth of 4.1% compared to the prior year. On the commercial side, TAS continued to perform well in the third quarter and delivered strong results despite tougher year-over-year comparisons. In fact, if you look historically at sequential revenue growth, Q3 is generally flat to down versus Q2, and we were slightly up this quarter. This was driven by ongoing momentum from drug launches and the strength of our broader commercial portfolio. I do want to mention the good growth we had this quarter in CSMS, about 1/3 of which was from an acquisition. We decided to increase our capabilities in this segment, as we are seeing a developing trend of large pharma clients increasingly looking to outsource commercial operations for established brands in specific markets. These tend to be large multiyear engagements, typically spanning across therapies and geographies, and IQVIA is uniquely positioned to capitalize on this trend by combining our information and analytics and domain knowledge with a local sales force footprint. Let me turn to the results of the quarter. Again, strong revenue and profit results. Revenue for the third quarter came in at the high end of our guidance range, representing year-over-year growth of 5.2% on a reported basis and just under 4% at constant currency. Third quarter adjusted EBITDA was up 1.1%. Third quarter adjusted diluted EPS of $3 increased 5.6% year-over-year. Let me just now, as I usually do, share a few highlights of business activity. Let me start with TAS. New drug launches continue to be a key area of strength for IQVIA. A few examples: a biotech client awarded us a multiyear integrated partnership to support faster product launches. This win includes a full suite of information assets and analytics capabilities. A top 10 pharma client awarded IQVIA a program to support the launch of a novel oncology therapy. Top 20 pharma client awarded IQVIA a contract to support the launch of a dual indication metabolic therapy utilizing AI capabilities to integrate advanced patient insights into product utilization and patient response. A top 10 pharma client selected IQVIA to provide launch support for a new autoimmune disorder therapy. The engagement includes advanced AI-enabled patient level solutions that enable performance tracking and analytics near real time and integrate specialty pharmacy data and payer insights. A good example of the commercial outsourcing trend I mentioned earlier was a very large award from a top 5 pharma clients to manage end-to-end commercialization and promotion of an established brand portfolio in a very large overseas market. We're progressing as planned to deploy highly specialized industry AI agents. So far, we have approximately 90 agents in development covering 25 use cases across commercial, real world and R&DS. We, in fact, are seeing growing demand to help our clients accelerate AI adoption. We are increasingly helping our clients build data infrastructures that are robust and AI-ready by leveraging IQVIA's health care-grade AI ecosystem, combining advanced information management, integrated platforms, security, safety and privacy, along with domain expertise. Let me share a few examples of key wins in the quarter. A top 20 pharma client selected IQVIA to deliver a next-generation information management solution that streamlines hundreds of sales data feeds into an AI-enabled centralized simplified global warehouse. Another top 10 pharma client awarded IQVIA a contract to deploy a next-generation AI-enabled SaaS platform to optimize global compliance reporting. A biotech client chose IQVIA to deploy a new global master data management program to enhance AI-enabled omnichannel marketing and analytics operations. Our real-world business continues to perform well. Here are some examples. Top 10 pharma client selected IQVIA to lead a post-market commitment study evaluating treatment outcomes in African-American patients with lung cancer. A biotech client selected IQVIA to lead a prospective real-world study supporting a regulatory commitment to a rare oncology disease. Biotech client selected IQVIA to deliver a retrospective real-world study supporting post-marketing commitments for their newly approved drugs to fulfill regulatory requirements. Turning to R&D Solutions. The positive momentum that we saw in Q2 continued to build through Q3. A few standout wins with our biotech customers first. In oncology, a first-time sponsor selected IQVIA to lead the Phase I trial for a novel leukemia treatment. Another biotech client selected IQVIA to lead a complex Phase I and Phase II trial in hematologic-oncology targeting multiple cohorts across 2 indications. We were also selected as the exclusive CRO partner for a biotech's entire cardiovascular program. And of course, this recognizes our leadership in cell and gene therapy and cardiovascular research as well as our ability to execute globally. Large pharma was also strong in the quarter. We were, for example, selected to lead a Phase II study in stroke therapy demonstrating our deep neuroscience expertise and global trial capabilities. Another top 10 large pharma client selected IQVIA to manage a global Phase III MASH program, leveraging AI-enabled pathology tools and a robust site network to accelerate execution. We were also selected to lead a Phase III ovarian cancer study, highlighting our deep therapeutic expertise and the strength of the integrated delivery model we built in partnership with the clients. Now before I turn it to Ron for details on our financial performance in the quarter, I want to say a word about the CFO transition we've announced some time ago. As you know, Mike Fedock will step into the CFO role on February 28, 2026, succeeding Ron Bruehlman, who will retire after a remarkable tenure. Ron -- and that's the good news. Ron will stay on as a senior adviser to continue to help us on specific projects and to help ensure a smooth transition. Ron has been a highly valued leader of this company for many years. In fact, Ron and I have been working together for over a quarter century. Ron has been instrumental in shaping IQVIA's financial strategy, driving its transformation into a leading global organization. He was here for managing the IMS Health IPO in 2014, through the Quintiles merger in 2016. And of course, he returned in 2020 to help us navigate the pandemic. His steady leadership and strategic long-term vision have been essential in building a high-performance global finance organization and in helping IQVIA remain resilient during unprecedented times over the past few years. Mike brings deep industry experience, and he has held key financial leadership roles across IQVIA, including as CFO of our R&D Solutions business, and prior to that as CFO of our IQVIA Laboratory business. He's worked closely with me and the senior team for years now and is very well positioned to lead our finance function into IQVIA's next phase of growth. Let me now turn to Ron for more details on our financial performance. Ronald Bruehlman: Thanks, Ari, and good morning to everyone. Let's start by reviewing revenue. Our third quarter revenue of $4.1 billion grew 5.2% on a reported basis and 3.9% at constant currency. Now excluding COVID-related work from this year and last, revenue grew 4.5% at constant currency, and this included about 1.5 points of contribution from acquisitions. Technology & Analytics Solutions revenue for the third quarter was $1.631 billion. That was up 5% reported and 3.3% at constant currency. R&D Solutions third quarter revenue was $2.26 billion, growing 4.5% reported and 3.4% at constant currency. Now excluding the step-down in COVID-related revenues, R&DS revenue grew 4.5% at constant currency. And lastly, our Contract Sales & Medical Solutions business, or CSMS, grew revenue of $209 million -- had revenue of $209 million, and that was up 16.1% reported and 13.9% at constant currency. Year-to-date revenue for the company was $11.946 billion. That's up 4.4% reported and 3.7% at constant currency. And excluding all COVID-related work, our year-to-date growth was approximately 4.5% at constant currency. Tech & Analytics Solutions revenue was $4.805 billion year-to-date. That's up 6.7% reported and 5.8% at constant currency. R&D Solutions year-to-date revenue of $6.563 billion was up 2.5% at actual FX rates and 1.9% at constant currency. Excluding COVID-related work from both periods, revenue grew approximately 3.5% at constant currency. And lastly, CSMS year-to-date revenue of $578 million was up 6.8% reported and 5.9% at constant currency. Let's move down the P&L now. Adjusted EBITDA for the quarter was $949 million, representing growth of 1.1%, while year-to-date adjusted EBITDA was $2.742 billion. That's up an even 2% year-over-year. Our third quarter GAAP net income was $331 million and GAAP diluted earnings per share was $1.93. Year-to-date, GAAP net income was $846 million or $4.86 of diluted earnings per share. Adjusted net income was $515 million for the third quarter and adjusted diluted earnings per share was even $3. Year-to-date adjusted net income was $1.48 billion or $8.50 per share. Now as already noted, we had strong net new bookings this quarter, confirming the improved demand environment we started to see in the second quarter. The R&DS backlog at September 30 was $32.4 billion, up 4.1% year-over-year. And next 12-month revenue from backlog was $8.1 billion, that up 4.0% year-over-year. Reviewing the balance sheet. As of September 30, cash and cash equivalents totaled $1.814 billion, and gross debt was $14.957 billion. That resulted in net debt of $13.143 billion. Our net leverage ratio ended the quarter at 3.52x trailing 12-month adjusted EBITDA. And third quarter cash flow from operations was $908 million and capital expenditures were $136 million, which resulted in record free cash flow for the quarter of $772 million. Now I'll turn it over to Mike Fedock, who will share details on our guidance. Mike? Michael Fedock: Thanks, Ron, and good morning, everyone. Let's start with our full year guidance. We are confirming our full year 2025 guidance and are narrowing the ranges for revenue, adjusted EBITDA and adjusted diluted earnings per share and are maintaining the midpoint of our prior guide. We expect revenue to be between $16.150 billion and $16.250 billion, representing year-over-year growth of 4.8% to 5.5% or 5.2% at the midpoint. This revenue guidance includes approximately $100 million of COVID-related revenue step down entirely in R&DS, approximately 100 basis points of tailwind from foreign exchange and approximately 150 basis points of contribution from acquisitions. These assumptions are unchanged from the prior guide. We expect adjusted EBITDA to be between $3.775 billion and $3.8 billion, growing 2.5% to 3.1% year-over-year or 2.8% at the midpoint. We expect adjusted diluted EPS to be between $11.85 and $11.95, up 6.5% to 7.4% versus prior year or about 7% at the midpoint. Now turning to the fourth quarter. We're expecting revenue to be between $4.204 billion and $4.304 billion, which represents year-over-year growth of 6.2% to 8.7%. Adjusted EBITDA is expected to be between $1.033 billion and $1.058 billion, representing growth of 3.7% to 6.2% versus prior year. And adjusted diluted EPS is expected to be between $3.35 and $3.45, which represents year-over-year growth of 7.4% to 10.6%. And this guidance assumes that foreign currency rates as of October 27 continue for the balance of the year. So to summarize, in the third quarter, we delivered strong top and bottom line results as well as record high free cash flow. R&DS net bookings were $2.6 billion, growing 13% year-over-year and resulting in a net book-to-bill ratio of 1.15x. The forward-looking demand metrics in the clinical business continue to trend in the right direction with 20% RFP flow growth year-over-year and sequential improvement in client decision-making time lines. TAS performed well and delivered solid results, driven by ongoing momentum from drug launches and the strength of our broader commercial portfolio, and we reaffirmed our full year 2025 guidance. With that, let me hand it back to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from the line of David Windley from Jefferies. David Windley: Ari, I wanted to ask you about what I think you call your see more, win more strategy and how that has played out through the middle of the year or through this year in terms of contributing to the RFP flows improvement that you're highlighting as well as your win rate and how we should think about an amount, if any, price competitiveness you're applying in that strategy and how that plays out through the P&L as that business converts to revenue? Ari Bousbib: Okay. Well, usually, we keep the best for the last, but you started with a big strategic question. So let's start with that. Okay. Well, look, the strength in bookings momentum and RFP flow, I think we have to say, and we could see it in the industry in general, I think reflects a reduction in the level of uncertainty in the market environment and the macro political environment. I think there have been a few developments that have sort of helped tilt decision-making at large pharma on certain programs favorably. And the climate overall has improved. That's undeniable in our sector. So that certainly is a big driver of our growth. The specifics of our see more, win more strategy, which we started earlier this year, which, as you know, now has a lot of imitators, has borne fruit as well in the sense that we've been looking at markets that we previously hadn't been touching and had left some more marginal players essentially in a quasi-monopoly situation in those segments, and we've decided to go after that. The pricing conversation is a little bit overdone in my opinion. In a climate where market dynamics were unfavorable with a lot of uncertainty and less deals to be had, there was more competition on pricing and all we did in the first part of the year was to align to those pricing discounts that were being offered as opposed to walk away in order to continue to build our book of business. We don't see that trend continuing. It hasn't been an issue at all. Certainly this past quarter, the opposite. We've walked away from deals. And we think that the sector in general is a lot healthier in terms of market dynamics. The level of uncertainty has gone down and pricing has returned to normal levels. You had a question, a follow-up on P&L implications. Look, we have a $32-plus billion backlog and only a tiny portion of that was subject to a few discounts that we did earlier in the year. The revenue associated with those things are going to bleed over our P&L over the next 5 years, and we do not expect that to have any impact whatsoever on our P&L going forward. Operator: Your next question comes from the line of Justin Bowers from Deutsche Bank. Justin Bowers: So Ari, it sounds like the business environment is improving, funding is up, consumer confidence is improving. And both of the segments, TAS and R&DS are strengthening, at least on a 2-year stack basis. Is this a momentum that we should expect to continue over the next few quarters and into 2026? And maybe if you could just give us a glimpse of how you're thinking about those two? Ari Bousbib: Yes. Well, look, I don't have a crystal ball here, and I'm not going to give you 2026 -- this was a clever way of asking me about 2026 guidance. We're not going to do that here. As you know, we usually provide guidance for the year concurrent with the release of our fourth quarter and full year earnings early in the year. So end of January or early February, we'll provide that. We are in the midst of our planning process and it's still early, we're still in October. But look, what I can tell you is, we are going to deliver this year over 5% in top line revenue growth, which, frankly, given what we've been through, and the environment we've been in, in the past 1.5 years, 2 years, I think is a very, very strong performance. And you could see that compared to our larger -- certainly the larger CRO peers, we are doing very, very well. So I cannot tell you yet what '26 will be in the next few quarters. But I mean, look, I would be surprised if revenue growth in '26 is not at least the same or better than the growth that we are seeing this year. So I say that with a certain amount of confidence. Operator: Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Elizabeth Anderson: Congrats, Ron, on your retirement. I was wondering if you could talk a little bit, Ari, about some of the differences between what you're seeing on the pharma side versus the biotech side. I think you covered the biotech side nicely in the see more, win more answer, but just sort of wanted to peel back the onion a little bit on the pharma side as well. Ari Bousbib: You mean the large pharma side? Elizabeth Anderson: Yes. Ari Bousbib: Look, large pharma went through a lot of transformation internally in terms of their investment programs. Going back to the IRA, there was this whole phase of reprioritization of programs and reviews of their pipelines, which led to an elevated level of cancellations due to this reprioritization activity. That lasted for 1 year, 1.5 years, beginning mid of '23 and certainly continuing through '24. We see that activity as having essentially been completed. And we haven't seen any further cancellations as a result of that type of activity. So we think that the pipelines are now fully sanitized. Of course, there continue to be cancellations, but they are all like more business as usual due to futility or other reasons and nothing unusual. Large pharma, actually, the RFP flow for large pharma is very strong. I mentioned that our RFP flow growth year-over-year is 20%. And that applies to large pharma and to EBP equally. I mean, there's a strong, strong momentum. And again, that's helped by the more calming environment and perhaps more certainty around what's coming. And it's also helped by the fact that these reprioritizations have been largely completed. And the programs are now on the table are programs that our clients want to engage in and want to go forward with. Our cancellations, I always say, in recent years were about $0.5 billion a quarter, plus or minus a couple of hundred million dollars. So they could range between $300 million and $700 million in a given quarter. So a couple of billion dollars plus year in, year out. In '24, we had more than 50% higher cancellation than that, right, over $3 billion in '24, because of these reprioritizations from large pharma. That essentially is behind us. And year-to-date, our cancellations follow the regular pattern. I think somewhere between $500 million, around on average about $550 million per quarter I saw the numbers yesterday. I think nothing much to talk about. This quarter, I think we were a little bit towards the higher end of our range. But again, not because of reprioritization, it's simply normal course of business. Our gross bookings were very strong, very, very strong this year. And you could see that also in our $2.6 billion of net bookings, which were up 13% year-over-year, up sequentially mid-single digits. And the trough we experienced Q1 probably was the trough. We don't see that in the near term. So again, large pharma dynamics returning to normal business conditions, trending towards normal business conditions and biotech funding improving, which as you know, is a driver of EBP growth. And that, again, is reflected in our bookings and in our RFP flow as well. Operator: Your next question comes from the line of Michael Cherny from Leerink Partners. Michael Cherny: Maybe if I can ask a little bit about TAS. Nice growth against obviously a tough comp. As you think about the pathway forward, what do you see as the contributions you're getting from some of your inorganic advancements? And where do you see the best opportunities to continue to expand that business above and beyond your own R&D, talk AI, talk anything along that vein, that would be great. Ari Bousbib: Thank you, Michael. Well, you spoke about inorganic. I think we said 1.5 points of contribution from acquisitions to the company as a whole. And as you know, as always has been the case, the bulk of that is in TAS, although I think in this past quarter, we did a large acquisition that was in R&DS and SMO. I think that we spent $485 million that we spent in total. And most of that is one acquisition called NEXT Oncology, which is an SMO specialty in oncology, very attractive business. We acquired this end of Q3. So not much contribution in Q3. And the inorganic contribution to R&DS will be a few million dollars, I guess, in the double digits, like $50 million or thereabouts of revenue to R&DS in Q4. With respect to TAS, we didn't do much in Q3. And so I guess the acquisition contribution for the year, well, we did a CSMS deal as well, right, which is small, obviously, but since CSMS is a small segment, it was a large piece of it. So not much in TAS in Q3. In general, we try to buy technology companies, companies that can add capabilities to our suite of products, analytics companies. There's a lot of innovation, as you know, in the AI space. Michael Fedock: Medical affairs... Ari Bousbib: Yes. Medical affairs, real world. Real world is a very strong -- real world evidence was really very, very strong in the quarter, and we expect that to continue into the future. So yes, I mean, for the year, again, 1.5 points, I would say 50%, 60% of that will be TAS and the rest -- for the year, right, 2025, and then the rest R&DS and then a little bit CSMS. Operator: Your next question comes from the line of Shlomo Rosenbaum, Stifel. Shlomo Rosenbaum: Ari, before I ask you a question, I just want to also commend Ron. So Ron, I've seen you retire before, and I'm not fully convinced you're gone right now. Ari Bousbib: Right. It's the wrong word to describe Ron, not retiring. Shlomo Rosenbaum: Yes, you've dragged him out of retirement in the past, Ari. So I don't know. Ari, I want to ask you to talk a little bit about the subcomponents in TAS and how they're growing in terms of real-world evidence and consulting and analytics. And just some of the trends that you're seeing there. I know consulting often kind of leads the trend in terms of you see that picking up, that means that the environment is getting better. And maybe you could just talk a little bit about each of the components and what you're seeing and maybe what that says about the market. Ari Bousbib: Yes. So look, the growth rate in Q3, it's hard to derive big trends because as you know, Q3 in general is the weakest quarter in the year. But specifically this year, we had a tough compare with last year. What was the growth of TAS? Q3 last year was like 8.6%, I want to say 8.6% growth last year. So we knew we had a tough compare this quarter. But as I mentioned in my introductory remarks, sequentially, we're slightly up. And usually, because Q3 is the toughest quarter given nothing happens for 6 weeks in Europe, it used to be 3 weeks, then it's 4, now it's 6, and it's going to 8 whereby nobody is working. So I think that the performance this quarter was very strong. It was led largely by the real-world evidence, which was very, very strong. And everything else was -- obviously, data is usually low single digits and everything else was between low to kind of mid-single-digit growth, again, against very tough compares. Same for consulting. Shlomo Rosenbaum: Are you seeing a pickup in that consulting? Ari Bousbib: You will recall that -- I know you're asking consulting because it's kind of the most discrete, and it's positive in terms of leading indicator when things were trending negative territory, consulting went down very rapidly in the '24 -- end of '23, the first part of '24 time frame, consulting was down, actually negative. One of the quarters, I think it was negative double digits. But it's positive this quarter. And again, everything outside real-world evidence in aggregate was mid-single digits or thereabouts. Operator: Your next question comes from the line of Eric Coldwell from Baird. Eric Coldwell: Ari, I'll stick on the TAS question here just to make sure we're all level set for the fourth quarter. Back in February, you guided to $6.3 billion to $6.5 billion. That was quite a while ago. A lot of things changed. But if I use that original range and I take out what you've done year-to-date, that would put the implied fourth quarter revenue guidance about $100 million to $300 million below the Street on TAS. That's a big range and obviously a lower number than where consensus lies today. So I'm just hoping you can give us a little specificity on what you're thinking for TAS in the fourth quarter, so we aren't ahead of our skates here. Ari Bousbib: Yes. I'm not sure, you're talking about our targets and then you talked about the Street. Eric Coldwell: You guided in February to $6.3 billion to $6.5 billion. And the year-to-date number through 3 quarters is $4.8 billion, a little over $4.8 billion. So that leaves less than $1.5 billion to less than $1.7 billion to get to the full year, if I've done the math right. Ari Bousbib: Yes. I was going to talk to the finance team here asking. I don't have the numbers in front of me. But what you were suggesting that TAS would be lower than our guidance, I don't see that. Eric Coldwell: Well, I'm not really suggesting anything. I'm hoping you can tell us... Ari Bousbib: Okay. We can take that on a... Eric Coldwell: Yes. I'm hoping you'll tell us that things have changed since the February numbers, but it is possible that maybe the Street is just a little high on the segment. I mean it looks like you'll cover it with R&DS and CSMS, but I just want to make sure we're... Ari Bousbib: Again, Eric, I think you -- we are delivering on guidance. Is that -- am I... Michael Fedock: Eric, we'll help you with some of the Q4 details. But on a full year basis, there's been no change all year with TAS, that the full year CFX growth rates were between sort of 5% and 6%. So there's no change there. So we can help you with the numbers. Ari Bousbib: We always said 5% to 6% growth year-over-year, correct? Michael Fedock: CFX. Ari Bousbib: CFX, correct. Eric Coldwell: I think you said 5% to 7% constant currency and I think I believe it was 5% to 7% on February 6 was the range? Michael Fedock: We narrowed our guide in the last call there. So we're still sticking with the 5% to 6%. There's no change from the prior guide and no change where TAS is going to land in the full year. Ari Bousbib: Yes. Well, there's no change, Eric. Michael Fedock: Yes, we'll help you with that with the Q4, but there's been no change. Eric Coldwell: Just want to make sure we're not ahead of our skates. I appreciate that very much. Ari Bousbib: And anything else you had on this clarification? Eric Coldwell: I had 42 questions, but you told us to stick to one. Let me... Ari Bousbib: I am going to give you a special discount, because that wasn't really a question. Eric Coldwell: Well, look, I mean... Ari Bousbib: That was like a commentary. You were trying to... Eric Coldwell: I appreciate it. So I'll sneak 2 in. I'll take advantage and give an inch, I'll take a mile. Two things just quickly. One, do get some ongoing questions on those couple of mega trials that you mentioned earlier this year. I'm just curious if you can tell us what the status is. I think one was definitely ramping back up here in the back half, and I believe the other was still pushed out until next year if happening at all. So maybe just an update on the mega trials. And then secondarily, Ari, in your prepared commentary, you highlighted some interesting wins. And you mentioned Phase 1 a couple of times. And my historic interpretation of past conversations was that you weren't really a big Phase 1 shot, maybe you partnered with some others. But I'm curious on what your involvement is these days in actually managing or even having Phase I CPU units. Maybe give us a little more color on what you're doing there. Ari Bousbib: Yes. It's a very good observation, Eric. We are seeing a lot of demand for Phase I work. And we are the network partners, we don't have any significant presence in that segment, but we are expanding, and this is why I chose to highlight a couple of examples. It's also, by the way, part of our see more, win more strategy. And it happens to me that there is more demand. Things are getting sort of restarted again and the pipelines are strong. And so we are seeing more demand, and we are ourselves being more present in the segment. Ronald Bruehlman: Yes. And Phase I in oncology is a little bit different, because you're not dealing with healthy volunteers. So it tends to feed your later business than other Phase I trials. So there is some distinction there. And that's what NEXT Oncology was Phase I oncology. Ari Bousbib: Yes. And then the 2 trials. Ronald Bruehlman: Yes, the 2 trials, no change there. We don't have anything factored into our fourth quarter guidance for revenue burn from either of them. So I suppose that's a slight change from what we said. Ari Bousbib: It's basically all pushed out of the year. And it's not contemplated in the guidance. Yes. Bear in mind that we mentioned this, what is it, like a year ago at this time because it caused us at the time to change our guidance for R&DS. These were fast burning and had already gotten started and they were interrupted. And so that caused us to change our guide for R&DS in the fourth quarter -- for the fourth quarter of last year. And so we had to mention it. We only mentioned specific trials to the extent we can, and we try to be very careful because we are mindful of confidentiality for our clients and so on. So we cannot say very much. But we do mention it when there is a significant event attached to one trial, in this case, it was two, and that caused us to change anything in our numbers. But bear in mind, at any point in time, we're working on a couple of thousand trials. And we keep building backlog, as you saw. And thankfully, we have had very positive momentum on our bookings, and it's continuing. So we feel good about that and it continues to stagger on our book of business. So yes, -- which again enabled us to continue to deliver and do even better on R&DS even without those trials resuming this year. Thank you, Eric. Michael Fedock: Next question, operator. This will be our last question. Operator: Your last question comes from the line of Jeff Garro from Stephens. Jeffrey Garro: I want to ask more about AI and maybe I'll try and make it a 2-parter. First part being if you have any insights how AI is changing your customers' business models and specifically their appetite for outsourcing? And then the second part would be how is IQVIA using AI internally to deliver results for clients that may be a little bit more efficiently and whether you have any visibility into potential gross margin improvements from those internal use cases? Ari Bousbib: Yes. So thank you, Jeff. We've spoken about this in the past. And so far, we have about 90 AI agents in developments that cover 25 use cases, and we continue to progress that. By early '27, we plan to develop 500 highly specialized agents. And what these do is they essentially eliminate a lot of physical labor from the tasks that we perform for our clients. So internally, and to take the second part of your question first, certainly, that will help improve our margins longer term. Now it takes time to deploy, obviously, and it takes time to translate that into margin improvements. We've had great examples on the commercial side. We use, for example, AI tools to compare patient cohorts to each other and highlight differences in natural language output, which leads to improvements in cycle times from several weeks to a couple of weeks. We really have a lot of examples and it takes a long time to recite those. But we see significant value in continuing to do more with less through deploying agents within our internal processes. For our clients, I gave a number of examples in my introductory remarks. Our clients are very interested, of course, in using AI. So early, early on, before we get involved in discovery, there's a lot of focus from our clients in the discovery space to try to use AI to sort out molecules and try to identify "the most likely to succeed" trials to tackle a specific disease. We participate a little bit with some models and some tools that we have. But later on, look, the issue on the clinical side is that it's highly regulated, and you get to go through standard processes that are defined by regulations and you have to use the intermediary spaces between those regulatory interactions to utilize and deploy AI. At the sites, it's very helpful. And our clients are using, of course, AI in all the technology tools that some of which are our tools that they use commercially. They use AI, I gave a few examples, to manage their promotion campaigns, marketing campaigns. They use AI to get patient insights in the real world. Real world, I mean is a big area for us, and one of the reasons we experienced such great growth is we've got very advanced capabilities given our vast information assets in real world patient data. Using AI tools and try to evaluate how the drug behaves in the real world using AI becomes a great, great opportunity. So these are the areas. Now with respect to the margin, as you know, we've had a lot of -- we have some margin headwinds certainly this year because of more pass-throughs largely because of the FX tailwind, all of which comes without profits and a little bit of the mix. For example, in Q3, CSMS was stronger and CSMS is lower margin. So when you have market headwinds like that, certainly, we're counting on our usual cost reduction programs, offshoring and so on. But longer term, certainly AI enablement will help mitigate those headwinds and help us long term improve margins. Thank you. And I think the team will be available for follow-up questions as always. Thank you. Thank you for taking the time today. Operator: Mr. Joseph, I turn the call over to you. Kerri Joseph: Thank you. Thanks for taking the time to join us today, and we look forward to speaking with you again on the 2025 fourth quarter and full year earnings call. The team will be available the rest of the day to take any follow-up questions you might have. Thank you. Operator: This concludes today's conference call. You may now disconnect.
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 welcome to the Q3 2025 Materialise Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Harriet Fried with Alliance Advisors. Harriet Fried: Thank you, everyone, for joining us today for Materialise's quarterly conference call. With us on the call are Brigitte de Vet, Chief Executive Officer; and Koen Berges, Chief Financial Officer. Today's call and webcast are being accompanied by a slide presentation that reviews Materialise's strategic, financial and operational performance for the third quarter of 2025. To access the slides, if you have not done so already, please go to the Investor Relations section of the company's website at www.materialise.com. The earnings release that was issued earlier today can also be found on that page. Before we begin, I'd like to remind you that management may make forward-looking statements regarding the company's plans, expectations and growth prospects, among other things. These forward-looking statements are subject to known and unknown uncertainties and risks that could cause actual results to differ materially from the expectations expressed, including competitive dynamics and industry change. Any forward-looking statements, including those related to the company's future results and activities, represent management's estimates as of today and should not be relied upon as representing their estimates as of any subsequent date. Management disclaims any duty to update or revise any forward-looking statements to reflect future events or changes in expectations. A more detailed description of the risks and uncertainties and other factors that may impact the company's future business or financial results can be found in the company's most recent annual report on Form 20-F filed with the SEC. Finally, management will discuss certain non-IFRS measures on today's call. A reconciliation table is contained in the earnings release and at the end of the slide presentation. With that introduction, I'd like to turn the call over to Brigitte de Vet. Go ahead, please, Brigitte. Brigitte de Vet-Veithen: Good morning and good afternoon and thank you all for joining us today. You can find the agenda for our call on Slide 3. First, I will summarize the business highlights for the third quarter of 2025. Then I will pass the floor to Koen, who will take you through the third quarter financials. Finally, I will come back and explain what we expect for the remaining months of 2025. When we've completed our prepared remarks, we'll be happy to respond to questions. Moving to Slide 4 for the highlights of the third quarter 2025. While our overall revenue remained under pressure, I am very pleased with the continued strong growth of our medical unit, where we achieved double-digit growth again on the back of an exceptionally strong third quarter last year. Today, I would like to highlight the progress that we are making in the cardiac segment, one of our newer markets. In 2025, we acquired FEops, a company specializing in AI-driven simulation technology for structural heart interventions. FEops' predictive simulation technology complemented our Mimics Planner, adding advanced simulations to its anatomical measurements. We have now taken 2 important steps in this market. First, we recently released the next version of FEops' heart guide for transcatheter aortic valve replacement, adding important features to the planner. In addition to giving physicians insights into the right size and position of the device in the aortic route, this release helps them to manage the lifetime of the patient. Specifically, this new release includes a predictive simulation of the potential ways to treat the patient should he or she come back for reintervention a couple of years down the line. Secondly, we generated additional clinical evidence to underline the benefits of our cardiac planners. As an example, in a prospective study with 126 patients, a leading cardiac center demonstrated time savings of up to 91% for patients undergoing transcatheter aortic valve replacement. This important time saving came with high accuracy combined -- compared to standard planning tools. Also, the fact that the cardiac planner is a cloud-based system that can be accessed from anywhere by the heart team, which typically consists of several specialties, facilitated the discussions in the preparation of the intervention. This evidence shows that our AI-enabled automatic case planning could play a role in generating efficiencies in this type of procedures, thus potentially enabling the treatment of more patients with a personalized approach in the future. The improved features of our planners and the additional evidence will strengthen our position in this market and provide a great foundation to treat more patients in the cardiac space. I would also like to highlight the progress we made in our existing markets. As an example, we released a new version of our Mimics Enlight CMF planner. You might remember that this software was one of the finalists for the TCT award in the healthcare category earlier this year. In this new version, customers can now benefit from a range of AI algorithms that enable them to plan cases faster and more efficiently. And this is particularly important, for example, for trauma cases. Trauma patients come to the hospital after accidents, sometimes with complicated fractures and multiple fragments of the jaw that the surgeon needs to puzzle together. The trauma planner of Mimics Enlight CMF now gives the surgeons the ability to efficiently plan the procedures and piece those fragments together. This planning also helps to gain time during the procedures because the surgeon knows how to treat the patient. In addition, the surgeon knows what type of device to use in the procedure. And in a world where more and more devices come in a sterile package, it saves a lot of cost if you only open what you need rather than trying multiple products and then having to resterilize and repackage or in some cases throw away what you don't need. So in summary, this new release of Mimics Enlight CMF enables us to target the trauma segment, which is a significant part of the market and first feedback from customers is encouraging. Turning now to our Materialise Software segment. We continue to make progress to establish CO-AM as the ecosystem for all AM operations. In the last 12 months, we launched our Magics SDKs and the next generation of our build processors. As a reminder, our Magics SDKs allow users to create custom preprint workflows by tapping into more than 800 algorithms built over 35 years. These SDKs enable customers to scale AM operations efficiently and print complex, high-performance geometries while avoiding field builds and improving part quality, all of this while protecting the intellectual property behind component designs. Similarly, the advanced algorithms of the next-generation build processors significantly improve build time and quality, thanks to, for example, its advanced strategies for multi-lasers. And they enable a variety of collaboration models, including the possibility for customers to build their own build processors, thanks to the availability of our SDKs. We are now going a step further by launching a low-code enabling technology on CO-AM, making these SDKs more accessible for customers without a deep engineering background. This facilitates new product introductions of our customers and enable easy workflow automation for large-scale applications. The new capabilities, therefore, have the potential to drive efficiencies and optimize the cost of additive parts. We are currently preparing for next month's Formnext, where you will hear more about this and our other capabilities on the CO-AM ecosystem. Finally, in our Materialise Manufacturing segment, we continue to execute on our strategy while facing continued headwinds in some market segments, including the automotive sector. Specifically, at ACTech, we continue to invest in the huge and heavy segment by adding machines able to produce giga castings and other large and complex parts, often at a significant weight. As a reminder, in the third quarter 2024, we celebrated the opening of our second ACTech plant and shipped first parts in the fourth quarter 2024. In segments beyond automotive, such as aquaculture, mining, maritime or energy, parts are typically not only larger and heavier, but also more complex, for example, to achieve better thermodynamic cycles in the large engines with maximum fuel efficiency. The combination of high-precision sand printing, casting and complex post-treatment that we can now offer at ACTech is ideal for these parts. Also, the machines installed in 2025 enable the automation required to produce these complex parts not only for prototypes, but also in small series. I would also like to highlight the progress we are making in the defense sector, where in light of the current geopolitical landscape and the breakdown of traditional global alliances, spending is increasing, in particular, in Europe in order to strengthen resilience and autonomy of the various regions. After the announcement of our broad engagement in this sector, we attended DSEI, one of the world's largest defense and security trade exhibitions and attended a series of other events, engaging with major primes and showcasing our capabilities. Additive manufacturing addresses the defense industry's challenges as additive manufacturing enables rapid, flexible and sustainable production of mission-critical components, reduces logistical constraints, fosters innovation and strengthens strategic autonomy in a complex and evolving security environment. The positive interactions with stakeholders in the industry confirmed that our additive production capabilities in Europe and our software capabilities globally are valuable assets to address the current challenges of the defense industry. I will now turn over to Koen, who will present the financial results. Koen Berges: Thank you, Brigitte. Good morning or good afternoon to all of you on this call. I'll begin with a brief overview of our key financial results, as shown on Slide 5. Our consolidated revenue grew by 2% compared to Q2 of this year, but ended with EUR 66.3 million, 3.5% lower than last year's strong third quarter. Our gross profit margin remained strong at 56.8% in the third quarter of this year, fully in line with the margin realized over the first 9 months of 2025. Adjusted EBIT for the third quarter of '25 amounted to EUR 2.9 million, representing an adjusted EBIT margin of 4.4% of revenue. Over the third quarter of this year, we generated a net profit of EUR 1.8 million. Driven by strong free cash flow in the third quarter of this year, we further increased our net cash position to EUR 67.7 million. In the following slides, I will elaborate further on these results. As a reminder, please note that unless stated otherwise, all comparisons are against our results for the third quarter of 2024. Turning now to Slide 6. You will see an overview of our consolidated revenue. In the third quarter of this year, Materialise Medical posted an all-time revenue record of EUR 33.3 million, growing by more than 10% compared to a particularly strong third quarter of last year. On the other hand, revenues from our Software and Manufacturing segments continue to be impacted by macroeconomic headwinds. As a result, revenue in both segments declined by 7% and 17%, respectively, leading to an overall decrease of 3.5% of our consolidated revenue compared to last year's period, while unfavorable ForEx effects, mainly due to a weaker U.S. dollar also impacted our top line this quarter. As you can see in the graph on the right side of the slide, Materialise Medical accounted for 50%, Materialise Software for 16% and Materialise Manufacturing for 34% of our total revenue over the third quarter of 2025. Our deferred revenue balance related to software maintenance and license fees coming from both our Medical and Software segments decreased in the third quarter of this year, which is fully in line with our seasonal pattern. Over the last 12 months, however, the balance increased by EUR 4.2 million, bringing the total amount carried on our balance sheet at the end of the third quarter of 2025 to EUR 45.3 million. On Slide 7, you will see our consolidated adjusted EBIT and EBITDA numbers for the third quarter of 2025. Consolidated adjusted EBIT totaled EUR 2.9 million compared to EUR 4.4 million for the same period of '24, representing an adjusted EBIT margin of 4.4%. Consolidated adjusted EBITDA for the third quarter amounted to EUR 8.4 million, decreasing from EUR 9.9 million in 2024, representing an adjusted EBITDA margin of 12.7%. Given current market volatility, we believe that it's important to also compare our operational performance on a quarter-over-quarter basis. In this context, both adjusted EBIT and EBITDA remained roughly stable compared to the second quarter of this year and are significantly up from the beginning of 2025 as a result of disciplined cost control and of targeted cost reduction measures, we have taken to safeguard operational profitability. Year-to-date, we generated now EUR 6.6 million of adjusted EBIT and EUR 22.9 million of adjusted EBITDA. Moving now to Slide 8. You will notice that the revenue in our Materialise Medical segment, as already mentioned, increased by 10% compared to the particularly strong third quarter of 2024. The growth was again generated by both medical software and by revenue from medical devices sales, which grew respectively, by 6% and 12%. Within our Medical Devices and Services activity, we saw continued growth in both our direct and our partner sales. In line with the top line growth, adjusted EBITDA grew further to EUR 10.2 million, resulting in an adjusted EBITDA margin of more than 30%. We further increased our R&D investments in Medical and will continue to do so in coming months in order to drive future growth. Year-to-date, our Medical segment realized revenue of EUR 97.2 million, up by 15% from last year, with an adjusted EBITDA of EUR 30 million, which represents a 31% adjusted EBITDA margin. Slide 9 summarizes the results of our Materialise Software segment. In the third quarter, software revenue decreased by 7% to EUR 10.3 million. This was partly due to unfavorable ForEx impacts, while macroeconomic and geopolitical uncertainty also continued to put pressure on our sales volumes, especially in the U.S. markets. During the third quarter, we continued our transition to cloud subscription-based business model. Over the quarter, around 83% of the software revenue was of a recurring nature versus 74% in the same quarter of last year, demonstrating the progress we keep making here. Despite the lower top line, effective cost management allowed us to keep the adjusted EBITDA margin stable at around 18% compared to the same period of last year, leading to an adjusted EBITDA of EUR 1.8 million. Year-to-date, our Software segment realized EUR 30 million of revenue and an adjusted EBITDA of EUR 3.8 million. Now let's turn to Slide 10 for an overview of the performance of our Materialise Manufacturing segment. In the third quarter of this year, the performance of manufacturing remained weak, with revenue declining by 17% compared to last year's third quarter and ended at EUR 22.7 million. Compared to Q2 of this year, however, revenue increased slightly. The macroeconomic headwinds we have been facing for some time continue to impact our operational results. Mainly as a result of the lower top line, the adjusted EBITDA of the Manufacturing segment ended negative this quarter at minus EUR 0.8 million, stable compared to this year's second quarter though. Year-to-date, our Manufacturing segment realized revenue of EUR 70.3 million with an adjusted EBITDA of minus EUR 2 million. Slide 11 provides the highlights of our consolidated income statement for the third quarter of this year. And over the period, our gross profit amounted to EUR 37.7 million, representing a stable gross profit margin of 56.8% compared to the previous quarters of this year, but slightly below the 57.2% realized in a strong Q3 of 2024. Our operating expenses in the quarter increased only by EUR 0.2 million or less than 1% in aggregate compared to the same period of last year, with R&D expenses increasing 4% year-over-year. During the quarter, we invested again over EUR 11 million in R&D, the majority of which was in our Medical segment. Sales and marketing remained flat year-over-year, while G&A expenses decreased by almost 3%, reflecting the impact of continued cost control. Net operating income in the quarter was EUR 0.9 million, remaining stable compared to prior year. As a result of all of these elements, the Group's operating result in the quarter was EUR 2.5 million. In Q3 2025, the net financial results amounted to a limited loss of EUR 0.1 million. Interest income on our cash reserves offset the interest expense on our financial debt and the negative impact from foreign exchange fluctuations. Last year's corresponding period, the net financial loss was minus EUR 1.1 million, mainly due to large unfavorable exchange rate effects at that time. Income tax expense in the quarter amounted to EUR 0.6 million compared to a tax expense of EUR 0.1 million in the corresponding period of last year. And as a result, we once again generated a positive net result in the third quarter of this year, amounting to EUR 1.8 million, representing EUR 0.03 per share. Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights. And also for the third quarter of 2025, we can report a strong balance sheet. Our cash reserve further increased to EUR 132 million at the end of the quarter. At the same time, our gross debt also increased to EUR 64 million. Both changes were impacted by an additional EUR 50 million drawing we made during Q3 on an existing bank credit facility in line with contractually agreed drawing periods. In the next 12 months, we will be drawing the remaining EUR 50 million of this facility. The net cash position at the end of the quarter, which is not impacted by these additional drawings, amounted to EUR 67.7 million, up by almost EUR 7 million compared to the beginning of this year, mainly driven by strong free cash flow. Trade receivables, inventory and trade payable positions on our balance sheet all decreased compared to the position at the end of last year. The total deferred income position decreased to EUR 58 million, out of which EUR 45 million was related to deferred revenue from software license and maintenance contracts, as mentioned earlier, reflecting the seasonal pattern of deferred revenue evolutions. As you can see from the graphs on the right side of the page, the operating cash flow in the third quarter amounted to EUR 10.4 million, significantly up from the EUR 6.9 million generated in the third quarter of 2024. Capital expenditures for the third quarter amounted to EUR 5.3 million, including EUR 3.1 million of non-recurring CapEx, mainly spent on remaining machinery for the new ACTech plant and on the installation of a solar panel park at HTU. Year-to-date, total CapEx amounts to EUR 11.8 million, out of which 60% or close to EUR 7 million can be considered to be of a non-recurring nature. Over the first 9 months of this year, the operating cash flow amounted to EUR 20 million, while the year-to-date free cash flow is positive at around EUR 11 million. And with that, I'd like to hand the call back to Brigitte. Brigitte de Vet-Veithen: Thank you, Koen. Let's now turn to Page 13. I'll conclude my remarks with a discussion of our full year 2025 guidance. As we approach the end [indiscernible] continue to impact the business environment in which we operate in our Manufacturing and Software segments. For fiscal year 2025, we therefore maintained our guidance as previously communicated with revenues in the range of EUR 265 million to EUR 280 million and adjusted EBIT in the range of EUR 6 million to EUR 10 million. We remain confident that our business is solid and resilient and that Materialise is strongly positioned to capture growth opportunities once market conditions improve. This concludes our prepared remarks. Operator, we're now ready to open the call for questions. Operator: [Operator Instructions] And our first question will come from the line of Troy Jensen with Cantor Fitzgerald. Troy Jensen: Congrats on the nice results. So, I'd just like to just unpack a little bit in Medical. Could you kind of give us an update on -- I guess I'm trying to figure out like relative exposure. I think of you guys as probably CMF and HIPS as the 2 biggest sections. I just would be curious if you could kind of rank order. And then this cardiac and some of these other things, how big and important can they be for next year here? Brigitte de Vet-Veithen: Yes. So I think in general, Troy, I mean, obviously, a very good question. I think what we've repeatedly communicated is that we have our existing markets and some new markets. So CMF, orthopedics and our research and engineering segments are the existing markets where we've already been active for quite a long time and that those markets are a little more mature than the others. In our new markets, we address the cardiac and the respiratory space in particular is new markets. So of course, the majority of our revenue comes from our existing markets. The new markets are still small, but we expect them to grow faster than the existing markets in the future. That's kind of how you need to think about that. Now within the existing markets, all 3 markets remain very important for us. Troy Jensen: Okay. All right. And how about just manufacturing here? I get a bunch of questions. I'll just rattle them off quick and see if you can hit them all. But you just hopes on a recovery, and I'm just kind of curious how big is aerospace and defense as a percentage of revenue? Brigitte de Vet-Veithen: So aerospace remain -- it has been a focus segment for us for quite a while. We see in the aerospace segment in general, we have seen continuous growth in that segment and we do believe that that's going to continue. Now the defense industry is a newer industry for us, at least with the broad engagement that we have communicated about earlier this year. So, the defense area at this point in time is not a significant market for us yet. At the same time, with -- as I mentioned earlier in my remarks, I think with the interactions we had so far, I see potential in that defense segment as our capabilities that we have built for aerospace can particularly be leveraged in the defense industry going forward. Troy Jensen: On the defense side, Brigitte, is it more on the metals front or is it polymers also? Brigitte de Vet-Veithen: It's actually a combination of polymer and metal. I'll give you an example on the aerospace segment, where our polymer offering is really important. There's 2 different applications on the polymer side that you can think about. One is interiors for the aerospace segment at large, in particular, for commercial aircraft as an example. The second is tooling where our polymer capabilities are helpful for aerospace companies, and in particular, the larger OEMs driving this. As an example, we were the first qualified supplier for Airbus in the polymer segment and that's a couple of years back. Troy Jensen: Okay. If I could sneak one more in. Can you just talk about just the manufacturing profitability? I mean, obviously, it's been a drag on you guys, unfortunately, here at these revenue levels. Any thoughts on either a recovery in kind of European industrial markets to drive better profitability or are there other things you can do to kind of cut costs to try to prevent that from diluting kind of the profitability level? Brigitte de Vet-Veithen: Yes. So I'll give you a double answer. So the first part of the answer is that, as Koen highlighted in his review of the financials, we have taken measures to significantly reduce our cost end of last year, earlier this year. And we do see the impact on our financials in manufacturing already. They might not be super visible on the EBIT and EBITDA lines given the weakness -- the continued weakness we see on the revenue line, but they have been making a difference, as Koen highlighted. So that's the first one. The second element to the answer I would give is there is 2 things really we need to see recovery on the revenue line. As you mentioned, the European environment is a really important one for us. So recovery in the European markets will certainly be a driver to bring our revenues to a more usual level. The second element that is important to keep an eye on is the automotive sector as such, because admittedly, in manufacturing at large, we are still exposed to the automotive industry and that is in Europe and in the U.S. And the recovery of the automotive industry will help us to recover to a more normal level on the revenue side as well. So it's really those 2 drivers that we need to keep an eye on. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Ms. Brigitte de Vet for any closing remarks. Brigitte de Vet-Veithen: Thanks again for joining us today. We obviously look forward to continuing our dialogue with you through investor conference or in one-on-one virtual meetings or calls. And we are also looking forward to meeting some of you in person at the upcoming Formnext event in November. In the meantime, please reach out if you have any questions. Thank you, and goodbye for now. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Hello, and thank you for standing by. Welcome to NXP's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead, sir. Jeff Palmer: Thank you, Towanda, and good morning, everyone. Welcome to our third quarter earnings call today. With me on the call today is Rafael Sotomayor, NXP's President and CEO; and Bill Betz, our CFO. Also on the call with us is Kurt Sievers, who will act as a special adviser to Rafael through the end of 2025. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for financial results for the fourth quarter of 2025. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure of forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2025 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP's website in the Investor Relations section. Now I'd like to turn the call over to Rafael. Rafael Sotomayor: Thank you, Jeff, and good morning. We appreciate you joining our call today. Our overall performance during the third quarter was solid. Our revenue exceeded guidance by $23 million. We experienced sequential growth driven by broad-based improvements across all regions and end markets. We maintained good profitability and controlled operating expenses, resulting in healthy fall-through. Turning to the specifics. NXP delivered third quarter revenue of $3.17 billion, a decline of 2% year-on-year and up 8% sequentially. Non-GAAP operating margin in the third quarter was about 34%, 170 basis points below the same period a year ago and 10 basis points above the midpoint of our guidance. The lower operating margin versus the same period last year was due to lower revenue and gross profit, partially helped by flat operating expenses. Taken together, we drove non-GAAP earnings per share of $3.11, $0.01 better than guidance. Distribution inventory was flat at 9 weeks, consistent with our guidance, while still below our long-term target of 11 weeks. From a direct sales perspective, we believe our shipments into the Tier 1 automotive supply chain has approached end demand. We estimate that aggregate inventory levels of NXP-specific products at our major Tier 1 partners are below NXP's manufacturing cycle time. We believe this reflects a continued cautious approach in the automotive supply chain due to the uncertain macro environment. Overall, during the quarter, we did not experience any material customer order pull-ins or pushouts. Now I will turn to our expectations for the fourth quarter. Our outlook reflects the continued strength of our company-specific growth drivers and signs of a steady cyclical recovery in our automotive and industrial markets. We do not yet anticipate direct customer inventory restocking as one might expect off the bottom of a cyclical trough. From a channel perspective, our guidance assumes distribution inventory may fluctuate between 9 and 10 weeks as we are selectively staging additional products in the channel to be competitive. We are guiding fourth quarter revenue to $3.3 billion, up 6% versus the fourth quarter of 2024 and up 4% sequentially. At the midpoint, we expect the following trends in our business during Q4. Automotive is expected to be up mid-single digits versus Q4 2024 and up in the low single-digit percent range versus Q3 2025. Industrial and IoT is expected to be up in the mid-20% range year-on-year and up 10% versus Q3 2025. Mobile is expected to be up in the mid-teens percent range year-on-year and up in the mid-single-digit range on a sequential basis. And finally, Communication Infrastructure and Other is expected to be down in the 20% range versus Q4 2024 and flat versus Q3 2025. In summary, NXP third quarter results and guidance for the fourth quarter reflect a growing confidence in the company-specific growth drivers and that our new up cycle is beginning to materialize. This is based on the several signals we track regularly. These include continually growing customer backlog placed with our distribution partners, improved order signals from our direct customers, increased short-cycle orders and a growing number of product shortages leading to customer escalations. At the same time, we do not yet see material customer restocking due to the uncertain macro environment. Now an update on our pending acquisitions of Kinara and Aviva Links. We have received all regulatory approvals. We have closed both Aviva Links and Kinara. We are extremely excited about the long-term benefits these acquisitions will bring to our customer engagements and market position. As we have previously shared, in the short term, these acquisitions will have an immaterial impact on the revenue and financial model of NXP. We do believe the revenue impact will be material in 2028 and beyond. The 3 recent acquisitions, TTTech Auto, Kinara and Aviva Links will enable NXP's vision to be the leader in intelligent edge systems in the automotive, industrial and IoT markets. As this is my first earnings call, I would like to assure you that the strategy we laid out during our November 2024 Investor Day stays firmly in place. This includes our product innovation focus in our financial and capital return model. For the last 6 months, I've traveled globally, engaging with our customers, suppliers and development teams. My key takeaway is that NXP's strategy is compelling. We are focused on the most important customers and thought leaders. Our highly differentiated product road maps position us well to achieve our long-term goals. I will continue to work closely with the cross-functional leaders throughout NXP to accelerate our innovation and time-to-market efforts. Overall, we remain focused on disciplined investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence. And now I would like to pass the call to Bill for a review of our financial performance. Bill Betz: Thank you, Rafael, and good morning to everyone on today's call. As Rafael has already covered the drivers of the revenue during Q3 and provide the revenue outlook for Q4, I would like to move to the financial highlights. Overall, Q3 financial performance was solid with revenue, gross profit and operating profit all above the midpoint of our guidance range, while operating expenses were a touch above the midpoint of our guidance due to slightly higher variable compensation. Taken together, we delivered non-GAAP earnings per share of $3.11 or $0.01 better than the midpoint of our guidance. Now moving to the details of Q3. Total revenue was $3.17 billion, down 2% year-on-year and $23 million above the midpoint of our guidance range. We generated $1.81 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 57%, down 120 basis points year-on-year and in line with the midpoint of our guidance range. Total non-GAAP operating expenses were $738 million or 23.3% of revenue, flat year-on-year. From a total operating profit perspective, non-GAAP operating profit was $1.07 billion, and non-GAAP operating margin was 33.8%, down 170 basis points year-on-year and 10 basis points above the midpoint of our guidance range. Non-GAAP interest expense was $91 million, while taxes for ongoing operations were $173 million or a 17.7% non-GAAP effective tax rate. Noncontrolling interest was $15 million and results from equity accounted investees related to our joint venture manufacturing partnerships was a $2 million loss. Taken together, the below-the-line items were $6 million unfavorable versus our guidance, primarily due to a slightly higher tax rate driven by improved profitability. Stock-based compensation, which is not included in our non-GAAP earnings, was $118 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $12.24 billion, up $757 million sequentially. We issued 3 new tranches of debt totaling $1.5 billion with a combined weighted cost of debt of 4.853%. During the quarter, we reduced our net commercial paper outstanding by $735 million. Additionally, we plan to retire 2 tranches of debt due in March and June of 2026, totaling $1.25 billion with a weighted cost of debt of 4.465%. Our ending cash balance was $3.95 billion, up $784 million sequentially due to the cumulative effect of commercial paper reduction, capital returns, equity and CapEx investments offset against the new debt and cash generated during the quarter. Resulting net debt was $8.28 billion with a trailing 12-month adjusted EBITDA of $4.65 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q3 was 1.8x, and our 12-month adjusted EBITDA interest coverage ratio was 15.9x. During Q3, we paid $256 million in cash dividends and repurchased $54 million of our shares, representing a 12-month total shareholder return of $2.05 billion or 106% of non-GAAP free cash flow. After the end of the quarter and through October 24, we bought an additional $100 million of our shares under a 10b5-1 program. Now turning to working capital metrics. Days of inventory was 161 days, an increase of 3 days versus the prior quarter, with inventory dollars up modestly due to prebuilds and wafer receipts from our foundry partners. Days receivables were 31 days, down 2 days sequentially and days payable were 58 days, down 2 days sequentially as well. Taken together, our cash conversion cycle was 134 days. Cash flow from operations was $585 million, and net CapEx was $76 million or about 2% of revenue, resulting in non-GAAP free cash flow of $509 million or 16% of revenue. During Q3, we paid $225 million towards the capacity access fees related to VSMC, which is included in our cash flow from operations. Additionally, we paid $139 million into VSMC and $15 million into ESMC, our 2 equity accounted foundry joint ventures under construction with the payments reflected in our cash flow from investing activities. Now turning to our expectations for the fourth quarter. As Rafael mentioned, we anticipate Q4 revenue to be $3.3 billion, plus or minus $100 million. At the midpoint, this is up about 6% year-on-year and up 4% sequentially, better than our view 90 days ago. We expect non-GAAP gross margin to be 57.5%, plus or minus 50 basis points. Operating expenses are expected to be about $757 million, plus or minus $10 million or about 23% of revenue, consistent with our long-term financial model. Taken together, we see non-GAAP operating margin to be 34.6% at the midpoint, bringing NXP back into our long-term financial model. In addition, our guidance includes about 2 months of operating expenses for the close of Aviva Links and Kinara acquisitions. Now turning to the below line items. We estimate non-GAAP financial expense to be about $103 million. We expect the non-GAAP tax rate to be 18% of profit before tax. Noncontrolling interest expense will be about $14 million and start-up expenses related to our equity account investees will be about $3 million loss. For Q4, we suggest for modeling purposes, you use an average share count of 254.3 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance to be $118 million. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.28. Turning to the uses of cash. We expect capital expenditures to be around 3% of revenue below our 5% target as we execute our hybrid manufacturing strategy. This includes consolidating our 200-millimeter front-end manufacturing factories, investing in our 300-millimeter joint ventures with VSMC and ESMC. These investments will result in margin expansion, supply resilience and access to a competitive manufacturing cost structure. As shared at our Investor Day, we will continue to substantially invest in VSMC in Singapore during Q4, including a $250 million capacity access fee payment and a $350 million equity investment. When VSMC is fully loaded in 2028, it will drive a 200 basis point improvement in NXP's total gross margin. Additionally, we will make a $45 million equity investment into ESMC in Germany, enabling additional 300-millimeter supply resilience. Lastly, we will pay approximately $500 million for the closed acquisitions of both Aviva Links and Kinara. And furthermore, we have restarted our buybacks at the beginning of September, and we will continue to buy back stock consistent with our capital allocation strategy. And finally, I would like to extend my personal thanks to Kurt as he transitions to a new and exciting chapter of his life. He's been in an inspiration to all NXP team members and a personal mentor and valued partner to me as a CFO. We will miss his infectious humor, timely counsel and thoughtful insights. With that, I would like to now turn it back to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Ross Seymore with Deutsche Bank. Ross Seymore: Congrats to both Kurt and Rafael. I guess my first question, a big picture one. Bill, you just mentioned that the guidance for the fourth quarter was better than you expected 90 days ago. But the details Rafael gave, while positive, didn't seem like much had really changed. So what specifically got better over the last 90 days, either by end market, inventory, region, et cetera? Rafael Sotomayor: Yes. Let me take that one, Ross. So we -- the way we think about Q4 is we're guiding Q4 sequentially 4% up. And so what we said last time, we said we're going to -- I mean, we did provide a soft guide of Q4 that we said we're going to be flat to slightly up. So I think what I would say is the things that we expected to go, maybe potentially the risk that we have, they didn't materialize. And the signals -- the signals with respect to a soft recovery continue to get -- continue to be there, right? And our order book continues to be strong. The end customer backlog our distribution partners continues to be healthy. And so if you look at the quarter-to-quarter guide, what is driving a slight improvement, I would say, over seasonality, pre-COVID seasonality, is Industrial and IoT, where I think we see signs now of slight demand improvement. Ross Seymore: Great. I guess on that front, you mentioned about the inventory staying in the 9- to 10-week level, not quite getting to the 11 that's your target. If you go from 9 to 11, any sort of rough dollar amount that, that contributes that we should think about? And is there any specific trigger that you're looking at to let that inventory get back to its normal level, whether it be in the fourth quarter, which it doesn't sound like or in, say, the first half of next year? Rafael Sotomayor: Yes, Ross, so I understand in the past, I mean, we apply a math that it was -- that we said it's about 1 week of inventory equals to $100 million. And I understand the math. But what I would like to kind of for now, think of -- I think it's more useful to look at how we are managing the channel strategically and so kind of shift a little bit of how you look at our channel inventory. If you look at today, given the current environment that we have, where visibility is limited, orders come late, the one thing I want to leave you with is important to have the right product mix in the channel to be competitive, especially when you think about our competition that has significantly higher inventory in the channel than us. And so -- and as you know, we're not a catalog company. So getting the right product mix is really important for us. Now today, right now, we're being selective. We stage in additional products that have -- that we have high conviction of sell-through. And so that one, that's the reason I state that the inventory may fluctuate between 9 and 10 because what I want to leave you with is, in today's environment, weeks of inventory is not static, right? Orders are coming late. Now I would say that your question with respect to when 11 weeks, I would say that as our visibility and confidence continues to improve, and I will confirm your point, we still see the optimal level moving towards 11 weeks. And that may or may not happen in Q1 as we see improvements in the business conditions. Operator: Our next question comes from the line of Francois Bouvignies with UBS. Francois-Xavier Bouvignies: My first question is on maybe your comment, Rafael, you said that you think inventories are, I mean, low in automotive, for example, and things are getting better broad-based, but you do not expect to increase inventories in the channel, I mean -- or even -- sorry, not in channel, but in the direct channel. So I was wondering if we look at Q1 in terms of seasonality, I think you are down high single-digit percentage quarter-on-quarter for Q1. Should I read this comment as today, with your visibility, you are comfortable with seasonality, assuming there is no stockpiling and demand is stabilizing. Is that the right way to look at it? Rafael Sotomayor: So you're asking about Q1? Francois-Xavier Bouvignies: Yes, Q1 like in a way, directionally based on what you just said, like are you comfortable with the seasonal trend? Rafael Sotomayor: Yes. Well, let me just kind of -- before I get into -- I give you a slight answer on that one, I would say that if you look into what we feel good about is the setup into 2026. If you look at how we finished Q4, I think that we are now entering a phase of inventory normalization in auto, and we've seen signals of, I would say, demand improvement in Industrial and IoT. I think we like the setup. I'm not going to guide Q1 for you, Francois, but I think if you're going to model -- I think modeling seasonality, and I would say, using pre-COVID seasonality, which is high single digits decline would be reasonable. Francois-Xavier Bouvignies: I appreciate the color. Maybe the second question is for Bill. I mean, gross margin is going up in the next quarter. I assume it could be because of mix, but I would be happy to have your view here. But more generally, I mean, your inventories is still fairly high, days a bit higher, dollars a bit higher. So I assume your loading is still -- you keep loading quite high. So how should we think about the gross margin direction after this Q4? Are you going to decrease the loading at the expense of gross margin? Or do you think you can manage this level of gross margin or even increase from here? Just some moving parts would be very helpful. Bill Betz: Sure, Francois. As you could see, as you mentioned, we are guiding gross margins up approximately 50 basis points into Q4. And this is driven by the higher revenues, Francois, improved operational costs and also, yes, higher utilizations, which is actually offset with unfavorable product mix. And then, of course, we have the normal plus or minus 50 basis points on what that mix tends to ultimately be in the quarter. For Q1 2026 and the full year of 2026, we are not guiding; however, please consider our normal seasonality that Rafael just talked about in revenues for Q1, along with our annual low single-digit price negotiations that typically impact us in the first quarter, and we always work to offset those throughout the year through cost reductions and operational efficiencies. So for full year 2026, I would say we expect to be in our long-term model of 57% to 63%, driven by a function of revenue levels, improved utilization, cost reductions offsetting the price gives and the normal product mix fluctuations in any given quarter. I would say, as stated before, please continue to use that rule of thumb for every $1 billion of revenue on a full year basis drives approximately 100 basis point improvement to gross margin. For example, I shared in the past, at $15 billion, we should be at 60%. And then remember, as I mentioned in my prepared remarks, beyond 2027, we also see another lift to our gross margins by approximately 200 basis points driven by our hybrid manufacturing strategy. And again, overall, I think we're very pleased with the trajectory of our gross margins and how we manage this. Related to your inventory question, you're right. In Q3, we finished inventory at 161 days. That was up 3 days. And we're staging inventory to support our growth into Q4. Proactively, we are holding more inventory to support the continued increase of late orders that Rafael talked about, which are coming in below lead times. And of course, the customer escalations have grown quarter-over-quarter, as Rafael shared in his prepared remarks. And as I mentioned last quarter, we started our prebuilds for the 200-millimeter consolidation plans, which by the end of the year will be worth about 6 to 7 days of our total NXP days of inventory. Also remember, we're holding approximately 14 days of inventory on our balance sheet versus our distribution partners, again, that assumes 9 weeks. And with the positive signals we are seeing and from lessons learned from the past, I'm quite comfortable and pleased with the internal inventory positioning. As we mentioned many times, we have long-lived inventory in die form, preventing obsolescence risk. So if you had me to call inventory into Q4, I would say similar levels from a days perspective, plus or minus 5 days is the best view I can give you at the moment into Q4. Operator: Our next question comes from the line of Joe Moore with Morgan Stanley. Joseph Moore: I also wanted to touch on automotive customers' kind of view on inventories. And I guess, can you just talk to us a little bit about what those conversations are like? Understanding there's not much overlap between you and Nexperia at this point, I would think stuff like that is a reason to want to hold more inventory and kind of buffer yourself from these geopolitics issues. Just are you seeing any indications that, that is happening or will happen? Rafael Sotomayor: Yes. Joe, I mean, that's a great question. And I think it really -- I think the issue with Nexperia really shows that the current level of inventory at the end customer is not sufficient to have any ripple of business continuity. We don't see restocking with our direct customers. And now I would say, I mean, the good thing, right, if you look at the business dynamics of auto highly related to inventory, the normalization and also already a very nice -- already -- we consider a very nice tailwind. And you would expect the next phase to actually be a restocking of inventory, but we have not seen it happen. And so the conversations are pretty much about how they are being very conservative with respect to how they manage their working capital. So no restocking so far. Bill Betz: Yes. Maybe I'll add, Nexperia itself, just to add to it because I think your question, does it impact NXP in any way from a direct standpoint, the answer is no. And as Rafael said, we're still in the early phase and seeing customer escalations, the signals improved. The restocking has not happened nor has price increases that happened, which you typically see during a supply crisis. But those are other signals that we wait to see. Joseph Moore: Okay. And is there any impact potentially on automotive production from all of that on the negative side that you could see if they have shortages of other components that it slows production? Rafael Sotomayor: Joe, we don't anticipate that. I think the products that are associated right now with Nexperia, these are products that could be second source. I think the qualification process is -- it could be relatively benign for OEMs. But so far, our orders will not indicate any impacts into the production of auto. Operator: Our next question comes from the line of Stacy Rasgon with Bernstein Research. Stacy Rasgon: My first one, I wanted to drill into gross margins a little more. So you are guiding it up sequentially, but it's flat year-over-year even on a pretty decent revenue increase. I guess that's mix, but I'm struggling to see where the mix issue is. It looks like your industrial mix is higher, auto looks about the same. Like what is going on with gross margin? It sounds like utilization, I'm not even sure they don't sound like they're lower year-over-year. Like why aren't we getting more gross margin leverage like on a year-over-year basis? Bill Betz: Yes, Stacy, I think the factor that we see going into Q4, again, what we talked about is from an end segment, our gross margins tend to be much closer to each other to the corporate average. But you can see the -- not the industrial, the comm and infra is down quite a bit year-over-year. And then the other one is you could see we're having record quarters in our mobile space, which, again, you kind of slightly below our margin corporate mix. So those 2 end markets are kind of impacting our mix. From a utilization standpoint, we are in the high 70s or plan to be in the high 70s into Q4 related to it. And so we do have kind of inventory at the high end internally. So of course, that also has an impact of how we run total -- our material throughout the line, just not in the front end, but also in the back end and so forth. So -- but really, those are help offsetting that unfavorable mix that we see at the moment. Stacy Rasgon: Got it. I guess the inventory also helps the depreciate -- the distribution stuff is higher margin as well. Bill Betz: Yes, there's 2 sets of it. So remember, the distribution and what you'll see is actually our distribution sales will be up quarter-over-quarter, but let me remind you that a portion of that or a large portion of it is driven by our mobile business where we drive and use the distribution partners in that mobile end market. And so that's what's driving the increase from a quarter-over-quarter perspective. Stacy Rasgon: Got it. For my follow-up, I just wanted to level set. So it sounds like there is some disty fill into Q4. So if I say half a week, I guess, is that -- do I just like roughly think of that as $50 million of income on the -- impact into the Q4 guide? And I know you said Q1, you were comfortable with seasonal, but does that incremental channel fill in Q4 influence how we might think about Q1 seasonality? Are you sort of implicitly assuming that you are going to be putting more into the channel in Q1 for a seasonal guide? Rafael Sotomayor: Okay. There were several questions on that one, Stacy. Let me grab that one. So you made a comment again on the -- on trying to kind of equate where we're going to end up in the channel. And I mean you mentioned $50 million. And again, I mean, I wouldn't see it that way. I mean we gave a guidance of $3.3 billion. The demand -- again, the visibility that we have right now is low. Orders are coming late. And so where the weeks of inventory end up in the channel, like I said, it may fluctuate between 9 and 10. It's not going to be more than 10, it may be 9. And so to put a formulaic kind of way of looking at how much revenue is going to come from weeks of inventory staying in the channel, I don't know if I can really kind of go there given how fluid the demand is. Again, we're putting