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Operator: Good day, ladies and gentlemen. Welcome to KPN's Third Quarter Earnings Webcast and Conference Call. Please note that this event is being recorded. [Operator Instructions] I will now turn the call over to your host for today, Matthijs van Leijenhorst, Head of Investor Relations. You may begin. Matthijs van Leijenhorst: Yes. Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us today. Today, we published our Q3 results. With me today are Joost Farwerck, our CEO; and Chris Figee, our CFO. And as usual, before we begin the presentation, I would like to remind you of the safe harbor on Page 2 of the slides, which applies to any statements made during this presentation. In particular, today's presentation may include forward-looking statements, including KPN's expectations regarding its outlook and ambitions, which were also included in the press release published this morning. All such statements are subject to the safe harbor. Now let me hand over to our CEO, Joost Farwerck. Joost Farwerck: Thank you, Matthijs, and welcome, everyone. Let's start with the highlights of the last quarter -- third quarter. Our group service revenues increased by 1.7% with growth across all the segments. In the mix, consumer was supported by ongoing commercial momentum, both in broadband and mobile. Business was driven by mainly SME and LCE. As expected, growth slowed in the third quarter, mainly due to the tailored solutions parts and wholesale continued to grow mainly driven by sponsored roaming. Our EBITDA grew by 2.3% on a comparable basis. And as expected, our free cash flow rebounded in the third quarter, up 12% year-to-date, driven by EBITDA growth. We further expanded our fiber footprint together with our joint venture, Glaspoort. And finally, we remain confident to deliver on the full year 2025 outlook and our 337 midterm ambition. As a reminder, our Connect, Activate and Grow strategy is supported by 3 key pillars. First of all, we continue to invest in our leading networks. Second, we continue to grow and protect our customer base. And third, we further modernize and simplify our operating model. And together, these priorities support our ambition to grow our service revenues and adjusted EBITDA by approximately 3% on average and our free cash flow by approximately 7% over the entire strategic period. And given that we are now nearly halfway through our strategic period, we look forward to sharing a strategy update with you next week, November 5, and we hope you will join us online for the webcast. Let me now walk you through the business details. We lead the Dutch fiber market. In the third quarter, we expanded our fiber footprint by adding 74,000 homes passed together with Glaspoort, and we connected 82,000 homes, bringing us close to 80% homes connected within the fiber footprint. And the rollout pace slowed compared to previous quarters due to timing. We stick to our ambition to cover 80% of Dutch households with fiber. During our strategy update next week, we'll share how we will get there within our financial framework. Let's now have a look at the consumer segment. Consumer service revenues continue to grow, driven by consistent fiber and mobile service revenue growth. Customer satisfaction remains a priority, and thanks to our CombiVoordeel offer supported by super Wi-Fi, our Net Promoter Score rose to plus 15 year-to-date and Net Promoter Score even reached plus 17 during the quarter, showing how these improvements are making a real difference for our customers. Let's take a closer look at our third quarter KPIs. We saw another quarter of double-digit broadband-based growth despite a challenging competitive environment. Thanks to a steady and healthy inflow of new fiber customers, combined with a growing ARPU, our fixed service revenues continue to grow. In mobile, we maintained a strong commercial momentum, adding 47,000 subscribers. And this was partly offset by ARPU decline driven by ongoing promotional activity in the no-frill segment. So overall, our mobile service revenue grew by 1%. Let's now turn to the B2B segment. Business service revenues increased by 1.4% year-on-year, driven by SME and LCE and good commercial momentum. Net Promoter Score rose to plus 5 in the third quarter, reflecting customer appreciation for stability, reliability and the quality of our networks and services. SME service revenues increased by 3.3% year-on-year, driven by growth in Cloud and Workspace, broadband and mobile. LCE service revenues increased by 1% year-on-year, supported by growth in mainly IoT, Unified Communications and CPaaS. Mobile service revenues were impacted by ongoing price pressure, though this was partly offset by a growing customer base. And finally, and as expected, I must say, Tailored Solutions service revenues decreased by 2.5%, reflecting a further focus on value steering. And then wholesale -- our wholesale service revenues continue to grow, mainly due to a strong performance in mobile, driven by the continued growth in international sponsored roaming. Broadband service revenues increased despite a decline in copper base driven by fiber and other service revenues increased mainly due to an update in visitor roaming. Now let me hand over to Chris to give you more details on financials. Hans Figee: Thank you, Joost. Let me now take you through our financial performance. First, let me summarize some key figures for the third quarter. First, adjusted revenues increased 2.4% year-on-year in the third quarter, driven by service revenue growth across all segments and higher non-service revenues. Second, our adjusted EBITDA after leases grew by 4.4% compared to last year, supported by higher service revenues, the IPR benefit and contribution from tower company, Althio. This was partly offset by the holiday provision effect. As a reminder, starting this year, most employees no longer register holiday leave, resulting in a lower provision release in Q3 compared to last year, impacting therefore, the distribution of EBITDA growth over the year with a specific negative accounting impact in the third quarter. Finally, as anticipated, our free cash flow rebounded in Q3 and is now up 12% year-to-date. I'll share more details on the underlying cash developments later in this presentation. Group service revenues grew by 1.7% year-on-year, supported by all segments. And within this mix, consumer revenues increased by 1.1%, driven by, as Joost said, continued solid momentum in both fixed and mobile. Business service revenue growth tapered off somewhat in the third quarter compared to previous quarters, mainly due to developments in Tailored Solutions and timing effects. And finally, wholesale service revenues increased by 5.2% year-on-year, driven by ongoing growth in our international sponsored roaming business. Our adjusted EBITDA grew 4.4% year-on-year in Q3 or 2.3% on a comparable basis if we adjust for the IPR benefits, the Althio contribution and the holiday provisioning effects. Direct costs remained broadly in line with last year, reflecting shifts in the revenue mix, particularly within Tailored Solutions, where our continued focus on value and margin steering is shaping direct cost dynamics. On a comparable basis, our indirect cost base decreased by EUR 5 million, driven by lower energy and billing costs. We further scaled down our workforce, resulting in a reduction of over 300 FTEs compared to previous year. Our year-to-date operational free cash flow increased by 12% compared to last year or 8.6% excluding the IPR benefit and Althio, driven therefore by EBITDA growth. As expected and communicated to you, free cash flow generation rebounded in the third quarter, mainly due to improved working capital and lower interest payments. Year-to-date, our free cash flow is up 12% compared to the first 9 months of last year, again, supported by EBITDA growth and partly offset by higher interest payments and cash taxes paid this year. Finally, we ended the quarter with a cash position of EUR 373 million, absorbing the impact of the interim dividend over '25 and share buyback payments. We continue to run with a strong balance sheet. At the end of Q3, we had a leverage ratio of 2.5x, in line with our self-imposed ceiling and remained stable compared to the previous quarter. We expect our leverage ratio to return to 2.4x by the end of the year, supported by increased free cash flow generation. Our interest coverage ratio was sequentially a bit lower at 9.5x, and our cost of senior debt decreased slightly, mainly driven by lower floating interest rates. Our exposure to floating rates, by the way, remains limited at only 16%. Our liquidity position of around EUR 1.4 billion remains strong covering debt maturities until the end of '28. We are on track to deliver the 2025 outlook we shared with you in July. And on 25th of July, we completed our EUR 250 million share buyback program for the year. The cancellation of about 60 million treasury shares will be finalized in Q4. And August 1, we paid out an interim dividend of EUR 0.073 per share in respect of 2025. And finally, we reiterate our midterm, also known as our 337 targets as presented at our previous Capital Markets Day. As outlined back then, both service revenues and EBITDA are expected to grow 3% per year on average over the plan period and our free cash flow by 7% per annum on average with growth in cash back-end loaded due to our CapEx plans. Until 2026, our free cash flow growth is expected to grow at a low single-digit rate per year since we face increasing cash taxes year-on-year. Now let me briefly wrap up with the key takeaways. We continue to see service revenue growth across all segments. While revenue growth moderated somewhat in Q3, we anticipate a recovery in the fourth quarter. Our commercial momentum remains solid, and we continue to lead the Dutch fiber market. Our net add developments in both fixed and mobile and both in consumer and business was quite satisfactory in Q3. As expected and planned for, EBITDA growth was relatively soft in Q3, but is set to recover in Q4. Cash flow generation was strong, up more than 10% year-to-date. Overall, we're on track this year and continue to make good progress towards our annual and midterm targets, and we reiterate our guidance for the year. Finally, as we approach the halfway point of our strategy, we can't wait and look forward to providing you with an update of our strategy next week, on November 5. Thanks for listening and turn to your questions. Matthijs van Leijenhorst: Yes. Thanks, Chris. Operator, please open the line for the Q&A. Please limit your questions to 2 please. Operator: [Operator Instructions] Our first question is from Polo Tang of UBS. Polo Tang: I have 2. The first one is, is there any update in terms of the Glaspoort acquisition of part of the DELTA Fiber footprint? And my second question is, we have a general election in the Netherlands this week, but is this having any impact on public sector spending in terms of your B2B segment? Joost Farwerck: Yes, Polo, thanks for the questions. The Glaspoort acquisition, it takes our regulator a very long time to come to a final opinion. So as you know, Glaspoort intends to acquire a rural fiber footprint of approximately 200,000 house passed from DELTA Fiber, and it's still under ACM review. We expect, well, something within 1, 2 months because it takes really too long. We think it's still no reason to refuse it. This could reduce overbuild risks for both parties and supports healthy market development. Then elections coming up in the Netherlands, that's tomorrow, by the way. We -- on the midterm, we see limited impact on KPN. Major topics in the elections are immigration, health care, housing markets. Well, the government wants to build more houses, and we think that's a good one because then we can take them into the house pass footprint. Topics that could affect KPN on the longer term are about investments in defense, and we're in good position on that. We are selected as the main digital provider for the Ministry of Defense and discussions around fiscal affairs, for instance, the innovation box facility and the share buyback taxation, but that's a vacant faraway remark somewhere from one of the left wing parties. So all in all, I don't expect that much impact for KPN. Polo Tang: Just on public sector, can I just clarify if there's any freezing of public sector spend into an election or out of an election because we see that sometimes in other markets? Joost Farwerck: No, not really. We have some kind of a framework. So when elections are coming up and when a Cabinet falls in the Netherlands, then they select a couple of topics that they have to continue to run. And we are all convinced in the Netherlands that we should keep on investing in the themes I just mentioned. And also when it comes to cybersecurity and digital, there's no slowing down there from the government, and we are heavily involved in there. Operator: And our next question comes from Mollie Witcombe of Goldman Sachs. Mollie Witcombe: My first question is on B2B. You have said that you've seen some price pressure in mobile and B2B. Could you give us a little bit more color on this? Are you seeing this dynamic both in LCE and in SMEs? And to what extent should we consider this when we're looking at longer-term trends going into 2026? And my second question is just on the B2C competitive environment. What are you seeing in terms of competition? And have there been any incremental differences versus last quarter? Hans Figee: On your question on mobile price pressure, mostly in LCE and larger corporate tickets, there is some price pressure going on. I think that I would say from our point of view, there's still some of the decline, but the decline is declining. So you can say the second derivative is positive, but that's a bit of a nerdy view. But I would say expected LCE, some repricing of our base into next year, but then probably we have good hope it's going to be bottoming out, at least. So there is some price decline, but it's getting a bit better. We saw something similar in SME, but SME, we especially be able to counter that with value-added services by selling more security solutions to customers. So keeping our ARPU up. So there is some price pressure, most notable in LCE, but gradually abating. So we'll go into next year, but I think somewhere during the course of this year, that effect we hopefully [ achieve that ]. And SME, it's much less prevalent. And there, we see and have experienced good opportunities to counter that with additional value-added services like additional bundlings, but mostly security services around SME to keep your ARPU stable there. Joost Farwerck: Yes. And on the competitive environment, well, like in Q2, the market remains competitive in consumer markets, so Odido and VodafoneZiggo, especially. VodafoneZiggo launched a new proposition, broadband fixed on their cable network, a 2-gig proposition recently announced. So interesting to see how they will do there. But impact on KPN expected to be limited because our first proposition is 1 gig, and we also offer 4 gig. So most of the new customers land in 1 or 4 gig via our fiber network. And for us, it's very important to play our own game. So we focus on base management, for instance, on convergence households via CombiVoordeel, resulting in lower copper and fiber churn and 11,000 net adds. We also are very happy with the acquisition of Youfone because on the lower end of the market, you call it that way, there's true competition going on. So Youfone covers that. And currently, more than already 2/3 of our broadband base is on fiber, and that's leading to lower churn and higher NPS. So that's how we position ourselves in this competitive environment. Operator: And our next question comes from Paul Sidney of Berenberg. Paul Sidney: [Technical Difficulty] revenue growth, it did slow into Q3 at the group level. There's obviously lots of moving parts... Matthijs van Leijenhorst: Paul, paul. Paul Sidney: Can you hear me? Matthijs van Leijenhorst: We couldn't hear the first part. Could you start over again? Thanks. Paul Sidney: Sure. Can you hear me now okay? Matthijs van Leijenhorst: Perfect, perfect. Paul Sidney: Okay. Great. Yes, just a first question on service revenue growth. We did see it slow into the quarter at the group level. There's lots of moving parts, and you've given some great granularity in terms of the drivers of that. But as we head into Q4, how confident are you that we can see an acceleration in that service revenue growth trend? And then secondly, just looking a bit bigger picture, you report very comprehensive KPIs, very detailed guidance, net add, service revenue growth, NPS scores, free cash flow and returns guidance. I was just wondering, if we take a step back, which of those is most important to KPN as a business in terms of what really is sort of driving the business? And maybe we get more detail on next week, but just really interested to hear your views on that. Hans Figee: Yes. Paul, let me give you some more granularity on how we see service revenue growth developing. I'm going to just walk you through the business. I think the second question is a typical CEO question. Joost Farwerck: Yes, for sure. Hans Figee: I'll leave that to you. Look, on consumer, fixed is showing 1% service revenue growth. We've had tailwinds from a price increase, some headwinds from migration from front to back book discounts, et cetera. I think overall, the good news is that churn is actually reducing. The churn is doing better than ever. It's one of the best churn quarters in fixed in some time to come. Also please note, we have a CombiVoordeel product, which we give customers with multiple products, additional discounts leading to lower churn. That additional discount feeds through the top line. So that affects top line and fixed service revenue growth by almost 0.5% this quarter and even more in next quarter. So for Q4, we expect fixed service revenues to come in at a 0.4%, 0.5%, but that's really the accounting and the upfront payment on these additional discounts that lead to churn. So the discount, especially to multi-converged customers, and we're seeing benefits of churn on that. We'll give you more intel next week because that feeds into [ '26 ]. In mobile, you see a price increase coming in has already come in, has landed pretty well. So I would expect mobile consumer to be around 1.5% in the fourth quarter, fixed below 1% and mobile well above 1% then go to B2B. I see SME recover. I mean there was some technicality in the SME numbers, but it's also, I think, good base and ARPU development, especially in the third quarter. And a little bit easier comps, I would say SME should be 4% to 5% again in the fourth quarter and also in that into the next year. LCE hovering around 0. And on the Tailored Solutions business, there's always some volatility in this business that has to do with the timing of projects. For example, if you go back to last year, we saw growth -- service revenue growth in Q3, from 5% to 2% back to 5%. There's always a bit of volatility in this business due to the nature of these activities. In the third quarter, we saw the effects of KPN condition more steering on margins. So we lost some business. Some of it we didn't actually mind because there was actually 0 margin revenues and underlying this growth in defense spending. So I'd expect the Tailored Solutions business to be back around 2% to 3% in the fourth quarter, which should bring B2B to around 3%. Wholesale, I would say, probably around 4% to 5-ish in the fourth quarter. So that means overall service revenues in Q4, I would say, around 2%, probably 2% or a bit up. But that's the moving parts. Some of it has to do with technicalities. For example, as I said, in fixed service revenues, the accounting for the [indiscernible] cost shows up to revenues. It is showing up to churn, so it leads to real value, but short-term service revenues are a bit affected. Mobile should recover, SME should recover and the rest, I think I explained to you for probably around 2%-ish service revenue growth in Q4. Joost Farwerck: Yes, Paul. And then your question on all the KPIs and the main target. I mean, yes, we try to keep things simple in our strategy. We're a single country operator. We're healthy, and we build a plan for all stakeholders. So we invest in the Netherlands, we invest in customers, we invest in our own people, and we want to reward our shareholders in a decent way. And for that reason, you're right, we give a lot of KPIs, which is about broadband base growth or base growth in broadband, mobile, SME, CAGRs on revenue, net Promoter Score, you name it all. At the end, we simplified everything by saying it's a 337 CAGR. So that's a top line EBITDA and cash. And if I have to make a choice, I say the 7, the cash is the most important one of those 3. And the rest is all leading. So sometimes you're a bit behind on the subsegment. Sometimes you're a bit speeding up somewhere, sometimes NPS is lower or higher. But at the end, it's very important that we get to that financial promise, and we're on track. So -- but it depends a bit on the stakeholder, I -- when it comes to the KPIs we focus on. Operator: And the next question comes from David Wright of Bank of America. David Wright: Just on VodafoneZiggo, they obviously announced their strategic shift earlier this year, pushing a little more into Q2. I'm sure we'll get a similar message on Q3. Are you observing -- how are you observing the sort of retail pushback now? They've obviously branded the 2 gigabit product. We've got a slightly keener pricing. Do you observe anything else? Is there a lot more marketing spend? Is the marketing different than it was before? Just any casual observations you might have on how they've changed [ TAC ]. Joost Farwerck: Well, the change we saw was the announcement on Superfast Internet. I think for the market, that's not that bad. I mean, on mobile, we all 3 move to unlimited, which is a good development for the total market. And if the total market moves to higher speed broadband, wouldn't be that bad, I guess. But we play our own game. So like I mentioned, customers come in on 1 or 4 gig, and that's difficult to copy. So, so far, it's more an announcement then I see real movements in the market. Chris, anything to add on? Hans Figee: Yes. I mean when I look at, for example, our broadband net adds and fiber net adds, fiber net adds have been steady, net adds. But if you exclude all the copper migrations, fiber real new clients come in around 60,000 to 70,000 for quite some time now. So it's pretty steady. We've seen churn coming down. So we've seen churn coming down in both fiber and copper. That churn reduction started in Q2 and continued in Q3. So that's actually positive. And we don't want to steer just by the month, but when I look at just the simple October numbers, the order balances and the early indication of the month of October are fine. So at this point, it feels that we are obviously cognizant that it's a serious competitor out there. But in terms of underlying performance, no change in recent trends from where we are right now. In fact, churn has come down and things have not fallen off a cliff in the month of October. Operator: And our next question comes from Joshua Mills of BNP Paribas. Joshua Mills: A couple of questions from my side. Firstly, it's been about a year since Odido launched FWA services across the Netherlands. I wondered if you could give an update on how you think that's impacted the competitive landscape and whether it is impacting on your wholesale line losses as well or whether that's due to other factors? And then secondly, if I just build on that wholesale line loss question, trends look to be similar to the last couple of quarters. How would you expect that to develop over the next couple of years? And do some of the more aggressive promotions we're seeing from your ISP partners go anyway to help with that trend going forward, even if it's painful on the retail side? Joost Farwerck: Yes, fixed wireless access from Odido, we see activations on fixed wireless access, but it's also a different market than the broadband market in general in the Netherlands. So it's also a bit of a niche market for people camping, people on holiday, people in boats. So therefore, it's useful. It's also used as another option than whole buy on our network or on DELTA's network. So for Odido, they are asset-light on fixed and they are asset-heavy on mobile. So they try to clearly sell more customers, fixed wireless access to leverage the asset and to avoid the wholesale payments. But it's not really impactful when it comes to total broadband market share. So we use it as well, by the way, in super rural areas, but we always use it in combination with the fixed line. So for us, convergence is, as you know, the strategy. So in copper areas, the speed of the Internet connection can be supported by bonding via fixed wireless access. And probably, we're going to use that more frequently in the rural areas. Hans Figee: Yes. And Joost, on the wholesale side, if you look at the line losses in wholesale, that's really only copper. So wholesale fiber is growing from our main customer and wholesale copper is declining. As we understand, that decline is mostly related to the switching of the Tele2 brand, so the switching of a brand and the switching of the brand leads to customer migration. That's the main driver for losses in copper and wholesale. I expect that to continue in Q4 and possibly in Q1, but that's probably -- then the light at the end of the tunnel. I think that's the end in sight on that development. And then, for example, broadband service revenues, I think we're up about 2% this year. I think broadband service revenues in mobile will be plus 2% this year. Next year, around flattish is a combination of fiber growth indexation and the decline in that copper part. So I think when I look at it, it's mostly the line loss in copper related to the switching off of a brand, and that is a project that will come to an end, I would say, next -- somewhere mid- to early Q1, I would expect that impact to really to fade away. Operator: And our next question comes from Keval Khiroya of Deutsche Bank. Keval Khiroya: I've got 2 questions, please. So you've done quite well on consumer broadband despite the competitive backdrop. But how do you think about the gap between front and back book pricing in broadband? Do you get many requests from customers to move to the current cheaper promos in the market? And secondly, helpfully, you commented on wholesale broadband. But how do we think about the level of mobile wholesale growth next year? Obviously, sponsored roaming has been quite helpful. And does that continue? Any insights on the level of growth next year would be helpful. Joost Farwerck: Yes. So we shifted a bit on strategy as we announced last year, and that is invest more in existing customers instead of playing the acquisition game. We think it's very important to make a difference against the more challengers in the market. And investing in the customer base also leads to back book front book migrations. So that's how revenues in broadband are impacted, and that's why you only see 1 point something on service revenue growth while we do a price increase of 3. Having said that, that's part of our plan. And so when we move customers into what we call combination -- CombiVoordeel, then they have to sign up for 2 years, and that's leading to a back book front book migration. But -- so we made it part of our strategy. Hans Figee: Yes. And Keval, on the wholesale side, yes, indeed, we've been quite successful in mobile service revenue growth in wholesale. I expect that to continue. I don't plan on this level of growth going forward. But we have a decent funnel of potential new counterparties signing up in these type of businesses. And then we have a number of these clients that we help to win new business. So we work them for them to win new businesses. So I expect continued growth in this business going forward, perhaps not at the same pace. I think wholesale should be able to grow around 4% or so top line growth next year, all in with flattish broadband service revenue growth and the remainder is mobile. So continued growth, but let me be a bit conservative and not project the same level of growth, but wholesale around 4% service revenue growth next year is definitely feasible with all of this. Operator: And our next question comes from Ajay Soni of JPMorgan. Ajay Soni: Mine is just around the FTE reduction. So I think you're 300 lower year-over-year, which seems to be around 3% of your employee base. So my first question is just around why is this not being reflected maybe more obviously within your EBITDA bridge? Are there any other headwinds which are -- which means it isn't reflected? And I think looking further ahead, can you accelerate this FTE reductions over the next year, so they are more meaningful in 2026? Joost Farwerck: Yes. Thanks for the question. And next week, we will update you on what we are doing on transformation programs and how we look at the company in a couple of years from now and what kind of operating model we're building. And as a result of that, yes, we expect more FTE reduction. So why don't you see the minus 300 already impacting our EBITDA. First of all, we have a CLA increase. We -- other increased pension costs. So we have to cover up for, I don't know, 6% something of increasing wage costs. And secondly, it's also about the timing in the year. So the 300 will kick in on a higher scale next year than this quarter. But moving the company to a lower FTE base as a result of quality improvements and digitalization is very important also to cover costs and to make a step down. Operator: And our next question comes from Siyi He of Citi. Siyi He: I have 2, please. The first one is really on the comments of the Q4 service revenue growth of 2%. Just trying to think about the trend for next year. I think you mentioned that the B2B and wholesale trend probably is going to be similar level to Q4. And I'm just wondering if you can comment what kind of tailwinds that you would expect to basically help the service revenue growth to accelerate from the 2% to the midterm guidance of 3% and my second question is basically on fiber rollout. I'm sure that you will cover it next week. But just wondering if you can give us some color of how should we think about the fiber CapEx considering that there seems going to be a decent acceleration needs to be done to meet the above 80% coverage target. Joost Farwerck: Well, on the fiber CapEx, we clearly guided to the market that we will make a step down in 2027, and we still plan for that. So we expect a step down of at least EUR 250 million. That's in our guidance, and we stick to the guidance. Chris? Hans Figee: Yes. I mean on the service revenue growth, we'll give you a lot more details -- next week on our capital strategy update -- on the full capital market strategy update, we'll give you more details. But think of consumer to be growing around 