products that we have high conviction of sell-through, right? And so I don't see it... Stacy Rasgon: But you must have a scenario that's baked into the guidance for Q4, right? Rafael Sotomayor: Yes. And the scenario says that it depends -- the inventory may fluctuate between 9 and 10 weeks. The scenario is what material we put in the channel. Operator: Our next question comes from the line of Tom O'Malley with Barclays. Thomas O'Malley: The Industrial and IoT business seems very strong to close the year, kind of particularly versus where expectations were. You guys have been helpful in the past about kind of laying out where you're seeing that strength, whether it's the core industrial side or more on that IoT side. Could you give us a little bit of a feel of what's moving into your Q4? Rafael Sotomayor: Yes, Tom, let me just step back. I mean, if you look at our Industrial and IoT business, at a high level, 60% is core industrial, 40% is consumer. And even within that, 80% of the revenue flows through distribution. So it just kind of gives you kind of step up. Now what we've seen in IoT, the end customer backlog through the channel continues to improve. So we see really strong signs of demand improvement. On the consumer side, this is where we continue to benefit from company-specific drivers. And this, for instance, I'll give you an example that there's a new category of wearables. There's smart glasses that have high demand. They require high-performance, low-power processing. And this is an area where our portfolio is strong. So we're seeing some tailwinds on that side. And the core industrial, we're seeing broad-based improvements across regions and products. And for us, if you were to drill into a little bit of the application specific, it will be driven by -- for us, it is driven by energy storage systems and building automation. Now let me put a caveat here. I don't think we will be -- the first one to tell you, we don't see ourselves as bellwethers for Industrial and IoT. And so what we see, it may be that this is very company specific. Thomas O'Malley: Helpful. And then a similar question just on the automotive side because it's useful to kind of see what's moving here is just on the S32 portfolio, like you've seen some really strong growth trends. And like part of the reason many think that you guys have handled this a lot better is just the growing portion of your business that is levered to processors. So maybe again, what happened in the quarter, maybe the processor business versus the rest of auto? And then into the fourth quarter, any kind of color on if there's a divergence there, how we should be thinking about just the entire auto business with those 2 pieces? Rafael Sotomayor: No. I think, Tom, I mean, we were encouraged about the direction that auto is taking, right? I mean if you were to take just Q3, in Q3, we were only 3% below our prior peak. And so I think that's encouraging. Now with respect to what is driving the performance in the business, I mean, it continues to be what we deem -- what we term calling accelerate growth drivers. And these are in the software-defined vehicle, which is the 32 franchise that you mentioned, is radar, is connectivity. And so if you were to ask me what is driving this, that is exactly what is -- I mean the secular shift to software-defined vehicles is driving the performance of auto. Bill Betz: And Tom, if I could add, we'll provide a full year kind of update on where we're at with our accelerated growth drivers on our Q4 call. But directionally, I'd say we feel very good about how the accelerated growth drivers are playing out intra-quarter. Operator: Our next question comes from the line of Vivek Arya with Bank of America Securities. Vivek Arya: Best wishes to both Rafael and Kurt. So Rafael, let's say, if '26 plays out the way '25 did with China OEMs and EVs growing, but the rest of the world not growing or flattish, what does it mean for NXP? So in an overall flattish auto production environment, what kind of lift can content provide net of any pricing movements? Like can your autos be conceptually within your long-term model for next year? Rafael Sotomayor: So Vivek, I think the one thing I want to maybe reframe the way we -- the drivers of our business, right? Car production is not the driver of our business. We're not SAAR related. I mean if you were to look at the production, the production has been stable for years. I mean it varies 1% here and there, but it stays pretty flat at [ 90-ish ] million a year. Content growth dwarfs SAAR growth. And so -- and then what you have in auto is the production is quite stable. But you have a very complex supply chain. And that complex supply chain is the one that creates either bubbles in inventory, but or vacuums that create shortages. And that -- the supply chain is the one that creates the cyclical aspect of our business. If I just say -- the way I see it is we see normalization in inventory. If you already get behind the content growth of auto, normalization of inventory is something that we see as very, very positive for the direction of auto. And so I just want to kind of basically reframe the way I think you posed the question a little bit and the way we see it. Content growth and normalization of inventory provides for us an optimistic view of our business in auto in 2026. Vivek Arya: And for my follow-up, Bill, on gross margins, is it just volume that takes you from the kind of the lower end of the 57% to 63% range right towards the middle of the range? Or are there any new products, any new kind of mixing up of your portfolio that can provide benefits on top of any volume benefit? Bill Betz: Absolutely. As we said in the past, our new product ramps are accretive to the company, and they go through their normal growing pain, of course, as they ramp and other parts of our products roll off. I mean, mix is really the one that what orders we get, what orders we serve. We serve over 10,000 SKUs or products every quarter. And so we have to adjust and either accommodate for it and offset those or vice versa, let them fall through, and that's why gross margin improves as another factor related to it. But really also our hybrid manufacturing strategy as we move more to 300-millimeter and as we're making all these investments, that will start to yield benefits beyond 2027, as I talked about. But short-term levers, again, it's -- I think we're doing a really good job offsetting any price gives that we give through our cost efficiencies and productivity internally on test time reductions and so forth. So those -- that's really what we're supposed to go do day in and day out. And I think the team is doing a good job. And you can see this by just our variability in our gross margins through this last cycle. So I think as we become less fixed cost, that will just improve with that variability going forward. As I mentioned today, we're 30% fixed. And my guess is in about a couple of years from now, once we finish our consolidation efforts, so I think 5 years and so we'll probably below 20%, which will reduce that variability. Operator: Our next question comes from the line of Chris Caso with Wolfe Research. Christopher Caso: I wanted to go back to some of what you said with inventory levels, particularly at your direct automotive customers. Where do those inventory levels stand now? And you quantified a bit on what the impact would be as the distribution channel -- increased inventory. Is there any -- I mean, help us with the magnitude of what would happen if those direct auto customers finally decided that they didn't need to restock. Rafael Sotomayor: So Chris, what we see right now that we are starting to shift to end demand. And I think that normalization and we can see it in our orders. And we did say indeed that we don't see the restocking. Now the specific question of what the levels are, I think we don't have visibility at a granular level per customer per Tier 1, that will be a complex. But it's very clear to us that is way below our manufacturing cycle. And that's what I mean by is I think that is just eventually not a healthy level to be able to manage sustainable business. I can't comment whether this will happen or not in the next few quarters or in even 2026. But that is a potential scenario of restocking is indeed a tailwind for our business that is something that will provide benefit for us. Bill Betz: Maybe I could add a little bit, Rafael. Chris, as you know, for about the last 8 quarters, we've been undershipping into the Tier 1 supply chain and actual end production. So it's actually been a headwind to us. I'd say over the last 2 quarters and in our guidance into Q4, we started to see that headwind subside. And so we think the inventory levels at the Tier 1 are where they, the Tier 1 players, believe are normalized for the current environment. They are still very cautious on the macroeconomic outlook. And so as Rafael said, we've not seen that next lever of restocking occurring. But when you go from a headwind of undershipping to at least shipping to end demand, that's the new growth in the short term. Did you have a follow-up, Chris? Christopher Caso: I do. I wanted to come to your comment on buybacks that you mentioned in your prepared remarks. Could you give us a little more detail on what the intention is going forward and what we should expect now that you're resuming the buybacks? Bill Betz: Yes. No change to our capital allocation strategy, Chris. As shared in our prepared remarks, we restarted our buybacks. As I mentioned, we have a lot of cash going out. And so we just wanted to make sure we had all the cash to continue to return and make all the investments we want to make inside NXP, but also balance that with healthy returns to our owners. And so if you look at the last 12 months, we returned 106% back to our owners, and we're going to continue to go do that. Operator: Our next question comes from the line of Blayne Curtis with Jefferies. Blayne Curtis: I just want to ask on the kind of cyclical tailwinds versus seasonality. I mean, I guess if you look at December, it's really just industrial that maybe you could argue is above typical seasonality. And then I think you said just soft guidance for March, normal. I think a lot of people have talked about just the slowing down of cyclical recovery. I mean your comments were pretty positive, Rafael. So I'm just kind of curious if you can just kind of assess -- if you're just looking at seasonality, I guess, is there -- is the cyclical tailwind slowing? And I guess maybe you can look at the different markets and if you feel differently about them. Rafael Sotomayor: Yes. I think if you look at the Q4 numbers, you clearly stated industrial and IoT was above robust seasonality. I would say that automotive was slightly better than seasonality, right, pre-COVID levels. And the drivers are -- they have one common driver that is, I think, is inventory digestion is almost done. I think that is one normalization is a big deal. And we're starting to shift to true end demand in automotive, and we're starting to see some company-specific drivers in industrial and IoT that are helping us. With respect to whether seasonality is going to change, are we calling an up cycle, I think we're careful with that because, one, we do have the inventory digestion done as a factor for an up cycle. We do see some specific areas of growth in industrial, and we see an encouraging signs of true demand in industrial and IoT. And so we do see the elements of a soft up cycle. And that's the reason why I would say that like that if you were to ask me today, are you more optimistic than you were last quarter? I would say that we are slightly more optimistic than last quarter. Blayne Curtis: And then I wanted to ask you on mobile. I mean, if I have the numbers right, it might be a record. I'm just kind of curious the drivers behind that. Rafael Sotomayor: Blayne, in mobile, we're a specialty player there, mostly driven by the wallet and a little bit of custom analog that we do for a Tier 1 customer there. I see the moves of Q2 to Q3 and Q4. And I think you got to take Q3 and Q4 together, is purely, in my opinion, it's just a seasonal move and some strength in some of our customers. Operator: Our next question comes from the line of Joshua Buchalter with TD Cowen. Joshua Buchalter: Congrats to both Rafael and Kurt and good luck. I know it's still early in earnings season, but your comments and outlook on the Industrial & IoT segment, were certainly better than your peers who have mainly talked about decelerating trends. We've kind of touched on it a little bit, and I realize you're not going to comment on peers. But would you say the difference in what you're seeing versus peers is because of inventory management or more product cycle driven? And what gives you confidence in the sustainability of sort of the up cycle that you're starting to see signs of with orders still coming in late and with the lead time? Rafael Sotomayor: Yes, Josh, so I can speak -- speak of NXP's situation with respect to Industrial and IoT because for us, Industrial and IoT has indeed been one of the more challenging end markets since 2022. And as of Q3, our business is still 20% below our peak, right? And again, I do remind you that we're not the bellwether for Industrial and IoT, so the comparisons to other, you can say, peers may not be, I guess, relevant. But I would have to say that we did manage inventory in a different way. We were very disciplined in the way we manage our business in the down cycle. And I think I would say that we will be similarly disciplined managing what we see, and I would say as a soft up cycle. And again, I mean, we are having some company-specific drivers there that are driving demand that is true new demand. And we have exposure to a few company-specific design wins in the core industrial that is driving some of the improvement. But I don't know how you will take that as a bellwether for the industry. Joshua Buchalter: Understood. Helpful color. And I was maybe also hoping that you could provide some color on the China auto market, what you saw there intra-quarter and your expectations into 4Q. I believe a good amount of that is actually served by the disty. So our inventory levels there lean as well? Rafael Sotomayor: Yes, China -- I mean, listen, I was in China a few months ago with Kurt, and we did a customer visit to both China, Taiwan and actually Japan. China specifically, China continues to be strong. It continues to be a very dynamic market, themselves, the auto industry there is very competitive, and they continue to actually push for innovation, push for product. Our -- I would say our inventory situation there is also lean -- is also, but it's a business that is driven, that is driving is strong. We have good customer traction. So we feel very optimistic about our position in China. Bill Betz: And Josh, if I could just add as a reminder, in the Asia market, specifically in China auto, we service the majority of that through our distribution channel. And it is in the Western markets in North America and Europe, where we do it on a direct basis. So our approach to channel management, which I'd say is probably best-in-class, we take a heavy hand there even in Asia with the channel. Operator: Our next question comes from the line of William Stein with Truist Securities. William Stein: First, I'm hoping you can remind us about the strategic purpose of the recent acquisitions? I think TTTech closed recently, but then you have the 2 new ones as well. Can you just frame that as it relates to the rest of the autos business? And then I have a follow-up. Rafael Sotomayor: Yes. William, these acquisitions are actually directly aligned with the strategic direction of bringing intelligent systems at the edge of industrial and automotive. If you look at TTTech is a company that is a software company that is going to help us accelerate our move of the system-defined vehicle and around S-32s and around a system approach. And so quite excited to have them. It's a capability that would have been very difficult to obtain organically. And it's a company that brings IP-specific also in functional safety at a system level. Aviva Links is a company that has a really, really, I would say, innovative technology on a SerDes technology that is a standard. So it's a standard SerDes. And that is critical to standardize sensors think of our radar, think of cameras, think of LiDAR around a core processor, which, in this case, will be our S32. So we're quite bullish on Aviva Links. And Kinara brings AI capabilities, especially GenAI capabilities, high performance, low power that is going to also accelerate our portfolio of intelligent into the edge. William Stein: And then as a follow-up, there's been some discussion about some elevated competitive dynamics in the infotainment part of your autos business. Can you remind us how big that is in your autos business and maybe update us on that competitive situation? Bill Betz: Will, I'll take that one. So if you think about IVI in vehicle infotainment, there's kind of 2 parts. There's the visualization what you see on the dashboards and there's the what you hear the audio portion. I'd say on IVI auto, we continue to be a dominant player there. On the visualization, our performance is maybe a little below some of our peers, but I think that's very well known at this time. And I think with that, Towanda, I think we're going to need to move back to Rafael for closing remarks, if we can. Rafael Sotomayor: Well, thank you, everyone, for joining us today and your thoughtful questions. This quarter marks both a leadership transition and a reaffirmation of NXP's consistent strategy, focus on profitable growth, disciplined execution and predictable returns. We are encouraged by the gradually increasing signs of a cyclical recovery across our automotive and Industrial and IoT end markets and by the continued strength of our company-specific growth drivers. Our priorities remain clear: deliver on our commitments and manage what is in our control and position NXP to continue to grow profitably. I want to express my gratitude to Kurt for his outstanding leadership and for the partnership we have built over many years. In his 30-year career at NXP, he has left a lasting legacy, navigating us through various challenges and positioning NXP as a leader in the markets we serve. I am truly humbled to follow his footsteps. It is a privilege to lead this company and this team. I am excited about what we will achieve together. Thank you. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Alfa Laval Q3 '25 Report Conference Call. I'm Valentina, 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 Tom Erixon, CEO. You will now be joined into the conference room. Tom Erixon: Good morning, and welcome to Alfa Laval's Third Quarter Earnings Call. And Fredrik and I, we're going to take you through the quarter. So let me, as always, start with a couple of introductory comments. Now with a solid order book and good demand in service and short-cycle businesses, sales grew 8% organically in the quarter. It was a stable and clean quarter operationally and earnings increased to a new record level of SEK 3.2 billion in the quarter on the EBITA level. And then finally, as you noticed, we have adjusted our financial targets to better reflect our financial performance levels. And I will comment on the financial targets a bit later. So let me go to the key figures. Order intake was good in the quarter with a 10% organic decline as expected due to the normalization of demand in cargo pumping applications. In the short-cycle business, both order intake and factory utilization are is at high or record high levels in several end markets and product groups. Sales developed well, supported by all 3 divisions and generated a margin of 18.4%. In all, it was a well-executed quarter with mix effects contributing to the margin improvement. Moving on to the Energy division. The market dynamics are shifting towards a stronger HVAC, heat pump data center growth and moderate expectations on CapEx projects in the fossil fuel business. Cleantech remains on a positive growth track across a wide range of applications despite growing concerns regarding the political support for the decarbonization journey in Europe and in the U.S. Strong momentum in energy efficiency, growing demand for nuclear and an expected scaling, making new technologies financially sustainable are the foundation for future growth in the cleantech sector. The margin was sequentially stable, but note that transaction costs related to the Fives Cryo acquisition was charged to the P&L in Q3 on the Energy division. So moving on to Food & Water. Order intake was firm in most end markets. Large order bookings were relatively slow, although the project pipeline still remains healthy in terms of outstanding quotations. Short-cycle demand drove a positive mix change with a healthy margin. The project business generated a positive margin improvement in the quarter, but we are still working through some project execution issues in the quarters to come. Then coming to Marine. Profitability remained sequentially stable on a high and good level with good order execution in the quarter. While the record ship contracting year in 2024 will not repeat, contracting at the yards is expected to remain at about 2,000 vessels per year pace, approximately matching the global yard capacity. As expected, the 2024 contracted ships are now converted into our order books with record level orders in several product groups within the Marine division. The order intake decline compared to last year was entirely related to the expected normalized order level in cargo pumping with new orders at a normal rate for the business. So on to service. Service has grown substantially over many years and now accounts for 31% to 32% of orders, structurally somewhat higher than historically. Still, this year, we have worked through a lot of operational challenges, both related to physical distribution centers and the digital systems supporting the spare parts flow in the Energy division. It is and was a needed scaling project to cope with the larger volumes. And with the troubleshooting behind us, we expect the Energy division to return to service growth in line with other divisions. In the Marine division, service accounted for 40% of order intake, supported by a larger installed base and an aging global merchant fleet. If the aging fleet provides some tailwinds, the constant transfer of older tankers to the Russian dark fleet is a headwind and obviously outside our business scope. Then finally, a few comments on key markets. China and the U.S. accounting for approximately 40% of our business had a strong quarter with good demand in many areas. Note that the cargo pumping affecting an otherwise growing business in both China and Korea. Most markets are stable to positive at this point in time in the quarter, but looking forward, Middle East CapEx projects may be negatively affected by the lower oil price. And with that, I hand over to Fredrik for some further comments. Fredrik Ekstrom: Thank you, Tom. So hello, everyone. Let us get started by recapping the order intake in quarter 3 at SEK 16.6 billion. Organic growth contracted with 10% in the quarter. A substantial part of this contraction stems from the lack of large project orders. In the Energy division, both the welded heat exchangers and Circular Separation Technologies noted the absence of large orders. Desmet and food systems in the Food & Water division denoted the same pattern. And finally, in the Marine division, the continued normalization of tanker vessel contracting impacted the numbers. Important to mention in this context is that the project list remained strong, both in quantity and quality. It is the conversion to orders that is occurring at a lower pace, reflecting uncertainty in the market driven by external factors. Transactional business has a different development, up 8% in the quarter comparatively, excluding currency movements. Both gasketed and brazed heat exchangers booked orders above the same period last year in the Energy division. Fluid handling equipment, separators and decanters also booked higher order intake levels than in quarter 3 last year in the Food & Water division. And finally, our traditional marine products are also continuing to outperform quarter 3 last year. Service was up 8% in the quarter, excluding currency movements. Currency has an overall negative impact of almost 6% and, our acquisitions so far this year have a positive impact of 3% on the total. The same pattern repeats on a year-to-date basis and is an important input to any trend analysis. Book-to-bill in the quarter was 0.96 with a remaining strong backlog of SEK 51 billion, of which SEK 16 billion is slated to be invoiced in quarter 4. The backlog price levels are well in line with current input prices and in line with current tariff levels. Now on to sales. SEK 17 billion in sales in quarter 3 represents a strong historical level for quarter 3. Our manufacturing entities are delivering to our customers on commitment and on high utilization levels, which is clearly visible in the gross profit boosted by a strong factory and engineering result. Currency once again impacts negatively on a comparative basis, but prominently organic growth is up 8% in the quarter. Worth mentioning here is that the proportion of large project business in the invoicing mix is high. Transactional volumes are up, but not to the same extent. Net sales for service grew 3.1% compared to the same quarter last year, accounting for a mix of 30%. We expect this mix pattern to continue into quarter 4. Gross profit improved to 36.8%, boosted by better factory and engineering results and positive purchase price variances compared to the same quarter last year. Operating income increased with 12.6%, to SEK 3 billion. Sales and administration expenses were SEK 2.6 billion during the third quarter, corresponding to 15.4% of net sales. Research and development expenses were SEK 427 million during the third quarter, corresponding to 2.5% of net sales. Earnings per share in the quarter amounted to SEK 5.53 and SEK 15.22 for the first 9 months. The corresponding figure, excluding amortization of step-up values and corresponding tax was SEK 15.97 for the first 9 months. Now on to profitability. The Energy division posted an EBITA margin of 16.6%, which is lower than previous quarters due to a shift in mix towards large orders and costs related to the acquisition of Fives Cryogenics. Continued strong sales in the transactional business portfolio and service compensated for a large project mix invoicing in the quarter, yielding an EBITA of 16.1% for the Food & Water division. The Marine division continued with a positive mix of invoicing from cargo pumping systems and service, which yielded a 23.5% margin. On a group level, the adjusted EBITA margin of 18.4% is a record with a -- sorry, is high with a record SEK 3.2 billion in money terms with a negative currency impact of SEK 178 million. Now on to the debt position. Post 3 acquisitions so far this year, most notably the Fives Cryogenics business, debt stands at SEK 18.6 billion or 1.3x last 12 months EBITDA. Net debt, excluding leases at 0.86 and including leases at 1.1 last 12 months EBITDA. Given our stated thresholds, the group retains sufficient debt power to complete further quality acquisitions as those opportunities arise. Cash flow from operating activities was SEK 2.2 billion in the third quarter and SEK 5.8 billion for the first 9 months. The lower cash flow is mainly due to an increased working capital compared to the same period last year, driven by inventory and predominantly [ WIP ] and decreasing advance payment as large projects are invoiced. Acquisition of businesses in the first 9 months was SEK 9.3 billion, whereof SEK 8.8 billion for the Cryogenics acquisition, and SEK 529 million was due to two minor acquisitions. Financing activities amounted to SEK 3.9 billion in the quarter and SEK 4.5 billion in the first 9 months. These numbers primarily composed of the additional debt added for the acquisitions of SEK 8.7 billion and a shareholders' dividend of SEK 3.5 billion. Before concluding, some guidance for the quarter ahead and looking into 2026. CapEx guidance for the fourth quarter is SEK 700 million, and reiterated guidance of SEK 2.5 billion to SEK 3 billion in 2026. PPA amortization of SEK 175 million in quarter 4 and SEK 580 million in 2026. These numbers include the preliminary purchase price allocations for the three acquisitions in 2025. Tax rate is guided to stay in the interval of 24% to 26%. And with that, I hand back over to Tom for some words on quarter 4. Tom Erixon: Thank you, Fredrik. Some forward-looking comments then as a summary. Let me start with the financial targets. The change in financial targets should not be seen as a change in guidance. We are making the adjustment because of two main reasons. First, we tend to overshoot the targets and consider them a floor level for performance. Now we are moving the targets into the present performance range, and it's important for us, including for internal reasons that we have similar objectives externally and internally. Second, we want to recognize that the investments during the last 5 years into technology and capacity were made for good reasons. We believe we have invested our shareholders' money responsibly and profitably, and we expect to continue to convert those investments into profitable growth in the next 5-year period. So finally, our crystal ball is no better than yours. If global macro deteriorates, if the energy transition stumble, if AI and data centers run into difficulty, we and others would find financial targets challenging. But with that said, we have changed the targets in terms of growth to 7% sales growth. And the EBITA margin moved up to 17% over the cycle. And we kept the ROCE target at the current 20% just to allow for the effects of future potential acquisitions. Regarding the next quarter, we believe demand in the fourth quarter is sequentially stable and on about the same level as in the third quarter. And on a divisional level, we expect the Energy demand to be higher, the Marine to be somewhat lower and the Food & Water to be stable compared to the third quarter. So with that, let's get over to the Q&A session. Operator: [Operator Instructions] The first question comes from Gustaf Schwerin from Handelsbanken. Gustaf Schwerin: Can I ask on the Energy division orders? If we look at this organically, they are largely unchanged versus Q2, so a bit lower than what you guided back during the summer. You, of course, mentioned the decision-making here. So given that you're now saying this should increase in Q4, has anything underlying really changed? Or is this just a matter of slower commercial rates on the orders? Yes, that's the first one. Tom Erixon: It's a good question. I think our perspective is that it is a fairly stable growth curve and sometimes projects end up in one quarter or another. So we are relatively positive to the demand trend in Energy. And given that we see improvement on the HVAC side and in a number of areas, the outlook for Q4 is reasonably positive. So I think it's more a question on when bookings are taking place than any change. We had a reasonable positive view 3 months ago in terms of the growth perspective, and we remain committed to that. Gustaf Schwerin: Okay. Then secondly, on the margin in Energy, can you give us a rough sense of the M&A costs here, and if we should expect this going forward as well? Tom Erixon: You should expect that the margin was essentially unchanged compared to Q2, excluding the cost related to the transaction. There will be some costs also in Q4, but I believe on a lower level. And we are not dealing with them as adjusted earnings. We're just [ charging ] them straight off. Operator: The next question comes from Magnus Kruber from Nordea. Magnus Kruber: Magnus from Nordea. Could you -- with respect to Cryogenics, does that business sit completely within the process industry end market? Tom Erixon: Yes. I mean it depends. There are essentially three application areas for Cryo at present. One is normal industrial gases, and the other one is LNG. And gradually, we expect hydrogen and energy transition applications, including carbon capture, be growing as part of the segment. So those are the end markets that we are dealing with. Largely, the applications are for larger projects in the industrial space. But I remind you that there's also Cryogenics pumping side that may fit well with our Marine business and some other applications as well. So I think the Cryo side may be a bit wider as we go along. But presently, essentially, you could consider it the process industry-related application. Magnus Kruber: Perfect. And secondly, light industry and tech saw a second quarter of declines year-over-year. Of course, FX is part of that. But could you comment a little bit about the momentum in data centers and other parts of the business, please? Tom Erixon: Yes, I think it's a correct observation. We are very comfortable with the development on the data center side. And we are entering into the expected frame agreements. And -- but I think what happens is that in terms of the actual quarterly bookings of the order, there are some variations. So in terms of progress on the data center side, it was good in the quarter. We expect that to continue into Q4 and next year. So we're on track with our plans, but the actual order intake bookings in Q3 was not that strong. Operator: The next question comes from Carl Deijenberg from DNB Carnegie. Carl Deijenberg: So first, I want to come back to the acquired Fives Cryogenics. I know you've talked about in the past that the aftermarket exposure in this entity relative to the, let's say, core Alfa Energy division is lower. And I just wanted to understand is there any difference here in the seasonality on the earnings given the sort of differences in the operational character? And also maybe going forward, I saw that you were adding roughly SEK 2 billion in the backlog. I guess this relates to the acquired entity. And given, let's say, the longer cycles you're addressing there relative to the transactional exposure in the Energy division, is there any significant quarter here going forward that you're set to finalize something or any large order that is going to come in that we should be aware of? Tom Erixon: I will not comment on individual orders, of course, but we always monitor our pipeline of outstanding quotes. And if I look at that pipeline, both in the Food & Water division and in the Energy division, it is relatively positive. The conversion time and if it gets through the final CapEx decision, there's always some uncertainties. But in general, we have a positive feeling around the pipeline in the Energy division, specifically for Q4. The Cryo, I don't -- it is, as you say, low on service. It will probably remain that way. The order intake will vary over the quarters. We had, I think, a normalized Q3. We expect a relatively strong Q4 on the Cryo applications. But in terms of earnings and how we execute those projects, it's percentage completion. I think we will -- Fredrik will work to have that as a stable and correct representation of progress every quarter. So I don't think -- if you want to add something? Fredrik Ekstrom: No, there's no particular seasonality to the percentage of completion. It's when the projects come to fruition and commissioning starts. So there's no deviation from that point of view, and there's no seasonality from that point of view. Carl Deijenberg: Okay. Very well. And then secondly, just very quickly on the pumping systems side. I see here in Q3 that orders seem to be stabilizing and actually being up slightly Q-on-Q, not by a huge amount, but a little bit. And could you just talk a little bit now on the sort of backlog or the timing on the orders you're taking in now on Framo and the lead times, just to understand the phasing of the backlog and so forth in Marine? Tom Erixon: Yes. I will not give you the full timeline on everything, but we are clearly fully booked for Q4, and we are essentially fully booked for 2026. So what we expect to see now is the normalized level renewing normal order flows as the contracting in '26 is expected to remain at about the 2,000 ships. And we don't see huge fluctuations in tanker contracting either. We think sort of with some variations between quarter, we will see a reasonable amount of new orders being signed, new contracts being signed. And so we were at Q3, if you think about it historically, actually perhaps somewhat on the high side when it comes to sort of our average order intake level. So we were pleased with the quarter. I think it substantiates that although we are not going to be at 2024 level in terms of order booking expected for a long time, we will continue to run that business on a good level. And that is also reflected in the investment decision we announced with our biggest CapEx decision in our history of SEK 4 billion. Although spread over a number of steps, a number of sequences and over 5 years plus, it is a big commitment to a business we believe in. Operator: The next question comes from Uma Samlin, Bank of America. Uma Samlin: My first one is on your guidance. So would you be able to help us to clarify how should we think about your growth guidance of 7%? What component of that is organic versus inorganic? And also on the margin guide, did I hear you clearly that the guidance is not a floor, but more of a through-cycle average margins? If that's so, where do you think we are in terms of the cycle? Tom Erixon: Yes. The growth ambition includes the possibility of acquisitions. We will make those judgments as we go, partly on where we are on the organic side and the macroeconomics and partly what opportunities we have on the M&A side. But we feel we have built a stable foundation for organic growth in the coming years. So without that, we would not have stretched our growth targets above the 5% we were at historically. And obviously, as you see, current level is higher. And at some point in time, the spread between the target and the floor level versus where we were just becomes a little bit problematic. So we think this is a good reflection on the growth side. On where we are in the cycle? If you asked me 10 years ago, I would give you a reasonable answer. After the last 5 years when we've been going through a COVID, shutdown, hyperinflation, a trade war, I have no clue where we are. The only thing I know is that with all of the turbulence that we've been living with in global markets, we come through that in a good way. And if we get some stability in the world regarding wars, regarding trade routes, regarding tariffs, I expect that we will have a couple of good years ahead. But to predict the macro events at this point in time seems to be a bit problematic. So we will deal with it as we go. But obviously, if we have a sharp downturn in the coming years, it will affect our financial performance just as everybody else. Uma Samlin: That's super helpful. May I just have one more follow-up on Marine. So how should we think about your expectation for Marine orders into Q4 and into '26, given the contracting has been fairly weak year-to-date. We just heard from your competitors who's expecting sort of like for '26 and '27 marine contracting to be up 30%. What's your thinking on that? Where do you see is the normalized level for Marine orders? Tom Erixon: Well, as I've said a couple of times, if we look at our invoicing path in Marine, it's a somewhat better way to track us financially than on the order intake and the contracting side. The global shipyard capacity in terms of deliveries is at about the 2,000 ship level, thereabouts. It may increase somewhat in the years to come, but we are not quite there yet. So that means that irrespective -- and basically, the yards are fully loaded for the years to come. So we see a lot of stability in terms of our delivery path in the coming years. In some areas, we are obviously tight on capacity now, but we are meeting our commitments and our obligations towards our customers. And there's a team who's doing a very, very good job on that. But sort of the downward risk in terms of volumes of invoicing for the foreseeable future is not -- does not look as a huge challenge at this point in time. I remind you that last year, we had an order intake of SEK 30 billion, about 50% ahead of the normal numbers. And so I said then, and I repeat that we are not a SEK 30 billion division in terms of invoicing, but we are on the SEK 20 billion plus. And I think it's from that level that we work with the organic growth and potential acquisition growth going into '26. Operator: The next question comes from Andreas Koski, BNP Paribas Exane. Andreas Koski: So three questions. First, on Marine sales. Can you give an indication of your pumping systems sales in the quarter? Are we at a level around SEK 2.5 billion or even closer to SEK 3 billion? And did I understand it correctly that you are fully booked through 2026. So the sales level that we're seeing in Q3, we should also expect through 2026? Tom Erixon: I will not give you detailed numbers to the million on individual path. But I want to remind you that the pumping systems include an offshore business. It does include a small aquaculture business. And so the whole thing is not and will not be on cargo pumping applications for tankers. So just for you to keep that in mind. But with that said, all of those businesses are in a good shape. And the demand situation looks -- despite some concerns on the oil and gas side, the demand situation for offshore looks reasonable going forward. The service business in that area remains strong. So that's sort of the backdrop of the business. I think in terms of invoicing, we are more or less at capacity, and the big investment program that we are doing is partly going to cope with the existing demand pressure, modernization, efficiency, automation and site consolidation improvements. But that will not have any major impact on invoicing capability for next year. And in any case, I think at the end of the day, it's the yard capacity that is determining the invoicing level in 2026. And I think they are pretty much running at full pace as we see it. Andreas Koski: Yes. The reason for asking is to try to understand if we should expect a margin of 23%, 24% also for the full year 2026 because the mix will remain as positive as it is today, but maybe you don't want to give any indications of that. Tom Erixon: I have full confidence in your ability to make your own calculation on that. Andreas Koski: Yes. Okay. And then on the order intake side in Q3, I understand Fredrik -- I think Fredrik mentioned that you lacked large project orders in Q3, but that the project business remains strong, both in quantity and quality. So I just wonder, in your outlook statement, have you assumed that the larger part of that project pipeline will convert into orders? Fredrik Ekstrom: No. To say that a larger part of the project list that we have right now would convert into quarter 4, then we would be giving you a different guidance... Andreas Koski: No. I mean a larger part than in Q3, I mean. Fredrik Ekstrom: Well, the conversion rate is determined by a lot of factors, and some of them are clearly external and clearly are held back on uncertainty. And if we see the uncertainty decreases in the coming 20, 30 days and assuming that, that's sufficient for somebody to make the final decision on an investment, then we might see that we have orders that have slipped in from quarter 3 that we expect to come into quarter 4, and there will be orders in quarter 4 that may very well slip into 2026. So it's hard to give you an exact guidance more than the one we already provided for quarter 4. Andreas Koski: Understood. And then lastly, if I may, on your new financial targets. If you want to elaborate and explain why you didn't go for a more ambitious margin target? And how much of your new growth target is expected to be organic? Tom Erixon: Yes. I think on the organic, some people already observed it was quite in line with our 2030 target of SEK 100 billion. We stick to that one. And let's see how the mix is. Obviously, the reason we are increasing the growth target is for organic reasons. We may or may not have some M&A opportunities converting in 2026 and 2027. But we think we have a good growth platform installed, build up, invested into capacity-wise created space for. So the organic growth is, I think, for us, the most important part of the growth story for us. So I leave it at that. We see where it comes. On the profitability target, I said this during many years, at the 15% level that our ambition is not at this moment in time to optimize our margin at all costs. We are a growth company. We are investing what we think is responsibly and profitably into technology and capacity. We continue to do so. And we think the long-term shareholder will benefit from long-term growth plan, stability in our execution. So we don't want to put ourselves into a type of a profit escape opportunity where we are acting everything that is not generating 17% plus. So this was a measured step reflecting approximately where we were and leaving the floor of 15% a little bit behind us and accepting that the current performance level is perhaps about the target range that makes sense for us. Andreas Koski: So does that mean that we shouldn't expect 17% to be sort of the floor as the 15% was? Tom Erixon: No. I think we did the 15% 20 years ago. I don't think it was, at that time, a floor. It was an ambition. We are not super guiding you on the margin. I mean, as you could notice this quarter, we were above. I think we will fluctuate. I think my point is saying, and I've told you this before, that it would be a very simple trick to increase the margin in Alfa Laval from where we are today with a percentage point or 2 if we decided that the long-term future was less opportunistic. And so we are committed to our long-term growth plan. We are investing in that, and we don't want to cut and limit our opportunities for the long-term growth potential that we see. So that will, in a sense, determine a little bit where the margin will be, and that's why we don't want to go too high on our ambitions because we think there are opportunities. But we also recognize that the 15% is not all that relevant as a financial target. And if you look at your own and everybody else's assumptions, I think the market estimates for the coming 3 years is pretty aligned with our targets. So that's why we're saying that don't think about this as a very strong guidance comment. It's more creating a relevance, not least internally for what we expect ourselves to work with. Operator: The next question comes from James Moore from Rothschild & Co. Redburn. James Moore: Can I just go back to Fives and the charges and just confirm that the Fives integration costs were SEK 215 million in the quarter and that the charge is basically exactly in line with the 430 bps impact on the energy margin year-on-year. And would it be fair to say about SEK 100 million for the fourth quarter? And attached -- maybe we start there, and I could follow up. Fredrik Ekstrom: Yes. No. So what we have indicated is that if you look at the sequential development and you look back a quarter, you probably get a better indication of what that charge was in relation to where we were -- finished in quarter 3 and that the same will probably hold true into quarter 4. Of course, some of this is also dependent on the invoicing mix that we have in quarter 4 with the invoicing mix that we had in quarter 3. decreased the margin. I think a good guidance is to look at quarter 2. So sequentially stable. James Moore: Sequentially, not year-on-year. My mistake. And the underlying performance of Fives, did -- it looks like you did SEK 620 million of revenue for, I don't know, [ 2.75 ] months, which to me looks like it's growing 20%. I don't know if that is the case. And if you strip out the charges, what was the underlying operating margin at Fives slightly accretive to Energy in the kind of low 20s margin range as you previously hoped? Or did it go up with growth? Or was it below due to seasonality? And how does the Fives seasonality play out over the coming few quarters, please? Fredrik Ekstrom: Yes. And as we indicated before, there's no real seasonality to the Fives or to the Cryogenics business unit, as we call it. There's no real seasonality to that invoicing. It's more how it's delivered to the customer and the milestones that are agreed with the customers from a percentage of completion point of view. Of course, the invoicing was good in quarter 3 for the Cryogenics business, and the margins were in line with expectations as we took on a business. There are some -- there is an element of onetime charges and integration charges, but we include those as part of the operating business. James Moore: I understand. And lastly, if I could. I understand the philosophy behind your new targets through cycle, internal benchmarking, et cetera. But obviously, behind that is a fair degree of confidence on long-term organic growth potential. I was just wondering to what degree is that underpinned by existing backlogs? And to what degree is it once you've got through those backlogs, you still see a high pace of growth continuing? And what is it that gives you renewed confidence on that apart from recent growth trends being better? Or is it just recent growth trends being better? Tom Erixon: Yes. We think it's better to look at -- if you're a debt analyst, you will look at the last couple of years and make a prediction of the future. If we do that, and we look at all the investments we've done, and how we described the 2030 target last year, and we will go through that again in our Capital Markets Day in November, there is the basis for our belief. We have, I think, an end market exposure that couldn't be better. And so I think it's up to us to utilize those positions in Energy, in Marine and in Food & Water alike. And are we convinced that we will reach the targets? We think this is the best indication we can give to ourselves, and we communicate the same to you guys that this is where we think we will be. But I would recommend you to come to the Capital Markets Day for a little bit of a review of the verticals and the business opportunities, the way we see the plan going forward rather than just a quick Q&A here. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: I was wondering if we could speak a little bit about Marine regulations. You may have seen the MEPC 84 session in October delayed the decision on, I guess, stronger emissions controls. I'm wondering if you're seeing any knock-on impact in terms of how your customers are ordering, not ordering, delaying orders? Tom Erixon: Yes, it's a very good question. And it's, of course, a situation we monitor extremely closely. It does potentially impact the way a customer will decide. I think our best estimate at this moment in time is that one of the main drivers other than efficiency and fuel efficiency and such, for environmental technology and multi-fuels capabilities, is to create an insurance against having a stranded asset some years from now when and if a new regulatory environment is forcing a decrease in the emissions. Now obviously, for many reasons, not only Alfa Laval's business, we are hoping that there will be a framework implemented in terms of emissions control on the Marine side as well as in other areas. And I think short term that the fair amount of ship owners will continue to hedge their bets as they order new ships. And I remind you that if we look at the multi-fuel levels in the industry right now about -- if you take ammonia and LNG and a couple of other sort of main alternative fuels to heavy fuel oils, the current level of orders are representing about 15% or so of the global fleet, equipping themselves with multi-fuel capabilities. So even if it should go down somewhat, it's not going to be a major impact on us in the next quarters or so. If we look at the current trend curves as they are, they are continuing to grow. But of course, those trend curves are back to time almost driven by decisions prior to the delay of the implementation side. So it's a bit early to really make a call on what is the immediate effect. But I would be surprised if we will see a dramatic change in the trend curve over the next couple of quarters while the uncertainty remain. John-B Kim: Great. And if I may, I'm sorry if I missed this, but can you update us on your newer product offerings in energy? I'm speaking specifically about the liquid-to-chip offering? Tom Erixon: Well, it's -- listen, it is our normal product ranges that are going into air and water cooling, and it's a question of capacities for certain sizes and formats and things like that. So the product mix in our supply chain is changing somewhat. But we are not in a technology development -- we do an awful lot of technology development, but for the data centers, it actually is in line with our current supply capabilities. And so our main challenge is to figure the volume demands in the coming years and matching sort of the supply chain capacities that we need in order to serve that market. So that's where we are on that one. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: Klas at Citi. I had -- coming back to the Energy and Food & Water margins. In Energy, obviously, some costs are linked to the recent acquisition, but you still have the R&D ramp. I was under the impression that, that R&D ramp concluded already in the second quarter. So I'm interested in how you look at this into the fourth. And then in Food & Water, you booked quite a lot of large orders in the second quarter. And obviously, this is a very good margin you're delivering right now. But I'm just trying to understand whether the mix from having then that backlog built up on the larger side will start to weigh on the margin here a bit in Food & Water. I'll start here. Fredrik Ekstrom: Well, if I take Food & Water first, of course, the -- we have a large percentage of large orders invoicing out in quarter 3. But we also have a substantial resurgence of the transactional business, and that's been happening over the last 6 quarters that we have seen an increase in the transactional business, including service. And of course, the fundamental margin accretion that we get from that transactional business and the service mix into Food & Water, of course, lifts the margin overall. So it's not that we have drastically changed the margin profile of large project orders. It's rather the mix that we see in the current quarter. That mix may look different, of course, in coming quarters. But -- so it's a little bit based on that mix. And if we then look at the Energy division. Well, the Energy division, we have spoken a little bit about the margin development before. And if we look at specifically the R&D as your question was, well, we have not put an end date to R&D. R&D is something we continue to do over indefinite period really. I mean, it's about product development. And if I take it one step further back to the question that Tom answered just a second ago around data centers, yes, we have a lot of products that are directly applicable and have a really good fit with the current demand for data centers, but we also have the ability to adapt those products further. And that's part of the R&D that we continually do, and that we do in dialogue with our customers. So I don't think, Klas, you should see the investment into R&D as something that has an end date when it comes to the Energy division or any of our other divisions for that matter. And I don't know if Tom wants to complete more on that. Tom Erixon: I agree. Fredrik Ekstrom: Agreed. Klas Bergelind: Okay. Okay. That's good to hear. Then looking at project orders in Energy, I mean, last quarter, and I'm zooming in now on clean energy. I mean, last quarter, i.e., second, you said that decisions were pushed to the right, reflecting increased uncertainty. It looks like orders are coming back here this quarter. So I'm interested in what happened here. And if you see this elsewhere, i.e., that decision-making on the larger side, Tom, is easing a bit or whether it's just normal lumpiness. Tom Erixon: I think maybe a little bit of both. There is a normal lumpiness in that. We have been having and we continue to have, a rather diversified cleantech order book and order pipeline. And that holds both geographically and application-wise. So the bookings were good in Q3. And although good means that the comparable quarter was maybe a bit weak side, so -- but anyhow, it was in line with what we were hoping for. And if we look at the pipeline, which obviously stretches more than a quarter forward, we see a number of projects and some of them, I would say, financially sustainable without being based on regulatory frameworks or such. So there are -- we have obviously moderated our expectations in the 5-year period as to what the energy transition will do. But we are still following an interesting track on a steady growth area in related to carbon capture, in related to plastic and packaging replacement materials in relation to possibility of SAF, and biofuel coming back a bit after a very low investment period during the last few years. So we are cautiously hopeful that we will see the energy transition continuing in a good way. Klas Bergelind: Good. Finally, back to you, Fredrik, on the ROCE target. It's unchanged despite lifting the margin by 2 percentage points. I guess this is just incremental intangibles from recent M&A? Or how should we think about it? Obviously, you're going to invest now in Framo, quite over capacity, but also curious to hear about your further working capital ambition within that. Fredrik Ekstrom: Yes. No. And the reason we have retained the return on capital employed target at 20% is because of exactly the dynamics that you bring up here. It is about a continued CapEx ambition going forward, we reiterate the SEK 2.5 billion to SEK 3 billion a few years going forward. We have announced the investment package in Framo, and we should expect that there will be other acquisitions, beyond the one -- acquisitions we've already made. We have the firepower in our balance sheet to make sure that we can also add on inorganic growth beyond the organic growth opportunities that we have. And a reflection of all of that ambition is why we have returned the return on capital employed target as it is. And it may temporarily -- should all of those things align very much in a short period of time, go below 20%, but with the ambition of going to 20% and above 20% in the long run, of course. Operator: The next question comes from Johan Eliason from SB1 Markets. Johan Eliason: I was just going to ask about the return target that you kept unchanged, but you sort of already replied to it. But I was wondering a little bit. I remember you did lower -- this was before you, but the Board lowered the target from 25% to 20% when you did the Frank Mohn acquisition. How has your major acquisition delivered versus the 20% return target? I guess Frank Mohn today is probably benefiting well above this 20% target. But what about the Norwegian weather forecasting service? Is that also performing well in line with these return targets? Tom Erixon: Well, may I first say that it's so nice to meet an analyst who's been longer with us than ourselves almost. So I appreciate the question very much. And I was not present at the Frank Mohn acquisition, but I think you are completely right that although it was a highly profitable business at the time, but when you put -- I think it was around SEK 13 billion on the balance sheet, to get a 25% return on that number is very hard. We have commented. And of course, as we go forward now, if we look at the Framo acquisition, in today's books, as you know, we are conservative on the goodwill side. So we put as much as we can into amortization, and that is almost completed for the Framo side now. So I think next year is the last year, if I remember correctly. And so we have a slightly smaller balance sheet post on it. We have a company that may be close to twice as big and at maintained margin, I think the return on capital on that investment, now, 12 years later, will start to look quite good. We haven't run those numbers, I think. But we may actually do this ahead of the Capital Markets Day. It's an interesting question. When we have looked at the entire M&A portfolio in recent times, we have concluded that if you take out the acquisitions over the last 15 years or so, our return on capital for the traditional Alfa Laval business or Alfa Laval classic is about 50%. And with the current multiples in the M&A market, we struggle to get to 20% regardless of the profitability. The pricing on those assets allows us maybe to get to a double-digit return number, but definitely not to close to 20%. So we don't see that our CapEx program into our existing businesses is affecting ROCE negatively. We were actually a little bit worried about that when we started the big investment programs years ago, but growth has compensated for that. So we -- the returns on our organic growth journey are excellent. And the question that's going to decide whether we are 25% or 20% or below 20% is the amount of capital we deploy on M&A. We'll get back to that question, I think, at the Capital Markets Day. It's a good one. Fredrik Ekstrom: It's well noted. Tom Erixon: Yes, well noted. Johan Eliason: Yes. No, but it will be interesting. I think the return target is important because it does give you some top price that you're willing to pay, that's obviously interesting for the investors. Looking forward to Capital Markets Day, as I said. Tom Erixon: I think with that, we take the last question. Operator: We have a follow-up question from Magnus Kruber from Nordea. Magnus Kruber: I just wanted to see if you could comment a bit about the development in the other end market category in Food & Water. You've seen a very good pickup there over the past few quarters, and you break out starch and sugars in this quarter specifically. Could you comment a little bit how sustainable this level is? Tom Erixon: Yes. We are reasonably -- well, it tends to be the stability of Alfa Laval, right? It doesn't change that much. The normal dynamics of GDP growth and a happier middle class is taking demands forward. When you think of stability in the Food & Water side, the thing I want you to remember is that we actually dropped quite significantly on the biofuel side 2 years ago. And it's been a very low project activity on the biofuel side other than some exceptions on the ethanol side. And so I think that is still not quite in the books. Pharma came down for us a bit after the COVID, where we had a lot of vaccine-related implementations on pharma. We expect that to come back. Dairy has remained quite good. Beer has been a bit up and down after years of consolidation. We see less of that now, but still the return of CapEx on the brewery side has been a bit better recently than before. So all in all, we see the coming years as reasonably interesting. What I would add to that, if I round up your question with that and say thank you for that, I'll just do a little marketing campaign for the Capital Markets Day. So we will meet in Flemingsberg, which is the technology center for Food & Water and the high-speed separation centers. We are inaugurating that, and we are also displaying part of the technology that we are developing there. And in that context, we will do divisional reviews. And one of the things that is changing is that we are redoing the strategy in the Food & Water division under new leadership with new growth aspirations and new opportunities. So we will review a number of interesting things, some things you will see visually and some things you will see on the slide. We hold those tools as realistic growth opportunities. So I hope you are excited about it. We are almost sold out. Ticket prices are rising. So I would recommend you to sign up quickly, and we look forward to welcome you in Flemingsberg in November. Operator: We have no more questions. Tom Erixon: Thank you. 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: Greetings, and welcome to the TriMas Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sherry Lauderback, Vice President, Investor Relations and Communications. Thank you. You may begin. Sherry Lauderback: Thank you, and welcome to TriMas Corporation's Third Quarter 2025 Earnings Call. Participating on the call today are Thomas Snyder, TriMas' President and CEO; and Teresa Finley, our Chief Financial Officer. We will provide our prepared remarks on our third quarter results and full year outlook, and then we will open up the call for questions. In order to assist with the review of our results, we have included today's press release and presentation on our company website at trimas.com under the Investors section. In addition, a replay of this call will be available later today by calling a (877) 660-6853, meeting ID of 13756458. Before we get started, I would like to remind everyone that our comments today may contain forward-looking statements that are inherently subject to a number of risks and uncertainties. Please refer to our most recent Form 10-K and 10-Q to be filed later today for a list of factors that could cause our results to differ from those anticipated in any forward-looking statements. Also, we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. We would also direct your attention to our website where considerably more information may be found. In addition, we would like to refer you to the appendix in our press release or presentation for the reconciliations between GAAP and non-GAAP financial measures used today during the call. The discussion today on the call regarding our financial results will be on an adjusted basis, excluding the impact of special items. At this point, I'll turn the call over to Tom. Tom? Thomas Snyder: Thank you, Sherry. Good morning, everyone, and thank you for joining us today. As I conclude my fourth month as CEO, I remain energized by the opportunity to lead this great organization. Over these 4 months, I've had the privilege of engaging with our teams around the world, visiting 16 facilities, listening to our employees and gaining a deeper understanding of operations and the opportunities that lie ahead. What I've seen is a company with solid capabilities powered by talented people and deeply committed to delivering value for our customers and our shareholders. At the same time, we have identified opportunities for continuous improvement, areas where I believe we can evolve, innovate and enhance our foundation for the future. Let's turn to Slide 3. This quarter, we've continued to take meaningful steps to strengthen our company and position TriMas for long-term success. I'd like to take a moment to highlight a few initiatives on this call. First, we're launching a comprehensive global operational excellence program to drive continuous improvement, enhance efficiency and share best practices across our footprint. This will be our company-wide operating system rooted in Lean Six Sigma principles and designed to improve safety, quality, delivery and cost while increasing speed and standardization. In the next 2 weeks, we'll begin implementation within our packaging business at 2 larger locations in Indiana and Mexico as initial model lines for this rollout. We expect to use these pilots to prove benefits, refine the playbook and then scale across the network, supported by visible daily management and leadership accountability. Over the next month, we are beginning a comprehensive strategic planning process. While strategic assessments are a regular part of our annual cycle, this year's approach goes much deeper. We will rigorously assess where we win, where untapped potential exists and where to focus going forward. Using internal and external data structured strategy tools and fresh voice of the customer input, we will develop a Hoshin Kanri road map often called True North Alignment that cascades from the enterprise value to each division and site. This work will set clear direction on our most important objectives, define actionable initiatives and assign ownership and time lines for accountability. Our goal is simple: align the entire One TriMas team on the few priorities that matter most and ensure consistent execution across the company. In our Packaging group, we've also launched the One TriMas branding initiative, a strategic effort to unify and elevate our brand identity and organizational culture across all regions and business units. Our goal is to consolidate the 6-plus legacy brands into one consistent brand across TriMas Packaging, creating a more cohesive and compelling experience for our customers and our employees, enhancing cross-selling opportunities and simplifying and fine-tuning our message. As part of this effort, we are conducting internal and customer-facing interviews to gain deep insights as to how our brand is perceived, where we can improve and how we can more effectively communicate the value we deliver. Additionally, we have successfully rolled out our new ERP system to a second location, significantly streamlining our operations and enhancing data visibility. We will continue to invest in automation and tools to enhance productivity, provide critical business data and increase responsiveness. These investments will help us reduce costs, improve consistency and free up our teams to focus on higher-value activities. And finally, as part of our global manufacturing optimization strategy, we are starting to actively evaluate our capacity and footprint to better support growth, enhance operational efficiency and respond to evolving market dynamics. In light of evolving trade policies, including tariffs and the increasing customer demand for manufacturing flexibility, cost effectiveness and localized production, it is more important than ever that we have the right capabilities in the right locations. This effort involves a thorough assessment of our global operations to ensure we can deliver high-quality products efficiently while remaining agile and responsive to customer needs. We are analyzing production volumes, logistic flows, cost structures and regional demand patterns to determine where we can scale, consolidate or invest to optimize performance. Together, these initiatives reflect our commitment to build a more agile, efficient and growth-focused enterprise. By strengthening our operational foundation, aligning strategic priorities and investing in our people and infrastructure, we are positioning TriMas to deliver sustainable value for our customers, employees and shareholders. I'm confident the actions we are taking will serve as a strong catalyst for long-term success. Before I shift gears to talk about our third quarter financial performance, I wanted to touch base on the Board-level strategic portfolio review we announced earlier this year. We are well into that process of evaluating our options and actively working on bringing this review to conclusion. However, as we have said in the past, we're not able to specifically announce any updates at this time, but we'll let you know as soon as we can. The team remains committed to making decisions that serve the best interest of our company and our shareholders. Turning to Slide 4. I'm pleased to report a strong third quarter performance with year-over-year sales growth across all 3 segments. TriMas delivered over 16% organic sales growth, along with improved cash flow and earnings per share, driven by solid execution and disciplined operational management. TriMas Aerospace led the way, posting record quarterly sales with over 37% organic growth, expanded margins and a strong backlog that supports continued momentum. TriMas Packaging remains on track for GDP plus growth, supported by ongoing improvement initiatives that position the business for enhanced performance as we look into 2026. These results are a testament to the dedication and focus of our global teams. I want to sincerely thank all our employees for their hard work and continued commitment to delivering value. With that, I'll turn it over to Teresa to walk through the financials and segment results for the quarter. Teresa? Teresa Finley: Thank you, Tom. Let's turn to Slide 5, highlighting our third quarter 2025 financial performance. We delivered another strong quarter with consolidated net sales reaching $269 million, up more than 17% year-over-year. Organic growth exceeded 16% for the quarter, excluding the effects of currency fluctuations and acquisitions and dispositions. Sales from our February acquisition of GMT Aerospace in Germany contributed $6.2 million, more than offsetting the $5.2 million reduction from the divestiture of Arrow Engine in our Specialty Products segment. Favorable currency exchange contributed an additional $2.1 million to net sales, further increasing our overall growth for the quarter. Consolidated operating profit increased by 34% year-over-year to $30.3 million, reflecting strong revenue growth and a 140 basis point expansion in our operating margin, led primarily by improvements in aerospace. This performance translated to a meaningful increase in consolidated adjusted EBITDA, which grew more than 25% to $48 million with margin improvement of 110 basis points to 17.8%. Our adjusted earnings per share increased to $0.61, representing a 42% increase compared to third quarter 2024. Turning our year-to-date performance on Slide 6. I won't spend too much time here as the trends closely align with our strong third quarter results. Year-to-date, sales are up 12.7%, driven almost entirely by organic growth of 12.6%. We've expanded our operating profit margin by 240 basis points to 11% and delivered diluted EPS of $1.68, a 38% increase year-over-year. These results reflect the sustained momentum across our businesses and the disciplined execution of our initiatives. Turning to the balance sheet and capital position on Slide 7. We continue to maintain a solid and flexible balance sheet, supported by low interest rates and long-term debt with no maturities until 2029. Net debt declined from both prior periods as we continue to pay down the increase associated with the GMT Aerospace acquisition. As a result of higher earnings and ongoing debt reduction, our net leverage improved to 2.2x as of September 30, 2025, down from 2.6x at the end of 2024. Free cash flow for the third quarter improved to $26.4 million, bringing year-to-date free cash flow to $43.9 million, more than triple the $12.6 million generated during the same period last year. This improvement reflects our enhanced operating performance and working capital management. Overall, we believe our capital structure is well positioned to support both near-term operations and future strategic investments. Let's shift gears and take a closer look at our Q3 segment performance, beginning with packaging on Slide 8. In the Packaging segment, organic sales grew 2.6% after adjusting for currency, reflecting continued strength in demand for dispensers in the beauty and personal care market. This was partially offset by softer demand for closures and flexibles, primarily used in food and beverage applications. Operating profit for the quarter was $18.2 million, a 4.3% decline primarily due to a tough year-over-year comparison as third quarter 2024 included a $1.1 million in gains from the sale of noncore properties. As a result, operating margin contracted by 120 basis points to 13.4%, while adjusted EBITDA margin came in at 20.1%. Once again, our teams continued to navigate direct tariff impacts effectively through proactive commercial strategies, including pricing adjustments and supplier negotiations. Looking ahead to full year 2025, we continue to expect GDP plus sales growth and relatively stable margins compared to 2024 as we continue to drive commercial discipline and continuous improvement initiatives that Tom mentioned earlier. With 1 quarter remaining, we're closely monitoring the evolving global tariff environment, which does remain one of the most significant external factors affecting the packaging industry. Longer term, we remain focused on positioning our package business for sustainable, profitable growth. Turning to Slide 9. I'll review our Aerospace segment. Our Aerospace Group delivered another record-setting quarter, once again surpassing $100 million in revenue with a year-over-year sales increase of more than 45%. This outstanding performance was driven by continued strength in the aerospace and defense market, improved throughput against a robust order book, disciplined contract execution and $6.2 million in acquisition-related sales from GMT, now operating as TriMas Aerospace Germany or as we call TAG. The year-over-year comparison also benefited from the absence of a work stoppage that impacted Q3 2024 results. Operating profit more than doubled compared to the prior year with margins expanding by 860 basis points. Our trailing 12-month adjusted EBITDA margin now stands at 23% reflecting the aerospace team's strong execution across the board from accelerated factory floor and operational excellence initiatives to strategic procurement actions and delivering innovative solutions that meets evolving customer needs. Given our strong year-to-date performance, we remain confident in achieving full year 2025 organic sales growth of 20% plus, along with margin improvement of over 500 basis points versus 2024. We're highly encouraged by the long-term growth outlook, supported by a healthy backlog and our continued focus on customer-driven innovation. To sustain this momentum, we are prioritizing targeted capital investments to expand capacity and drive further operational improvements across TriMas Aerospace. If we turn to Slide 10, I will now cover our Specialty Products segment. Norris Cylinder delivered improved performance in the third quarter with sales up 31% year-over-year as they continue to recapture market share. This growth more than offset the $5.2 million reduction in sales resulting from the divestiture of Arrow Engine. As a result, the segment posted overall sales growth of 7.2% compared to Q3 2024. Operating profit for this segment was relatively flat year-over-year as the higher profit contribution related to Norris Cylinder was offset by the loss of profit related to the divestiture. However, it's worth noting that Norris Cylinder grew operating profit year-over-year nearly 40%, while expanding margins another 50 basis points. For full year 2025, we expect Norris Cylinder to deliver mid- to high single-digit sales growth with operating margins trending slightly higher year-over-year. We remain focused on driving operational efficiency and leveraging demand tailwinds to support continued profitable growth within the segment. I will now turn the call back to Tom to provide further details on our outlook. Thomas Snyder: Thank you, Teresa. Let's now look -- turn to Slide 11. As highlighted in our press release this morning, we are raising our full year 2025 outlook following 3 strong quarters. We're increasing both our sales and earnings per share guidance supported by continued strength in our Aerospace business. We now expect full year sales growth of approximately 10% compared to 2024 and adjusted earnings per share in the range of $2.02 to $2.12 as compared to the previous guidance of $1.95 to $2.10 per share. At this new midpoint, this represents a 25% increase over last year's earnings per share of $1.65, an encouraging step forward in our growth trajectory. While we expect much of this positive momentum to continue, it's important to note that Q4 typically reflects seasonal softness driven by fewer production days and customer holiday shutdowns. Additionally, the evolving tariff environment continues to introduce uncertainty in customer ordering patterns and consumer demand, which we are actively monitoring. That said, we remain focused on mitigating these impacts through proactive planning and ongoing performance improvement initiatives. Before turning to Q&A, I want to reiterate how pleased I am to be part of TriMas and how excited I am about our future. While each of our businesses, TriMas Packaging, TriMas Aerospace and Specialty Products is at a different stage in its cycle, all are well positioned to deliver long-term growth and value. I'm excited about what we can accomplish together, and I look forward to working with our teams, customers and investors to build an even stronger TriMas. Thank you. And with that, I'll turn the call back to Sherry. Sherry Lauderback: Thanks, Tom. At this point, we would like to open the call to questions from our analysts. Operator: [Operator Instructions] Our first question comes from Ken Newman with KeyBanc Capital Markets. Katie Fleischer: Teresa, I just wanted to clarify -- sorry, this is Katie on for Ken. I should have said that. Teresa, I wanted to clarify one of the comments you said when you were talking about expectations for packaging margins. Did I hear you say that there's -- you expect those to be relatively stable in full year '25 versus 2024? Teresa Finley: Yes, that's correct, Katie. We expect about flat margins year-over-year. Katie Fleischer: Got you. Okay. And then can you help us think about how much cost out benefited margins within Packaging this quarter? And then how much dry powder you think is left for improvement within that segment? Teresa Finley: Well, I'll start, but I'll turn it to Tom. I think we see some definite upside on the activities that we're putting in place across the Packaging business. The continuous improvement initiatives that Tom referenced should certainly help us manage our costs going forward no matter what environment is presented to us in 2026. So we certainly see opportunities ahead. Thomas Snyder: Yes. We're early in that process. We're identifying opportunities. I anticipate a lot of activity, especially as we look towards next year and the opportunity to -- everything I said earlier really about optimizing our footprint, figuring out where we should be making what and then putting the tools of lean in place and driving standardization across these facilities. As we've talked before, these were really separate companies run independently in a lot of regards, not running to any best practices or any particular standards. And so there's definitely a lot of opportunity to improve that. But again, we're early in that. We're kicking it off right now, and I look forward to continuing to report on that as we go forward. Teresa Finley: Katie, I would add that in the quarter, as previous quarter and likely in Q4, we continue to manage our tariff pressures across the Packaging business. We're doing pretty well and managing that through pricing actions and procurement actions, but there is a bit of a headwind, obviously, on our business and FX that we need to continue to try and overcome, maybe somewhere around 30 to 40 basis points in a given quarter. But we're doing well managing that, but that is a headwind we don't think is going to -- it doesn't look like it's going to disappear anytime soon. Katie Fleischer: Got it. And then if I could just squeeze one more in here. I think Howmet had mentioned that they put it up 30% EBITDA margins in their fastener business recently. Any thoughts on how high the TriMas business could get and if that's a reasonable long-term goal? Teresa Finley: We get that question a lot, Katie. We've had such great performance out of the Aerospace. But I would just say we like where our margins are today. We're looking at certainly balancing growth and balancing continuous increase in margin. We think there's always opportunities. We're constantly looking at robotics and other things to take out costs and to create more throughput. So I don't want to say we're done, but I would say we like where we are today. Thomas Snyder: I would just say, too, let me add to that and say that in the visits that I've been to in these facilities, there's a lot of activity about increasing throughput, value stream mapping their operations, identifying areas where they can reduce waste. They're energized about that. We're pretty excited to see kind of the work that they're doing in that area. And so I think between the throughput improvements that they're making in the plants and then the additional -- and we've talked about this before, the capacity that we had largely through adding human resources, skilled trades into these operations. That is one of the bottlenecks to continuing to improve throughput, and we do that in a very measured approach. And so we did that this year. We have opportunities to continue to do that next year. So we'll see both, I think, throughput increase as well as productivity, overall volume and productivity, both in those aerospace facilities. Hopefully, that gives you a little bit of additional color. Operator: Our next question comes from Hamed Khorsand with BWS Financial. Hamed Khorsand: I just want to start off with on the packaging side. You've talked about different strategic events there and trying to manage the business. Why is it every quarter, there's a lot of moving parts associated with it. And do you feel like you're ahead of the curve or right at where the market is? Thomas Snyder: Can you explain a little bit when you say a lot of moving parts, what you're looking at, what you're thinking about? Hamed Khorsand: Sure. Like last quarter and 2 quarters prior, you were talking about the beauty market moving higher. This quarter, you're talking about how you're trying to manage the business with growth strengths. So I'm just trying to understand like do you actually have -- you're on the pulse of this business or you just plan... Thomas Snyder: Yes. Let me -- I can give you a little bit of insight from my perspective here. We continue to see strong growth in the dispensing side of the business. Especially in certain markets, we see a lot of growth in Latin America. We continue to see that. And I think we've been consistent, I think. I mean I haven't been here that long, but I think that's what we've been saying. The -- on the closure side of the business, it's been -- I think we've been consistent there as well. It's been softer than we'd like to see. And both in the U.S. and in Europe for different reasons, perhaps. We've seen some softness. We're more beverage oriented in Europe, and we're more food-oriented, let's say, on the here. So we've seen some, like I said, softness in that closures market. I think it's consistent with what we've been addressing all year. And the Industrial business, that continues to be a very stable business. This year, in fact, slightly growing for a very mature business. And so that's the -- if you want to talk about the moving parts, I mean, those are the parts that are moving. Teresa Finley: Hi, Hamed, I would just add that we've been consistent all year that we're going to turn out GDP plus growth, and we are on track to do that this year. So in terms of consistency there, I don't know if that helps with your question. That's helpful. Hamed Khorsand: And as you look out into 2026, is there anything that bothers you as far as clarity goes in the packaging business. Thomas Snyder: Well, overall, the situation we're talking about, the tariff situation, the lack of global, let's say, demand and economy, all those kind of macro factors that are going to impact any business, those always worry me a bit. But I tend to be a lot more optimistic than pessimistic when I think about next year because, again, I just think there's a lot of things that this business should have been doing that they weren't doing over the past. And I've addressed those in the plan that we laid out here a few minutes ago as far as looking into the future. So I know consolidating our businesses into like one brand, bringing broader awareness to our customers. I mean a lot of customers don't even know TriMas, let's say, when I say not necessarily our customers, but broadly into the packaging space. When you talk about TriMas, they might know some of the brands. They're closer to some of those individual historic brands, but they don't know the breadth or the depth of kind of what we can provide. And we've seen some firsthand situations here recently where there's been some real surprise, like, "Oh, you do that, that's great." So I think we're going to. That's a really important thing. And then getting our plants operationally aligned and driving best practices, that's something that should have been done from the time these plants were acquired. And so we're going to see improvements on the operating side. We're going to see improvements on the commercial side. And I'm very comfortable with an optimistic view as we look forward. Hamed Khorsand: Great. And just lastly, on the aerospace side, how does your order book look for '26. And Do you have the capacity to grow compared to 2025 levels on a unit volume basis? Thomas Snyder: Yes. Our order book is order booked for the most part, right, for 2026. It's a very, very strong backlog. And then we did add some -- spend some capacity -- some CapEx this year to meet the demands of some of our contracts moving forward. And as I mentioned earlier, we're constrained primarily around our skilled resources that we have in our facilities. They're very high skilled tradesmen that are operating in these facilities. We grow capacity roughly 10% a year, somewhere in that area based on the amount of people that we feel is responsible to add and train and bring up to speed in this highly quality-oriented business. Operator: We have reached the end of our question-and-answer session. I would like to now turn the floor back over to management for closing comments. Sherry Lauderback: Once again, thank you for joining us today and for your continued interest in TriMas. We appreciate your ongoing support, and we look forward to updating you on our progress next quarter. Thank you. Thomas Snyder: Thank you, everyone. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Annukka Angeria: Good afternoon from Helsinki, and welcome to Nokian Tyres Q3 2025 Results Webcast. My name is Annukka Angeria, and I'm working at Nokian Tyres Investor Relations. Together with me in this call, I have Nokian Tyres' President and CEO, Paolo Pompei; and Interim CFO, Jari Huuhtanen. As usual, Paolo and Jari will start by presenting the results. And after that, there will be time for questions. With these words, I will hand over to you, Paolo. Please go ahead. Paolo Pompei: Thank you, Annukka, and good afternoon also from my side. Let's start this presentation with our headline, which is a stronger operating profit improvement in quarter 3, driven by announced pricing in passenger car tire, actions ongoing to further strengthen our financial performance. We are closing an important quarter. And I have to say that I'm very pleased to tell that we are really moving in the right direction. As we said in the headline, our operating profit increased significantly. And obviously, this is very encouraging for the future journey that we have ahead of us. But what we are going to do this afternoon, we are going to talk about our quarterly highlights, the financial performance. Jari will comment on the business unit performance. And then, of course, we will close the presentation with assumptions and guidance. Now let's go to the quarterly highlights. In Slide #4, we had double-digit sales growth. We were able to grow in all the regions. The sales growth was 10.8% in comparable currency. The operating profit improved significantly, plus 427%, and this was mainly driven by our effort in improving our pricing in the passenger car tires. We still have a lot to do. There are still a lot of actions going on in order to improve our financial performance. We're also very pleased about our ramp-up of the operation in Romania that are progressing extremely well, and we are now actually running 24/7. This -- in the month of September, we were also expanding our product offering and brand partnership. We will tell something more in a minute. And of course, there is also starting from the 1st of September, a favorable tariff development in North America for Nokian Tyres. Moving to Slide #5. Let's talk about our new factory in Romania. We are very pleased to say that we are in line with our plan. We will reach 1 million pieces by the end of this year, and we started now operating 4 shifts 24/7. We have now all the people we need to carry on our journey and to make sure we will be able to achieve the target of this year of 1 million pieces. We also released a few weeks ago a new product line that is completing the summer product range at this stage after the all season range that we released only a few months ago with the start-up of the operation in Oradea. Moving to Slide #6. This is also an important step forward for the factory, but also for Nokian Tyres, in particular, for our business in Central and South Europe. We released our Powerproof 2 a few days ago. This is our premium offering in the ultra-high performance segment summer tire. This range is performing extremely well, has been certified in terms of performance and tested by the TUV SUD. And we were able to launch in this new product in the beautiful scenario of our test center in Spain, HAKKA RING, together with more than 160 customers and journalists coming from Central and Southern Europe. This obviously will support our growth in the Central European market, together, obviously, with our winter tire range as well as our all-season tire range. Moving to Slide #7. We're also pleased to tell you that we received once again several testimonies of our premium performance in the winter tire segment, in particular in the Nordics, where we were able to be tested in several magazines or by several associations being scored as #1 tire or on the podium when we talk about studded and not studded winter tires. So we keep our leadership, and we still have new projects coming up in the next few months that will actually reinforce our leadership in the winter tire segment. But we have also some good news related to the heavy tire business. We will receive in a few days silver metal for our Intuitu 2.0 smart tire technology that is going to be fitted in our agricultural tires. This is a very important step forward in terms of connecting the tire to the machine and the operator of the machine, measuring the load of the machine or the pressure and optimizing the operating performance of the machine at the right pressure. Moving to Slide #8. We're also reinforcing our effort in terms of communication. We signed an important agreement for 2 years with the IIHF Association, which is actually Federation, sorry, which is actually going to support the world competition in the Ice Hockey segment in Switzerland in 2026 and in Germany in 2027. We are very pleased to be partner of this important sport because it reflects our value and also it is giving the possibility to Nokian Tyres to be visible to millions of Ice Hockey fans that are obviously happy to view and to support this nice competition. Moving to Slide #10. We are going to look at our performance. Quarter 3 was in some way, stable in Europe, a little bit down in North America. When we look at the performance now year-to-date, we have the market pretty stable in Europe, and we see the market gradually declining in North America when we talk about passenger car tires. The market in truck tires or in the agri tire has been stable in truck tires, while in the agricultural segment is still down compared to previous year, both in the replacement market as well as in the original equipment market. Moving to Slide #11. Despite the, I will say, difficult market condition or stable market condition when we talk about Europe, we are very pleased to say that we were able to grow by 10.8% with comparable currency in the quarter, and we were able to grow in all the regions. But we did really an exceptional good performance in the North American market in a declining market environment. So we are finally doing extremely well in North America, and we are very pleased about the journey that we have done so far. Our EBITDA as well has been increasing up to EUR 65.4 million. This is actually now 19% in percentage of sales. And our segment operating profit has been growing by over 6% to EUR 32.4 million. It's very important to remember that the comparability when we talk about segment operating profit is heavily affected by EUR 13.3 million exclusions or write-down related to the write-down of the contract manufacturing product that we did last year in quarter 3 2024 that are in some way impacting the comparability. This is why we are very pleased about the extremely important growth of over 427% in the operating profit performance that is reflecting really the performance of the company at 360 degrees. Moving to Slide #12. As I mentioned before, we are growing in terms of net sales in all the regions in Europe by 4.6%, in Central Europe and Southern Europe by 9.2%, and we're growing by 27% in North America, supported by good pricing and mix. Moving to Slide #13. We move to the cash flow, in particular, we were able to improve our cash flow performance. This was mainly driven by lower investments, but also by improved working capital as we will see in the next slide. Overall, year-to-date, we are growing in terms of sales by more than 9.4%. And of course, we are improving our segment EBITDA as well as our operating -- segment operating profit. Looking a little bit deeper to the cash flow. You will see that, obviously, the improvement of cash flow was coming, obviously, from the EBITDA improvement of EUR 33 million, then, of course, by an improvement of the working capital, we've been able to grow, reducing our inventory level in our operations. We are also obviously investing less. We are getting step-by-step to a normal level of investments. And of course, we have higher financial expenses. And obviously, we had a lower dividend, but obviously higher debt. So overall, year-to-date, we are improving. And obviously, our target is to become cash positive, meaning generating positive operating cash flow already next year. As we mentioned, we are now guiding EUR 180 million investment level at the end of 2025. This will basically close a long cycle of approximately 3 years that was necessary to reinforce our operations and to build our new manufacturing footprint, in particular, with the latest investment we did in Romania in Oradea. The CapEx are expected to return then next year to a normal level. And of course, we -- as you know, we are entitled to get state aid from the Romanian government up to EUR 100 million, and we are expecting to receive the first part of this incentive by the end of the year or in quarter 1 next year. Moving to Slide #16. I would like to pass the stage to Jari for the performance of the business units. Jari Huuhtanen: Okay. Thank you, Paolo, and good afternoon. I'm moving to Page Passenger Car Tyres. In third quarter, we continued sales and profit growth. Net sales was EUR 234 million and the increase in comparable currencies plus 13.2%. Our average sales price with comparable currencies improved and the share of higher than 18 inches tires increased significantly. Segment operating profit was EUR 38.9 million or 16.6% of the net sales. And the segment operating profit improved due to price increases and favorable product mix. Moving to Page 18. Here, we can see Passenger Car Tyres net sales and segment operating profit bridges in third quarter. Net sales improved from EUR 210 million to EUR 234 million. And clearly, the biggest positive contribution is coming from the price/mix, plus EUR 35 million. Sales volume was slightly down comparing to last year, minus EUR 7 million. And in addition, we had some currency headwind coming mainly from U.S. and Canadian dollars. In segment operating profit, you can see that there are 2 components which are clearly coming visible. First of all, this positive price/mix, EUR 35 million. On the other hand, in supply chain, we have a negative impact of EUR 25 million. Here, the reasons are mostly related to non-IFRS exclusions what we had in last year third quarter. Contract manufacturing inventory write-downs and Dayton ramp-up related exclusions. In material costs, we still had a slightly negative impact, minus EUR 3 million. However, we can say that we are very close to previous year cost level at the moment. Sales volume, minus EUR 3 million, but otherwise, it's very stable performance comparing to prior year. Moving to Page 19, Passenger Car Tyres net sales components, quarterly changes. In price/mix, we can see a significant improvement comparing to last year, plus 16.5%. This is due to implemented price increases and better product mix comparing to last year. In sales volume, minus 3.3% and in currency, minus 1.7% in the third quarter. Moving to Heavy Tyres. In third quarter, we had lower volumes, which affected the net sales and profitability. Net sales was EUR 55.4 million and the change in comparable currencies, minus 4.4%. Net sales decreased mainly due to lower volumes in truck and agri tires. Segment operating profit was EUR 5 million or 9% of the net sales. Profitability declined in Heavy Tyres, mainly due to lower volumes and inventory revaluations, which had a positive impact in last year's third quarter numbers. And in Vianor, in third quarter, we reported improved sales and operating profit. Net sales was EUR 74.9 million and the increase in comparable currencies, plus 7%. Segment operating profit seasonally negative minus EUR 6.4 million or minus 9% of the net sales. However, we can see an improvement both in operating and business profitability. Then I'm handing over back to you, Paolo. Paolo Pompei: Moving to Slide 23 to the assumptions and guidance. Well, we have a very good news in quarter 3 coming from the North American market. As you know very well, we are exporting all-season tire from our factory in Dayton in United States to Canada. And this -- there were obviously counter tariff implemented by Canada in quarter -- at the end of quarter 2. Those counter tariffs have now been removed. So obviously, today, we are in the ideal situation to deliver tires from U.S. to Canada without duties. Anything else remains as it was before 85% of what we sell in the United States is made in United States, and this is making the company much less vulnerable, being -- having a business model that is local for local. And the winter tire business that is going to Canada is supported by our factory in Nokian based in Finland. So moving to Slide 24. Our guidance for 2025 remain exactly the same. We are expected to grow and segment operating profit as a percentage of net sales to improve compared to previous year. We are assuming a stable market to remain at the previous year level. And of course, we are like anybody else, we observe the development of the global economy as well as the geopolitical situation since trade and tariffs are creating some uncertainty and may create some volatility to the company business environment. Of course, we follow our own journey. We have opportunities to grow also in a changing market environment, also supported by our new manufacturing footprint in Romania that is supporting our Central and South European market. We close this presentation. And obviously, we are happy to reply to all your question and answer. Annukka Angeria: [Operator Instructions] The next question comes from Akshat Kacker from JPM. Akshat Kacker: Three, please. The first one on price increases that you implemented, -- congratulations on a good quarter. If you could just put that into context for us, could you just talk about a few regions or product ranges where you've increased these price increases? And specifically, how do you think about the sustainability of these price increases going forward? Because a couple of your peers, the bigger Tier 1s have actually taken down their price/mix assumptions in the last quarter based on the inventory situation and the price mix trade down that they are seeing from the consumers in the market. So just the first question on the price increases and the sustainability of that going forward. The second question is on volumes. I noticed on the passenger coverage that volumes have declined by around 3.5% in the quarter. It's the first quarter where we've seen that volume decline, obviously, somewhat explained by the price increases. But just could you talk to us about overall expectations for volume growth going forward given that the business has been in a supply-constrained mode? And the last one on passenger car margins, please. Again, a very strong development in Q3. Margins have improved to 12% versus the 2% that we saw in Q2. Could you talk about your expectations into Q4? Should we still expect improving mix, improving margins as we go into Q4, please? Paolo Pompei: Excellent. Thank you very much for your question. And obviously, I'm happy to reply to at least the first 2 questions. Talking about price increase, this is a journey that we started already at the end of quarter 1, as you may remember. It was necessary, first of all, to compensate the raw material cost increasing in quarter 1 compared to previous year. And that was mainly valid for all the regions, in particular for Nordics. Then, of course, we combine these price increases also to necessary to gradually reposition our products in Central Europe as well as in North America. The question is if this is sustainable? Of course, we cannot keep increasing pricing. It was extremely important for us, again, to compensate the increasing rising raw material costs and at the same time, to gradually repositioning our products in Central Europe and in North America. Is this affecting volume? Going to the second question, in reality, in a very small part. What I mean is that this important improvement is also related to the strong write-off and consequent sellout of a lot of tires that we did in quarter 3 last year. This is what is affecting the comparability of segment operating profit, but at the same time, it's improving significantly our profit. So this 3% in reality is extremely -- if we take away the action that we did last year in order to release quickly the slow-moving inventory accumulated due to the crisis in the Red Sea, then of course, we can still calculate an important growth for the company. And that is really where the volume effect is coming from. So we are not expecting the price increase to affect volume at this stage and minus 3% is well by the comparability with the previous year due to the action we made in order to release the slow-moving stock that we have accumulated due to the crisis in the Red Sea channel. The margins are improving, obviously will keep improving because at the same time, we are not only improving in terms of prices, but we are also operating more efficiently with our own factories. So obviously -- and now we are moving to the last part of the season, meaning that we will sell in this quarter more winter tire. And so by definition, our margins will keep improving in quarter 4. I hope I replied. Annukka Angeria: The next question comes from Thomas Besson from Kepler Cheuvreux. Thomas Besson: I have 3 as well, please. The first one is on your planned adjustment measures, the personal negotiations that may lead to 80 permanent white collar job cuts. Could you put that in perspective? Is that part of your better or more efficient operations? Or is that coming on top of what you were describing with the new Romanian plant and the substitution of your offtake by your own production? Second question will be on the EUR 180 million CapEx guide. Could you confirm that it does not include any Romanian state aid that may or not happen in 2025? And finally, you had a tough quarter for your ag and trucks business or what I would call the specialty business or industrial tire business. Could you tell us whether you already see a trough coming for that business and when that would be or whether it's still not visible yet when that would be? Paolo Pompei: Thank you very much for your question. I start with the negotiation. Obviously, this is part of our journey when we want to improve efficiency and productivity. So -- and this is necessary to support the company in this journey, in particular, when we talk about SG&A development. So we start the negotiation. And obviously, we will inform you about the progress. But in general, I mean, it's part of our journey to improve our efficiency and productivity within the company. When we talk about the state aid, I confirm that within the EUR 180 million, there is nothing about the state aid. So this -- at the moment, we are not including the state aid in any calculation when we talk about CapEx as well as cash. About the agri and truck business, well, this is a million-dollar question. However, I believe the agri business, in particular, is subject to cycles. And cycles can be long or short. But in general, obviously, we are now landing at the end of second, I would say, almost second years of downturn. So obviously, I'm expecting the agri business at the OE level in particular, to recover pretty soon in the next 6 to 12 months. Obviously, this is not scientific. I'm just observing the history and the cycle that were affecting the agricultural, in particular, tire business in the last 20 years, and you will see there is a growing trend if you take the last 20 years, but this growing trend has gone through up and down with cycle that were lasting in a positive or negative way 2 or 3 years. I hope I replied to all your questions. Annukka Angeria: [Operator Instructions] The next question comes from Artem Beletski from SEB. Artem Beletski: So I also have 3 to be asked. So the first one is relating to the price/mix development in Passenger Car Tyres. And I guess it's also volume related given the fact that it was a bit messy comparison from last year. I think you agree with it. And maybe just a question on pricing side. So could you maybe comment whether there has been some further price changes, what you have done, for example, during Q3, which are not yet visible in the numbers? Then the second question is related to net debt. So I understand that Q3 seasonally is the peak, what we always see in your case. Maybe you can provide us with some type of indication where you see net debt landing by the end of this year. And the last one is just relating to winter tire season. So how you have seen the demand picture so far when it comes to Europe and also North America? Paolo Pompei: All right. Thank you for the questions. And I start with the first question about price and mix development. I agree with you. Obviously, the comparability with last year is affected by the write-off and consequently by the sale of the slow-moving tires in the Central European market. However, we can say that the price and mix development was good for the company also without this effect. Clearly, we have implemented pricing action in quarter 2 and in quarter 3. There will be a carryover in quarter 4, and that is pretty clear. Then of course, we will not make any comment about future price development for obvious competition rules. Regarding the second question was -- sorry, the third question was about the net debt. As you know very well, considering our seasonality, quarter 3 is always the period of the year where obviously our debts are getting to a higher level. So we are expecting the level of net debt to go down in the next quarter. And about the winter tire season, we can say that obviously, the weather was actually a little bit too warm, let's say, in September, but now it's getting colder, both in the Nordics as well as in North America. So we are expecting the winter tire season to basically start as I speak in this moment in November. We had also a good presales activities, obviously, in the previous month. So the market -- we see the market is still growing. So obviously, we are pretty positive about the development of the winter tire sales. Operator: The next question comes from Thomas Besson from Kepler Cheuvreux. Thomas Besson: I'll take the opportunity to ask some follow-up questions, please. First, I'd like to discuss a bit about your working capital, if that's possible. I mean your inventories declined, but receivables increased. Could you indicate whether you see any risk of write-down? And could you talk about your exposure to [ ATD ] Whether it's new, how much it increased? I mean this company went under recently. Did you have any exposure as it moved into Chapter 11 or not? And when I look at your payables, they are higher than usual. Could you explain why and whether this will be a headwind on the working capital front in Q4? And my last question will be on your net interest charge. I mean your net debt obviously has gone up the last 3 years because of your investment program. We've seen the net interest charge in your P&L and your cash flow statement going up. Could you give us some indication about what we should expect for '25, both on the P&L and on the cash flow statement and whether it will already be declining in '26 or be flat in '26 and '25? Paolo Pompei: Okay. Thank you. I will reply to the first one and maybe Jari can also support the discussion on the last 2 topics. About the working capital, the working capital is improving with growing sales year-to-date. So we are very pleased about this development. And obviously, this is really driven in particular by the reduction of the inventory that we have implemented in -- basically during the whole year, in particular now in quarter 2 and quarter 3. The receivables are growing because we are growing in terms of sales. And about ATD, obviously, is a new partnership. I think ATD today is very well supported by strong equity funds, extremely strong from the financial point of view. Of course, our exposure is relative low since we are at the beginning of the journey. So we will grow together with ATD, and we will support -- ATD will support our growth in North America. They are by far the largest national distributor in North America, and they are able actually to very well support our sales in any corner of that country. Payable are higher, obviously, because we are growing in Oradea. But please, Jari, would you like to comment the payable and net interest? Jari Huuhtanen: Yes. Thank you. So first of all, payables, of course, we have multiple different actions ongoing to get a little bit better performance in payables. Unfortunately, at the moment, we are not -- have not been able to see, but of course, we will continue and we want to improve in that respect. And I think the second question was related to net debt and interest expenses in our P&L. Of course, we have more net debt as we discussed earlier and interest expenses are higher than what we had in last year. And then on top of that, you can notice from the report as well that we have some hedging costs, which are related to our Romanian operation and especially to the project to build a new factory in Romania. It's quite difficult to comment anything related to '26 at the moment. So let's come back to that later. But that -- those are the main kind of answers or reasons behind. Annukka Angeria: The next question comes from Rauli Juva from Inderes. Rauli Juva: Rauli from Inderes. A question still on the passenger car tire margins. You touched this already, but just want to be clear, you posted in Q3 now around 16% EBIT margin as in last year and then your Q4 last year was really weak. So I guess you should be improving from that year-on-year. But how do you see the dynamics on the passenger car tire margin from between Q4 and Q3? Paolo Pompei: I think the level of margins that we are reaching today are rewarding really the strong effort of the team globally in improving pricing and at the same time, improving our cost when we talk about manufacturing. So they are a natural consequence of what we are doing around the company. And obviously, we should expect that we are improving because this is what we are here for in order to reach our financial targets. Pricing, as I told you, already has a strong impact, but we should not underevaluate as well the improvement that we are having also from the manufacturing point of view, also considering that last year, we were excluding in quarter 3, the part of the cost that we had in North America in Dayton, while this year we don't have those kind of exclusions. So in terms of comparability, I believe that we are really progressing in the right direction, and this is really encouraging. So you should see step-by-step margins improvement. Akshat Kacker: The next question comes from Akshat Kacker from JPM. A couple of follow-up questions, please. The first one, when I think about your production capacity and your footprint, could you talk about your overall plans for capacity additions going into next year, please? Are you adding more capacity at Dayton or in Finland, please? And the second part of the question is, could you just clarify the contribution from the Romanian plant in terms of commercial tires in this quarter? And how should we expect offtake agreements to progress going into next year? Just a total overview on overall capacity planning, please? Paolo Pompei: Thank you very much. As I mentioned several times, and this is very important, I will focus -- we will focus as a company on profitable growth. So capacity now is there. We were able to build this capacity. We are very pleased about what we were able to do so far, but now it's really time to focus on profitable growth. So the capacity that we have today, it's enough to support our strategic term objective for the next 3 years. So we will not need to implement additional capacity at this stage in -- both in Central Europe as well as in North America. Clearly, we will do specific adjustments on specific lines since we are going, for instance, in terms of mix. So we are producing bigger and bigger sizes. So we will need to do some adjustments in order to increase eventually the capacity on bigger sizes. But in general, I would say, overall, I think it's now time to harvest what we did in the last 3 years and to make sure that we are able to saturate our existing capacity. So answering briefly to your question, we don't see the need to add additional capacity in the next 2 years at this stage. When we talk about offtake, of course, we are reducing the level of offtake. We have indicated that from the strategic point of view, in average, 10% of our total volume will remain in offtake to keep flexibility and to make sure we will be able to get the support of somebody else for product lines that we believe is not strategic to produce internally within the company. Romania start to contribute to the sales in the Central European market. And that is already ongoing since May, June this year. And obviously, we can expect that in the future, more than 80% of what we sell in the European market will be supported by our Romanian factories for Central Europe as well as Southern Europe. Annukka Angeria: The next question comes from Thomas Besson from Kepler Cheuvreux. Thomas Besson: I'm sorry for coming back in slot time, but just to come back on the previous question. I just want to make that clear because right now, you're talking about 1 million Romanian capacities, and you said you don't want to increase capacities, but you still aim to have substantially higher production levels in Romania if you plan to be able to supply 80% of your European sales with Romania. So you mean -- I just want to clarify what you said. You mean you're not going to have to add incremental CapEx, but you're still able to increase the absolute level of production in Romania, 2 million, 3 million, 4 million in the next couple of years, knowing that the investment is behind you, right? Paolo Pompei: Thank you very much. And you don't need to apologize if there are questions. So this is really what this section is all about, answering to your question. So we're happy to do it. We need to distinguish about production and capacity. By the end of this year, we will produce 1 million tires, but we have already capacity to produce up to 3 million tires. Step by step, we will during 2026, complete this expansion and obviously, adding semifinished product lines more than curing or building machineries. So this is why we say the investment in Romania for the next 3 years will be really limited because we are at the end of the process. So in total, we will have 6 million pieces capacity already by, let's say, the end of next year, eventually, obviously, we -- this is really how the factory works. So 1 million is the production, but the capacity already by the end of the year will be up to 3 million pieces and up to end of next year up to 6 million pieces, reinforcing areas that are not strictly related to curing and building, but mainly about mixing and semi-finished products. I hope I replied to your question. Annukka Angeria: The next question comes from Artem Betsky from SEB. Artem Beletski: Yes. Also one follow-up from my end. And it is relating to PCT profitability. So what we have seen during years '23 and '24 and also beginning of this year is that margins have been extremely volatile on a quarterly basis. Looking ahead, do you anticipate this type of volatility will be clearly lower? And maybe just coming back to past development, what have been the key reasons in your view that margins have been swinging so much in that segment? Paolo Pompei: For sure. Thank you for your question. Clearly, again, we need to look at the history of this company in the last 3 years. So we came out from the storm, and it was difficult to reach stability when we had obviously the necessity to switch and to change completely our production footprint, moving out from Russia quickly and then building our new footprint, reinforcing our factory in Finland as well as in North America and at the same time, building a new greenfield in Romania. So it was really difficult for the team to manage all this transition. And in some way, we are still managing this transition. But of course, we see finally good progresses, and we see finally a gradual stabilization of our performance and continuous improvement. So answering to your question, of course, you will see more stability in the development of the margins moving forward because now finally, we can leverage our increased capacity. We can leverage efficient and efficient manufacturing footprint. And at the same time, we are improving day by day, as I mentioned, already in placing our product in the market and improving pricing capabilities around the company. I hope this will reply to your question. Annukka Angeria: There are no more questions at this time. So I hand the conference back to the speakers. Operator: If there are no further questions, it is time to end this call. I want to thank you, Paolo and Jari and especially all of you who participated in this call. We wish you a nice rest of the day. Paolo Pompei: Thank you very much, and looking forward to the next call. Jari Huuhtanen: Thank you.
Operator: Ladies and gentlemen, welcome to the Alfa Laval Q3 '25 Report Conference Call. I'm Valentina, 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 Tom Erixon, CEO. You will now be joined into the conference room. Tom Erixon: Good morning, and welcome to Alfa Laval's Third Quarter Earnings Call. And Fredrik and I, we're going to take you through the quarter. So let me, as always, start with a couple of introductory comments. Now with a solid order book and good demand in service and short-cycle businesses, sales grew 8% organically in the quarter. It was a stable and clean quarter operationally and earnings increased to a new record level of SEK 3.2 billion in the quarter on the EBITA level. And then finally, as you noticed, we have adjusted our financial targets to better reflect our financial performance levels. And I will comment on the financial targets a bit later. So let me go to the key figures. Order intake was good in the quarter with a 10% organic decline as expected due to the normalization of demand in cargo pumping applications. In the short-cycle business, both order intake and factory utilization are is at high or record high levels in several end markets and product groups. Sales developed well, supported by all 3 divisions and generated a margin of 18.4%. In all, it was a well-executed quarter with mix effects contributing to the margin improvement. Moving on to the Energy division. The market dynamics are shifting towards a stronger HVAC, heat pump data center growth and moderate expectations on CapEx projects in the fossil fuel business. Cleantech remains on a positive growth track across a wide range of applications despite growing concerns regarding the political support for the decarbonization journey in Europe and in the U.S. Strong momentum in energy efficiency, growing demand for nuclear and an expected scaling, making new technologies financially sustainable are the foundation for future growth in the cleantech sector. The margin was sequentially stable, but note that transaction costs related to the Fives Cryo acquisition was charged to the P&L in Q3 on the Energy division. So moving on to Food & Water. Order intake was firm in most end markets. Large order bookings were relatively slow, although the project pipeline still remains healthy in terms of outstanding quotations. Short-cycle demand drove a positive mix change with a healthy margin. The project business generated a positive margin improvement in the quarter, but we are still working through some project execution issues in the quarters to come. Then coming to Marine. Profitability remained sequentially stable on a high and good level with good order execution in the quarter. While the record ship contracting year in 2024 will not repeat, contracting at the yards is expected to remain at about 2,000 vessels per year pace, approximately matching the global yard capacity. As expected, the 2024 contracted ships are now converted into our order books with record level orders in several product groups within the Marine division. The order intake decline compared to last year was entirely related to the expected normalized order level in cargo pumping with new orders at a normal rate for the business. So on to service. Service has grown substantially over many years and now accounts for 31% to 32% of orders, structurally somewhat higher than historically. Still, this year, we have worked through a lot of operational challenges, both related to physical distribution centers and the digital systems supporting the spare parts flow in the Energy division. It is and was a needed scaling project to cope with the larger volumes. And with the troubleshooting behind us, we expect the Energy division to return to service growth in line with other divisions. In the Marine division, service accounted for 40% of order intake, supported by a larger installed base and an aging global merchant fleet. If the aging fleet provides some tailwinds, the constant transfer of older tankers to the Russian dark fleet is a headwind and obviously outside our business scope. Then finally, a few comments on key markets. China and the U.S. accounting for approximately 40% of our business had a strong quarter with good demand in many areas. Note that the cargo pumping affecting an otherwise growing business in both China and Korea. Most markets are stable to positive at this point in time in the quarter, but looking forward, Middle East CapEx projects may be negatively affected by the lower oil price. And with that, I hand over to Fredrik for some further comments. Fredrik Ekstrom: Thank you, Tom. So hello, everyone. Let us get started by recapping the order intake in quarter 3 at SEK 16.6 billion. Organic growth contracted with 10% in the quarter. A substantial part of this contraction stems from the lack of large project orders. In the Energy division, both the welded heat exchangers and Circular Separation Technologies noted the absence of large orders. Desmet and food systems in the Food & Water division denoted the same pattern. And finally, in the Marine division, the continued normalization of tanker vessel contracting impacted the numbers. Important to mention in this context is that the project list remained strong, both in quantity and quality. It is the conversion to orders that is occurring at a lower pace, reflecting uncertainty in the market driven by external factors. Transactional business has a different development, up 8% in the quarter comparatively, excluding currency movements. Both gasketed and brazed heat exchangers booked orders above the same period last year in the Energy division. Fluid handling equipment, separators and decanters also booked higher order intake levels than in quarter 3 last year in the Food & Water division. And finally, our traditional marine products are also continuing to outperform quarter 3 last year. Service was up 8% in the quarter, excluding currency movements. Currency has an overall negative impact of almost 6% and, our acquisitions so far this year have a positive impact of 3% on the total. The same pattern repeats on a year-to-date basis and is an important input to any trend analysis. Book-to-bill in the quarter was 0.96 with a remaining strong backlog of SEK 51 billion, of which SEK 16 billion is slated to be invoiced in quarter 4. The backlog price levels are well in line with current input prices and in line with current tariff levels. Now on to sales. SEK 17 billion in sales in quarter 3 represents a strong historical level for quarter 3. Our manufacturing entities are delivering to our customers on commitment and on high utilization levels, which is clearly visible in the gross profit boosted by a strong factory and engineering result. Currency once again impacts negatively on a comparative basis, but prominently organic growth is up 8% in the quarter. Worth mentioning here is that the proportion of large project business in the invoicing mix is high. Transactional volumes are up, but not to the same extent. Net sales for service grew 3.1% compared to the same quarter last year, accounting for a mix of 30%. We expect this mix pattern to continue into quarter 4. Gross profit improved to 36.8%, boosted by better factory and engineering results and positive purchase price variances compared to the same quarter last year. Operating income increased with 12.6%, to SEK 3 billion. Sales and administration expenses were SEK 2.6 billion during the third quarter, corresponding to 15.4% of net sales. Research and development expenses were SEK 427 million during the third quarter, corresponding to 2.5% of net sales. Earnings per share in the quarter amounted to SEK 5.53 and SEK 15.22 for the first 9 months. The corresponding figure, excluding amortization of step-up values and corresponding tax was SEK 15.97 for the first 9 months. Now on to profitability. The Energy division posted an EBITA margin of 16.6%, which is lower than previous quarters due to a shift in mix towards large orders and costs related to the acquisition of Fives Cryogenics. Continued strong sales in the transactional business portfolio and service compensated for a large project mix invoicing in the quarter, yielding an EBITA of 16.1% for the Food & Water division. The Marine division continued with a positive mix of invoicing from cargo pumping systems and service, which yielded a 23.5% margin. On a group level, the adjusted EBITA margin of 18.4% is a record with a -- sorry, is high with a record SEK 3.2 billion in money terms with a negative currency impact of SEK 178 million. Now on to the debt position. Post 3 acquisitions so far this year, most notably the Fives Cryogenics business, debt stands at SEK 18.6 billion or 1.3x last 12 months EBITDA. Net debt, excluding leases at 0.86 and including leases at 1.1 last 12 months EBITDA. Given our stated thresholds, the group retains sufficient debt power to complete further quality acquisitions as those opportunities arise. Cash flow from operating activities was SEK 2.2 billion in the third quarter and SEK 5.8 billion for the first 9 months. The lower cash flow is mainly due to an increased working capital compared to the same period last year, driven by inventory and predominantly [ WIP ] and decreasing advance payment as large projects are invoiced. Acquisition of businesses in the first 9 months was SEK 9.3 billion, whereof SEK 8.8 billion for the Cryogenics acquisition, and SEK 529 million was due to two minor acquisitions. Financing activities amounted to SEK 3.9 billion in the quarter and SEK 4.5 billion in the first 9 months. These numbers primarily composed of the additional debt added for the acquisitions of SEK 8.7 billion and a shareholders' dividend of SEK 3.5 billion. Before concluding, some guidance for the quarter ahead and looking into 2026. CapEx guidance for the fourth quarter is SEK 700 million, and reiterated guidance of SEK 2.5 billion to SEK 3 billion in 2026. PPA amortization of SEK 175 million in quarter 4 and SEK 580 million in 2026. These numbers include the preliminary purchase price allocations for the three acquisitions in 2025. Tax rate is guided to stay in the interval of 24% to 26%. And with that, I hand back over to Tom for some words on quarter 4. Tom Erixon: Thank you, Fredrik. Some forward-looking comments then as a summary. Let me start with the financial targets. The change in financial targets should not be seen as a change in guidance. We are making the adjustment because of two main reasons. First, we tend to overshoot the targets and consider them a floor level for performance. Now we are moving the targets into the present performance range, and it's important for us, including for internal reasons that we have similar objectives externally and internally. Second, we want to recognize that the investments during the last 5 years into technology and capacity were made for good reasons. We believe we have invested our shareholders' money responsibly and profitably, and we expect to continue to convert those investments into profitable growth in the next 5-year period. So finally, our crystal ball is no better than yours. If global macro deteriorates, if the energy transition stumble, if AI and data centers run into difficulty, we and others would find financial targets challenging. But with that said, we have changed the targets in terms of growth to 7% sales growth. And the EBITA margin moved up to 17% over the cycle. And we kept the ROCE target at the current 20% just to allow for the effects of future potential acquisitions. Regarding the next quarter, we believe demand in the fourth quarter is sequentially stable and on about the same level as in the third quarter. And on a divisional level, we expect the Energy demand to be higher, the Marine to be somewhat lower and the Food & Water to be stable compared to the third quarter. So with that, let's get over to the Q&A session. Operator: [Operator Instructions] The first question comes from Gustaf Schwerin from Handelsbanken. Gustaf Schwerin: Can I ask on the Energy division orders? If we look at this organically, they are largely unchanged versus Q2, so a bit lower than what you guided back during the summer. You, of course, mentioned the decision-making here. So given that you're now saying this should increase in Q4, has anything underlying really changed? Or is this just a matter of slower commercial rates on the orders? Yes, that's the first one. Tom Erixon: It's a good question. I think our perspective is that it is a fairly stable growth curve and sometimes projects end up in one quarter or another. So we are relatively positive to the demand trend in Energy. And given that we see improvement on the HVAC side and in a number of areas, the outlook for Q4 is reasonably positive. So I think it's more a question on when bookings are taking place than any change. We had a reasonable positive view 3 months ago in terms of the growth perspective, and we remain committed to that. Gustaf Schwerin: Okay. Then secondly, on the margin in Energy, can you give us a rough sense of the M&A costs here, and if we should expect this going forward as well? Tom Erixon: You should expect that the margin was essentially unchanged compared to Q2, excluding the cost related to the transaction. There will be some costs also in Q4, but I believe on a lower level. And we are not dealing with them as adjusted earnings. We're just [ charging ] them straight off. Operator: The next question comes from Magnus Kruber from Nordea. Magnus Kruber: Magnus from Nordea. Could you -- with respect to Cryogenics, does that business sit completely within the process industry end market? Tom Erixon: Yes. I mean it depends. There are essentially three application areas for Cryo at present. One is normal industrial gases, and the other one is LNG. And gradually, we expect hydrogen and energy transition applications, including carbon capture, be growing as part of the segment. So those are the end markets that we are dealing with. Largely, the applications are for larger projects in the industrial space. But I remind you that there's also Cryogenics pumping side that may fit well with our Marine business and some other applications as well. So I think the Cryo side may be a bit wider as we go along. But presently, essentially, you could consider it the process industry-related application. Magnus Kruber: Perfect. And secondly, light industry and tech saw a second quarter of declines year-over-year. Of course, FX is part of that. But could you comment a little bit about the momentum in data centers and other parts of the business, please? Tom Erixon: Yes, I think it's a correct observation. We are very comfortable with the development on the data center side. And we are entering into the expected frame agreements. And -- but I think what happens is that in terms of the actual quarterly bookings of the order, there are some variations. So in terms of progress on the data center side, it was good in the quarter. We expect that to continue into Q4 and next year. So we're on track with our plans, but the actual order intake bookings in Q3 was not that strong. Operator: The next question comes from Carl Deijenberg from DNB Carnegie. Carl Deijenberg: So first, I want to come back to the acquired Fives Cryogenics. I know you've talked about in the past that the aftermarket exposure in this entity relative to the, let's say, core Alfa Energy division is lower. And I just wanted to understand is there any difference here in the seasonality on the earnings given the sort of differences in the operational character? And also maybe going forward, I saw that you were adding roughly SEK 2 billion in the backlog. I guess this relates to the acquired entity. And given, let's say, the longer cycles you're addressing there relative to the transactional exposure in the Energy division, is there any significant quarter here going forward that you're set to finalize something or any large order that is going to come in that we should be aware of? Tom Erixon: I will not comment on individual orders, of course, but we always monitor our pipeline of outstanding quotes. And if I look at that pipeline, both in the Food & Water division and in the Energy division, it is relatively positive. The conversion time and if it gets through the final CapEx decision, there's always some uncertainties. But in general, we have a positive feeling around the pipeline in the Energy division, specifically for Q4. The Cryo, I don't -- it is, as you say, low on service. It will probably remain that way. The order intake will vary over the quarters. We had, I think, a normalized Q3. We expect a relatively strong Q4 on the Cryo applications. But in terms of earnings and how we execute those projects, it's percentage completion. I think we will -- Fredrik will work to have that as a stable and correct representation of progress every quarter. So I don't think -- if you want to add something? Fredrik Ekstrom: No, there's no particular seasonality to the percentage of completion. It's when the projects come to fruition and commissioning starts. So there's no deviation from that point of view, and there's no seasonality from that point of view. Carl Deijenberg: Okay. Very well. And then secondly, just very quickly on the pumping systems side. I see here in Q3 that orders seem to be stabilizing and actually being up slightly Q-on-Q, not by a huge amount, but a little bit. And could you just talk a little bit now on the sort of backlog or the timing on the orders you're taking in now on Framo and the lead times, just to understand the phasing of the backlog and so forth in Marine? Tom Erixon: Yes. I will not give you the full timeline on everything, but we are clearly fully booked for Q4, and we are essentially fully booked for 2026. So what we expect to see now is the normalized level renewing normal order flows as the contracting in '26 is expected to remain at about the 2,000 ships. And we don't see huge fluctuations in tanker contracting either. We think sort of with some variations between quarter, we will see a reasonable amount of new orders being signed, new contracts being signed. And so we were at Q3, if you think about it historically, actually perhaps somewhat on the high side when it comes to sort of our average order intake level. So we were pleased with the quarter. I think it substantiates that although we are not going to be at 2024 level in terms of order booking expected for a long time, we will continue to run that business on a good level. And that is also reflected in the investment decision we announced with our biggest CapEx decision in our history of SEK 4 billion. Although spread over a number of steps, a number of sequences and over 5 years plus, it is a big commitment to a business we believe in. Operator: The next question comes from Uma Samlin, Bank of America. Uma Samlin: My first one is on your guidance. So would you be able to help us to clarify how should we think about your growth guidance of 7%? What component of that is organic versus inorganic? And also on the margin guide, did I hear you clearly that the guidance is not a floor, but more of a through-cycle average margins? If that's so, where do you think we are in terms of the cycle? Tom Erixon: Yes. The growth ambition includes the possibility of acquisitions. We will make those judgments as we go, partly on where we are on the organic side and the macroeconomics and partly what opportunities we have on the M&A side. But we feel we have built a stable foundation for organic growth in the coming years. So without that, we would not have stretched our growth targets above the 5% we were at historically. And obviously, as you see, current level is higher. And at some point in time, the spread between the target and the floor level versus where we were just becomes a little bit problematic. So we think this is a good reflection on the growth side. On where we are in the cycle? If you asked me 10 years ago, I would give you a reasonable answer. After the last 5 years when we've been going through a COVID, shutdown, hyperinflation, a trade war, I have no clue where we are. The only thing I know is that with all of the turbulence that we've been living with in global markets, we come through that in a good way. And if we get some stability in the world regarding wars, regarding trade routes, regarding tariffs, I expect that we will have a couple of good years ahead. But to predict the macro events at this point in time seems to be a bit problematic. So we will deal with it as we go. But obviously, if we have a sharp downturn in the coming years, it will affect our financial performance just as everybody else. Uma Samlin: That's super helpful. May I just have one more follow-up on Marine. So how should we think about your expectation for Marine orders into Q4 and into '26, given the contracting has been fairly weak year-to-date. We just heard from your competitors who's expecting sort of like for '26 and '27 marine contracting to be up 30%. What's your thinking on that? Where do you see is the normalized level for Marine orders? Tom Erixon: Well, as I've said a couple of times, if we look at our invoicing path in Marine, it's a somewhat better way to track us financially than on the order intake and the contracting side. The global shipyard capacity in terms of deliveries is at about the 2,000 ship level, thereabouts. It may increase somewhat in the years to come, but we are not quite there yet. So that means that irrespective -- and basically, the yards are fully loaded for the years to come. So we see a lot of stability in terms of our delivery path in the coming years. In some areas, we are obviously tight on capacity now, but we are meeting our commitments and our obligations towards our customers. And there's a team who's doing a very, very good job on that. But sort of the downward risk in terms of volumes of invoicing for the foreseeable future is not -- does not look as a huge challenge at this point in time. I remind you that last year, we had an order intake of SEK 30 billion, about 50% ahead of the normal numbers. And so I said then, and I repeat that we are not a SEK 30 billion division in terms of invoicing, but we are on the SEK 20 billion plus. And I think it's from that level that we work with the organic growth and potential acquisition growth going into '26. Operator: The next question comes from Andreas Koski, BNP Paribas Exane. Andreas Koski: So three questions. First, on Marine sales. Can you give an indication of your pumping systems sales in the quarter? Are we at a level around SEK 2.5 billion or even closer to SEK 3 billion? And did I understand it correctly that you are fully booked through 2026. So the sales level that we're seeing in Q3, we should also expect through 2026? Tom Erixon: I will not give you detailed numbers to the million on individual path. But I want to remind you that the pumping systems include an offshore business. It does include a small aquaculture business. And so the whole thing is not and will not be on cargo pumping applications for tankers. So just for you to keep that in mind. But with that said, all of those businesses are in a good shape. And the demand situation looks -- despite some concerns on the oil and gas side, the demand situation for offshore looks reasonable going forward. The service business in that area remains strong. So that's sort of the backdrop of the business. I think in terms of invoicing, we are more or less at capacity, and the big investment program that we are doing is partly going to cope with the existing demand pressure, modernization, efficiency, automation and site consolidation improvements. But that will not have any major impact on invoicing capability for next year. And in any case, I think at the end of the day, it's the yard capacity that is determining the invoicing level in 2026. And I think they are pretty much running at full pace as we see it. Andreas Koski: Yes. The reason for asking is to try to understand if we should expect a margin of 23%, 24% also for the full year 2026 because the mix will remain as positive as it is today, but maybe you don't want to give any indications of that. Tom Erixon: I have full confidence in your ability to make your own calculation on that. Andreas Koski: Yes. Okay. And then on the order intake side in Q3, I understand Fredrik -- I think Fredrik mentioned that you lacked large project orders in Q3, but that the project business remains strong, both in quantity and quality. So I just wonder, in your outlook statement, have you assumed that the larger part of that project pipeline will convert into orders? Fredrik Ekstrom: No. To say that a larger part of the project list that we have right now would convert into quarter 4, then we would be giving you a different guidance... Andreas Koski: No. I mean a larger part than in Q3, I mean. Fredrik Ekstrom: Well, the conversion rate is determined by a lot of factors, and some of them are clearly external and clearly are held back on uncertainty. And if we see the uncertainty decreases in the coming 20, 30 days and assuming that, that's sufficient for somebody to make the final decision on an investment, then we might see that we have orders that have slipped in from quarter 3 that we expect to come into quarter 4, and there will be orders in quarter 4 that may very well slip into 2026. So it's hard to give you an exact guidance more than the one we already provided for quarter 4. Andreas Koski: Understood. And then lastly, if I may, on your new financial targets. If you want to elaborate and explain why you didn't go for a more ambitious margin target? And how much of your new growth target is expected to be organic? Tom Erixon: Yes. I think on the organic, some people already observed it was quite in line with our 2030 target of SEK 100 billion. We stick to that one. And let's see how the mix is. Obviously, the reason we are increasing the growth target is for organic reasons. We may or may not have some M&A opportunities converting in 2026 and 2027. But we think we have a good growth platform installed, build up, invested into capacity-wise created space for. So the organic growth is, I think, for us, the most important part of the growth story for us. So I leave it at that. We see where it comes. On the profitability target, I said this during many years, at the 15% level that our ambition is not at this moment in time to optimize our margin at all costs. We are a growth company. We are investing what we think is responsibly and profitably into technology and capacity. We continue to do so. And we think the long-term shareholder will benefit from long-term growth plan, stability in our execution. So we don't want to put ourselves into a type of a profit escape opportunity where we are acting everything that is not generating 17% plus. So this was a measured step reflecting approximately where we were and leaving the floor of 15% a little bit behind us and accepting that the current performance level is perhaps about the target range that makes sense for us. Andreas Koski: So does that mean that we shouldn't expect 17% to be sort of the floor as the 15% was? Tom Erixon: No. I think we did the 15% 20 years ago. I don't think it was, at that time, a floor. It was an ambition. We are not super guiding you on the margin. I mean, as you could notice this quarter, we were above. I think we will fluctuate. I think my point is saying, and I've told you this before, that it would be a very simple trick to increase the margin in Alfa Laval from where we are today with a percentage point or 2 if we decided that the long-term future was less opportunistic. And so we are committed to our long-term growth plan. We are investing in that, and we don't want to cut and limit our opportunities for the long-term growth potential that we see. So that will, in a sense, determine a little bit where the margin will be, and that's why we don't want to go too high on our ambitions because we think there are opportunities. But we also recognize that the 15% is not all that relevant as a financial target. And if you look at your own and everybody else's assumptions, I think the market estimates for the coming 3 years is pretty aligned with our targets. So that's why we're saying that don't think about this as a very strong guidance comment. It's more creating a relevance, not least internally for what we expect ourselves to work with. Operator: The next question comes from James Moore from Rothschild & Co. Redburn. James Moore: Can I just go back to Fives and the charges and just confirm that the Fives integration costs were SEK 215 million in the quarter and that the charge is basically exactly in line with the 430 bps impact on the energy margin year-on-year. And would it be fair to say about SEK 100 million for the fourth quarter? And attached -- maybe we start there, and I could follow up. Fredrik Ekstrom: Yes. No. So what we have indicated is that if you look at the sequential development and you look back a quarter, you probably get a better indication of what that charge was in relation to where we were -- finished in quarter 3 and that the same will probably hold true into quarter 4. Of course, some of this is also dependent on the invoicing mix that we have in quarter 4 with the invoicing mix that we had in quarter 3. decreased the margin. I think a good guidance is to look at quarter 2. So sequentially stable. James Moore: Sequentially, not year-on-year. My mistake. And the underlying performance of Fives, did -- it looks like you did SEK 620 million of revenue for, I don't know, [ 2.75 ] months, which to me looks like it's growing 20%. I don't know if that is the case. And if you strip out the charges, what was the underlying operating margin at Fives slightly accretive to Energy in the kind of low 20s margin range as you previously hoped? Or did it go up with growth? Or was it below due to seasonality? And how does the Fives seasonality play out over the coming few quarters, please? Fredrik Ekstrom: Yes. And as we indicated before, there's no real seasonality to the Fives or to the Cryogenics business unit, as we call it. There's no real seasonality to that invoicing. It's more how it's delivered to the customer and the milestones that are agreed with the customers from a percentage of completion point of view. Of course, the invoicing was good in quarter 3 for the Cryogenics business, and the margins were in line with expectations as we took on a business. There are some -- there is an element of onetime charges and integration charges, but we include those as part of the operating business. James Moore: I understand. And lastly, if I could. I understand the philosophy behind your new targets through cycle, internal benchmarking, et cetera. But obviously, behind that is a fair degree of confidence on long-term organic growth potential. I was just wondering to what degree is that underpinned by existing backlogs? And to what degree is it once you've got through those backlogs, you still see a high pace of growth continuing? And what is it that gives you renewed confidence on that apart from recent growth trends being better? Or is it just recent growth trends being better? Tom Erixon: Yes. We think it's better to look at -- if you're a debt analyst, you will look at the last couple of years and make a prediction of the future. If we do that, and we look at all the investments we've done, and how we described the 2030 target last year, and we will go through that again in our Capital Markets Day in November, there is the basis for our belief. We have, I think, an end market exposure that couldn't be better. And so I think it's up to us to utilize those positions in Energy, in Marine and in Food & Water alike. And are we convinced that we will reach the targets? We think this is the best indication we can give to ourselves, and we communicate the same to you guys that this is where we think we will be. But I would recommend you to come to the Capital Markets Day for a little bit of a review of the verticals and the business opportunities, the way we see the plan going forward rather than just a quick Q&A here. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: I was wondering if we could speak a little bit about Marine regulations. You may have seen the MEPC 84 session in October delayed the decision on, I guess, stronger emissions controls. I'm wondering if you're seeing any knock-on impact in terms of how your customers are ordering, not ordering, delaying orders? Tom Erixon: Yes, it's a very good question. And it's, of course, a situation we monitor extremely closely. It does potentially impact the way a customer will decide. I think our best estimate at this moment in time is that one of the main drivers other than efficiency and fuel efficiency and such, for environmental technology and multi-fuels capabilities, is to create an insurance against having a stranded asset some years from now when and if a new regulatory environment is forcing a decrease in the emissions. Now obviously, for many reasons, not only Alfa Laval's business, we are hoping that there will be a framework implemented in terms of emissions control on the Marine side as well as in other areas. And I think short term that the fair amount of ship owners will continue to hedge their bets as they order new ships. And I remind you that if we look at the multi-fuel levels in the industry right now about -- if you take ammonia and LNG and a couple of other sort of main alternative fuels to heavy fuel oils, the current level of orders are representing about 15% or so of the global fleet, equipping themselves with multi-fuel capabilities. So even if it should go down somewhat, it's not going to be a major impact on us in the next quarters or so. If we look at the current trend curves as they are, they are continuing to grow. But of course, those trend curves are back to time almost driven by decisions prior to the delay of the implementation side. So it's a bit early to really make a call on what is the immediate effect. But I would be surprised if we will see a dramatic change in the trend curve over the next couple of quarters while the uncertainty remain. John-B Kim: Great. And if I may, I'm sorry if I missed this, but can you update us on your newer product offerings in energy? I'm speaking specifically about the liquid-to-chip offering? Tom Erixon: Well, it's -- listen, it is our normal product ranges that are going into air and water cooling, and it's a question of capacities for certain sizes and formats and things like that. So the product mix in our supply chain is changing somewhat. But we are not in a technology development -- we do an awful lot of technology development, but for the data centers, it actually is in line with our current supply capabilities. And so our main challenge is to figure the volume demands in the coming years and matching sort of the supply chain capacities that we need in order to serve that market. So that's where we are on that one. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: Klas at Citi. I had -- coming back to the Energy and Food & Water margins. In Energy, obviously, some costs are linked to the recent acquisition, but you still have the R&D ramp. I was under the impression that, that R&D ramp concluded already in the second quarter. So I'm interested in how you look at this into the fourth. And then in Food & Water, you booked quite a lot of large orders in the second quarter. And obviously, this is a very good margin you're delivering right now. But I'm just trying to understand whether the mix from having then that backlog built up on the larger side will start to weigh on the margin here a bit in Food & Water. I'll start here. Fredrik Ekstrom: Well, if I take Food & Water first, of course, the -- we have a large percentage of large orders invoicing out in quarter 3. But we also have a substantial resurgence of the transactional business, and that's been happening over the last 6 quarters that we have seen an increase in the transactional business, including service. And of course, the fundamental margin accretion that we get from that transactional business and the service mix into Food & Water, of course, lifts the margin overall. So it's not that we have drastically changed the margin profile of large project orders. It's rather the mix that we see in the current quarter. That mix may look different, of course, in coming quarters. But -- so it's a little bit based on that mix. And if we then look at the Energy division. Well, the Energy division, we have spoken a little bit about the margin development before. And if we look at specifically the R&D as your question was, well, we have not put an end date to R&D. R&D is something we continue to do over indefinite period really. I mean, it's about product development. And if I take it one step further back to the question that Tom answered just a second ago around data centers, yes, we have a lot of products that are directly applicable and have a really good fit with the current demand for data centers, but we also have the ability to adapt those products further. And that's part of the R&D that we continually do, and that we do in dialogue with our customers. So I don't think, Klas, you should see the investment into R&D as something that has an end date when it comes to the Energy division or any of our other divisions for that matter. And I don't know if Tom wants to complete more on that. Tom Erixon: I agree. Fredrik Ekstrom: Agreed. Klas Bergelind: Okay. Okay. That's good to hear. Then looking at project orders in Energy, I mean, last quarter, and I'm zooming in now on clean energy. I mean, last quarter, i.e., second, you said that decisions were pushed to the right, reflecting increased uncertainty. It looks like orders are coming back here this quarter. So I'm interested in what happened here. And if you see this elsewhere, i.e., that decision-making on the larger side, Tom, is easing a bit or whether it's just normal lumpiness. Tom Erixon: I think maybe a little bit of both. There is a normal lumpiness in that. We have been having and we continue to have, a rather diversified cleantech order book and order pipeline. And that holds both geographically and application-wise. So the bookings were good in Q3. And although good means that the comparable quarter was maybe a bit weak side, so -- but anyhow, it was in line with what we were hoping for. And if we look at the pipeline, which obviously stretches more than a quarter forward, we see a number of projects and some of them, I would say, financially sustainable without being based on regulatory frameworks or such. So there are -- we have obviously moderated our expectations in the 5-year period as to what the energy transition will do. But we are still following an interesting track on a steady growth area in related to carbon capture, in related to plastic and packaging replacement materials in relation to possibility of SAF, and biofuel coming back a bit after a very low investment period during the last few years. So we are cautiously hopeful that we will see the energy transition continuing in a good way. Klas Bergelind: Good. Finally, back to you, Fredrik, on the ROCE target. It's unchanged despite lifting the margin by 2 percentage points. I guess this is just incremental intangibles from recent M&A? Or how should we think about it? Obviously, you're going to invest now in Framo, quite over capacity, but also curious to hear about your further working capital ambition within that. Fredrik Ekstrom: Yes. No. And the reason we have retained the return on capital employed target at 20% is because of exactly the dynamics that you bring up here. It is about a continued CapEx ambition going forward, we reiterate the SEK 2.5 billion to SEK 3 billion a few years going forward. We have announced the investment package in Framo, and we should expect that there will be other acquisitions, beyond the one -- acquisitions we've already made. We have the firepower in our balance sheet to make sure that we can also add on inorganic growth beyond the organic growth opportunities that we have. And a reflection of all of that ambition is why we have returned the return on capital employed target as it is. And it may temporarily -- should all of those things align very much in a short period of time, go below 20%, but with the ambition of going to 20% and above 20% in the long run, of course. Operator: The next question comes from Johan Eliason from SB1 Markets. Johan Eliason: I was just going to ask about the return target that you kept unchanged, but you sort of already replied to it. But I was wondering a little bit. I remember you did lower -- this was before you, but the Board lowered the target from 25% to 20% when you did the Frank Mohn acquisition. How has your major acquisition delivered versus the 20% return target? I guess Frank Mohn today is probably benefiting well above this 20% target. But what about the Norwegian weather forecasting service? Is that also performing well in line with these return targets? Tom Erixon: Well, may I first say that it's so nice to meet an analyst who's been longer with us than ourselves almost. So I appreciate the question very much. And I was not present at the Frank Mohn acquisition, but I think you are completely right that although it was a highly profitable business at the time, but when you put -- I think it was around SEK 13 billion on the balance sheet, to get a 25% return on that number is very hard. We have commented. And of course, as we go forward now, if we look at the Framo acquisition, in today's books, as you know, we are conservative on the goodwill side. So we put as much as we can into amortization, and that is almost completed for the Framo side now. So I think next year is the last year, if I remember correctly. And so we have a slightly smaller balance sheet post on it. We have a company that may be close to twice as big and at maintained margin, I think the return on capital on that investment, now, 12 years later, will start to look quite good. We haven't run those numbers, I think. But we may actually do this ahead of the Capital Markets Day. It's an interesting question. When we have looked at the entire M&A portfolio in recent times, we have concluded that if you take out the acquisitions over the last 15 years or so, our return on capital for the traditional Alfa Laval business or Alfa Laval classic is about 50%. And with the current multiples in the M&A market, we struggle to get to 20% regardless of the profitability. The pricing on those assets allows us maybe to get to a double-digit return number, but definitely not to close to 20%. So we don't see that our CapEx program into our existing businesses is affecting ROCE negatively. We were actually a little bit worried about that when we started the big investment programs years ago, but growth has compensated for that. So we -- the returns on our organic growth journey are excellent. And the question that's going to decide whether we are 25% or 20% or below 20% is the amount of capital we deploy on M&A. We'll get back to that question, I think, at the Capital Markets Day. It's a good one. Fredrik Ekstrom: It's well noted. Tom Erixon: Yes, well noted. Johan Eliason: Yes. No, but it will be interesting. I think the return target is important because it does give you some top price that you're willing to pay, that's obviously interesting for the investors. Looking forward to Capital Markets Day, as I said. Tom Erixon: I think with that, we take the last question. Operator: We have a follow-up question from Magnus Kruber from Nordea. Magnus Kruber: I just wanted to see if you could comment a bit about the development in the other end market category in Food & Water. You've seen a very good pickup there over the past few quarters, and you break out starch and sugars in this quarter specifically. Could you comment a little bit how sustainable this level is? Tom Erixon: Yes. We are reasonably -- well, it tends to be the stability of Alfa Laval, right? It doesn't change that much. The normal dynamics of GDP growth and a happier middle class is taking demands forward. When you think of stability in the Food & Water side, the thing I want you to remember is that we actually dropped quite significantly on the biofuel side 2 years ago. And it's been a very low project activity on the biofuel side other than some exceptions on the ethanol side. And so I think that is still not quite in the books. Pharma came down for us a bit after the COVID, where we had a lot of vaccine-related implementations on pharma. We expect that to come back. Dairy has remained quite good. Beer has been a bit up and down after years of consolidation. We see less of that now, but still the return of CapEx on the brewery side has been a bit better recently than before. So all in all, we see the coming years as reasonably interesting. What I would add to that, if I round up your question with that and say thank you for that, I'll just do a little marketing campaign for the Capital Markets Day. So we will meet in Flemingsberg, which is the technology center for Food & Water and the high-speed separation centers. We are inaugurating that, and we are also displaying part of the technology that we are developing there. And in that context, we will do divisional reviews. And one of the things that is changing is that we are redoing the strategy in the Food & Water division under new leadership with new growth aspirations and new opportunities. So we will review a number of interesting things, some things you will see visually and some things you will see on the slide. We hold those tools as realistic growth opportunities. So I hope you are excited about it. We are almost sold out. Ticket prices are rising. So I would recommend you to sign up quickly, and we look forward to welcome you in Flemingsberg in November. Operator: We have no more questions. Tom Erixon: Thank you. 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 morning, and welcome to the Fourth Quarter 2025 Earnings Conference Call for D.R. Horton, America's Builder. [Operator Instructions] I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton. Jessica Hansen: Thank you, Paul, and good morning. Welcome to our call to discuss our fourth quarter and fiscal 2025 financial results. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release and supplemental data presentation can be found on our website at investor.drhorton.com, and we plan to file our 10-K in about 3 weeks. Please note that we are now posting our supplementary data presentation at the time of our earnings release. After this call, we will also post our updated investor presentation for your reference. Now I will turn the call over to Paul Romanowski, our President and CEO. Paul Romanowski: Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray, our Chief Operating Officer; and Bill Wheat, our Chief Financial Officer. This year, the D.R. Horton team had the privilege of providing homeownership to nearly 85,000 individuals and families, including approximately 43,000 first-time homebuyers. In total, our homebuilding and rental operations provided more than 91,200 households a place to call home during fiscal 2025. We work every day to use our industry-leading platform, unmatched scale, efficient operations and experienced employees to bring affordable homeownership opportunities to more Americans. New home demand remains impacted by affordability constraints and cautious consumer sentiment. Our teams continued to respond with discipline during the fourth quarter, driving a 5% increase in net sales orders while carefully balancing pace, price and incentives to meet demand. The D.R. Horton team produced solid fourth quarter results to finish the year, highlighted by consolidated pretax income of $1.2 billion on revenues of $9.7 billion, with a pretax profit margin of 12.4%. For the year, our consolidated pretax income was $4.7 billion, with a pretax profit margin of 13.8%. Our homebuilding pretax return on inventory for the year was 20.1%. Return on equity was 14.6% and return on assets was 10%. Over the last 10 years, D.R. Horton has delivered a compounded annual shareholder return of more than 20% compared to the S&P 500's compounded annual return of 13.3%. Also, our return on assets ranks in the top 20% of all S&P 500 companies for the past 3-, 5- and 10-year periods, demonstrating that our disciplined, returns-focused operating model produces sustainable results and positions us well for continued value creation. We remain focused on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders. In fiscal 2025, we generated $3.4 billion of cash from operations after making homebuilding investments in lots, land and development totaling $8.5 billion. We leveraged our strong cash flow and financial position to return $4.8 billion to shareholders through repurchases and dividends. Over the past 5 years, we've generated $11 billion of operating cash flow and returned all of it to shareholders. Over the same time frame, we grew consolidated revenues at an 11% compound annual rate, reflecting consistent, efficient execution and disciplined balanced capital allocation. We strive to offer our customers an attractive value proposition by providing quality homes at affordable price points. We will continue to tailor our product offerings, sales incentives and number of homes in inventory based on demand in each of our markets to maximize returns. Mike? Michael Murray: Net income for the quarter was $905.3 million or $3.04 per diluted share on consolidated revenues of $9.7 billion. For the year, net income was $3.6 billion or $11.57 per diluted share on revenues of $34.3 billion. Our fourth quarter home sales revenues were $8.5 billion on 23,368 homes closed. Our average closing sales price for the quarter of $365,600 is down 1% sequentially, down 3% year-over-year and is down 9% from our peak sales price of more than $400,000 in 2022. Our average sales price is lower than the average sales price of new homes in the United States by $140,000 or almost 30%. Additionally, the median sales price of our homes is $65,000 lower than the median price of an existing home. Bill? Bill Wheat: Our net sales orders in the fourth quarter increased 5% from the prior year quarter to 20,078 homes and order value increased 3% to $7.3 billion. Our cancellation rate for the quarter was 20%, up from 17% sequentially and down from 21% in the prior year quarter. Our cancellation rate is in line with our historical average. Our average number of active selling communities was up 1% sequentially and up 13% from the prior year. The average price of net sales orders in the fourth quarter was $364,900, which was flat sequentially and down 3% from the prior year quarter. Jessica? Jessica Hansen: Our gross profit margin on home sales revenues in the fourth quarter was 20%, down 180 basis points sequentially from the June quarter. 