1.5%, I think B2B north of 3%, B2B around 4%, and that should make for top line growth, but more in details next week. B2B 3, wholesale 4, yes. Operator: And the next question comes from David Vagman of ING. David Vagman: The first one, coming back on the competitive environment in broadband. If you can comment on your view on your expectation rather on the potential ARPU evolution, in mind speed tiering, but also competition, the announcement of VodafoneZiggo and the tweaking of offers by Odido yesterday. And then second question on the broadband wholesale market in the Netherlands, also your expectation on the ARPU side for KPN? Joost Farwerck: Yes. So on the -- I mean, the market is competitive. It will stay competitive, and I don't expect that to change. The difference between the Netherlands and most other markets is that we have a fully fiberized country already almost. So we're -- 90% of the households already are covered by fiber networks. All households are connected to at least 2 networks fixed. So what I want to say, our digital infrastructure fixed is of a super high level compared to other countries. So there is a competition between the fixed players, but I don't expect much competition coming in from fixed wireless access or satellite or other things you see in countries covering more rural areas as well, like -- and then -- so the competition will be firm, but we positioned ourselves, and I'm glad we did, by the way, we built a fiber footprint of almost 70%, more or less clean. And there's not that much appetite to overbuild us there. It will be more competitive in the new areas for us. So there, we can say to overbuild. We're waiting for our regulator to see what they do with that Glaspoort deal. But compared to other countries, I would say, yes, it is competitive. It is challenging, but we build a strong fiber footprint in the core of our strategy. Hans Figee: Yes. And to your point on wholesale ARPUs in broadband, a couple of things at play. Of course, every year, we have indexation. There's a schedule approved and agreed with the regulator, effectively around 2% indexation every year. Our ARPU is supported by the mix shift from copper to fiber. So we see a decline in copper and increase in fiber, that is supportive. And then any ARPU actions that we do to support our broadband -- for broadband partners tend to be linked to retention, tend to be for specific higher speeds or tend to be around linked to volume commitments. So basically, I would say ARPUs in wholesale broadband are pretty much the same and often linked to a combination of mix, price increases and/or specific agreements on retention and volume. Operator: And the final question is from Ottavio Adorisio of Bernstein. Ottavio Adorisio: A couple of follow-up questions. On Slide 8, you effectively stated that you expect bottoming up on the mobile. And during the call, effectively, you highlighted the price increases. But when someone look at the chart, you can see that, that revenue trends bottom up already in Q4 and deteriorated afterwards. So my question is that what makes you confident that the price increase will stick this time around, we don't go to promotion later on and the revenue trends deteriorate again? The second one is on the broadband. The churn for copper for your copper customers is stable, you stated that one. But looking at the numbers, you look at the migration from copper to fiber to be the lowest this quarter over the past 2 years. So my question is that there is any plan to encourage migration by reducing the price gap between copper and fiber? Hans Figee: Yes. On the first question, what happened -- what will happen from Q3 to Q4, what happened last year? Well, Q4 last year was a very particular quarter where a few things happened. We saw a temporary drop, actually, an accounting drop with roaming that actually reversed in the first quarter. You can see in the first quarter, sales revenue growth in mobile going up had to do with the accounting and booking of some roaming revenues. Second, we had an iPhone credit. If you recall well last year, we had some iPhone disturbances for which we gave some of our customer specific credits to compensate for that. I mean the iPhone disturbances are on hold for the end customers. And thirdly, we had a special offer in the market in that very fourth quarter. So a couple of particular trends that took down growth in the fourth quarter to a low level after which it rebounded in Q1 last year. So those were particular impacts on that third quarter, fourth quarter, and I don't expect them to repeat. So that gives me some comfort that, that blip that you saw last year will not come again this year. And the second question on copper upgrades to fiber. We really try to upgrade customers to fiber. It's a function of network rollout. It's a function of planning. It's a function of access to customers that fluctuates a bit over time. There's no strategic or technical retweet in this part, if you see what I mean. It has to do with timely and operational execution. We will continue to migrate customers from copper to fiber. We might actually, at the point in the midterm, try to accelerate that to enable the switch off of our copper network to accelerate. Joost, do you want to add? Joost Farwerck: Well, the unique thing of our fiber footprint is that we're building a fiber footprint with 80% of the households homes connected. And that's first of all to migrate all existing customers of KPN to the fiber network. That's the copper churn or the urban copper migration. Then we want to connect a lot of new customers, and then we want to connect as well a lot of wholesale connections. So there's more room on the network of households already prepared for an activation from a distance. So the copper migration is something that's really in our system to finalize to switch off the copper network as well. Matthijs van Leijenhorst: Okay. One final question. Operator: And our final question comes from Joshua Mills from BNP Paribas. Joshua Mills: Possibly a pedantic one here. But if I look at Slide #6 in the presentation where you have homes passed as a percentage of Dutch households, you have the target of 80%. And I don't see a year associated with that. I think in previous presentations, you were highlighting that you'd reach 80% homes passed coverage by the end of 2026. Can you just confirm that that's still the guidance and there's no change there, just so I'm clear. Joost Farwerck: Well, so yes, we are expanding our fiber footprint this year, next year and the years after, 74,000 homes passed, 82,000 homes connected this quarter. We stick to 66,000 because if you read it as well as you did. And last quarter, we also reported 66,000, but that's because of annual addition of households by CBS, the Central Bureau of Statistics in the Netherlands. And we stick to our ambition of 80% of Dutch households on fiber. But next week, during our strategy update, we'll share how we will get there within our financial framework. So we aim for 80%, and we confirm our midterm ambition of 3 targets, including the CapEx step down of to EUR 1 billion in 2027. Joshua Mills: Okay. And just -- so to be clear, the explicit target previously of reaching 80% by the end of 2026 is... Joost Farwerck: I've said earlier in previous calls as well that there's a lot of KPIs like we just discussed out there. And sometimes we meet -- we're getting faster, sometimes we're slowing down. The 80% is also a target, which is a very important one for us, and we will meet it for sure. But on the timing part, we will get back to you next week. And at the end, it's for us very important that the overall total strategy works, and that's working. Matthijs van Leijenhorst: Okay. That concludes today's session. Obviously, we will see -- we'll meet online next week during our strategy -- next Wednesday on the 5th of November. See you then. Cheers. Operator: Thank you. Ladies and gentlemen, this concludes today's presentation. Thank you for participating. You may now disconnect your line. Have a nice day.
Operator: Good evening, and thank you for standing by for New Oriental's FY 2026 First Quarter Results Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I'd like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Sisi Zhao: Thank you. Hello, everyone, and welcome to New Oriental's First Fiscal Quarter 2026 Earnings Conference Call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, Stephen Yang, Executive President and Chief Financial Officer; and I will share New Oriental's latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org. I'll now first turn the call over to Mr. Yang Stephen. Please go ahead. Zhihui Yang: Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Before diving into the details of our first quarter results, I would like to share that after periods of testing and trialing various business models and offerings, formulating the right strategy and direction for New Oriental. We're pleased to see that the company has now entered a stable growth trajectory. This quarter, we recorded an encouraging set of results that exceeded our expectations, mainly driven by our strong capabilities, enhancing operational resilience and sustainable profitability. This quarter's total net revenue has increased by 6.1% year-over-year. Bottom line-wise, we're delighted to see that our efforts to manage costs and streamline efficiency has yielded tangible success with non-GAAP operating margin reaching 22% this quarter, representing a year-over-year improvement of 100 basis points. Our key remaining business remains solid, while our new initiatives have continuously demonstrated positive momentum. Breaking it down for the first fiscal quarter of 2026. Overseas test prep business recorded a revenue increase of about 1% year-over-year. Overseas study consulting business recorded a revenue increase of about 2% year-over-year. Our adults and university students business recorded a revenue increase of 14% year-over-year. At the same time, our continued investments in new education business initiatives primarily centered on facilitating students all around development have delivered consistent progress, further driving the company's overall momentum. Firstly, the non-academic tutoring business, which focused on cultivating students' innovative ability and comprehensive qualities has now been rolled out to around 60 cities. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of this business. Secondly, the intelligent learning system and device business, which utilize our past teaching experience, data technology to provide personalized and targeted learning and exercise content to improve students' learning efficiency has been tested in around 60 existing cities. We're encouraged by the improved customer retention and scalability of these new initiatives. The top 10 cities contribute over 50% of this business. In summary, our new educational business initiatives recorded a revenue increase of about 15% year-over-year for the first quarter of 2026. Moving to the integrated tourism-related business line and breaking it down, both domestic and international study tours and research camp for K-12 and university students were connected across 55 cities nationwide, with the top 10 cities contributed over 50% of our revenue. In parallel, we provide a series of premium tourism offerings primarily designed for middle-aged and senior audiences across 30 featured provinces in China and internationally. Our product range has also been expanded to now include cultural travel, China study tour, global study tour and camp education. With regards to our OMO system, our efforts in developing and revamping our online merging offline teaching platform continued. These efforts aim to deliver more advanced and diversified education service to our customers of all ages. A total of $28.5 million have been invested during the quarter to upgrade and maintain our OMO teaching platform. Beyond OMO, we continue to focus on our venture in AI. Our newly launched AI-powered intelligent learning device and smart study solution marks significant steps of our ongoing pursuit to transform education through technology. Encouraged by the positive market feedback, we have been and will continue to refine and embed AI across our offerings to strengthen New Oriental's core capabilities. Simultaneously, we're also leveraging AI to streamline internal operations, thereby boosting efficiency and providing enhanced support for our teaching staff. As an industry leader, we're dedicated to driving long-term revenue growth through dual focus on product innovation and operational efficiency. In upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investments in AI. Now with regards to the East Buy's performance. In fiscal year 2026, East Buy strategically invested in its private label portfolio centered around the promise to deliver products that are healthy, high quality and good value for money. As we enrich East Buy's product categories, our blockbuster offerings, namely the nutritious food product line has particularly stood out. We have strengthened our capability through rigorous end-to-end quality management from sourcing to aftersales service, which resulted a greater market recognition for our private label products. During the reporting period, East Buy further advanced its East Buy app and membership platform, connecting our loyal customer base to premium products and services. As the business continued to evolve steadily, East Buy has intensified its focus on improving operational efficiency and profitability metrics to align closely with the group's corporate strategy. Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead. Sisi Zhao: Thank you, Stephen. Now I'd like to share our key financial details for this quarter. Operating costs and expenses for the quarter were $1,212.2 million, representing a 6.1% increase year-over-year. Cost of revenues increased by 9.3% year-over-year to $637.8 million. Selling and marketing expenses increased by 3.6% year-over-year to $200.6 million. G&A expenses increased by 2.4% year-over-year to $373.8 million. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 239.8% to $23.3 million in the first fiscal quarter of 2026. Operating income was $310.8 million, representing a 6% increase year-over-year. Non-GAAP operating income, excluding share-based compensation expenses and amortization of intangible assets resulting from business acquisitions was $335.5 million, representing an 11.3% increase year-over-year. Net income attributable to New Oriental for the quarter was $240.7 million, representing a 1.9% decrease year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $1.52 and $1.5, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $258.3 million, representing a 1.6% decrease year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $1.63 and $1.61, respectively. Net cash flow generated from operations for the first fiscal quarter of 2026 was approximately $192.3 million, and capital expenditure for the quarter were $55.4 million. Turning to the balance sheet. As of August 31, 2025, New Oriental had cash and cash equivalents of $1,282.3 million, $1,570.2 million in term deposits and $2,178.1 million in short-term investments. New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the service or goods were delivered at the end of the first fiscal quarter of 2026 was $1,906.7 million, an increase of 10% as compared to $1,733.1 million at the end of the first fiscal quarter of 2025. Now, I will hand over to Stephen to go through our outlook, guidance and our new shareholder return plan. Stephen? Zhihui Yang: Thank you, Sisi. Following a strong start to the fiscal year, we're optimistic about further improving our margins and operational efficiency while staying committed to effect cost control and sustainable profitability across our all business. As part of these efforts, we are taking a thoughtful and strategic approach to capacity expansion and hiring, ensuring that we continue to grow without compromising the quality of our offerings. We plan to increase our presence in cities with stronger top line and bottom line performance last year, while carefully managing resources. Rest assured, we will closely monitor the pace and scale of new openings, aligning them with local official needs and financial results throughout the year. Guidance-wise, we expect total net revenue for the group, including East Buy in the second quarter of the fiscal year 2026, September 1, 2025 to November 30, 2025, to be in the range of $1,132.1 million to $1,263.3 million, representing year-over-year increase in the range of 9% to 12%. In the second quarter, we projected a notable acceleration of revenue growth in K-12 business, driven by our enhanced service quality, which has led to steady year-on-year and quarter-on-quarter improvement in student retention rates. As for the full fiscal year 2026, we are very confident that our previously provided guidance of total net revenue for the group, also including East Buy to be in the range of $5,145.3 million to $5,390.3 million will be realized, representing a year-over-year increase in the range of 5% to 10%. As part of our appreciation for our shareholders' unwavering support, we today announced that the shareholder return plan for the fiscal year 2026 has begun. The Board of Directors has approved an ordinary cash dividend and new share repurchase program. Regarding the ordinary share dividend, the ordinary cash dividend of $0.12 per common share or $1.2 per ADS will be paid in two installments with an aggregate amount of approximately $190 million. The first installment with $0.06 per common share or $0.6 per ADS will be paid to holders of common shares or ADS of recorded as of the close of business on November 18, 2025, Beijing and Hong Kong time and New York time, respectively. The second installment $0.06 per common share or $0.6 per ADS is expected to be paid around 6 months after the payment date of the first installment to holders of common shares and ADS of the record date to be further determined by the Board of Directors. Details of the second installment will be announced in due course. Regarding the share repurchase program, pursuant to the new share repurchase program, the company may repurchase up to $300 million of its ADS or common shares from open market over the next 12 months. To conclude, New Oriental remains committed to our trajectory of sustainable growth, delivering premium offerings to our customers and sharing the fruits of our success with our shareholders. We're also in close collaboration with the government authorities in various province and municipalities in China, ensuring compliance with the relevant policies, guidelines and any related implementations, regulations and measures and adjusting our business operation as required. This is the end of our fiscal year 2026 Q1 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you. Operator: [Operator Instructions] We will now take our first question from the line of Felix Liu from UBS. Please ask your question, Felix. Felix Liu: I'm glad to hear that you mentioned or expect a notable acceleration in your K-12 business in the upcoming quarter. I know previously, there are market concerns over increased competition, especially over the summer. So, could management elaborate on how is the latest competition landscape in K-12 that you're feeling at the moment? What are the -- have you made any adjustments to your strategy? And what is a reasonable level of sustainable growth for your K-12 business in the mid- to long term? Zhihui Yang: Thank you, Felix. First of all, I'm very happy to see the revenue growth acceleration in our K-12 business since Q2. As you know, started in Q1 and even for the whole year, I think our target is to enhance our quality of product and service in K-12 business. And I think since Q2, we will see the good result. I think, the better quality drives the student retention rate up after the summer. So, that means more and more students chose our Q2 course and also the better word of mouth attracts new student enrollment of our autumn classes. Yes, as you know, we missed some competition pressure in the summer, because of some competitors were using the low price or even the free course strategy. But now we are happy to see students came back to New Oriental to enroll our classes in autumn. So, that's why we raised the guidance of the K-12 business. So, let's divide the K-12 business one by one. And so, we expect the K9 new business revenue growth will be around 20% year-over-year growth in Q2. And for the high school business, I think in the Q2, the growth rate will return to double-digit growth. So, I think you see the revenue acceleration since Q2. And so, I think the high student retention rate and the better word of mouth will drive the revenue growth acceleration. And I think, I believe the revenue growth acceleration will continuously since Q2 and throughout the year. So for -- yes, so for the whole year, 2026, I think the K9 business will be -- the year-over-year growth will be over 20%. And for the high school, like double-digit growth. So, I think, our strategy is correct, because the student retention rate, both for the primary school students and middle school students and high school students, all this is why the student retention rate is getting higher year-over-year. Operator: Our next question comes from the line of Alice Cai from Citibank. Yijing Cai: I have two quick questions. First on SBC. It jumped into a lot to $23 million this quarter. I'm wondering what drove this increase and what's the outlook? The other increase, $21 million, would you break down what the driver is for the SBC? Zhihui Yang: Yes. I think, Alice, your question is about the SBC, the share-based compensation. I think in the second half of the last fiscal year, we issued -- we grant the ADS shares to the management and the staff and teachers in the next 3 years. So, it's driving the SBC up. And yes, so the number of the SBC in this quarter is bigger than that of last year. And yes, but as you know... Sisi Zhao: Yes. You can roughly estimate going forward, every quarter, the SBC expenses will be similar with this quarter and at this kind of level for the coming several quarters. Zhihui Yang: Yes. But I think typically, the first year we recorded more SBC expenses, more in first year and then less in second and third year. Operator: We will now take our next question from the line of Lucy Yu from Bank of America Securities. Lucy Yu: Stephen, I have a question on overseas. It looks like overseas has been stronger than your earlier expectation. Could you please break down the test prep growth by age and also the consulting growth break down by subsegment? How should we think about the overseas sustainability growth? And will that impact your guidance for the full year? Zhihui Yang: Yes. As for the overseas-related business, as you know, we are adversely affected by the external environment. Last quarter, we guided in Q1, the revenue of the overseas-related business would be down by 5%. But in Q1, I think overseas test prep still grew by 1%. Overseas consulting business grew by 2%. I think, we will strive to minimize the negative impact going forward. And so, in the Q2, we still guide the overseas-related business will be down by low single digits in Q2, which were still use the conservative method to make the forecast. And I think, yes, the negative impact from the -- like the international relationship, even the outside environment changed a lot. But I think, we will strive to minimize the impact. And so, we do expect we can beat our guidance, because we do the guidance in Q2, even for the whole year more conservatively. Lucy. Lucy Yu: Stephen, just to follow up. So for example, your test prep is positive. So by age group, like younger age, high school and like, college students, which one of them is better than expected? And also for the consulting business, I believe that 60% is around pure consulting and the other 40% is like background raising. So which part of that is better than expected? Zhihui Yang: Within the overseas test prep, the younger age students group, the business of that part grew very fast, even more than 25% year-over-year. So, that's why the makeup of the like the adults or even the college students business is down. And within the overseas consulting business, I think the non-U.S. and U.K. business, especially for the Asia country consulting business and the background improving the business still grew very fast. So as a whole, I think the overseas test prep and consulting business, we will still give the guidance like the 4% or 5% down year-over-year. But I believe we will do better than our guidance, Lucy. Operator: Our next question comes from the line of D.S. Kim from JPMorgan. D. S. Kim: I actually wanted to ask why the share price is down 6%, 7% pre-market, but I guess that's a question for the market not you. I actually have a question regarding shareholder return policy, if that's okay. How shall we think about the policy going forward, say, is this based on your projected or budgeted net profit and payout ratio? Or is it more based on our expectation on cash flows and whatnot? The reason why I'm asking is, if I use my own estimated the GAAP EPS, what you announced is roughly about 100% payout, say, like 40% payout for the dividend and 60% for buyback based on my GAAP net profit or EPS. Is that what we should think about going forward, i.e., like we could pay regularly over 50% as you guided, but more like 100% payout going forward based on this earnings and payout? Or shall we treat the buyback as one-off only for current year, because of the stock price is low and we only -- we can only expect 50% going forward? Like can we walk us through how we can think about the payout ratio or shareholder return going forward? Zhihui Yang: Thank you, D. S. It's a good question. I think last quarter, our Board approved 3-year shareholder return plan. And this -- we announced earlier today, we paid $190 million dividend, which amounted to the 50% of net profit, we generated last year. And combined with the $300 million, the new share buyback program. So let's do the math. We -- I think, the payout ratio this year is over 130% if you compare the capital allocation with the net profit we made last year. And the dividend plus the share buyback yield is over 5%. So, I think the -- going forward, next year, I think the dividend we will pay, because I think, it is a regular dividend. And the $300 million share buyback we announced this year is not onetime. It's not onetime. I think, next year, I think, I will discuss with the Board and to push the Board to approve the new capital allocation program. And I think, we will keep the high level of the payout ratio and the yield, because think about that, we meet some pressure slowing down the top line. And -- but we can still like the 10% or plus topline growth and generate higher margin. And also, we are piling up the cash. So, that's why the Board support the management to pay more capital allocation to investors. And I think the investors deserve to get more money the capital allocation from the company. And so we announced the 3 years -- the shareholder return plan. So, I think in the next year, we will pay more. D. S. Kim: If I may follow up just on that part, just to clarify, when I said 100%, that was based on fiscal year '26, my EPS. Because the wording of the announcement say this is a dividend for fiscal year 2026. But based on what you say, shall we, going forward, expect that, like, what you announced is actually coming out of fiscal year '25 earnings and what you are going to announce next year will be coming out of fiscal '26. So, will there be 1-year delay? And is that how we should think about? Or I guess, it's all flexible, but just wanted to get your thoughts. Zhihui Yang: I think, this is our internal policy. Because we make the calculation based on the last year net profit. So, we -- last quarter, we announced that we paid no less than 50%. But finally, we paid about 30% -- 30%. And next year, I think we will calculate based on the net profit we made in fiscal year 2026, and we will do the same thing. D. S. Kim: I think that's actually much, much better than what I had expected. So, I am again wondering why stock is down 6%, not up 6%. But anyway, let's see how it goes. Operator: Next question comes from the line of Yikun Zheng from Citic. Yikun Zheng: Congratulations on the strong results. My question is regarding the operating margin. Since the operating margin in Q1 is quite good, I'm not sure if it was mainly due to the cost reduction plan or some other reasons? And how can we expect the contribution of the cost reduction plan for the next season or for the full year? And how do we expect the operating margin for the full year? Zhihui Yang: It's a good question about margin. Let us start the margin analysis of Q1 this quarter. Even though we meet some margin pressure from the slowdown of the overseas-related business, but we still got the group margin expansion by 100 basis points in Q1. And I think the margin expansion was mainly driven by the better utilization, operating leverage and the cost control and the profit contribution from East Buy. As you know, we started to do the cost control since March in the last fiscal year, this year March. And we have seen the good results. And I think, it will help the margin expansion even in the rest of the year, this fiscal year. And we look ahead into the Q2 margin guidance. I think, we are quite optimistic about the margin expansion for the whole group in Q2. And so that means the core business and the East Buy business, both of the business, the margin will be up in Q2. And I believe the margin expansion in Q2 will be greater than that of Q1. And as for the margin outlook for the whole year, I think the whole group are focusing on the profitability across all business lines. We are doing the cost control in all business lines. So, we do hope we can get the margin expansion for the whole year for the group. Operator: We'll take our next question from the line of Elsie Sheng from CLSA. Yiran Sheng: Congratulations on the very good results. I have a quick question on the tax rate, because I noticed that the tax rate in the first quarter is higher. So, could you let us -- so what should we look at the tax rate in the next quarter and also for the full year? Zhihui Yang: In Q1, I think the situation is special, because even the -- since the second half of last year and Q1, we paid dividend from the WFOE to ListCo. And so, we need to pay the withholding tax to the tax bureau. So, it drive the ETR up in Q1. So it was 27%. And typically, we paid 25% of the ETR. And going forward, I think we probably -- we will do more -- pay more dividends from WFOE to ListCo. So, I think in this year, the ETR will be higher than that of last year or normal. But I think the reason is that, you saw, we announced earlier today, we raised the capital allocation to investors roughly $490 million as the capital allocation total. So, we need more dollars, and that's why it drives the ETR up. Operator: [Operator Instructions] We now take our next question from the line of Timothy Zhao from Goldman Sachs. Timothy Zhao: My question is regarding the Q2 K9 new initiatives. When I look at the enrollment growth for this quarter, I still noticed a pretty big gap between the non-academic tutoring and the intelligent learning system and devices. Just wondering, can we use that gap to model the revenue growth gap between these two segments for the first quarter or the second quarter? And do we think that this gap may sustain, I think, going forward, given I think for the intelligent learning system, I think it's a very good business. It's probably also margin accretive to you. Zhihui Yang: I think, the growth rate, the revenue growth of the junior high school business is a little bit faster than the primary schools business. Because, first of all, it's a little bit low base than the kids' business. And secondly, we spent a lot of the efforts and resources in the last 3, 4 years to open a new business of the middle school business. And I think, the whole team contribute a lot of the -- provide a better the product to the customers and the students love the new product. That's why the revenue growth is better. And so going forward, I think we believe the revenue growth of the middle school business will be a little bit higher than the kids' business. But as a whole, the K9 new business growth, you saw our guidance for Q2 and even for the whole year. I think definitely, it's the revenue acceleration is coming. And so as I said, in Q2, the K9 business roughly 20% top line growth. And we do hope we can do better in the second half of the year. Operator: We are now approaching the end of the conference call. I'll now turn the call over to New Oriental's Executive President and CFO, Stephen Yang, for his closing remarks. Zhihui Yang: Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 Labcorp Holdings 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, Christin O'Donnell, Vice President of Investor Relations. Please go ahead. Christin O'Donnell: Thank you, operator. Good morning, and welcome to Labcorp's Third Quarter 2025 Conference Call. As detailed in today's press release, there will be a replay of this conference call available. With me today are Adam Schechter, Chairman and Chief Executive Officer; and Julia Wang, Executive Vice President and Chief Financial Officer. This morning, in the Investor Relations section of our website at www.labcorp.com, we posted both our press release and an Investor Relations presentation with additional information on our business operations, which include a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures. Please see the use of adjusted measures section in our press release and Investor Relations presentation for more information regarding our use of non-GAAP financial measures. Additionally, we are making forward-looking statements. These forward-looking statements include, but are not limited to, statements with respect to the estimated 2025 guidance and the related assumptions, the projected impact of various factors on the company's businesses, operating and financial results, cash flows and/or financial condition, including global economic and market conditions, future business strategies, expected savings, benefits and synergies from the LaunchPad initiative and from acquisitions and other strategic transactions and partnerships, the completed holding company reorganization and opportunities for future growth. Each of the forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and in the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I'll turn the call over to Adam Schechter. Adam Schechter: Thank you, Christin, and good morning, everyone. Thank you for joining us today to discuss our third quarter 2025 financial results and progress on our strategy. During the quarter, we delivered strong revenue growth and margin improvement, leading to double-digit EPS growth. Our financial results reflect continued momentum in our Diagnostic Laboratories and Central Laboratory businesses. At an enterprise level, revenue increased to $3.6 billion, representing 9% growth compared to last year. Margin for the quarter improved 100 basis points, driven by Diagnostics. Adjusted EPS grew 19%, and we generated strong free cash flow of $281 million. Moving to our business segments. Diagnostics revenue increased 8.5%, primarily due to strong organic growth of 6%. Margin improved 110 basis points, driven by strong organic demand in Invitae. Invitae was accretive in the quarter and will be slightly accretive for the full year. BLS revenue increased 8% or 5% constant currency. Central Laboratories growth was strong at 10% or 7% constant currency, more than offsetting softness in early development. BLS margin improved 20 basis points and the quarterly book-to-bill was 0.9 with the trailing 12 months remaining strong at 1.09. In response to the lower-than-anticipated revenue in early development, we are beginning to divest or restructure through site consolidation, approximately $50 million of annual revenue. We will focus these actions on noncore areas, which will result in a more streamlined business and slight improvement to operating income. Julia will provide more details on our results and full year 2025 outlook in just a moment. We continue to make progress on our strategy to be the partner of choice for health systems and regional/local laboratories to lead in high-growth therapeutic areas and to use science and technology to accelerate growth, to enhance the customer experience and to improve operational efficiency across our business. Starting with health systems and regional/local laboratories, we've added a significant number of strong strategic relationships over the past several years. Through these partnerships and acquisitions, we've expanded our patient and provider network, and we've strengthened our presence in key markets. These partnerships have increased access to our broad test menu. They've improved patient care and have driven efficiencies for our customers. This quarter, we signed an agreement to acquire select clinical laboratory assets of Empire City Laboratories, which serves the New York Tri-State area. We signed an agreement to acquire select assets of Laboratory Alliance of Central New York, a pathology reference laboratory. In parallel, we signed an agreement with Crouse Health to manage their inpatient labs. We expect these transactions to close in the first quarter of 2026. We continue to make progress on the acquisition of select assets of the outreach business from Community Health Systems across 13 states, which we expect to close by year-end. We completed our acquisition of select oncology and clinical testing assets from BioReference Health. This acquisition further solidifies Labcorp's position as an industry leader in oncology. We continue to have a very robust pipeline of opportunities, and we look forward to updating you on our progress. Additionally, we are expanding our business in high-growth specialty areas, including oncology, women's health, neurology and autoimmune diseases. These are areas where science, clinical need, the use of genetic testing and innovation are accelerating. We are experiencing strong growth across these segments, which also increases demand in our core test menu as physicians rely on Labcorp for comprehensive diagnostic solutions. In the quarter, we introduced several innovative testing capabilities. We expanded our leading oncology and genetic testing portfolio. OmniSeq INSIGHT, our comprehensive genomic profiling test for solid tumors in support of therapy selection now evaluates ovarian tumors for HRD. PGDx elio tissue complete used for therapy selection for pan solid tumors became the first and remains the only tissue-based tumor profiling test with CE marking under the European Union's In Vitro Diagnostic Regulation. This enhances our global tissue profiling capabilities in support of clinical trials. Geneoscopy received FDA approval for a simplified at-home collection method for ColoSense for colorectal cancer screening. As a commercial partner, we will be expanding access to this test to patients and providers. We also expanded access to our Invitae genetic tests through Epic Aura, enabling streamlined ordering and results delivery for Epic customers. In neurology, where we have one of the most comprehensive test menus in the industry, we expanded our leadership position. We introduced the first blood-based test cleared by the FDA to aid in the diagnosis of Alzheimer's disease in specialty care settings. In early 2026, we're planning to offer the only FDA-cleared blood test to rule out Alzheimer's related amyloid pathology in the primary care setting. Separately, we continue to experience strong momentum in our consumer business. In the quarter, we launched several consumer-initiated tests through Labcorp OnDemand, including tests for lead exposure, ApoB for heart health and a panel for healthy aging. Labcorp partnered with Praia Health, a consumer experience platform for health systems to help close care gaps and to deliver better experiences for patients. Moving now to review our use of science and technology to accelerate growth, to enhance the customer experience and to improve operational efficiency. This quarter, we launched Labcorp Test Finder, a generative AI tool developed with Amazon Web Services to improve test selection for providers and health systems. It allows clinicians to easily search for lab tests using plain language, streamlining decision-making and improving care. In our core laboratory operations, we're investing in digital and AI capabilities to improve in areas such as pathology, cytology and microbiology. Through a collaboration with Roche, we are digitalizing pathology workflows using slide scanners to enhance diagnostic speed and scalability. We've also deployed a new FDA-cleared AI platform for digital cytology that enables remote viewing and rapid analysis of cell-based samples, improving turnaround times. Finally, we're using AI and automation to accelerate microbiology workflows to reduce turnaround times. These are just a few examples where we are using technology, robotics and AI. We look forward to discussing others in the future. In summary, we delivered a strong quarter and made meaningful progress on our strategy. We have momentum as we finish 2025 and move into 2026. Our focus remains on driving value for both our customers and shareholders. With that, I'll turn the call over to Julia to discuss our financial results and 2025 outlook in greater detail. Julia Wang: Thank you, Adam. Now let me start with a review of our Q3 financials, and my remarks today will focus on our adjusted financial results. Please see our earnings press release and supplemental financial presentation for detail on our GAAP results. Revenue for the quarter was $3.6 billion, an increase of 8.6% compared to last year, driven by organic growth of 6.2%, the impact from acquisitions of 1.7% and the foreign currency translation of 0.7%. Adjusted operating income in the quarter was $513 million or 14.4% of revenue compared to $441 million or 13.4% of revenue last year. The increase in adjusted operating income and operating margin was primarily driven by organic demand, including the strong performance of Invitae. Our LaunchPad initiative continued to be on track in the quarter, which offset typical increases in personnel costs. The adjusted tax rate for the quarter was 23.3% compared to 22.8% last year. We continue to expect our adjusted tax rate for full year 2025 to be approximately 23%. Adjusted EPS was $4.18 in the quarter, up 19% from last year. Free cash flow for the quarter was $281 million compared to $162 million last year. The $119 million increase in free cash flow was primarily driven by higher cash earnings. For the full year, we expect capital expenditures to be approximately 3.5% of revenue. During the quarter, the company invested $268 million in acquisitions and partnerships, paid out $60 million in dividends and repurchased $25 million of stock. At quarter end, we had $598 million in cash, while total debt was $5.6 billion. Our debt leverage as of quarter end was 2.4x gross debt to trailing 12-month adjusted EBITDA and slightly under the low end of our targeted leverage range of 2.5x to 3x. Now I will review our segment performance, beginning with Diagnostics Laboratories. Revenue for the quarter was $2.8 billion, an increase of 8.5% compared to last year, with organic growth of 6.3% and acquisitions of 2.2%. Total volume increased 4.7% compared to last year, with organic volume contributing 3.5% as we continued to execute our strategy and drive strong demand. Acquisitions contributed 1.2%. Price/mix increased 3.7% versus last year. Organic price/mix was 2.8% as we benefited from mix, primarily due to the annualization of Invitae as well as an increase in test per accession. Acquisitions contributed 1%. Diagnostics adjusted operating income for the quarter was $450 million or 16.3% of revenue compared to $387 million or 15.2% of revenue last year. Adjusted operating margin was up 110 basis points. Adjusted operating income and operating margin increased, primarily driven by organic demand, including the strong performance of Invitae, coupled with slight favorability from weather year-over-year. Now I will review the segment performance of Biopharma Laboratory Services or BLS. Revenue for the quarter was $799 million, an increase of 8.3% compared to last year due to an increase in organic revenue of 5.3% and foreign currency translation of 3%. We continue to perform well in Central Labs. In constant currency, Central Labs revenue was up 7% in the quarter. Early Development revenue was up 1.1%, lower-than-expected due to delayed study starts. In response to the lower-than-anticipated revenue in Early Development, we are beginning to divest or restructure through site consolidation, impacting approximately $50 million in annual revenue in noncore areas. We expect these actions to result in a more streamlined business with a slight improvement in operating income. BLS adjusted operating income for the quarter was $132 million or 16.5% of revenue compared to $121 million or 16.4% of revenue last year. Adjusted operating income grew 9% year-over-year, driven by organic demand. We ended the quarter with a backlog of $8.6 billion, and we expect approximately $2.7 billion of this backlog to convert into revenue over the next 12 months. Our segment quarterly book-to-bill was 0.89. Our trailing 12-month book-to-bill remains strong at 1.09. Now I will discuss our updated 2025 full year guidance, which assumes foreign exchange rates effective as of September 30, 2025, for the remainder of the year. The enterprise guidance also includes the impact from currently anticipated capital allocation, utilizing free cash flow for acquisitions, share repurchases and dividends. Beginning with the segments, Diagnostics continues to execute well in the marketplace. We have maintained the midpoint versus prior guidance and narrowed the growth range to 7.2% to 7.8%, which assumes approximately 4.5% organic revenue growth. In BLS, we expect to grow 5.7% to 7.1% versus prior year. We have lowered the midpoint by 40 basis points versus prior guidance due to the unfavorable impact of currency. In constant currency, we have maintained the midpoint versus prior guidance as strength in Central Labs is offsetting softness in Early Development. We continue to expect Central Labs to grow in the mid-single digits for the full year. We now expect Early Development to grow low single digits for the full year, with Q4 presenting the most challenging year-over-year comparison. We updated the 2025 enterprise revenue growth guidance range to 7.4% to 8%. We lowered the midpoint by 40 basis points due to timing of acquisition revenue, which are held at the enterprise and the unfavorable impact from currency. We continue to expect full year enterprise margins to increase with margins improving in both Diagnostics and BLS in 2025 versus 2024. Our guidance range for adjusted EPS is $16.15 to $16.50 with an implied growth rate at the midpoint of 12%. As compared to prior guidance, we have narrowed the range and raised the midpoint by approximately $0.05. Our free cash flow guidance range is $1.165 billion to $1.285 billion. We narrowed the range and raised the midpoint by $25 million versus prior guidance, given our strong cash flow generation year-to-date. In closing, our quarterly performance reflects the strong execution of our strategy and the continued efforts of our teams across the organization. As we look ahead, we are confident in our ability to deliver sustainable growth and long-term value for our shareholders. We look forward to updating you in the coming quarters. Operator, we will now take questions. Operator: [Operator Instructions] And our first question comes from Lisa Gill of JPMorgan. Lisa Gill: I just want to better understand when we think about the revenue and the updated guidance around revenue. So Julia, I heard you talk about currency and acquisitions. I'm curious, one, are you seeing an increase in utilization from, for example, the exchange population as people anticipate that they potentially could lose their benefit or it could cost more going into 2026? And then is there a way for you to break down that 40 basis point between currency and acquisitions? And again, is the acquisition just a timing aspect and so we'll see that come through in '26? Adam Schechter: Lisa, I'll start. First, I'd say that $13 million of it was from the foreign exchange, the rest was from the acquisitions, and it's fully timing related. Some of the acquisitions this year closed a little bit later than what we anticipated. So that impacted us just a little bit and then a few fell into next year. But overall, the pipeline remains strong. The acquisitions remain strong. So it's purely timing related. With regard to your question on utilization, I'll first start off by saying we had a very strong quarter when you look at the Diagnostic business. And when you look at the organic volume, it was up 3.5%. And when I think about the volume, we're certainly seeing some uptick, I think, from demographics in the marketplace, from market share that we're gaining. I don't necessarily believe it's due to people concerned about losing to ACA because doctors can only take so many appointments and I don't -- and they're usually very booked. So it would be hard to get a large number of people into those offices that quickly. So I think we're seeing it more from organic volume increases. Operator: And our next question comes from Michael Cherny of Leerink Partners. Michael Cherny: Congrats on a nice quarter. Maybe if I can dig in a little bit on organic price per mix in particular. It's been strong. You had a tough comp this quarter, and yet it still grew nicely. As you think about the behavioral changes that you're making as an organization, how much of it do you feel is proactive versus reactive in terms of what you can push versus what the market is bringing to you as we think about how that builds beyond this year? Adam Schechter: Yes. Sure, Michael. I'll give you some context, and I'll ask Julia to jump in and give you some specifics on the price/mix. So when I look at the Diagnostic revenue, it grew 8.5% versus last year. Organically, it was about 6%. When I look at the organic volume, that grew 3.5% and price/mix grew about 2.8%. Some of that was from mix, but also from Invitae. But I'll ask Julia to give you some more specifics about the price/mix. Julia Wang: Yes. Michael, if you were to break down the impact between unit price and mix, we continue to see unit price being relatively flat. Therefore, the price/mix impact has really been benefiting from mix. And as Adam just shared, in the third quarter, our organic price/mix was up 2.8%. That was driven primarily by increase in tests per session as well as Invitae. Now the impact in Invitae was more pronounced in Q3 due to the timing of the annualization being in the middle of Q3. And going into Q4, we expect Invitae to drive continued price/mix favorability and the impact will somewhat moderate when compared to Q3. And if we step back and look at price/mix in general, over time, we have seen a slight yet consistent growth in test per accession post-COVID era. Longer term, we continue to believe that the mix growth will be supported by the increase in our partnerships with the large hospitals and the health systems as well as the aging population, the health and wellness trend, the breadth of our test menu as well as our focus on specialty testing. And for the full year, you might have seen that in terms of our updated guidance, we maintained the midpoint of Diagnostic revenue guidance of 7.5% and updated the organic revenue growth expectation to 4.5%, whereby the price/mix is going to be a big contributor to that expectation. Operator: And our next question comes from Jack Meehan of Nephron Research. Jack Meehan: I was hoping to get a little bit more color on the announcement around the site consolidation in the Early Development business. Can you just talk about what the factors were you're seeing in the market that led you to make this decision? And it sounds like we got the revenue impact. Is it possible to think about -- it sounds like this might be a low margin, just what the earnings impact might be from the decision? Adam Schechter: Yes, absolutely. And Jack, I'll start off with giving some additional color, then I'll answer the question specifically. But if you look at the Biopharma Laboratory Services businesses, it performed well. And you saw an 8% increase in revenue or 5% in constant currency, but it was really driven by strength in Central Laboratories, it was up 10%, 7% if you look at constant currency, and it more than offset the weakness that we saw in Early Development. Based upon what we're seeing in Early Development, we've decided to look at some noncore areas. We're going to divest certain things there, but we're also going to have some site consolidation. And that will be leading to approximately $50 million of annualized revenue. But without that revenue, we expect to see a slight increase in operating income. So it actually was negatively impacting our accretion. So that will be a positive for us. What drove us that decision was we look at 3 things with the Early Development business. We look at RFPs coming into us, then we look at what's our win rate and then we look at do the trials start on time. If you look at the RFPs and numbers, we're getting about the same number of RFPs that we've gotten in the past. If you look at our win rate, it's about the same. Our market share is stable as it's been in the past. The issue that we're seeing is with timing of study starts. They're just not starting in a timely fashion that we would have expected based upon historical time lines. We expected that to start to come back to more normalcy. Unfortunately, it has not. Based upon that, we've decided to streamline the business and to take the actions we talked about today. Operator: And our next question comes from Patrick Donnelly of Citi. Patrick Donnelly: Maybe just given that PAMA is a little more topical here heading into year-end. Can you just talk about the expectations there? I know you've talked about the $100 million top line impact. I think during conference season, you were talking about some levels of mitigation efforts, maybe something like $25 million. Can you talk about, I guess, the probability, what you're hearing on PAMA, results, et cetera? And then again, what you're doing on the offset? Are you already kind of getting things in line? Would love just your thoughts on the expectations and then the potential mitigation efforts you guys could do into next year? Adam Schechter: Yes, absolutely, Patrick. So we've consistently said that we believe the CMS's execution of PAMA was not accurate, and it shouldn't be implemented in its current form. We've worked really closely with our trade organization, ACLA, to advocate for the RESULTS Act, which would put a freeze on the cuts for a period of time. When you look at that, it has strong bipartisan support. I mean, Democrats, Republicans sponsored the bill. We think that we have very strong support. The question is, with everything that's happening right now and the shutdown and everything else, will we see additional legislation approved by the end of this year. We're going to continue to advocate for it. We have strong support for it, but it's very hard to handicap whether or not that will happen by year-end. We also are continuing to work to see if it should be and can be delayed again as it has been for the last number of years. And that's really going to come down to, I believe, the [ OBO ] score, which we've not seen a final score. If the [ OBO ] score is positive or maybe kind of neutral to slightly negative, I think there's a good chance that it could be delayed again. If it's not, and it goes in a different direction, then I think it will be more difficult with everything else that's going to have to happen by the end of the year. So it's really difficult to predict whether we'll be able to get the results, legislation implemented and/or get another delay. So therefore, we think the prudent strategy is for us to plan that there will be a $100 million impact on both the top line and bottom line for full year 2026. And with that, we are already planning and we have work underway to offset, like you said, approximately $25 million of that impact. And that's in addition to the commitment that we have for LaunchPad, which roughly offsets the cost of inflation. So we're going to do that in addition to. And a lot of that's going to come from the things that we've started to discuss for AI implementation and things that we're doing to increase our efficiency and use AI more effectively. So those things are underway, and we'll provide guidance for 2026 in February, and we'll give you more specifics. Operator: And our next question comes from Erin Wright of Morgan Stanley. Erin Wilson Wright: Could you speak a little bit to your efforts around the consumer-driven testing, the contribution you're seeing now from that? I know one of your peers was talking about that, the margin profile growth rate of that business? And is it starting to what move the needle in terms of volume or overall revenue growth? Adam Schechter: Yes. So if you look at our consumer business, we continue to have a strong focus on consumerism. We're trying to meet the patients where they are through a whole bunch of different channels. And importantly, I mean, we interact or engage with over 75 million patients through all the different avenues that people come to get Labcorp results or information from Labcorp. So as the consumers are taking a much greater control of their health care, we want to be a resource for them and offer solutions that put them in the driver seat, frankly. Today, a lot of them engage with us through our on-demand e-commerce platform. We also have the Ovia app where many people interact with us as well. And what we're seeing is a very significant increase in terms of growth rate. There's no doubt about it. It hasn't reached critical mass at the moment for us to pull out the numbers and provide separate numbers, but we're continuing to add new tests. Just this quarter, we added tests for lead exposure, ApoB for heart health and even a panel for healthy aging. And we're going to continue to add new things there. In addition to that, if you look at Ovia Health, it's a leading app that supports women's health and it guides through all different stages, including pregnancy, postpartum, menopause and a lot more. So these are really important capture points for us. I do believe we're going to continue to see growth in these areas. And as it reaches critical mass, we'll figure out when to start to report it separately. Operator: And our next question comes from Andrew Brackmann of William Blair. Andrew Brackmann: Maybe I guess, on the Diagnostics segment margin expansion, I think it was 110 basis points in the quarter. Can you maybe pick that apart a bit more for us? And I guess, how should we be thinking about the go forward there and considerations around things like price, Invitae and just underlying improvements there? Julia Wang: Yes. Andrew, let me provide some color on margin. As you can see, we delivered meaningful margin expansion at the enterprise level in the third quarter, up 100 basis points versus prior year, supported by both segments. As we shared before, the year-over-year margin comparison in the second half of this year gets tougher for BLS and gets easier for Diagnostics, given the margin evolution throughout 2024. As such, in the third quarter of this year, BLS margin was up 20 basis points, driven by organic demand. Diagnostics had a strong margin improvement of 110 basis points versus prior year, which was primarily driven by organic demand, including strong performance of Invitae. You might recall that Invitae annualized in August of this year and is now fully integrated into our broader business infrastructure. As you look at the Diagnostics margin in Q3, in addition to Invitae, there were some other puts and takes. For example, the savings from our LaunchPad initiative, coupled with a slight favorability from weather helped us offset typical annual wage increases and mix impact from in-hospital lab management agreements. As we think about Q4 margin for Diagnostics, we expect Invitae to continue to be a tailwind. Sequentially speaking, we expect margins to moderate in Q4 versus Q3, reflecting typical seasonality. Overall, I would say that we expect the full year margin expansion by both segments to support enterprise margin expansion in 2025, which contributes to our expectation of growing adjusted EPS by 12% for the full year at the midpoint of our guidance. Operator: Our next question comes from Elizabeth Anderson of Evercore ISI. Joanna Dynak: This is Joanna for Elizabeth. So I have a question about '25 guidance. We only have 1 quarter left, yet the EPS guidance do have a very wide range of $0.35. Like what are the major moving pieces that could swing you towards the high end or the low end of that guidance range? Adam Schechter: Yes. Thank you for the question. And as I look at the guidance, we've narrowed the ranges in our overall revenue guidance and our Diagnostic guidance. We purposely kept the range in BLS a little bit larger. We didn't adjust it this quarter. And the primary reason is as we're looking to do some of the divestitures and/or the site consolidation, the timing of what could impact us this quarter is a little bit uncertain. We're moving as fast as we can, but there are certain things that we can only move so fast on. And that's why we've kept that range a bit wider than we typically would. Operator: And our next question comes from Kevin Caliendo of UBS. Kevin Caliendo: I'm still a little confused about why the margins weren't maybe a little bit better in 3Q. I'm