110 basis points of the decrease in our gross margin from June to September was due to higher incentive costs on homes closed during the quarter and 60 basis points of the decrease was from higher-than-normal litigation costs. On a per square foot basis, home sales revenues were down roughly 1% sequentially, while stick and brick costs per square foot were flat and lot costs increased 3%. For the first quarter, we expect our home sales gross margin to be flat to slightly up from the fourth quarter. We anticipate our incentive levels to remain elevated in fiscal 2026 with both incentive levels and home sales gross margin for the full year dependent on the strength of demand during the spring selling season, changes in mortgage interest rates and other market conditions. Bill? Bill Wheat: Our fourth quarter homebuilding SG&A expenses were flat with the prior year quarter, and homebuilding SG&A expense as a percentage of revenues was 7.9%. For the year, homebuilding SG&A was 8.3% of revenues. Our annual SG&A expenses increased 3%, primarily due to the expansion of our platform, including a 13% increase in our average community count. The investments we have made in our team and platform position us to continue producing strong returns, cash flow and market share gains, and we remain focused on managing our SG&A costs efficiently across our operations. Paul? Paul Romanowski: We started 14,600 homes in the September quarter and ended the year with 29,600 homes in inventory, down 21% from a year ago. 19,600 of our total homes at September 30 were unsold. 9,300 of our unsold homes at year-end were completed, including 800 that had been completed for greater than 6 months. For homes we closed in the fourth quarter, our median cycle time measured from home start to home close decreased by a week from the third quarter and 2 weeks from a year ago. Our improved cycle times enable us to hold fewer homes in inventory and turn our housing inventory more efficiently. We expect our sales pace will increase in the first half of our fiscal year in preparation for the spring selling season, and we will continue to manage our homes and inventory and starts pace based on market conditions. Mike? Michael Murray: Our homebuilding lot position at year-end consisted of approximately 592,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. 78,000 or roughly half of our owned lots are finished and the majority of our option lots will be finished when we purchase them over the next several years. We are actively managing our investments in lots, land and development based on current market conditions. We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others. Of the homes we closed during the quarter, 65% were on a lot developed by either Forestar or a third party, up from 64% in the prior year quarter. Our fourth quarter homebuilding investments in lots, land and development totaled $2 billion, of which $1.3 billion was for finished lots, $540 million was for land development and $120 million was for land acquisition. For the year, our homebuilding investments in lots, land and development totaled $8.5 billion. Paul? Paul Romanowski: In the fourth quarter, our rental operations generated $81 million of pretax income on $805 million of revenues. From the sale of 1,565 single-family rental homes and 1,815 multifamily rental units. For the full year, our rental operations generated $170 million of pretax income on $1.6 billion of revenues from the sale of 3,460 single-family rental homes and 2,947 multifamily rental units. Our rental property inventory at September 30 was $2.7 billion, down 7% from a year ago and consisted of $378 million of single-family rental properties and $2.3 billion of multifamily rental properties. We remain focused on improving the capital efficiency and returns of our rental operations. Jessica? Jessica Hansen: Forestar is our majority-owned residential lot development company, and our strategic relationship is a vital component of our returns-focused business model. Forestar reported revenues for the fourth quarter of $671 million on 4,891 lots sold with pretax income of $113 million. For the full year, Forestar delivered 14,240 lots, generating $1.7 billion of revenues and $219 million of pretax income. 62% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton and $470 million of our finished lots purchased in the fourth quarter were from Forestar. Forestar's strong, separately capitalized balance sheet, substantial operating platform and lot supply position them well to provide essential finished lots to the homebuilding industry and aggregate significant market share over the next several years. Mike? Michael Murray: Financial services earned $76 million of pretax income in the fourth quarter on $218 million of revenues with a pretax profit margin of 34.7%. For the year, Financial Services earned $279 million of pretax income on $841 million of revenues with a pretax profit margin of 33.1%. As we now post the supplemental data presentation to our investor website prior to the call, we will no longer review detailed mortgage metrics during our prepared remarks. Bill? Bill Wheat: Our capital allocation strategy is disciplined and balanced to support an expanded operating platform that produces attractive returns and substantial operating cash flows. We have a strong balance sheet with low leverage and healthy liquidity, which provides us with significant financial flexibility to adapt to changing market conditions and opportunities. During fiscal 2025, we generated $3.4 billion of operating cash flow, representing 10% of our total revenues and 95% of our net income. During the fourth quarter, we repurchased 4.6 million shares of common stock for $689 million. For the full year, we repurchased 30.7 million shares for $4.3 billion, which reduced our outstanding share count by 9% from the prior year end. We also paid cash dividends of $118 million during the quarter and $495 million during fiscal 2025. Our fiscal year-end stockholders' equity was $24.2 billion, down 4% from a year ago. However, our book value per share was up 5% from a year ago to $82.15. At September 30, we had $6.6 billion of consolidated liquidity, consisting of $3 billion of cash and $3.6 billion of available capacity on our credit facilities. We repaid $500 million of our 2.6% senior notes in September, and debt at the end of the quarter totaled $6 billion. We have no senior note maturities in fiscal 2026. Our consolidated leverage at fiscal year-end was 19.8%, and we plan to maintain our leverage around 20% over the long term. Based on our strong financial position and cash flow, our Board declared a new quarterly dividend of $0.45 per share, a 13% annualized increase compared to the prior year, making fiscal 2026 our 12th consecutive year of dividend growth. Jessica? Jessica Hansen: Looking forward to fiscal 2026, we expect new home demand to reflect ongoing affordability constraints and cautious consumer sentiment. As outlined in our press release this morning, for the full year of fiscal 2026, we currently expect to generate consolidated revenues of approximately $33.5 billion to $35 billion and homes closed by our homebuilding operations to be in the range of 86,000 to 88,000 homes. We forecast an income tax rate for fiscal 2026 of approximately 24.5%. We expect to generate at least $3 billion of cash flow from operations in fiscal 2026. We currently plan to purchase approximately $2.5 billion of our common stock during fiscal 2026, in addition to paying dividends of around $500 million. For our first fiscal quarter ending December 31, we currently expect to generate consolidated revenues in the range of $6.3 billion to $6.8 billion and homes closed by our homebuilding operations to be in the range of 17,100 to 17,600 homes. We expect our home sales gross margin for the first quarter to be in the range of 20% to 20.5% and our consolidated pretax profit margin to be in the range of 11.3% to 11.8%. Finally, we expect our income tax rate for the quarter to be approximately 24.5%. Paul? Paul Romanowski: In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint and focus on delivering quality homes at affordable price points. All of these are key components of our operating platform that support our ability to aggregate market share, generate substantial operating cash flows and return capital to investors. We recognize the current volatility and uncertainty in the economy, and we will continue to adjust to market conditions in a disciplined manner to enhance the long-term value of our company. Looking ahead, we have a positive outlook for the housing market over the medium to long term. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors and real estate agents for your continued efforts and hard work. Let's continue working to improve our operations and provide homeownership opportunities to more individuals and families during 2026. This concludes our prepared remarks. We will now host questions. Operator: [Operator Instructions] The first question today is coming from John Lovallo from UBS. John Lovallo: The first one is when we think about the walk from the 20% gross margin in the fourth quarter to the 20% to 20.5% in the first quarter. I mean how do we sort of think about incentives, land, labor, material costs? And is the warranty litigation costs expected to remain a 60 basis point headwind? Or how should we sort of think about that piece? Bill Wheat: Thanks, John. The 60 basis points unusual impact from litigation this quarter is not expected to persist into Q1. Our baseline would be that we have a more normal impact from warranty litigation going forward. And so if you take our 20.0% reported margin this quarter, pro forma for the litigation, we would be 20.6% this quarter. And so our guide of 20% to 20.5% would be down slightly from Q4 to Q1 gross margin. And that just reflects the environment we're in and the level of incentives that we're seeing and our exit gross margin at the end of the quarter was a bit lower than we anticipated coming into the quarter. And so that's what was reflected in the Q1 guide. John Lovallo: Makes sense. I mean it's also the slowest quarter of the calendar year. So that would make sense. But okay, if we think about the starts pace in the quarter, it seems like it was down fairly meaningfully. I mean, rough math, maybe 30% per community. I guess how quickly can you ramp this to meet demand if it exceeds your expectations, even to get to that sort of 87,000 deliveries at the midpoint? Paul Romanowski: John, our starts were lower certainly in the quarter, and that was intentional as we look to get our inventory in line with where it is also in response to our continued improvement in our cycle times. I feel like we don't need to carry as much inventory and also an opportunity for us in a slower starts environment to go into the market with our vendors and try and find reduced stick and brick as we move into the spring season. And we're going to need to increase our starts as we go through the quarter and into the spring, but feel very good about our ability from a labor base and from our positioning of our communities and our lot supply to respond to the market as it comes at us. Operator: The next question will be from Stephen Kim from Evercore ISI. Stephen Kim: I guess my -- looking at your guide on 1Q, the gross margin, I think you've explained it pretty well here. But the consolidated pretax still seemed a little lighter for us. And I was curious as to whether or not your outlook in 1Q is anticipating maybe just some seasonal lightness or something in profitability from either rental or Forestar, financial services? Or is there something else maybe below the homebuilding gross margin line that you might want to call out? Jessica Hansen: Yes. We would expect rental to be a little bit softer quarter. We delivered a lot this year. And so rental is lining up to be back end or back half of the year, heavier again for us this year. And so that certainly would have an impact on our consolidated op margin. And then to your point, we'll just have less leverage on SG&A from the lower closings volume on the homebuilding side. Stephen Kim: Got you. That's very helpful. I appreciate that. Second question relates to your free cash flow guide, which was healthy. You had talked about, I think, in the past, being able to achieve free cash conversion, I think, about 80% to 100%. I just want to make sure that I remember that correctly. Is that kind of in line with what you are looking for still on a go-forward basis? Bill Wheat: Yes. We expect to be more consistent in our cash flow conversion going forward. This year, cash flow as a percentage of revenues was between 10% and 11% overall, and we expect to be in that range. The guide is roughly in that range as well. Operator: The next question will be from Sam Reid from Wells Fargo. Richard Reid: A few quick follow-ups on the gross margin. I just want to drill down a little bit deeper on that sequential step-up in warranty expense, just to make sure I fully understand kind of some of the puts and takes there. Why you expect it to normalize into the first quarter? And then I'm sorry if I missed, but could you also just remind us what's embedded in Q1 on lot costs and stick and brick. Bill Wheat: Sure. On the litigation, we had several large settlements that settled this quarter, nothing outside of the ordinary course of business, but they were larger than normal just in terms of size. And that has an impact on some of the factors that we use in our litigation reserve model. So we had to increase a few of those. And so that drove the change in the quarter. Those are elements we don't expect to repeat going into the going into the next quarter. And then as we look at margin going forward, our base expectation is we do expect our lot costs and our home closings to continue to increase incrementally. And we're certainly going to be striving to offset that as best we can with stick and brick savings as we move into the year. Richard Reid: That helps. And maybe drilling down a bit more detail on the incentive line item. So it does look like incentives stepped up sequentially. Can you just break out the difference between step-up in price discounting versus rate buydowns? And then I know you do buy down to some very below market rates in certain communities/units as low as 3.99%. Just curious whether the proliferation of those significantly below market buydowns stepped up in Q4? Jessica Hansen: Yes, Sam. So as we anticipated on our last call, we did expect to lean in more heavily to the offering of 3.99%. That is something that we've been doing, and we saw the mortgage rate in our backlog come down. It's actually below 5% today coming into this quarter. And we also saw a slight increase in the percentage of buyers sequentially that received a rate buydown overall. So that accounted for about 73% of our total closings in Q4, which was up from 72% sequentially. Operator: The next question will be from Alan Ratner from Zelman & Associates. Alan Ratner: And apologies in advance, I got disconnected for a moment. So if I repeat the question, I'm sorry. But first question, just a pretty solid order number, especially considering kind of the start pace way down. And just curious if you can kind of talk a little bit about how demand trended through the quarter and whether you feel like that year-over-year order growth is any indication of maybe a little bit of an improvement in demand as rates were coming down? Or was there perhaps a little bit of a shift in incentive strategy? I know incentives were up a bit for the quarter. Just curious if you kind of increased them in the back half of the quarter that might have driven some of that order increase. Michael Murray: I think we did see a decent demand throughout the quarter. It was choppy as rates were a little bit volatile, and that will push people off the couch and back on to the couch. It seems like with the headlines. But we did lean into the incentives pretty hard in the quarter, as we talked about, and we expected to. We did start a fair number of homes in our June quarter, and those homes were going to sell and close in September. And we have a few more in the backlog that will be closing out as well. But we moderated the starts pace to reflect a sales environment, as Paul says, to rightsize our inventory position and leaning into our production improvements, the ability to compress the cycle time will allow us to deliver homes faster from start sale to delivery at closing. Jessica Hansen: And so in today's environment, we'd expect our starts in the first half of the year to be up from our recent starts pace that we've had. Alan Ratner: Got it. Okay. That makes a lot of sense. And then second question, just looking at your closing guide for '26 up slightly year-on-year. Obviously, your homes under construction are way down. It doesn't feel like there's anything today that would point to '26 being an up year from a demand perspective. So I'm just curious how you're thinking about kind of the -- maybe the upside and downside risk to that closing guidance. Obviously, it will be dependent on the spring. But is this more you taking a view of, hey, we've got the communities opening. We want to put homes on the ground and kind of keep the machine running? Or is that actually your expectation that maybe lower rates a little bit, still solid economy that you feel a little bit more positive about the demand outlook heading into this year's spring versus last? Paul Romanowski: Alan, I would say that we are absolutely in position to deliver on the units in the guide. When you look at our community count being up 13%, and that's been increasing double digit for some period of time. So we're not assuming increased absorption per flag to achieve this guide. We have the production capacity throughout the industry, we think, to deliver on that. And we have what I would characterize as solid traffic in our communities today. There's some uncertainty and consumer confidence certainly is keeping people on the fence. So ultimately, it's going to depend on the spring selling season and the strength of the market. But we believe we're in position to deliver on our guide and feel good about our positioning today. Even with our inventory, total housing inventory at a lower number, that's been purposeful because we believe we have the ability to deliver the units in a timely fashion. Operator: And the next question will be from Matthew Bouley from Barclays. Matthew Bouley: I have, I guess, a similar question to what Alan just asked, but I want to add a little more to it around the gross margin side. And so obviously, guiding to growth in a housing market that is not growing at the moment, and I hear you loud and clear on the community growth supporting that. But maybe in the context that the gross margins came in a little bit below the guide, even excluding the unusual litigation. So I'm trying to understand if there's any signal there, kind of any conceptual change to that balance between growth and gross margin? And perhaps are you actually willing to maybe sacrifice a little bit of gross margin here in order to drive those volumes higher this year? Michael Murray: I think we're continuing to respond to the market that's in front of us on a day-to-day and week-to-week basis at each of our communities. The growth in the community count and the lots that are available to us today in our portfolio that are ready to start homes on is probably unprecedented in the company's history relative to our outlook for the year. So we feel like we have a lot of flexibility to lean into the strength that materializes in the market. And at the same time, we can't -- you cannot continue to run the machine to a 0 profit margin. That makes 0 sense whatsoever. Matthew Bouley: Yes. Got it. Okay. Understood. And then maybe just zooming in to the lot cost. So I guess it sounded like there was still a little bit of inflation sequentially. I'm just curious that kind of the very front end, whether it's development costs or kind of renegotiating with your land counterparties, et cetera. Is there an outlook to either flattening or eventually improving lot cost? And when may that begin to benefit you guys? Paul Romanowski: I think, Matt, given the mix of our overall lot portfolio and different age, I don't think you're going to see much of a shift in that over the next 12 months. We are seeing on the front end from a development cost perspective, some flattening there and some reductions that we expect to take advantage of in new lots that are going on the ground either for us or through our third-party developers. Not as much movement on the overall land valuation, but we are seeing favorable opportunity to renegotiate on terms and time to control our lot position and the number of lots that we own based on market conditions. Jessica Hansen: And I think an even better opportunity that we look at in '26 is renegotiating our stick and brick costs. Lot costs continue to be sticky, and we're doing everything we can on that front, but we would expect our stick and brick costs to come down as we move throughout the year. Operator: And the next question is coming from Rafe Jadrosich from Bank of America. Rafe Jadrosich: I just wanted to ask on the second half -- the delivery outlook seems like it's more second half weighted. Can you talk about like the starts pace and community count that you're assuming? How do we think about the cadence of that through the year? Paul Romanowski: I think overall, our starts pace needs to move up, right? I mean at 14,600 starts this quarter, well below what we need to be doing on a quarterly basis. But again, that's been intentional to get our inventory in the pace that we're looking for and feel good about our capacity and ability to start into the market, but our starts are going to have to keep pace with or exceed our sales pace a little bit as we look at the first and second quarters into this year. Bill Wheat: And with respect to community count, we've been seeing double-digit year-over-year increases in community count. We do expect that to moderate at some point more to the mid- to high single digit. But right now, as we go into the year, we are up double digits. So that positions us well to not have to plan for higher absorptions in order to achieve our volume and our business plan. Rafe Jadrosich: And then just following up on the last question. Can you just tell us what the year-over-year increases on lot cost? And then what you'd expect that to be through 2026? Jessica Hansen: Yes. I think we were up 8% on a year-over-year basis on a per square foot for lot costs. And I think as we've said, we do expect that to remain pretty sticky, at least on closings for the next year or so. And so it's probably best case mid-single, but it could continue to be high single as well as it takes a little bit longer for that ultimately to flow through in our closings. Operator: The next question will be from Trevor Allinson from Wolfe Research. Trevor Allinson: First question is on demand in Texas. We've heard a couple of builders call out Texas as being among the weaker markets here, but your South Central orders were up 11% year-over-year. So can you talk about what you're seeing there? Is the strong order performance, the decision to lean more into volumes? Or you've got really strong community count growth? Did you see a lot of that come through in Texas? Just any commentary on what's driving the good order growth there relative to some weaker commentary from others? Paul Romanowski: Trevor, I would describe Texas like a lot of markets and areas and geographies, and that's choppy. It's kind of market to market. We did lean in, as you saw in our margins, the incentives to drive the absorptions that we were looking for in the fourth quarter. Still have certainly bright spots throughout the state, but others that we still have an elevated inventory level that we and the industry need to work through in the coming months. Trevor Allinson: Okay. And then second question, you've talked about getting your inventory lower in the quarter. You're also now talking though about increasing your starts pace here. So perhaps that suggests that you feel good about where your inventory is at. What about for the industry more broadly relative to demand? Do you think that the reduced starts pace here recently has brought inventory more in alignment with current demand conditions? Or do you think, especially in some of these weaker markets that there's still room for inventory to move lower here early -- late in 2025 and early in 2026? Michael Murray: I do think the reduction in starts has helped to balance inventory market by market. Again, it is market by market as you look at that. Across the board, our slowdown in starts also gives us the opportunity to work on repricing some of our stick and brick costs and the ability for us to sell houses and start houses. And increase our starts pace is predicated upon the sales environment and the ability to reduce our vertical construction costs so that we can start houses. So I expect to see that the inventory balance helping support a backdrop of increasing starts into our December and March quarters. Jessica Hansen: I think we've had a lot of chatter about builders just being more rational today, right? And so we are seeing the industry, by and large, adjust their inventory overall, so we don't end up in an oversupply situation in most of our markets. Operator: The next question will be from Anthony Pettinari from Citi. Anthony Pettinari: Your repurchase guide, $2.5 billion, I think, is kind of significantly below what you'll probably end up doing in '25 despite cash generation could be somewhat similar year-over-year. Is that just caution early in the year or before the year starts? And then maybe more broadly, can you just talk about potential capital allocation priorities in '26 in terms of step-up in land purchase development or any other thoughts there? Bill Wheat: Yes. We repurchased $4.3 billion in fiscal '25. The guide of $2.5 billion is lower. It's all governed by our cash flow. This year, we have said several times in fiscal '25, we had a unique situation coming into the year. We had a higher-than-normal level of liquidity coming into the year. So we felt like we had some cushion there to utilize it, and we took advantage of when our price was much lower to buy shares with that. We were also coming into fiscal '25 below our leverage targets. So we had some room on our balance sheet, and we did increase our leverage a bit and utilize that cash in our share repurchase as well. So we had some unique opportunities in fiscal '25 to lean in a bit, take advantage of the dislocation in our stock price. But going forward and over the long term, consistently, our share repurchases and dividends will be governed by our level of cash flow. And right now, going into the year, every year has potential upside and downside relative to our business plan. But right now, our baseline is we expect to generate $3 billion of cash flow and essentially distribute it to our shareholders, $2.5 billion of share repurchase, $500 million of dividends. And so that's our baseline going into the year. And then we will adjust as necessary depending on what the market shows us in the spring and ultimately what our cash flow generation is. Anthony Pettinari: Okay. That's very helpful. And then when I look at your net sales order growth year-over-year by region, it looks like you have relatively strong sales order growth, except in the Southeast. And I'm just wondering if you can give any kind of additional color on the Southeast, if there are MSAs that are stronger or weaker or particular inventory challenges? Or just any kind of color you can give on that region and kind of where you are in terms of visibility into inflection there? Michael Murray: Generally, within the Southeast, Florida is a big component of the company, and that's a huge component of the Southeast region we report. There are some markets within Florida that have struggled with some inventory balance issues. Notably, Jacksonville and Southwest Florida have had some excess inventory and demand has been a while coming to absorb that. So that's kind of what you're seeing in the current quarter's results in the Southeast for us. Operator: The next question will be from Michael Rehaut from JPMorgan. Michael Rehaut: First, I wanted to circle back to the gross margins for a moment, but look at it from a perspective of we've highlighted and discussed the outlook for continued land cost inflation and the hope that, that could be offset by lower labor and material costs. I'm trying to get a sense for, theoretically, let's say, if from here on in, so from the 20% to 20.5% gross margin expected in the first quarter, if land costs are going to be up, let's say, mid- to high single digits, what type of reduction would you need in construction costs to offset that so that gross margins would be flattish without any help from better pricing? Paul Romanowski: I think absent of any pricing or reduction in incentives or breaks on the cost of our builder forward and financing, I think you need to see that somewhere in the 3% to 5% range. And we'll see how that comes in over the year, but I have certainly seen our vendors interested in the starts pace increasing as are we. I mean that's good for the industry, and they recognize that and have been at the table with us to help do what we can to replace the homes that we're selling today with a more affordable home. And that's really the ultimate goal is to open up homeownership to more people. So we do see the opportunity to balance the reality of the increased lot cost that we see over the next 12 months. Michael Rehaut: And -- I appreciate that, Paul. And what was -- what were construction costs on a year-over-year basis for the fourth quarter? Jessica Hansen: We were down 1% year-over-year and flat sequentially. And for the full year, we were down about 1.5%. Michael Rehaut: Okay. That's helpful. And then I guess, secondly, on some of the regional commentary. I guess we've heard that Texas remains kind of choppy, I believe you said, and Florida, some pain points. I guess I'm interested in if those are the 2 markets today that you'd consider broadly speaking, the most challenged across your footprint? Or how does California and Pacific Northwest fit in there? And then if you've seen any change for the better or for the worse, marginally better, marginally worse, where you sit today versus 3 months ago? Paul Romanowski: I think California has also been a bit of a struggle. I think we're seeing some strength or at least stability, if you will, across the Midwest and into the Mid-Atlantic. I think gauging it today compared to 3 months ago, I would say similar. And it truly is choppy. I mean -- and there's a lot of headlines and noise, and we would have expected to see a little bigger bump out of the reduction in mortgage rates that we've seen, and we've seen them come down a little more here recently. And hope that, that turns into more people getting off the fence and into the buy box. But we do see interest in our sales offices, and we do see people out there looking for homeownership. Operator: The next question will be from Ken Zener from Seaport Research Partners. Kenneth Zener: I want to take a step back, if we could, just to -- because your orders are up. It's a big deal, right, in a market that is challenging. But could we start -- first question, 20% gross margin guidance, while it's down sequentially, it's actually kind of in the range, if you take the historical view of the industry, that's pretty normal. So do you think that, in fact, this could be the more normalized rate given how much you've improved your asset efficiency in terms of upwards of 2/3 of your lots being bought finished, A. And also, can you talk to -- a lot of the homebuilders describe consumer confidence. The way I look at it, we describe it as job growth in Dallas is kind of half what it was historically. Phoenix has been kind of flat the last 6 months. Vegas has been a bit negative. And I'm asking this because are we actually kind of in a more environment where the consumer -- while interest rates matter and affordability matters, there's just not a lot of job growth. So it's more of a traditional economic slowdown. Paul Romanowski: I think that job growth certainly, I mean, absolutely has an impact on new household formations and consumer confidence. And where you see that flatness in those markets, that is going to have an impact on go-forward demand. Do still feel very good about our positioning across our markets and at the affordable price points and the need for housing. But ultimately, yes, Ken, we need to see consistent sustainable job growth to drive growth in the housing market. Kenneth Zener: And the 20% question? Jessica Hansen: I think we feel pretty good where our margin profile is based on the disruptions we've seen in the housing market over the last year or 2. And we've adjusted accordingly. And the bottom line op margin, we're still producing generally better than what our old historical norm would have been. Not ready to call a bottom on anything right now, but we do feel good still over the long term about running on average sustainably higher pretax profit margins. Kenneth Zener: Okay. And then I guess you said incentives went up 120 bps. I know you guys haven't quantified it in the past. I think it would be good if you did. But you said high single digits in the past. Are we in -- at the -- does the 120 bps increase now bring us into low double digits in terms of incentives? Jessica Hansen: No, it was a 110 basis point sequential increase, and we're still a high single-digit percentage overall. Kenneth Zener: And no specificity, I take it, correct? Jessica Hansen: No. I mean we give you the gross margin detail that shows kind of our core lot level gross margin and then the things that also impact our gross margin below that, that we've already talked to in terms of the outsized litigation costs. We also did in our supplemental presentation, break out external broker commissions now. So you'll see of the 110, 10 basis points was related to increased broker commissions, which is to be expected when we're trying to drive incremental sales. Operator: The next question will be from Susan Maklari from Goldman Sachs. Charles Perron-Piché: This is Charles Perron in for Susan. First, I would like to discuss the performance of operations in smaller markets where you have a large market share. You've been successful in those markets in the past few years. Can you talk about the opportunities you're seeing there relative to your larger markets and how this influences your ability to outperform the market next year? Paul Romanowski: Yes. I think we have seen when we just kind of look at the beginning expectation or budget for some of those divisions, a higher level of able to achieve their intended absorptions. And when we're in a lower competitive environment and we can react to the market, whether that's up or down and control some of those inventories a little better, we have seen a pretty solid performance in some of those and feel good about our geographic footprint. We've expanded quite a bit into some of those secondary markets over the last couple of years and happy to see our divisions and our teams maturing in those markets. Charles Perron-Piché: Got you. That's helpful. And second, I want to drill down on the ASP a little bit. Considering the 3% growth in closings and flat revenue guide for next year, this suggests the potential for ASP pressure continuing into fiscal '26. I guess, first, is this a fair assumption? And more broadly, how do you expect the ASP to trend in 2026, should market conditions persist? And how much of that would be driven by like-for-like pricing versus mix relative impact? Bill Wheat: Yes. I mean we continue to try to focus on affordability. That's one of the constraints in the market today. And so our ASP has been trending down caused both by mix in terms of smaller homes and the mix of homes that we're providing as well as the incentive levels that we're providing. So our base assumption is that we will continue to see a net decline in ASP in fiscal 2026 for those same reasons. Operator: The next question will be from Mike Dahl from RBC. Michael Dahl: I had another follow-up on kind of starts and inventory dynamic. You guys did a great job on really significantly reducing inventory in the quarter. Now at the same time, you're acknowledging that you do have to ramp starts pace consistent with how you've guided for the year. So that's still absent market improvement suggests that you are going to ramp specs back up, which I understand is normal seasonally, but I'm trying to get a better handle on what exactly we should be thinking about in terms of your comfort level on ramping specs specifically back up into 1Q given the current market dynamics? Paul Romanowski: I would say our preferred path is to sell the homes earlier in the process and be building more backlog. We are going to need to see an increase in starts, whether those are for specs or sold homes. But we just -- with the speed at which we're building homes and the ability to deliver with predictability of delivery date and rate even on a new start. We just don't need to carry as many total specs and feel comfortable with the spec count that we have, and we'll be managing that to the market as the sales come. Michael Dahl: Got it. Okay. And then as a follow-up, you did just close on the acquisition of SK Builders in South Carolina. I was wondering if you could comment a little bit more on how much contribution you expect from that? And then taking a step back, you've done a number of these kind of tuck-ins to help bolster market share at a local level and kind of firm up the growth. Maybe give us a broader view on how you're seeing the kind of the M&A and bolt-on and for yourselves? Michael Murray: I think the SK acquisition helps our positioning in the Greenville, South Carolina market quite a bit. We picked up about 150 houses in inventory, another 400 lots on the ground today and then sales orders on those homes in construction, about 2/3 of them are sold. And then we got control of another 1,300 lots in good communities throughout the Greenville market that will help further leverage our operating platform in Greenville. And with what happened there, we continue to look at those tuck-in opportunities to accelerate the pace of delivery of homes into those markets across the country. We tend to operate with our capital structure, cost structure at a higher pace than some of the smaller builders do with some of the limitations they have on capital and cost. So it's very accretive to our platform, and we look to see people that are really good at the small local homebuilding are also generally very good at the local entitlement and some development operations and kind of decoupling their operations from entitlement development from homebuilding and splitting it between us and them works out really well for a long-term win-win for both the seller and the D.R. Horton. Jessica Hansen: And if anyone is not familiar, that was an October transaction that didn't happen during the quarter. So it was subsequent to year-end. Operator: The next question will be from Jade Rahmani from KBW. Jade Rahmani: I wanted to ask you about your view on interest rates and if you think a step down in mortgage rate will translate into further mortgage buydowns. In other words, if you will pass on that improvement to buyers in the new home market to maintain relative standing with the existing market? Or if you think those lower rates will actually alleviate some of the incentive pressure? Paul Romanowski: Jade, we're still solving for a monthly payment across most of our communities. And so the ability to offer a lower rate than market and to solve for a monthly payment that it allows people to move forward with the purchase is what we will continue to do. In the current environment, the reduction in rates generally has meant a little lower cost for us in the rates that we're offering. We're still largely at the low end, about 3.99% rate that we're offering. And we'll just see as it comes. I think it's probably going to be a combination of both. In other words, if we need to step down some more to drive to the monthly payment to open up the absorptions that we're looking for at a community level to drive the returns that we want, then we'll continue to do that. And if rates drop down and we are allowed to reduce our incentive in terms of the cost of that BFC, we'll take advantage of some of that. So I would expect it to be a balance as we look forward. Jade Rahmani: And in terms of buyer preferences, on the incentive package, have you seen any shift toward outright lower home base prices or savings in other areas over mortgage buy-downs? Paul Romanowski: I think for our buyer, again, it still comes back to the monthly payment. And the most attractive monthly payment we can put them in is with a lower rate. And I think it's a benefit to the homeowner over time in terms of they're paying down more of their principal. And I think just overall, it's been a solid incentive and probably the most that people have taken and had interest in is still at the lower range. Operator: The next question will be from Jay McCanless from Wedbush. James McCanless: So I just wanted to follow up on your comments. I think it was Bill, you said that the exit rate on gross margins at the end of the quarter was lower than you guys expected. I mean, was that more incentives, higher lot costs? Maybe talk about that a little bit? And what have you seen so far in October? Bill Wheat: On a like-for-like basis, we landed about 40 basis points below the low end of our guide for Q4. And really, most of that we would put at the feet of incentives. What it took in order to get the sales for the closings that needed -- that we needed to generate the volume and generate our returns. For fiscal '25 was -- ended up being a little bit more than what we anticipated as we went into the quarter. And so as we go into Q1, we'll be trying to strike the balance as best as we can, but we are starting Q1 at a lower entry point than we did when we entered Q4. James McCanless: Got it. Okay. And then I can't remember who made the comment about this, but about lower rates seeming to drive some traffic, but maybe not conversions. I guess what are you all hearing from the field? Why aren't people willing to go ahead and pull the trigger? I mean I know we've all talked about confidence ad nauseam at this point, but are there other things that you're hearing from the field that are keeping people from going ahead and stepping up and buying the home? Michael Murray: In some cases, it's -- they want to buy the home, it's a qualification issue for what payment they can afford. So as Paul said, we're solving back for a payment. And when we can align that payment that's attainable for them that they are compelled to do that and make that move. Other buyers with rates bouncing around being volatile, they're thinking, well, maybe I should wait for them to drop, maybe I should -- I can't afford now because they're spiking up. I think we'll see rates -- if rates drop, we'll see an increase in the transactions in the existing home side, which helps relocate people and shuffle them around a little bit and those folks then will be looking for different housing options other places. And we see a lot of people with house-to-sell contingencies that come in that want to buy a house, but they can't get their house sold. Operator: And the next question will be from Alex Rygiel from Texas Capital. Alexander Rygiel: What percentage of your buyers are using adjustable rate mortgages? And how has that changed over the last 12 months? Jessica Hansen: Sure. It's come from essentially 0 to mid- to high single-digit percentage on closings this most recent quarter. And as we have introduced some new ARM products tethered to a rate buy down, I do think our base case would be that percentage continues to drift up, but it won't move sharply. Alexander Rygiel: And then secondly, as you reaccelerate starts, can you comment on the average square footage of the floor plans? Have you changed it much at all? Or do you expect sort of modestly smaller homes kind of for the foreseeable future? Paul Romanowski: I would say modestly smaller. Our square footage has continued to drift down slightly, but not a significant change over the last 12 months. I think where we are today and where we have starts coming, it will be on the smaller end in the community, but we'll respond to the market as it comes. So the good news about having the ability to sell early in the process is it opens up us to be more responsive to the market and not just responding with the inventory that we've already selected. Operator: Thank you. This does conclude today's Q&A. I will now hand the call back to Paul Romanowski for closing remarks. Paul Romanowski: Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our first quarter results on Tuesday, January 20. Congratulations to the entire D.R. Horton family on a successful fiscal 2025. Due to your efforts, we just completed our 24th consecutive year as the largest builder in the United States. We are honored to represent you on this call, and we look forward to everything we will accomplish together in fiscal 2026. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the Custom Truck One Source Inc. Third Quarter 2025 Earnings Conference Call [Operator Instructions] I'd like to turn the call over to your host today to Brian Perman. Sir, you may begin. Brian Perman: Thank you. Before we begin, we would like to remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of the company's filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during the call in the press release we issued yesterday afternoon. That press release and our third quarter investor presentation are posted on the Investor Relations section of our website. We filed our third quarter 2025 10-Q with the SEC yesterday afternoon. Today's discussion of our results of operations for Custom Truck One Source Inc., or Custom Truck, is presented on a historical basis as of or for the 3 months ended September 30, 2025, and prior periods. Joining me today are Ryan McMonagle, CEO; and Chris Eperjesy, CFO. I will now turn the call over to Ryan. Ryan McMonagle: Thank you, Brian, and welcome, everyone, to today's call. Building on our momentum from the second quarter, Custom Truck had a strong third quarter, delivering 20% adjusted EBITDA growth and 8% revenue growth versus Q3 2024. Third quarter performance was characterized by continued solid fundamental demand in our core T&D markets and excellent execution by our team, leading to strong results in both our ERS and TES segments and overall year-over-year revenue growth for the quarter. Custom Truck powers the people who strengthen and build our nation's infrastructure. Our trucks are used to build and maintain the grid on a daily basis. Our steady business activity and strong intra-quarter order flow continue to reinforce our optimism about achieving our expected growth targets in 2025. As a result, we are reaffirming our previous fiscal 2025 revenue and adjusted EBITDA guidance. While Chris will discuss our segment's performance in greater detail, I'd like to highlight some key trends. In ERS, our utility contractor customers continue to see sustained and increased levels of activity, which they expect to persist for the foreseeable future, driven largely by spending tied to unprecedented secular growth and electricity demand. As several recent articles highlight, the real bottleneck in the AI build-out is electricity. Current industry projections estimate that total T&D CapEx among U.S. investor-owned utilities for the 5-year period from 2025 to 2029 will be approximately $600 billion. The overall annual growth rate of spending is expected to be almost 10% with transmission spending expected to grow at more than 15% annually through 2029. We feel these trends in the utility end market have been among the key factors driving the growth in our OEC on rents over the last year and position us well for 2026. For the third quarter, average OEC on rent was more than $1.26 billion, a 17% year-over-year increase. We ended the third quarter with over $1.3 billion of OEC on rent and have continued to see growth so far in the fourth quarter. Average utilization in the quarter was just over 79%, up more than 600 basis points versus Q3 of last year and the highest level in more than 2 years. We continue to see mid-70% to mid-80% utilization rates across most of our fleet, demonstrating the long-term resilience of our end markets. These trends drove a year-over-year increase in rental revenue of 18% in the quarter, with total ERS segment revenue up more than 12% versus Q3 of last year. Because of the sustained strong demand, we decided in the quarter to accelerate rental fleet CapEx, which Chris will discuss in more detail. We believe this spending will position us well for continued growth in 2026. At the end of Q3, our total OEC was just over $1.62 billion, our highest quarter end level ever. Coming off near record segment sales last quarter, TES continued to see good sales performance in the third quarter, posting year-over-year growth of 6% and year-to-date growth of 8.5% versus the first 3 quarters of last year. While our backlog was down in the quarter, we continue to see strong intra-quarter order flow, particularly among our local and regional customers. This reflects the current availability of equipment broadly in the market, which decreases the need for customers to place orders far in advance. Signed orders in the quarter from this portion of our customer base were up more than 40% year-over-year, driving overall order growth of over 30%. With the supply of certain vocational vehicles remaining at elevated levels across the market, segment gross margin was down slightly in Q3 compared to the prior quarter. However, it remained within our expected range of 15% to 18%. Overall, our current pace of orders and the continued strong demand for vocational vehicles across our end markets combined to provide us with confidence in our outlook for TES for the rest of the year. We continue to believe that accelerated depreciation provisions contained in the recent federal spending and tax bill will benefit Custom Truck, particularly for sales of used and new vehicles in the fourth quarter. Since the end of the third quarter, we've seen this reflected in our backlog, which has grown so far in the fourth quarter to over $350 million. With respect to the tariff landscape, we continue to feel that as a result of our mitigation actions taken earlier this year, the tariffs will have a limited direct cost impact on our business this year. However, we continue to hear about hesitancy related to new equipment purchase decisions from some of our customers as a result of economic uncertainty, continued high interest rates and the overall inflationary pricing environment to which the tariffs have contributed. We are reaffirming our full year 2025 guidance. Our strong year-to-date results, our robust order flow and resilient end market demand continue to drive our expected growth across our consolidated business this year. Despite some volatility in the macro environment, our business outlook remains positive. Long-term sustained end market demand, buoyed by secular megatrends and our ability to provide exceptional execution on behalf of our customers set us apart from our competition. Our multi-decade relationships with strategic suppliers and our long-tenured and diversified customer base will continue to be key to our success. I continue to have the highest degree of confidence in the Custom Truck team and want to thank everyone for their hard work and dedication that helped achieve these results this quarter. We look forward to updating everyone on our progress on next quarter's call. With that, I'll turn it over to Chris to discuss our third quarter results in detail. Christopher Eperjesy: Thanks, Ryan. For the third quarter, we generated $482 million of revenue, $156 million of adjusted gross profit and $96 million of adjusted EBITDA, up 8%, 13% and 20%, respectively, versus Q3 of 2024. On a year-over-year basis, all our rental segment KPIs improved in the quarter. Average utilization of the rental fleet for Q3 was over 79% compared to 73% in Q3 of the prior year. Average OEC on rent in the quarter was over $1.26 billion compared to under $1.1 billion in Q3 of 2024. Both metrics so far in Q4 are higher than the averages we experienced in Q3, currently standing at more than $1.3 billion and over 80%, respectively. As of today, OEC on rent is up more than $180 million or 15% versus a year ago. The ERS segment had $169 million of revenue in Q3, up more than 12% from $151 million in Q3 of 2024. Rental revenue was up meaningfully on a year-over-year basis, showing 18% growth. Rental asset sales were essentially flat and are up 20% year-to-date compared to the first 3 quarters of last year. Segment adjusted gross profit was $104 million for Q3, up 19% from Q3 of last year. Adjusted gross margin for ERS was 62% in the quarter, more than 370 basis points higher versus the same period last year, driven by a higher mix of rental revenue as well as improved rental margins of almost 76% and sustained rental asset sales margins in the mid-20% range. On-rent yield was 38.2% for the quarter, down slightly from Q3 of last year, but still within our expected upper 30% to lower 40% range. Net rental CapEx in Q3 was $79 million, and our fleet age is just below 3 years. Our OEC in the rental fleet ended the quarter at over $1.62 billion, up almost $130 million versus the end of Q3 2024 and up more than $60 million in the quarter, reflecting our strategic investment given the strong demand environment we continue to experience across our primary end markets, particularly in T&D. We expect to continue to invest in the fleet in the fourth quarter, resulting in high single-digit percentage OEC growth versus the end of 2024, which is higher than previously expected. In the TES segment, coming off near record sales in Q2, we sold $275 million of equipment in Q3, up 6% year-over-year. Gross margin in the segment in Q3 was 15%, down from Q3 2024. We expect TES gross margins to improve in the coming quarters as supply of vocational equipment in the market comes more into balance, reducing some of the pricing pressure we've seen this year. PES new sales backlog decreased by $55 million in the quarter, driven by continued strong sales activity. At 3 months of LTM TES sales, our TES backlog is slightly below our targeted historical average range. However, net orders in Q3 remained strong at $220 million, up more than 24% compared to Q3 of 2024. So far in Q4, which is historically our highest quarter of PES sales, we've continued to see strong order flow and our backlog has grown to over $350 million. That, combined with the ongoing feedback from our customers regarding their equipment needs for the remainder of the year, provides us with confidence that we will see strong revenue growth in TES this year, but we do believe it will be closer to the low end of our guidance range. Our strong and long-standing relationships with our chassis, body and attachment vendors continue to be an important driver of TES production. Our current level of inventory positions us well to meet our production, fleet growth and sales goals for the year as well as help mitigate any impact from tariffs. Our APS business posted revenue of $38 million in the quarter, up 3% compared to Q3 of last year. Adjusted gross margin in the segment was over 26% for Q3, up both year-over-year and sequentially. Our year-to-date adjusted gross margin in APS remains in our expected mid-20% range. Borrowings under our ABL at the end of Q3 were $708 million, an increase of $38 million versus the end of Q2, largely to fund both rental and non-rental CapEx and certain other working capital needs. As of the end of Q3, we had $238 million available and over $230 million of suppressed availability under the ABL, resulting in substantial liquidity for the company. With LTM adjusted EBITDA of $365 million, we finished Q3 with net leverage of 4.53x, a sequential improvement. We did make progress on our planned inventory reduction with inventory down almost $54 million in the quarter. This contributed to a reduction in our floor plan balances of almost $57 million. We continue to expect to reduce our inventory in Q4 and into next year, which should contribute to lower balances on our floor plan lines as well as reduced borrowings on the ABL. However, given the strong demand environment that we are expecting to continue into 2026 and beyond, we now expect to reduce our inventory by $125 million to $150 million compared to the level at the end of last year. We intend to use our levered free cash flow to reduce our net leverage and to continue to target a level of below 3x. This remains a primary and important goal for us and one that we expect to achieve by the end of fiscal 2026. We are reiterating our previous 2025 guidance with total revenue in the range of $1.97 billion to $2.06 billion and adjusted EBITDA in the range of $370 million to $390 million. However, given the sustained rental demand in ERS, we now plan to invest more than previously expected in our rental fleet this year, resulting in net rental CapEx of approximately $250 million. In addition, we expect our non-rental CapEx to be higher this year as well as we have taken the opportunity to fund some additional production and manufacturing improvements at our Kansas City location, which should result in expanded production capacity and better position us for growth across our segments. While our segment guidance remains unchanged, we do expect ERS to finish the year with revenues in the upper half of our $660 million to $690 million range and TES to finish the year with revenues closer to the lower end of the $1.16 billion to $1.21 billion range. The extent of the benefit we get from our customer spending on new and used equipment as a result of the accelerated depreciation provisions is likely to be a key determining factor as to where in our guidance ranges we end up for both ERS and TES. As a result of higher-than-expected rental and non-rental CapEx, as well as the decrease in our planned inventory reduction, we now expect our levered free cash flow to be less than our previous $50 million target. However, we are confident that the incremental CapEx will yield strong returns that will result in higher sustained levels of levered free cash flow going forward. In closing, I want to echo Ryan's comments regarding our continued strong business outlook. Despite some macroeconomic uncertainty this year, our year-to-date results and the continued strong fundamentals of our end markets allow us to be optimistic about the long-term demand drivers in our industry and our ability to produce double-digit adjusted EBITDA growth this year. With that, I will turn it over to the operator to open the line for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Scott Schneeberger from Oppenheimer. Daniel Hultberg: It's Daniel on for Scott. So it seems like momentum is really strong here. Can you guys please elaborate on the visibility you feel you have for 2026 to sustain this momentum, please? Ryan McMonagle: Sure. Yes. Good to hear from you, Daniel, and thanks for the question. Yes, we're seeing really good demand in the utility sector and transmission and distribution. And as we talked about on the call in our remarks, we're seeing demand increase, especially around transmission, in particular. So as everybody is hearing, it does feel like we're heading into a strong cycle of transmission demand. And so that's the decisions that we made in Q3 were to invest more into the rental fleet. Some of that will carry into Q4 as well. And we think that's what sets us up really well for 2026. So we said on the call that OEC on rent averaged $1.26 billion for the quarter. It finished the quarter at $1.3 billion and has continued to grow into October. So utilization on rental is back into the 80 -- is north of 80% at this point. And so that's, I think, why we're really comfortable with the impact of that heading into 2026. Daniel Hultberg: Got it. Honing in on ERS and OEC on rent yield. Could you discuss how you think about that going forward and how you feel about the pricing environment? Ryan McMonagle: Yes. We've guided, obviously, high 30s to low 40s from an on-rent yield perspective, Daniel. And we've seen yield increase a bit in September and into October versus what we averaged for the quarter. So we've seen that as a positive thing. Obviously, 2 things in play there, right? One is as we shift more towards transmission, slightly higher yield that we've talked about. And so I would expect that to continue a bit. And then as utilization increases, we've been able to take advantage of some pricing opportunities where it makes sense. Obviously, we have to price to the market. We have to be competitive in the market. And so that's obviously what we're dealing with on a day-to-day basis. But I think it should be in the range that we've guided to, and we -- I would expect that it would increase a bit from where we -- where it was in Q3 of this year. Operator: Your next question comes from the line of Justin Hauke from R.W. Baird. Justin Hauke: I guess I wanted to ask a little bit about the cash flow. I appreciate all the color on the uptick in the CapEx to kind of capitalize on the growth that you're seeing. But maybe just a little bit more clarification on the inventory reduction and the timing of that. You said kind of into '26 to get that down by the $125 million to $150 million from year-end '24. Just trying to think about what that means? Is that more second half of '26? I just don't know how long this kind of elevated CapEx is going to be before those inventory levels start coming down. And then maybe the corollary to that would be just on the free cash flow guidance saying the levered being under the $50 million. I guess it's been kind of a use of cash all year. I'm just trying to think about the fourth quarter and do you expect to kind of continue to use cash in 4Q? Or will that be a cash inflow quarter? Christopher Eperjesy: Yes. Thanks, Justin. This is Chris. And maybe I wasn't clear. So the $125 million to $150 million reduction versus the start of the year will occur by the end of this year. And so we do expect to see -- I think through Q3, I think we're only down $14 million or $15 million. So you should expect another $110 million to -- I guess, it would be $135 million of further reduction in Q4. And so I think at peak last summer, we said we were just under 11 months of whole goods inventory on hand. I think now we're just under 8. We've set a target of trying to get to 6. I think the into and beyond into 2026 relates to getting that further -- getting down to 6 months by the end of next fiscal year. And so I do expect we'll generate free cash flow in the fourth quarter, but it's -- given the incremental investment in the rental fleet and the timing of some of that inventory reduction, we're not going to have -- for the full year, we won't have any meaningful free cash flow. Justin Hauke: Okay. Okay. And I guess just on the non-rental CapEx, the uptick on the production capabilities, can you quantify just kind of how much that is as we kind of think about, I don't know, the difference for next year versus that investment? Christopher Eperjesy: Yes. So I mean the answer is it really is just expanding some of our capabilities here in our KC campus. And I would think of it in the magnitude of $10 million to $15 million kind of impact, and it really is land building and putting some equipment in those facilities. And so I think we -- next year, we get back. I think historically, we've been $25 million to $40 million of non-rental CapEx. I think it will be -- continue to be similar as we move forward. Operator: Your next question comes from the line of Naim Kaplan from Deutsche Bank. Naim Kaplan: This is Naim Kaplan on for Nicole DeBlase. So I was wondering what was the latest on your utility T&D customers' ability to execute projects? I know you kind of touched on this, but just like to have a little bit of elaboration. And it seems like also the industry is back on track after delays in 2024 and 2025, basically. Is that kind of the right way to think about it that we're back on track? Ryan McMonagle: Yes. I think that's a great way to think about it. I think we're seeing -- we've seen distribution really pick up throughout the year. And I think it's back in a very good spot from a utilization and from a demand to purchase new equipment. And then we're seeing transmission pick up. It's been a significant pickup as it normally is in the fall. And obviously, that's what we've been investing into. And it feels like that it's got very good tailwinds behind it when it comes to transmission projects that are in process and under construction and will continue to need our equipment. So yes, I'd say it's back to normal and continuing to improve on the transmission side. Naim Kaplan: Okay. Perfect. And can you provide more color on the drivers of the 30% organic growth in PES? And maybe if you could touch on the customer types as well. And then on the backlog, was that only down year-over-year due to like a prior year comp because you had some past due backlog last year? Christopher Eperjesy: Yes. I'll take the second question. And you may have to repeat the first -- your first question because I don't think we heard -- you gave a percentage that I don't think we're familiar with. But on the backlog, we've said historically, we're not really a backlog-driven business. We're in kind of an order-driven business. And if you go back and look at the history, we've continued to post -- in '23, we posted 30% new sales growth last year, 7%. This year, on a year-to-date basis, almost 9%. And in that period, the backlog has come down almost $600 million, and we've continued to post growth quarter after quarter. Ryan did talk about in his prepared remarks, we have seen the backlog grow almost 25% -- or a little over 25% here in the first 3 weeks of October. So we're back close to $360 million of backlog. So we're feeling really good about kind of the guidance we're giving and overall, just the health of the new sales business. But if you could just clarify the first question for us. Ryan McMonagle: I think -- was it the -- you're talking about 30% intra-quarter order growth. Is that what you're referring to? Naim Kaplan: Yes, within TES. I'm pretty sure what you had in the release. Ryan McMonagle: Yes. No, that's -- we just wanted to make sure you're asking the right question. The thing that -- in addition to backlog, what we're watching really closely and what we have good visibility to is how orders are coming in within the quarter. And so there's a meaningful -- so we're -- that 30% is an increase in signed orders when we compare Q3 of '25 to Q3 of 2024. And I think that's where we're feeling comfortable about the growth we expect in Q4 and obviously, the performance, the 8.5% growth we've seen year-to-date in the TES segment. So in addition to backlog, we're watching kind of the intra-quarter order flow kind of in a real-time basis, and that's what we wanted to share with you all, too. But that's why I think we have comfort in the full year number that we've talked about for TES. Naim Kaplan: Okay. Very helpful. And just to follow up on that, if I may. Any details on the customer type? Ryan McMonagle: Yes. We're seeing -- it's a good -- we are seeing really strong demand in the utility segment. So that's both our utility contractors and our forestry contractors, where we're seeing really strong demand. As we talked about some in the comments, we're seeing a bit more hesitation in some of the infrastructure end markets, things like refuse and some of our dump truck where there's a bit more inventory in the market that we talked about in the prepared remarks. But I'd say there's still a good mix of our large national customers and our smaller customers as well. And so no significant shift there other than maybe skewing a little bit more towards T&D where we're seeing a stronger demand and infrastructure is a little bit softer from a demand perspective. Operator: Your next question comes from the line of Brian Brophy from Stifel. Brian Brophy: You touched on this a little bit, but hoping to get a little bit more color. Hoping you can give us an update on what you're seeing from a large transmission pipeline perspective. What's the latest you're hearing from your customers regarding to when some of these large projects that have been discussed are going to come to fruition? Ryan McMonagle: Yes. We're seeing good demand there, Brian, for sure. And so we have seen a meaningful uptick in our transmission utilization late in the third quarter and into the fourth quarter. So I think that's driving a lot of the increase that we talked about on the call. And I think we have strong expectations for 2026 there as well. There are a couple of very specific projects, right, that are in process now that are driving that demand. And then there's a lot of floating going on, too, that is for early 2026 also. So really good demand there. I think that's where we -- the comment that we made some additional CapEx investment, that's where we did add to the rental fleet to grow that part of the rental fleet further because we're seeing the good demand that our customers are talking about. Brian Brophy: Okay. And then just to touch on one project in particular, I wanted to ask on GreenLink. Obviously, it's been discussed as a project you guys have been involved with, and we saw some headlines intra-quarter regarding a pause in activity. It doesn't seem like it's impacting your fourth quarter based on some of the comments you made. But just maybe any updated thoughts you can provide on this project and if we could see an impact this quarter? Ryan McMonagle: Yes. No, it's still been -- it's not impacting the fourth quarter. We're still seeing good demand on transmission. I think that's what's always interesting when you get into these strong transmission cycles is I think customers don't want to return gear because they know that they may not see it again too. So I think it should not be an impact in our fourth quarter. And that transmission sector, as I said, is staying very strong from an overall utilization perspective. Operator: Your next question comes from the line of Mike Shlisky from D.A. Davidson. Michael Shlisky: Can we back up a couple of questions? You had mentioned some comments about the infrastructure sector and how that's going. Can you maybe kind of round it out by just talking a few senses on how it's going in the telecom world and in rail as well? Ryan McMonagle: Yes. I think we're seeing -- look, across the board, we're seeing growth, right? And so I think that's important to say. We're seeing the strongest growth in transmission and distribution, just given what's going on there. So we are -- within telecom and rail, we're seeing some activity pick up. As you know, telecom and rail are less than 5% of our revenue. So we're seeing some growth in rail. We're seeing telecom, a lot of discussion and a lot of quoting happening. I expect that should pick up some in the fourth quarter and then into 2026 as well. But overall, it's growth. The strongest growth is in transmission and distribution. And then just where there's more competition from an inventory perspective in things like dump trucks or water trucks or some of our refuse product categories, we're seeing less growth or is the right way to say it, Mike. Michael Shlisky: Got it. And then turning to T&D, you start to see headlines from some data center operators as they build the data center, they're also building or contracting for energy production assets either close by, on site, a few miles away, not a long grid connection as far as distance is concerned, I guess. Not all of the data centers, but some of them are trying to co-locate the energy. Does custom trucks still play a role in a project like that? Does it accelerate the pipeline opportunities when people are just saying we can't wait for the utilities go to build at least on our own infrastructure. Does have an impact on pricing and margins when you have a project where it's much closer to the data center than others? Ryan McMonagle: Yes, it's a great question, Mike. And I think the way we're thinking about it is it is very good overall demand, right, for T&D for us, right? And so to me, it feels like there's a lot of generation that's coming online that in some cases, it's temporary generation, too. And so to me, that's why I think we're getting comfortable that there should be a sustained period of long demand here. So in some cases, it's temporary generation, right, to get the data center up and then the expectation is the utility will come back through and bring a transmission line or a substation or whatever is needed, right, for that particular project. And that's where I think it feels like it's going to be good sustained demand for custom truck and for our trucks in both of those cases. Michael Shlisky: Got it. And then, Chris, can I give some more comments on your -- on the CapEx plan that you put out here for the rest of '25. Is any of this pull forward from '26? I'm trying to figure out, is there a point where you pause in the CapEx kind of harvest what you've got and pay down some more debt at some point? Christopher Eperjesy: The answer is yes. As you know, we -- the age of our fleet going back 3 or 4 years ago was a little over 4 years. We're now, I think, at 2.9 or right around 2.9 years. So that's $0.5 billion, $600 million investment to do that over time. And -- but the short answer to your question is we should start to see some improved free cash flow, certainly as we're able to pull back on some of that net investment. Michael Shlisky: Great. Chris, can I just follow up there? You had said you were once 4 years. I think you were a little bit above 4 years depending on how far back you kind of Nesco and so forth. How far would you take it? Like I guess I'm curious where the competition is with their average age? And how close would you get to the competition while still being the newest. I'm trying to figure out how long you might be able to let your assets for if you were to try to find a way to harvest some cash flow. Ryan McMonagle: Yes, it's a great question. And look, it's -- there's not great data out there, but we do think that we are the youngest fleet, the youngest utility rental fleet that's out there. And so you're right, Mike, there is the ability to age it. And so to me, if you kind of use the bounds of where we are today of under 3, 2.9 or whatever the exact number is right now, and you think about the fact that we were over 4 just a few years ago, to me, that's a pretty good band that you can live in and allow to age -- and allow ourselves to age our fleet and therefore, generate cash flow that way. So I'd give you that as a pretty good band to think about and still have a very strong performing fleet where we take care of the customer and are very competitive from an overall age perspective. Michael Shlisky: And I appreciate you've got a lot of opportunities coming in, so I don't want to issue your balance. So -- anyways I appreciate [indiscernible] a lot. Operator: [Operator Instructions] There are no further questions in queue. I'd like to turn the conference back over to Ryan McMonagle for any closing remarks. Ryan McMonagle: Great. Thanks, everyone, for your time today and your interest in Custom Truck. We look forward to speaking with you on our next quarterly earnings call. And in the meantime, please don't hesitate to reach out with any questions. Thank you again, and have a good day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Hello, everyone, and thank you for joining the CTS Corporation Third Quarter 2025 Earnings Call. My name is Claire, and I will be coordinating your call today. [Operator Instructions] I will now hand over to Kieran O'Sullivan to begin. Please go ahead. Kieran O'Sullivan: Good morning, and thanks for joining us today. We delivered a quarter of strong double-digit growth in our diversified end markets, with sales up 22% versus the prior year period. Diversified sales for the quarter were 59% of overall company revenue. We also expanded gross margin by 66 basis points and had solid operating cash flow. Secondly, our SyQwest team was awarded a sole-source naval defense contract with an initial value of $5 million and the potential to add additional platform awards within the next 12 months. Finally, in transportation, we had a strong quarter with wins of $130 million and added a new braking sensor application. Ashish will take us through the safe harbor statement, Ashish. Ashish Agrawal: I would like to remind our listeners that this conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in the press release issued today, and more information can be found in the company's SEC filings. To the extent that today's discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available with today's earnings press release and supplemental slide presentation, which can be found in the Investors section of the CTS website. I will now turn the discussion over to our CEO, Kieran O'Sullivan. Kieran O'Sullivan: Thank you, Ashish. We finished the third quarter with sales of $143 million, up 8% from $132 million in the third quarter of 2024. For the quarter, diversified end market sales, including sales to medical, aerospace and defense and industrial end markets were up 22%. Transportation sales were down 7% from the same period last year. Diversified end market sales were 59% of overall company revenue in the quarter, up from 52% in the third quarter of last year. Our book-to-bill ratio for the third quarter was slightly above 1 in comparison to the third quarter of 2024, where we're marginally below 1. Bookings for our diversified end markets were up double digits in industrial and defense, and an increase in the high single digits in medical on a year-over-year basis. We expect stronger medical bookings in the last quarter, especially for therapeutic products. Third quarter adjusted diluted earnings were $0.60 per share, down from $0.61 in the third quarter of 2024, primarily due to an unfavorable impact from the recent U.S. tax legislation. Ashish will add further color on this and on our financial performance later in today's call. In the medical end market, third quarter sales were up 22% compared to the same period in 2024. Bookings in the quarter were up 8% compared to the prior year period. We are excited about the prospects for growth in minimally invasive applications, where our products help deliver enhanced ultrasound images and make it easier for medical professionals to detect artery restrictions. Our teams are engaged on next-generation product development to further enhance diagnostic capability with our customers. We are proud to highlight that our products support solutions that help save lives. Additionally, our products enable medication delivery for treatment of infected areas, aid blood analysis and flow, cancer treatments and are incorporated in pacemakers and cochlear implants. Our therapeutic products enhance skin aesthetics and in combination with other medical procedures, help improve skin tightness. During the third quarter, we had multiple wins for diagnostic ultrasound and had wins for therapeutics, pacemakers and a win for an ophthalmology application. We are also developing samples for Doppler ultrasound for a vascular flow application. In addition, we added 2 new customers for diagnostic ultrasound. Demand remains strong for therapeutic products, and we expect increased volumes in 2026. Over time, we expect the volume increases in portable ultrasound diagnostics and therapeutics will continue to enhance our growth profile as well as expansion into new applications. Aerospace and defense sales in the third quarter were up 23% from the third quarter of 2024. SyQwest revenues in the third quarter increased to $8.8 million, and we expect to maintain this momentum through the balance of this year. Bookings in the third quarter were up 29% from the prior year period, as we maintain a healthy backlog, and we expect solid bookings in the last quarter of this year. Our strategy is focused on moving from a component supplier to a supplier of sensors, transducers and subsystems and is further validated by our recent naval award. We received multiple orders in the quarter for sonar applications. The order mentioned in my opening comments for the SyQwest business is for a naval munition application, and we expect additional platform awards as we move forward. SyQwest continues to drive a strong pipeline of opportunities. In the industrial market, we continue to see a steady recovery with OEMs as well as a stronger recovery with distribution customers. Sales in the third quarter were up 9% sequentially and up 21% compared to the prior year period, underscoring our expectation of a continued recovery. Bookings in the quarter were up 29% from the same period last year. We were successful with multiple wins in the quarter for industrial printing, EMC, temperature sensing wins for pool and spa and the win for an industrial heat pump application. We added one new customer in the quarter for position sensing. Demand across industrial end market is expected to remain healthy for the balance of 2025. The megatrends of automation, connectivity and efficiency enhance our longer-term growth prospects. Transportation sales were $58.5 million in the third quarter, down approximately 7% from the same period last year due to softness for commercial vehicle products. In the third quarter, we had awards across various product groups, including accelerator module wins with OEMs in Europe, South America and China. Total booked business was approximately $1 billion at the end of the quarter. We had various wins for passive safety and chassis ride height sensors across several regions. We added a new product to the portfolio for brake sensing, securing a business award with a North American OEM. This further strengthens our long-term capability to expand our footwall presence. We also had a large win in commercial vehicle for smart actuators with an existing customer. Additionally, during the quarter, we released our COBROS technology, a new platform for electric motor control. This technology eliminates the need for 3 discrete current sensors and the position sensor, allowing for a simplified design, weight reduction and more precise control. The near-term growth rates for ICE versus EVs and hybrids are less of a concern for us given our light vehicle products are mostly agnostic to the drivetrain technology. The trend towards increasing demand for hybrids with extended range capabilities remains robust. Interest in our e-brake product, offering weight and cost advantages continues across OEMs at a slower pace as certain OEMs recalibrate EV investments and launch dates. We remain confident in the longer-term growth prospects for our e-brake and other footwall products. These, along with existing and new sensor applications will increase our ability to grow content. For our diversified end markets, subject to the uncertain tariff environment, demand in the medical market is expected to remain mixed with strength in therapeutics and softness in diagnostic ultrasound. In aerospace and defense, revenue is expected to grow given the timing of orders and momentum from the SyQwest acquisition. Industrial and distribution sales are expected to improve. Longer term, we expect our material formulations supported by 3 leading technologies and their derivatives to continue to drive our growth in key high-quality end markets in line with our diversification strategy. Across transportation markets, production volumes are expected to remain soft given the tariff impact and demand from customers. The North American light vehicle market is expected to be in the 15 million unit range. European production is forecasted in the 16 million unit range. China volumes are expected to be in the 30 million unit range. We are carefully monitoring for any potential impact from supply chain issues related to rare earth, aluminum and semiconductors, although we are not seeing any immediate impact. Electric vehicle penetration rates have softened in some regions, while hybrid adoption continues to improve. There was a notable demand increase for EVs in September with the elimination of the vehicle subsidy for the North