wondering if there was anything discretionary, but any discretionary spend on top of that, just given this. But my real question is more around '26. If we think about the impact if PAMA comes back, let's say, you said the net impact would be $70 million, $75 million. Given all the other puts and takes that you have with Invitae and some of the other deals that you have, can you still meet your LRP if PAMA comes back? And I know there a chance that you could be updating your LRP at some point next year. But I'm just thinking out loud here, just given sort of where the headwinds and tailwinds are. Adam Schechter: Yes. So Kevin, first of all, thank you for the question. And there's nothing unusual for the margins. The 110 basis point improvement in Diagnostics, we think, is strong, driven partially by Invitae, but there's also offsets when you think about some of the hospital deals that we do, they typically start off being dilutive to margins and over time, get to the average margin. So there's always some puts and takes to the margins as we think about that. We also are on track for our Labcorp -- our LaunchPad initiative, which is taking out a significant amount of cost covering almost all of the inflation that we have from employees. So if you then think about Biopharma Laboratory Services, we also saw an increase in the margin of about 20 basis points. When you put those 2 together, we thought we had a strong margin improvement of 100 basis points for the quarter. As we think about next quarter, we expect to see continued strength, particularly in Diagnostics. It's important to note that this quarter, we overlapped 2 or 3 months from the Invitae acquisition. Next quarter, it will be 3 out of 3 months. And in addition to that, we'll continue to make progress in the other areas. BLS will be more difficult because, as you may recall, it was an easier compare in the first half of the year, it's a much more difficult compare in fourth quarter for BLS. But net-net, margins for both businesses, we expect to improve this year versus last year. It's frankly too early to give specifics about 2026. We're going to provide that guidance in February. But I would say we're working really hard to do everything we can to not only get the LaunchPad, but also additional savings from some of the AI initiatives that we have underway, which would offset as much as we can from the impact of PAMA, which is such both on the top line importantly as well as the bottom line. So it's an impact to both top line and bottom line there. Operator: And our next question comes from Luke Sergott of Barclays. Anna Krasinski: This is Anna Krasinski on for Luke. It sounds like the hospital M&A pipeline has reaccelerated given all the macro and policy uncertainty. And just curious if you can talk about whether your deal criteria has changed at all given this larger opportunity set? And would you be willing to take on a lower-margin asset that offers meaningful potential share gains in a particular geography where you're less penetrated? Adam Schechter: Yes. No, thank you for the question. And the hospital pipeline does remain strong, and I expect it to continue to be strong. When I think about the hospital business, I think about 3 different parts of it. One is running the laboratories in the hospital. Those are typically the lowest margin business, but it has a very high return on cost of capital. So we will do that business even though it's a bit lower in margin because it does have a great return on cost of capital. The second thing we look at is the reference work. So if it's business that they can't do in a hospital lab, well they send it to us as reference. And that's good margin business, about the same as our average margin. And then the third part is acquiring the outreach business, which also is about the same as our average margin. Most hospitals, when we do all 3 of those things, it ends up being about the same as our average margin. If we were to only do the hospital running of the labs, it would be lower, but that's not typical. Typical, we would do running the labs along with either the reference and/or the outreach business. So net-net, it should be neutral to margins over time. Operator: And our next question comes from Michael Ryskin of Bank of America. Unknown Analyst: This is Aaron on for Mike. It looks like esoteric testing is growing almost double routine. I guess how are you guys prioritizing R&D investments into those more esoteric tests? And then kind of following that line of questioning for Geneoscopy's ColoSense, how are you thinking about your commercialization strategy? And any reimbursement updates that you guys can provide us? Adam Schechter: Yes. So I'll start with the esoteric business. And we certainly are seeing growth in esoteric business, and it's -- continued asymptotic increases over time. But when you think about 700 million tests that we do in a year, it's hard to move the needle. And typically, esoteric tests are lower in volume overall, but they're very important because when you run the esoteric test, you typically do all the routine tests that come along with it. We have been launching many esoteric tests. But importantly, we're focused on oncology, women's health, neurology and the autoimmune areas. And in those areas, we see growth rates that should be 2 to 3x faster than the overall diagnostic market. So it's certainly an area that we want to be competing in. When we think about how to compete, some of those tests we develop ourselves, some of those tests we license or acquire. And we're really focused on what's the best way to get the best test to market as quickly as we can. And to us, it's more about having all the tests that a physician would need for a patient as opposed to developing any one test internally. So we're really agnostic to developing it ourselves or to acquiring or licensing it. Operator: And our next question comes from Yujin Park of Baird. Yujin Park: On BLS, can you provide more color on bookings between Central Lab and Early Development? I recognize Central Lab bookings can be more chunky quarter-by-quarter and Early demand -- Development demand environment, as you said, didn't change much, but I wanted to hear your thoughts between the 2. Adam Schechter: Yes. So I'll start off with overall on the book-to-bill, then I'll talk specifically. If you look at the book-to-bill, it was about 0.9 for the quarter, a little bit lower than we typically like. We like to be about 1.0 to 1.05. But if you look at the trailing 12 months, it was a 1.09. And I've always said that you have to be careful looking at any one quarter because there are ups and downs to any one quarter. But over time, the trailing 12 months, that's a better predictor. I would expect the book-to-bill in fourth quarter to be better than it was in the third quarter, if you look at it sequentially, albeit it will be a tough year-over-year compare because last year fourth quarter was very strong as well. If I look at the book-to-bill, I feel confident that we're in a very good place. Book-to-bill is a good measurement for the Central Laboratory business, and it remains very strong. I've always said book-to-bill is a little bit more difficult for Early Development business with the primary reason being that many studies in Early Development start and end in the same year. And therefore, there's not a lot of 2- or 3-year trials that kind of build your book-to-bill over time. So you would expect the Early Development book-to-bill to be lower than the Central Laboratory, which it is. But I would say the Central Laboratory is very strong. For the Early Development, I look at the RFPs, the win rate are strong. It's the study starts that are really the issue in Early Development. Operator: And our next question comes from David Westenberg of Piper Sandler. Skye Gilbert: This is Skye on for Dave. Could you provide some more color on the expected revenue and EPS accretion from the completed and progressing acquisitions for 2025 and if you can, 2026, kind of what are the key integration milestones we should be looking out for and potential synergies expected from these transactions? Adam Schechter: Yes. So I think it's -- if you look at what we've provided, we say typically, we expect the acquisitions to provide 1.5% to 2.5% growth in a given year. And that's what we are projecting in our longer-term guidance, which we continue to expect that type of growth. The pipeline remains strong. It remains good. We don't give specific operating income or margin for the individual deals. What I would say is, as I look at hospital deals, in general, when you do all 3 pieces of the business, meaning the reference laboratory work, the in-house laboratory work for the hospital itself as well as the acquisition of the reference -- of the outpatient labs, you tend to have a margin that's about the same as our average margin. Operator: And our next question comes from Tycho Peterson of Jefferies. Tycho Peterson: I want to probe on the Central Lab strengths a bit more. I understand your book-to-bill comments earlier, but can you maybe just talk about the acceleration you saw here in 3Q, a nice step-up from 2Q. Maybe just talk about the durability of what you're seeing now on the Central Lab side. Adam Schechter: Yes. So if you look at our Central Lab business, it remains strong. It had 10% growth on the top line, but it was 7% if you looked at the constant currency growth rate, which is very healthy growth. We expect that it will be in the mid-single-digit growth for the full year. That's typically where you'd expect the Central Laboratory business to grow. We're seeing strong book-to-bill. Last quarter, we announced that we had several large studies that were going to go over multiple years. The more large studies over multiple years you have, the better you are. But overall, I would say that, that business, we expect to continue to grow and to do well as we look for that to offset some of the softness that we're seeing for the Early Development for the rest of the year. Operator: I show no further questions at this time. I'd like to turn it back to Adam Schechter for closing remarks. Adam Schechter: Well, thank you, everybody, for joining us today. And I want to just take a moment to recognize our 70,000-person team members around the world. Our employees really are the driving force behind our mission to improve health and improve lives. Hopefully, you see we have momentum based upon our third quarter results going into fourth quarter, and we look forward to sharing our 2026 guidance in February of next year. Thank you all. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Jan Strecker: Good afternoon, ladies and gentlemen, and thank you for joining us today to review financial results for the third quarter of 2025. Present on today's call are Stephan Leithner, our Chief Executive Officer; and Jens Schulte, Chief Financial Officer. Stephan and Jens will provide an overview of our performance and key developments during the quarter. Following their remarks, we will open the line for your questions. As usual, the presentation materials have been distributed via e-mail and are also available for download on our Investor Relations website. This call is being recorded, and a replay will be made available shortly after the conclusion of today's session. With that, let me now hand over to you, Stephan. Stephan Leithner: Thank you, Jan, and welcome, everyone. I'm pleased to present our third quarter results, which once again demonstrate the strength, resilience and strategic balance of Deutsche Börse Group's diversified business model. Despite a more challenging backdrop in select areas, particularly index derivative at Eurex, ESG & Index at ISS stocks and some FX headwinds, we delivered solid net revenue growth without treasury results. This performance was driven by broad-based momentum with 5 out of 8 business units achieving double-digit growth in the quarter. That's a clear reflection of the robust diversification of our franchise. Our portfolio's balance enables us to consistently deliver even when individual segments faced temporary headwinds. By combining businesses with distinct growth drivers, we maintained a steady and scalable performance trajectory. Let me begin the review of the quarter with Investment Measurement Solutions. As expected, Software Solutions was the key growth driver delivering a solid 10% increase in net revenue. Importantly, annual recurring revenue is trending towards the upper end of our guidance range, supported by a robust client pipeline as we head into the fourth quarter and beyond. The recent acquisition of Domos marks an important strategic step for us in the Software Solutions business. Paris-based Domos is a leading provider of technology-driven solutions for managing and administering alternative assets including private equity, real estate and infrastructure investments. By integrating Domos' advanced digital platform and specialized expertise, we can offer clients a broader range of services, great operational efficiency and enhanced transparency in the alternative investment space. This positions us to capture the growing demand for alternatives among institutional investors and strengthens our footprint in a rapidly evolving segment of the financial industry, especially with the general partners, this opens up many new client opportunities. As we explained last quarter, the environment in the second part of our Investment Management Solutions segment, ISS STOXX remains challenging, especially for the ISS part. While we acknowledge the headwinds resulting from a changed attitude towards certain products, especially in the U.S., we believe this is largely temporary dynamic similar to historic cycles. We remain confident in a return to stronger growth in the medium term. In addition to market dynamics, this business saw the biggest impact of the weaker U.S. dollar on the top line. Regarding the 20% minority stake in ISS STOXX held by General Atlantic, nothing has changed, and we are under no pressure to make a decision this year. A buyout remains an option, and we will continue to carefully evaluate all alternatives with a focus on long-term value creation. Let me turn to the second area to Trading & Clearing. We saw strong contributions across several areas. Cash Equities delivered an impressive 21% net revenue growth driven by robust demand for European equities, in particular, from retail flows. Commodities advanced by 10%, continuing their secular growth trajectory, while FX rose by 7%, supported by market share gains. In Financial Derivatives, fixed income products performed well with 11% net revenue growth without treasury results. We're already seeing initial benefits from the active account requirements under EMEA for example, in OTC clearing with a noticeable step-up in volumes, and this puts us on track with our fixed income road map for further momentum in the coming months. As we have explained before, clients have some flexibility for activating accounts, but the overall potential has not changed. Equity index derivatives, however, remained under pressure due to subdued volatility and challenging market conditions. We believe this is primarily driven by cyclical factors, and encouragingly, we have already seen some improvement in volumes in October as volatility has picked up again. Our Fund Services and Security Services businesses, #3 and #4 of my outline, have also delivered excellent results with net revenue growth without treasury results of 15% and 13%, respectively. These gains were driven by record activity levels, supported by continued expansion of debt outstanding, healthy equity market valuations and sustained inflows into European assets, while double-digit growth in our fund business was in line with expectations. The performance in Security Services clearly exceeds them. In addition to strong custody activity, we saw new all-time highs in international settlement and collateral management, which further underscores the strength and scalability of this business. Let me especially applaud the teams in the new client wins and fast onboarding, like with German neo-brokers and Asian clients. On the cost side, for the entire group, operating expense growth came in slightly below our expectations. FX tailwinds and lower share-based compensation helped offset higher investments and inflationary pressures, keeping us firmly on track to achieve our full year target of around 3% cost growth. Based on our new steering methodology without treasury results, this translates into significant scalability, a 7% increase in revenue drove a strong 16% increase in EBITDA for the quarter. Even when including the treasury results, we maintained solid scalability underscoring the strength of our operating leverage. Looking at the 9 months of the year, we are fully in line with our expectations, delivering 9% net revenue growth without treasury results. Based on this performance, we confidently confirm our guidance for 2025. Our outlook remains supported by strong secular growth trends and continued inflows into European assets even as we experience slight FX headwinds. We're also confirming our overall targets for next year under the Horizon 2026 strategy. At our Capital Markets Day on December 10 in London, we'll provide an update on our progress and introduce new midterm guidance beyond 2026. We firmly believe that the secular growth drivers addressed by our strategy will continue to support our performance at least until the end of the decade. In addition, we see new growth themes emerging across the group that we will focus on to further fuel long-term growth. Taken together, these factors will enable us to consistently deliver growth levers going forward comparable to what we have achieved over the past several years. Artificial intelligence will also play a positive role in this journey. Let me emphasize this. It is certainly not a disruption risk, but as a powerful enabler of revenue growth and operational efficiency. We have performed an AI assessment across the group, and the results are very clear. We see our overall portfolio as extremely robust because we operate regulated system-critical infrastructure at scale. Today, I cannot replace. Instead, we are well positioned to capitalize on the AI opportunity. Our cloud-first infrastructure strategy, coupled with our current cloud adoption rate of over 74% has laid the groundwork for rapid, cost-effective and secure scaling of AI. We expect AI to generate tangible value for our clients and shareholders in 3 key areas. First, although most of our core process is already highly automated, AI will help us create greater efficiencies in our internal processes. Currently, we are focusing on automations across the software development life cycle, corporate center optimizations and improvements to client service and processes. Second lever that we see, we are actively rolling out algorithmic and domain-specific AIs across our products to enhance client productivity and initial results are very promising. AI also provides an additional distribution channel for our proprietary financial market data. And as a third lever, we are seeing positive secondary effects in our core businesses. For example, in our commodity business. Europe's power demand is estimated to increase by 10% to 15% due to AI data center energy consumption. Just like AI will drive further noncorrelated trading and small-sized high-volume trading in all of our asset classes. To hear more about this and much more, I warmly invite you to join us in London on December 10. It will be a great opportunity to engage with our leadership team, gain deeper insights into our strategy beyond Horizon 2026 and explore the exciting growth opportunities ahead. With that, I will hand it over to Jens for a closer look at the financials and segment details. Jens Schulte: Yes. Thank you very much, Stephan, and welcome, everyone, also from my side. Let's start with a quick look at our performance over the first 9 months as shown on Page #2. As you recall, the first half of the year came in slightly ahead of expectations. This was largely driven by elevated equity market volatility in March and April, along with strong inflows into European assets. In Q3, we experienced the typical summer seasonality, coupled with lower equity volatility. This had a somewhat greater than anticipated impact on equity derivatives, particularly index products. That said, our year-to-date results remain firmly in line with our full year expectations and our Horizon '26 growth path. Net revenue without the treasury result rose by a solid 9%, underscoring the strength and resilience of our business model. Now turning to operating costs. We saw a few moving parts across the 3 quarters, but overall, the picture is consistent with our planning share-based compensation provision fluctuated during the period but ultimately were flat year-over-year in the first 9 months. The U.S. dollar-euro exchange rate, which started the year as a headwind turned into a modest tailwind. While the impact was less than 1 percentage point, it still contributed positively to the cost development. We also benefited from lower exceptional costs this year. This reflects last year's termination fee related to the EEX NASDAQ agreement as well as the wind down of costs tied to IMS synergy realization. All in, operating costs increased by 3%, exactly as expected. This uptick was primarily driven by inflation and targeted investments in our strategic growth areas. Bottom line, our EBITDA margin without treasury results improved significantly to 53%, up from 50% in the prior year as our businesses continue to scale. And we also made further progress with our share buyback program. By the end of last week, we had repurchased Deutsche Börse shares worth around EUR 441 million. This leaves approximately EUR 59 million remaining to be executed by the end of November. Let's move to Page #3 with our third quarter results. As Stephan already mentioned, net revenue without the treasury result grew by a strong 7%. Given the cyclical headwinds we faced this quarter, this performance highlights the breadth of our diversified portfolio. Total net revenue rose by 3% to EUR 1.44 billion. This was driven by the continued decline in the treasury results, primarily driven by lower interest rates and despite stable cash balances. Operating costs remained stable in the third quarter, while inflation and increased investments played a role. These were fully offset by favorable FX movements, lower share-based compensation expenses and a reduction in exceptional costs. Overall, our cost discipline remains strong and fully aligned with our strategic priorities. We continue to strike the right balance between investing for growth and maintaining operational efficiency. As a result, EBITDA without the treasury result showed high operating leverage increasing by 16%. Lastly, our effective tax rate came in slightly below expectations, thanks to smaller onetime positive effects. Looking ahead, we continue to plan with a 27% tax rate for '26 and beyond. Let's now turn to Page #4 and take a closer look at our segment results, starting with Investment Management Solutions. This segment is composed of 2 key areas. First, Software Solutions, which combines SimCorp's software business with Axioma's analytics capabilities. Within this area, we saw SaaS revenues grow by 22% and while on-premise revenues declined slightly by 1% as expected. This reflects a clear and ongoing shift. Existing clients are increasingly migrating to the cloud and new clients are typically SaaS-based from day 1. Our annual recurring revenue reached EUR 632 million at the end of the quarter, an 18% increase year-over-year at constant currency. Growth was particularly strong in North America with 27% and APAC with 37%. EMEA delivered a solid 17%. These figures compare very favorably with our main peers and reinforce the strength of our global footprint. The second part of the segment is the ESG & Index business of ISS STOXX, which saw flat net revenue development. However, on a constant currency basis, the picture is more encouraging. Net revenue in ESG & Index grew by 4% in Q3, supported by a solid contribution from the ESG business with 6% revenue growth. Similar to previous quarters, the Market Intelligence business experienced flat growth and low equity market volatility negatively impacted the exchange license business in the Index segment. Importantly, the segment's EBITDA saw a significant increase, driven by disproportionately lower operating cost growth, highlighting the scalability and efficiency of our model. Now let's turn to Slide 5, which highlights the performance of our Trading & Clearing segment. Starting with Financial Derivatives. We continue to benefit from strong fixed income activity. Net revenue without the treasury result increased by 11%, driven by double-digit growth in fixed income futures and repo revenues. OTC clearing all saw high single-digit growth, supported by record clearing volumes following the implementation of the EMEA 3.0 active account requirements in June. On the Equity Derivatives side, volatility moderated significantly in the third quarter, creating a headwind for index products. As markets trended upwards to new all-time highs, hedging activity also declined. However, we partially offset the effects of volume through an increase in average revenue per contract. This was in part due to the decommissioning of the Korea Exchange Link for after hours KOSPI trading as mentioned in our last call. Our Commodities business delivered another strong quarter with double-digit growth once again. In gas, revenue rose 31%, fueled by robust activity in European gas markets amidst supply uncertainties and below target storage levels. We also saw continued momentum in power derivatives in the U.S. and APAC, while activity in Europe moderated slightly due to reduced hedging needs. In Cash Equities, we benefited from strong demand for European equities and significant inflows into European ETFs. This reflects a broader investor rotation into European markets and growing interest in passive strategies. Additionally, we recorded a onetime revenue effect of approximately EUR 3 million from the sale of a T7 license to a third-party exchange. Finally, our Foreign Exchange business achieved net revenue growth across most product lines supported by new client wins and geographic expansion. This diversification continues to broaden our revenue base and enhance the resilience of the FX franchise. Turning to Slide #6. Let's look at the continued strong performance in our Fund Services segment. We are seeing positive momentum across the board, supported by higher equity market levels, new client wins, portfolio growth and ongoing inflows into European assets. As a result, we recorded a further increase in assets under custody and sustained high volumes of settlement transactions. Notably, our fund distribution business saw a significant step up in assets under administration, which now exceeds EUR 700 billion, a major milestone. This growth underscores the increasing relevance of our Fund Services offering and our ability to support clients across the full investment life cycle, from custody and settlement to distribution and administration. With disproportionately lower operating cost growth, the segment delivered significant operating leverage, resulting in strong double-digit EBITDA growth, both with and without the treasury results. Lastly, let's move to our Securities Services segment on Page #7, which has seen a further acceleration of growth compared to the strong first half of the year. The segment continued to benefit from strong capital markets activity with ongoing fixed income issuance and higher equity market levels, driving sustained growth in assets under custody and settlement transactions. We also saw record levels of collateral management outstanding this quarter, which contributed to the strong performance in custody revenue. These trends reinforce our central role in the post-trade infrastructure and the strength of our platform. On the interest income side, cash balances remained stable, averaging around EUR 17 billion for the quarter. As expected, we saw seasonal lows in July and August followed by a recovery in September when market activity picked up and balances rose to slightly above EUR 18 billion. The main driver behind the decline in net interest income was the lower interest rate environment. The ECB rate was 1.5 percentage points below the prior year quarter. And the Fed rate was 0.75 percentage points lower, both in line with our expectations. To wrap up, let's take a look at our full year 2025 outlook on Page #8. We are confirming our guidance for the year, supported by our expectations of continued secular growth and sustained inflows into European assets. This is despite the modest FX headwinds and the low equity market volatility and also aligns with the current sell-side consensus. In addition, we continue to expect a treasury result of more than EUR 0.8 billion for 2025. Based on current interest rate assumptions and stable cash balances, we forecast around EUR 825 million, which is also in line with analysts' expectations. On the cost side, we are very well on track to meet our guidance of around 3% growth in operating expenses for the full year. This reflects our disciplined cost management and strategic investment approach. That concludes our presentation. We now look forward to your questions. Operator: [Operator Instructions] And the first question comes from Arnaud Giblast, BNP Paribas Exane. Arnaud Giblat: One question then. I was wondering if -- I mean, you mentioned during the call that the IMS [ STOXX ] was postponed and that you are still considering a potential buyout. But I'm just wondering if you could update us whether there's an actual time frame on giving the [ minority ] shareholders a liquidity event? And if I may, secondly, there's been quite a lot of news around political comments made by German Chancellor around the potential -- around their willingness to see further consolidation in cash equities. So I was just wondering if you could update us on your thoughts there. I mean, historically, we know that cash equities hasn't necessarily been your priority in terms of consolidation. I'm just wondering if that might have shifted. Stephan Leithner: On your first, Arnaud, and I just looked it up last call, we also took you as the first one on the question. So you've got a [ pull ] position. On the first one of your questions regarding to the minorities, there's no change to what we said before. There's the dual track. As we have always said, we're not alone, there is a partner, and we jointly manage the time line. So no changes in that overall. I think second, on the remarks that Chancellor made, I will put them into the context of a broader, very encouraging commitment that is made around strengthening the European capital markets. So really a push that wasn't there historically around capital markets unions, progressed a number of levers in that context. I think for us, we are a big contributor to that. We have made a lot of progress in terms of European full coverage in terms of infrastructure. This isn't only about the cash markets. So there's really no change with respect to our position and our strategy. Operator: Next question is from Benjamin Goy, Deutsche Bank. Benjamin Goy: One question on your excess cash. Maybe you can remind us of the likely position at year-end and how this impacts your capital allocation policy other than the potential minority buyout? Any other major files you're looking at. Jens Schulte: Yes. So thank you very much, Benjamin. So in terms of excess cash, probably this will play out somewhere in the magnitude of EUR 1.5 billion to EUR 2 billion towards the end of the year. In terms of share buybacks that you alluded to, we have our program running, right, as I said, and we will complete the EUR 500 million. And the further story we will communicate when time is there. Operator: The next question is from Enrico Bolzoni, JPMorgan. Enrico Bolzoni: One, I wanted to go back on your comments about AI and being an opportunity, not a risk. And of the 3 elements you listed, I was particularly interested in the second one. I think you quickly mentioned that it might create new distribution channel. Can you perhaps expand a bit more and let us know if, for example, you are signing or about to sign partnership with, for example, third-party AI engines and whether you think that we might see a monetization of these agreements? And then related to that, if I actually have to take a more bearish stance, there's been a lot of rumor about potential disruption for software solution companies. Can you just remind us of what is the position of SimCorp in this regard and why you think is not subject to perhaps AI disruption? So that's my first question. And my second question is, in a way also related to technological disruption. I know you -- when it comes to the ledger, so the blockchain technology [indiscernible] in the past agreement with HQLA. Can you remind us what do you expect will happen to post services in an environment where there is basically a rising velocity of collateral and perhaps the settlement cycle compresses further, maybe also beyond T+1. So how do you think the business should be positioned and is that a risk? Stephan Leithner: Thank you very much, Enrico, taking up both of your questions. Let me first start on the AI side. And I really emphasize and appreciate you taking up SimCorp. I think the uniqueness of SimCorp is that contrary to sort of any ancillary type services on the software side. SimCorp is very much a front-to-back sort of backbone type business. Therefore, it is really anchored at the core of what is the clients' operations, and that really sets it apart. That's why I think we see a lot of positive enhancement possibilities. That's what SimCorp has started to put in place with the copilot for example around their front office reporting capabilities. Many of those tools give improved usage capabilities for the clients. But I don't think there is any way similar to many of our operations type businesses and execution services. This is a real backbone type system that we operate for the clients in the cloud increasingly as we have said. I think the second point with respect to the data, we have a broad set of data points. And let me just highlight 2 or 3 examples out of that. One is the proprietary data that we can provide on collateral management. One of the themes that you later come back with the DLT and blockchain. So we have a pretty unique capability. In terms of the data understanding, both on collateral as well as on settlement that allows us to deliver services directly to clients because we have that connection to the clients. So therefore, our focus is not signing up a wider distribution agreement, but it's really delivering and optimizing what we can do directly with the client. I think that economically is a much better, much stronger way to monetize AI as well as proprietary data, which we have in so many areas. On your second theme around the blockchain and DLT, HQLAX is one good example of a very advanced and broad industry partnership where Deutsche Börse or Clearstream in this case, has carved out a pretty unique position because within that ecosystem of HQLAX with most of the relevant market participants, the only TTP, so the only trusted third party that is able to confirm the portfolio composition similar to a tri-party agent role is really the Clearstream side. So I think it shows that in these network environments, even if there is DLT used, there is a very strong ability for Clearstream to position and have a unique starting point. Now you also inquired around the implications, if I get it correctly, on the T+1, the higher settlement cycles. We overall see this as something that we don't expect material extra costs on our side, very different from many custodian firms who have a big rewiring to do. So there is no material cost because today, we are really able to operate. Most of this process is already on a T+1. This doesn't fundamentally change. So we also don't see an erosion of our position coming out of T+1. It's really strengthening the strongest operators in the CSD space, and that's where certainly there's not more than 2, if I look those that are able to operate. We have just announced the pan-European footprint operation by basically operating direct services on settlement across all 28 CSDs. Again, it's a unique partnership, a unique link up network that Clearstream has, no others have it. I think it will be strengthened if we move into T+1. Operator: Next question is from Tobias Lukesch, Kepler Cheuvreux. Tobias Lukesch: Also one or two questions from my side, please. Touching on the costs, you mentioned some active cost management and also some investments. I would be interested how active were you in Q3? Should we consider the 3% guidance to be more of a 2.6% for this year, and in terms of investments, is there more to come on the AI opportunities that you're seeing? Or is that something we should consider for '26? Or is that not all really impacting your investment cycle that you have planned so far? And very quickly, you touched on the OTC derivative clearing again and said, with EMEA, this is well on track. Maybe you could give us a bit more insight on the business development since also your competitor kind of doubled down on the business with Q3. Jens Schulte: Good. So I take -- first of all, I start with the OpEx question. So in terms of just generally active cost management, we continuously do active cost management, for example, in terms of expanding our location footprint currently moving parts of the business to India and other locations and gaining further efficiency from our systems. So that is an ongoing process that is not only -- has not only been relevant for Q3. Now very specifically to your question in terms of guidance, we do confirm that guidance at the moment. Keep in mind that as in previous years, if you look into '23 and '24, we usually in Q4 have some seasonality, for example, driven by investments being a bit back-end loaded, driven by merit increases, severance and several other things that typically tend to come more out towards the year-end. So for the moment, we do plan with the 3% and that is the target and then let's see how we come in. But we are well underway. I mean that is certainly true. On the second point, OTC clearing, and the EMEA side, so what I alluded to in my part is that we actually did increase the number of accounts from about 1,600 to 2,200, so by 600 accounts. It is fair to say that the activation rate of those accounts is still relatively muted. So it's overall around 20%. However, what we do recognize now is that after a technical implementation standards have come out and after the clients have started to sort themselves, they are now making specific plans as to how to route their flows. And so we do expect the activity to increase next year. Bear in mind on this topic, that the -- basically, the activation requirement needs to be fulfilled throughout the first full year, so until basically May of next year, so the customers still have time and they take the time to organize themselves properly, but we do expect a significant increase of activity beginning of the next calendar year. Stephan Leithner: Let me take your third part, the investments impact of AI. First of all, let me give you a context that I think is truly very important and sets us apart, which is we have gone very much an advanced investment cycle when it comes to a number of items that now really benefit us on the AI journey, and that's, in particular, the transition into the cloud. We have a mid-70% of our portfolio that is in the cloud that allows us much faster and much more efficient. We have in parallel done and made the transition on the IT security side. So again, these are all areas where we have, over the last years, run significant investment portfolios from which we are now benefiting, that's why we also don't expect any requirements or change when it now comes on the AI invest because we can really build on that effectively and efficiently work together with major model providers and deploy very fast into our organization. So that's one of the items that I think truly from a wider market debate that I've seen around the margin impact of AI is something that we, in our scan and in our review process that we have run have really not seen happen. And I think that's very encouraging to us in terms of the speed and the implementation environment. Operator: [Operator Instructions] And now is from Hubert Lam, Bank of America. Hubert Lam: I've just got one of them. Can you talk about a bit about the pipeline of new clients or upsell for SimCorp into Q4. Usually, I think there's more seasonality in Q4. Just wondering if we should expect a big quarter and what kind of growth to expect heading to the end of the year? Stephan Leithner: Thanks for asking the question, Hubert. I think the seasonality of Q4, we have now explained a number of times and documented in the past years. I think we have given the guidance that in the remaining quarters, we'll see 10% quarter-by-quarter or that's what we said after the first quarter, I think we continue to stick and believe. And if we look at the pipeline, that's what we actually see. But software is every year back-end loaded sort of environment, and therefore, I think it's a lot of hard work, but signs are all on track. Operator: And the next question is from Tom Mills, Jefferies. Thomas Mills: You've alluded to the setting up of new medium-term targets at your CMD on the 10th of December, which I guess means to out sort of 2028. There's obviously been a change of CEO and CFO since the current medium-term targets were put in place. Could you maybe talk a bit about how you fear about getting to the '26 targets? Is it your intention to kind of maintain those or do you step back from them at all? Just because I see sort of consensus is a little below where you're currently expecting to get to? Stephan Leithner: Thank you very much, Tom, for giving me the opportunity to reiterate and emphasize what I said earlier. I think we both really very much confirming our 2026, Horizon '26, as we had talked about it before. I think there is no change and December 10 will not make us change their position. And secondly, also emphasize what I alluded to earlier, which is we see that many of the new growth themes that we see emerging are really fueling us for a long-term growth that goes beyond 2026. So we have a very comfortable outlook there. Operator: Next question is from Jochen Schmitt, Metzler. Jochen Schmitt: I have one follow-up question on custody revenues. You have already mentioned higher revenues from collateral management. Would you see those revenues as partly nonrecurring? Or would you see Q3 as a reasonable starting base for modeling purposes? That's my question. Stephan Leithner: So we do see that as recurring revenues. The settlement business, settlement custody business has a very good run at the moment, and we do see that carrying into the future. Operator: At the moment, the last question comes from Michael Werner from UBS. Michael Werner: I got two, please. First, on the [indiscernible] products. I was just wondering if you can update us on your thoughts about the fee holidays that you currently have on them and whether that could potentially lift in 2026? And then just looking at IMS, I know there was some decline in exceptional costs. But the underlying cost base in IMS year-on-year has been pretty steady, showing quite decent operating leverage. Is that something we should expect going forward? Was there any kind of moving parts on the cost base as I assume SimCorp is a place you want to continue to invest? Stephan Leithner: I think with respect to the fee holiday outlook, we have said we will work on establishing a very stable sort of business base before we really change. So we'll continue to monitor that in Q1, how far out that is going to go. We will decide in the course of the year. So there is no prediction that we're giving at this point. I think the second question that you had with respect to the IMS cost operating leverage, indeed, sort of clearly with respect to some of the areas that have shown slower growth or we have been active and the management teams have been working on the cost. So I think you need to look at that in the aggregate of IMS. I think it doesn't signal at all. And our investment commitment around the SimCorp momentum, as we speak, is very unchanged and there's important product enhancements on which we're working. There have been recent product introductions that have also been fueling some of those big wins, in particular, in the U.S. that we have been very proud about and that we reported on basically a named basis, if I can say, in Q2 already. Jan Strecker: There are no further questions in the pipeline. So we would like to conclude today's call. If there's anything else, then please do feel free to reach out to us directly. Thank you very much for your participation, and have a good day.
Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2025 Universal Health Services Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Darren Lehrich, Vice President of Investor Relations. Please go ahead. Darren Lehrich: Good morning, and welcome to Universal Health Services Third Quarter 2025 Earnings Conference Call. I'm Darren Lehrich, Vice President of Investor Relations. With me this morning are our President and CEO, Marc Miller; and our Chief Financial Officer, Steve Filton. Marc and Steve will provide some prepared remarks, and then we'll open it up to Q&A. During today's conference call, we will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, we recommend a careful reading of the section on Risk Factors and -- forward-looking Statements and Risk Factors in our Form 10-K for the year ended December 31, 2024, and our Form 10-Q for the quarter ended June 30, 2025. In addition, we may reference during today's call, measures such as EBITDA, adjusted EBITDA, adjusted EBITDA net of NCI and adjusted net income attributable to UHS which are non-GAAP financial measures. Information and reconciliations of these non-GAAP financial measures to net income attributable to UHS can be found in today's press release. With that, let me now turn it over to Marc Miller for some introductory remarks. Marc Miller: Thank you, Darren. Good morning, everybody. Thank you for your interest in UHS. I also want to take this opportunity to welcome Darren to the UHS team. We look forward to having him in a dedicated Investor Relations function for our company. . Turning to our third quarter 2025 results. We reported adjusted net income attributable to UHS of $5.69 per share representing a 53% increase from the third quarter of 2024. Revenue growth for the third quarter of 2025 was 13.4% year-over-year. Our third quarter performance reflects continued growth in our acute care operating environment, modest volume improvement in our behavioral health segment and solid pricing across both segments. The third quarter included $90 million of net benefit from the recently approved supplemental Medicaid program in the District of Columbia. Steve will cover the details of this approval and other supplemental Medicaid program updates. Based on our operational performance year-to-date and the increased supplemental reimbursement in the District of Columbia, offset somewhat by additional professional and general liability reserves, we are increasing the midpoint of our 2025 adjusted EPS guidance by 6% to $21.80 per diluted share from $20.50 per diluted share previously. During the quarter, we experienced progress in our 2 most recent acute care hospital openings, West Henderson Hospital in Henderson, Nevada and Cedar Hill Regional Medical Center in Washington, D.C. Specific to Cedar Hill, we achieved accreditation in early September. As a result, the financial drag from our certification timing delay and start-up issues began to subside during the third quarter, and we expect to exit this year at breakeven or better, putting us in a stronger position at this facility heading into 2026. We believe the long-term outlook for Cedar Hill remains favorable due to demand for services and strong support within the community, as well as our long-standing presence in the district at the George Washington University Hospital. Our next de novo acute care hospital opening will be the Alan B. Miller Medical Center in Palm Beach Gardens slated for 2026 -- slated for the spring of 2026. This project remains on track, and we are encouraged by significant interest in the new medical campus by members of the community and the health care professionals that serve patients within this fast-growing market. We have a long track record of expanding presence in core markets with new state-of-the-art hospitals and are excited to build on our existing presence on the East Coast of Florida. Separate from these new hospital projects, we've also been active on the outpatient side within our acute care segment, where we operate 45 outpatient access points, including freestanding emergency departments, surgery centers and other ambulatory services. On a year-to-date basis, we've opened 4 freestanding EDs, bringing our total to 34 and we believe our FED strategy is highly complementary to our acute care operations by allowing us to capture incremental higher acuity outpatient volume within our markets. Within our behavioral health segment, we've taken a disciplined approach to new bed capacity growth, which has allowed us to focus on the highest potential expansion and de novo projects while we increasingly devote resources to accelerate our outpatient behavioral strategy. On the outpatient side of our behavioral segment, we operate approximately 100 access points, including step-down programs closely aligned with inpatient and residential operations as well as step-in programs that allow us to reach patients in convenient community settings. We are on track to open 10 of these step-in programs this year under local brands, as well as our new 1,000 branches wellness brand in a model that supports outpatient services through both virtual and in-person settings. Our strategies are designed to accelerate our outpatient growth rate, diversify our payer mix and allow us to be the provider of choice within the behavioral marketplace that continues to have strong demand across the continuum. The behavioral health care we provide serves an important need within the health care system and our society more broadly. With that, I will now turn the call over to Steve Filton, for a financial review of the third quarter. Steve Filton: Thanks, Marc. I will highlight a few financial and operational trends before opening the call up to questions. The company reported net income attributable to UHS per diluted share of $5.86 for the third quarter of 2025. After adjusting for the impact of the items reflected on the supplemental schedule, as included with the press release, our adjusted net income attributable to UHS per diluted share was $5.69 for the quarter ended September 30, 2025. We recognized approximately $90 million of net benefit during the third quarter of 2025 from the District of Columbia supplemental Medicaid program, which covered the time period from October 1, 2024, through September 30, 2025. Approximately $73 million of this benefit was recognized in our acute care results while the remaining benefit was recognized in our behavioral results. During the third quarter of 2025 on a same facility basis, adjusted admissions in our acute care hospitals increased 2.0% over the third quarter of the prior year. Acute care volumes were consistent with trends in the first half of 2025 with solid growth in both inpatient medical admissions and outpaced services during the third quarter and surgical volumes that increased slightly as compared to the prior year. Same facility net revenues in our acute hospital segment increased by 12.8% during the third quarter of 2025 on a reported basis as compared to last year's third quarter and increased 9.4% after excluding the impact of our insurance subsidiary and the prior period net benefit from the District of Columbia supplemental Medicaid program. Acute care same-facility revenue per adjusted admission increased by 9.8% during the third quarter of 2025 on a reported basis and increased 7.3% after excluding the impact of our insurance subsidiary and a prior period impact of the District of Columbia supplemental Medicaid benefit. Operating expenses continued to be well managed across labor, supplies and other expense categories. We have not experienced any noteworthy impact from tariff trade policies. Total operating expenses per adjusted admission increased by 4.0% on a same facility basis over last year's third quarter after excluding the impact of our insurance subsidiary. For the third quarter of 2025, our solid acute care revenues, combined with effective expense controls, resulted in a 190 basis point increase year-over-year in same-facility EBITDA margin to 15.8% after excluding the prior period impact of the District of Columbia's supplemental benefit. Turning to our behavioral health results. During the third quarter of 2025, same-facility net revenues increased 9.3% on a reported basis and were up 8.5%, excluding the prior period impact of the District of Columbia supplemental Medicaid program. Same-facility revenue growth was driven by a 7.9% increase in revenue per adjusted patient day as compared to the prior year. Excluding the prior period impact of the District of Columbia supplemental, same-facility revenue per adjusted patient day increased 7.1% during the third quarter of 2025. Same-facility adjusted patient days increased 1.3% as compared to the prior period's third quarter with volume growth modestly improving as compared to 1.2% in the second quarter and 0.4% during the first half of 2025. We expect further volume improvements during the fourth quarter, although we now believe a reasonable expectation for same facility adjusted patient day growth should be in the 2% to 3% range with our near-term expectations at the lower end of this range. Expenses in our behavioral health segment continued to be well managed with relatively stable margins during the third quarter leading to a 7.6% increase in same-facility EBITDA as compared to the third quarter of 2024 after excluding the prior period impact of the District of Columbia supplemental benefit. We continue to experience labor tightness in some markets, although hiring trends have improved steadily throughout the year. Our cash generated from operating activities was approximately $1.3 billion during the first 9 months of 2025 as compared to approximately $1.4 billion during the same period in 2024. We expect to collect the $90 million of District of Columbia supplemental payments during the fourth quarter of 2025. During the first 9 months of 2025, we spent $734 million on capital expenditures, close to 30% of which related to the new hospital in Florida and a replacement facility in California. During the 9 months ended September 30, 2025, we also acquired 3.19 million of our own shares at a total cost of approximately $566 million including 1.315 million shares purchased during the third quarter of 2025. Today, our Board of Directors authorized a new $1.5 billion increase to our stock repurchase program, bringing our total authorization to $1.759 billion, including amounts remaining under the previous authorization. Since 2019, we have repurchased approximately 36% of the company's outstanding shares and paid approximately $340 million in dividends to shareholders. In the absence of compelling acquisition opportunities over the near term, we expect to continue to prioritize our excess free cash flow for share buyback and dividends. As of September 30, 2025, we had approximately $965 million of aggregate available borrowing capacity pursuant to our $1.3 billion revolving credit facility. Turning to an update on Medicaid supplemental payment programs. Our current projected 2025 full year net benefit from various previously approved programs is $1.3 billion. This figure includes amounts recorded during the third quarter for the previously mentioned District of Columbia program and additional amounts related to this program that are expected to be recorded in the fourth quarter of 2025, but it does not include programs pending CMS approval. As we discussed during our second quarter 2021 earnings call, the OB3 legislation includes several significant changes in the Medicaid program, including changes to state-directed payment programs and provider taxes. At this time, assuming no changes to our Medicaid revenues or other changes to related state or federal programs, we estimate that commencing with the 2028 fiscal years, our aggregate net benefit will be reduced on an annually increasing and relatively pro rata basis by approximately $420 million to $470 million in 2032. This cumulative impact range has been increased to reflect recent supplemental program approvals. Given various uncertainties, including the evolving state-by-state interpretations and computations related to this legislation, our forecasted estimates are subject to change potentially by material amounts. Operator, that concludes our prepared remarks, and we're pleased to answer questions at this time. Operator: [Operator Instructions] Our first question comes from Justin Lake with Wolfe Research. Justin Lake: Steve, appreciate all the details. I was hoping you could give us an update in terms of I know there's a couple of states pending approval, Florida, I believe, Nevada. Maybe you can give us some color on the potential DPP there that could benefit the company if those are approved? And then maybe give us a quick rundown on -- or an update on where the exchange contribution looks like? What's the kind of run rate on the exchange volume in revenue year-to-date? And any updated thoughts on if those subsidies expire, what do you think that estimate is? Steve Filton: Sure, Justin. So as far as any new potential Medicaid supplemental benefits, we've been disclosing for I think several quarters that there is approval of a pending plan or expansion of the pending plan in Florida that we estimate would result in about a $47 million annual benefit to us. As I said that program remains pending CMS approval or the state of Florida seems confident that it will be forthcoming at some point. Additionally, I think we learned this quarter, and we'll include this in our to-be filed 10-Q for the quarter that there's another maybe $30 million approximately of Nevada DPP increase, again, pending CMS approval. So on a combined basis, these 2 states would represent somewhere in the $75 million to $80 million range. To the best of our knowledge, there are no other material programs or approvals pending. As far as your second question about exchange contribution, the percentage of our total adjusted admissions, acute care admissions that are exchange patients is in the 6% to 6.5% range. That number has been ticking up. Most of those patients are in 2 states in Texas and Florida. And so I think all the public companies have been reporting increases and we have a smaller footprint in those states than some of our peers, but our numbers have been picking up as well. We have previously given an estimate assuming that the exchange subsidies don't get extended about $50 million to $100 million negative impact on us annually. Given the increase in exchange volumes, we're probably trending towards the higher end of that range. As far as, I think, sort of any prediction about how the exchange subsidy issue is to be resolved, I don't think we have any particularly pressing insight into that and what we're watching how this develops in Congress along with everybody else. Operator: Our next question comes from Jason Cassorla with Guggenheim. Jason Cassorla: Great. Just wanted to check in on '25 guidance. You increased the midpoint by a little over $90 million. Can you just walk through the bridge to the updated guidance, how that's split between the 5 quarters of D.C. DPP, the malpractice reserve increase, the legal settlement in the quarter and outperformance? And then you have about a $50 million guidance range at the low and high end, not significant range by any means, but just thoughts on what you need to see to trend towards the high end or the low end of guidance at this point. Steve Filton: Yes. So Jason, I think you largely captured the components of the guidance increase. As you said, at the midpoint, it's in that $90 million to $95 million range. That's made up of $140 million of increased DPP. The biggest chunk of that, of course, is the D.C. number. That's $90 million that we recorded in the third quarter and another $25 million that we expect to record in Q4. So that's $115 million of new DPP. There's another $25 million of miscellaneous increases across a variety of space, none of which are singularly materials to get us to the $140 million increase in DPP. And then we deduct from that the $35 million malpractice increase that we described in our press release and another $18 million in a legal settlement that we described in an 8-K that we filed a few weeks ago and that gets you to that sort of low to mid-90s number. Effectively meaning that we're assuming from a core business perspective, the trends that we expected when we increased guidance last quarter will continue. When you talk about sort of what it takes to get us to maybe the higher end of that, we're talking about, I think the 2 businesses running same-store revenue increases in the 5% to 7% range. And what gets us to the higher end is if we land at the higher end of that range, either through volumes or pricing. So I think all that is pretty consistent with what we've said previously. Jason Cassorla: Okay. Maybe just as a follow-up, just checking in on managed care activity and state budgets in relation to your behavioral health business. I mean it looks like behavioral health length