American market. We anticipate general softness in commercial vehicle demand in the fourth quarter. Shipments of our new commercial vehicle actuator continue to ramp as we prepare for 2026, where we will implement further product enhancements. As I mentioned in previous calls, revenue from the SyQwest acquisition will introduce some seasonality where the timing of revenue may be influenced by the approval of funding by the U.S. government. As reported, we saw an increase in revenue for SyQwest in the third quarter and expect to maintain this positive momentum through the end of this year. We continue to closely monitor and evaluate the tariff and geopolitical environment, while focusing on agility and adapting to cost and price adjustments in close collaboration with our customers and suppliers. Assuming the continuation of current market conditions, we are narrowing our guidance for sales in the range of $535 million to $545 million and adjusted diluted EPS to be in the range of $2.20 to $2.25. Now I'll turn it over to Ashish, who will walk us through our financial results in more detail. Ashish? Ashish Agrawal: Thank you, Kieran. Sales in the third quarter were $143 million, up 6% sequentially and up 8% from last year. Sales to diversified end markets increased 22% year-over-year. SyQwest sales were $8.8 million during the quarter. As Kieran has highlighted, we expect the momentum to continue for sales from SyQwest in the fourth quarter. Sales to transportation customers were down 7% from the third quarter of last year due to the softness in sales related to commercial vehicle products. Foreign currency changes had a favorable impact on sales of approximately $1 million. Our adjusted gross margin was 38.9% in the third quarter, up 66 basis points compared to the third quarter of 2024, and up 12 basis points compared to the second quarter of 2025. Our global teams continue to focus on operational execution to deliver margin improvements. Tariffs had a minimal impact on profitability in the third quarter, and we continue to work closely with customers and suppliers to manage the impact. Adjusted EBITDA was 23.8% in the quarter. This is an improvement of 86 basis points sequentially and a reduction of 55 basis points compared to the third quarter of 2024. Earnings were $0.46 per diluted share for the third quarter. The third quarter results include a $4.2 million increase in reserve related to EPA's cost reimbursement claim for a prior environmental matter. Adjusted earnings were $0.60 per diluted share compared to $0.57 in the second quarter of 2025 and $0.61 in the third quarter of 2024. We had an unfavorable impact on our tax rate from changes in the mix of earnings. And in addition, the recent U.S. tax legislation changes had an adverse impact of approximately $0.03 on adjusted earnings per diluted share for the third quarter. Moving to cash generation and the balance sheet. We generated $29 million in operating cash flow in the third quarter compared to $35 million in the third quarter of 2024. Year-to-date, we have generated $73 million in operating cash flow. Our balance sheet remains strong with a cash balance of $110 million at the end of the quarter. Our long-term debt balance was $91 million, leaving us good liquidity to support strategic acquisitions. During the quarter, we repurchased 400,000 shares of CTS stock for approximately $17 million. In total, we returned $44 million to shareholders through dividends and share buybacks in the 3 quarters of 2025. We have $21 million remaining under our current share repurchase program. Our focus remains on strong cash generation and appropriate capital allocation, and we continue to support organic growth, strategic acquisitions and returning cash to shareholders. This concludes our prepared comments. We would like to open the line for questions at this time. Operator: [Operator Instructions] Our first question comes from John Franzreb from Sidoti Company. John Franzreb: I'd like to start with the guidance. It seems to me that you raised the midpoint on your revenue guidance, but lowered the midpoint on the EPS guidance. Now I recognize that you've been suggesting it would be the low end of that EPS. But I guess I'm surprised the dynamic of raising the revenue in light of that. Can you just walk us through what's going on there? Kieran O'Sullivan: Yes, John. So from a top line perspective, we feel good about the direction we're going there. As I mentioned in the prepared comments, the fourth quarter has some headwinds on CV. But overall, we've got good progress in industrial, nice momentum in aerospace and defense, strength in therapeutics and then some things we're monitoring on the diagnostics side. So that's it on the top line. And then on the bottom line, primarily, as Ashish mentioned in his prepared comments, there's the tax impact. And Ashish, you probably want to comment on that. Ashish Agrawal: Yes. So John, there are a couple of things that are having an adverse impact on our tax rate. Number one, the mix of earnings. And then the second piece, which is more pronounced is the tax legislation, given the mix of earnings we have, it actually has an adverse impact on our overall tax rate. So you saw that impacting our Q3 earnings in a meaningful way. And then that impact is expected to continue, obviously smaller into Q4 as well. John Franzreb: Okay. Understood. And Kieran, you just mentioned the CV market. So that begs the question. What are your transportation customers signaling about the 2026 production rates? Kieran O'Sullivan: John, for 2026, it's kind of a bit of a mixed market out there. You hear some OEMs, especially on the light vehicle side, talking more positive, some talking a little bit negative. So it's a very mixed story. What I would tell you is on the light vehicle side in this quarter, excluding Cummins, our large customer in CV, we saw an incremental -- small incremental increase in low single digits. And we had solid bookings in the quarter. So we feel really good about the bookings and where we're going. So the market is going to be a bit mixed still next year from everything we hear on transportation, but feel very good about what we're doing in medical, aerospace and defense and industrial. John Franzreb: Agreed. Can I just maybe touch on the end markets as a whole because the gross margin improvement was nice to see. And I'm actually kind of curious and maybe you could help me frame this better. But if you kind of rank your end markets on the gross margin contribution or should we be thinking about it on the operating margin contribution? How would you -- I know you're not going to give the actual margin profile, but how would you rank them so as we can see the change on a go-forward basis, we can think about the impact to profitability? Ashish Agrawal: So John, we earned good margins on our diversified end markets pretty obviously. I don't know if I would split the margins by end markets in terms of profile. They are pretty decent on the diversified side. Medical, industrial, aerospace and defense, we are doing reasonably good margins on all of those. Transportation is obviously behind in terms of comparison, but we earn good margins on the transportation side as well. John Franzreb: Okay. Kieran O'Sullivan: And John, the other thing I would comment on is you can see the -- you talked about the improvement in gross margin. Our diversification percentage is going up quarter-on-quarter as well. So I think that's what you're going to see is positive momentum there. Yes. John Franzreb: Yes. I was just -- I guess I'm kind of curious as how much, I don't know, medical has more of an impact versus, say, aerospace and defense. I would guess that industrial will be third in that ranking, but that would be me just guessing. Ashish Agrawal: So John, it's a little bit more, I would say, split by product line. The margin profile on different product lines has a different level in pretty much all the end markets. So for example, when you look at our piezo product lines, we have single crystal in there, tape cast and bulk and the margin profile varies. So single crystal would be slightly higher margins than the other 2. In frequency, we'll have a different level of margin, which is higher. And then -- so that -- it's not so much where we are seeing distribution by end market as we are seeing distribution by product lines. John Franzreb: I appreciate that clarity. Kieran O'Sullivan: Okay. Thanks, John. Operator: Our next question comes from Hendi Susanto from Gabelli Funds. Hendi Susanto: First question is for Ashish. The tax impact, the adverse tax impact, will it go away in 2026? Ashish Agrawal: So Hendi, we'll obviously be looking at areas that we can drive improvements. The specific change from the tax legislation that will continue to have a slight adverse impact, but we'll continue looking at other areas of opportunity in terms of tax efficiency as we have always done. So I would expect at this point, 2026 to be similar tax rate as 2025, but we'll continue working on it. Hendi Susanto: I see. And then Ashish, would you be able to spell out what tax rate estimate we should use for our -- like [indiscernible] model? Ashish Agrawal: Yes. So we are in the low 20% range right now, Hendi. We are talking about 21% to 23% type of ballpark on a go-forward basis. Hendi Susanto: Yes. And then this question is for Kieran. Kieran, this morning, NXP Semiconductor reported its September quarter. I know that it's an apple and orange comparison. They do say that Tier 1 inventory burn is getting closer and closer to be completed. How should we view the expectation that inventories in your channel for transportation is close -- is somewhat close to representing the end market demand. And then at some point, they will need to build more inventories internally. How should we view that notion? Kieran O'Sullivan: Yes. I didn't see the NXP data. But what I would look at, Hendi, is if you look at the days of supply on hand, it's probably trending on the light vehicle side around 50 days, which seems pretty normal. I wouldn't be concerned about it at all. There is obviously some further softness in the commercial vehicle market, and that's one we're watching more closely, but not on the light vehicle side. Hendi Susanto: I see. And then looking at SyQwest acquisitions and then your expectation, given we have insight into the quarterly revenue run rate for the last 5 quarters, would you be able to give some puts and takes and whether or not the company's revenue contribution meets or exceeds your target for this year? Kieran O'Sullivan: Yes. So Hendi, if I look at it quarter-by-quarter, we've always said the first half is going to have some seasonality, whether it's heavier in the second half, and that's what we're seeing now. So we've seen a step-up in revenues from Q2 to Q3, and we expect that step-up to continue. We will see some seasonality next year as well, first half, second half due to government funding. And we're very pleased with the pipeline of opportunities. And we called out an award today in the comments, sole-sourced for a new platform with the first $5 million, and we expect other awards in the next 12 months and over the next several years as well. So we feel really good about that, and we want to build on that momentum. Hendi Susanto: Got it. And then one last question for Ashish. The operating expense line. The SG&A is somewhat meaningfully larger this quarter. I know that you mentioned that's a $4.2 million increase in reserve. Is that the main reason of the increase in OpEx? Ashish Agrawal: Yes. So Hendi, that is by far the largest. We also have a year-over-year increase in equity-based compensation as going through the year, sometimes you have to make adjustments based on expected performance. And last year's number had a relatively larger reduction. So that is also causing the year-over-year comparison to look a little bit unfavorable in Q3 of 2025. Operator: We now have a follow-up question from John Franzreb. John Franzreb: Yes. Kieran, I'm kind of curious about your comments on the industrial end markets. It seems like -- to me, it seems like you're more positive than you've been in quite some time. Is that the case, or am I just reading too much into it? Kieran O'Sullivan: No, John. I think when we look at all the diversified end markets, we feel pretty good. And if I start with industrial, which you mentioned, we've seen a 9% sequential improvement over 20% year-on-year. We've seen a strong increase in distribution-related sales. So we feel very good about the trend there. And then I also mentioned on medical, we expect bookings to increase in the fourth quarter and the very same on aerospace and defense. So across the diversified markets with industrial right up there, I feel very good. John Franzreb: And just on the medical, do you think bookings will increase, do you think the diagnostics side of the business will be coming back, or do you think that will remain weak on a go-forward basis? Kieran O'Sullivan: The diagnostics side is a little weaker, but it's still solid overall, and we expect it will improve probably more so next year. But we've got strong momentum on therapeutics, and we feel that's going to continue not just in the fourth quarter, but into next year as well, John. John Franzreb: Got it. And can you kind of walk me through how you're successfully navigating tariffs. A lot of companies I cover anticipate a delay in being able to recover pricing from the customer base. You seem to be doing extremely well. Can you just talk about what's going on there? Ashish Agrawal: So John, we've talked about this in the past where a lot of what we do in Asia stays in Asia. what we do in Europe stays in Europe and what we do in North America stays in North America. It's not 100% that way, but largely, it is that way. And that helps us mitigate cross-border flows, which is where you see the impact of tariff. That's a big portion of it. The other is where we do have tariff impact, we are working very closely with suppliers, with our customers to find ways to mitigate, but then also pass the cost on to our customers as we work through the impact. And so far, we've been able to manage well. We have talked about USMCA. That's where our exposure would increase if USMCA were to go away and it doesn't get replaced with something suitable. But other than that, we've been able to manage pretty well. John Franzreb: Very good. I guess one last question. The fire at the Ford aluminum supplier, does that have any impact on your company at all? Kieran O'Sullivan: John, Novelis, that's the aluminum supplier, and then there's Nexperia the chips. We haven't seen any direct impact, but it's something we're monitoring as we go through the fourth quarter. So nothing to report at this point. John Franzreb: Okay. Keep up the good work. Kieran O'Sullivan: All right. Thank you. Operator: [Operator Instructions] We currently have no further questions. So I'll hand back to Kieran for any closing remarks. Kieran O'Sullivan: Thank you, Claire, and thank you all for your time today. Despite the challenges of tariffs, geopolitical and economic pressures, diversification remains a strategic priority to drive growth and margin expansion. In addition, we are expanding in vehicle powertrain agnostic solutions. We look forward to updating you on our full year 2025 performance in February of 2026. Thank you again. This concludes our call. Operator: This concludes today's call. Thank you for joining. You may now all disconnect your lines.
Operator: Welcome to Storytel Q3 Report 2025. [Operator Instructions]. Now I will hand the conference over to the CEO, Bodil Eriksson Torp, and CFO, Stefan Ward. Please go ahead. Bodil Torp: Good morning, everyone, and welcome to Storytel Group's Q3 2025 Earnings Call. We are pleased to report strong financial performance today across both our segments in streaming and Publishing, with robust customer intake and record-high profitability. This performance reinforced our confidence in achieving our guidance for 2025, which we will talk more about today. So I am Bodil Eriksson Torp, the CEO of Storytel Group for a year. Also joining us today is our new CFO, Stefan Ward. So welcome to you, Stefan, to our first call from inside Storytel, and I'm sure that you're going to love it. So, as we just said, we have delivered another strong quarter with over 2.6 million paying subscribers. Most of them, as you know, are highly engaged book lovers, and we increased our paying subscriber base by over 10% year-over-year. We continue a strong financial development, reflecting underlying growth in both our segments, and we delivered revenue growth of 9% in constant currency. The growth was driven by a focus on our customer experience, while the continued operational efficiencies led to our record-high profitability and a strong cash flow generation. Regarding the ARPU, it decreased due to a main factor that is the FX effects of SEK 4, but also due to our continued growth in markets outside the Nordics, where we are having lower price points as we have been talking about before. The Publishing segment achieved strong sales and growth, and also a significant improvement in profitability, partly driven by the successful acquisition of Bokfabriken. But I would also emphasize that the underlying growth, excluding the acquisition of Bokfabriken, remained very solid. So, combined with continued progress in streaming, this is also highlighting our strength of our business model. We delivered a strong Q3 with an increased profitability of 26% year-on-year. And by that said, we also raised our 2025 margin guidance to the range of 18.0% to 19.5%. So here are our group financial highlights. Group net sales increased by 6% year-over-year to over SEK 1 billion. Like many other Swedish companies, we have also been affected by the strong currency headwind. In constant currency, our net sales increased by 9%. The solid development was driven by healthy growth in both our segments, as I said before, and gross profit increased by 6% and the gross profit margin was on par with last year. We reached a record high EBITDA margin of 22.1%. Adjusted EBITDA increased by 26% to SEK 224 million. The net profit for the period increased by 150% to SEK 138 million during the quarter. The significant improvement in profitability was driven by increased operational efficiency. Overall, we are very satisfied with the financial development in Q3. And our financial position provides us with a very high flexibility now for further expanding our businesses. So it's important for us to continue to improve satisfaction and engagement for our customers. So when we look ahead, we will increase our investments in locally relevant content and also the user experience in our services. This will continue to improve both engagement and satisfaction for our current and our future book levers. So when we're looking into rolling 12, we see a strong development with strong momentum. On an annualized basis, our revenues are now close to SEK 4 billion with a margin of 18.4%. This confirms our successful business model, as you can see. So let's continue with our 2 business segments. Over to you, Stefan. Stefan Wård: Thank you, Bodil. We'll continue with a brief overview of our streaming performance. During the quarter, we added 56,000 new subs. And over the past 12 months, we have added 236,000 new subscribers. So solid growth, both on a quarterly and annualized level. Especially the Nordics were strong in the most recent quarter with net adds of 36,000, while we added 58,000 for the full past 12 months. So, a relatively strong intake from the Nordics in Q3. Outside the Nordics, we added 20,000 new subs in Q3 and 178,000 over the past 4 quarters. So relatively softer quarter outside the Nordics in Q3. At the end of the last quarter, our Nordic base was 1.32 million, while our base outside the Nordics was 1.28 million for a total customer base of 2.6 million subs. So we're roughly evenly split between the Nordics and outside the Nordics, and it's a reasonable assumption that we soon will pass the shift will tilt towards our international non-Nordic customer base going forward. As a consequence, we continue to see a decline in ARPU. We have lower average ARPU levels outside the Nordics, but that does not necessarily mean that we have lower profitability on those customers. On the CMB/SAC ratio, we remain well above our target level of 3, supporting arguments for continued subscriber growth. Not only do we have a well-diversified subscriber base in terms of markets, but we also have a highly engaged and loyal customer base, visible in our low churn level, which continued to decline during the quarter to a new all-time low. Looking specifically at the financial performance of the streaming segment, we delivered a reported sales growth of 4% and 7% in constant currencies. Streaming gross margin was unchanged, while our EBITDA margin improved 4.3 percentage points to EBITDA margin for the streaming segment of 17.9%. Operating leverage continued. So our growth in operating profit was 43% year-on-year. In our Publishing segment, we delivered, as Bodil said earlier, a strong growth, 14% year-on-year, SEK 39 million of the annual increase for the first 9 months, a total increase of NOK 39 million, of which Bokfabriken accounted for NOK 22 million. BoKfabriken has, since we acquired the unit, delivered very good results above our forecast. So we're very happy with that acquisition. It's a good example of how we can continue to grow our publishing business. The development was also driven by strong digital and physical sales, with a good performance of new titles. Publishing EBITDA increased by 25% to NOK 108 million for a margin of 33.4%, up 3 percentage points year-on-year. Looking at the cash flow generation, we transform or convert over 80% of our EBITDA to operating cash flow before changes in working capital. So, cash flow grew by 37% and was SEK 203 million in the quarter. On a trailing 12-month basis, it's at SEK 658 million, corresponding to 90% of our run rate EBITDA for the past 12 months  Working capital had a negative impact of SEK 45 million in the quarter. In our view, this is a normal variation, and we will see a release of working capital in the final quarter. A fair expectation for the full year would be to have a relatively neutral impact from working capital in 2025. During the quarter, we also repaid SEK 50 million of our debt. And that, together with the increase in working capital, explains the relatively softer total cash flow for the period compared with last year.  Looking at the balance sheet, it's strong, not much to say there. We have cash and equivalents of just over NOK 0.5 billion. That's roughly on par with our interest-bearing debt. Our equity-to-asset ratio continues to improve, and it's currently at 50%. Speaking of our net debt, it's tiny, it's NOK 23 million. We will go into net cash during the fourth quarter if we don't make any drastic investments. So we have a very good financial position. In addition to our strong operating profitability, we continue to see improved financing costs. So we will have a better financing situation going forward.  We also have a significant amount of deferred tax assets, which are currently off-balance sheet. These are primarily related to losses made in our now very profitable Swedish business. So we are quite certain that we will be able to utilize these deferred tax assets going forward, which will mean that we will have a fairly low paid tax rate, and that is also good for our cash flow generation going forward. With that, I'll hand it back to you, Bodil.  Bodil Torp: Thank you, Stefan. Super good. And thank you for highlighting our strong financials and our position. So we summarized this quarter, and we are satisfied with our operational performance and our solid subscriber growth. And it's also that our highly engaged book levels have led to an all-time low churn rate again. That's really good. So our substantial cash generation provides us with a very strong financial position. And we will continue to expand into new and existing markets in a prudent way. We have launched our services in Estonia during the quarter, while also forming a new partnership in Chile will support growth over time.  So this is to continue the path that we are doing. Our strategic focus is super clear for us. We continue to strengthen our leading position in the Nordics, and we will also accelerate our growth in our core non-Nordics markets. That's super important for us and expand into new adjacent markets. So this strong momentum, coupled with our high degree of financial flexibility, supported by an active M&A agenda, positions us now very well for the future. So we will continue to hopefully end with a really good year here. So now over to your questions.  Operator: [Operator Instructions] The next question comes from Derek Laliberte from ABG Sundal Collier.  Derek Laliberte: I was wondering, you delivered obviously a really strong margin here in Q3, driven by lower costs. It looks like mainly lower OpEx. What were the key components of that? And is this level, so to speak, sustainable into Q4?  Stefan Wård: Thank you, Derek. Stefan here. Yes. So, the primary reason on an annualized basis, we had some costs last year in Q3 that related to headcount reductions that are not apparent this year. Other than that, we just continue to work by improving our efficiencies. As Bodil mentioned earlier, during the first half, we've trimmed the OpEx base. So, part of it will be sustainable, and we definitely see a higher profitability level going forward, hence our raised full-year guidance. I hope that answers your question.  Derek Laliberte: Yes, very clear. And I was also wondering in the summer months here, a strong performance in terms of intake. Can you say something about what you've experienced in the Nordics here with regards to sort of how efficient your conversion of customers has been and what you've seen on the competition front as well?  Bodil Torp: Yes. I think we always, have always increased our efficiency in our MarTech function, and that is also what we are seeing from the figures, while our growth is increasing in the Nordics in a good way. So the competition is what it is. I mean, it's the same as it has been before. So I think we've done a good job during this quarter to also have the increase in the Nordics when it comes to the subscriber base. And that goes to the efficiency and the good function that we have for the Match, I would say. Also, monitoring and being agile in doing the right things in tactical marketing is also important.  Derek Laliberte: Looking at the non-Nordics core markets here, I think you said that Poland and the Netherlands continue to be strong, but is there anything else to highlight in terms of particular tail or headwinds that have had any meaningful impact in any of these countries?  Bodil Torp: I would say we have a strong momentum in Poland and the Netherlands, and that is what we're also telling in the report today. Of course, we are on a good path, and we're taking market shares there. So I won't say that we have any different headwinds than we see. It's more about gaining shares and increasing the momentum that we have in those markets. It's important for us to continue to grow there. And also, as Stefan mentioned in the call that this will, going forward, change a little bit regarding the balance where we see the growth and the customer base in the pay base, regarding Nordic and the growth non-Nordic course. So this is, of course, super important for us, and we have a good momentum there.  Derek Laliberte: I was also wondering, I mean, you've talked for quite some time about further differentiating your product from competitors' offerings. Where would you say you are on this journey? And what benefits are you experiencing from what you've achieved so far? And what should we expect in the future?  Bodil Torp: We increased our efforts to deliver the best streaming service to our customers, of course. So, we have also launched different features during this quarter that go into seamless reading and listening function, for example, and also the audio around Dolby.  So, we are on the right track to increase our deliveries to our customers to actually make it more to increase the customer experience in the app. And that is also important since I mean, we had the big launch of VoiceSwitcher, and then it was a time where we didn't really release any features.  But we are into that momentum now that we have actually launched some features, and we will continue to do that. So, we have good progress in product and tech, and also a new setup there with an organizational setup that is also more focused on delivering the product features to the market to increase our strength in the app, of course.  Derek Laliberte: Finally, you announced yesterday this Klarna partnership. Can you talk about the potential you see in this deal in terms of what it could mean for distribution and conversion?  Bodil Torp: I would say, I mean, we launched it yesterday. So, in the very beginning. But I mean, Klarna's network is reaching over 100 million consumers worldwide, and this goes into different tier models across 14 markets. So, of course, we are very hopeful that this will be a really good partnership for us.  I mean, also, when it comes to Klarna's customers, we know that they are really tech savvy, and they also want to have new services regarding streaming. So, there's a good collaboration, and it's a good fit with Klarna's customers. So, we will come back to this, but we are very happy and have a good forecast that we will have some good business values out of this partnership.  Derek Laliberte: And then I'd also like to ask, I think you mentioned before about adding, I mean, this additional expansion or additional markets. I'm not sure if it was 6 to 8 in total over the years. And we've clearly had your announcements on Estonia here and also the partnership in Chile.  What should we expect going forward here? And what type of approach will you take? I noticed with these 2 launches, so to speak, that you've, I mean, gone for a partnership model to quicker get an attractive catalog up and running in the service?  Stefan Wård: Well, I think you should expect that we continue to add markets to our footprint. We can both reignite existing markets where we've been active in the past and already have a catalog. We can go into new markets, completely new markets, as in Estonia, for example. We can go in organically, or we can go in through acquisitions, and we can also go in via partnerships. These are just 2 examples that we're executing on that strategy, but it's a fair assumption to continue that we will continue to do so. And that's the best answer I can give you there.  Operator: The next question comes from Joachim Gunell from DNB Carnegie.  Joachim Gunell: So, on this raised margin, ambitions for 2025 since we're only 1 quarter to go. And on a trailing 12-month basis, you're already delivering 18.4% adjusted EBITDA. So, how should we think more conceptually about this still fairly broad interval in light of that's only Q4 to go? And then essentially, what scenarios do you play with here in order to hit either the high end or the low end of that range?  Stefan Wård: Well, as you stated, Joachim, we're already delivering within our range. So, we felt that we needed to revise to lift our communication range and notch upwards, and that is what we have done. Other than that, I don't think you should read too much into it. We're confident that we will deliver on our targets for the full year and expect to finish the year in a good way.  Joachim Gunell: There's been a lot of industry chatter about both Spotify launching and also potential relaunch of Audible in the Nordics over the coming quarters. You discussed a bit about the steps you are taking to differentiate the service and then improve the listening and reading experience. But just remind us what you see as Storytel's deepest competitive modes, whether it's, of course, the local content, UI, UX, brand, price, et cetera? And how durable are they?  Stefan Wård: So, our deepest moat is our existing customer base that is not churning and very loyal, and has a very high activity of our content. So, the content that we build over a long time that it's core to our strategy, and it's a very good moat for us. Then hopefully, if new entrants come in, we hope that they will help evolve the entire cake. But we're used to intense competition, and this will be nothing new for us. We have our content-based strategy and think that is what has helped us win so far.  Bodil Torp: Yes. And we should also remind ourselves, this is really a local game. So it's also about having the right competencies and know-how regarding the local game in the different markets. Since we know that over 80% is consumed in a local language, it's super important to have relevant local content, and we are very good at that. So, there's a long history of knowledge in that area in the company.  Also, like Stefan said, it's also about our customer base, who are really engaged book lovers that have been with us for a long time, and the churn is all-time low. So, they're actually having a really good and high engagement and loyalty to Storytel. So, this is also a moat where we know that our customers want to have their bookshelf in our app. So that is the main moat, I would say.  Stefan Wård: We can also add that we are audible has been in the market in the past, as you mentioned, and we face competition from Spotify in, for example, the Netherlands, and we're still able to grow our subscriber base very strongly in that market.  Joachim Gunell: When it comes to providing, say, tools for creators to manage, promote, and grow their audiobook business, I mean, where is Storytel in relation to your ambition when it comes to, say, visualizing different types of data statistics on listeners and those kinds of things to your authors and publishers?  Bodil Torp: I would say we are in the moment where we are digging deep into this. So, we will actually come back on that because we also need to see how we will be better at delivering that kind of data and services to all the authors. So that is a project that is ongoing as we speak.  Joachim Gunell: Just a final one for me. How are your AI initiatives, like the AI generation and then voice switching tracking, versus expectations? I think there was some, of course, initial traction of this, but can you say anything about user engagement trends, suggesting if these are preferred new features? Or do your loyal book lovers prefer the classic experience?  Bodil Torp: There is a good user experience in voice switches. We know that there are a lot of users who actually want to switch the voice when they don't like the voice. So it's 9 out of 10, and there's a high engagement in using the voice switches. So we are actually increasing our voice switches to more titles and more languages as we speak to scale it in a bigger way than we have done. So it's attractive, and it's a really good feature in the app that is highly engaging, I would say. So it's in good traction.  Stefan Wård: And we have an intense AI agenda currently ongoing within the company, both from an efficiency but also from a product enhancement perspective.  Bodil Torp: That goes group-wide in the whole company. And that is an intense agenda, also regarding education.  Operator: The next question comes from Georg Attling from Pareto Securities.  Georg Attling: I have a couple of questions, if I may, just also starting on the margin guidance here for this year. Looking at the financial target in 2028 of about 20% margin, that looks quite conservative considering you're almost there in the higher end of this year's range. I'm just wondering if this is a reflection of you just staying conservative? Or are you seeing areas where you would like to accelerate cost growth?  Stefan Wård: Well, regarding the current year, I think the high end of our updated guidance is not conservative. It's a stretch to reach that. We're at 18.4% on an annualized level, and the update to the high end is 19.5%. So I think we have balanced guidance for the rest of the year that is not too conservative.  Regarding our midterm targets, we say that we're going to be above 20%. That could always be specified, but I think our progress just shows that that is a reasonable expectation to be above 20% in 2028. Then, exactly where we will end up, there will be plenty of time to be more specific about that.  Georg Attling: Also wondering about the Netherlands, you pointed out as one of the markets in the non-Nordic core that's the strongest, which is interesting considering Spotify's sentence there a year or so ago. So I'm just wondering if you can give us some more color on how the market has developed since Spotify entered, because it seems like, if anything, it's been positive for you.  Stefan Wård: Well, yes. So it looks to our best understanding that we do not exactly compete for the same customers in that market, and that they are actually helping to evolve the entire market, and that would be a very positive scenario for the audiobook format. That's our view. Then, the Netherlands is still in a relatively early phase compared to the Nordics. So there's still a lot of growth in the total market to be done. So when we do strategic marketing in the Netherlands, it pays off in a nice way. So we're able to grow our own subscriber base. I hope that helps.  Georg Attling: Yes. Then just a final question from me. There were some comments in some local media here a couple of months ago that you are in talks with Spotify about licensing your content to Spotify, then in the Nordics, if I understand it. Could you give some more color on where you stand with regard to this?  Bodil Torp: I mean, we don't comment on rumors. So we are open to discuss different business agreements when it's having good opportunities, and that goes into all the players in the market. That is all I can say.  Operator: [Operator Instructions] There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions or closing comments.  Stefan Wård: We have a couple of written questions here. And the first one concerns AI, if we see a case where AI becomes a threat to our business model, and how we use AI to improve our business. Any comments there, Bodil?  Bodil Torp: I would say that we are actually using AI in a wide range of the company. Every team is now in both educational mode, but also we have been using AI for a very long time when it comes to, for example, product and tech, and also back in days with all the machine learning. So I would say that we are on the front line when it comes to the AI capabilities. And we are searching, of course, for efficiency increase and also getting the best out of it for our customers when it comes to customer value. So there's a big scope for this, and we're having a strong focus on AI in the company. What was the other question?  Stefan Wård: The other one was whether AI will become a threat to our business model, and that could be bundled into whether we think that AI can help large international competitors challenge us in our home market. I can give a short answer to that, that we do not see AI as a threat to our business model nor do we see it as an enabler for international competitors to threaten us in our home market since having a good offering is based on what content you can access, and that is regardless of whether the technique that we use to produce or distribute the content. But we are certain that we need to work a lot with new AI-based technologies to stay competitive with our offering.  Bodil Torp: Definitely.  Stefan Wård: Okay. And we have a final question, whether we have any plans to reintroduce our Storytel reader to enhance the customer experience of books.  Bodil Torp: Yes. We are looking into that, I can tell. So hopefully, we will have some happy customers in the future. So we are looking into it. We know there are a lot of customers who really want us to restart that product. Thank you.  Then there are no further questions. Stefan Wård: No.  Bodil Torp: So thank you, everyone, for joining us today in the call, and we are looking forward to our next quarter, and we are looking forward to meeting you soon again. And as you know, we are confident in achieving our updated 2025 guidance. So thank you, and have a good day.
Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to Herc Holdings, Inc. Third Quarter 2025 Earnings Call and Webcast. [Operator Instructions] Now I would like to turn the call over to Leslie Hunziker, Senior Vice President, Investor Relations. Please go ahead. Leslie Hunziker: Thank you, operator, and good morning, everyone. Today, we're reviewing our third quarter 2025 results, with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A. Let me remind you that today's call will include forward-looking statements. These statements are based on the environment as we see it today and are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the press release, our Form 10-Q and in our most recent annual report Form 10-K, as well as other filings with the SEC. Today, we're reporting our financial results on a GAAP basis, which include H&E results for June through September in the 9-month period for 2025. In addition, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. Finally, please mark your calendars to join our management meetings at the Baird Industrial Conference in Chicago on November 11, Redburn Atlantic Virtual CEO Conference on December 2, and the Melius Research Conference in New York on December 10. This morning, I'm joined by Larry Silber, President and Chief Executive Officer; Aaron Birnbaum, Senior Vice President and Chief Operating Officer; and Mark Humphrey, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Larry. Lawrence Silber: Thank you, Leslie, and good morning, everyone. I want to start by thanking all of Team Herc for their incredible energy, focus and commitment throughout the third quarter. Integrating the largest acquisition in our industry is no small feat, but our team has truly risen to the challenge, driving alignment, accelerating progress, supporting one another, and accomplishing a large systems migration, all while remaining focused on scaling operations in a mixed demand environment. We continue to see robust activity across mega projects and specialty solutions, underscoring the strength of our strategic positioning. In the local markets, growth is limited as new projects in the commercial sector remain on hold due to the high interest rate environment. In this bifurcated landscape, our scale, advanced technology platform and diversification across geographies, end markets and product lines continue to be competitive advantages is enabling us to operate with agility and resilience. At the same time, we're executing against our integration road map with discipline, speed and a clear focus on unlocking both cost and revenue synergies within our 3-year time frame. Let's now turn to Slide #5 for an update on our progress. Since closing the transaction, we expanded our field operating structure from 9 to 10 U.S. regions, reorganized districts and added key leadership roles to ensure operational continuity and scalability. Our regional vice presidents and field support staff continue to relentlessly manage change and support our teams for growth. Early on, we completed a comprehensive sales territory optimization exercise to restructure coverage and deepen customer relationships given our much larger scale. And we equipped our new sales team members with a broader product offering and expert product support. They are now undergoing training on enhanced market and customer analytics and customer engagement tools. Together, these initiatives will further improve retention and strengthen the capabilities and execution of our sales force. Equally important in the quarter, we completed the full systems integration. We got this done in just 90 days, compared to a typical time line of 6 to 18 months for companies of a similar size and complexity. This accelerated execution reflects the strength of our internal capabilities, disciplined planning and deep experience with enterprise technology deployments. This integration included an enterprise platform consolidation, where we transitioned the H&E branch operations from SAP to our customized rental and front end system, and Oracle ERP framework. Our proprietary pricing engine also is now fully integrated with centralized controls in place to ensure consistency, protect margins and align pricing decisions with our broader business goals. Our logistics system called [indiscernible] is also now operational across the expanded network to improve delivery accuracy and optimize route planning at the lowest possible cost. As we deployed our business intelligence suite across the acquired locations, giving us real-time visibility beginning this month into combined performance metrics, customer behavior and operational KPIs. Finally, our industry-leading customer-facing technology, ProControl by Herc Rentals is now available to our entire customer portfolio, enabling equipment renting, tracking and asset management and control from any device anywhere. We view these systems integrations not just as a technical milestone, but as strategic enablers. They're going to allow us to scale faster, operate smarter and deliver more value to our customers and shareholders. The systems alignment marks a turning point. For the first time beginning in the fourth quarter, we have full visibility into our combined business and are now positioned to analyze the operations at a more granular district and branch level. Specifically this quarter, we're drilling down into three key areas. First, productivity. We're using the data to benchmark performance, lagging underperforming locations for deeper review and identifying top-tier branches where we can replicate best practices to drive operational improvement across the organization. Second, expense management. We want to pinpoint additional variable cost saving opportunities, discontinue activities that do not align with our strategic priorities, and eliminate inefficiencies at the local level. And third, fleet management. After having conducted a full audit of our combined equipment assets in the third quarter, we made good progress of disposing underutilized, off-brand and aged acquisition fleet. Aaron will share some of those details. But our focus on fleet management is ongoing as we rebalance our portfolio to match demand patterns, optimize mix and support scalable growth. Another way we're scaling the business for 2026 and beyond is by optimizing our network footprint. We've undertaken a market-by-market analysis of our combined branch locations with a goal of reducing redundancies and enabling better product allocation to further strengthen our market presence. Over the next 6 months, we expect to consolidate some general rental branches for cost and operational efficiencies. We'll repurpose certain of those branches into stand-alone specialty equipment locations. In other instances, we'll further expand access to our specialty solutions by co-locating specialty equipment within existing general rental facilities. These initiatives are expected to result in about 50 additional specialty locations, increasing our specialty network by 25% next year and supporting accelerated growth in these high-margin product categories. Overall, we're making excellent progress on the integration. Our teams are getting acclimated. Our systems are unified. Our customers are already seeing early benefits. We remain confident in our ability to deliver the full value of the acquisition both in terms of cost efficiencies and accelerated growth while continuing to deliver on our long-term growth strategies, which are outlined on Slide #6. As we said, integrating this acquisition is our primary focus, and therefore, we have paused other M&A initiatives for the time being, and are completing the remaining in-flight greenfields. Year-to-date, we added 17 greenfield facilities, of which 6 were opened in the third quarter, and we have roughly 10 more new location openings planned for the fourth quarter. Capitalizing on the secular shift from ownership to rental, particularly in the specialty market, and yielding greater value from mega projects through specialty solutions is a key focus for us. Further cross-selling specialty gear is an important component of the revenue synergies with H&E. In line with this strategy, we've continued to over-index our gross CapEx plans towards specialty, with the goal of increasing this category as a percent of our overall fleet composition long-term. And of course, re-purposing general rental branches into ProSolutions facilities, as I just mentioned, will support specialty equipment capacity for the 160-plus acquired locations. Finally, we continue to elevate our industry-leading ProControl by Herc Rentals technology offering with new efficiency features and controls, seamless navigation and tailored experiences all in a single app, addressing our customers' more complex and expanding needs. While we work through the integration of H&E, we'll continue to follow our playbook. Leveraging branch network scale, our broad fleet mix, technology leadership, and capital and operating discipline to position us to manage across the cycle and generate substantial growth over the long-term. We are committed to our goal of becoming the supplier, employer and investment of choice for the equipment rental industry. Now I'll turn the call over to Aaron, who will talk a little bit more about operating trends, and then Mark will take you through the third quarter financial performance and outlook. Aaron? Aaron Birnbaum: Thanks, Larry, and good morning, everyone. As we continue executing on this important integration, I also want to personally thank our teams for their incredible commitment and perseverance. Whether navigating change, supporting integration efforts, or pushing forward on growth initiatives, their resilience and focus have been exceptional. They have continued to show up for our customers, for each other and for the future we're building together. That dedication is what drives our momentum and it's what sets team Herc apart. Equally important to our success is our unwavering commitment to safety. Safety is at the core of everything we do and is an immediate integration priority. We onboarded 2,500 new Herc team members into our Health and Safety program in the third quarter. As you can see on Slide 8, our major internal safety program focus on perfect days. We strive for 100% perfect days throughout the organization. In the third quarter, on our branch-by-branch measurement, all of our operations achieved at least 97% days as perfect. Also notable, our total recordable incident rate remains better than the industry's benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and our customers. Turning to Slide 9. We're operating in a disproportionate demand environment, where the local market remains affected by interest rate, sensitive commercial construction, while mega project activity continues to be robust. In the third quarter, local accounts represented 52% of rental revenue compared with 53% a year ago on a pro forma basis. On the national account side, private funding for new large-scale projects is still quite robust. We kicked off several new mega projects in the third quarter as the push for restoring manufacturing, along with increases in LNG export capacity and the expansion of artificial intelligence are continuing to drive new construction demand. We are winning our targeted 10% to 15% share of these project opportunities with even more new mega projects on deck and current projects still ramping up. As a combined company, we'll continue to target a 60% local and 40% national revenue split long-term, knowing that this diversification provides for growth and resiliency. Sticking with the topic of resiliency, let's turn to Slide 10, where you can see that despite the uncertain sentiment in the general market around interest rate -- interest rates and tariffs, industrial spending and non-residential construction starts still show plenty of opportunity for growth, built on a foundation of mega project development and infrastructure investments. Taking a look at the updated industrial spending for forecast at the top left, industrial info resources is projecting strong capital and maintenance spending through the end of the decade. Dodge's forecast for non-residential construction starts in 2025, is estimated at $467 billion, a 4% increase year-over-year, with 3% to 6% growth continuing in each successive year. Additionally, the mega project chart in the upper right quadrant gives you a snapshot of the total dollar value and U.S. construction project starts over the last 2 years, and a growth projection that exceeds $650 billion for 2025. We estimate we are only in the early to middle innings of this multi-year opportunity. We don't take the chart out beyond this year because visibility is less clear for actual start dates of those projects still in the planning phases. But there are trillions of dollars in the mega project pipeline that aren't accounted for here. Finally, there's another $346 billion in infrastructure projects estimated for 2025. That's a roughly 6% increase over 2024, and infrastructure construction activity is expected to further strengthen in the out years. Of course, there are some overlapping projects among these 4 data sets, but no matter how you look at it, for companies with a safety record, product breadth, technology and capabilities to service customers at the national account level, the opportunities for growth remain significant. Moving to Slide 11. Let me take a minute to walk you through how we're managing fleet levels and equipment mix in response to this dynamic and evolving landscape. First, we are rightsizing our acquired fleet and aligning brand consistency to drive operational efficiency and long-term value. At the same time, we're making targeted investments in specialty equipment to unlock revenue synergies, ensuring we're not just leaner, but also more capable and better aligned with high-value opportunities. Our fleet strategy is also calibrated to support the divergent operating environment scaling a repositioning fleet to meet national demand while maintaining flexibility in local markets. In the third quarter, we executed against the strategy, increasing gross CapEx seasonally and expanding our specialty equipment offering in line with our much larger branch network and our revenue synergy goals. We're still expecting gross fleet CapEx of $900 million to $1.1 billion for 2025. Also in the latest quarter, we nearly doubled disposals on an OEC basis versus last year, as we work to optimize our larger general rental fleet post acquisition. Realized proceeds were 41% of OEC on those equipment dispositions. Given the significant amount of fleet we were selling and the variance in brand quality, more sales went through the auction channel this quarter than in the recent past. Once we have the fleet in a more optimal position we'll resume our channel shift strategy to the higher-return wholesale and retail outlook. For the full year, we're still expecting disposals at OEC of $1.1 billion to $1.2 billion. We're tracking at about 75% of that target with the remainder coming in the fourth quarter. I know there's strong interest in our 2026 CapEx plan, but it's still early in the process. So we're not yet in a position to share specifics. But from a high level, I could tell you that we have an especially young fleet today as a result of the H&E acquisition. We'd like to get it back to Herc's historical average fleet age, so that's something that will be considered in our fleet plan. Also, we fully expect continued growth in national accounts and specialty solutions next year, we're planning our fleet by mix and geography to support that momentum. At the same time, demand visibility for local projects remains highly compressed, which reinforces the need for agility in both how we manage our existing fleet and the pace of planning for 2026. The scale we've gained bolsters our ability to respond to near-term trends in local markets while also leveraging efficiencies to prepare for the start of a cyclical recovery. But it's important to remember that a pickup in local demand typically lags interest rate reductions. Developers still need time to secure financing and contractors have to obtain permits and mobilize labor for planned projects. So we're being thoughtful and disciplined in our planning, balancing short-term responsiveness with long-term readiness. Turning to Slide 12. I'll continue to state the obvious. Diversification is an important strategy for fostering sustainable growth and navigating economic cycles. As Herc is diversified into new end markets, geographies and products and services over the last 9 years, we have reduced our reliance on a single industry or customer. We become more resilient to downturns and more adaptable to emerging opportunities like the mega project developments, technology advancements that support customer productivity, and the secular shift from ownership to rental, especially in the specialty category classes. We believe we are well positioned to manage dynamic markets and the acquired scale further bolsters our capacity and therefore, our opportunities. With that, I'll pass the call on to Mark. W. Humphrey: Thanks, Aaron, and good morning, everyone. I'm starting on Slide 14 with a summary of our key metrics for the third quarter, which includes Cinelease results for July. As you may have seen, we completed the sale of Cinelease on July 31 with proceeds used to pay down our ABL. For the third quarter, on a GAAP basis, equipment rental revenue was up approximately 30% year-over-year, driven by the acquisition of H&E, and strong contributions from mega projects and specialty solutions. Adjusted EBITDA increased 24% compared with last year's third quarter, benefiting from the higher equipment rental revenue, as well as used equipment sales. Adjusted EBITDA margin was primarily impacted by a higher proportion of our used equipment sold through the lower-margin auction channel as we work to align the acquired fleet. Also affecting margin with lower fixed cost absorption as a result of the ongoing moderation in certain local markets where H&E was overweighted, as well as acquisition-related redundant costs preceding the full impact of cost synergies. REBITDA, which excludes used equipment sales, was up 22% during the third quarter. REBITDA margin was 46%, impacted by the lower-margin acquired business. Margin improvement will come from equipment rental, revenue growth and a shift over time to a higher margin product mix, as well as delivery of the full cost synergies and improved variable cost management from the increased scale. Our net income in the third quarter included $38 million of transaction costs primarily related to the H&E acquisition. On an adjusted basis, net income was $74 million. Shifting to capital management on Slide 15, you can see that we generated $342 million of free cash flow, net of transaction costs in the 9 months ended September 30, 2025, which was in line with our expectations. Our current leverage ratio is 3.8x. Our goal is to return to the top of our target range of 2 to 3x by year-end 2027, as revenue and cost synergies drive higher EBITDA flow-through. And less capital will be required to achieve the revenue synergies due to scale benefits on the utilization of existing fleet. The combined entity will be capitalized to maintain financial strength and flexibility. On Slide 16, we're reiterating our 2025 guidance. When we set the guide a month into the integration, we modeled the back half of the year using the second quarter trends we were seeing for each of the legacy companies. Of course, in any large-scale acquisition, integrating the acquired operations and acclimating new team members as a phase an ongoing effort. We're starting to get a better read on the pacing of training, upskilling and re-engaging the acquired team. And we're making good progress on backfilling for the H&E sales force attrition that occurred, with strong patterns in place for recruiting candidates and onboarding and training new hires. Despite a lot of moving pieces with the integration overall, the guidance still feels about right based on current visibility. Two points I'd like to call out for the fourth quarter. First, unless something big happens in the next 2 weeks, we'll likely have a tougher comp from a U.S. weather standpoint, with last year benefiting from about 2 to 3 points of hurricane-related pro forma revenue upside for the combined company. Second, when it comes to fourth quarter adjusted EBITDA, you should expect that we'll continue to utilize the auction channel more than Herc typically would as we're still rightsizing the acquired fleet with a focus on dispositions of off-brand and aged general rental equipment. This shift in channel mix will continue to pressure proceeds and therefore, the used sales margin. With a completed systems integration now providing a uniform granular view of the entire company, we're putting action plans in place to address any underperforming areas or foundational inefficiencies. All of that will better position us as we planned for 2026. Longer term, based on all the opportunity we see, we remain confident in the strategic value of this combination, and our ability to achieve both the full revenue and cost synergies over the next 3 years. With that, operator, we'll take our first question. Operator: [Operator Instructions] And your first question comes from the line of Mig Dobre with Baird. Mircea Dobre: I guess my first question goes to this comment on the rightsizing of the fleet. And I'm kind of curious where you are in this process? Do you expect to be largely done with this in the fourth quarter? Or is this kind of stretching into 2026? And is there any way to maybe get us to better understand the magnitude of the work that needs to be done here, either in terms of amount of OEC that needs to be disposed, or any other way that you want to frame it? Aaron Birnbaum: Yes, Mig, this is Aaron. I'll take that question. A lot of the heavy lifting was done in Q3. We still have more work to do as we go through Q4. As long as the 2026 kind of landscape economic -- demand landscape is good, we'll be essentially kind of closing that part of it out. The Q3 -- higher disposals in Q3 was really related to just some rebalancing of the fleet. On the H&E side, they didn't do their normal cadence of disposals that they historically would have done in Q1 and Q2. So we had to catch up on that. And then just some of the brand mix, the operations are more efficient when you've got a standardized kind of manufacturer-type fleet. So that's what some of the shaping was done. And we feel good what we got done, but as we mentioned, a little more auction activity than we typically would do. And as we get into '26, we'll get back to our normal cadence of getting the higher retail wholesale channel. W. Humphrey: Mig, this is Mark. Maybe just a couple of other points there. I think when you think about what Aaron said. Going back to Q2 and the comments we made then, we thought that there was probably, call it, $250 million, $300 million of activity that needed to happen in the back half of the year to sort of rightsize or better rightsize that fleet for the territories it was going in. And I would say, as we sit here through Q3, probably half of that was completed, maybe a little bit more than that in the third quarter. And so the expectation would be better rightsizing the fleet as we get through fourth quarter, such that next year, we can lean on aging the fleet and disposing of less gear. Mircea Dobre: All right. That's helpful. Then maybe a question on your overall mix. The national accounts account for, if I'm not mistaken, pretty much a record as far as my -- back as my model goes. So a lot more business done with national accounts. I guess that would be consistent with your comment on mega projects being an area of growth. As you sort of think about 2026, I do wonder if this business, megaproject national accounts is to some extent, dilutive to margins. If this is something that we need to think about as we think about the margin framework for next year? And I'm not asking for guidance. I'm just asking for some color as to how this portion of the business is really impacting you? Lawrence Silber: Yes. Mig, Larry, I'll take that. Look, we're expecting, obviously, for the same type of activity to continue into '26 because as you know, until interest rates have a substantial reduction, which maybe we'll see tomorrow another 25 basis points, who knows. It usually takes 6 to 9 to as long as 12 months for that to trickle down into the local market to make that a more attractive business opportunity and certainly spur the activity for us in the local market, which remains somewhat muted. Overall, though, we don't find that there's any significant margin dilution. Because remember when we put equipment out at a national account or a mega project, you have minimal movement of that project. You're not having excessive delivery there. And we also have a larger volume of equipment out there, and we tend to also get a lot more specialty product out on those projects that are opportunistic for us as we go along. So we don't see much dilution at all relative to continuing in this trend. Operator: And your next question comes from the line of Tami Zakaria with JPMorgan. Tami Zakaria: My first question is on the comment you made about combining some of the [ gen rent ] locations. I think you said you're going to have 50 additional specialty. Is it the right way to think about it that about 100 of the general rental locations would close and those would sort of merge and become 50 specialty? How should I think about the interchange between the two? Aaron Birnbaum: No, not at all, actually. Our branch count increased dramatically as a result of the acquisition. The way we want you to think about it is there were, hopefully, in two buckets. One, we have a strategy where we typically do a branch and branch, right? So that's how we kind of scale the business. We'll open a specialty business inside of a general rental branch and let it mature. And when it gets enough scale, then we'll pop it off and have its own stand-alone location. That's really what's the fuel with the 50 new locations as we go through next year's period. There were just a handful of locations that H&E where they're like 1 mile away from our brand, so we could consolidate those. And in those cases, we're turning those into another specialty branch right away sooner than we typically would. But we're not closing branches from H&E, that would be dilutive to what our strategy is. So we like the scale and it gives us a bigger footprint, which allows us to solve the market needs better. Tami Zakaria: Understood. That's super helpful. And my second question is now that your -- the two businesses are on the same platform, it gives you more visibility into the combined business. Would you consider revisiting some of the cost synergies and any -- the revenue synergy targets you had at the start of the journey? W. Humphrey: Yes. I mean, I think, Tami, I mean that's an ongoing process, right? I mean I think that from a cost synergy perspective, we originally laid out $125 million into buckets. So those buckets look the same today as they did yesterday? No. Will they continue to change and evolve? Yes. And then I think -- and probably good news here, as I mentioned in my prepared remarks, there's also efficiency reviews taking place now that we're on the same platform. And so whether you want to call that synergy or efficiency, I don't care. Ultimately, it's incremental margin and efficiency that we're going to gain. So that's how we're looking at it, and I think it will continue to evolve as we move forward. Operator: Your next question comes from the line of Kyle Menges with Citi Group. Kyle Menges: Yes, maybe following up on that. I guess, is there anything noteworthy or unexpected incremental coming from these efficiency reviews that are taking place now, now that you're on the same platform? W. Humphrey: Again, I mean, it's early innings, right? I mean it's just sort of completed at the end of Q3. I guess the way I would respond to that, Kyle, is that Herc has a fair number of operational KPIs. And so as we sort of rolled ourselves out of Q3 and had clear visibility really for the first time, right? Now it's about aligning our KPIs and our expectations to these newly formed, or re-devised territories on the consolidated platform. So I don't think there's anything of a surprise nature in that. I think it's just us running our playbook and our game plan and looking for efficiency along the way, and that's exactly what we'll do. Lawrence Silber: Yes. And keep in mind that we still -- while we have the IT integration completed, we still have a fair amount of training and education and development of people and aligning resources that needs to happen here in Q4 to prepare the organization as it goes into Q1. And we have a fair amount of work ahead of us still in addition to the movement of these branches that Aaron talked about a moment ago. So a lot of work ahead, and we'll continue to look for opportunities for improvement. Kyle Menges: Makes sense. And then it would be helpful just to hear an update on dissynergies and synergies. I guess, just what's giving you guys confidence that dissynergies are behind you? Are you continuing to see that stabilization in the sales force, any success bringing people back? And then just it would be helpful to hear an update on some of the earlier -- early revenue synergies that you're seeing as well? Lawrence Silber: Yes, I'll take the first part of that and saying, yes, look, we've been able to stabilize the sales organization. Now attrition is happening at or below normalized Herc levels that we've seen in the past. And a lot of that is behind us. There have been a couple of folks that we brought back into the organization. But we fill the vast majority of those holes with our team, with our Black and Gold team that have been in training in preparation for sales territories and we're looking to continue to keep with the training, with the education, with the introduction to our technology platform, that's an enabler for these salespeople to earn more money, and it's also a retention device. So we're excited about that being behind us for the most part. Aaron, do you want to? Aaron Birnbaum: Yes, we're seeing on the revenue synergy side, we're seeing -- it's early innings. We're just getting started with it. We're introducing some of the specialty products to customers that were on the H&E side, regional type customers, and we're getting some good traction, right? So it's -- some of the products we offer weren't offered at H&E and the customers were able to kind of move their share of wallet, our direction. So it's -- we're happy where the progress is, but we've got a lot more work to do. Operator: Your next question comes from the line of Kenneth Newman with KeyBanc Capital Markets. Kenneth Newman: Maybe for my first question, Mark, it seems like gross margins in the quarter came in a bit lower than I would have expected, but you did leverage SG&A a little bit stronger than my model. Is there any way you could help us just dimensionalize how to think about gross margin sequentially, third quarter to fourth quarter, just given all the moving pieces? Maybe also a little bit of help on how we think about SG&A dollars going forward. W. Humphrey: I guess, look, there was a little bit of noise, quite honestly, in the original view, at least the way that I was looking at this and we couldn't know the answers until we finished all of the mapping of their expenses into our general ledger structure. And so I think what -- and the way that I would sort of guide you here is that in totality, you probably had somewhere in the order of magnitude of 55% between DOE and SG&A in the quarter. And I think that, that's a reasonable proximity into the fourth quarter, recognizing that there's probably a little less coming through the funnel in the fourth quarter shoulder period. So I don't think that there'll be a ton of movement. But I think, generally speaking, you're probably a little less efficient in the fourth quarter just from an overall revenue sort of downtick as you get into the November and December time frame. Kenneth Newman: Okay. No, that's very helpful. I'm sorry if I missed it, but did you disclose how much H&E's contributed to rental revenue and EBITDA in the quarter? I'm just trying to get a sense of what core dollar you would like in the quarter? W. Humphrey: You didn't hear that because I can't give it. We wouldn't be doing our job, Ken, if I could still sort of pull apart and tell you the performance of H&E and Herc. I can't, and therefore, I won't. But I would tell you that sort of overall, the business on hold performed about the way that we thought it would inside of Q3. Operator: Your next question comes from the line of Rob Wertheimer with Melius Research. Robert Wertheimer: A couple of questions. Larry, you touched on it, if I didn't mishear, you touched on employee retention and you're kind of going in the positive direction now with hiring, rehiring, and then attrition has stopped. Customer attrition, can you talk about that on H&E kind of former accounts if we come through all the dissynergies as you kind of thought in recent quarters? And then I'll just bolt on my second one. When you've had a chance to look at the business more closely now, how does rental rates stack up and what do you need to do if it's below? What do you need to do and what time frame to kind of improve service levels or broaden out service levels and improve that? Lawrence Silber: Yes. Look, what I said and what I hope came through is that we've stabilized the attrition that had happened prior to close. And we feel that, that is now at a normalized level with no further significant attrition that we're expecting that would be any different from what we would experience with Herc on a normalized basis. So I think we're okay there. But remember, we have backfilled a lot of those positions with folks that have been in our Black and Gold, what we call our PSA program, Professional Sales Associate program. So they're going into new territories, they're on a learning curve, picking up new responsibilities and -- and we'll have some training and education to do over the course of the balance of the year and into early next year. But it will have to ramp up probably into Q2 when we see them become fully effective. And as you know, that usually takes over a 2- to 3-year period for a sales person to sort of really understand their territories and really perform at the levels we'd like them to perform at. I'll pass the other side over to Aaron relative to your comment on pricing and where it was, and what we're doing to get back to the overall Herc average. Aaron Birnbaum: Yes, Rob, so I'd say to Larry's point, the attrition and all that stabilized. As Q3 went through, we focused a lot on integration. We got the reorganization all done. And now we're back to kind of like performance management and developing our sales team with the go-to-market strategies we already have. When H&E came into the business, their pricing was lower than the Herc. So we're working on moving that to the needle upward with our tools and systems that we have. We talk about some of our pricing tools that are proprietary to Herc. So they're learning the tools. Our sales management is working with them. That's not going to happen overnight, right? That's a bridge that's going to happen over time to get them back to the Herc historical, kind of, rental rate performance. But we've done a good job with the customers. We've negotiated all the contracts H&E had into the Herc system. And the regional type H&E customers, as I mentioned earlier, have really embraced some of the extra fleet breadth that we have. And then the local customers where the market is not as strong and there were some disruptions with some leading up to the closing of the acquisition. Maybe that was because they weren't as busy or maybe because their sales rep moved on. So we've got all the data. We're moving forward with our CRM and our sales efforts to engage with those customers. And some of those engagements take 3 or 4 different -- 5 different cycles of connection. But we know that we've got a great rental operation, and we're confident those customers will come back over time. But we're happy where we are in the process right now. Operator: That concludes our question-and-answer session. I will now turn the call back over to Leslie Hunziker for closing remarks. Leslie? Leslie Hunziker: Thank you for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don't hesitate to reach out to us. Have a great day. Operator: That concludes our question-and-answer session. This concludes today's call. You may now disconnect.