of stay continues to hold on. Pricing remains favorable. I guess are you seeing any different behavior as it relates to managed care at this juncture for behavioral? And we're hearing multiple states enacting budgets that are reducing behavioral rates. Just any thoughts on the state budget situation across your markets stepping into 2026 would be helpful. Steve Filton: Yes. I mean I think we have consistently found that managed care players are aggressive in their utilization management and their management of length of stay and their management of where patients are treated, meaning in inpatient or outpatient settings. I don't know that that's changed materially. As you point out, our length of stay has remained fairly constant. A lot of that is I think, a function of our aggressive behavior in terms of documenting the medical needs of patients, et cetera, which we are very much focused on. And so we, again, have not seen, I think, significant changes in payer behavior to date. We understand that payers are under -- or any number of payers are under some pressure, but we also understand that their subscribers do need behavioral treatment. And I think given our market presence, given our clinical reputation, et cetera, we continue to be, I think, a preferred provider for many of those managed care companies. As far as state budgets are concerned, the only state budget that I'm aware of where there have been actual Medicaid cuts is in North Carolina for behavioral. It's not a state that's material to us. I think about 2% of our behavioral beds are in the state of North Carolina. Other states have talked about state budget cuts for Medicaid, and we're sort of tracking that. But at the moment, I've not seen anything that affects us in any sort of material way. Operator: Our next question comes from Whit Mayo with Leerink Partners. Benjamin Mayo: I'm just curious how West Henderson is performing now and any cannibalization of that on overall volumes within the quarter? And then my second question is just on Cedar Hills, whether or not you think it can offset the headwinds. So if it was, let's say, a $50 million drag with start-up losses this year, that $50 million will reverse itself. But any thoughts on maybe the growth next year? Steve Filton: Yes. So I think as Marc commented in his remarks, West Henderson has been performing well. It's had positive EBITDA really ever since it opened, which is really quite remarkable for a startup hospital. It does, I think, affect our same-store numbers and particularly our same-store volumes that we've talked in the past that there's probably -- and again, this is difficult to quantify precisely, but we would estimate maybe a 50 or 60 basis point impact on our same-store adjusted admissions meaning without Henderson or West Henderson in the mix, our same-store adjusted admissions might be 50 or 60 basis points higher because of the cannibalization because some of their admissions or adjusted admissions are coming from our existing hospitals in the market. The West Henderson is doing well, and we would expect we'll continue to improve into 2026. Cedar Hill, as we identified last quarter, lost $25 million in the second quarter. We projected they would lose $25 million in the back half of the year. They did lose that $25 million in the third quarter. And I think as Marc pointed out, we expect them to break even in Q4 and improve into next year. So obviously, the $50 million loss that we incurred in 2025 should be a tailwind going into 2026, assuming that worst case Cedar Hill breaks even. We assume they'll do better than that, and they will be profitable in 2026, although I think our general sense and we'll give more detail on this when we give our guidance in February is that any incremental improvement over breakeven will largely help to offset any opening and start-up losses from the ABM Medical Center in Florida. Operator: Our next question comes from Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: I appreciate your commentary on your outpatient surgical initiatives. I was wondering if you could give us a little bit more color on what you're seeing in terms of surgical trends, both inpatient and outpatient and what case mix is looking like in the quarter and just how that's contributing overall to the volume growth for the acute care hospital segment? Steve Filton: Yes. So I think in our prepared remarks, we made the comment that outpatient surgical trends increased slightly over the prior year in the quarter, and that actually was an improvement over the first half of the year when I think they were actually down. So we're encouraged by that. And I think we've noted that I think some of the, call it, surgical softness or softness in surgical volumes, I think, it's been difficult comparisons with prior years where we were seeing some benefit from the catch-up of deferred and postponed -- procedures that have been deferred and postponed during COVID. I think we're starting to anniversary that and we kind of get behind us. And it feels to us like surgical volumes are returning to sort of more normal levels. Again, I'm sorry, was there a second part to your question? Unknown Executive: Case mix... Steve Filton: Case mix. Yes, case mix was up slightly in the quarter, not a big driver of improvement, maybe 30 basis points. Operator: Our next question comes from Raj Kumar with Stephens. Raj Kumar: Just on the BH side, maybe just trying to kind of understand overall supply/demand dynamic. You've seen kind of like SWB growth of high single digits on a same-store basis or while volumes have kind of been slightly negative to slightly positive throughout the year. So maybe just trying to understand what the dynamics are in terms of your kind of increasing staffing and we should expect kind of better volume growth kind of in subsequent quarters. Or is this kind of more just in order to maintain capacity that you're kind of push into these SWB trend? Steve Filton: Yes. Raj, I mean, I think that we've talked at some length in previous quarters, if there are 2 broad sort of overarching dynamics that I think have muted behavioral volumes. One, as I think we mentioned in our prepared remarks, has been a labor scarcity issue. It's not pervasive. I think it exists in maybe 1/4 to 1/3 of our hospitals where we struggle to fill all of our vacancies, whether that's nurses, whether that's therapists, whether that's nondegree professionals, the people that we describe as mental health technicians. But I do think that in those specific facilities, volumes are often muted. I think as we said in our prepared remarks, our hiring numbers are increasing incrementally, albeit. And I think you see a little bit of that in the salary and wage data that you're referring to. I think the other piece of this is what we're finding, and I think we read through what a number of the managed care companies say is that behavioral utilization broadly and nationally is up across the board. A lot of that seems to be on the outpatient side. And I think that's being delivered in a very -- I'll describe it in a sort of fragmented way, meaning those -- that outpatient care is being delivered in all sorts of settings, including hospital emergency rooms and urgent care centers and retail pharmacy clinics and mom-and-pop operations. We think we can do a better job of capturing more of that outpatient activity through, frankly, better focus as well as new and additional dedicated outpatient facilities. Obviously, that focus and those facilities require additional staff, and we've been staffing up for that. So to some degree, I think the increase that you're alluding to in salaries and wages is something that's preparing us to be able to treat and absorb more patient volume. Raj Kumar: Great. And then maybe as a quick follow-up. You had a step-up in kind of acquisition spend in the quarter, and I'm assuming that's kind of more on the outpatient behavioral acceleration that you've kind of spoken to. So maybe what could we kind of expect forward from a capital deployment on M&A on that front? Steve Filton: Yes. So the acquisition spending that you referred to is actually mostly it's about $35 million or $40 million in the U.K. in the quarter, and that's mostly honestly on the inpatient side. I think we've talked about the fact on the outpatient side in the U.S. creating a greater presence in the outpatient space really doesn't require a tremendous amount of new capital. It's probably $1 million or $2 million on average to create one of the step-in outpatient clinics. So again, I think the bigger challenge in those places is finding the appropriate number of therapists more than it is a significant capital spend. Operator: Our next question comes from A.J. Rice with UBS. Albert Rice: Maybe a couple of quick things here. I think in your updated guidance, there's about $25 million of sort of miscellaneous DPP payments. And it seemed like in the back half of the year that are incremental, is that more in the third quarter? Or was that something that will be booked in the fourth quarter? And on the litigation settlement in Nevada, was that booked in the third quarter? Or is that going to be booked in the fourth quarter? Steve Filton: Yes. So the litigation settlement was recorded in the third quarter, and it's reflected in our non-same-store acute results. The additional DPP, I think, is spread pretty ratably between the third and fourth quarters. Albert Rice: Okay. I know you -- your pricing on both businesses, actually, even if you ex out the DPP payments was pretty strong by historic standards. Anything to call out there? Any -- is that a sustainable level of year-to-year pricing gains? Any thoughts on that? Steve Filton: So taking it segment by segment, I think on the acute side, we said that our revenue per adjusted admission was close to 10% increase. Half of that, I think, is DPP related, which means 5% is sort of from core results. That's on the high side for sure. I think we think that sustainable acute care pricing is more in the 3%, maybe 3-plus percent range. I think the excess in the quarter is a result of some revenue cycle initiatives that we've undertaken to ensure that our billing is clean and complete that our denial appeals are as appropriate and aggressive as they should be, dispute resolutions with a number of payers, all that sort of stuff. There's a few small onetime items in terms of an opioid settlement, and we've disclosed our accountable care organization profits, but yes, I think our general sense is that acute care pricing in the 3% range is sort of that sustainable level. On the behavioral side, we've been in the 4% to 5% range when you adjust out, I think the DPP impacts. We've been running that and probably in the quarter, we're again at the higher end of that range, because of, I think, some of the things we've discussed already, some pressure from Medicaid state reductions. I think we believe that the sustainable level of behavioral pricing is probably a notch below that, maybe 3.5% to 4.5%. But still it should continue to be quite positive and a good tailwind for that business. Operator: Our next question comes from Craig Hettenbach with Morgan Stanley. Craig Hettenbach: On the behavioral side, you mentioned kind of a slight improvement in hiring. Can you just talk about more broadly how you think about capacity versus demand in behavioral and kind of what that means for volume growth? Steve Filton: Yes. I mean we've said that I think we think a reasonable level of volume growth in the behavioral business in the intermediate and long term is sort of 2% to 3% adjusted patient day growth. We're still a little shy of that and feel like there's a chance we can get there exiting this year. But if we don't, I think it's a reasonable target for next year, particularly at the lower end of that range. . To get there, we need to continue to be able to fill our vacancies and reduce our turnover, things that have been happening, and I think we can improve. But I think we can see that, that process has been somewhat slower than we expected. But we continue to make incremental progress and expect that we'll continue to make incremental progress. Craig Hettenbach: Got it. And then just a follow-up on capital allocation on the back of the increased buyback authorization. Your net leverage is at kind of the low end of history. Just how you're thinking about that? And any targets there and how that might influence capital deployment going forward? Steve Filton: Yes. I mean we've been an active acquirer of our shares for a number of years now. We' said in our prepared remarks that since 2019, we've repurchased more than 1/3 of our shares. We continue to view share repurchase, particularly at the current stock price levels as a compelling use of our capital. We have seen an elevation in our activity in share repurchases, largely, I think, tied to the increase in our free cash flow. And I think our expectation is that at a minimum, we'll continue to devote most, if not all, of our free cash flow to share repurchase, absent any other compelling opportunities. Might we choose to increase that and lever up even more to do that? We might. That's something that will make that judgment as we move along. Operator: Our next question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: Great. Maybe I'll ask a behavioral question again, maybe slightly differently. I guess like when we've historically thought about this long-term supply-demand imbalance within behavioral, you at least had a competitor who is growing very quickly now. It seems like they're slowing, they're closing down capacity in certain locations. Is there anything else that you're seeing more broadly? Because 2% to 3% isn't a Herculean number, I don't think, but it also is easier to underwrite when someone else is growing much faster. Is there a competitive dynamic that's going on that's maybe skewing things as a part of the market that we don't see every day? Or anything else that you would kind of point to that might say that the broader market is, in fact, growing faster than we can see from the outside? Steve Filton: Yes. I mean, so Kevin, the first thing is it's difficult for us, I think, to comment on operating trends in a competitor. We just don't have access to enough detail to really have, I think, useful insight in that regard. In terms of sort of what -- maybe I'm rephrasing a little bit, the question you asked in terms of what gives us confidence that there is increasing demand out there. I did reference before. I think I'm not going to say every single managed care entity, but a great many of the managed care entities over the last several quarters in explaining an increase in their medical loss ratios and utilization have cited behavioral care as a significant chunk of that. And we obviously don't have access to their data, but we do have access to claims data and things that we look at fairly carefully. And what we see is increased behavioral utilization, as I said earlier, on the outpatient side, in particular, being delivered in a lot of -- I'm going to sort of call them nontraditional, some not necessarily dedicated behavioral facilities, but in emergency rooms and urgent care centers and nursing homes, et cetera. And I think given the clinical product that we can offer in our in and outpatient facilities, given our in-network position with many of these managed care companies, et cetera, we believe that there's an opportunity for us to capture an incremental amount of that. And as you point out, it's not a Herculean effort. We're at 1.3% patient day -- adjusted patient day growth in the quarter. We're sort of targeting 2%. That's obviously not a huge gap to fill. Marc Miller: Let me just add also, Steve's made the point. I mean some of the limitations have been on staffing. And as that stabilizes, we do think that there are significant opportunities that we can take advantage of. We've been very responsible for the last few years in our growth. And other competitors, multiple competitors have been a little bit more aggressive and now probably didn't make sense some of the moves that they've made, and they're having to temper that and go backwards. So we're on the same path that we've been on. We've been responsible in the way we've looked at it. We've held on some supply increases. So adding beds because of maybe a lack of staffing in some of those markets. And as that stabilizes, we're going to have even more opportunities to grow going forward. So we feel really good about where we are with that. Kevin Fischbeck: Okay. Then maybe just then follow-up on the outpatient side of the equation because to your point, you do have some advantages here as far as your in-network location position and contracts and things like that. But it sounds like you're not capitalizing or you haven't capitalized on it historically. Can you talk a little bit about the barriers? Is it just lack of focus? Are there markets where you are doing it well and that are blueprint? I mean, how can we get confidence that you're going to get that if hiring has been the issue because hiring has been kind of an issue for a while now. Why will you be able to kind of capture that volume going forward? Steve Filton: So what we've talked about, I think in the last couple of quarters, Kevin, is I think 2 things. One is just an increased focus. We have conceded that for most of our decades-long history as a behavioral health provider, it has been a very inpatient-centric business. And while we have always had in most of our markets, outpatient programs, they just haven't been a focus. And what we've done, that I think will wind up being quite effective is we've reorganized such that throughout the organization now, there's really dedicated personnel or personnel that are dedicated to developing clinical programs, business development, referral sources, et cetera, that are dedicated outpatient focused. And I think that's going to make a big difference because historically, when you have inpatient-centric facilities that have sort of on the side, outpatient programs, the outpatient programs just don't get the attention that they need. So I think focus reorganization of personnel, et cetera, will be a big help in that regard. The second piece, which we've talked about quite a bit in the last few calls is there's really 2 components of behavioral outpatient. One is what we describe as a step-down business. These are folks who are generally discharged from our facilities, but who require follow-up care, either partial hospitalization or intensive outpatient therapy. We've always had that. And again, I think that business will benefit from increased focus. But where we haven't really had much of a presence historically is what we described as step-in business. These are patients who enter the behavioral system in an outpatient setting and often are not comfortable doing that and entering the system on a hospital campus, they much prefer to get that care in a freestanding outpatient setting. And I think that's where Marc was referring in his prepared remarks to our 1,000 branches, branded program. We brand it that way because we don't want to necessarily associate it with an existing inpatient hospital, but again, as you said and/or repeating what I have said, we have advantages. We already have existing referral relationships, referral source relationships. We have existing managed care contracts, et cetera, that should help us establish a footprint in that step-in freestanding business a lot faster than a competitor might be able to do. Operator: Our next question comes from Matthew Gillmor with KeyBanc. Matthew Gillmor: I wanted to ask about the acute performance. As you think about the volume trends and the expense trends that Steve discussed, is there any geographic variation to call out to highlight, particularly in some of your larger markets like Las Vegas? Steve Filton: Yes. I mean, obviously, there's always some variation in performance. We've been asked, I think, about the Vegas economy in the last couple of calls. I think it's fair to say that our Vegas or the results in the Vegas market are very similar to our overall results. And again, as we pointed out, I think West Henderson in particular, is ramping up quite nicely. We do acknowledge that there's been a lot of data that suggests that tourist volume is down in Las Vegas. It's something we're watching. If that decline in tourist volume starts to have a ripple effect on the Vegas economy and unemployment rises, et cetera, that, I think, could be challenging in the future. At the moment, we're not seeing those impacts. Unemployment honestly, I think it has remained relatively stable at the moment in Vegas. And again, I think our performance in that market is remaining pretty stable and pretty consistent with our overall portfolio in the acute care business. Other than that, no, I don't think there's anything real significant from a geographic perspective. Matthew Gillmor: Okay. Fair enough. And then a quick follow-up on the pending SDP approvals. You mentioned Florida and Nevada. Is there a way for us to think about how that breaks down the net benefit between acute and behavioral? Steve Filton: Well, first of all, I would say that the Las Vegas number is predominantly acute. I don't have a breakout in front of me, Matt, for the Florida number. We can provide that in the future. Operator: Our next question comes from Benjamin Rossi with JPMorgan. Benjamin Rossi: Just wanted to touch on operating cash flow development. You noted that some of the drag year-to-date has been coming from unfavorable changes in AR. I know you're expecting to get some of that back next quarter as you collect on the D.C. approval, but do you have any theories as to the drivers behind this unfavorable trend? And then is it fair to attribute some of this to a broader payer utilization management trends? Steve Filton: Yes. I think our belief, Ben, is that the increase in our AR is almost exclusively a function of the $90 million of D.C. DPP that we intend to collect or expect to collect in the fourth quarter. And then the new receivables, both in D.C., we didn't get our Medicare certification and ability to bill until early September. So there's virtually no collections in -- at Cedar Hill in the third quarter. And even West Henderson, as its business continues to grow, its AR continues to grow. I think once we sort of factor in those dynamics, we're finding our days in receivables to be quite consistent with historical levels. Benjamin Rossi: Okay. Appreciate the confirmation. I guess just a follow-up on some of your acute volume commentary. Specific to your self-pay category, how did volumes trend during 3Q? And then how your self-pay volumes developed year-to-date relative to your expectations coming into the year? Steve Filton: I think as we said in our previous comment, the one sort of identifiable change in payer mix is we saw an increase in exchange volumes. That seemed to come at the expense or as a shift from Medicaid. So exchange volumes are up a little bit on an overall basis and Medicaid volumes are down. In terms of our other payer classes, Medicare, commercial and self-pay that you're asking about specifically, we haven't seen any major changes in those other payer classes. Operator: Our next question comes from Stephen Baxter with Wells Fargo. Stephen Baxter: I think you touched on this a little bit, but just hoping you could elaborate more on the change in surgical you saw in the quarter going from down slightly as of last quarter to up slightly this quarter. I guess where are you seeing that improvement come from? And I think this has kind of been bounced around a little bit, but just wondering if you feel like there's been any kind of pull-forward evidence that we've seen of that for maybe like exchanges, other populations where coverage loss is a bit of a concern going forward. Steve Filton: Yes. I mean I think we've seen the improvement in surgical volumes relatively across the board. I would say cardiology and cardiac services has been particularly strong. As far as sort of pull through, which I think the crux of that question is, does it seem like exchange patients are sort of accelerating care in anticipation of potentially losing their coverage. I don't think we -- I don't think that we're really seeing that. I think we've made the comment before that, that exchange population seems to behave or their utilization behavior sort of mirrors or is more closely tied to the Medicaid population, meaning it tends to be emergency room centric as opposed to a lot of elective cases. So I don't -- we don't think -- I think that there is this significant pull-through impact. Operator: Our next question comes from Michael Ha with Baird. Hua Ha: On behavioral volumes, I just wanted to confirm, you're now expecting 2% to 3% growth in fourth quarter, but closer to the low end. And then should we expect next year to be consistently in that 2% to 3% range? And then on acute pricing strength, even excluding the D.C. DPP, 5% is pretty strong, especially off a tough prior year comp. I know, Steve, you mentioned case mix, revenue cycle initiatives, other one-timers, but how much did exchange volumes contribute to pricing? And I know you mentioned 2% to 3% is still a pretty good long-term target. Just to confirm, you're still confident on 2% to 3% even in the face of exchange volume declines over the next couple of years. Steve Filton: Yes. So you threw out a lot of numbers, Michael. I'm not sure that I follow all of them. Again, I'll repeat I think that our view of the sustainable acute care model is 5%, 6% revenue, same-store revenue growth, split pretty evenly between price and volume. So 2.5% to 3% price, 2.5% to 3% volume. I think on the behavioral side, maybe 6% or 7% same-store revenue growth, 2% to 3% volume, 3.5% to 4.5% price. Operator: Our next question comes from Ryan Langston with TD Cowen. Ryan Langston: I appreciate the commentary on capital deployment, but the leverage ratios just keep coming down despite the share repurchase activity. I know you mentioned the new Florida Medical Center. But have you sort of contemplated any additional areas you could increase capital spending or sort of absent M&A and again, additional spending, are you just kind of comfortable letting those ratios decline? Steve Filton: Yes. I don't think we anticipate our leverage ratios getting any lower than they currently are. Obviously, we're not looking for ways to spend capital just to increase our leverage ratios, whether that's acquisition-type opportunities or CapEx. We'll continue to invest where we think we can earn a compelling return. I think we've intentionally kept our leverage ratios low in an environment where there has been some level of uncertainty at the sort of policy, regulatory legislative level. I think that's been a prudent approach. As I think we sort of start to experience and hopefully, we do start to experience more certainty, we may be more comfortable increasing those leverage levels. Operator: Our next question comes from Joshua Raskin with Nephron Research. Joshua Raskin: Yes. I guess one that just left maybe an updated view on where you think margins can trend in the next few years, sort of think about prepandemic levels versus the progress you guys have made since the pandemic? And maybe specific areas where you think there's opportunity to expand margin in each segment? Steve Filton: Yes. I think just sort of mathematically, Josh, the general sense is if we can achieve the revenue targets that I just outlined in my last response, 5%, 6% on the acute side, 6%, 7% on the behavioral side. Clearly, costs at the moment are not rising faster than that. They're rising more at the 4% range. And so as I think has been the case with the historical model for these 2 businesses for many years, there should be an opportunity for EBITDA growth and margin expansion. And again, in an environment of relatively stable operating costs and I think relatively stable demand and pricing, we're looking at margins in both businesses able to continue to improve. Joshua Raskin: And maybe the follow-up, and it's probably a silly question, but how do you go back -- I know let's exclude some of the government segments that are paid. But when you're negotiating with managed care companies, if you're seeing that revenue number, I think the core acute number of 5% that you guys are throwing out, if you're seeing numbers in that ballpark and costs are not going up as high, what's sort of the conversation with the payers and the justification around above-average rate increases that we've been seeing lately? Marc Miller: So the point that I would make on this is not exactly what you're pointed to. But when we sit down with these managed care companies, we've got much better information these days than maybe we had years ago. So even though we feel like we're doing well in a number of our areas, we still see some of our pricing lagging competitors in certain markets. And that's what we really point out and hone in on. And that's where we're able to have a positive effect for ourselves, because we're still behind what they're paying some of our competitors. So that's one big area that we bring up in our negotiations. Operator: That concludes today's question-and-answer session. I'd like to turn the call back to Darren Lehrich for closing remarks. Darren Lehrich: Thank you, everyone, for participating in today's call and also for your interest in UHS. Hope you have a great rest of your day. Thanks. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the A.O. Smith Third Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Helen Gurholt. Helen Gurholt: Good morning, and welcome to the A.O. Smith Third Quarter Conference Call. I'm Helen Gurholt, Vice President, Investor Relations and Financial Planning and Analysis. Today, I'm joined by Steve Shafer, Chief Executive Officer; and Chuck Lauber, Chief Financial Officer. Within today's presentation, we have provided non-GAAP measures. Free cash flow is defined as cash from operations less capital expenditures. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website. A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we described in this morning's press release among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue. We will use -- we will be using slides as we move through today's call. You can access them on our website at investor.aosmith.com. I'll now turn the call over to Steve to begin our prepared remarks. Stephen Shafer: Thank you, Helen, and good morning, everyone. I would like to start by briefly thanking the many dedicated A.O. Smith employees and broader set of partners and customers in our ecosystem for another quarter of helping to make clean, hot and safe water available to millions of people. We appreciate all you do to make that happen. Please turn to Slide 4, and I will now review our financial performance in the quarter. Our global A.O. Smith team delivered third quarter sales of $943 million, a year-over-year increase of 4%, and EPS of $0.94, a 15% increase over 2024. North America sales grew 6%, primarily as a result of our pricing actions and strong commercial water heater and boiler volumes. We achieved North America segment margin expansion of 110 basis points and Rest of World segment margin expansion of 90 basis points. Continued economic challenges and more limited availability of government stimulus programs led to a 12% decrease in local currency sales in China. Pureit contributed $17 million of sales in the quarter, and our legacy India business continued its strong double-digit growth trajectory by delivering 13% growth in local currencies. North America water heater sales increased 6% in the third quarter, driven by pricing actions taken in response to higher tariffs and other input costs as well as higher commercial water heater volumes. Our market-leading high-efficiency condensing gas and heat pump products continue to have a compelling payback story in commercial applications. Our residential water heater volumes were also positive, so we believe that Q3 industry volumes declined year-over-year. As we expected, we believe our -- we believe we outperformed the residential and commercial markets in the quarter, in part due to our production efficiency initiative that limited the prebuy impact on our sales in the first half of the year. Our North America boiler sales increased by 10% compared to the third quarter of 2024, led by the benefits of pricing actions and higher volumes of our high-efficiency boilers. North America water treatment sales decreased 5% in the third quarter, as continued growth in our priority channels was more than offset by an expected decrease from the retail channel. Our priority dealer, e-commerce and direct-to-consumer channels grew 11% in the quarter. In China, third quarter sales decreased 12% in local currency, as the ongoing economic challenges and reduced availability of government subsidy programs along with an increasingly competitive environment led to lower volumes. Despite these challenges and the resulting volume pressure, we achieved 90 basis points of margin expansion compared to last year through the restructuring initiatives we undertook in 2024 and other cost-saving measures. Please turn to Slide 5. I would now like to take a moment and talk about our commitment to sustainability. For us, sustainability is not just a goal, but a core part of who we are and what we do every day. We are committed to not only developing and bringing to market innovative, high-efficiency products, but we are also dedicated to sustainability in our facilities and manufacturing processes. Later this week, we will publish our sustainability progress report, which will include our sustainability scorecard and an update on our water conservation, greenhouse gas emissions and waste reduction goals. What the report will show is that we are meeting or exceeding the goals that we set out for ourselves. The outcome of these efforts are providing both sustainability and bottom line results. Example initiatives we have undertaken to support these goals include the test water recirculation system, which recycles water used during our product testing processes and our glass enamel reuse process, which captures waste glass enamel for reuse in our tank manufacturing process. These are examples of how we are seamlessly -- how we seamlessly integrate sustainability into 2 of our priority areas, operational excellence and innovation. We remain dedicated to finding better ways of doing things, including how to improve our business while protecting our planet. I'll now turn the call over to Chuck, who will provide more details on our third quarter performance. Charles Lauber: Thank you, Steve, and good morning, everyone. Please turn to Slide 6. Third quarter sales in the North America segment of $743 million increased 6% compared to the same period last year, primarily due to benefits of pricing actions as well as higher commercial water heater and boiler volumes. North America segment earnings were $180 million, an 11% increase over the third quarter of 2024. Segment operating margin was 24.2%, an increase of 110 basis points year-over-year, primarily due to pricing actions and higher volumes, more than offsetting higher material and other input costs. Moving to Slide 7. Rest of the World segment sales of $208 million decreased slightly compared to last year and included $17 million of sales from the Pureit acquisition. Sales in our legacy India business grew 13% in local currency. China third-party sales decreased 12% on a constant currency basis. Rest of the World segment earnings of $15 million increased year-over-year as continued expense management and the benefits of restructuring actions more than offset lower volumes in China. Segment operating margin was 7.4%, an increase of 90 basis points compared to the prior period. Pureit will continue to be a headwind in the near term as we focus on integration, which is progressing well. Please turn to Slide 8. Operating cash flow grew 21% to $434 million, and free cash flow grew 35% to $381 million during the first 9 months of 2025 compared to the same period last year, primarily due to lower inventory balances that were partially offset by other working capital outlays, including lower customer deposits in China. Our cash balance totaled $173 million at the end of September, and our net debt position was $13 million. Our leverage ratio was 9.2% as measured by total debt to total capital. Let's now turn to Slide 9. Earlier this month, our Board approved a 6% increase in our quarterly dividend to $0.36 per share, making 2025 the 32nd consecutive year that A.O. Smith has raised its dividend. We repurchased approximately 5 million shares of common stock in the first 9 months of 2025 for a total of $335 million. This is an increase compared to the same period last year, as we raised our planned full-year repurchase intentions from $306 million in 2024 to approximately $400 million of shares for 2025. Consistent with our key priorities, we are actively assessing strategic opportunities and have sufficient dry powder for acquisitions that meet our strategic and financial criteria. Our M&A priority continues to be deals that strengthen our core business or help us build new growth platforms. Please turn to Slide 10 and our 2025 earnings guidance and outlook. We are narrowing the range and lowering the top end of our 2025 EPS outlook from a range of $3.70 to $3.90 per share to a range of $3.70 to $3.85 per share. We have included the following assumptions in our outlook. We began to see the impact from tariffs in the third quarter and expect that our tariff costs will continue to increase into the fourth quarter as additional impacts make their way through our supply chain. Though the tariff landscape remains uncertain, we maintain our estimate that annualized tariffs will increase total company cost of goods sold by approximately 5%, which includes tariff rates currently in place as well as the mitigation efforts we have implemented. As a reminder, our mitigation strategies include footprint optimization, strategic sourcing and other cost controls and pricing actions as necessary. Apart from tariffs, we expect overall material costs for the year to remain approximately flat versus last year, with steel costs rising 15% to 20% in the second half of 2025 compared to the first half. We estimate that 2025 CapEx will be approximately $75 million. We expect to generate free cash flow of approximately $500 million. Interest expense is projected to be approximately $15 million. Corporate and other expenses are expected to be approximately $75 million. Our effective tax rate is estimated to be approximately 24%. And we project our outstanding diluted shares will be 142 million at the end of 2025. I will now turn the call back over to Steve, who will provide more color around our key markets, top line growth outlook and segment expectations for 2025, remaining on Slide 10. Steve? Stephen Shafer: Thanks, Chuck. Key assumptions in our top line outlook include the following. We project that 2025 U.S. residential industry unit volumes will be flat to slightly down compared to last year, a slight decrease from our previous guidance due to residential new construction expectations that have come down since last quarter. Lower housing completions, particularly in multifamily as well as concern around consumer confidence, have led to this revised outlook. The wholesale channel impact is expected to be greater due to its heavier exposure to new construction. That said, we are encouraged by the resilient demand we are seeing in the commercial water heater market segment. And as a result, we are increasing our projection for commercial water heater industry volumes from flat to last year to up low single digits. We are pleased with our strong performance relative to the market in the third quarter and the share momentum we have going into the fourth quarter, supported by our winning products in this segment. Economic challenges persist in China. While government stimulus programs helped to stabilize parts of the market in the first half of 2025, we believe the stimulus programs pulled forward a significant amount of demand. During the third quarter, national sub fees were discontinued, resulting in increased promotional activity and discounting from our competitors, much of which we chose not to participate in. Because we do not expect an improvement in market conditions in the near term, we are lowering our 2025 China sales outlook to a decline of approximately 10% in local currency. We continue to benefit from the restructuring actions taken in 2024, as well as other cost-saving measures, which we project will offset the margin impact of lower volumes for the year. Our 2025 North America boiler sales projection of an increase of between 4% and 6% compared to 2024 is unchanged. We are very pleased with our growth in the first 9 months of the year, although we believe we may have benefited from a minimal amount of prebuy related to price increases implemented in the second quarter. We continue to monitor our key markets closely. We have not changed our guidance that North America water treatment sales will decline approximately 5% in 2025, as we deemphasize the less profitable retail channel. We continue to be pleased with the growth we have seen in our priority channels and our onboarding of new dealers during the year. Our plan to drive 250 basis points of operating margin improvement in 2025 for the North America water treatment business is on track. Finally, we expect the addition of Pureit will add approximately USD 55 million in sales in 2025, slightly higher than our earlier guidance. It will not have a significant bottom line contribution this year, as we work through integration. Based on the continued economic challenges in China and the softening wholesale residential water heater market in the U.S., we have lowered our full-year sales outlook from 2% to 3% growth to a range of flat to up 1% compared to last year. We continue to expect our North America segment margin will be between 24% to 24.5%, and we expect that Rest of World segment margin will be approximately 8%. Please turn to Slide 11. Last quarter, I laid out my areas of focus. Earlier this month, the top 140 leaders of A.O. Smith gathered to talk about the future of our company, to align on key priorities and inspire each other through the opportunity to connect and share ideas on how to deliver the next great chapter of the A.O. Smith legacy. I came away from this important time together confident in our path forward and with the commitment from our leadership team to execute. I look forward to sharing more regarding this leadership summit and our focus areas in the quarters to come. I am also pleased to welcome Chris Howe as our new Chief Digital Information Officer. Chris is the transformational leader that we need to help us invest wisely in new technologies for the future and unlock even more value potential in the technologies we are invested in today. In his previous roles, Chris led transformational effort to leverage enterprise software solutions or most recently worked on the forefront of generative AI solutions. He will be instrumental in ensuring we have the technical capabilities needed to support all our priorities, especially operational excellence and innovation. As we shared last quarter, and as part of our portfolio management priority, we announced the intention of our formal China strategic assessment. While we remain early in the process, we are making good progress. We commissioned a third-party analysis of the China market, and it confirmed many of our assumptions entering the strategic assessment. One, our brand remains strong, well-known and respected among Chinese consumers, especially with regard to our innovative products and premium solutions. Two, our strategy to expand into broader categories that can be connected by smart home solutions and our AI Link capability was a necessary path forward. And three, we have a number of go-to-market and business model opportunities to better strengthen the business and capture our fair share of market recovery. We believe that we have a good understanding of our challenges and are evaluating potential opportunities to ensure the future success of this business, as we drive greater value for shareholders, employees and other stakeholders. In conclusion, I am pleased with our third quarter execution, particularly in the North American segment. I'm also encouraged by the progress we are making on our strategic priorities, including portfolio work to help strengthen our business going forward. Regarding execution, we delivered a solid third quarter in North America, led by pricing performance and our strong commercial, high-efficiency portfolio while expanding margins through operational discipline. Looking forward, we remain confident in our ability to navigate the tariffs and competitive landscape in our core water heater and boiler businesses, where we serve a large replacement-driven market with a broad industry-leading portfolio and go-to-market model. Regarding our portfolio, we are driving double-digit growth in priority areas, including boilers, select North America water treatment channels and India. At the same time, through our strategic assessment, we are working to understand and address what is required to improve the performance of our China business. Finally, we continue to generate cash, maintain a strong balance sheet and are ready with dry powder necessary to build out our portfolio in ways that complement our business today. With that, we conclude our prepared remarks and are now available for your questions. Operator: [Operator Instructions] Our first question comes from Saree Boroditsky with Jefferies. Saree Boroditsky: Maybe just building on some of the China color. You obviously lowered expectations around China sales. Could you just talk about your performance versus the overall market there? And is this just a weaker market? Or is there any competitive dynamics going on? Stephen Shafer: Yes. It's a little bit of both. So the market continues to have its challenges. And as I mentioned, there's been a little bit of a pull-forward demand driven by the government subsidy program. So we're on the other side of that. And I think within that down market, the competitive intensity continues to increase. So we see a lot of promotional activities trying to step in where government subsidies were playing a role to generate demand previously. And so that's adding to the competitive pressure. And I think, as we see our path forward, as I mentioned, we've got confirmation that our brand remains very strong there. We have a really strong innovative portfolio to serve our customers, but we need to work through this period of challenging market conditions. Saree Boroditsky: Appreciate that. And then obviously, one of the bright spots this quarter was in the North America commercial water heater sales. I think previously, you attributed some of the strengths to prebuy. So just maybe a little bit more detail on what you're seeing in that market and what's driving the strength there? Stephen Shafer: Yes. It's been a strong market condition for commercial products, but I'd also say we have a really strong portfolio in that space. And I mentioned on the last earnings call, the launch of our FLEX commercial water heater, and -- so we've got that out in the marketplace that I think is performing very well. So it's a combination of a really strong market backdrop, but also in an area where we've got a really competitive product offering. Charles Lauber: And I would add that during the third quarter, we benefited from our production efficiency program to make sure that we were level loading a bit closer to the market. And some of that strength we saw in commercial and residential heater was a part of the output of that benefit in the level loading program. Operator: Our next question comes from Bryan Blair with Oppenheimer. Bryan Blair: Just to level set on the China strategic review. We know there isn't a timetable as of now in terms of the ultimate decision, but given the insights from the assessment so far, has the range of potential outcome has been narrowed in any way? Stephen Shafer: No, Bryan, not yet. I mean, we're still early enough in the process that we're not ruling out any outcomes at this point. So like I said, we've done some really good work just trying to profile and understand the market. We've gotten some third-party assessment to do that. We've started the process of reaching out to other participants, which is why we wanted to announce that we were putting the business under the strategic assessment, but we're not at a point yet where we've kind of narrowed down or have a view of what the outcome of that is yet. It's still too early. Bryan Blair: Yes. Understood. Appreciate the color. The priority channel growth in North American water treatment, certainly encouraging in Q3, and that 11% nicely aligns with the 10% to 12% organic growth target you had put out at Investor Day. With mix now reset for the platform, is that kind of organic growth in play going forward? Stephen Shafer: I mean, that's certainly how we think about the business long term. I would say there's still more work to be done, right? So we've done some reprioritization of the channels and where we think we can be competitive and win. I think there's still more work and investment in that space to build out that platform. But we feel good about the growth potential of that business. Operator: Our next question comes from Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Just on the U.S. resi water heater market, I think you didn't change your industry shipment assumptions, but seem to lean a little more cautious. So I just wanted to understand a little bit better how you see that playing out. Charles Lauber: Yes. Our outlook for the industry, we were talking about flat industry on our last call. And now, we're saying flat to slightly down. So we do see a little bit of pressure on the residential side. Most of that is coming through new home construction completions on the residential side that we're seeing some of that weakness. So we've taken it down just a tad. Jeffrey Hammond: And are you seeing kind of the market share recapture play out as you thought? Stephen Shafer: Yes. As we were looking at level loading our production this year, we've seen our performance relative to the market in Q3 come back and gain share back as we expected. Jeffrey Hammond: Okay. And then just -- I think you mentioned some additional tariff headwinds, maybe quantify or talk about where you're seeing that? And then just as you look at steel pricing and kind of forward tariffs into '26, how does that kind of inform pricing actions you need to take into '26? We're seeing -- we're hearing from kind of other channels that maybe next year is another above average increase. I just wanted to get your view there. Charles Lauber: Yes. This is Chuck. I mean, the mention on tariff pressure was really framing from third quarter to fourth quarter. It's probably maybe 20 basis points on North America margins, where we are seeing a bit heavier tariffs kind of accumulate. Our full year outlook at 5% has not changed. So it's still a little bit of timing, putting a little pressure on the North American margins in the fourth quarter. We'll be back in January. We're giving a little bit of an outlook on cost. The tariff world is a bit volatile. So I think we'll kind of hold off commentary to see where material costs go in that respect. Operator: Our next question comes from Mike Halloran with Baird. Michael Halloran: Could you talk a little bit through what you're seeing in the residential side of things in terms of the discretionary spend? I certainly heard the commentary earlier that some of that weakness that -- or incremental weakness you saw in the residential volume side from an outlook perspective is tied to new housing starts being a little bit lower, no surprise. Are you seeing anything different on the discretionary piece? Charles Lauber: We really haven't seen that change. We do a survey every quarter, and we look at proactive replacement, as you know. And if we kind of look at that survey, there's quarters where it edges up, edges down. But overall, it's still above that 30%. Proactive replacement remains pretty resilient. Certainly, something we'll watch as we go forward. But -- it's a backward since the last trailing 12 months survey. So we'll have to continue to watch that and make sure we understand if there is a trend developing. But right now, still above 30%. Michael Halloran: So -- and then following up on Jeff's other question, I know you're not giving '26 thought process, but if trends were to play out, and we weren't going to get any incremental actions, the pricing that you've taken in your mind is enough to make you price-cost positive or at least be price-cost neutral on the margin line or in terms of EBITDA dollars once kind of all the catch-up happens. Is that a thought process? Or is there still going to be some gaps relative to what you're seeing from an inflation perspective with the actions you've already taken? Charles Lauber: Yes. When we do our price increases, and it really was no different other than the amount of the price increase this time with the tariff costs hitting us, we typically look to cover margin plus cost. So just a reminder, the last one was second quarter because it was effective. When we announce those prices, they go out, and certainly, we see pressures over time on the price, and we have a bit of a fade. So I think we'll kind of still reserve kind of the answer to that as we get into the next quarter, but we're comfortable with our price-cost relationship now. But as you'll see, there's some pressure when you look at our guidance and a little bit of pressure on margins in the fourth quarter. Operator: Our next question comes from Susan Maklari with Goldman Sachs. Charles Perron-Piché: This is Charles Perron-Piche. First, I'd like to go back on the China market. Understanding the market conditions are tough, but I guess, do you have any thoughts on potential additional restructuring initiatives in the region given the environment and something that would be done ahead of potential strategic announcement? Stephen Shafer: I think it's one of the things we're going to continue to kind of work through and learn more about as we go through our strategic assessment, and I kind of alluded to the fact that there's opportunities for us as we think about how we go to market, our business model. We're going to continue to evaluate those things. Whether we do those through partnerships or we do them for ourselves, it's something we still have to work through. But our goal is to make sure that the business is set up well for success. And obviously, a little bit of market recovery will help aid that in a bit. But we're going to continue to kind of learn from the changing market environment and make the necessary changes. And whether that comes through things that we'll take on and self-help to do that or whether that's done through partnerships is one of the things we're assessing right now. Charles Perron-Piché: Okay. That's helpful color. And then I think in your prepared remarks, you talked about the potential for a strategic acquisition within your or adjacent market. I guess, on this, can you talk about what is the pipeline for these types of opportunities in the current environment, along if the timing of any strategic decision on that is dependent on the potential announcement of the strategic review in China? Stephen Shafer: No, I think one of the strengths we have, right, is a strong balance sheet and our cash generation capabilities, so we've got an active pipeline. We continue to evaluate that from kind of a strategic lens, financial lens, where we want to go next. And as I mentioned, partly it's how do we strengthen the core of our business, how do we think about building new higher-growth businesses, and we're going to continue through that process. So I don't think it's connected to other decisions we're making across our portfolio at this time, and we're ready to move, I think, when the right opportunities come about. Operator: Our next question comes from David MacGregor with Longbow Research. David S. MacGregor: I wonder if you could just give us an -- I was wondering if you could just give us an update on gas tankless and the progress to date on relocation of manufacturing and market development and just the impact on third quarter margin contribution and maybe the implied fourth quarter, which you've got in the '25 guide? Stephen Shafer: Sure. As you know, we've made a big investment to enter with our own products into the gas tankless space. We've been building out the right set of products, the manufacturing capability here in North America. And all of that is progressing well. I think the market itself for tankless is under pressure, heavily connected back to the residential construction market that we talked about. So from that standpoint, it remains kind of a challenging market. But I think we're really excited that I think we've got the right products, we've got the manufacturing capability ready. As we've talked about in the past, we've made some changes. In the past, we were talking about launching in China, moving to North America. We've made some changes into that strategy, which has made some delays to our current plan in terms of how we're going to go after the market. But I think we're happy with where we're at. We'd like to move faster in the marketplace. And I think as the market picks up and recovers, especially around new construction, and with the product offering we have and the supply chain we have, we'll be ready to compete successfully. David S. MacGregor: Are you getting good feedback -- sorry, go ahead. Charles Lauber: I was just going to answer the question on margin pressure. It's -- we're anniversarying when we first launched the product last year, so the margin pressure is a bit less than the 40 basis points we had historically talked about. For the quarter, it's probably about 20 basis points. It's not overly significant. And I think you were asking about feedback. David S. MacGregor: Yes. I was just going to get you to talk a little bit about what you're getting back from the marketplace and people. I know that you were undertaking a phased launch on that product in terms of just incremental models, and is the acceptance level relatively good at this point? Or are people waiting for the full assortment? Just any commentary on that would be helpful. Stephen Shafer: Yes, folks love the product. And when they get their hands on it, and they get comfortable with it. And as you know, we've been building out our portfolio. So when we have the full portfolio, we'll be even more compelling. There's also elements of how we serve this market, right? A lot of more gas tankless tied to the new construction. So we're working out on the business model as well. But I would say, at the end of the day, the product is a market-leading product, and that's what we look to do when we got kind of our own product offering into this space. Operator: Our next question comes from Nathan Jones with Stifel. Adam Farley: This is Adam Farley on for Nathan. Let me follow up on -- I wanted to follow up on the China commentary. I know fourth quarter is typically seasonally stronger quarter due to the shopping holidays. So what is your expectation for the selling season going into the fourth quarter, balancing that with some of the headwinds you guys are seeing there? Charles Lauber: Well, you're exactly right. It's typically the fourth quarter is one of our strongest quarters in China. Our outlook assumes that there is an uptick in volume in the fourth quarter compared to the third quarter. But I will say when you kind of frame our outlook for China overall to be down 10%, you'll note the fourth quarter gets a little more pressure on year-over-year comps compared to the third quarter. So without the -- with the discontinuation of the subsidy program, there's a bit of uncertainty in China on how the fourth quarter may play out. But right now, we have kind of normal cadence, but not at normal volumes. But just kind of relative to the third quarter, we do see a bit of an uptick. Adam Farley: That's helpful. And then maybe shifting to boilers, which was a bright spot in the quarter, I think you mentioned maybe you think there's a little bit of pre-buy there, but I was also wondering if the boiler sales cycle is maybe elongating at all due to general market uncertainty or maybe that's not an issue at all? Charles Lauber: No. I mean, we do believe that there was some pre-buy, so there is certain boilers that, I'll call it, inventoriable size. They're small enough that you'd be willing to invest and put them in inventory. We've seen a couple of strong quarters in boilers. Typically, our strongest quarter is the third quarter. So we do think we'll see a little bit of a headwind as we go into the fourth quarter for some of the unwind of the, call it, inventoriable boilers that will come out in the fourth quarter. But overall, the market quoting remains pretty steady, pretty consistent, particularly on the large CREST units. So we're not seeing any major change or elongation in, what I would say, quoting to the order cycle. Operator: Our next question comes from Andrew Kaplowitz with Citi. Andrew Kaplowitz: Steve, obviously, you've had good operating experience in your past positions. Maybe just stepping back as you've looked at AOS, and given how many of your markets are relatively sluggish, how have you sized the potential opportunity for cost out overall at AOS and/or the potential to accelerate new product-related growth as you begin to transition into '26? Stephen Shafer: Yes. Andy, so as I've mentioned, 2 of our priority areas are A.O. -- the operational excellence and how do we get more out of the A.O. Smith operating system and innovation. And I think that gets after both components of your question. I think -- we don't have a good sizing yet of what the