Christopher Eger: Good morning, and welcome to Resolute Mining Q3 Quarterly Highlights. My name is Chris Eger. I am the CEO of Resolute Mining, and I'm joined today by Dave Jackson, our CFO; and Gavin Harris, our Chief Operating Officer. Moving to Page 3. Let's start with some of the key highlights of the quarter. So as you see on the page, we had gold poured of 59,807 ounces, just shy of 60,000. And for the year, that brings us to 211,000 ounces of gold poured. With regards to our group AISC, in Q3, we achieved a $2,205 per ounce cost. It's worth noting though that in Q3, we are paying a much higher royalty expense across the business because of the higher gold price environment. So we estimated that the AISC increased by about $125 in Q3 relative to previous quarters as a result of the higher gold price environment. The business generated a healthy amount of cash in Q3 of around $26 million. Therefore, we ended the quarter with a net cash position of $136 million. Overall, the gold price that we achieved in Q3 was $3,400, which also was an increase over Q2 as the Q2 gold price average was $3,261. Very pleased to say that our TRIFR reduced from the previous quarters, and we're now sitting at 1.95 for Q3. And one of the key developments that we had in the quarter was to increase our resource at the Doropo project in Côte d'Ivoire, and now we're sitting at 4.4 million ounces. As you also see on the bottom right side of the page, we have now narrowed our guidance as we're approaching the end of the year and have much better visibility of our activities in both our operating sites. Our original production guidance of 275,000 ounces to 300,000 ounces has now been narrowed at the bottom end of the range to 275,000 ounces to 285,000 ounces, predominantly from a decrease at Syama, which again, I'll explain in the upcoming slides. Also on the all-in sustaining cost, which was originally guided at $1,650 per ounce to $1,750 per ounce, we have now increased the AISC by $100, really to reflect the higher gold price environment, which is increasing royalty rates, royalty costs, as we say, across the business. But again, this will become clearer as we talk about both Syama and the Mako operations. Moving to Slide 4. I wanted to recap what we believe is a very exciting and attractive organic profile that we put in place at Resolute Mining. As you can see, in 2025, our updated guidance provides a production profile of 275,000 to 285,000 ounces. In the next 2 years, we expect similar type production levels as we will be continuing to process stockpiles at Mako. But with the ramp-up in Syama as a result of the SSCP, we expect to start hitting numbers closer to 300,000 ounces, probably more in 2027 than 2026. But very excitingly, from 2028 and onwards, once we bring Doropo into production, we feel very confidently that the business will start to achieve production levels above 500,000 ounces. But moving beyond 2029, I'm very pleased with the amount of work that we're doing in exploration that the business has real potential to dramatically increase its production profile beyond 500,000 ounces. So in summary, the business is very much on track for this growth profile, and I'm very pleased with the progress that we've made year-to-date with the substantial transformations that have happened in the business throughout 2025. Now let's move into each of our country activities to give a quarterly update on the key progress that's been made across the group. So starting with Mali, let's turn to Page 6. As previously highlighted, Syama unfortunately continued to have operational challenges in Q3, mainly due to supply chain disruptions from explosives. So gold poured was just shy of 40,000 at 39,918 ounces, slightly down from Q2, which was around 41,000 ounces. We saw all-in sustaining costs increasing quite a bit to $2,358, but one of the key contributing factors to increasing AISC was that for the quarter, we saw an increase in royalty rates as a result of the high gold price, and that impact of higher royalty rates resulted in a higher AISC of about $160 relative to our original guidance at the beginning of the year. CapEx was as expected for $26 million for the quarter. And so look, talking about the site, we made some good progress on supply chain disruptions, whereby we have now increased suppliers with regards to explosives, but explosives continues to be the Achilles heel of the operation. Today, we're sitting around 100 tonnes of explosives, which is only about 1 month's worth of stock, not even, to be honest. We have activities in place today to try and get an additional 400 tonnes, which will take us to the end of the year. But unfortunately, the explosives and supply chain situation continues to be very delicate, and we're managing the best possible by trying to bring in as many new suppliers as possible as well as to work with the government in the logistics of those explosives. We're making good progress on the underground even with the explosives that we have. Today, we're starting to mine continuously 8,000 tonnes per day relative to what was half of that at the beginning of the year. So look, the activities on site are going well. We're making some good inroads in reducing costs. We're right now also in the budget season for 2026. And so I'm pleased with how the team is coming together. But unfortunately, like I said before, the explosive situation is really a key contributing factor to the reduced production levels. In Q3, we also made quite a few management changes on site. And today, Gavin, who's here with me, is effectively acting as a General Manager as we are completely restructuring the management team at Syama in order to prepare for a much more profitable 2026 and beyond. The oxide production is also reduced in Q3 because we're very much at the end of the life of the oxide production. And so we experienced expected lower grades as a result of diminishing oxides. So unfortunately, as a result of the challenging year that we've had at Syama, we have decided to reduce the full year production guidance to 177,000 ounces to 183,000 ounces. And I could say probably the vast majority of the reduction in ounces as a result of the lack of explosives, which, as I said before, has been a real frustration for us. Therefore, with the lower production and the higher gold price, we've needed to increase the all-in sustaining costs by roughly $200 to reflect the changes in the business environment. But what I want to highlight is of that $200 increase, probably 2/3 of it relates to the higher gold price environment that we sit in today relative to the beginning of the year. All in all, at Syama, it's been a very challenging year, but I am quite confident that as we look to 2026 and beyond, we are putting in the right people and the right infrastructure in place to start to achieve our historical targets. On to Page 7. One of the key projects that I believe may have gotten lost in the investment thesis of Resolute Mining has been the Syama Sulphide Conversion Project or as we call it, the SSCP. To recap, this is a very exciting project that was commenced back in 2023. And what we're doing here is converting our oxide line to process sulfides. It's roughly $100 million project that is now in the final stretches of completion. This project has run extremely smoothly. It's been on budget, on track. And I'm very pleased to say that after close to 1 million man hours spent, we've had no LTIs. As explained, the project is well on track. This year, we've spent just over $20 million of the planned guidance of $30 million. In Q3, we added 2 additional CCIL tanks that you can see in the top left part of the picture as well as commissioned the pebble crusher. Both of those achievements will add a bit more flexibility to the business with increasing a bit more recovery as we are starting to have increased residence times in the CCIL tanks. However, the main benefit will come next year once the secondary crusher and the ball mills are commissioned as well as the roaster upgrades. So moving into 2026, the site will be fully operational to process 100% sulfide ore, which will dramatically increase the flexibility of the operations and expect to increase the production back over 210,000 ounces for this foreseeable future. So this has been a great project that we've completed or near completion, and it shows the capabilities of our business in building projects on time and on budget, which I think speaks to the team as we're starting to enter operations and constructions at Doropo next year. On to the next slide, Slide 8. I wanted to highlight a few other activities that have been important in Mali. As some of you may know, back in October, early October, I visited Mali and had a chance to meet with senior government officials. Most namely on October 10, I was able to meet with both the Prime Minister and the Minister of Mines in Bamako. This was my first trip to Mali as CEO of Resolute Mining, and I have to say it was a very productive trip. The discussions with both the Prime Minister and the Minister of Mines focused on historical challenges of the business, activities that we're facing today, but most importantly, trying to create a platform for constructive growth. So we had a very open discussion around what's happened in the past, what are the challenges that face the industry today and how to try and work together for the future. It was an initial conversation that will lead to many more discussions, but I have to say, pleasingly, it was a step in the right direction. Other activities at Syama have been focused on exploration, although in 2025, exploration has been less of a priority at Syama relative to other areas in the business. We have targeted a few potential oxide ore bodies, but I have to say they have not come back with meaningful results. Moving into 2026, though, we will look to increase our exploration activities at Syama, but most likely with a focus of really developing additional sulfide ore in order to fill the plant considering the flexibility that's been implemented in 2025. So in summary, before I move to talk about our operations and activities in Senegal, in summary, activities in Mali this year have been very complicated. We've had a lot of changes. We've made a lot of significant management changes, but I'm confident that now we are putting in the right pieces, the right people, the right infrastructure in order to have a much more successful year in Mali in 2026 and beyond. What will be key to the success of Syama will not only be our people and our operations delivering their targets, but maintaining a constructive and productive dialogue with the government, which I'm confident will result in a win-win solution for Resolute Mining, our employees, the community as well as our stakeholders. Now let's move to our activities in Senegal, starting first with our Mako operations on Slide 10. I'm very pleased to say that in Q3, the site produced just shy of 20,000 ounces at 19,939 ounces. And year-to-date, we've achieved 82,000 ounces of gold poured. So as a result of the very strong first 3 quarters of the business and what we expect for the remaining quarter for 2025, we believe that full year production will fall somewhere between 98,000 to 102,000 ounces at this stage. Therefore, we've increased guidance to these levels. As we look at AISC, with the higher production from the site, but a slightly higher AISC as regards to the higher royalty, we believe that AISC will remain unchanged from a guidance perspective between $1,300 and $1,400 per ounce, although I will probably say that we'll end up being at the lower end of that guidance. So all in all, the activities at Mako have had a very robust year. The site has been performing extremely well, and I'm very pleased with the activities at Mako. However, there's a lot of other activities in Senegal that are worth noting, specifically as it relates to our mine life extension projects. Looking on Page 11, as you can see, we have 2 key projects that we are in the process of developing in order to add additional ore and mine life to the Mako operations. As discussed in the past, the 2 projects are Tomboronkoto and Bantaco. Today, both deposits have over 600,000 ounces of known gold that we believe will add at least 5 to 10 years of additional mine life to the Mako operation. But there's a lot of work that needs to happen in order to develop these 2 satellite deposits, which I'll go through in detail in the next couple of slides. Starting with Tombo, on Page 12. In Q3, we had a very key milestone with regards to the fact that the ESIA for the Tombo development was lodged with the government, and we're in active dialogue in discussing that ESIA with the government to get hopefully their approval by the end of this year or in Q1. Having the approval of the ESIA is a key milestone in order for Resolute to file for its mining exploitation permit planned for some time early next year. The other key activities at Tombo was ongoing community engagement to educate the folks that are involved around the benefits of developing Tombo as people remember, we have to move a village. And finally, the other key activities at Tombo was regards to completing the technical reports, namely the DFS required in order to file for that mining application in the beginning of next year. So in summary, I'm very pleased with the activities at Tombo in Q3. Again, I congratulate the team and the filing of the ESIA and looking forward to getting the government's comments so that we can maintain our time line, which you can see in the bottom left of the page. So there's still quite a lot of work that needs to be done. The permitting and licensing will probably be the biggest risk to the overall time line. Once we have the exploitation permits in hand, we can start to really develop the project by moving the village in order to get into mining the ore body in sometime in 2028. Moving to Slide 13. The other key activity in Senegal has been our progress at Bantaco. If you remember back in July during my Q2 announcement, we provided initial MRE at Bantaco, and in Q3 of this year, the key focus for us has been to continue to drill at Bantaco with regards to doing infill drilling at Bantaco South, also at Bantaco West as well as some additional drilling to expand the resource. But really, the focus has been infill drilling. And as we look into Q4 and early next year, we'll be looking to expand the Bantaco resource. That infill drilling was needed so that we can complete the technical studies required as well as the ESIA for Bantaco and get that lodged with the government so that we can be in a position to file for an exploitation permit in Q2 of 2026. There's 2 pictures on this slide on the far right. The picture on the top is Bantaco South, and you can see some of the promising drill results that we've had in Q3 as regards to infill. We believe the deposit continues to extend at strike and also down dips, and we will continue to explore across this area, like I said, in the latter part of this year and into next year in order to make the deposit at Bantaco South bigger. The other picture that you see on the bottom right of the page shows Bantaco West. This is an interesting picture because you can see the Bantaco West potential ore bodies, and you can also see the Tombo ore body in yellow. The magenta line to the left of the Bantaco West ore bodies represents the planned road diversion that we'll have to undertake in order to develop the satellite deposits. So again, congratulate to the team for the significant amount of work that they've done in Q3 in order to progress both Bantaco and Tombo as these are key projects with regards to the extension of the mining activities at Mako. But again, I'm very pleased to say that all the activities are on track, on budget, and the team is doing a fantastic job. Now moving to Côte d'Ivoire. I'm very pleased to say that the Doropo project remains very much on track and on budget at this stage. A key development in Q3 was the fact that we updated the MRE to 4.4 million ounces based off of a more realistic gold price, and this was published in September. The increase in gold price has created a lot more optionality and flexibility for the development of Doropo, and we're in the process today of very much updating the DFS with regards to creating this additional optionality and flexibility. So key activities in Q3 across Doropo was the increase in the MRE, continued work on the updated DFS, community activities as well as permitting, specifically as regards to key activities in updating DFS. The main focus has been to think about increasing the capacity as regards to the fact that we know there's going to be a lot more gold than that was originally anticipated. We're also evaluating different power options. And most importantly, we're updating all the cost figures for more realistic assumptions based off today's environment. So today, we very much see that we are on track to provide an updated DFS at the end of November, early December, which will crystallize the value of the Doropo project. The other key activity in 2025 is around permitting. As flagged in the past, we are in the final stages of getting our exploitation permit granted. But what we knew would be a bit of a complication around the permitting process was the fact that there were elections in Côte d'Ivoire on Saturday, which thankfully, what we hear have gone very peacefully. But unfortunately, because of the elections and the politicking that occurred before the elections, the Minister of Mines office has been preoccupied with the elections at this stage. However, we believe that discussions will resume, and we should be able to get our permits granted by the end of this year, worst case, very beginning of next year. However, none of that changes the overall time line because we still envision that we will proceed with final investment decision post updated DFS and permits, either at the end of this year or early next year and then start early works, complete financing, all with an anticipation of being in production in 2028. So overall, very pleased with how the project is developing. There's been an awful lot of work. There continues to be an awful lot of work in getting all the steps completed. But at this stage, we're very much on track. Moving to Page 16. I wanted to talk to you about some of the other key exciting activities in Côte d'Ivoire, namely on exploration. So first, let's start with the ABC development project. ABC today has over 2.2 million ounces at 0.9 grams per tonne. But as you can see in the picture on the right, those ounces are dedicated to the Kona permit, which is in the middle of the 3 red boxes. In Q3, we did quite a bit of additional work on all the different permits in order to identify where we would like to drill next. And very pleasingly, we are going to start drilling in the permits in the north, the Faraco and Nafana permits with a planned 10,000 meters of RC drilling to commence in November, and that will continue into early next year. We're very excited about that area because, as you can see, it's just southeast of the Awale-Newmont joint venture license, which have had some very high-grade intercepts in the past quarters. However, we're not going to stop doing work at the Kona and Windou permits. We've done quite a bit of surface geochemistry and mapping. And as we've seen, we believe there's additional resources in order to expand and grow that deposit. And so we are targeting at least 15,000 meters of RC drilling in order to develop that deposit. So in combination between the 3 areas, we're very excited about what we see at ABC and has the potential to become a fourth mine for Resolute at some point in the future. And finally, before I turn the page, it's worth noting that we're still active in looking for new permits in Côte d'Ivoire as we find it to be a very interesting area for development. And as you can see on the bottom right side of the page, we were granted a permit called [ Gbemanzo ] which was actually granted in June of this year, and we still have permit applications for 2 others that we expect to receive in 2026. And moving to our final exploration projects in Côte d'Ivoire. On Page 17, I want to give you an update of the La Debo project. So to date, La Debo has over 400,000 ounces at 1.3 grams per tonne, but that resource is dedicated to the northeast of the deposit, which you can see in the bottom left picture between the G3N and G3S areas. In Q3, we finished our exploration activities at La Debo. And today, we're in the process of updating our MRE, which we believe will be a substantial increase in what was previously published, and we're on track to update that MRE by the end of this year. Moving forward, we will look to expand our drilling activities focusing on the middle to southwest parts of the deposit. So again, very pleased with the progress at La Debo. We believe that this project also has very exciting potential. But at this stage, it's a bit too small for us to say it will become a mine, but it has the potential to do so. So with that, let me turn it over to Dave Jackson to discuss the financials of our Q3 results. Dave Jackson: Thanks, Chris. Today, I'll walk you through this quarter's headline financial results, highlighting the key performance metrics. Overall, our Q3 metrics were in line with our expectations as we continue to strengthen our balance sheet and build cash in the business. Looking at the financial highlights, our year-to-date EBITDA was an impressive $293 million versus $225 million in the same period last year. This performance was underpinned by revenue of $664 million. This was generated from the sale of 209,000 ounces of gold at an average realized price of $3,175 per ounce. As previously noted, Resolute remains fully unhedged and continues to sell all of its gold at spot prices. At quarter end, net cash stood at $137 million, marking more than a $20 million increase from Q2. Included in the net cash figure is $58 million of bullion, representing nearly 15,000 ounces of gold that we have sold after the quarter closed. We had $32 million drawn on overdraft facilities at quarter end. These continue to be used locally to optimize working capital. The group has in-country overdraft facilities of approximately $100 million available as we continue to maintain financial flexibility for the group. The group all-in sustaining cost for Q3 was $2,205 per ounce sold, which represents a $500 per ounce increase from Q2. This increase was primarily driven by the expected reduction in gold production at Mako, the impact of supply chain issues, which impacted gold production at Syama and the increased royalties at both sites due to the rising gold prices. This has added approximately $125 per ounce in Q3 at the group level. At Syama, all-in sustaining cost was higher than Q2 due to lower production volumes as we continue to experience supply chain issues. As Chris already mentioned, while we are cautiously optimistic that we're addressing these issues, the situation in Mali continues to be unpredictable. Despite these challenges, we are focused on maintaining strict cost control across the group. Let me now walk you through the key components of our financial results that led to the cash and bullion position of $168 million at the end of Q3. We generated a solid $68 million in operating cash flow during the quarter. CapEx totaled $89 million year-to-date. This includes $20 million allocated to exploration, $28 million in sustaining capital across Syama and Mako and $41 million in non-sustaining capital at Syama, of which $20.7 million was spent on the SSCP. Overall, CapEx and exploration spend was in line with expectations, and we remain on track to deliver our 2025 guidance range of $109 million to $126 million. As previously noted, we made the initial $25 million payment for the acquisition of the Doropo and ABC projects during Q2. These projects represent exciting growth opportunities for the company and are expected to deliver meaningful long-term value for our stakeholders. VAT outflows at the end of Q3 totaled $20 million across Mali and Senegal. VAT remains a source of cash leakage for us, but we continue to engage actively with local governments to recover these amounts. Our recent discussions have been positive, and we remain encouraged by the progress being made. We recorded a $5 million working capital inflow for the year-to-date, primarily driven by a reduction in stockpile balances. Also, we have made solid progress in lowering consumable inventory levels as a part of our ongoing efforts to optimize working capital. Our ending cash and bullion of $168 million marks a $67 million increase from the beginning of the year. This leaves us with ample available liquidity of over $244 million at the end of September. As noted on the 15th of October, Loncor Gold entered into a sale agreement whereby subject to certain conditions, Chengtun Mining will acquire all the outstanding common shares of Loncor in an all-cash transaction. Resolute holds just over 31 million common shares of Loncor that are valued at around USD 31 million at the current exchange rate. The transaction is expected to close no later than Q1 2026, and Resolute expects no tax impact on its proceeds once received. In summary, we're in a very solid financial position and are excited about the growth potential of the business. And with that, I'll hand it back to Chris. Christopher Eger: Thank you, Dave. So look, in summary, I'm very pleased with how the business performed year-to-date, although we had a very difficult time in Mali with the explosive situation. So as such, we're still very much on track for full year group production guidance, albeit at the lower end of the range of 275,000 to 285,000 ounces. The business is performing well. We're producing cash, as you can see through our net cash generation of $26 million in Q3 and therefore, ending the quarter with a net cash position of $136 million. We continue to make good progress across the group, namely in Côte d'Ivoire with our development of the Doropo project. So we're very much advancing all our strategic initiatives across each of the countries that we operate, and we're very much on a pathway to deliver targeted annual production of over 500,000 ounces from 2028. With that, I'll hand it over for questions. Thank you very much. Operator: [Operator Instructions] We'll take our first question from Reg Spencer from Canaccord. Reg Spencer: Congrats on a good quarter. My question relates around what I'm sure is a frustrating issue on explosives in Mali. Can you tell me what you think the circuit breaker to this situation might be? Are we at a stage where we should be concerned about maintaining current levels of production? Or is there really any risk to near-term or medium-term production outlook due to the ongoing issues? Christopher Eger: Thanks for joining the call. So look, with regards to explosives, it hasn't been easy because I think I've highlighted before at the very beginning of the year, we lost our historical explosive supplier. We moved to a new supplier that has not been performing well throughout the year. And so now we've added a second supplier into the mix, which will help. But what complicates matters is the fact that there's been also fuel shortages in country, which you may have heard about from some of our other colleagues. That hasn't impacted ourselves with regards to our fuel activities, but it has impacted the generation of explosives. So that's been a major concern as well because the supply of explosives is just obviously low in Mali. And then look, the last component, which I've also highlighted in the past has been the complicated government regulations required to import and move explosives around. We are making no progress educating the government on this fact, and we've also highlighted to them that, look, we're down a meaningful amount of gold production this year because of their frustrations, and we've seen them react quicker to this. So the way we think about it today is that with additional suppliers, with additional education from us to the government, we do think we're in a better spot. We have more stock than we've had historically throughout the year. And like I said, we're probably building enough stock to get us to the end of the year. But it is unfortunately going to be an ongoing bit of a struggle to have, call it, ample stock for the 2026. So it's a risk, but I do think we've been heading in the right direction. Reg Spencer: I appreciate if you can really give much more color around the situation. I know some of the other operations in Mali may not be actually operating, but it sounds like a countrywide thing, it's certainly not specific to you guys, right? Christopher Eger: From what we see, yes. I mean, look, we are trying to buy explosives from our other -- to the other operators in country, and we're having a bit of progress. But in some cases, we're not having any progress, which just demonstrates that it's not -- there's not a lot of ample supply of explosives in Mali these days. Operator: We are now taking our next question from Will Dalby from Berenberg. William Dalby: Just a couple from me. I think in light of this explosive situation and obviously, the higher royalties, I'm just wondering if you feel there's much scope to improve your group AISC next year versus this year? That's the first one. Christopher Eger: Look, so in short, yes, because we think, look, next year, the production volumes at Syama will go up as we have effectively commissioned and will be commissioning SSCP. So we're obviously in the budget process now, but we expect to be back up above 200,000 ounces. So that will help on one aspect. But look, the gold prices is the other key component. Today, we're sitting at just shy of $4,100. And obviously, that has a meaningful impact in royalty expenses, which will impact the site. But look, on an apples-to-apples basis, we do expect AISC to decrease next year because of the higher production. But I just don't have an exact figure in my head because of the higher royalty expenses today. William Dalby: And then second, sort of just around the VAT receivables piece in both Mali and Senegal, that's sort of been an ongoing challenge there. I wonder if you can flesh out and give a bit more color on that situation? Are you seeing any kind of progress there? And how is that kind of unfolding? Dave Jackson: Yes. Thanks, Will. It's Dave here. Yes, the situations are very different in both countries. So we mentioned in the quarterly release, we are getting VAT back in Senegal, which we used to offset various government payments. So the situation is quite positive in Senegal. But in Mali, it still remains to be a point of cash leakage for us. I mean, we're engaging with the government discussing potential path forward. But as we stand right now, we continue to be not getting any of the VAT back. So there is quite a bit of cash leakage, as I said, in Mali. And until that's resolved, it will be a bit of an issue for us. Christopher Eger: And Will, it's worth noting that when I met with the government officials, namely Prime Minister and the Minister of Mines, we obviously put this as one of the key topics and said, "Look, not getting our VAT refunds is impacting the future growth of the business," and they understood it. So I think they're hearing the message from quite a few folks, but unfortunately, because of their economic situation, it continues to be very difficult to get them. And I'm not optimistic that we'll get any more in the rest of this year. William Dalby: And then maybe just a quick last one. I just sort of know in [indiscernible] on these very helpful development time lines that you have, you have plant modifications at Mako for Tomboronkoto. I just wondered if you could give a bit more detail around what's required there. I see it's in the time line for Tombo but not Bantaco. So is that sort of specific modifications for that deposit? And yes, I guess, how is that working? Christopher Eger: Yes. So look, the ore at Mako, the original ore was quite ore rock. But as we look to mine ore from both Bantaco and Tombo it's a lot softer, and so it's going to require additional capacity. The other key area of improvement in the plant is to increase overall throughput. So today, Mako has a throughput capacity of about 2.3 million tonnes per annum, and we're looking to increase it to 2.9 million tonnes per annum because we've been historically processing ore at probably 2.2 grams per tonne and both Tombo and Mako -- sorry, Bantaco and Mako are going to be closer to 1.1, 1.2. And so in order to try and maintain appropriate production levels, we want to increase the capacity. So that's the main reason for the plant modifications. Operator: [Operator Instructions] It appears we have no further questions. I'd now like to turn the conference back to Chris Eger for any additional or closing remarks. Please go ahead, sir. Christopher Eger: Look, thank you very much for joining the call. And look, like I said, it's been a challenging quarter. But in summary, we believe we're on track to deliver a very robust set of performance for 2025 and the platform for a very robust 2026. Thanks again. Have a good day. Cheers. Bye.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair Third Quarter 2025 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the call over to Ryan Barney, Head of Investor Relations. Ryan, please go ahead. Ryan Barney: Good morning, and thank you for joining us. Today, we will review our third quarter 2025 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; Kate Gulliver, Chief Financial Officer and Chief Administrative Officer; and Fiona Tan, Chief Technology Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that our call today will consist of forward-looking statements including, but not limited to, those regarding our future prospects, business strategies, industry trends, and our financial performance, including guidance for the fourth quarter of 2025. All forward-looking statements made on today's call are based on information available to us as of today's date. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2024, our 10-Q for this quarter, and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and the webcast will be available for replay on our IR website. I would now like to turn the call over to Niraj. Niraj Shah: Thanks, Ryan, and good morning, everyone. We're pleased to be here today to discuss our third quarter results with you. Q3 was a great success. Share gain further accelerated with revenue growing 9% year-over-year, excluding Germany. This came in tandem with more than 70% year-over-year growth in adjusted EBITDA. Our 6.7% adjusted EBITDA margin marks the highest level achieved in Wayfair's history outside of the pandemic period. As we've promised, substantial profitability flow-through is powered by a strong contribution margin and fixed cost discipline as our business has returned to growth. As we shared in Q2, we see the groundwork we've laid over multiple years directly driving share capture and profitability despite a category that remains stubbornly sluggish. Existing home sales continue to bounce along the same multi-decade lows we've seen since late 2022. Decreasing short-term interest rates certainly loosened financial conditions, but mortgages are a longer-duration product, and will require more relief in long-term rates before we start to see a broader unlock in mobility. In that context, it's important to note that our plan to grow is driven by Wayfair-specific factors and is not reliant upon a recovery in the housing market. In spite of the depressed housing environment, we've been encouraged to see that the category has moved past its multiyear trend of double-digit declines. Based on the data we have, the category started down low single digits and has been inching closer and closer to flat over the course of 2025, though it remains structurally underspent against the pre-pandemic baseline. This directional improvement is all the more encouraging given the uncertainty our industry has faced around the evolving tariff landscape this year. These changes have only served to reinforce the relative strength of our model, consistently delivering the best value and experience to our customers, while simultaneously enabling our suppliers to win share and grow their businesses. That strength should be very clear in the KPIs themselves. Revenue growth was driven by order momentum. We saw orders grow by over 5% year-over-year in the quarter, including new orders growing mid-single digits for 2 quarters in a row. Active customers saw sequential growth for the first time since 2023. AOV was up roughly 2% in Q3, driven almost entirely by mix shift as our higher-end brands and B2B outperformed the growth of the Wayfair business. Competition remains intense amongst our suppliers and provides a structural incentive to keep prices as low as possible to win share on our platform. To measure our momentum, we anchor on quarter-over-quarter trends as a barometer of success. Q3 this year was the best sequential growth we've seen in the third quarter since 2019, following strong trends from the second quarter. I'm sure many of you are wondering how much of this is intrinsic growth improvement versus something more transitory like pull forward due to tariffs. The only instances of pull forward we've identified came from a very short-lived increase in large appliances demand back in the early spring and a similarly short-lived increase in vanities late in the third quarter. Neither of these moves the aggregate in a meaningful fashion. We see our outperformance as structural share capture driven by our strong day-to-day execution against the core recipe, the early success of the new programs we've been able to launch and from the broad gains we have brought to bear from our technology team. Since the start of the year, we've highlighted the strong returns we're seeing from initiatives like Wayfair Rewards, Wayfair Verified and our growing fleet of retail stores. These successes all reflect the deeper engineering resources we've been able to dedicate now that our multiyear replatforming is largely complete. At the turn of the decade, we made the decision to modernize our technology stack, including migration from data centers to the cloud. The simplest way to think about this is that by replatforming our code base, we can now be much more agile and, as a result, meaningfully ramp up the pace of innovation and what we can offer our customers and suppliers. We completed the bulk of our replatforming earlier this year and the timing couldn't have been better as we are in the early innings of a new phase in how customers shop online. While AI has certainly become the buzzword of late, we've been on the forefront of machine learning for a long time, leveraging algorithms to drive everything from pricing decisions to marketing investments. Today, there is new ground being broken with the proliferation and sophistication of generative AI, and Wayfair is a leader in the application of AI in retail. To that end, I'm excited to have Fiona Tan, our Chief Technology Officer, here today to spend some time diving deeper into the ways we're bringing Generative AI to bear across all of Wayfair. Let me now turn it over to her. Fiona Tan: Thank you, Niraj, and good morning, everyone. I'm thrilled to join you today to share how our technology teams are shaping the next chapter of Wayfair's growth, powered by a long leadership in AI and machine learning and now by pragmatic advances in generative and agentic AI. Wayfair has always been a technology-focused, customer-obsessed company. Our promise to customers is to make it easy for them to create a home that's just right for them, and the rapid evolution of AI represents a considerable opportunity to deliver on that promise in new ways. Our long history of applying machine learning from the predictive models that power our core pricing and marketing engines to the algorithms that help us classify and organize our vast complex product catalog, means we're not starting from zero, but instead scaling from a position of strength, backed by operational discipline to measure impact rigorously. Our investments in AI are pragmatic and results-oriented centered on three key strategic outcomes. First and most importantly, we are reinventing the customer journey. We are moving beyond simple personalization to create truly intuitive and inspiring shopping experiences that guide customers from their initial idea to the perfect product for their home. Second, we power this best-in-class experience by supercharging our operations and our teams. We are embedding AI into our core processes to make them faster and more efficient and have provided generative AI tools to every employee. This allows us to deliver our customers with a level of excellence that is difficult to replicate. And third, we are powering our platform and ecosystem. We are building tools that make Wayfair the best possible partner for our suppliers and are ensuring our catalog is seamlessly integrated into the next generation of AI-driven commerce. Let me walk you through each of these. Starting with the customer, we are using generative AI to make the shopping journey more intuitive and personal than ever before. We think about this as an AI-powered growth flywheel to inspire, engage, learn and personalize. It all starts with inspiration. And we're using generative AI in multiple ways to help customers discover products they love. We developed Muse, our proprietary AI-powered inspiration and discovery engine, to create shoppable photorealistic room scenes to capture the attention of low intent customers and Spark discovery. Muse offers a visual browsing experience, entirely powered by generative AI. We then incorporate learnings from Muse into our new Discover tab in our app, offering an endless loop-based shopping experience that turns inspiration directly into action, delivering a measurable lift in conversion as well as visit duration for customers that engage with the tab. In parallel, we're using generative AI to understand what inspires our customers beyond just their searches and clicks. Our new interest-based carousels are driving incremental revenue uplift by matching product to every customer's lifestyle and aesthetic, with contextual signals like location and weather coming soon to enhance personalization. Once a customer is inspired, we engage them with a suite of AI-powered tools that builds confidence and removes friction from their journey. We've evolved our on-site search to be more intuitive using a sophisticated LLM to move beyond traditional keyword matching. This allows us to interpret what a customer is looking for with far greater nuance, connecting to the right products with greater precision. For shoppers who have picture, but not the words, our visual search allows them to simply upload or snap a photo and instantly find similar products from our catalog, turning real-world inspiration into a shoppable reality. When customers have specific questions, our AI-powered assistant provides instant reliable answers by drawing directly from product specifications and reviews. These interactions feed our ability to learn, and ultimately to personalize. This is where we combine AI scale with our unique home expertise. We had our own interior designers, annotate nuanced style pairings then used LLM to scale this understanding across our entire catalog. The results are compelling. Customers who see these designer quality personalized recommendations are 1/3 more likely to save, add to cart or order products, reflecting a much higher confidence in our selections. And we are just getting started. We are now preparing to test a new generative AI feature called, Complete the Look. What's unique here is our proprietary ability to generate a complete styled room scene where the products visualized are directly inspired by real shoppable items in our catalog. This allows customers to move from individual product ideas to a complete shoppable design plan more intuitively than ever before. None of this is possible without world-class execution. This brings me to our second pillar, supercharging our operations and our teams. A core part of our operational excellence is the quality of our product catalog itself. We are using generative AI at scale to improve the accuracy, consistency and completeness of our product information. This makes our catalog more reliable for customers and simplifies the management process for our suppliers. This catalog enrichment is already delivering an impactful lift in add to cart rates. At the same time, we are using AI to automatically detect and process duplicate items, which keeps the customer experience clean, and is projected to reduce the cost of this review process by 3 quarters. With a more reliable catalog as our foundation, we deliver superior customer service. We recognize that the unique nature of our category, which involves high consideration and complex orders, requires a sophisticated approach to service. For immediate 24/7 resolutions on common inquiries, we use fully autonomous conversational AI agents. For the more nuanced situations that benefit from human expertise, we've equipped our associates with a powerful real-time AI copilot, which combines several advanced capabilities. It uses our patent-pending intent-based routing to connect customers to the right expert on the first try, and it uses advanced reasoning models to recommend better, more proactive solutions when a standard replacement won't be enough. This holistic system is designed to live first contact resolution and post contact satisfaction, all while reducing our cost to serve and driving down waste. This focus on a reliable experience also extends to trust and safety. Our multimodal AI now uses computer vision to detect fraudulent imagery in real time, better protecting both our customers and our suppliers. Just as AI is evolving our operations, it's also up-leveling how we work. We are committed to ensuring that every Wayfarian can benefit from this AI transformation. Our engineers are integrating leading coding assistants to accelerate development cycles, while business teams, in marketing and merchandising use generative tools to automate repetitive tasks and focus on more strategic work. We have provided a generative AI license to every single employee, and we are fostering a culture of hands-on innovation that goes beyond just structured training. We're encouraging our entire team to find new ways to create value with these tools through programs like our Gen AI Innovation Challenge, where any employee, not just technical ones, can submit ideas that solve real business problems. In fact, many of these have already been implemented across the organization today. By using leader boards and other engagement models, we are making AI experimentation part of our everyday culture. This mindset where our teams are learning with the same urgency and curiosity we expect of the technology itself is fueling innovation that translates directly into better supplier tools and richer customer experiences. Finally, our third pillar is about powering our platform and ecosystem. We win when our partners win, and that means using AI to both improve their operations and to drive more qualified customers to their products. For our suppliers, we've developed an AI agent that automates service ticket classification and resolves a portion of inquiries without manual intervention, a truly agentic implementation that we expect to drive measurable savings over time. Simultaneously, we are using generative AI to put those suppliers' products in front of more customers. We've utilized LLMs to rapidly scale and optimize our SEO titles, leading to greater Wayfair presence in Google Search and a higher volume of free traffic. We've also used gen AI to create superior titles and ad copy for our Google Product Listing Ads, driving strong, consistent results and a powerful synergy between our organic and paid marketing performance. This leadership in search is now the foundation for our work in generative engine optimization to ensure our products are not just discoverable, but are selected and recommended by these new AI platforms. Looking ahead, we are actively shaping the future of agentic commerce with a clear dual-pronged strategy. First, we view this as a new additive channel for growth, so we will be where our customers are. This begins with ensuring a vast and specialized catalog is deeply integrated and accurately represented on leading AI and search platforms including Google, OpenAI and Perplexity. This provides the foundational third-party truth on our selection, pricing and delivery promises, but we are moving beyond just discovery to enable seamless transactions. Our plan is to make our catalog fully transactable on leading AI platforms, allowing customers to shop with confidence and ease wherever their journey begins. Simultaneously, we are building deep competitive moats to ensure our own site and apps remain a premier shopping destination. These moats are built on our unique advantages, a powerful inspiration and personalization road map, fueled by our proprietary data, our foundational strength in selection and fast delivery and unique programs like Wayfair Verified that build customer trust and confidence. That belief in our unique advantages underscores how we're thinking about differentiation in the AI era. In a world of AI-driven commerce, retailers with a large, well-detailed catalog of products, verified supply chains, transparent fulfillment and deep technology capabilities are advantaged. We believe that customer attention will flow to the most trustworthy API, not the loudest ad. The disciplined investments we've made in our core data and technology architecture position us to deploy these technologies safely and at scale. This turns our deep technical heritage into a sustained competitive advantage, and it gives us confidence that we're not only keeping pace with the AI revolution, we're helping lead it. Thank you. And now I'll hand it over to Kate to review our financials. Kate Gulliver: Thanks, Fiona, and good morning, everyone. Let's dive into our financial results for the third quarter before we move to guidance. Starting with the top line. Revenue grew by 8% year-over-year on a reported basis and 9% year-over-year excluding the impact of our exit from Germany. We saw healthy growth across both our segments with the U.S. business up 9% year-over-year, and international up by 5%. Let me continue to walk down the P&L. As I do, please note that the remaining financials include depreciation and amortization, but exclude equity-based compensation, related taxes and other adjustments. I will use the same basis when discussing our outlook as well. Gross margin for the third quarter came in at 30.1% of net revenue, while customer service and merchant fees were 3.7% and advertising was 10.6% of net revenue. As I discussed back in August, our focus is on improving contribution margin, that is gross margin less customer service and merchant fees and advertising, and balancing the trade-offs between these three-line items. The structural gross margin improvements we are achieving through initiatives like supplier advertising and logistics provides us with a wider envelope of dollars to reinvest back into the customer experience. We're doing this while driving savings in other lines of the P&L, such as advertising. We think about where the ROI of each dollar of spend is maximized on a multi-quarter basis as we map out the mix of investments in the customer experience and advertising that generates the most EBITDA dollars. The net of this was a contribution margin of 15.8%, up 150 basis points year-over-year and our best result since 2021. The bulk of this was driven by the considerable leverage we saw in advertising this quarter. We're continuing to see the dividends of investments made in prior quarters paying off as well as the compounded effects of efforts to improve the mix of free versus paid traffic. Last quarter, I mentioned the success we've had in driving adoption of our mobile app, and we saw that ramp even further in Q3. In fact, the revenue from our mobile app grew by double digits year-over-year and total installs grew by nearly 40%. Some of this reduction in ad spend is onetime in nature. We ran several holdout tests in the third quarter, which drove the outperformance versus guidance. These tests are important as they help us refine our perspective on incrementality spend and play a valuable role in refining the machine learning algorithms that drive our advertising operations. Selling operations, technology, general and administrative expenses totaled $360 million for the quarter. In total, we generated $208 million of adjusted EBITDA in Q3 for a 6.7% margin. This is a remarkable achievement, up by more than 70% year-over-year. We ended the quarter with $1.2 billion in cash, cash equivalents and short-term investments and $1.7 billion in total liquidity when including our undrawn revolver. Cash from operations was $155 million, offset by $62 million of capital expenditure. Free cash flow was $93 million, an improvement of more than $100 million compared to the third quarter of last year. The improvement in our profitability picture has demonstrably changed our capital structure profile. A year ago, our net leverage is more than 4x trailing 12-month adjusted EBITDA. Today, that sits at 2.8x, well over a full turn reduction. Having managed our 2025 and 2026 convertible maturities, we've begun to turn our attention to our 2027 and 2028 bonds, which have strike prices of $63 and $45, respectively. In August, we used roughly $200 million of cash to repurchase about $101 million of principal on our 2028 notes. Given the trading price of the stock, these bonds essentially trade as an equity substitute. So said differently, the $200 million of cash was effectively an offset to roughly 2.2 million shares of potential dilution and future interest expense through 2028, all while reducing the gross debt balance outstanding. We are operating with a dual mandate: reducing leverage while also managing dilution, and you'll see us continue to balance these goals opportunistically in the future. Let's now turn to guidance for the fourth quarter. Our quarter-to-date performance is skewed by the timing of our fall, the Way Day, which ran in early October last year and is running right now for 2025. Controlling for that timing, we're seeing strong performance over the first month of the quarter and we're excited about the holiday season ahead. Going forward, we're planning to move away from giving quarter-to-date results given how often it is contorted by comparability issues and will instead just anchor on the full quarter guide. For the fourth quarter, we would expect net revenue to be up in the mid-single digits year-over-year, which includes the roughly 100 basis point drag from the impact of closing Germany. Turning to gross margins. We will continue to anchor you to the 30% to 31% range, likely coming in at the low end of the range once more as a function of both our reinvestment as well as the typical seasonality we see in the holiday quarter. Customer service and merchant fees should be just below 4%, and advertising should be in an 11% to 12% range of net revenue. As I mentioned a moment ago, the outperformance we saw in Q3 was driven in part by the holdout test, which were onetime in nature. While we're certainly making strong progress on driving structural improvement in ad cost as a percentage of net revenue, we would expect Q4 to come in modestly higher than Q3 in the absence of these tests on top of our typically higher spend in the final months of the year. The net of all these moving pieces should get us to a place where we drive a contribution margin that is in line with where we were in the second quarter of this year and a considerable improvement on a year-over-year basis. SOT G&A is expected to stay in the $360 million to $370 million range, likely at the top end of the range given seasonality in the holiday quarter and some spend here tied to revenue like cloud computing costs. This continues to be the appropriate run rate to think about as we look to 2026. Following this all down, we anticipate adjusted EBITDA margins in the 5.5% to 6.5% range for the full quarter. Now let me touch on a few housekeeping items. We expect equity-based compensation and related taxes of roughly $80 million to $100 million. This includes approximately $20 million of impact from the CEO performance award approved by our Board in September. You should expect this to become a recurring part of stock-based compensation in the quarters ahead. The accounting treatment begins expensing the fair value of the grant today, but I want to be clear that there are no shares being issued right now nor will any be issued until the share price targets are met. Depreciation and amortization to be approximately $71 million to $77 million; net interest expense of approximately $30 million, weighted average shares outstanding of approximately $130 million; and CapEx in the $55 million to $65 million range. I want to now wrap up by taking a moment to turn the clock back to where we began 2025. In the shareholder letter, Niraj and Steve, published in February, they talked about our three core goals for the year: one, focus on tight execution to drive profitable growth through taking market share in what is likely a continued challenging market; two, continue improving the financial position and strength of the business; and lastly, invest in building the five long-term moats of the business. We're very proud of how much we've been able to achieve across each of these. As we turn our sights to 2026, we plan to invest judiciously to grow the business at a rapid pace while growing adjusted EBITDA faster than revenue. None of this would be possible without the work of an exceptional team. So I want to end today with an enormous thank you to everyone that worked so hard to make all of this possible across the entire Wayfair team. And with that, we hope everyone takes a moment to check out the exciting Way Day deals. Thank you. And now your Niraj, Steve, Fiona and I will take your questions. Operator: [Operator Instructions] Your first question comes from the line of Christopher Horvers with JPMorgan. Jolie Wasserman: This is Jolie Wasserman on for Chris. Our first question is more how you're thinking about the way the consumer is going to show up this holiday, since you did move Way Day back a few weeks, and from some -- away from some of these more major promos out there across retail like Prime Day. Does this mean you're anticipating spending is going to be more spread out this year? Or are you seeing more of an urgency to get out ahead of the potential 232 tariffs? Niraj Shah: Jolie, this is Niraj. Thanks for your question. Well, I mean, there's kind of a few different things wrapped up in there. What I would say it on the tariffs, we really have not seen any consumer behavior based on the tariffs. So as we mentioned earlier on the call, the minor, minor pull forwards we saw were -- lasted days in duration and were very small. So we don't really think there's any tariff-induced behavior. We actually think the holiday shopping is probably going to be similar to past years. And so what we did with Way Day is we actually went back to the timing that we actually had, not last year, but the 2 prior years. So it's the same timing of '22 and '23, which is late in October. And last year, in '24, we did move it earlier in October. And what we kind of came to the conclusion for is that we think that the period that we've always done it in, late October, is probably more optimal, and so that we just went back to that. So I would just -- you should just view it is, yes, we're running kind of a very similar seasonal cadence to what we traditionally do. Jolie Wasserman: That makes sense. And our second question is just more broadly, how you're thinking about 2026 abilities to lap accelerated share gains, whether price increases are expected to become a bigger driver and also just how you're thinking about getting some more of the gross margin, advertising margin expansions for 2026 more broadly? Niraj Shah: Yes, yes. Great. I mean, so for 2026, what I'd say is, we're definitely focused on driving further top and bottom line growth, and EBITDA growth will definitely outpace revenue growth. And I think the way we're going to do that, it's kind of what we've been talking about since the beginning of this year, which is that since late 2022 through now, we've taken share through continued investment and improvements in the core recipe which is price selection, speed and availability, but then what we've been able to do this year is augment that with the two other pillars of growth that we've historically had through the bulk of our 20-plus year history, which is that we always improve the recipe, which is that core consumer value proposition, but then we augmented that with the second pillar, which was really about new programs and innovation. So some examples of what's been added over the last year and is really scaling is, for example, what we're doing in physical retail stores, our loyalty program, Wayfair Rewards, what we're doing with our editorial program, Wayfair Verified. Those are three notable examples, but there's a long list. And then the third pillar, and the third pillar is that we have a technology organization of around 2,500 people. And these are software engineers, data scientists, applied science folks, product managers, designers. And these folks, generally, the bulk of their effort is focused on improving the customer and the supplier experience, which drives up conversion, drives up traffic, allow suppliers to do more for customers. It compounds through repeat gains. And what we did for the last 2, 3 years since 2022 is we spent a couple of years working on reshaping our organizational model so that we could be lean and focused and execute well, but we also spent about 3 years on a very large technology replatforming effort for almost all of our core systems. And as we've gotten substantially through that by the end of last year, we've then seen the technology cycles return to driving the business forward. So that's part of why we're able to launch all the new programs I mentioned in the second pillar, and it's also contributing a lot to the experience, which is the third pillar. So when you take those three pillars of growth, you see how they provide this compounding benefit. You can then see how we've been gaining momentum through this year, and you can see how it should go into next year, you'll see further top line growth, further bottom line growth, and you'll see EBITDA growth outpace revenue growth. Fiona Tan: Jolie, I want to touch on your question around how to think about the gross margin, and the ACNR for next year because I think that speaks to a really important point that we spoke about a little bit in the prepared remarks, which is thinking about that contribution margin. So the gross margin less the customer service and merchant fees, less the marketing expense gets us to that contribution margin. Obviously, it's been sort of 15%-ish plus over the last few quarters. And we increasingly think that's a thoughtful way to sort of look at the business, right? We want to make sure that, that contribution margin is in a very healthy place. And then the flow-through to EBITDA is really strong because that SOT G&A line below that is holding relatively constant. So as you think about that contribution margin staying healthy and that could be some interplay between gross margin and marketing spend and then the flow through being quite strong, that's how that EBITDA dollar growth is really outpacing that top line growth. And we're very focused on the EBITDA dollar growth continuing. Operator: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: I want to first ask about sales, a little follow-up to the prior question. So your top line is running in a place where I think it aligns with the slide deck that you put out, I think, in 2022, mid- to high single digits, if not maybe close to that. Do you think the business is now at this inflection point where it continues to grow in that level? You said it was past some certain technology investments. I realize you can't control what the industry does, but it feels like you've gotten past a bunch of bumps or tough compares plus industry normalizing. So do you think we've gotten past this inflection point? Niraj Shah: Yes. So I'm not 100% sure what you're referring to. I think you might be referring to the Analyst Day that we had in the summer a little over 2 years ago, in the summer of '23 and August '23. There, I think we were talking about kind of the long-term potential of the business, and we provided a view as to how the revenue growth could be kind of meaningfully into the double digits. But when you think about our different lines of business and the initiatives we had and the potential and then getting past the technology replatforming, et cetera, and that we're still very bullish on how this compounding benefit will continue to accrue and when our momentum will climb. And then we also give a view on EBITDA growth and how that could grow over time and get meaningfully into the double digits as well. And you're seeing that play out as we go through time. And we think a lot of benefits are still ahead of us as we get the benefits of volume, as we continue to deploy technology, et cetera. So I would say we feel very good about the direction we're on from that meeting we had 2 years ago. Kate Gulliver: Yes. I think I'd maybe add to that. I think what you're seeing here is share gains, as Niraj spoke about, that are compounding frankly because of the initiatives that we started a year plus ago. So things like the replatforming being completed and tech advancements that Niraj spoke to our loyalty program, Wayfair Verified, over time, you'll physical retail. And so you're seeing that ongoing momentum. Obviously, there's a macro context that we're operating in, and we think the category itself right now is flat to slightly down, but that macro context could move things around on the top line. Simeon Gutman: Okay. And then a quick follow-up. Any predictions -- if paid search moves more towards agentic, how does that change the advertising line? Is this something you can think about? Is there visibility on this? Or it's just theoretical at this point? Niraj Shah: Well, I think we can both think about it and it is theoretical at this point. So I'll give you some thoughts, but it's very, very early, right? And so I think the way to think about it is so there's no question that the use of the chatbot is growing quite quickly. And you could see how search will then evolve, and whether it's the search interfaces become -- that exist today like a Google search becomes more agentic or whether it's that chatbots become a new way to search, there's different things, and they could all emerge into whatever that new version is. At the end of the day, the goal historically of search was to show the best answers to questions. And the goal of these agents is to help you find the best answers to your questions. And it's just a different way of doing it, trying to get you closer to answers that help you. Ultimately, if Wayfair is providing the best offerings and provides the best solutions for people, we're going to surface really well. Ultimately, whoever are the media owners of those properties, there's probably a high chance they're also going to monetize them through advertising, right? And so I tend to think that paid search may turn into a different form of paid services and organic search will turn into a new surface of how organic answers are provided. We've had a long history of being a great partner to all the media properties, whether you think about Google, or you're thinking about Meta, or you're thinking about Pinterest and the list goes on, codeveloping products with them, being an early tester of them, being very optimized for them in the early days. And so the work we're doing with the various AI chat LLM companies is no different, and we're working with a number of them very closely, and that's part of the benefit of having a 2,500-person technology organization and being very technology-oriented, and how we think about how we approach the business and being led by folks who are definitely closer described to being engineers than merchants. Operator: Your next question comes from Peter Keith with Piper Sandler. Peter Keith: Great results, guys. So clearly, there's some share gains happening with your business, but it does seem like the industry backdrop is getting better, which I think is surprising to some investors given a sluggish housing market and tariffs. So Niraj, I was wondering if you could just opine on the industry backdrop, if you think it's getting better and, if so, why and perhaps maybe there's some type of replacement cycle that's already starting up. Niraj Shah: Yes, sure. So I guess I think the way to think about it, I think, is that the industry backdrop is getting better and a different way to say that is, it is no longer getting worse at a fast rate, right? And so if you think about kind of multiple years of double-digit declines, that means that you've kind of come pretty far off of where you were. And if you take the trend back to pre-COVID, we're quite far off what the trend -- the long-term trend had been. Now what's happening now? Well, it's no longer declining at that type of rate, right? We think it's more like flattish. So one way to describe that is that it came off perhaps you would call high, it broke trend. And then it basically has kind of "bottomed out" or it's in a low -- a depressed low of some sort. And once you're at that depressed low, things like the replacement cycle, folks who move still for whatever reason, the degree that household formation is still happening, those things are still going to cause people purchasing items. So it's not like the lowest where you purchase 0 in the category. But then it is, there are cycles, and you're seeing that. Every quarter that goes by, the percent of mortgages below 4% ticks down because some amount of folks refinance to a new mortgage because there is a reason to move. There is a reason to sell their house. There is something that overwhelms the fact that perhaps at a low-cost mortgage and they're going to end up with a high cost margin. So it's happening, it's just happening slowly. And so I do think when you look forward, you're going to see that housing is at a low right now existing home sales. It will end up higher. You'll see that the purchasing in the category will end up higher. And we do think there's kind of a long-term trend that probably, most things revert to the mean over some period of time, and it will probably revert to the mean over some period of time. So I think that's where you can see that it will get better. It's just less clear that it's an acute upturn. And that's why we took some time this morning in the comments to try to clarify the strategy we have and the way in which we have the compounding gains and the compounding share gains and the compounding benefits to growth and even more to EBITDA is really around things we control. So some folks refer to that as self-help, but basically improving the recipe is something we can do, launching new programs, innovation, growing those is something we can do. Investing our technology efforts into improving the customer-supplier experience is something we can do. And so we think that is how we had only $12-ish billion in revenue out of $500 billion in the TAM, have a lot of room to take share and grow even while the category is more anemic. And as the category gets more energy into it, we would expect that to accrue to even more benefits to growth. Peter Keith: Okay. That's very helpful. I guess I had a follow-up question, too, from a topic that's been kind of ongoing during the quarter, which was that Amazon had stopped advertising through Google Shopping early in Q3. And I guess I'm wondering if you think this provided any benefit to sales or maybe ad leverage during the quarter? Niraj Shah: Yes. So Amazon, they for a certain period, cut their spending in a certain channel in half. Then they came back in, and then they took spending down entirely. Then they came back in certain countries. And so they've done various things, probably different versions of testing what it's worth to them and the like. Most advertisers that do hold out tests. We mentioned that we just did some recently of some large-scale. Just you want to make sure that your advertising is productive and incremental and paying off in the way that you would need it to want to continue. That does not -- what they did does not have a very big impact on us at all. And the reason is just that where they're advertising, when you think about the pockets that we specialize in, we're a very significant player already. So what happens is when you think about who surfaces on these paid services, and the auction, there's always multiple folks. And if you're already at a pretty high share. It doesn't really matter whether someone else comes in or out, they just get replaced by someone else. And it doesn't necessarily make sense for you to take more share because you're already purchasing the optimal amount of share that is worth to you. And the places where they may advertise where it's less relevant to you, you're not going to go advertise there anyways even if the price went very close to 0, because it doesn't benefit you. It's not something that you participate in, not a category you sell in or where your offering makes sense to advertise. So the net effect is, I'm sure, for some folks who maybe were just under them in share who -- Amazon's bidding price was such that, all of a sudden, the inventory opened up and they're the next person who could grab it, it would benefit them. But that's going to be very narrow and who it would help. And in our case, given our specialist nature and where we focus and the degree of share we have there, it didn't really have an impact on us. Kate Gulliver: Yes. Peter, to your question around the sort of what drove the ad spend leverage in the quarter, I would think about it as a few folds. First, we are seeing nice gains in free traffic. We've talked about that. I mentioned in the prepared remarks, increased downloads, frankly, of the app and app usage, which is an area that we've been driving for some time. And then there are some onetime benefits because of our own holdout test this quarter. And so when you think about the sort of efficiency beyond that general 11% to 12% range, some of that was certainly driven by the holdout testing that we do. We think that's quite important frankly to ensure the efficacy of our modeling. But I would think about that in general. Yes, and those are onetime in nature. Operator: Your next question comes from Maria Ripps with Canaccord. Maria Ripps: Congrats on the quarter. First, can you maybe give us a little bit more color on what drove sort of revenue acceleration in the later part of the quarter? Is there anything sort of worth highlighting in terms of performance by brand or consumer income levels? And can you quantify the impact have been of this pull forward to Q3? Kate Gulliver: Maybe I'll just start on sort of revenue and then, Niraj, you can jump in. So we don't typically disclose revenue by month or within the quarter. In general, revenue growth has been aided by all of these factors that we've been speaking to, which has been really the compounding share gains from initiatives that have been begun over a year ago, so Wayfair Verified, the loyalty program, the improvements to the site experience from the replatforming, and we're seeing that continue to build momentum. As it relates specifically to brands and income, we are seeing strength in the sort of higher-end brands. That's been for quite some time. So Perigold, which is our luxury brand, and then the specialty retail brands, those all operate at a higher average order value, higher price point, has seen some really nice strength, which I think is consistent with what others have seen from consumers that, that higher income consumer has held in a bit better. Niraj Shah: Yes. And what I would say, the strength we're seeing overall comes from the structural business initiatives we have, not pull forward. So -- and we're continuing to see good momentum on the structural business initiatives, and it's just -- and those are things we control. So I wouldn't think of a pull forward being -- playing a role into how the quarter played out. Maria Ripps: Got it. That's very helpful. And then just to follow-up on agentic shopping, and I appreciate all the color there. Can you maybe give us a little bit more color on how sort of agentic shopping for the furniture vertical could be different from shopping across maybe like other simpler items? And can you maybe give us a little bit more specifics in terms of how you're optimizing your platform and listings for organic chatbot search results? Niraj Shah: Yes. So great. Maybe, I'll let Fiona share some thoughts and then I'll add anything that maybe -- as well. Fiona, do you want to share any thoughts? Fiona Tan: Yes. So certainly, I think for agentic shopping, one of the things that is a little bit different for us in the home category is the fact that it is a more complex category. We've got high consideration items and very complex delivery promises. So one thing we want to make sure that we get right is the foundational first-party truth as to make sure that our catalog, pricing fulfillment is perfectly integrated, and that's the critical first step. And we're working on that actively with all the partners that I mentioned earlier, the AI platforms. And then we also make -- want to make sure that once customers are able to discover our products also that they're able to transact, so something that we are also working on with the partners. Niraj Shah: Yes. And I think, Maria, one thing we've always found is that -- and this goes back to even back to the search days when you think about platforms like Google, Pinterest and Meta, but certainly be true today. This is a category -- it's not a UPC code commodity-driven category where you can specify what you need. And then a lot of the purchasing is replenishment purchasing, where you continue to buy the same items over time, and you want them deliver to you perhaps or maybe pick them up. But either way, you kind of know exactly what you want. And so product discovery is something that is, I think, is unique in our category. And so customers do have a lot of zeal to understand what's available, what styles are developing, what's changing in trends. So I do think in the agentic world, there's a lot one can do with customers to help them, with whether it's product visualization, taking their room and showing them images of what it could be. And I think there's things that can happen on these AI chatbots in there. But I think there's a lot we can also do on our own platform with customers, particularly with all the data we have about them. And I think what you'll find is that there are certain things that may start more upper funnel and as they move lower funnel and maybe different experiences they need that are helpful as the product discovery, product education, nuanced decision-making all occurs. Operator: Your next question comes from the line of Brian Nagel with Oppenheimer. Brian Nagel: Congrats on a nice quarter. So the first question I want to ask, just with regard to -- it's a bit repetitive, but with regard to gross margin, in the commentary this quarter and then, I guess, just recently about the focus now on contribution margin. Is there a philosophical change happening as you're thinking about gross margin? Or are you seeing a lever within that line item now that you're increasingly likely to pull in order to drive a better outcome? Niraj Shah: Let me -- I'll just say one thing, and I'll turn it over to Kate to answer your question. I would say we're very focused on the long-term potential of the business, the long-term profitability of the business. And so if you think about long-term, how do we maximize EBITDA? There's multiple ways to maximize EBITDA. Margin rate is one feature. Revenue volume is another feature. And obviously, if you multiply these things by each other, you then end up with the EBITDA dollars, or we can talk about free cash flow dollars. Ultimately, we care about the owner's earnings dollars, which is really the thing we're trying to optimize, which is where we do think of the stock-based compensation is a real cost. And so the owner's earnings dollars, which is what we care about, we're going to optimize. And we're going to do that by both growing, by managing costs well, and there's an interplay between the two. Now to answer your question more precisely from a financial modeling standpoint, let me turn it over to Kate. Kate Gulliver: Yes. I think, Niraj articulated actually the philosophy and the philosophy that's been consistent for some time, right, which is ultimately what we're focused on is adjusted EBITDA dollars growth on this multi-quarter view. Perhaps what you're hearing from us is we're trying to do a better job of articulating how that happens and the components there. So if we go to contribution margin, again, that's the gross margin less the CS&M, less the ACNR. That contribution margin, we are also focused on optimizing contribution margin dollars on this multi-quarter view and how do we manage the levers that make up contribution margin to get to that point. As we think about those, the variable cost components that sort of drive that contribution margin, we are constantly testing what is the sort of optimum mix and what works best, again, with this multi-quarter dollars view, right? And so to the specific question on gross margin, for the last many quarters, the optimal place to be, has sort of been between the 30% and 31% range, closer to 30%, as you all have noticed. And that's been the right place again to optimize multi-quarter contribution margin dollars and then, obviously, multi-quarter adjusted EBITDA dollars because as we think about having that fixed cost piece of that SOT G&A controls, as we grow those contribution margin dollars, that flow-through to adjusted EBITDA dollars, you're seeing that these last several quarters is quite nice. So again, not a philosophical shift, but hopefully a better articulation of how we're managing it. Brian Nagel: No, that's really helpful. I appreciate all the color. My follow-up question, look, I appreciate all the discussion today on gen AI and how Wayfair is employing the technology, and nice to meet you over the phone, Fiona. So I guess the question, I don't want to go too short term on this, but clearly, Wayfair, there's an improving market share dynamic here we've seen. The question is, as you -- is Gen AI helping that? Or -- and I guess maybe another way to ask it, from an investment standpoint, what should we be watching for in Wayfair results to basically say, look, here's a company that truly is using gen AI to break away from the pack? Niraj Shah: Yes. So one thing I would say to that, Brian. So if you think about the potential of what you can do with gen AI, it's quite substantial, but like if you think about like a baseball game, last night went 18 innings, but say it normally goes 9 innings, you'd still say we're in like the first inning of what you can do. Now, I think what we're doing is meaningfully out ahead of most retailers, but what we're doing is still very early days compared to what we think the potential is. And so the bulk of the gains are definitely yet to come. And in terms of the market share dynamic, in terms of us gaining market share, meaning looking backwards over what's happened over this year so far over the last couple of years, gen AI would not have played a very big role in that. But what we're working on and deploying, we're very excited about, and we can see the trajectory of what it's doing. And so we think it will become meaningful over time, but this is just the latest in what's been an ongoing evolution of technologies. We've been using machine learning for a decade or longer, and there's a lot -- we've always done with technology, that's very helpful. And I think basically, it's hard not to be excited about the potential of gen AI. And I do think you will see some companies be much more adept at using it in a way that's differentiated and faster than others. And so I do think it is yet the latest in something that will separate some from others through technology and the use of. Operator: Your next question comes from the line of Steve Forbes with Guggenheim Securities. Steven Forbes: Niraj, maybe changing topics to the multichannel fulfillment offering, curious if you could just expand on the general receptivity from their supplier network. Any comments on how you expect the offering to mature? And just how fast we should sort of think through CastleGate utilization as that program ramps over the coming years here? Niraj Shah: Yes. Yes. Sure, Steve. So on multichannel fulfillment, so we talked about that last quarter. That's a great example. When I talk about the three pillars of growth, I talked about the recipe, the second is programs, and the third was technology. And a lot of the programs are enabled by technology. Multichannel is a great example of another program, right? And so that's something that required technology work for us to create it and launch it. Obviously, then it's something we execute on our physical operations in our facilities. It's something that adds a lot of value to our suppliers. It helps us with a larger forward position inventory pool for our business. It creates a new revenue stream and margin stream associated with infrastructure we already have. And it's just another way we can be a deeper partner to our suppliers. So it has had many compounding benefits the profitability being one of the benefits, meaning the direct profitability program being one of the benefits, but there's all the other things. And so suppliers have actually been pretty excited about it. It is optimized for what they care about, meaning that we focus -- we generally sell larger bulkier items. And so our program is optimized for larger bulkier items. Most of the fulfillment services suppliers can use that are out there are optimized for smaller, lighter packages, which is the bulk of packages that ship every day, but not in the home space. And so it's been a great offering for suppliers that they've been excited by. We're seeing them -- they start by trialing it out, and then they like it, they start ramping up and they start growing their usage over time. And so we feel good about how that's going to go. The fulfillment center infrastructure we have is quite large. And so it's just another way we can leverage it, and use it and get volume into it. In terms of CastleGate penetration, I think we -- Kate, did we give a stat about how it hit kind of an all-time high last quarter? Kate Gulliver: Yes. We said last quarter, there was roughly 25%. We give that stat from time to time. But I just -- sort of stepping back on that, you are seeing nice momentum there. And that's certainly, obviously, helping as we think about improving that customer offering and getting it tour as fast and as efficiently as possible. Niraj Shah: Yes. And just to be clear, that 25% number is the percent of our order volume that ships out of CastleGate facility, not the percent of our fulfillment centers that are utilized. I think I've seen sometimes confusion on that. So just to clarify. Steven Forbes: Maybe just a quick follow-up. You talked about the replatforming in the shareholder letter earlier this year. I don't know if you could just maybe speak to how you would sort of qualify the benefits of moving past that, how they're trending relative to expectations and if any sort of new opportunities have emerged as you sort of plan for the next couple of years here? Niraj Shah: Okay. So yes. So the way to think about it is so we're 23 years old. And what happens is as you build your technology infrastructure and, as I mentioned, we have a thousands of people, so you're building a large technology infrastructure. Your systems, over time, there's a lot of benefit in replatforming them because what can happen -- what will happen with our core systems is that they basically got very intertangled over time. And they weren't built very discretely because when you're smaller, building them discretely just would be much more expensive than undertaking, and you don't get a lot of benefit. But as you get bigger, the way you could scale is you want them to be discrete and just interface with each other through APIs and other interfaces or published streams of data so that when a team is working on something, they don't need to then go into every other system. They can engage with those systems through published interfaces or easy, simple, clean interfaces. And so what happens as you go through that replatforming is, obviously, it's a very intensive activity and quite expensive from an investment standpoint because you're spending your technology cycles for a long period of time on doing that work. But what you get out of it is then your developer velocity, your speed of developing new things is dramatically faster. Your ability to preclude kind of errors or issues in the platforms is much higher so the quality goes up, and you can actually also reduce costs. So it's undertaking that we've been very -- sort of it was a necessary thing to do. But now that we're quite far along in it, we're seeing the benefits in terms of our velocity, the things we can launch, the speed at which we can launch them, the ways in which we can use third-party products as well as what we do first party. And so it's been pretty exciting, and we're just -- I'd say there's a lot of gains to come. But I highlight it because when we talk about the second pillar of new programs or when we just talk about the core supplier and customer experience, those are both highly reliant on technology and the use of technology. And so it's a very market difference that we're now back in a position where we have the technology cycles to invest in this way, versus where we were committing those cycles to the replatforming. So it's just we're in a very different place, and we're seeing the benefits. Operator: That concludes our question-and-answer session. I will now turn the call back over to the Wayfair team for closing remarks. Niraj Shah: Thanks, everybody, for joining the call this quarter. We're obviously excited with the momentum we're building in the business. Thanks for your interest in Wayfair, and we look forward to talking to you next quarter. Kate Gulliver: Thank you. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Welcome, ladies and gentlemen, to the analyst and investor webinar on the 3Q results for HSBC Holdings plc. For your information, this call is being recorded. I will now hand over to Pam Kaur, Group CFO. Manveen Kaur: Welcome, everyone. Thank you for joining. We are making positive progress towards creating a simple, more agile growing HSBC. The intent and discipline with which we are executing our strategy is reflected in the momentum this quarter and our target upgrades. Most notably, our annualized RoTE of 17.6% year-to-date excluding notable items. Throughout this presentation, I'll focus on year-over-year comparisons. This will exclude notable items and be on a constant currency basis. The equivalent comparisons on a reported basis can be found on Slides 16 and 22. Let's turn straight to the highlights. We reported a strong quarter. Total revenues grew $500 million to $17.9 billion. Wealth had another good quarter, with 29% growth in fee and other income. Our customer deposit balances stand at $1.7 trillion. If we include held-for-sale balances, these grew by $86 billion. We are also investing for growth. On 9th October, we announced our intention to privatize Hang Seng Bank. We see this as a compelling opportunity. Let me set out clearly our reasoning. First, it meets all four of our criteria for acquisitions. Second, we see good growth in Hong Kong in the years ahead. It's a business, in a whole market we know very well. Third, we see an opportunity to create greater alignment for better operational leverage and efficiencies. Fourth, we are acquiring a business with structurally high pre-impairment margins. And while we are not calling the credit cycle, we believe it is a cycle. Fifth, we are removing a $3 billion capital inefficiency. This is a transaction which we initiated as a growth investment. It is also a statement of our confidence in the outlook for Hong Kong. We are in an offer period, so we are unable to give more details on synergies at this stage. What I will say is that consolidating the noncontrolling interest from the profit and loss increases our profit attributable to ordinary shareholders. We have also said that we see the potential for additional revenue through expanded capital market products to Hang Seng commercial clients and Wealth products to its affluent clients. And we can simplify and streamline decision-making processes, improve operational risk management and better align operations, which we expect will result in efficiencies. We are confident the integration will not distract us from organic growth and it's more value generative than a share buyback. Turning now to upgrades. We are delivering against the targets we set out to you. We are now upgrading two items: our 2025 banking NII to $43 billion or better, our 2025 RoTE, excluding notable items to be mid-teens or better. We remain disciplined with our shareholders' capital, investing it where we see growth, exiting businesses with the intention to redeploy the costs where we don't. We are progressing at pace with the exit of nonstrategic activities. This quarter, we have announced the exits of HSBC Malta and Retail Banking in Sri Lanka. This brings our total announced exits to 11 so far this year. Last week, we announced that we are conducting a strategic review of our Egyptian retail banking business. The review will not include our wholesale banking activities in Egypt, which remains an important market and one we believe has strong potential for growth. Finally, we are on track to achieve our target of around 3% cost growth in 2025 compared to 2024 on a target basis. Let's now turn to the firm-wide financial results. First, the income statement. Annualized RoTE was 16.4% in the third quarter or 17.6% year-to-date, both excluding notable items. Revenue grew 3% year-on-year to $17.9 billion in the quarter. This was driven by a return to growth in banking NII and strong fee and other income. Profit before tax was $9.1 billion. Looking at our capital and distributions. Our CET1 capital ratio is 14.5%, and we continue to target a dividend payout ratio for 2025 of 50% of earnings per ordinary share, excluding material notable items and related impacts. Let's now turn to our business segment performance. We grew total revenue by 3%, and each of our four businesses returned greater than mid-teens annualized RoTE. Moving now to banking NII. $11 billion this quarter is a return to growth driven by deposit volumes. We are raising our full year guidance to $43 billion or better. I know you will have questions on the outlook. So I'll note here the multiple drivers of banking NII. HIBOR, which has recovered; deposit growth, which continues; interest rates, where the Fed is still cutting. We have grown our structural hedge to $585 billion and its rolling on to higher yields. I'll also just mention that the chart on the left is on a constant currency basis, while our full year guidance is as reported. There is a reconciliation in the footnote. Turning now to wholesale transaction banking. We are pleased with our strong ongoing customer engagement. This year has really validated the strength of our franchise in a range of economic and tariff situations. Both payments and trade grew again in the third quarter. In trade, I would note the first half was particularly strong as we supported customers to navigate a fast-changing trade landscape. In security services, fee and other income grew 15%. This was due to higher asset balances given improved valuations and new customer mandates in Asia and the Middle East. In FX, performance reflects lower currency volatility and a strong prior year comparison. Looking through this, performance of $1.3 billion was strong. Turning now to Wealth. We delivered 29% fee and other income growth to $2.7 billion. This shows our strategy is working. Net new invested assets were $29 billion, with more than half coming from Asia at $15 billion. This takes total invested assets to $1.5 trillion. Wealth was driven by all four income lines. Our insurance CSM balance is up by $2.5 billion year-to-date. This is driven by strong new business. I would note that we review our insurance assumptions in the third quarter, favorable experience and strong market performance slightly flatter at these figures. Private Banking grew 8%; and Asset Management, 6%, respectively. Investment distribution also performed very well, up 39%, reflecting strength in our customer franchise in Hong Kong. And Wealth is not just a Hong Kong story. It runs across our Asian franchise with double-digit fee and other income growth in Singapore, Mainland China and other markets. We are providing you with a little extra color this quarter on our Hong Kong flows on the next slide. We are pleased to have added 318,000 new-to-bank customers this quarter. This brings us to more than 900,000 year-to-date. What this slide shows, over a slightly longer period is that nonresident customers have been a significant driver of customer activity and balances. These new-to-bank customers have contributed up to 1/3 of flows across deposits, investments and insurance. We see new nonresident customers as a significant and long dated opportunity for the bank. Now let's turn to credit. ECL of $1 billion is flat year-over-year and down modestly on the second quarter. We retain our full ECL guidance of around 40 basis points. Our ECL charge this quarter includes $0.2 billion Hong Kong commercial real estate. On Slide 19, you will see we have updated the Hong Kong commercial real estate slide we showed you at the half year. Other charges include $150 million from a Middle East-based customer, $0.3 billion in the U.K., $0.2 billion in Mexico and a $0.1 billion release due to improved economic assumptions. Now let's turn to costs. We remain on track to achieve our target of around 3% cost growth in 2025 compared to 2024 on a target basis. Year-to-date, we have taken actions to realize $1 billion of annualized simplification savings with no meaningful impact on revenues. We continue to expect $0.4 billion simplification savings to be realized in the full year 2025 P&L. It's worth noting that there is some slight seasonality to costs in the fourth quarter, which also includes the U.K. bank levy. This quarter, we have $1.4 billion of legal provisions on historical matters, which don't impact our ongoing business. They consist of $1.1 billion, as you will have seen in yesterday's announcement relating to made-of litigation, which is a material notable item and, therefore, does not impact any dividend, and $0.3 billion related to historical trading activities in Europe, which is a notable item. I would also just draw your attention to Appendix Slides 16 and 17, where we detail recent and potential future notable items. This leads us to our exit of nonstrategic activities, which we will discuss on the next slide. We are progressing at pace. With our exit of nonstrategic activities, this slide sets out that progress. The red boxes show the exits announced in each quarter, the gray, those in prior quarters. Given the phasing of the sale processes, only Grupo Galicia is currently complete with others to follow. In the third quarter, we have announced Malta and Retail Banking in Sri Lanka. Last week, we announced that we are conducting a strategic review of our Egyptian retail banking business. As I said earlier, the review will not include our wholesale banking activities in Egypt, which remains an important market. As a reminder, costs released from the exits of a nonstrategic activities will be invested in our priority growth areas at accretive returns. Now let's turn to customer deposits and loans. Including held-for-sale balances, we've had another strong quarter with $86 billion of growth in deposits in the last 12 months. By business, there is some volatility this quarter. Silver bond subscriptions in Hong Kong moved deposits from Hong Kong business to CIB for a few days over quarter end, benefiting CIB balances. CIB also benefited with -- from some large client deposits, which may be short dated. Overall, we see good momentum in our customer deposit franchise. In the U.K., lending was the standout. We saw continued growth in mortgages and our commercial lending book. Infrastructure being a key area of focus. In our U.K. business, the book has grown 5% year-over-year, which includes a drag from the repayment of COVID loans. We see low levels of household and corporate debt in the U.K., which we expect to provide a platform for the continued growth of our franchise. In Hong Kong, we saw customer repayments and corporate deleveraging notably in the commercial real estate space. Credit demand remains muted. Now turning to capital. Our CET1 is 14.5%, reflecting strong organic capital generation during the quarter. We said with the announcement of the Hang Seng offer that we do not expect buybacks for the next 3 quarters. That is, of course, dependent on underlying capital generation with strong profitability and currently modest loan growth via highly capital generative. Finally, let's turn to targets and guidance. In summary, the intent with which we are executing our strategy is reflected in the growth and momentum in our performance this quarter. It again shows discipline, performance and delivery. Discipline in the way we are applying strong cost control. We are on target to achieve our target of around 3% cost growth in 2025 compared to 2024 on a target basis. Our simplification saves are ahead of our previous expectation. We have announced 11 exits so far this year. We will continue to progress at pace and invest costs released from exits into priority growth areas. Performance in our earnings. Each of our four businesses is making mid-teens RoTE or better, excluding notable items. Delivery, our third quarter results show that we are creating a simple, more agile growing HSBC. Revenues grew and excluding notable items, our year-to-date 17.6% RoTE demonstrates that we are delivering against the targets we set out to you. That is why we expect 2025 RoTE, excluding notable items to be mid-teens or better. With that, I'm happy to take your questions. Operator: [Operator Instructions] Our first question today comes from Aman Rakkar at Barclays. Aman Rakkar: I wanted to ask about banking NII rather predictably, please. So just at face value, your guide does imply a decent step off in interest income in Q4. But I don't think that you really mean that. I just wanted to kind of check in around what your expectations are for net interest income in kind of Q4. I guess I'm particularly mindful of the tailwind from average HIBOR in the quarter alongside things like the structural hedge and hopefully, balance sheet momentum. My best guess is that Q4 NII is actually up Q-on-Q. But any color you can give us there in terms of what you mean and what the drivers are, would be very helpful. And then the second question is around deposits. And I'm interested in your take on the sustainability of the kind of current 5% underlying deposit growth that you're benefiting from at a system level. Obviously, Hong Kong year-to-date has been a key driver of that. And how sustainable do you think this level of pace is? And what confidence does it give you around things like net interest income growth next year? Manveen Kaur: Thank you, Aman. So firstly, on banking NII. I want to say that we are not walking back the Q4 as a starter. As the maths would show, we are saying that the banking NII would be no less than $10.6 billion. So absolutely, that's why it is $43 billion or better. And you are quite right from a balance sheet momentum, we see that continuing from the third quarter onwards, albeit there can be a few seasonality fluctuations. HIBOR is a tailwind, structural hedge is a tailwind, but we should be mindful that the U.S. dollar rate curve will be a headwind. So that's where we are on banking NII. In terms of deposits, and as you know, we are not giving a guidance on banking NII for 2026. But our deposit franchise is very strong across all markets, all currencies, all business areas. So it's not just dependent on Hong Kong dollars. But of course, we are very pleased with our preeminent position and strength in Hong Kong, which is a key driving force for the deposit growth. So very positive on deposit growth from here on as we've had before. Operator: Our next question today comes from Guy Stebbings at BNP Paribas. Guy Stebbings: The first one was back on bank NII then one on insurance. So obviously, quite a big move in the banking in our guidance. Outside of HIBOR, is it really the deposit strength that's the delta in terms of the guidance here? I mean you also referenced yield curve steepening. So I'm just wondering if you would encouraged to think about anything above and beyond the structural hedge roll when you think about yield curve steepening when it comes to NII? And then on insurance, really strong quarter, but there's quite a lot going on there, I think, so 46% growth. But you mentioned model changes, experience variance. And then if you can help quantify that, I think there might have been $150 million or so type model changes. I mean if that's the case, we're still talking about a sort of 20% clean run rate. So if you'd encourage you sort of think along those sorts of lines in the CSF now at $50 billion, it looks like a very sort of useful underpin from here? And if I can sort of briefly flip on that. There was $1.1 billion of CSM build year-to-date from economic factors. I'm just interested how much of that is sort of purely lumpy items? Some of your peers show the normalized unwind or expected return of in-force, which can be sort of quite material and a consistent tailwind to the CSM built above and beyond the new business systems. So I'm just wondering whether we should treat that $1.1 billion boosters very much one-off or an element of that is repeatable, if you like? Manveen Kaur: Okay. Great. Thank you, Guy. So firstly, in coming -- so with your question on banking NII. So it's -- our deposits strength, as I've called out, but our structural hedge is also important tailwind for us on banking NII and the stabilization of HIBOR, which impacted banking NII almost equivalently on the negative side in Q2 and Q3, is not expected for Q4 and has not shown that at all in Q4 so far. The insurance growth, you're again right, it's -- the one-offs are circa $150 million, as you've called out in terms of the change in assumptions, which is a normalized annual process that we go through. So we are very pleased with a very strong CSM and balance build, which gives the underpin in terms of the growth in this business. In terms of any one-offs or lumpy items, nothing material to note, but I'll ask our IR team to follow-up with you. You can see some of the walk on the CSM balances on Slide 21. Operator: Our next question today comes from Katherine Lei at JPMorgan. Katherine Lei: I also have a follow-up on NII and then I would like to ask about Hong Kong CRE. On the NII line, I noticed that in Hong Kong, the composite deposit rate actually comes significantly in 3Q. I think this is because that this move -- migration from time deposit to demand deposits and also that banks generally lower the time deposit rates. So into 3Q -- into the 4Q because of the rebound in -- because of the rebound in HIBOR, do we expect some of the reversal of that decline in composite deposit cost? Will that lead to some sort of risk to the banking NII? This is number one question. And then have we seen any like further migrations or what's the trends of deposits in CASA deposits? And then the next question will be in Hong Kong CRE. We noticed that the Stage III loan ratio increased from 16% to 20%, but however, if we look at the impairment charges on Hong Kong CRE, this quarter is actually lower than that of last quarter. So I would like to have some color from management say, for example, what is the latest trend in terms of the asset quality? And what is our thought behind that while the Stage III loan ratio continued to increase, but then we slow down the pace in making provision against Hong Kong CRE risk. Manveen Kaur: Thank you, Katherine. So in terms of HIBOR, it continues to be a tailwind from a deposit perspective, we see the trends from sort of prior quarters, continuing to Q4, so nothing much to call out there. Specifically, yes, there has been some small rise in time deposits, but that is all factored in terms of our banking NII guidance. And I'm speaking both from what we saw at the end of the September as well as the ongoing trend. The banking NII, as I've said earlier, in addition to HIBOR, the structural hedge also continues to be a tailwind for us. And that is the reason why we have obviously upgraded our banking NII guidance. And you know we are very conservative in HSBC. It takes a lot for us to upgrade the guidance and also to add the word or better. So take from that what you will. In terms of Hong Kong commercial real estate, I would like to take a little bit of time to share with you our reflections in the Hong Kong commercial real estate. So firstly, in terms of residential properties, the trend has stabilized and is getting stronger. The resi property index has grown 2% year-to-date. September transaction volumes were up 79% year-on-year and the valuations as well as rentals have held well. We have also seen some supportive developments in the retail sector. Hong Kong retail sales have grown since May and are up 4% year-on-year in August. It is also underpinned by increase in year-to-date tourist arrivals of 12% year-on-year. Now if I look at the office sector, of course, the office sector continues to be challenging and under pressure, and we expect that to continue through most of next year as well. However, there has been a slight uptick for take-up for grade A office space. So this is in the best locations with the best specs and that is an improvement, which we see quarter-on-quarter. As you know, our portfolio is well collateralized. This quarter, of course, there was some slippage, which is expected as part of our review in as things move through from some good to satisfactory, substandard to impaired, but there were names which you are aware of, no big surprises. And hence, the ECL pickup was relatively modest. Operator: Our next question today comes from Ben Toms at RBC. Benjamin Toms: In relation to the $1.1 billion provision in relation to Madoff litigation. [indiscernible] the ongoing cases with a cumulative total contingent liability of, I think, greater than $5 billion. Can you just provide that the case that was decided last week does not set any legal precedent for the other 4 cases? Especially the 3 cases that are in the Luxembourg courts where there's a more material exposure? And can you confirm that the litigation charge does not change your aspiration to resume the buyback at half 1 '26? And then secondly, on Slide 10, which is a really nice slide, you made 11 disposals year-to-date. It can be quite difficult sometimes to track the transactions coming out of the P&L. Is it possible to give us some idea of the annualized cumulative PBT lost as a result of these sales? Although the transactions may be RoTE positive together, it just be good to get a sense of the PBT headwind going into next year? Manveen Kaur: Okay. Thank you, Ben. So firstly, on the Madoff litigation provision charge, you can expect that we did a thorough exercise with advice from internal, external counsel as well as colleagues in the accounting function to determine what would be our best judgment on this case. In terms of the other cases, of course, we look at read across and those gets factored in. But each case has very distinct factual considerations. So there's nothing more to add on that other than what we've already called out as disclosures in the midyear. So please don't read more into that. As you know, on this case, we won on the cash side of the element of the case, but it was the securities element that we are providing against. In terms of our share buyback and announcements at the time of Hang Seng privatization offer. As you can imagine, this case has been pending for a while. We had looked at all kinds of downside scenarios. So when we came with our view of suspension of share buyback for the Hang Seng offer for up to 3 quarters, we still stand behind that number, that was all included. As you know well, we will go through a rigorous process every quarter. We continue to be highly capital generative as you've seen with also the upgrades on our guidance. And once we look at that, we see where the organic growth opportunities are. Obviously, in organic, that's where the Hang Seng privatization offer comes in and then the residual after obviously, looking at the 50% dividend payout, which is a key element of our capital distribution, then we look at share buybacks. So I don't expect any headwinds in that, the up to 3 quarters still holds. In terms of the 11 disposals, I note to your point, these are all relatively, as you can see, small disposals. What is very important is each time disposal happens and it's completed like we had the Grupo Galicia, but also as we did with the closure of the investment bank, we immediately reinvest, and the kind of areas we've invested and we've actually seen the benefits come through is we have invested in the U.K. And as you see, we have seen some loan growth in the U.K. We have invested in Wealth, both in the U.K. and Asia and the Middle East. And of course, the numbers speak for themselves. But also we take very specific opportunities where we see either growth in volumes or new customer mandates as we saw in security, services so that we can be in a prime position to take those opportunities. So that's an ongoing piece of work. We don't stop at the end of each quarter or regularly to see what we need to reinvest as soon as we have the money available, we reinvest. Operator: We will take our next question today from Joe Dickerson at Jefferies. Joseph Dickerson: I just -- it's just more of a conceptual question really in terms of the return profile of the bank. I guess why isn't this -- why isn't HSBC post-Hang Seng integration more of a high-teens bank than a mid-teens bank? I mean, clearly, the exit rate for this year on banking NII is going to be much higher, I think, than what most analysts would have thought, particularly given that the HIBOR move, you only had about 6 weeks of that embedded in Q3. So you get a full quarter of that in Q4. And effectively, you feed that through to next year. And yes, you can have lower rates, but ultimately, you probably have a structurally higher banking NII given the deposit mix. And then if you look at your invested assets, in Wealth, you clearly have a strong business there that continues to grow and the marginal ROE is much higher and throwing Hang Seng, you're 70, 80 bps just from the minority deduction. I guess why don't we get to a number that's in the high-teens here as opposed to mid-teens? Manveen Kaur: Thank you, Joe. It's a really good question. As you can imagine, we in the bank obviously reflect on this very closely as well. And you'd see that we have upgraded obviously, our guidance for this year. But let me just remind you, when we came up with our target of mid-teens RoTE for the medium term, '25, '26, '27. That's a target. There's nothing that says that you will stop working once you achieve the target. You continue to work to both achieve to target as well as to improve on the target. In terms of the target itself, we are not making any change. We will, of course, reflect on it as we go through our year-end results and go into next year and give greater details on our forward-looking guidance. But just remember, a target is something that you have to achieve or better. Target is not where you stop. Operator: Our next question today comes from Kendra Yan at CICC. Jiahui Yan: My question -- my first question is regarding to the Wealth management revenue. We've observed a very strong -- very rapid growth rate in the third quarter. Could you elaborate on the key drivers behind this performance and its sustainability? And my second question concerns is about the credit risk. In recent weeks, we've seen some risk involving the U.S. market, like the small and medium-sized banks in the U.S., they have some risk. And also the JPMorgan, they cautious the market about the credit risk during its earnings call. Although HSBC's primary client base is not in this segment, but still I'd like to ask whether HSBC has any exposure or concern in loans to nonbank financial institutions or say, those private credit corporate sector? Manveen Kaur: Thank you, Kendra. Two really good questions. So firstly, in terms of Wealth, we are very comfortable with our medium-term guidance of a double-digit growth in fees, though obviously, quarter-on-quarter, it can vary. So what has been really strong this year has been investment distribution notably in Hong Kong and strong equity volumes. As I said earlier, our insurance business has continued to grow, and that momentum is helped both in terms of existing client base, but also the new clients we are onboarding in Hong Kong, in particular. Obviously, strong equity markets have been favorable, and that becomes a lever for Wealth in terms of both the sentiment and the activity we see. But overall, not changing our guidance, but very optimistic for Wealth in future, as seen from Q3 results. And of course, be mindful there are some seasonal fluctuations, Q4 can be a little less in Q1 more, but we'll see how it progresses. So far, all on a very good trajectory. From a credit risk perspective, and as you can appreciate, I've been a Chief Risk Officer for 5 years. So indulge me, I'll share my thoughts on that with you. Private credit as a sector, of course, is going to have stronger players and weaker players. What is very key is how you do the due diligence and what are the kind of underwriting standards you apply in this new area. You are quite right. This is primarily U.S.-driven, 80% a U.S.-driven business, and our footprint in U.S. is relatively small. All I can tell you is that our direct exposure in the private credit space is single billion dollars. We apply the same strong credit underwriting principles there. So I'm very comfortable in that space. What I do want to call out is, you're right, it is always the second and the third order risk that you should be very mindful of, which are not your direct exposures, but exposures you may have through weaker counterparties. We have always taken a very conservative view in terms of our exposures to smaller banks, regional banks in the U.S. and elsewhere. We've been doing that right through the COVID period, through Russia, Ukraine, through inflation, high interest rates, so on as well as exposure to smaller hedge funds. Having said that, we closely monitor this space because you can never get too comfortable in the space, and good risk management really means looking forward to see what else can impact the overall ecosystem, which then can cause indirectly concerns to all participants. Operator: Our next question today comes from Kian Abouhossein at JPMorgan. Kian Abouhossein: Just to come back on the NDFI exposure because you mentioned private credit just now a single digit. NDFI would be similar. Clearly, you get your U.S. legal entity exposures, whether the branches, which is below $10 billion. So should we see that as overall group exposure roughly for total NDFI, can you confirm that? And then secondly, on tariff scenarios, you gave an impact scenario or sensitivity scenario of low single digit on group revenues before Clearly, things have changed, but also that was on a very specific part of your business. So I'm just trying to understand how you're thinking about impact scenario going forward in the current situation and expectation of a trade deal? And secondly, also what the impact has been so far? Manveen Kaur: So let me come through the NBF exposures. As you can appreciate, NBF is a very broad industry. My comment on our disciplined and conservative approach to weaker NBFIs holds. So from an exposure perspective, both in terms of quantum that I've called out and beyond, I am very comfortable in terms of our approach to date as well as going forward. For the tariff exposure and the impact, as you've seen, the trade segment has continued to perform well. We have the advantage that as much as there is an impact on U.S. dollar-related corridors. There are other corridors, which are growing, which we have a strong presence in, whether it's India, U.K., Middle East, Asia, Intra Asia. So that's been quite good for us. So overall, guidance that we've given on the direct impact of tariffs has not changed. And of course, we look at that as part of our downside risk scenarios even for the ECLs. From an overall view on the macro environment with all the trade deals being done, I'll just give one reflection that our probabilities that we give to our upside, downside in base case scenarios have now normalized, and that's resulted in some modest releases of ECLs because we think the situation is improving compared to where they were more weighted towards the downside scenarios in the previous quarters. Operator: [Operator Instructions] We will take our next question today from Amit Goel at Mediobanca. Amit Goel: So two questions for me. The first, just on the U.K. business. It looked like there's a bit more investment and there was also a little bit of a tick up in the impairment rate versus prior quarters. So just wanted to check what kind of investments you're making there for what kind of opportunity? And then on the impairment, what's driving that? And then the second one is just a follow-up on the Madoff litigation. I'm just kind of curious what is really the range of outcomes? I know obviously, it says that it could be materially different to the provision. There are a lot of kind of numbers in the release. So just curious how you see that range? And I was also kind of curious why a provision wasn't taken in December '24 when you had the original ruling that went against? Manveen Kaur: Okay. Thank you, Amit. So first on the U.K. business, we have continued to invest for Wealth, both in terms of hiring of RMs to grow our premier customer numbers and to sell more Wealth product for the customers who we already have very strong deposit base with. We are also investing as we've opened a new Wealth center in the U.K. in this space. And then business banking has been important for us for investing in, in terms of customer service, customer journeys, and that's primarily a liability-driven business. Having said that, we are very pleased that our corporate lending book in the U.K. has shown sustainable growth in the sectors that we have lent into, so more into the new economy sectors, into infrastructure, into social housing, into innovation and so on. So that has been really positive for us. From an impairment perspective, just to give you a context, a $300 million charge in a quarter for the U.K. is not abnormal. In prior quarters where we had to release the charge can fluctuate between $200 million to $300 million. In terms of the specifics, there were a few single name defaults, but they are all of very small amounts, so nothing notable. And no specific concentration in any sector. So I feel quite comfortable in that space. From a made-of perspective, just to be clear, we had an appeal as of December, and the outcome of the appeal was only known to us on Friday, the 24th of October, and therefore, we gave our RNS and announcement on the provision yesterday. So the provision we have given is our best judgment of likely outcomes. It's not a midpoint. It's not a broad range as people may think, but it's just our best judgment based upon advice from both internal and external legal counsel. Operator: Our next question comes from Kunpeng Ma at China Securities. Unknown Analyst: It's [ Chen Li ] from China Securities. And I also have the questions about the Wealth management because of the further interest rate cut. So will the nonresident new customers in Hong Kong will slow down or keep stable? And also, how would the migration of retail deposits into wealth management products impact our wealth management revenue? Manveen Kaur: Thank you. So on Wealth management, the growth of wealth management that we've seen comes both from new customers, but primarily from our existing customer base in Hong Kong. We do not believe that at a normalized HIBOR rate, which we've had seen for quite a long period of time despite the fluctuations we've had earlier this year that, that should have an impact on both the appetite of our customers for Wealth management products, their desire to diversify and our matched product offering, which is in a prime position to meet their needs. So I don't think there is anything more to call. Obviously, a positive stock market is good optimism factor and encourages customers to invest even more. But the baseline growth that we are seeing quarter-on-quarter is very much expected to continue. Operator: Our next question today comes from Alastair Warr at Autonomous. Alastair Warr: I just wanted to quickly return to the Hong Kong CRE question. You saw as you touched on yourself some downward migration. You said before, you've been focused particularly on the higher LTV problem loans. And those have gone up quite a bit again, third quarter versus the half year. So could you just give us a little bit more about what's going on in collateral there in the background, why the ECL would be able to come down by quite a bit in terms of, say, individual clients posting more collateral, what the values have been doing in the quarter? Manveen Kaur: So thank you for the question, Alastair. So in terms of the Hong Kong CRE, you're right, if you look at the LTV, 70% plus the number, which has grown. But in the same note, we've taken more provisions. So net of the provisions quarter-on-quarter, that number has pretty much stayed steady around the $900 million. Now in terms of valuations, of course, we look at valuations across the board. And particularly for these, we look at them on a quarterly basis as well as if there are any transactions or events that cause us to pause and look at the valuations, again, we are looking at that. The real distinction between perhaps what you saw in the middle of the year and now is that there is no individual surprise name or situation. And overall, in Hong Kong CRE, retail has got better, residential, as we know, has stabilized. And on the office space, which is challenging, we are not so far seeing improvements, which are coming from the momentum even slight as it may be in terms of A-type properties going into the rest of the office space. So hence, I think that challenge will continue. Operator: Our last question today will be from Andrew Coombs at Citi. Andrew Coombs: A couple of questions, please. Firstly, just to follow up on divestments. You've now announced Sri Lanka, you've talked about Egypt retail being up for review. I see there's no mention of Australia or Indonesia in the slides this time, whereas there was in Q2. Can you just provide us with an update there? Particularly Australia because that is a potentially more sizable divestment. And then the second question, just on the new disclosure on Slide 7 where you provided the resident versus nonresident split of the additional customer in Hong Kong. Perhaps you could just give us an idea of what the split is of the stock as well as the flow. How that changes with Hang Seng Bank if you were to combine the two, not just look at the Red brand and how the revenue margins compare between resident versus nonresident? Manveen Kaur: Thank you, Andrew. So firstly, your questions on the divestments that we had called out in terms of strategic reviews. There is no further news. They are continuing through that strategic review process. So that's why we haven't called out anything specific here. It's work in progress, no turning back as such. So the slide that we have said on the resident and nonresident, the reason for that slide is really twofold. Firstly, to explain to you that why this growth and the reasoning of how it's grown up since the borders opened up in '23 and see that trajectory, and that shows how the trajectory is continuing. However, it does show that fundamentally, the customers who are coming in to begin with are coming with small balances, and it's a deposit-led growth story. There is also an uptake on insurance, which is a preferred product. So we called that out. The other Wealth products, it takes time to convert. Overall, if you look at the premier customer base between the start and the end, it stays pretty much stable, 15% to 16%. So that's how I would look at it. And new customers coming in, in terms of a trajectory has continued pretty consistently at least through this year at 100,000 plus every quarter. It's a little higher than what it was in '24, which was a little hard to begin with from where it was in '23. So you can see that as a continuum. In terms of Hang Seng, they don't do a third quarter filing. So I don't want to say anything about that. There's no news to share. They are a listed company in their own right. But obviously, as we have talked about the opportunities for revenue growth and operating leverage as part of our offer that does call out that from a revenue perspective, particularly on Wealth products, we will have greater opportunities to leverage the Wealth products in the Red brand, for the Green brand customers, both existing and new, which continue. Operator: Thank you, Pam, and thank you all for your questions today and for joining our webinar on the 3Q results for HSBC Holdings plc. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the FTAI Aviation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alan Andreini, Head of Investor Relations. Please go ahead. Alan Andreini: Thank you, Marvin. I would like to welcome you all to the FTAI Aviation third quarter 2025 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer; Angela Nam, our Chief Financial Officer; and David Moreno, our Chief Operating Officer. We have posted an investor presentation and our press release on our website, which we encourage you to download if you have not already done so. Also, please note that this call is open to the public in listen-only mode and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today, including EBITDA. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. These statements, by their nature, are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements and to review the risk factors contained in our quarterly report filed with the SEC. Now I would like to turn the call over to Joe. Joseph Adams: Thank you, Alan. Angela will provide a detailed overview of the numbers. But first, I'd like to highlight a few key updates. #1, we passed a significant milestone this month with the successful close on the final round of equity commitments for SCI, which is strategic capital initiative #1. We've had tremendous interest from institutional investors in the partnership throughout the year. And given this high level of demand, we have upsized the total equity capital of the 2025 partnership to $2 billion. FTAI will co-invest up to approximately $380 million including the $152 million we have invested year-to-date for a 19% minority equity interest compared to our original expectation of 20%. With the $500 million increase in equity capital, our new target is now to deploy over $6 billion in capital through the 2025 partnership, up from our previous target of $4 billion and double the original goal of $3 billion we announced in December of last year when we launched SCI. This expanded partnership corresponds to a larger total portfolio size of approximately 375 aircraft with full deployment of capital now anticipated by mid-2026. Today, we now have over 190 aircraft either closed or under LOI commitment and continue to have confidence and visibility from the SCI investments team on sourcing the remaining aircraft through a combination of lessor counterparties and direct sale-leaseback transactions with airlines. The successful $6 billion launch of this partnership creates significant value and positions FTAI for sustained long-term earnings growth. The MRA agreement, which provides fixed price exchanges for all engines in the SCI portfolio establishes a multiyear contractual pipeline of demand for rebuilt engines within our Aerospace Products segment. Additionally, our role as servicer and 19% minority equity investment is expected to generate attractive returns within our Aviation Leasing segment. For our equity partners, SCI represents a compelling opportunity of enhanced returns relative to the traditional leasing business model. Through the MRE or Maintenance Repair Exchange agreement, LPs benefit from higher, more predictable cash flows combined with lower residual risk across a highly diversified lessee pool. For our airline counterparties, engine exchanges also provide clear meaningful value by eliminating the financial and operational risk and burden of managing engine shop visits. With this significant value proposition to all parties, FTAI, our equity LP partners and airlines, we see strong opportunities -- opportunity to launch additional SCI partnerships each year going forward. Turning now to Q3 results. Aerospace Products delivered another strong performance, generating $180 million in adjusted EBITDA at a 35% margin, up approximately 77% year-over-year. This positive momentum underscores the strong and accelerating global demand for prebuilt engines and modules in the CFM56 and V2500 aftermarket. We continue to see adoption of our aerospace products expanding across both new and existing customers, supplemented by our MRE agreement with the SCI. Airline operators and asset owners increasingly recognize FTAI as the most flexible, cost-efficient alternative to traditional shop visits, which are more expensive, more complex and more time-consuming than a simple and cost-effective exchange with FTAI. A recent example of this is Finnair, with whom we announced a multiyear perpetual power program. Through our scale, asset ownership and extensive in-house maintenance capabilities, FTAI's engine exchanges help Finnair manage their maintenance costs, improve reliability and ultimately deliver a better service to their passengers. The trend toward longer-term partnerships like Finnair is increasing, and we expect to announce additional new airline perpetual power programs in the future. Overall, we're confident our differentiated business model and competitive advantage places FTAI to be the long-term leader in engine aftermarket maintenance for these engine types. We're well positioned to achieve our goal of reaching 25% market share in the years ahead. Moving over to production. We refurbished 207 CFM56 modules this quarter between our 3 facilities in Montreal, Miami and Rome, an increase of 13% versus the last quarter, and we remain on track for our goal of producing 750 modules in 2025. In Montreal, our recently established training academy has also already enrolled over 100 trainees who are graduating significantly faster than traditional methods, thanks to our technology-driven approach using virtual reality and AI technology protocols. Combined with our emphasis on specialization and operational efficiencies, these initiatives are delivering measurable improvements in throughput and productivity. We remain confident in the trajectory of substantial production growth ahead as we scale the Montreal facility to capacity. In Rome, our operations continue to develop at an impressive pace. We have successfully integrated FTAI's MRE operations with the facility and technicians from Rome have conducted extensive training seminars at our Montreal Training Academy to improve skill development and optimize production efficiency. We're also actively investing in upgrading Rome's infrastructure and component repair capability, enabling heavier and more complex module repairs, which will position us to ramp production next year to double our 2025 target. We're also pleased to announce agreement to acquire ATOPS for approximately $15 million, an MRO with extensive CFM56 engine operations, strengthening our presence in Miami. This acquisition will transform our Miami MRE operations by complementing our nearby module and test cell facilities, adding expansion space and adding experienced technical staff to support increased production next year once the integration into our operation is complete. Additionally, the purchase includes an ATOPS facility in Portugal, which will serve as a logistics and field service hub in coordination with our European operations in Rome. We've also made good progress in expanding our component repair capabilities through the launch of a 50-50 joint venture called Prime Engine Accessories with Bauer, Inc. out of Bristol, Connecticut. The Bauer team brings tremendous experience and expertise in accessory test equipment. And together, we're building an industry-leading MRE repair facility for accessory parts. Once operational, which we expect by the end of this year, this facility is expected to deliver up to $75,000 in average savings per shop visit. Our initial $10 million working capital investment will enable us to redirect FTAI volumes to this facility rather than to outside vendors, driving meaningful cost efficiencies and time savings. This investment like Pacific Aero, which we did last quarter, further differentiates our offering and aids us in both expanding productivity and expanding margins. With a substantial activity in enhancing our facilities and the broader MRE ecosystem, we are now targeting growth in production next year to 1,000 CFM56 modules, an increase of 33% compared to this year's production. We also continue to expect Aerospace Products margins to grow to 40% plus next year as we optimize our parts procurement and repair strategies, including the approval of PMA Part #3, which we continue to expect approval of in the very near term. Next, let's talk about adjusted free cash flow. In the third quarter, we generated $268 million, which includes $88 million from the sale of the final 8 aircraft from the 45 aircraft seed portfolio, which were sold to SCI 1. Year-to-date, we have now generated $638 million in positive free cash flow, positioning us on track to our revised goal of $750 million for all of 2025 prior to our expanded contribution to SCI 1. As FTAI pivots to an asset-light model focused on aerospace products and strategic capital, we continue to expect substantial growth in free cash flow in the years ahead. Our primary use for available cash is to pursue investments in high-impact growth initiatives, and we're seeing today a significant number of these opportunities and possibilities. FTAI's targeted disciplined approach is to identify opportunities complementary to our MRE operations in areas where we can accelerate production, expand margins and further differentiate our product offerings to customers worldwide. We do expect surplus cash balance above these investment opportunities, and therefore, we are announcing an increase to the dividend this quarter from $0.30 per quarter to $0.35 per share. The dividend of $0.35 per share will be paid on November 19 based on a shareholder record date of November 10. This marks our 42nd dividend as a public company and our 57th consecutive dividend since inception. Additionally, we will also continue to evaluate future opportunities for capital redistribution to shareholders. And finally, we remain confident in our full year 2025 estimates of $1.25 billion to $1.3 billion business segment EBITDA for all of 2025, comprised of Aerospace Products EBITDA ranging from $650 million to $700 million and Aviation Leasing EBITDA of $600 million. Looking ahead to 2026, for Aerospace Products, we're estimating $1 billion in EBITDA for next year, which represents significant further growth versus the $650 million to $700 million this year and approximately $380 million, which we generated just recently in 2024. For Aviation Leasing, we're estimating $525 million in EBITDA in 2026, which is in line with our expected results for 2025, excluding insurance recoveries and gains on sale. Within the Leasing segment, we estimate the growth in servicing fees and our 19% minority equity investment will offset the decline in on-balance sheet leasing revenues from the seed portfolio sold to the SCI as we continue to pivot to an asset-light growth model. Overall, we now anticipate total business segment EBITDA in 2026 of $1.525 billion, up from our original estimate of $1.4 billion. Based on these projections, we expect to generate $1 billion in adjusted free cash flow next year, representing a 33% increase over the $750 million we are targeting in 2025 prior to our expanded contribution to SEI 1. With that, I'll hand it over to Angela to talk through the numbers in more detail. Eun Nam: Thank you, Joe. The key metric for us is adjusted EBITDA. We maintained our strong momentum this quarter with adjusted EBITDA of $297.4 million in Q3 2025, which is up 28% compared to $232 million in Q3 of 2024 and in line with Q2 2025 results after excluding the onetime benefits from insurance recoveries and seed portfolio gains on sale we recorded last quarter. During the third quarter, the $297.4 million EBITDA number was comprised of $180.4 million from our Aerospace Products segment, $134.4 million from our Leasing segment and a negative $17.4 million from Corporate and Other, including intersegment eliminations. As we have predicted, Aerospace EBITDA is now exceeding leasing's EBITDA. Aerospace Products had yet another great quarter with $180.4 million of EBITDA and an overall EBITDA margin of 35%, which is up 9% compared to $164.9 million in Q2 of 2025 and up 77% compared to $101.8 million in Q3 2024. We continue to see accelerated growth in adoption and usage of our aerospace products and remain focused on ramping up production in each of our facilities in Montreal, Miami and Rome as well as expanding component repair operations at our recent acquisition in California and our new joint venture launched in Connecticut. Turning now to leasing. Leasing continued to deliver strong results, posting approximately $134 million of adjusted EBITDA. For gains on sale, we continue the year with $126.8 million of asset sales proceeds, generating a 7% margin gain of $8.3 million as we closed on the final 8 aircraft of the seed portfolio to SCI 1 and divested several noncore assets, including several Pratt & Whitney 4000 and CF680 engines. Overall, the total 45 aircraft seed portfolio contributed an aggregate gains on sale of $50.1 million to 2025 leasing EBITDA at a margin of 10%. The pure leasing component of the $134 million of EBITDA came in at $122 million for Q3 versus $152 million in Q2 of 2025. But included in the $152 million last quarter was a $24 million settlement related to Russian assets written off in 2022 as well as leasing revenue generated from seed portfolio, which we have now sold to the SCI. With that, let me turn the call back over to Alan. Alan Andreini: Thank you, Angela. Marvin, you may now open the call to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: Congratulations on upsizing of SCI. It looks like great traction from the investor base and sourcing these aircraft, and I think you have now 375 aircraft target or the size of United Airlines CFM fleet. So can you maybe walk us through the financial implications of the upsizing, both from a segment EBITDA and free cash flow perspective? Alan Andreini: Sure. So I mean, the way I think about it is we're increasing the number of aircraft that we'll have in SCI by that amount of going up 33%, 250 up to 375. And we'll probably do it a little bit faster than we had expected given the pace of investing activity. So our plan has always been to do -- continue to do additional SCIs every year. So I think it really is -- the main impact is just accelerating the growth under SCI. And we originally said we expected the SCI business for FTAI to represent about 20% of the Aerospace products volume. And probably with this acceleration of the SCI fundraising, that number might go up to 25%. So 20% to 25% going forward. And the important thing is that, that business is 100% of all the engines in those partnerships are dedicated, committed to FTAI Aviation for the duration of the ownership period, which we expect will be 5 to 6 years. So it's locked in volume. We know everything you need to know about the engines we have access to. We can plan our production very efficiently. We can have engines prepositioned -- it's just a great -- there's just so many benefits that come out of us having -- being the manager of these capital pools. It also makes us look a lot bigger to the airline customers. So when you go into a visit an airline and you own a significant chunk of their fleet as a lessor, the ability to get business from them on other engine products that we offer is higher, is bigger. So it has cross-selling opportunities that also will benefit FTAI. But I think the main thing is just faster -- what we're pushing for overall as a company is really just faster market share gains in the MRE business and aerospace products. Sheila Kahyaoglu: Got it. And then maybe, if I could ask one on the ATOPS acquisition, if you could give any color on how that came about, how it adds 150 modules worth of capacity? And similar to Pacific Dynamic, if you could give color on EBITDA contribution as we think about the savings from that? David Moreno: This is David and I'll take that Sheila. So on our M&A strategy, you're really seeing 2 themes play out, right? We're doing investments to either increase margin or expand our capacity well ahead of our production needs. So ATOPS specifically is the latter, where we're increasing production well ahead of our production needs. ATOPS, as Joe mentioned earlier in the opening remarks, has 2 facilities. The main facility is in Medley, Florida, which is very close to our test cell today. So it immediately creates synergy between our test cell and the facility. It also includes 60 employees, and we have the ability to process 150 modules out of that location. So effectively, that raises our overall production at the company from 1,800 modules to 1,950. Additionally, the second facility is located in Lisbon, Portugal. That has a small team that we expect to grow. Our goal out of that facility is to run our field service, and those are the employees that actually deliver the module exchanges to customers, specifically out of Europe. And we expect to grow that facility because we see a lot of local talent that we could recruit from. So the ATOPS transaction is mostly focused on increasing capacity. We also did announce the Bauer transaction. That represents the first theme, which is we're looking to increase margin and looking to continue to vertically integrate. So that is a 50-50 joint venture, which we call Prime Engine accessories based in Bristol. It is for the engine accessories. So that includes fuel pumps, HMUs, actuator and valves. Those are the components that regulate air, fuel and oil between the engine and the aircraft. It was a repair that we were lacking that now we're able to in-source. And we're very happy to partner up with Bauer, which is a leading manufacturer of a lot of this -- the test and bench equipment. As Joe mentioned, for that investment specifically, we're expecting to capture around $75,000 of savings per shop visit. And we're expecting to do about 350 engines per year, when that starts ramping in 2026. Operator: [Operator Instructions] And our next question comes from the line of Kristine Liwag of Morgan Stanley. Kristine Liwag: I just want to follow up on SCI. I mean you guys are significant buyers of aircraft engine assets now in a time where that there still seems to be a shortage of assets out there. Can you talk about the availability of assets that you're able to buy, pricing, expected returns? I mean, ultimately, what were your conversations with investors like? What do they like about SCI? And where are areas of potential concern? Joseph Adams: Sure. I'll start on that. If you think about the market, there are 2 different sellers of these narrow-body current tech aircraft. 1 is lessors, and they own roughly half of the world's fleet. So if you think about 14,000 aircraft, that are 737NGs and A320ceo family aircraft, about 7,000 are owned by lessors. And as lessors begin to take delivery of new aircraft into their portfolios, they need to sell off older aged equipment. One of the big drivers of that is just to maintain ratings. Those rating agencies and debt investors and lenders look to that metric of average age of your portfolio as one that they track very carefully. So during COVID, I think a lot of lessors were able to hold on to assets longer. They extended the average life of their portfolio, maybe, for example, from 12 years to 14 years. But now people are saying, you got to sell the older stuff. So that portion of the market represents north of probably 1,000 aircraft a year that are sold by lessors. So we're buying from that group. And we have a very significant competitive advantage in that we can do engine exchanges. So we're an advantaged buyer, and we're one of the larger pools of capital that are focused really solely on NGs and ceos. The second source of deals is airlines. And a lot of airlines had deferred as much of the engine maintenance as possible during COVID. They've kicked the can down the road pretty far. But there are a lot of shop visits coming up in the near future and airlines are looking to do sale leasebacks, which allow them to avoid both raise capital today and avoid a shop visit. So that investment in that shop visit can be a significant amount of their capital for an airline, and they're looking at alternatives for how to do that, and we present the perfect alternative, which is an engine exchange. There's no downtime, no shop visit and they're back in service and they totally avoid the capital investment in that engine shop visit. So it's a perfect product. Industry sort of have all cited that airlines in the maintenance world, there's an increasingly heavy orientation on heavier shop visits. The core restoration is the most expensive part. There's more of that, that's going to be needed in the next few years, and that plays perfectly into our strengths because that's what we do in our facilities as we rebuild those. So that's the supply side. In terms of the investors, when we look at this compared to a traditional approach, what we show the investors that we solve problems. MRE, Maintain Repair and Exchange is a better way of doing engine maintenance. And we solve problems and save people money. And so when you solve problems and you save money, that means higher returns for investors and less risk. And it's actually a very simple explanation, people get it immediately. And who in the credit world doesn't want higher returns with lower risk. So we're finding a high receptivity to that. It's relatively -- it's predictable cash flows, relatively short duration, and it's an asset-backed structure that's uncorrelated to public markets. So it really fits in nicely into today's investment world and we have a terrific group of investors, all of whom will -- as I say, if we deliver the returns that we show people, then we'll be able to raise a lot more capital. Kristine Liwag: That's super helpful color, Joe. And maybe a follow-up question, it could be for Angela. When we look at your 19% equity portion of SCI, I mean, with the upsized amount, this is a pretty sizable leasing income. How do we think about that portion? Is that going to be reflected in the adjusted EBITDA in the leasing segment? Will this be reported in the other line? I mean, ultimately, what's the treatment of SCI in your financials? Eun Nam: Yes. On that 19% specifically, as you mentioned, yes, so it will show up in our equity pickup line. So you'll see that as the equity income line pick up for the 19% that we own from SCI's leasing returns. But in addition to that, as Joe mentioned, as we are the servicer, we'll also pick up servicing revenue, which is currently in other revenue in the Leasing segment. So that will grow with the asset base also growing. And then we'll also see in our aerospace products business, the engine exchanges that are coming through for all the engines that are coming up for exchanges with the SCI at the fixed price that we've already committed to. Joseph Adams: We will include that in adjusted EBITDA. 19% will be included in adjusted EBITDA in Leasing. Kristine Liwag: Good. Super helpful. And look, sorry, there's just so many things going on. So if I could ask a third question here. Look, I want to take a step back on the module facility. I mean, I think sometimes we kind of gloss over the success you've had in the past few years, but ultimately, you're targeting 750 modules by year-end, and you've already gotten 9% of the market share for CFM56 and V2500. I mean 5 years ago, you guys were at 0. And so this has been a fairly astronomical growth and penetration, especially for what was a financing company to really enter into the wrench-turning MRO business. I wanted to ask you, can you share with us some of the secret sauce and how you were able to execute, I mean, fairly seamlessly with this kind of volume that we've never really seen others be able to accomplish? Joseph Adams: Thank you. But I would say 2 things that we did. I would -- looking back that were important one was focus, which most people in the business tend to get into this diversification mode, where every -- they're trying to do, [indiscernible] is aircraft or a fleet of -- or different engine types and diversify often to people they equate to less risk. But we consciously decided that with these engines that this was the best opportunity in the industry and that we should do nothing else. And so I would attribute a large part was that decision to say, let's get out of the other engine types. So let's just focus on CFM56 and then ultimately V2500. So that was big. And then the second is really people. You have to attract great people and retain them. And we have a terrific team of people across the entire organization. And everybody -- it is always ultimately about that. And to do that, people have to -- you have to sell the vision and people have to buy into it. And I think people have. When you go out to meet with customers, that's kind of the biggest reinforcement is when people on the buy side are saying, I really -- I'm not that good at doing shop visits. I've had bad experiences. I want to do anything to not have to do a shop visit. So when you show up and you say, I can solve your problem. That really invigorates people because they feel like they're doing something worthwhile. Operator: Our next question comes from the line of Josh Sullivan of JonesTrading. Joshua Sullivan: Congratulations on the quarter. Just on -- a follow-up on ATOPS. $15 million in equity for $150 million -- sorry, 150 modules, fantastic trade. How do we understand the calculus in module capacity potential here? Just looking at maybe like the FTAI USA as an example. What are the gating factors to finding these relatively small investments for such a big yield on module capacity increase? Is there a lot of runway to do these relatively small investments or do we need a larger investment eventually to drive significant module capacity growth? Joseph Adams: No, I think it's there's a surprising number of what I refer to them as almost like empty buildings that once upon a time, somebody was in the business and they left their tooling and there's a building and somebody is trying to figure out what to do with it. And that's where we have a unique ability to walk in and say, well, we can deliver engines immediately. And so these opportunities do exist and as you mentioned, the math on them because there is no real vibrant business operating inside of these buildings today, we can acquire them at very low prices and fill them up. And the gating factor is the people. It's the mechanics. That's why we've been talking about the training facility in Montreal is a big initiative because we found we could hire people, but you couldn't make them productive as fast as we wanted. And sometimes you have -- people don't actually ever become productive. So you have to focus on how do you increase your yield and shorten that time to get people into a mode of being a contributor. So that's where a lot of our energy has gone. I think there are more facilities out there that we can find. There don't seem to be a shortage of that. There are people offering us deals all the time now. So it's really going to be trying to find those ones that are the easiest for us to plug-in and have the biggest available pool of mechanics in the nearby area. Joshua Sullivan: Got it. And then I guess similarly, just on the JV of Power, $75,000 cost saving per visit. Is the capability more about improving turnaround times for your customers or margin in-sourcing at FTAI? And I guess, were customers pushing you to add this capability, which might lead to additional new MRE customers. Or is it just a good asset to have in source to drive margin? Joseph Adams: There were a multiple choice question I would choose E, all of the above. I mean it's really phenomenal. These -- the engine is so complicated in some ways and so simple in other ways, but these accessories are very complicated and the know-how that people with Bauer have is phenomenal. I mean they make all the test equipment that everyone uses. And so we are partnering with them, and we've already had interactions with our engineers and their engineers and there's a sharing of experiences and we think they'll make us better, and we hope we can contribute and make them a little better. But it's really just widening, expanding circle with people that have specialized knowledge and intellectual property in areas that are incredibly expensive to fix the engine is full of them. It's every time you look at something else that is also a very high cost and very specialized knowledge. So it's -- we feel like we found a phenomenal partner that works -- the math works well for both of us. And we think it's going to continue just to -- as you said, it makes our margins better. It makes our people smarter. It shortens the turnaround time. And if you send an accessories out now to a third party, you're beholding upon that third party to get it back to you so you can keep producing. In this way, we have more control over our -- the whole process. Operator: Our next question comes from the line of Giuliano Bologna of Compass Point. Giuliano Anderes-Bologna: Congratulations on the continued great execution on all fronts here. As the first question, you mentioned several conferences and on some calls that we should think about FTAI as being in the spread business. Can you expand on that? And as it relates -- and especially as it relates to both weak and strong markets? Joseph Adams: Yes. So when you -- increasingly, we think about our business as being really in 2 different areas. 1 is the manufacturing business, where we buy, run out engines, rebuild them and sell them. And the other is the asset management business, which we raised capital and buy airplanes and that gets committed volume to FTAI aviation. So if you think about the 2 businesses that the first business is buying an engine at a price in the market and then rebuilding it and you're adding basically hours and cycles to that engine and then you're selling it for whatever people will pay for hours and cycles on a rebuild basis. And so that's the spread. It's the buy and then the build and we can control the cost of the build and then the sell. And so we're basically, like in the manufacturing business, I say, isn't that what Apple does, when they make an iPhone. They buy parts and people. They put them together and they sell it. So that's our core business. And in a soft market, you're going to buy cheaper on the runout side, and you'll maybe sell a little bit cheaper, but usually not for long. And so I think of the market is very strong. The price of rebuild engine is driven primarily by the OEM list prices on those parts because that's your alternative. And as long as people are flying aircraft, they're going to need to replace hours and cycles on those engines. And so that's what drives it. If we were to hit a period where there's excess availability of engines, and that's happened in the past and other engine types, not this one in recent history. Well, if you go back to COVID. But what happens is I would look at that as a 3- to 6-month window to accelerate market share gains for us because it always rebounds. So if there's an opportunity to pick up some inventory at a lower price or build our capacity then when it rebounds, you'll be in a better position at the end of that. And we've really done that consistently of our entire careers. Giuliano Anderes-Bologna: That's very helpful. And I appreciate that. Maybe the next question for Angela. I see the new slide on Slide 39 of the supplement data details the way that the cash flow statement would change and the reporting would change using industrial accounting versus lease accounting. Is the right way to think about it that effectively all of the gains on sale or economics that were flowing through cash spread by investing activities would effectively move into operating cash flow when you change the industrial accounting because of a more streamlined methodology there? Eun Nam: Yes. No, that's the right way to think about it. So as you mentioned, we did include the pro forma cash flow statement on Slide 39 of our supplement. And what you will see is that for 9 months ended 9/30, we would essentially be moving about $722 million in cash proceeds from our sales assets from investing to operating activities. And we've outlined the line items that was specifically changed, but you've hit on them where it would include the gain of assets and the proceeds from asset sales. And starting in third quarter, we have classified all of our inventory purchases going through operating. So you will see a transition of that aligning with our GAAP cash flow statement going forward. Operator: Our next question comes from the line of Hillary Cacanando of Deutsche Bank. Hillary Cacanando: Could you unpack the guidance for 2026? What's the upside driven by new customers, repeat customers, new contacts from Finnair or the acquisition of ATOPS and the launch of JV, et cetera. I'm assuming it's a combination of all of those, but if there's anything that stands out, if you take this kind of a detail. Joseph Adams: Well, I think if you break it into 2 parts, it's volume and margin. And so on the volume side, the MRE product, as we mentioned, continues to grow. Our production is expected to grow 33% next year. And it's a mix of new customers and existing customers. And I would also highlight that there's bigger volumes coming from existing customers. So where we've gotten the foot in the door, and we've enabled people to try the product and say, this is really how it works. It works terrifically and the experience that then we are seeing customers come back with larger orders for their engines going forward. So that's a great -- that's exactly what we have hoped would happen with those initial orders. So we're seeing continued adding new customers. We highlighted Finnair last quarter and we're seeing existing customers get bigger. On the margin side, we've indicated next year, we expect to see 40% margins, and it's really driven off of the parts acquisitions strategy that we've been implementing and repairs. And so we've highlighted that PMA is one of those contributors where we expect imminently to have approval of the third part. And then we've also had acquisitions of used serviceable material that we've been implementing. And then on the repair side, we've highlighted we have capability in Montreal, which we've been adding, but we also specifically added Pacific Aerodynamic and now Bauer. Hillary Cacanando: Great. That's really helpful. And then just on Finnair, how should we think about the margin impact or EBITDA contribution from that contract? I mean are they market rate? Or how should we think about that? David Moreno: Hi, Hillary, this is David. Yes, they're in line with a large program that we have with customers. I would say they're largely in line. But just to give you a little more flavor on the Finnair program, we're covering their entire fleet. So 36 engines and we're prepositioning engines ahead of shop visits. We effectively provide them a serviceable engine and then take the unserviceable engine back. So it provides cost savings for the airline. It lowers maintenance costs and then provides more importantly, flexibility for the airline. So we're -- as Joe mentioned earlier, we're focused with airlines on winning large programs that cover their entire maintenance, and this is an example of one that we won, and we expect others to happen soon after. Operator: Our next question comes from the line of Brian Mckenna of Citizens. Brian Mckenna: Just one more here on SCI. Have you disclosed what FTAI will be earning in terms of management and performance fees for managing the SCI vehicles. I asked this because Leasing assets have declined 30% year-to-date. And that's really just from 1 SCI vehicle that's not even fully deployed yet. So with a couple more vehicles, most or all of these assets will likely move into third-party asset management vehicles that you're managing. Maybe I spend too much time covering alternative asset managers and private credit more broadly, but it would seem like Leasing ultimately turns into an asset management business over time. And if that's the case, you have 2 high multiple earnings streams not 1. So any thoughts here would be appreciated? Joseph Adams: Yes, Brian, we think alike. I mean, it's very much what we've been -- how we've been repositioning the business. I would say that first of all, the fees are market-based. And so the asset management fee that FTAI earns is on total assets. So that would be on the $6 million. And 1% or higher is typically market for that type of structure. And then the incentive compensation will be low double digits for provided that the returns exceed a hurdle. But it's meaningful. Those numbers, as we've mentioned, we always try to have an aspiration, and we initially said, why not manage $20 billion in this way in some point. So we started out we were at $3 billion and now we're at $6 billion. So we may -- it may not be that crazy that we get there. And it is a much better way to own assets in a private capital structure, a partnership like this than in a public company. So increasingly, as I said, we look at that we have 2 businesses. 1 is a factory that makes engines and the other is an asset manager that manages the money that owns the aircraft that has the engine on it. Brian Mckenna: Got it. That's super helpful. And then maybe just a related follow-up. So it's pretty minor, but FTAI's ownership in the first vehicle, SCI vehicle came down to 19% from 20%. I mean if demand remains elevated, and it feels like it's pretty robust here, just given the upsized commitments, et cetera, I mean, is there an opportunity for your ownership or essentially the GP stake to decline to something lower than that? And then essentially, it creates an even more capital-light model. Like I'm just trying to take through that a little bit more moving forward. Joseph Adams: Yes, it's possible. I mean, we wanted to make the first -- I mean, as you can imagine, one of the concerns that investors always have is are you aligned? Do you have the same interest that I have as the manager? And obviously, that equity commitment is -- goes a long way to answering that question. But over time, if you demonstrate a track record and you show people repeatedly good numbers, everything is negotiable. Operator: And our next question comes from the line of Andre Madrid of BTIG. Edward Morgan: This is Ned Morgan on for Andre this morning. I just wanted to ask, how should we think about the pace of long-term partnerships to materialize in terms of scale, will future deals be more in line with the major U.S. carrier deal or the Finnair deal? I guess -- and also if you're able to comment on the margin impact of these partnerships, what that could look like? Joseph Adams: Well, the pace of investing, as I said, we started the first partnership really at the beginning of this year, and we have under LOI or closed about $3.5 billion, and it's next week is November, I guess. So we're -- our original thought was we could invest $4 billion in the first year. And I expect that, that will go up as we get -- we have more of a backlog than we had when we launched the first partnership. So I think the pace of investment, I'm pretty optimistic. This is a $300 billion market that we should be able to deploy that type of capital regularly. And the margins, the SCI is treated like any other third-party customer from a pricing point of view. The only difference is it's contracted. So it is 100% committed. So the margins and the profitability from SCI business for FTAI are very similar to the other third-party customers. And as I indicated next year, we expect an improvement in margins to 40% and we are seeing an increase in larger orders from existing customers. So that trend we expect to continue to get more engines from third-party customers per customer as they experience the benefits of the product. Operator: Our next question comes from the line of Brandon Oglenski of Barclays. Brandon Oglenski: Joe, I guess, can we come back to the $1 billion cash flow outlook for next year? That's pretty impressive just given where this business has been. How much should M&A factor into your outlook for capital deployment looking forward? I think you got asked the question a little bit previously, but do you see like long-term needs for build-out of incremental capacity here? Joseph Adams: Well, I would turn it around a little bit differently. We expect to continue to expand our capacity, but we're doing so in a way that's not -- it doesn't cost a lot of money. So if you look at the other -- the deals we've done in Rome or in Miami, we're adding a meaningful amount of capacity, but the total investment is like $20 million or $30 million. So that I have to apologize that it's not bigger, but it's not -- we're not trying to invest more capital. We're trying to get more capacity at the best price. So we will continue to do that. On the M&A repair side, equally, we've -- the deals we've done are fairly -- are extremely accretive and then not a lot of dollars invested to get in the business. And when we look at a part or repair activity, we try to evaluate all the different ways we could get into that. We look at the companies that could be for sale. We look at building it organically in Montreal or Rome. We look at partnering with other people. And we've done all of the above, we just try to find the best way in and the way that has the most accretive effect on our business. So we're sort of very flexible, but thus far, the opportunities we found have been extremely attractive from a return perspective and not require a lot of capital. Brandon Oglenski: Okay. I appreciate that, Joe. And Angela, can you walk us through what you think is like the right sustainable level of maintenance CapEx and maybe reinvestment in the Leasing business as we look forward? Eun Nam: Yes. As mentioned, as you can see, our maintenance CapEx this year is targeted to about $125 million. And going forward, we expect that it will maintain similar levels. And the replacement CapEx, we don't expect that to increase as well. As we've mentioned, most of all of our SCI work that we'll do with the engines are structured as exchanges, where we will give a serviceable engine and get an unserviceable engine back. So the replacement CapEx, we don't expect to be expensive going forward either. Operator: Our next question comes from the line of Ken Herbert of RBC CM. Kenneth Herbert: Joe, maybe to start, can you just provide an update on where you are on the V2500 program? I know you'd initially committed to or procured access to, I think, 100 full performance restoration shop visits? How is that going? And where are you on that pipeline? Joseph Adams: Yes. We're about halfway through. And what are we -- 2 years into it now, 2 years in of a 5-year deal and we're about halfway in terms of the volume. And it's going quite well. I mean that engine is -- it's a more expensive engine to do a performance restoration on, as we all know and by design, but the demand is incredible because of the continuing saga of the GTF grounding. So there's been a huge life extension. We have a lot of operators that are very eager to avoid the shop visit, and that's exactly what we delivered to them. So we expect that it will continue and at some point in the next couple of years, we'll talk about an extension or other alternatives, but we're going to stay in that engine. Kenneth Herbert: Okay. That's helpful. And I know the percentage of work that has flown through or the revenues within Aerospace products dedicated to the SCI has bounced around, and I can appreciate timing is a piece of that. But as you think out a couple of years and SCI subsequent versions continue to attract capital how much of the Aerospace Products segment or revenue do you think eventually is SCI related? And how do you view sort of a natural cap on that? Joseph Adams: Well, the way you have a natural cap is to continue to grow third-party business because the SCI business will grow, but we're also expanding the third-party business at really a very similar clip. So I expect it to be roughly 20% to 25% of FTAI Aviation's business for the foreseeable future. And the answer is we grow both of them. Operator: This concludes the question-and-answer session. I'll now turn it back to Alan Andreini for closing remarks. Alan Andreini: Thank you, Marvin, and thank you all for participating in today's conference call. We look forward to updating you after Q4. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Greetings, and welcome to the Avis Budget Group Third Quarter 2025 Earnings Call. [Operator Instructions] Reminder this conference is being recorded. I would now like to turn the conference over to your host, David Calabria, Treasurer and Senior Vice President, Corporate Finance. Please go ahead. David Calabria: Good morning, everyone, and thank you for joining us. On the call with me are Brian Choi, our Chief Executive Officer; and Daniel Cunha, our Chief Financial Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information, including potential future financial performance, which is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from such forward-looking statements. These risks, uncertainties and other factors are identified in our earnings release or periodic filings with the SEC and on the Investor Relations section of our website. Accordingly, forward-looking statements should not be relied upon as predictions of actual results. Any or all of these statements may prove to be inaccurate and we make no guarantees about our future performance. We undertake no obligation to update or revise any forward-looking statements. On this call, we will also discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website for definitions of these measures and reconciliations to the most comparable GAAP measures. With that, I'd like to turn the call over to Brian. Brian Choi: Thanks, David, and thank you to everyone joining us today for our third quarter earnings call. Last quarter, we took a different approach, less about line items, more about where this company is headed. The response was encouraging. Many of you appreciated the more strategic forward-looking discussion. We plan to keep building on that. That said, a few participants pointed out that we didn't actually talk about our quarterly earnings on our quarterly earnings call. Fair point. The good news is that we now have a seasoned CFO nearly 4 months in, who will walk you through some of the numbers and trends. But before Daniel gets into that, I want to highlight something that I'm proud of our revenue growth this quarter. We delivered $3.51 billion in revenue this quarter, up from $3.48 billion a year ago, a $39 million increase. Modest, yes, but meaningful. This is the first earnings call in 8 quarters where we get to say that our revenue was higher than last year's. The question you're all asking is, what's normalized EBITDA? Well, that's tough to answer until you have some stabilization on the top line and we haven't hand that post-pandemic. I believe that normalized EBITDA and more importantly, sustainable EBITDA growth cannot come from just cost-cutting alone, especially in this type of environment. You have to grow both volume and price by delivering a product that wins the customer's share of wallet. That's what makes you a relevant, viable company. Just to state the obvious, growth at any cost doesn't work for us. Cost discipline is a necessary condition. In our business, it's foundational to survival to be lean. But we can't afford to forego investments that drive productivity, elevate the customer journey, and differentiate us from the competition. It's a simple flywheel and not unique to Avis, be operationally excellent and stay disciplined on cost. That affords you the right to invest in improvements to both the customer and the employee experience, which eventually drives greater revenue and results in operating leverage if you remain disciplined on cost and on and on expense. This quarter marks the first time in quite a while that we've seen all of those elements working together at Avis. Will it be a straight line to the moon from here? No. It will be bumped along the way. But simply put, this is our game plan going forward, cost discipline to afford reinvesting in our product and people to earn revenue growth through a better customer experience. We will be consistent and disciplined in executing that model. And in the quarters ahead, I'll share more about how we're putting these words into action. But for now, I'd like to focus on that better customer experience portion and explain what that means for us today at Avis Budget Group. During my time at Avis, I've noticed that when we talk about customer experience, it often gets reduced to a handful of metrics, percentage of app bookings, number of counter bypasses or express exits and NPS scores, all important things but that's not customer experience. Customer experience is not a number. It's the overall perception a consumer has of a brand shaped by every interaction. When done exceptionally, it creates preference, loyalty and ultimately value creation. Here's the reality. Our industry hasn't done nearly enough on this front. We at Avis intend to change that. One of the core initiatives of this leadership team is a hard reset on customer experience. We try harder in our DNA. But during the survival years of COVID, we drifted from that bedrock principle. Now it's time to return to it with intent. And here's the message we're evangelizing. We are not just a rental car company. We are a service company, delivering a dependable product at the best value proposition. Let me break that down. First, we have to fully embrace that we're in the service business. We don't sell merchandise you can hold in your hand. Our product is a rental day and experience. And if our product is an experience, customers need to know what that experience will be. It has to be dependable. Think about McDonald's. Nobody would return if the drive-thru sometimes took 3 minutes and sometimes an hour. If the Big Mac came out differently each time or if you ordered a Big Mac and found chicken nuggets in the bag instead. And yet in our industry, that kind of inconsistency is commonplace. No cars available, long lines, wrong vehicle class, we've all been there. Our commitment is simple: deliver products consistent enough to build brands around. In an industry often seen as unreliable, service and dependability can be a differentiator. Customers don't just want the lowest price. They want the highest value. Great companies earn pricing power by delivering value worth paying for. That's where we intend to live. So that when corporate procurement teams choose a rental partner, they know Avis holds itself to higher vehicle standards than they require. Or when families plan annual vacations, they know budget won't waste their precious time waiting for a car. Delivering that peace of mind through a dependable product builds brand equity, trust and loyalty. All of that is within our control. It's repeatable if we impose discipline on ourselves and it's the path we've chosen. We will define and deliver a better product, exceed customer expectations and build brands that actually stand for something. The alternative path is to keep participating in the zero-sum game this industry has been playing for years, fighting over basis points of share and torching brand equity in the process. We have no interest in that. We are a service company and dependability delivered at the best value proposition is what we stand for. This is why we launched Avis First last quarter. It's that principle in action, and it's only the beginning. The same rigor around customer experience will cascade through every brand in our portfolio, Avis, Budget, Payless and beyond. The fact that we operate a family of global brands is a competitive advantage that we haven't fully leveraged. I said it on our last call but it's worth repeating. We can't keep relying on this old-school binary view of premium versus value. That framework doesn't reflect how consumers behave today. In rental car, premium brands focus on commercial accounts. Value brands chase leisure customers and the differentiation between those lanes is actually minimal. That's very different from how the airlines across their cabin classes and hotels across brands have approached segmentation. But it's not limited to the travel industry. Think about streaming, the Netflix and Spotifys of the world. They offer clearly defined segments, ad-supported, basic, standard, premium family plans. The more defined your product tiers, the better you can optimize value for both the customer and the business. We need to apply the same logic to our company. When we set out to operationalize this philosophy, we asked ourselves a simple question. What would our St. Regis look like? What would the ideal rental car experience be if you combine the agility of a digitally native company with the scale and expertise of an industry leader? The answer is Avis first. We're not tweaking at the margins with this product. We're making a statement. Avis First is the opening salvo in our broader transformation, proof to customers, employees and investors that we're serious about moving this business out of the commodity trap. It's been just 3 months since launch, and the results confirm we have real product market fit. Concierge coverage has expanded rapidly at our earliest airports in response to strong demand. We've tripled our footprint from a dozen locations at launch to 36 today. We continue to refine the technology stack to minimize delivery and collection times, proving to our airport partners that even during busy periods, curbside flow remains smooth. But here's what I'm most proud of. With Avis First, we don't have to rely on proxy metrics like NPS to gauge customer satisfaction. Every transaction comes with a direct customer rating, 0 to 5 stars. Launch to date, across thousands of rentals nationwide, Avis First renters are giving us an average of 4.9 stars. Did anyone think that was even possible in the rental car industry? Name another major consumer brand with ratings like that. It's rare. Our customers clearly see the value and are willing to pay for it. At an RPD of over $100, Avis First proves that when we deliver consistent excellence, we earn both customer satisfaction and meaningful margin expansion. It's a true win-win for the traveler and for our business. So let me level set expectations. Avis First RPD is higher but it hasn't scaled yet. Our overall Americas RPD still declined 3% this quarter, and I'm not okay with that. Given the pressures we're seeing from rising costs, everything from vehicles to wages to financing, we believe we can reach a structurally higher base RPD. We have a lot of work ahead of us to reshape how consumers perceive car rental but we now know it's possible. We simply need to be brave enough to hold ourselves to higher standards to reinvest in our people and technology and rental by rental, location by location, day by day, deliver a service that we can be proud of. Brand equity and customer experience don't show up in this year's EBITDA. They're investments, and we're making them because we believe that over time, those returns will flow to the bottom line. Jeff Bezos put it best when he wrote, take a long-term view and the interest of the customers and shareholders align. We couldn't agree more. We ask for your patience and support as we stay true to that principle. On our calls next year, I'll share more about the operational work underway and the resources we're deploying to deliver on this game plan. For now, though, I'll hand it over to Daniel, who will walk you through the highlights of this quarter's results. Daniel Cunha: Thanks, Brian, and good morning, everyone. Having now completed my first full quarter with Avis Budget Group, I'm excited to share my perspective on the company's performance and financial position. Over the past several months, I've seen firsthand the strength of our operating model, the resilience of our business and the dedication of our global team. Today, I'll cover our third quarter performance and provide updates on liquidity, capital allocation and outlook. My comments will focus on adjusted results, which are reconciled to GAAP in our press release and in the supplemental financial materials posted on our website. Overall, we're pleased with how the summer played out. As Brian mentioned, revenue grew 1% year-over-year, while consolidated adjusted EBITDA increased 11%. This adjusted EBITDA growth came despite a challenging RPD environment in the Americas and meaningful fleet recalls. Let's go through some of that in more detail. Consolidated pricing declined 1% but dynamics between our regions varied significantly. In the Americas, RPD decreased 3%, reflecting softer leisure pricing, consistent with the weak pricing we saw in the industry overall. Our mix continues to shift towards leisure, which carries higher ancillary attachment rates, a trend that partially offset the broad RPD decline. In International, RPD grew 5%, excluding exchange rate effects, driven by an intentional mix shift towards higher-margin leisure and inbound business. As Ryan mentioned last quarter, we were impacted by a large safety recall affecting vans and mini vans, vehicles that typically yield higher RPD. These units remained out of service through the quarter, reducing utilization and pressuring fleet costs. To meet peak summer demand, we retained some older vehicles we had planned to sell earlier. These carried higher depreciation expense and impacted per unit fleet cost. We had initially expected most recall-related repairs to be completed by the end of Q3. However, roughly 2/3 of those vehicles are still awaiting parts. We now expect the majority of this impact to linger through the fourth quarter and potentially into early 2026. We remain in active dialogue with our OEM partners to accelerate repairs and return these vehicles to service as quickly as possible. Speaking of OEMs, let me also provide an update on our model year 2026 buy. Our 2026 model year buy took longer to finalize than in previous years, largely due to uncertainty around tariffs. Our discussions with long-standing OEM partners were constructive. Both sides approach the table with a shared understanding this is a long game, not just about this year's purchase volume but about relationships we've built over decades through multiple economic cycles. I'm pleased to report that the vast majority of our anticipated purchases are now complete. We've achieved our goal of refreshing the fleet to deliver exceptional customer service while maintaining strict ROI discipline. Our negotiations remain outstanding, and on our next call, we'll be in a position to share more detail around our expected depreciation per unit for fiscal '26. Now let's move on to liquidity and capital allocation. As of September 30, we had available liquidity of nearly $1 billion and additional borrowing capacity of $1.9 billion in our ABS facilities. In July, we extended our $1.1 billion floating rate term loan debt, pushing the maturity out to 2032. Year-to-date, our adjusted free cash flow was negative $517 million, driven by more than $1 billion in voluntary fleet contributions. This $1 billion was funded by $500 million of our operating cash flow and $500 million of corporate debt raised in this first quarter with the intention to repay in the fourth quarter. Our long-term allocation priorities remain unchanged, which are to maintain a strong balance sheet, invest in fleet and technology modernization as well as return capital to our shareholders opportunistically. Looking ahead, we now expect our 2025 EBITDA to be toward the low end of our previously stated range. The shift in vehicle recall impact into the fourth quarter represents the single largest headwind relative to our prior outlook. We are also monitoring declines in the government business tied to the shutdown and softer commercial demand internationally. Even so, our teams remain focused on closing the year with the same discipline and execution that defined the third quarter. With that, I'll turn the call back to Brian for closing remarks. Brian Choi: Thanks, Daniel. Before we wrap up, I want to take a moment to speak directly to our people, the employees who make this company run every day everywhere around the world. The progress we've talked about today from stabilizing revenue to launching Avis First didn't happen in PowerPoint slides or in the boardroom. It happened at our rental counters in our service space and across our airports. It happened through the effort and pride of thousands of people who still believe that service matters. Over the last few years, this industry and our company have been through a lot. We had to fight for survival, and we did it by tightening our belts and pushing through uncertainty. But now we're doing more than surviving. We're building our brands back up. Every car prepared to standards, every customer greeted with respect, every rental turned around just a little faster. That's what drives our flywheel. That's how we can earn trust one customer at a time. It's the kind of excellence that can't be mandated. It has to be owned. So thank you for stepping up and owning that responsibility. Let's keep the momentum and let's keep holding ourselves and each other to the higher standard that's now defining Avis Budget Group. Okay. Operator, let's open it up for questions. Operator: [Operator Instructions] Our first question comes from the line of John Healy with Northcoast Research. John Healy: Brian, I was hoping we could talk just a little bit about the summer season. You kind of expressed some disappointment in the U.S. RPD but also in the prepared remarks, you guys seemed happy with how the summer went. So would just love to understand kind of where we're at in the kind of continuum of pricing? And what do you describe as kind of the main factor of why we saw RPD down this year, at least through the summer months? Brian Choi: John, so in terms of the RPD decline for the summer, so the 3% decline is an average for the quarter. But within the quarter, we saw a stronger performance in July and August, and then there was some softening in September. What we're seeing in the market is fairly typical seasonal behavior, higher RPD during the peak leisure demand like summer and lower RPD in shoulder periods post Labor Day. And you know as well as I do, that's normal market dynamics. But like you said, and I said on my prepared remarks, I'm not satisfied with it. Just given the inflationary pressures we're seeing, we believe that a structurally higher base RPD is justified. We're going to continue to push for that to meet our return on capital thresholds. One thing that's encouraging, though, is when you look at RPD over the past 4 quarters on a 2-year stack, you can see clear stabilization in the trend. And when we look forward to the fourth quarter, it's always harder to predict because demand is concentrated around Thanksgiving and Christmas. But that said, we're pleased with how the book of business is shaping up so far, even though it's still early. So Americas RPD down 3% in Q3. But from where we stand right now, we currently expect a modest improvement in Q4. John Healy: Got it. And then just for the finance team there, I was hoping we could get maybe just a little bit of a cliff notes way to think about kind of interest expense going into next year. Obviously, there's been some rate movements and probably some expected ones, and you guys have done some refinancings and stuff like that. I was just trying to think about how we might think about interest expense, both on the fleet and the corporate level for next year given all the movements. David Calabria: Sure, John. So from a vehicle interest standpoint, we have $3 billion of maturities, term maturities next year. Half of those were issued at lower interest rates. Half of them were at these higher interest rates. So you got to take a look at that as we're going through and as you're modeling out what size you think we are, that will have that impact. But we'll have to refinance half of it at higher rates and the other half at a little bit lower rates. On a corporate interest standpoint, I would say it's probably going to be pretty steady, right? We have some debt that we'd like to pay down at the end of this year. So if you remove that, it will be a little bit lower, and we'll go from there. But with the rates as they continue to drop, most of our debt is fixed. So you're going to have a little bit that's going to come down just based off the lower rates going forward. Operator: Our next question comes from the line of Chris Woronka with Deutsche Bank. Chris Woronka: I guess to start off, Brian or Daniel, I was hoping maybe you could at least bucket for us the recall impact, whether you want to talk about kind of Q3 or maybe full year '25 basis, just between things like RPD, volume, DOE, fleet costs because I think not everyone appreciates the fact that those are all intertwined when you have a bunch of elevated recalls. So if there's a way to kind of bucket that out in terms of overall impact, I think it would be super helpful. Daniel Cunha: Yes, Chris, thanks for the question. You can see we were able to navigate the summer a little better. And as you saw, we had a modest decline in utilization in spite of almost 5% of the Americas fleet being grounded. And we have seen a sizable impact just in cost alone, right, between depreciation, interest, shuttling, parking expenses. something closer to $60 million. In Q3, we anticipated another $40 million. We're probably going to be in the $90 million to $100 million range for the full year, right? In terms of expectations here for Q4, I think you should expect it to be a little bit more challenging for us to continue to post a high utilization for 2 reasons. One, there's a seasonal decline, typically demand go down in Q4 and with less demand, it's a little harder to optimize the fleet. And we still have a significant amount of vehicles that are waiting parts, right? So we typically have sold them by now. We're going to have to carry them for the bulk of Q4 potentially into Q1. Chris Woronka: Okay. That's very helpful. And then as a follow-up, Brian, I'm encouraged by kind of what you're saying about trying to, I guess, decommoditize this industry for your company specifically. I guess the question would be, do you expect do others need to follow your lead in terms of making their product differentiated? And do you think they will? And if they do, is that a good thing? Or do we ultimately end up back at Square One with a kind of recommoditized product? I'd love to hear your thoughts on that. Brian Choi: Yes. Listen, we think that we're going to focus on customer experience as a differentiating factor for Avis. We think the bar is fairly low, like I said, in the industry. If the rest of the industry comes and delivers a better product to the overall customer, I think that's better for the traveling consumer, and we're happy to compete on that environment. I think that the benefit you get from there is that in order to get a structurally higher RPD, you need to give the customer something a little more. And I think that we, as an industry, can hold ourselves to higher standards in terms of what's possible. So we're going to lead the charge. If others follow, we're welcome to see them do the same. Operator: Our next question comes from the line of Lizzie Dove with Goldman Sachs. Elizabeth Dove: Just to expand on Chris' question, bigger picture question here on RPD. It sounds like you do think that can be structurally higher for all the reasons that you pointed out. I guess, how long do you expect these investments to kind of take to play out? Or said differently, is the base case that RPD in the Americas can be up next year? What needs to happen from a competitive standpoint or an industry defleeting standpoint? And how do you balance that? And are you willing to kind of, I guess, give up some share at the expense of RPD? Just curious about the kind of overall algo, I suppose. Brian Choi: Yes. Lizzie, we're not going to get into guidance in terms of what RPD can be for next year. I'm going to stick to kind of what we said before that we think that RPD, just given the cost inflation that we're seeing across several major categories of our business should be going up. We are pushing for that. In terms of -- we don't manage to share over here. We manage to thresholds on return on invested capital, and that has a high pricing component to it. So we're very focused on making sure that we meet those thresholds. And the last thing that I'd point to is what I said earlier, I can't forecast for you and we're not prepared to give out guidance, like I said, for next year. But if you do look at what the 2-year stack has been doing with pricing, there is some stabilization there. So we're encouraged by that. Elizabeth Dove: Got it. That's helpful. And then I guess, like nearer term and in terms of what you have been seeing, could you maybe share how the competitive environment has been tracking? Has it been more aggressive, less aggressive than usual and how you've seen that kind of play out quarter-to-date? Brian Choi: Yes. I mean I think it's reflected in the trends we've been seeing this summer and actually all throughout the year. It's a competitive market. It always has been. I wouldn't characterize it as any more or less aggressive than in previous years. And that's why I think our focus has to be if we want to offer a differentiated product, our stand is going to be on customer experience. We're going to have to find a way to have the customer choose to come to Avis. And my hope is that by offering a better product, we can command a slightly higher price. We don't want to be subject to just always the overall market demands. We're a macroeconomic-driven business. Some of that you can avoid, but that which we can, we're going to try and put a line in the sand, offer a differentiated product and hopefully earn some pricing power for ourselves. Operator: Our next question comes from the line of Chris Stathoulopoulos with Susquehanna International Group. Christopher Stathoulopoulos: Brian, if we could dig a little bit more into demand here. I'm surprised on the September side with leisure or perhaps not though, that's usually when corporate shows up. So curious if actually did corporate show up or sort of "take the baton" from leisure there because it is a dynamic that we did see in airlines. But bigger question here, if you could want to dig into the travel segment pie here. Maybe speak to what you're seeing here with leisure and business for the fourth quarter, U.S. domestic, international inbound, cross-border, how you're thinking about the shutdown? And then next year, there are a few events here as I think about leisure and certainly my coverage here, potential catalyst, World Cup, America's 250 midterm elections. Your thoughts on how Avis is preparing or just sort of participation around that? Brian Choi: Okay. Sure, Chris. A lot to unpack here. So just jump in with a follow-up if I get one of those things. But let's start with a high-level just macro overview in terms of what we're seeing. So we're seeing a mixed environment. So demand has held up better than many expected but it's uneven across segments and geographies. So like you said, leisure remains healthy. Although it's -- that's causing peaks during the weekends. And I mentioned our government segment being affected by the shutdown. But even more than that, before that even on the commercial side of things, and I think this is something more unique to Avis is we have a large government adjacent business, like think of the defense segment. And that's been challenged all year long, and we've been seeing that in our business. From our perspective, I think the right way to navigate this environment isn't to forecast the macro. It's to stay disciplined and agile. So our cost base is lean. Our fleet planning is flexible, and we're focused on controlling what we can, which is service consistency, dependability and execution. I think those are levers that perform in any cycle and will perform in next year as well. We think that the World Cup, and we're planning for that site by site specifically. In certain areas, we think it's going to be a benefit in certain areas that are maybe more city-centric, maybe less so it would be like the Olympics. It kind of depends on the city. America 250, I think, is going to be a help. We're not exactly sure how to model that at this point but we are positioning ourselves to provide vehicles to our consumers for the great American road trips. So we think both of those will be net positive for 2026. Christopher Stathoulopoulos: Okay. And my follow-up here. So I appreciate all the commentary and the color around the customer experience. So we -- there are 2 airlines out here in the U.S. that have been working towards this more premium focus or customer-centric brand loyal focus here for 10 or so years. That's Delta and United, and I'm sure you're aware of that. It's certainly not an overnight event. I'm curious, at a high level, this is the second call that we've been talking about this. What does this plan look like sort of over the next 1, 3 and 5 years because this is going to take some time. And ultimately, of course, this has to translate into margin improvement, earnings, free cash flow, ROIC. What are some of the guardrails here? And maybe, Dan, you can speak to us at a high level. I know you're not giving guidance for the out year. But as we put all this together here, conceptually, ultimately, this has to be one about confidence and sustainability of EBITDA but at a high level here, anything we should think about with respect to equity earnings or ROIC? Brian Choi: Yes. Chris, I appreciate the question, and you're absolutely right. Investing in your brand, investing in your customer experience is not for the faint hearted, and it is a long game. Like you said, with Delta and United, it's been a 10-year journey. And -- but you can see clearly today how that's benefiting both the business and the consumer. So we take that as a framework to model after ourselves. And we're making a very deliberate shift from treating the customer experience as an abstract NPS number, which is a year-to-year thing to running it as an operating system for the company. Our Head of Americas always says you only manage what you measure, and we're doing just that and building customer service around 2 pillars, one being the customer journey and the other being customer care. So the customer journey, it comes down to 3 things. One is predictability. We're improving vehicle readiness and accuracy, and we now monitor fleet uptime and car ready status real time, day-to-day, hour by hour at our major locations. Number two is speed, and we want to be deploying technology that lets customers no matter how they book across channels to precheck before pickup for a smoother, faster experience. And the third is empowerment. That's giving our frontline teams tools to resolve issues on site in the moment instead of escalating them to the back office. So that's one side on the customer journey. On the customer care side, we're reengineering our contact center model with an AI lens. The goal is to resolve the most common post-rental issues. So billing, rental extensions, roadside assistance. We want to solve all of that faster and with less friction. And there's a lot of exciting things happening there. So I'll share progress on that in the quarters ahead. But like you said, this is going to require investments. The way that we're viewing this is that we need a baseline of EBITDA for the business. We've said this before in the past that it's going to be over $1 billion in a normalized annual environment. On top of that, so we want to maintain that base level of EBITDA. And that $1 billion isn't a target. It's a floor, which we intend to build from. And while maintaining that floor and growing that base, we want to continue to invest in the customer experience. So in our -- from our perspective, Chris, we have to do both. We're going to continue to deliver on a level of EBITDA that we think that the company is capable of and requires. And at the same time, we're going to look forward into the future and continue to invest in ourselves and providing a better experience for our customers. Operator: Our next question comes from the line of Ryan Brinkman with JPMorgan. Ryan Brinkman: I thought to ask first on fleet management, including utilization, it looks like it only fell 20 bps year-over-year in the Americas despite the massive increase in recall vehicles being held back as they await repair. So firstly, just how did you manage that better underlying result? And then secondly, what kind of utilization rate or progress in the fleet management front might we be talking about this quarter if it were not for the elevated level of industry recalls? Daniel Cunha: I'll take this one. And as you pointed out, the operations team did a fantastic job over the summer. I think one of the key levers here, repositioning the fleet, moving it where the demand was the highest to maximize utilization as much as we could was how the team got there. Brian can probably touch on a few technology investments the company has been made that has facilitated getting those results. As we pointed out, the fleet being 5% of the Americas fleet being out of service had about a 2.8 point utilization impact in Q3. So that was significant, and that was mostly offset by this great execution. Anything you want to add, Brian? Brian Choi: No, just like you said, maybe the one thing I'd add is we've been investing heavily in our field operating systems and the benefits are starting to show. It's new technology. We're excited about. We're very proud of what the teams are building but it's still in rollout mode. So we'll share more detail on that platform and results in a future call once the implementation is further along. Ryan Brinkman: Okay. That's helpful. I think I heard you say in response to an earlier question that the full year impact of the elevated level of recalls might be $90 million to EBITDA. Did I hear that right? And then my follow-up to that is, what line of sight, if any, might you have based on your conversations with your OEM partners or anything else you might be hearing as to when the level of the elevated level of recalls, it might settle down to something more normal for the industry overall or even specifically for the vehicles that are most impacting you right now? Daniel Cunha: Yes, you did hear that right. So we're estimating $90 million to $100 million of impact for the full year. This is just cost, right? There's no here on lost profits or anything else. So this is all very tangible. And as I mentioned, we still have over 2/3 of our vehicles awaiting parts. The parts are starting to come in. They are not coming in, in very large numbers. And then the repair itself is somewhat of a lengthy process, 2 to 4 hours per vehicle. So we are anticipating bleeding down the number of out-of-service vehicles through the quarter, but we're potentially going to have still some amount into Q1. So that's what we know right now. Operator: [Operator Instructions] Our next question comes from the line of Dan Levy with Barclays. Dan Levy: International is a segment that doesn't generally get a ton of airtime. I know it's the smaller of the 2 segments. But maybe you can just talk about the underlying trends in international because it has driven some of the upside versus Street expectations. I know it's gone through a bit of a transformation here. You've done some restructuring. Maybe you could just talk about the underlying trends in international, what the runway is on some of the increasing RPD, which we saw in the third quarter. Brian Choi: Dan, thanks for the question. So a few things are happening in International. First, I want to acknowledge that the leadership team there is really hitting its stride. So Anna, our President of International; and James, our Chief Commercial Officer in the International segment. They're about a year in, and the organizational and strategic changes they've implemented are really coming together. So we've taken a very deliberate approach to shifting our business mix internationally. This involves increasing exposure to higher RPD leisure demand and exiting some local market monthly business that didn't meet our return requirements. And you're seeing that reflected in the higher RPD and lower volume numbers that we're reporting, and that's by design. And so like you pointed out, this top line mix shift, combined with disciplined cost management, that's what's really driving the substantial EBITDA increase, which is up nearly 40% year-over-year. Are we going to expect that level of increase next year? No, I think we're not going to be catering at those levels. But the overall strategy and trend will remain where we're going to be more deliberate about the leisure business that we take and pruning those -- that business that doesn't really make sense for us. What I would say, Dan, as you rightly pointed out, no other rental car company has the global reach that we do. And historically, given the relative size and where HQ sits, ABG has been Americas focused but we're really changing that mindset today. So we're embracing the fact that we're a truly global company, and you'll see increased focus and investment in our international business going forward. Dan Levy: Great. My second question is on DPU trends and overall depreciation. And I know you'll give us an outlook early next year. But maybe you could just talk within the quarter, to what extent the recalls were weighing on the total DPU. And into next year, a, I know you said that you'll give us commentary on the cap costs, but if there are any early reads. But b, given you just did a big fleet refresh for the model year '25, shouldn't we view that as really the driving factor on your DPU next year and the broader residuals because you've already done the lion's share work and you'll have proportionately lower refresh next year? Brian Choi: So I'll start and then maybe, Daniel, you can chime in. So broadly speaking, I agree with your assessment, Dan. So if you take what's happened this year, so the impact of tariffs certainly provided some uplift to the used car market this year. And what we're seeing is pretty consistent with what the Manheim Value Index -- Used Vehicle Value Index is showing. So there was a bump during the April tax refund season and values have remained relatively stable since. But in the first half of October, we're seeing a bit of giveback, which follows normal seasonal trends. You know as well as I do that by the fourth quarter, when next year's models like really hit the market, it's typical to see a sequential decline in the used car market. The good news is, yes, we did plan for that. So like you said, we've already disposed of a substantial portion of our model year '23 and '24 vehicles throughout the year. We still do have some that we're going to sell in the fourth quarter and in the first quarter of next year. But our fleet mix is shifting towards the newer model year '25 cohort as planned. And like you said, we do think that, that should be the primary driver next year of where depreciation shakes out. So I can't really give you too much commentary around the model year '26 buy. We're still in negotiations with a few of our larger OEM partners. But generally speaking, we think that the model year '26 is going to look pretty similar to the model year '25. That's what we've seen in the deals that we've closed. So we do think that model -- next year, it will be more specifically model year '25, model year '26 driven, and we don't think that we need to rely on kind of the macro shifts we see in the overall industry. Daniel Cunha: Maybe the only color I would add that those macro changes in fleet mix were mostly like Brian shared. But to recall, because those vehicles tend to be larger because they tend to carry higher DPU in the $400 to $500 range per unit in 4% to 5% depending on what fleet you're looking at and what quarter was around that had close to $20 impact on our per unit in the quarter, and we expect it to continue in Q4. Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session and we will conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.
Operator: Good day and thank you for standing by. Welcome to the Nautilus Biotechnology Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ji-Yon Yi, Investor Relations. Please go ahead. Ji-Yon Yi: Thank you. Earlier today, Nautilus released financial results for the quarter ended September 30, 2025. If you haven't received this news release or if you'd like to be added to the company's distribution list, please send an e-mail to investorrelations@nautilus.bio. Joining me today from Nautilus are Sujal Patel, Co-Founder and CEO; Parag Malik, Co-Founder and Chief Scientist; Ken Suzuki, Chief Marketing Officer; and Anna Mowry, Chief Financial Officer. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking within the meaning of the federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled Forward-Looking Statements in the press release Nautilus issued today. Except as required by law, Nautilus disclaims any intention or obligation to update or revise any financial or product pipeline projections or other forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast on October 28, 2025. With that, I'll turn the call over to Sujal. Sujal Patel: Thanks, Ji-Yon, and thank you all for joining us. Q3 was another important quarter for Nautilus. We made meaningful progress across our scientific platform and operational priorities as we continue our disciplined path toward commercialization. Last quarter, we published a preprint showcasing our iterative mapping method and demonstrating the power of our platform to measure proteoforms, distinct forms of proteins with unprecedented resolution. That manuscript was accompanied by an announcement of Tau focused collaborations with investigators from the Neuro Stem Cell Institute and with Joel Blanchard's lab at Mount Sinai Medical Center. These collaborators were central to generating the intriguing biological data shared in that manuscript. In addition to these partnerships, I'd like to call attention to 2 other exciting partners. The first is the Allen Institute for Brain Science. As highlighted in our July 30 press release, that collaboration aims to examine how Tau proteoforms vary across brain regions as a function of disease severity. Ultimately, such projects may enable the use of proteoform biomarkers to predict the course of Alzheimer's disease. We're excited to have already begun generating the first data sets from their samples. One other key collaborator is the Buck Institute for Research on Aging. As a world leader in aging research, they have deep experience in Alzheimer's disease research and are excited to examine how Tau proteoforms contribute to disease progression and therapeutic efficacy. I'm particularly thrilled to share that Dr. Birgit Schilling, one of our collaborators at the Buck Institute, will be presenting her results at the Human Proteome Organization's World HUPO Conference in November marking the first public presentation of externally generated Tau data measured on the Nautilus platform. In addition to being an acclaimed aging researcher, she is also an eminent proteomics KOL and recently served as President of U.S. HUPO. Our session with Birgit at World HUPO will highlight both key technical aspects of the Tau assay such as reproducibility and also intriguing biological findings that were only possible using the Nautilus platform. I'd like to call attention to the fact that the results in our manuscript and the results that Birgit will be sharing are based on real-world biological samples, not only model samples composed of recombinant proteins or peptide. We believe our presentation at HUPO will not only validate the technical readiness of our assay, but will also underscore the potential for our platform to drive meaningful biological insight, something we consistently hear is a top priority for researchers in this space. We view the results from our early partnerships as clearly demonstrating our platform's unique ability to measure proteoforms at an unprecedented level of precision and resolution. This is especially important for targets like Tau where the combination of isoforms and post-translational modifications have a profound impact on disease progression. We expect that the Nautilus platform's unique ability to quantify complex mixtures of proteoforms at the single molecule level will prove an important tool for driving biological insight. Collaborations with institutions like the Buck and the Allen institutes are emblematic of the caliber of researchers and institutions that are now engaging with Nautilus. This quarter, our pipeline of potential collaborators has expanded significantly including academic centers, nonprofit institutes and biopharma companies. These researchers are eager to explore how Nautilus can bring new clarity to neurodegenerative disease biology and also eager to explore proteoform-based precision biomarkers for Alzheimer's disease and related tauopathies. These researchers also understand that studying Tau requires resolution beyond what traditional platforms can offer and recognize that our approach is uniquely suited to identify the modified forms of Tau that may drive disease progression. We're also seeing increased interest from additional partners eager to expand into new disease areas and novel proteoform targets reflecting both the maturity of our platform and the unique insights it enables. The conversations we're having are with premier researchers and institutions at the forefront of translating molecular insights into impactful diagnostic and therapeutic advances. The growing engagement we're seeing reinforces our belief that Nautilus is becoming a key enabling technology for the next generation of biological discovery. We anticipate that several of these discussions will lead to active engagements when we launch our early access program in the first half of 2026. Initially, customers will gain streamlined access to our Tau proteoform assay. Select partners will be able to submit samples, receive data and provide feedback, similar to our current engagement with the Allen Institute. These early engagements will primarily focus on generating high-quality data and validating our platform. We expect only limited revenue in the near term. However, this validation is essential for building momentum and opening broader commercial opportunities, including the expansion of our assay for other proteoforms of interest. Over time, we'll expand our early access to offer support for both targeted proteoform assays and for broadscale proteomic studies. Our aim is to make each early engagement an opportunity to build credibility, momentum and operational readiness ahead of our commercial launch. On the technology front, we made steady progress in Q3 transitioning to our new broadscale assay configuration to better align with our growing probe library and improve platform performance. Early results have been promising and we expect this configuration to enable our broad-scale commercial launch in late 2026. Briefly, assay configuration change efforts were focused on better aligning assay design with the characteristics of our expanding probe library, improving probe yield and overall platform performance. One of the most significant areas of change was in the flow cell and associated assay reagents. Together, these changes were designed to reduce technical risk and enable higher performance as we scale toward a more comprehensive view of the proteome. A key milestone of our broadscale assay configuration change was achieved in Q3 demonstrating that affinity reagent probes previously incompatible with our old assay configuration are compatible with the new configuration. In Q4 of this year and Q1 of 2026, we plan to test the whole probe library with this new configuration to better understand performance and finalize the steps needed for broadscale's launch. We're confident that broadscale will drive long-term scalability and value for Nautilus. Lastly, we continue to be highly intentional in how we invest our resources. In Q3, we reduced expenses quarter-over-quarter, reflecting a more focused operating model aligned with our top priorities. This operational discipline is an important part of how we're extending our runway even as we move closer to commercialization. Taken together, the progress we've made in Q3 moves us closer to realizing the promise of single molecule proteomics, a future where researchers can decode biology with a level of precision and resolution that is simply not possible today. We're proud of the scientific and technical advances made this quarter and grateful to our team and collaborators who continue to push the boundaries of what's possible. As always, I want to thank our scientific and engineering teams for their continued dedication. The work they're doing is not only technically challenging, it's foundational to the future of proteomics. With that, I'll hand the call over to Ken, our Chief Marketing Officer, to share key insights from our recent voice of the customer and market research work. Ken? Kentaro Suzuki: Thanks, Sujal, and good morning, everyone. Over the past several months, our teams have been focused on sharpening our marketing strategy by developing a deep understanding of our customers, their challenges with existing technologies, goals for next generation solutions and how the Nautilus platform can uniquely address their needs. In the third quarter, we completed an extensive market study involving more than 250 decision-makers across North America and Europe spanning academic institutions, pharma, biopharma and leading proteomics organizations. These participants represent our core target segments and are highly familiar with both mass spectrometry and affinity-based technologies. Through a combination of detailed qualitative [ in-reviews ] and deep quantitative analysis, we built a rigorous and data-rich view of our market opportunity. Three clear themes emerged. First, customers viewed the Nautilus platform as uniquely differentiated from current mass spectrometry and affinity-based technologies. They highlighted our iterative mapping approach as delivering an unmatched combination of protein coverage, reproducibility and sensitivity. In particular, customers were most drawn to our ability to achieve both broad proteome coverage and deep single molecule proteoform level resolution, a capability that only iterative mapping can deliver. Our competitive differentiation is stronger than ever. As a former General Manager of mass spectrometry at Agilent, I found it especially validating when 1 customer commented that the Nautilus platform "has the potential to replace a major portion of mass spectrometry and proteomics". Second, our research confirmed that customers both expect and are willing to pay a premium for our solution. The ability of iterative mapping to provide broad scale and proteoform level insights drove particularly strong enthusiasm and willingness to invest in our solution. Combined with the platform's reproducibility, sensitivity and simple AI-ready output; customers valued our instrument on par with high-end mass spectrometry systems, a strong endorsement in an already premium segment. Finally, we heard a clear and consistent message of eagerness to engage with Nautilus. Many customers described current technologies as limiting, constrained in performance, lacking cross-platform agreement and often complex to use. They are actively seeking a new class of measurement technology to complement or replace their existing tool sets. After decades of experience introducing new products, I'm encouraged by the strength of this product market fit and by our customers' enthusiasm to begin evaluating the Nautilus platform. We are channeling this confidence as we plan for our early access program beginning with the Tau proteoform assay in the first half of 2026. I look forward to continue sharing our progress as we transition towards our commercial phase. Next, I'll hand over the call to Anna to walk through our financials. Anna? Anna Mowry: Thanks, Ken. For the third quarter of 2025, total operating expenses were $15.5 million, down from $19.1 million in the same quarter of 2024. This 19% year-over-year decrease reflects our continued focus on expense management, operating efficiency and lower development costs overall. Our stock-based compensation expense also declined meaningfully year-over-year. Research and development expenses for the third quarter of 2025 were $9.6 million, down from $12.3 million a year ago. This year-over-year reduction was driven by lower development cost as well as improved operating efficiency in personnel, laboratory and services spend. General and administrative expenses were $5.9 million, down from $6.8 million in Q3 2024 driven largely by reduced stock compensation expense. Net loss for the quarter was $13.6 million compared to $16.4 million in the prior year period. We ended the quarter with $168.5 million in cash, cash equivalents and investments. Cash burn in Q3 was $11.0 million reflecting the benefit of lower operating expenses. We continue to project a cash runway extending through 2027 providing ample time to advance platform development and early-stage commercial activities. Looking ahead, we anticipate that total operating expenses for the full year 2025 will come in below what we saw over the past 2 years. With that being said, we expect Q3 will be a low point in our spending and future quarters will increase as product and market development activities ramp up. As for our Tau early access program, the first customer engagements are likely to be with academic KOLs that need access to the platform and initial data sets in order to support their grant applications. We believe these first internally funded services engagements will lead to revenue engagements over time, but more importantly, publications, additional grant applications and potentially instrument orders. We are excited by the shift towards commercially oriented activities, but we don't expect meaningful services revenue from these engagements in 2026. Back to you, Sujal. Sujal Patel: Thanks, Anna. As you've heard throughout today's call, Q3 was a quarter of continued execution and meaningful progress for Nautilus. We advanced our Tau proteoform assay, built momentum with prospective collaborators and are on track to launch our early access program in the first half of 2026 beginning with Tau. We're preparing to showcase externally generated Tau data at World HUPO in November, a milestone that reflects years of investment in scientific and technical innovation. As demonstrated by our excitement and ability to expand our collaborative work, Nautilus' doors are open today for partners who are interested in funding the development of new proteoform assays and shaping the future of proteomics. We also made steady progress towards the new broadscale assay configuration that will support our commercial launch. In addition, our disciplined operations and spending have us ending the quarter with a strong balance sheet and clear line of sight to our strategic goals. As we close, I want to step back and emphasize something fundamental. Our platform is as disruptive today as it was when we first set out to build it and now we have even more external validation to back that up. Iterative mapping represents a completely new class of measurement, different from anything else in the market, delivering proteome and proteoform insights that existing technologies simply cannot match. Our extensive market research and voice of the customer work encompassing more than 250 interviews with representative customer groups makes it clear that the market recognizes our differentiation. Customers consistently affirm that what we're building will reshape the landscape. This strong validation gives us tremendous confidence in both our technology and the commercial opportunity ahead. I'm incredibly proud of what the team has accomplished; the science we're advancing, the platform we're building and the opportunities ahead. Our foundation is strong and our mission has never been more focused. Thank you again for joining us today. With that, we'll open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from Dan Brennan with TD Cowen. William Ruby: This is William Ruby on for Dan Brennan. Just a couple of questions. First, just wondering how we should think about the level of OpEx investment you'll need to make heading into the launch next year. And I know you touched on it a good amount on the call, but if you could just go into a little bit more detail on the funnel that you're building out of early access coming into next year. Anna Mowry: William, this is Anna. I can speak to the first one. From an OpEx standpoint, we're, as I said in the prepared remarks, expecting that from our low point here in Q3 we are anticipating that spend will increase as we get closer to commercialization. As you might expect, I don't have an outlook yet for 2026, but you can extrapolate from our guidance that we have cash through 2027 and I would anticipate some steady step-up between now and the end of 2027. Sujal Patel: And William, this is Sujal. Let me take the second half of your question, which is the funnel. So let me first sort of describe just in a little more detail how we would expect next year to unfold. And so what we talked about on the script was that we intend to launch our early access program in the first half initially with Tau and our proteoform panel with Tau and then in the second half, we'll expand that early access to include our broadscale proteomic capabilities. And that sort of setup will lead to a launch of each of those things after that early access period, that official launch. And we continue to state that by the end of 2026, we expect a launch of our broadscale capabilities. And that early access and then launch model is a model that we'll use for subsequent proteoforms and subsequent versions of broadscale and so forth as we move beyond into future years. So in terms of the pipeline build, pipeline build is occurring for both of those different products and use cases, proteoform starting with Tau and with broadscale. With Tau, obviously the pipeline build in earnest really just began as we released that preprint last quarter meaning Q2 of 2025 and started to talk to partners about the capabilities of our product. And as we mentioned in the prepared remarks, we intend to at the beginning or the first half of 2026 launch early access in a [ funnel ] manner for those Tau capabilities. And so with that coming, we're in the process of sort of finalizing our product verification and validation. We're in the process of talking to and building the top of the funnel for those Tau capabilities. And we're starting to think through the first commercial hires, which we would expect the first -- we have business development and scientific affairs types of headcount today, but we would expect that in the first quarter we would make our first official hire on the direct sales side as well to build capacity for the Tau services initially and then broadscale as we move on to the second half of the year. Operator: Thank you. This concludes today's question-and-answer session and today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to the Dorman Products Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'd now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead. Alexander Whitelam: Thank you. Good morning, everyone. Welcome to Dorman's Third Quarter 2025 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chief Executive Officer; and David Hession, Dorman's Chief Financial Officer. Kevin will provide a quick overview, along with an update on each of our business segments and their respective markets. Then David will review the consolidated results and our guidance before turning it back over to Kevin for closing remarks. After that, we'll open the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which are available on the Investor Relations portion of our website at dormanproducts.com. Before we begin, I'd like to remind everyone that our prepared remarks, earnings release and investor presentation include forward-looking statements within the meaning of federal securities laws. We advise listeners to review the risk factors and cautionary statements in our most recent 10-Q, 10-K and earnings release for important material assumptions, expectations and factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. We'll also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our earnings release and in the appendix to this earnings call presentation, both of which can be found in the Investor Relations section of Dorman's website. Finally, during the Q&A portion of today's call, we ask that participants limit themselves to 1 question with 1 follow-up and to rejoin the queue if they have additional questions. And with that, I'll turn the call over to Kevin. Kevin Olsen: Thanks, Alex. Good morning, and thank you for joining our third quarter 2025 earnings call. As Alex mentioned, I'll start with a high-level review of the results along with an update on our segments and market observations for each before turning it over to David. Let me start on Slide 3. First, I'd like to thank our contributors for all their hard work and dedication this year, which allowed us to execute exceptionally well and deliver for our customers. In the third quarter, we drove strong top and bottom line growth. Consolidated net sales were $544 million for Q3, up 7.9% year-over-year. This growth was primarily driven by tariff-related pricing actions that took effect in the quarter, which we covered in detail during our last earnings call. Additionally, we saw solid POS growth in the quarter which was up mid-single digits year-over-year. As we expected and discussed previously, we delivered strong margin growth in the quarter. This was largely driven by the timing dynamics of pricing and costs associated with tariffs. As a reminder, while the majority of our price increase went into effect in the third quarter, the inventory that we purchased in Q2 comes with higher tariff-related costs that will begin to impact our income statement in the fourth quarter of this year. As a result, we expect a lower gross margin in Q4 compared to Q3. Adjusted operating margin for Q3 2025 was 20.5%, a 340 basis point increase over last year's third quarter. Adjusted diluted EPS grew 34% year-over-year to $2.62 which, again, was driven by our growth, margin expansion and the timing dynamics of pricing and costs related to tariffs. Finally, operating cash flow was $12 million, and free cash flow was $2 million in the quarter. While this is a slight improvement over Q2, our cash flow continues to be impacted by higher tariff costs. David will discuss this in more detail shortly. So while there were some timing subtleties within the quarter, we're pleased with our performance and expect to continue delivering strong year-over-year growth for our shareholders. Next, I'll provide our results for each of our business segments. I'll also dive into our market observations and share some highlights for each. Starting on Slide 4, our Light Duty business had another strong quarter with net sales increasing 9% year-over-year in Q3. The growth was primarily driven by tariff-related pricing actions that took effect in the third quarter. POS more closely aligned with our net sales up mid-single digits year-over-year. And similar to last quarter, we're not seeing any significant oversupply in the inventory data we have from our largest customers. On the margin front, Light Duty delivered a 470 basis point gain in operating margin, driven primarily by tariff-related pricing as well as the impact of our supplier diversification initiatives. Looking across the Light Duty market, macro trends continue to remain positive. The vehicle miles traveled increasing year-over-year. However, uncertainty in the market related to tariffs and trade dynamics continues to persist. We're closely monitoring the environment and continue to work with our suppliers and customers as part of our overall tariff mitigation strategy. And while it appears that inflationary pricing has started to reach our end users, we remain confident in our ability to drive long-term growth as nondiscretionary repair parts have historically performed well through various economic cycles. We also thought it would be helpful to provide some business insights and highlight new products and updates across our segments. In the Light Duty business, we recently launched an electronic power steering rack for specific Ram truck models from 2013 to 2024. This is a first aftermarket part and the only available option in the independent aftermarket that is manufactured new. This product is a great example of our capabilities within complex electronics given the functionality and integration of various systems throughout the vehicle. The EPS rack is an OE fixed component with significant upgrades compared to the original manufacturers part and designed to ensure a long, reliable service life. Electronics within have been redesigned with added service protection and an improved layout to reduce heat and electrical interference. Additionally, protective coatings have been applied to resist contamination from water, salt dust and other harmful contaminants. It has also been designed for simple, seamless installation with no dealer programming needed. This product is a culmination of extensive complex cross-functional work with our engineering teams. So I'd like to congratulate everyone involved. Next, let me turn to Slide 5 for updates on our Heavy Duty business. Net sales grew 6% year-over-year in the third quarter. While market conditions continue to pressure the segment, the team executed on the pricing front and drove volume through new business wins. The benefit of higher net sales growth in the quarter was offset by lower manufacturing productivity, impacting margins, which were flat year-over-year. Longer term, we remain focused on driving a mid-teens operating margin profile for the Heavy Duty segment. Digging more into the broader trucking and freight market, it remains difficult to predict an inflection point. While we're pleased with the recent net sales growth over the last 2 quarters, we continue to see mixed signals across our customer channels, but we're hopeful that the worst is behind us, we'll see a turn in the coming quarters. Despite the headwinds, we continue to execute key initiatives to best position the business for the eventual rebound of the trucking and freight market. As an example, we just launched our redesigned website with an improved e-commerce platform that helps customers identify the right parts for the right applications and get our products to the right locations on time. We expect a new site, which has been designed with the next generation of heavy-duty repair professionals in mind will enable us to scale and be even more competitive with the help of its user-friendly interface and modernize look and feel. On Slide 6, I'll provide an overview of the Specialty Vehicle segment. Top line growth was relatively flat year-over-year with continued market pressures in the quarter, including weak consumer sentiment from tariffs and interest rates remaining at higher levels. Operating margin was impacted by lower manufacturing productivity in the quarter as we proactively reduced production in our Chinese manufacturing facility in Q1 following a ramp-up of production in Q4 of 2024 to get ahead of tariffs. Long term, we are targeting a high-teens margin profile for the business. We remain focused on our innovative strategy and continuing to develop new products for both the current park and next-generation vehicles. Despite the challenging consumer sentiment during the quarter, UTV and ATV ridership remains strong, which is a continuation of the positive trends we've seen in prior quarters. We expect that as the economy continues to stabilize and interest rates further decline, riders will increase their spending on their vehicles. OEs have also commented that machine inventory is starting to normalize, which should bring stability to the end market. Speaking of new products, I wanted to highlight the 4-inch long travel kit that we introduced for Polaris XD 1500 models. This bundle widens the vehicle's wheelbase by a total of 8 inches, providing more stability and control on rough terrain. The kit is designed for more of a utility application, allowing operators to improve the rides that fit the work they do on a daily basis. This is a great example of a solution design for those utilizing their vehicles for work, not just play. We continue to expand our portfolio of nondiscretionary utility-focused products to broaden our reach with new users. With that, I'll turn it over to David to cover our results in more detail. David? David Hession: Thanks, Kevin. Let me start with our consolidated results for the third quarter on Slide 7. Net sales in the third quarter were $544 million, up 7.9% year-over-year. As Kevin outlined, our net sales growth was driven primarily by tariff-related pricing initiatives. Positive macro trends in our Light Duty business and the success of our innovation strategy across all 3 segments remain foundational to the strong momentum of the overall business. Adjusted gross margin for the quarter was 44.4%, a 390 basis point increase compared to last year's third quarter. As Kevin mentioned, this margin expansion was driven by the timing dynamics of when price and costs related to tariffs are recognized in our income statement. Additionally, our supplier diversification efforts contributed to margin improvement in the quarter. We remain on track to reach our goal of reducing our overall supply from China to 30% to 40% as we exit 2025. Adjusted SG&A expense as a percentage of net sales was 23.9%, up 50 basis points compared to the same period last year. Adjusted operating income was $111 million for the third quarter, up 30% compared to last year's third quarter. Adjusted operating margin expanded 340 basis points to 20.5%, primarily from the improvement in gross margin I just discussed. Finally, adjusted diluted EPS in the third quarter was $2.62, a 34% increase year-over-year. In addition to the increase in operating income, lower interest expense positively impacted our adjusted diluted EPS growth, offsetting a higher comparable effective tax rate, given favorable discrete items in last year's third quarter. Turning to our cash flow on Slide 8. For the third quarter, our cash flow was impacted by the higher cost inventory, affected by tariffs. This led to operating cash flow of $12 million and free cash flow of $2 million in the quarter, which was a decline from last year, but a modest improvement from last quarter. We expect that free cash flow will rebound in the coming quarters. With tariff and trade uncertainty impacting parts of our business, we maintained our pause on share repurchases through the quarter. As always, we'll continue to monitor market conditions, along with the cash needs of the business and opportunistically repurchase shares to return capital to our shareholders as part of our broader capital allocation strategy, which remains unchanged. We also believe we remain well positioned to fund our strategic growth initiatives, given our strong liquidity position, which I'll cover on the next slide. Slide 9 reiterates what we've been saying for a number of quarters now. Our asset-light nature and long track record of generating strong levels of cash flow have enabled the liquidity position and balance sheet capacity that allow us to manage higher cost inventory while still investing in strategic growth opportunities. As you can see, at the end of the quarter, net debt was $401 million and our net leverage ratio was 0.92x adjusted EBITDA. Additionally, our total liquidity was $654 million at the end of September, up from $642 million at the end of 2024. Again, we expect the strength of our balance sheet will stand as a competitive advantage and a key driver of our success going forward. Finally, let me discuss our guidance for 2025 on Slide 10. With our strong performance through the first 9 months, we have reaffirmed our net sales and EPS guidance ranges for the year. Our guidance for 2025 is based on the tariffs that are currently enacted. Should any material changes to tariffs or trade disruptions significantly impact our business or alter our expectations, we may look to update our guidance prior to year-end. Starting with top line. We expect net sales growth to be in the range of 7% to 9% over 2024. And for adjusted diluted EPS, we expect a range of $8.60 to $8.90 or an increase of 21% to 25% compared to last year. Finally, for modeling purposes and additional clarity on the final quarter of the year, we expect that Q4 will see a reduced gross margin percentage compared to this quarter as tariffs begin to impact our cost of goods sold. Also, we expect the full year tax rate will land at approximately 23.5%. With that, I'll now turn it back over to Kevin to conclude. Kevin? Kevin Olsen: Thanks, David. Just to finish up, I'd like to commend the team on delivering strong top and bottom line performance in the quarter and year-to-date. Our results reflect the hard work and dedication of our contributors all around the globe who are managing exceptionally well in the dynamic economic environment. Our business is well positioned to deliver strong performance in 2025 and we're pleased with the opportunities ahead. With that, I would now like to open the call up for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Scott Stember of ROTH Capital. Scott Stember: Last week, one of your bigger customers commented that they were starting to see some elasticity issues, notably on the DIY side. Are you seeing any change in behavior, whether it's DIY or DIFM related to elasticity? Or is it too soon to say at this point? Kevin Olsen: Scott, it's Kevin. Good question. Look, I'm not going to comment on what our customers say. But I will tell you how we're looking at it, really solid quarter, growth up 9% in Light Duty, 8% overall. POS was solid in the quarter. New continues to be a strong driver of growth. Macros continue to look solid in terms of the sweet spot of the vehicle, miles, age of the vehicle. But keep in mind that our portfolio differs quite a bit from a lot of our customers and a lot of our other folks in the supplier community, we have a heavy nondiscretionary majority of our parts. So either your car is not going to run or it's not going to run safely. So we have some benchmarks as well. We went through the 2018 and '19 time frame where we had some inflation. We went through the time period of 2023 and -- 2022, '23 when we had that inflationary period, and we raised prices and what we generally see over time is our portfolio is generally inelastic and performs pretty well because of the nondiscretionary nature of it. Scott Stember: Got it. And then last question before I jump back into the queue on margins. Typically, when price increases go through to cover tariffs, usually there's some optical distortion on the margin line. But it seems that you guys at least recently have been comfortable that you could keep margins relatively flat because of some of the self-help stuff that you have going on. Is that narrative still in play? And just trying to get a sense of where we should look at margins as we go forward in the next couple of quarters. Kevin Olsen: Yes. Look, really strong quarter for margins. We've reached 20% operating margin. But as David said in his prepared remarks, we do expect some compression as we move into the fourth quarter with the dynamic of the tariffs coming through COGS, cost of goods sold. But there are a lot of activities that we've also talked about that we anticipate reading through, whether that be cost initiatives, whether that be productivity improvements in our DCs and throughout the business, frankly. And longer term, we continue to see this business as a high-teens operating margin business. Operator: Your next question comes from the line of Jeff Lick of Stephens Inc. Jeffrey Lick: Congrats on a nice quarter. Kevin, I was wondering if you could just maybe address the trajectory of Light Duty, up 9.3%, with price increases relative to the 10.1% and 13.8% it was up the previous 2 quarters. Just any additional color, clarity on what was driving that? That would be great. Kevin Olsen: Look, it was -- Jeff, we view it as a very solid quarter in Light Duty, 9% sales growth. POS was very solid in the quarter. New products continue to drive exceptional growth there. We don't see that stopping. As I mentioned before, the macroeconomic environment still looks very good there in terms of the sweet spot of the 7- to 14-year-old vehicle continues to rise. Miles driven continue to increase. I think the age of the vehicle now is around 12.8 years old. So when we step back and we look at it, given the nondiscretionary nature of our portfolio there, we feel really good about driving future growth. David Hession: And Jeff, to add a little color. I'm sorry, to add a little color there. The Q3 was 9.3% was real consistent with the second quarter, and it's pretty consistent with the first quarter as well because if you look at the first quarter, it had a very easy comp. So pretty consistent growth through the year on Light Duty business. Jeffrey Lick: Just a quick follow-up on the kind of the dynamics of price increases. I was just curious as let's just say you guys decide, hey, you're going to take a 4% price increase, which obviously goes to your customer, who then, in turn, will pass that along in 1 way, shape or form to the end user. How does that dynamic play out? Is it typically that your customer is going to take your price increase and just pass that on percent -- at the same percentage? Or what's the dynamic there? Kevin Olsen: Yes. I mean, look, I really can't comment on how our customers are going to react to potential price increase from us or any other -- any other supplier. All I can tell you, Jeff, is kind of how we handle it. It's a multifaceted approach, right? I mean -- and it's really in line with historical practices that I talked about earlier. We've been through this before in '18, '19 and '22, '23. First, we have a very defined strategy to diversify our supply chain, which we've made a lot of progress on over the years. We're a much different company than we were from that respect from 6, 7 years ago. We negotiate with our suppliers, right? I mean, obviously, these are our supply partners around the globe. And so we obviously look to get the best price value combination we can from our supply base. And then as I mentioned earlier, we continue to look at productivity initiatives across the company. And when that's all said and done, we'll work with our customers to strategically implement price increases. But beyond that, Jeff, I really can't comment on what our customers are going to do from that standpoint. Operator: Your next question comes from the line of Tristan Thomas-Martin of BMO Capital Markets. Tristan Thomas-Martin: First Brands has been all over the news. How should we think about kind of like product overlap or any other overlap? And then what could it be potentially in terms of the opportunity for you guys? Kevin Olsen: Yes. Thanks for the question, Tristan. It's a good one. I'll start out by saying that we don't view ourselves as a comparison to First Brands. And then I'll also point out from the Dorman perspective, we have a very healthy balance sheet and liquidity. And I think we're carrying less than 1x leverage at this point. We don't engage in any off-balance sheet financing. We only participate in the customer-sponsored factoring programs with our largest customers, and frankly, we've been doing that for decades. We do have publicly secured debt, but we haven't speculatively financed our receivables or frankly, any other working capital assets. And to kind of address your question straight on. I mean, we do have some categories that overlap with First Brands, but not in a material way. It's really around the edges. And of course, we stand ready to help our customers that if they need help from this situation as we always do. Tristan Thomas-Martin: Okay. And then just one on specialty vehicles. I was just wondering you introduced the new long travel suspension for the XD1500. Do you see any change in aftermarket attachment rate on newer vehicles, such as the XD 1500, that OEMs are focused a little bit more on factory accessories versus maybe some older more mature vehicles that don't have the same OEM kind of accessory split? Kevin Olsen: Yes. I mean, clearly, when you have less contented models, that's a good thing for us. And frankly, with price points being what they are, and they've increased so much over the years, we view that as a good dynamic going forward because I think we'll start to see a lot more entry price point models in the future. So I'd tell you that the specialty vehicle market continues. Look, we're very -- we love the business. Rider enthusiasm continues to remain high. We do surveys of dealers and riders consistently. But the discretionary side of that business has definitely felt more impact, which is roughly half the business. And that's why we continue to double down on nondiscretionary repair parts in that business, which we've really expanded that portfolio since the acquisition a few years ago. Operator: Your next question comes from the line of Bret Jordan of Jefferies. Bret Jordan: I think you said that your POS was up mid-single digits. Is that units or is that POS dollars out the door of the customer? I guess if we can sort of look at the Q3, how much of the growth was price versus pieces? Kevin Olsen: Yes, Bret, that's dollars. And we've always quoted POS in dollar terms. Hope you can appreciate that we don't and have never disclosed unit growth for competitive reasons. It could really put us in a situation with some customers that they could triangulate price increases. So we don't disclose that. I'll only say that POS growth in the quarter was very solid, particularly as we look at it compared to Q2. And look, as I said before, the nondiscretionary nature of our portfolio bodes well in a period of increasing inflation. We've seen it before. It's not our first time going through a period like this. Bret Jordan: Yes. So I guess when you think about your customers have sort of thrown out same-SKU inflation between 2.5% -- at least 3% and then 4%, where do you sort of [Technical Difficulty] that low mid-single digit, is the right number? Kevin Olsen: You broke up a little bit there, Bret. I will -- I think I got the gist of your question though. I mean -- at the end of the day, I can't comment on what my -- our customers that are publicly out there have very different product offerings than we do in terms of DIY, and we tend to -- the majority of our portfolio is, as you know, hard parts, much more DIFM, professional content. So it's not a real good compare trying to compare some of our customers to our portfolio. Bret Jordan: Okay. And then a question on supply chain. I think you're saying you expect to be 30% to 40% China by year-end. What's the supply chain map going to look like? I mean a few years ago, you were 70% China. Are there other countries that are concentrated, I think, sort of how diverse [Technical Difficulty] too? Kevin Olsen: Look, right now, yes, I mean, we've said previously that right now, we're about 30% to 40% China depending on the mix, roughly 30% in the U.S. and the balance is rest of the world. I think we're -- as we move forward, you'll probably see a little bit less than that indexing towards China. But to be honest, I think we feel pretty good about the nature of the footprint now. Even with regard to all these very fluid situation around tariffs, we're very diversified. And frankly, we have a very robust supply chain, much more robust than we did 6, 7 years ago. So I think we can handle anything that's thrown at us on the trade front, given where we are and frankly, if we need to pivot, we have the experience to do that. We have the know-how and the tools and the experience to do that. Bret Jordan: It seems like some of your margin benefit has been sort of shifting the supply chain. Is the rest of the world cheaper than your prior average? Or is it -- where are you picking up this margin from sort of revamping the supply chain? Kevin Olsen: Well, I mean there's certainly been some of that as we've -- over the years, Bret, I mean, it seems like we've been in a constant flux since 2018, '19. But listen, we're never going to move to a region where we become uncompetitive. I mean, so that's always a part of the calculus in terms of the cost, but there's a lot of other things that factor in there, too, in terms of the quality, the value that the supplier offers, the lead times. So there's a lot that goes into that equation. But at the end of the day, the moves we made we feel comfortable that we can remain competitive in this environment. Operator: Your next question comes from the line of David Lantz of Wells Fargo. David Lantz: I guess considering strong Light Duty sales and a sequential improvement in Heavy Duty and Specialty Vehicle trends, curious if you could just talk about your share position across those segments in Q3. Kevin Olsen: Yes. Sure. I mean, listen, in Light Duty, we continue to believe we're taking share. If you look at the overall market growth statistics that we look at over the years, anywhere between 3% and 4% historically. We've consistently outperformed that. And that's really driven by our new product efforts, particularly new to the aftermarket, where that part only exists in the OE channel the day before we launch it. And that's been a huge driver of growth. I'd say in Heavy Duty, we did see some nice growth in the quarter. So some positive signs. Some of that growth was driven by tariff pricing, but we also had some key customer wins. That -- we have a very small share in a large TAM and heavy duty. So we feel we have a lot of runway to go in that space. And in specialty, again, when you look at our overall share position, it's pretty small in a fairly large market. So we like the runway. It's why we like the space. And I would tell you that just in terms of share performance, we believe we're outperforming the overall market, although we're not happy with flat sales growth, we believe that the rest of the market has been down. So we do believe we're taking share. We think it's a combination of the initiatives that we've undertaken, whether that be expanding our nondiscretionary repair portfolio or geographic expansion. We've seen a lot of success in that regard. David Lantz: Got it. That's helpful. And then the balance sheet is really healthy. So curious if you could talk about your appetite for M&A and what the pipeline looks like today? Kevin Olsen: Yes. Great question. Look, we have different acquisition strategies across the different segments. I think if you look at -- and I'll just remind you what those are. In Light Duty, we're always looking for potential technology acquisition as the vehicles continue to technologically advance. We want to make sure we stay ahead of that curve as we have in years past. And geographic expansion remains a priority for that segment. If you look at Specialty Vehicle, a lot -- highly fragmented market. As you know, we have a fairly small share of that market. So we view that as right for brand and product portfolio acquisition plays. And in Heavy Duty, we're still a small player in a very large market. There are a lot of channel -- channel plays where today we have opportunity that acquisition will really help us penetrate some of those channels in a much greater way. I would tell you that the funnel looks very strong. We consistently work the funnel, but I will tell you that targets -- the amount of actionable targets has been a bit slowed. I think it's slowed by the tariff situation. I think a lot of potential sellers are probably waiting to see how the tariffs impact their business, whether that be for pricing or margins or demand, what have you. I think once that shakes out, I think there'll be a lot more activity on the other side of that. David Hession: Yes. And just a little comment on the balance sheet. The leverage right now in the quarter was 0.92x. So strong balance sheet. We view that we've got the dry powder to not only absorb the higher cost of inventory but also execute against the M&A program, which Kevin outlined. Operator: Your next question comes from the line of Justin Ages of CJS Securities. Justin Ages: I wanted to follow up on the comment about First Brands. So I think we're aware about the customer-sponsored factory. Have you seen any or had any conversations about terms that you guys -- the terms that might be changing as a result of that? Or completely unrelated and then the terms are pretty clear set? David Hession: Yes. Just the terms are pretty clear, and we don't see any indication that there's going to be any change in the terms. Justin Ages: Okay. That's helpful. And then on the Light Duty, can you give us some color on the amount of time, like the lead time for the power steering product that you outlined. Just want to get a sense of from idea to get to market how long that took? Kevin Olsen: Well, that's a loaded question, but it's also a great question. For that particular product, I mean, we have been in the market with an electronic power steering rack for a different making model, starting about 18 to 24 months ago. But if I look at total development time on a part like that, it's substantial. Certainly a lot longer than a purely mechanical part, as you can imagine. There's a safety component to that part, there's an electronic -- complex electronics component to that part. So it's a much longer cycle time on that part. And obviously, as a result, has a much higher selling price than a pure mechanical part. Operator: Your next question comes from the line of Gary Prestopino with Barrington Research. Gary Prestopino: Could you guys give us some idea on specialty, what the mix is of nondiscretionary versus discretionary and at this point and how that has shifted since the acquisition? Kevin Olsen: Gary, sure, absolutely. It's roughly about 50-50 right now, and it was materially less than that when we acquired the business. So it's moved up quite a bit. And I think we're very well positioned for when that market does recover. The pure accessory side and then the brake fix or nondiscretionary repair to drive oversized growth compared to market when we do start seeing the recovery and the geographic expansion, which I talked about before, too, we've seen some great progress there as well. Gary Prestopino: Yes, that's what I wanted to hit on, too. I mean the geographic expansion, as I recall, you said you were west of the Mississippi, you were pretty light with dealerships. Can you maybe help us out as to how that is going in terms of picking up new dealerships without getting too specific, I mean, overall growth in dealership would be helpful. Kevin Olsen: Yes, that's a great question, Gary. We have been very focused on that. And we've added -- I'll just -- I'll put it this way. We've added a significant amount of new dealer relationships out West. Now our focus is on driving more share of wallet within those dealerships. So first step, getting in the dealers, getting relationship established and now we're driving share of wallet gains there. Operator: Your last question comes from the line of Scott Stember of ROTH Capital. Scott Stember: Just a quick follow-up on tariffs. Has there been any meaningful change to your exposure from a geographic standpoint, whether it's India, China or any other country, since the last time you guys gave an update? Kevin Olsen: Boy, Scott, that's a great question. I'm not -- I think the answer is yes. from last quarter. Certainly, we've seen some changes. But there's a lot of headline news around tariffs that actually haven't made their way into law or implementation. So it's hard for me to -- it's changed so much. It's been so fluid, Scott. It's hard for me to pinpoint an exact date. But look, I'll just summarize it this way. Where we sit right now, we feel well positioned to handle the current tariff environment or any other potential changes that might come down the pipe, particularly as we look at how we compare competitive set. We feel like we have a footprint that is as competitive as anyone else out there in the aftermarket. And so I think we can handle any changes that come our way. And I'll characterize it as manageable at this point. Scott Stember: Got it. That's great. Operator: There are no further questions at this time. Ladies and gentlemen, this concludes today's earnings call. We thank you for participating. You may now disconnect.