value is at stake on that, but what I'll tell you is I'm encouraged by the fact that we can bring even more kind of discipline into our operating rhythm at A. O. Smith. I think we have great manufacturing capability, and we run a lot of our business with great people with a lot of experience. And I think bringing some discipline, and I mentioned Chris Howe joining us as our CDIO, I think discipline and leveraging some of the technology investments we've made is going to be a meaningful opportunity for us. And we haven't kind of framed that in numbers yet. We're sort of building the foundation that we can build on. And I think that's something we'll continue to talk to you all about going forward. And then, on the innovation front, we also have a new CTO, and one of the things we're really focused on is how do we kind of increase the pace and success of our commercialization capabilities and -- across our businesses. And so that's another area of focus. And again, we're kind of putting the foundation in place. But we've got a great history at this company of breakthrough innovation, creating categories. And so tapping into that culture of innovation is something that's another big priority for us. Andrew Kaplowitz: That's helpful. And maybe just a little more color on inventories across your resi channels, anything you're seeing there? Obviously, resi HVAC is having much more difficult time than resi water heaters, given their own inventory problems over there. It doesn't seem to be the case with you guys here, but what's the risk given weaker consumer confidence that we could see some destocking? Charles Lauber: Right now, I would say we think that inventories in the channel on both residential and commercial side is at pretty normal levels, pretty much target levels. As there's hesitancy, maybe on new home construction, may see some of the distributors looking to be very prudent on how they manage inventories in the back half of the year. But we feel like channel inventories are pretty much where they should be right now. Operator: Our next question comes from Tomohiko Sano with JPMorgan. Tomohiko Sano: My first question is on CapEx. Could you talk about the CapEx guidance compared to 3 months ago, including what kind of items like did you revise for the full year, please? Charles Lauber: Yes. We lowered our CapEx outlook just a little bit. We pushed out some of the investments that we had planned for the fourth quarter of this year into early next year. Some of those, not all of those were related to just watching the DOE commercial regulatory initiatives out there, and we're just being prudent on making those investments until we have a more surety around that. Tomohiko Sano: And my follow-up is capital allocation. So you have been aggressive with buybacks and dividend increases, how do you prioritize capital allocations going forward, especially if the macro headwinds persist, please? Charles Lauber: I mean, certainly, the dividend is very important to us. We've raised it for 32 years. We look at that from a yield perspective, and we feel pretty comfortable with where we are at on that. Buybacks, we're framing really to not grow cash, which we're buying back a prudent amount, we believe to not grow cash and still reserve firepower for acquisitions. So as Steve mentioned, we have adequate firepower. We're looking for adding those acquisitions, and we're in a good position to do that. Stephen Shafer: And I'd say in terms of market conditions and how they change, we still recognize we need to deploy capital to our core business, and we have a very resilient core business from that standpoint. So making sure that we maintain a very strong core business that's cash flow generating is in that dynamic as well. And at the same time, we're looking to how do we provide more adjacencies that get us into kind of higher growth businesses. Operator: [Operator Instructions] Our next question comes from Scott Graham with Seaport Research Partners. Scott Graham: I'm sorry for jumping on late, balancing several conference calls. So I missed your prepared remarks. Was sort of the lean into the -- I should say, the reduction to the lower end of the guide range for the year, was that on China exclusively because it looks like the North American items are fairly flat versus last quarter? Was that China? Or was it something else? Stephen Shafer: Yes. Scott, there were 2 things we pointed out. There was obviously the softness, and we did revise down our China outlook for the year to down 10%. So that was a big part of it. The other thing we've highlighted is weakness on the residential side of the North America business, and we just see that a little bit softer now, where previously, we talked about it as a flat market. We now see it as flat to slightly down. So those 2 components are what have us being a little bit more cautious. Scott Graham: Okay. And I'm sorry for having to ask that. It was something you already said. Does that presuppose that, or maybe contemplate that, the October industry shipments were better than September because September really dropped off there? Can you kind of talk about what you're seeing in the industry in October? Charles Lauber: Well, the industry shipments, August really was down quite a bit on the residential side. We think September will be -- not similarly down, but was also weak. And as we think about kind of our orders, and maybe that's where we can comment in October because we haven't seen any industry data yet for October. But in October, as we look at our orders, we haven't seen resiliency, particularly on the wholesale side, which is generally more influenced by new home construction. So it's been a bit weak overall. So those all kind of -- all those factors come into play, Scott, when we're thinking about a flat industry last quarter, now flat to slightly down. We just see a little bit of pressure, particularly on the new home construction. Stephen Shafer: And we've talked about our approach to trying to level load our production a bit more for the efficiency benefits of that, working closely with our customers to do that. So we saw Q3 where the industry was down a bit, but we also gained share as was our intention as we walked through the quarter because of the way we level-loaded our production. Operator: Thank you. I would now like to turn the call back over to Helen Gurholt for any closing remarks. Helen Gurholt: Thank you for joining us today. Let me conclude by reminding you that we are pleased with our growth in the quarter. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join our presentations at 3 conferences this quarter: Baird on November 11; UBS on December 3; and Goldman on December 4. Thank you, and enjoy the rest of your day. Operator: This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to Invesco's third quarter earnings conference call. [Operator Instructions] As a reminder, today's call is being recorded. Over to Greg Ketron, Invesco's Head of Investor Relations. Sir, you may begin. Gregory Ketron: All right. Thanks, Cedric, and to all of you joining us today. In addition to the press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for the accuracy of our earnings transcripts provided by third parties. The only authorized webcast are located on our website. Andrew Schlossberg, President and CEO; and Allison Duke, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions. I'll now turn the call over to Andrew. Andrew Schlossberg: Okay. Thank you, Greg, and good morning to everybody. I'm pleased to be speaking with you today. We continue to perform remarkably well against our strategic priorities, which are centered on emphasizing the intersection of market size and secular change while leveraging our unique position to drive growth in the highest opportunities, regions, channels and asset classes. We delivered another strong quarter of broad-based progress, and we continue to generate significant operating leverage while executing on initiatives to unlock value across the organization to deliver for both clients and shareholders. If you turn to Slide 3 of the presentation, which highlights some of our most recent high-impact initiatives over the past several months. In aggregate, these initiatives will help to streamline our business, drive profitability and margin expansion, build a stronger balance sheet and continue to enhance shareholder returns. Significant among these efforts is the strengthening of our capital management through the recapitalization of our balance sheet. Here, we have improved flexibility, enabling us to continue to further deleverage. We have already repaid approximately 25% of the term loans used for the $1 billion preferred stock repurchase announced earlier this year, accelerating the expected earnings accretion from that transaction and paving a path for future redemptions. We have also made substantial progress in our efforts to simplify and hone our organizational focus. Of note is the implementation of our hybrid investment platform which we announced in May, would be shifting to a combined Alpha and Aladdin program. Progress continues in our conversion. During the third quarter, we launched the second wave of significant equity AUM onto the Alpha platform. This entire hybrid implementation, which is on track to be complete by the end of 2026 will drive simplification, improved investment system consolidation and future cost avoidance. Also under the banner of simplifying our business and focusing on improving performance, earlier in the quarter, we realigned our fundamental equities, global international and regional investment teams. We have consolidated capabilities under a single CIO for these particular asset classes and made portfolio management changes to our U.S. developing markets and aspects of our international and regional equity strategies. This consolidated global related equity platform mirrors our already established global fixed income structure and as part of our ongoing efforts to strengthen our investment returns in this important area for the firm. The single platform also allowed us to elevate our top investment talent and use our scale advantages to gain efficiencies. Investment performance does take time to turn around, but we are beginning to see progress on this front. Further advancing our efforts to simplify and streamline our focus, we announced in late summer, our decision to sell Intelliflo, which is our cloud-based practice management software subsidiary. This sale will generate net cash of approximately $100 million at closing, which is expected in the fourth quarter, and it could also generate up to $65 million in additional future potential earn-outs. Finally, we are accelerating growth through a number of recently announced business development initiatives noted on the bottom of Page 3. I'm pleased to report that we have made significant progress with our Barings private markets partnership, launching our first joint product together earlier this month. The speed at which we have been able to execute is notable. Together, we have come to market with the jointly managed Invesco Dynamic Credit Opportunity Fund within just a few months of our announced partnership. This product strategy is an interval fund targeting the U.S. wealth management market that dynamically allocates across the full spectrum of private corporate credit. By combining our 2 firms complementary strengths, we're accelerating our ability to meet client demand for income-oriented solutions in this rapidly evolving market. This represents the first milestone of the broader private market strategic product and distribution partnership with Barings, which MassMutual intends to support with a total of $650 million of capital. A second co-managed fund is currently in development and is expected to be in market at the beginning of next year. These new strategies will complement our existing private real estate offerings that are targeting U.S. wealth management clients and have seen significant organic traction over the past several quarters. Also in the category of accelerating our growth, we are in the final stages of selling a majority interest in our Indian business to the Hinduja Group and jointly establishing a local joint venture. We believe that the combined benefits of our existing Indian asset management business with Hinduja's domestic financial institution and local expertise will enhance the growth of that business. Our ongoing minority ownership structure will allow us to participate in the Indian market development, while also refocusing our resources accordingly. We expect this transaction to close in the fourth quarter and Allison will detail the financial implications and anticipated timing of these transactions later in the call. Finally, as you are all well aware, a significant transformative growth initiative is underway as we seek to modernize the structure of our sizable QQQ ETF. We are in the process of soliciting shareholder approval, and we are pleased to report that we have seen strong participation and momentum in the proposals outlined in the proxy, and votes cast are overwhelmingly in favor of the proposals. We are getting close to the vote totals needed and to allow for additional time to solicit the votes needed to pass the proposals. Last week, we announced that the special meeting of the QQQ shareholders has been adjourned until December 5. Our scheduled time to complete the solicitation process is not an all uncommon. And given the sheer size of this fund and its large retail shareholder base, it is not unexpected. We are proud of the progress on these significant initiatives highlighted on Page 3. We believe they are indicative of the exceptionally hard work of our Invesco colleagues to drive these and other efforts to completion, while continuing to seek incremental opportunities to unlock value. I am grateful for all that has been done and the ongoing disciplined focus on delivering to our clients and our shareholders. So let's pivot now to Slide 4 for our third quarter business highlights. We had strong momentum coming into the quarter, which continued as key market indices reached new highs and increasing investor confidence was bolstered with the Fed rate cut in September. These dynamics are leading to some broadening out of investor demand, which is a welcome shift in the asset management landscape and one that we are beginning to see reflected in our results. We reached a record AUM of $2.1 trillion with exceptionally strong net long-term inflows of nearly $29 billion, or an 8% annualized organic growth which is our best flow quarter since 2021. Even more encouraging with the breadth of these flows, reflecting our diversified scaled global platform. We had strong growth on many dimensions, including across most of our strategically important investment capabilities. It also included positive flows in aggregate in both our active and passive products, the retail and institutional channels and across the Americas, EMEA and Asia Pacific regions. Nearly 40% of our long-term AUM is now from clients outside of the U.S. and 2/3 of our net inflows this quarter were from EMEA and Asia Pacific regions. In the quarter, we continued to scale our ETF platform, gaining market share and launching products to meet client demand. When considering the entirety of our ETF and index offerings across all investment capabilities and including the QQQ, we recently reached an important milestone of $1 trillion in AUM. This was among our best-performing quarters for our increasingly profitable ETF and index investment capability with an annualized organic growth of 15%. We garnered record net inflows in a diverse set of products for our U.S. range, including the QQQM,several ETFs within our S&P Factor suite, the China technology ETF. And in EMEA, we generated strong flows in our use of QQQ ETF and our synthetic product suite. We continue to innovate and evolve our ETF lineup to offer investors new ways to access our in-house, high-quality active strategies. Notably, 65% of our ETF launches this year have been active. Our 5 new active ETFs launched during the third quarter brings our total to 36 months. The development is not only a U.S. trend. We now have 10 active UCITS ETFs, extending our smart beta range of products in the EMEA region. Our ending active ETF AUM firm-wide stands at $16 billion. However, when including our active teams engaged in our passive and index capabilities, it elevates that total AUM to nearly $30 billion. Bringing the depth of our investment capabilities into the ETF wrapper has long been part of our overall strategy and will continue to be as we innovate to meet client demand. Shifting to fundamental fixed income where we garnered over $4 billion in net long-term inflows in the third quarter. However, this only considers what's included in our fundamental fixed income capability. Looking more broadly at the fixed income asset class across all of our investment products, the third quarter net long-term flow number jumps to nearly $13 billion with the inclusion of our fixed income ETFs and China JV-based fixed income assets. Here again, the strength of our geographic profile is evident with more than half of our overall fixed income inflows coming from clients outside the United States. Though overall recent client demand trends remained largely intact this quarter in fixed income, we did begin to see a measured extension from ultrashort and short-term fixed income to the intermediate and longer end of the curve. We saw institutional interest for investment-grade bonds with strong demand in Asia, driving net inflows. Further, we saw demand for our leading United States defined contribution focused, stable value capability, and we are exiting the quarter with a healthy pipeline for this product. Additionally, our U.S. Wealth Management SMA platform continued to help drive fixed income flows, particularly in municipal bond strategies. Our entire SMA platform which also includes a portion of equity assets continued to capture market share, and it now stands at nearly $34 billion in AUM. We have one of the fastest-growing SMA offerings in the U.S. wealth management market with an annualized organic growth rate of 19%. Moving to our China JV and Indian capabilities where we produced exceptionally strong results this quarter. Our broad product suite and scale position in China is empowering us to perform as well as dynamic shift in this market. We reached a record high AUM in our China JV of $122 billion, reflecting a 16% increase over last quarter. We delivered a robust $8.1 billion of net long-term inflows in these capabilities, marking one of our best quarters to date, $7.3 billion of that total came from our China JV which represents a 34% annualized organic growth rate. Flows during the quarter in our China JV were led by fixed income plus and our ETF funds. Institutional investors are favoring fixed income plus strategies as they provide an effective means of enhancing equity exposure. We are also beginning to see interest in pure equity strategies, particularly in passive funds, as demand for active equity is slower to regenerate. We are exceedingly well positioned for the near and longer-term trends developing in the onshore China market. We continue to innovate to meet client demand across both active and passive capabilities. Of note, we launched 12 new products this quarter in our China JV, including our first fixed income ETF. We believe that in time, demand for fixed income products will shift towards those offered in the ETF wrapper. We also launched equity index funds to capture increasing demand for these growth-oriented products. While we continue to launch innovative products to meet current and future client demand in our China JV, existing products have been the more significant driver of our organic growth, an indication of the strength of our platform. We expect our China JV to continue to benefit as both the secular and now cyclical tailwinds develop in the world's second biggest economy. Shifting to private markets where we posted $600 million of net inflows driven by private credit and direct real estate. Private credit had nearly $1 billion of net inflows with strong CLO demand during the quarter in both the U.S. and EMEA as these products continue to offer meaningful value versus corporate bonds. We launched 3 new CLOs during the quarter, two in Europe and one in the United States. Direct real estate contributed nearly $100 million of net inflows. INCREF, which is our real estate debt strategy targeting the U.S. wealth management channel continues to generate net inflows, and we continue to onboard platforms and clients. INCREF is now on 3 of the 4 major U.S. wealth management platforms. Assets in this fund with leverage now total over $4 billion after just 2 years in the market. Our real estate team also remains well-positioned in the institutional markets, with $7 billion of dry powder to capitalize on emerging opportunities. And as I outlined earlier, our partnership with Barings should help accelerate growth for overall private market strategies in the wealth channel. In fundamental equities, we have continued to see positive flows from our clients in EMEA and Asia Pacific, specifically for global and regional equities and headlined by our Global Equity Income Fund managed out of the United Kingdom. This fund posted record net inflows of $3.8 billion during the quarter, predominantly from clients in the Japanese market, where it ranked first among retail active funds and has rapidly grown to $20 billion in AUM and has a very favorable net revenue yield to the firm. This is a compelling representation of our ability to have the right products in the right markets at the right time. Despite these positive flow highlights, we did record overall net outflows in fundamental equities of $5 billion in the quarter. Our results partially reflect the broader secular outflow trend in actively managed equities, particularly in the United States. This was compounded by the expected acceleration of net outflows from our developing markets fund, which totaled $4.5 billion for the quarter. Given our strategic decision to reposition the fund to a new internal portfolio management team, this wasn't wholly unexpected. We are confident that the aforementioned fundamental equity platform changes that have been recently implemented sharpen our focus on investment performance and risk management as we continue to identify areas of demand within fundamental equities and mitigate redemptions at a better rate than the market. Moving on to Slide 5, which shows our overall investment performance relative to benchmark and peers as well as our performance in key capabilities where information is readily comparable and more meaningful to driving results. Investment performance is key to winning and maintaining market share despite overall market demand. As such, achieving first quartile investment performance remains a top priority for Invesco. Overall, more than half of our funds are performing in the top quartile of peers on a 3-year time horizon with 45% reaching that bar on a 5-year basis. Further, nearly 70% of our AUM is meeting its respective benchmarks over those measurement periods. Of note, we saw significant improvements in some of our fundamental equity performance with more than half of our funds beating benchmark on a 3-year basis and 39% in the top quartile on a 5-year basis. Continuing to strengthen our investment performance is key to reducing redemption rates in these critically important equity strategies. Fixed Income continues to have strong performance with nearly half of our funds performing in the top quartile on a 3-year basis and nearly 2/3 beating their benchmarks. So with that, let me turn the call over now to Allison to discuss the quarter's financial results, and I look forward to your questions. Allison Dukes: Thank you, Andrew, and good morning, everyone. I'll start with the third quarter financial results on Slide 6. Strong markets and net asset inflows drove assets under management to a record level for Invesco in the third quarter. Total AUM exceeded $2.1 trillion at quarter end. This was $123 billion or 6% higher than at the end of the second quarter and $329 million or 18% higher than the end of the third quarter of 2024. Average long-term assets under management were $1.46 trillion, an increase of 9% over last quarter and 16% over the same quarter last year. Growth in total assets under management during the quarter was driven by market gains of $99 billion and net long-term inflows of $29 billion. Net revenues, adjusted operating income and adjusted operating margin all significantly improved from last quarter and the third quarter of 2024, while adjusted operating expenses continued to be well managed. This drove meaningful operating -- this drove meaningful positive operating leverage on both a sequential quarter and a year-over-year basis. On a sequential quarter basis, positive operating leverage was 480 basis points delivering a 300 basis point improvement in the third quarter operating margin to 34.2%. On a year-over-year basis, positive operating leverage was 410 basis points delivering a 260 basis point improvement in operating margin. Adjusted diluted earnings per share was $0.61 for the third quarter. We continue to strengthen the balance sheet during the quarter through the repayment of $260 million of the 3-year bank term loan. We also ended the quarter with no draws on our revolving credit facility. Given the level of operating cash generation going into the fourth quarter, we are in a position to repay the remaining $240 million of the 3-year term loan by the end of this month. When we announced the repurchase of $1 billion of preferred stock in April, funded with $1 billion in term loans, we indicated that once the loans will repay, the EPS run rate benefit would reach $0.13 annually. Given that we will have repaid $500 million, up to $1 billion in term loans earlier than projected, we will have captured approximately 60% of that EPS run rate benefit on a go-forward basis. The magnitude of the potential reduction in the remaining $500 million term loan that matures in 2030 will depend on the level of cash flow we generate going forward. Additionally, we have a $500 million senior note that we intend to redeem when it matures this coming January of 2026. Finally, we continued common share repurchases, buying back $25 million or 1.2 million shares during the quarter. Moving to Slide 7, a slide most of you are familiar with by now is we've been including this update for a number of quarters, and hopefully, you have found this helpful in analyzing our net revenue and net revenue yield dynamics. Client demand continues to drive diversification of our portfolio. And as a result, concentration risk and higher fee fundamental equities and multi-asset products has been reduced while our portfolio reflects a higher mix of ETFs, index and fundamental fixed income capabilities. Our more balanced AUM profile better positions the firm to navigate various market cycles, events and shifting client demand. The ranges by capability are representative of where the net revenue yield has trended over the past 5 quarters, and we know where in the range yields have trended more recently. To provide context for the net revenue yield trends during the third quarter, our overall net revenue yield was 22.9 basis points. This is similar to the sequential quarter decline that we experienced in the second quarter. The magnitude of the last 2 quarterly declines is notably lower than prior quarters. And maybe aside, we're closer to reaching a degree of stabilization in the net revenue yield, but this will be dependent on the future direction of asset mix shift. The exit net revenue yield at the end of the third quarter was 22.8 basis points near the adjusted net revenue yield for the quarter. As Andrew noted earlier, last week, we announced a special meeting of QQQ shareholders have been adjourned until December 5 to allow for additional time to solicit votes. We did want to note that under the new structure, the revised fee allocation would work similar to how we currently recognize fees on most of our ETFs. The 18 basis point fee will be recognized as investment management fees, approximately 12 basis points, which is principally for the licensing fee and administrative custody and transfer agency services will be recognized as third-party distribution, service and advisory expense. Under the current structure, marketing expenses associated with the QQQ are included a third-party expense. Upon finalization and filing of the definitive proxy statement, reflecting comments from the SEC and further accounting review, it would determine that the marketing expenses associated with the QQQ should be included in the marketing expense line item versus third-party expense. This is solely a reclassification of where the marketing expenses are reported and the expected overall net impact to adjusted operating income of approximately 4 basis points of QQQ AUM and is unchanged from what we previously disclosed. Now turning to Slide 8. Net revenue of $1.2 billion in the third quarter was $82 million higher as compared to the same quarter last year. The increase in net revenue was largely from investment management fees, which were $102 million higher than last year and mainly driven by higher average AUM. Operating expenses continue to be well managed with the increase of $24 million, partially driven by variable employee compensation related to higher revenue. On a sequential quarter basis, the increases in net revenue and operating expenses were driven by similar dynamics as the year-over-year changes. And that result is a substantial increase in positive operating leverage on both the year-over-year and sequential quarter basis. The Alpha hybrid platform implementation costs of $11 million were below our expectations for the third quarter, but near the range of prior quarters. We launched the second wave of equity AUM onto the Alpha platform during the third quarter. We will continue to implement the hybrid approach we announced earlier this year. We expect the overall implementation to be completed by the end of 2026. Regarding implementation costs going forward, we expect onetime implementation costs to continue in the $10 million to $15 million range for the fourth quarter as we transition more AUM onto the platform. This amount in future quarters may fluctuate to a degree due to timing as we work towards completion by the end of 2026. We'll provide further updates as the implementation progresses throughout next year. As disclosed in August, we reached an agreement with Carlyle to sell Intelliflo, our cloud-based practice management software subsidiary. We moved Intelliflo to held for sale in the third quarter and the noncash impairment charge of $36 million was recorded in other gains and losses, somewhat lower than the $40 million to $45 million that we had indicated previously. We expect to close this transaction in the fourth quarter and then the annual net operating impact of Intelliflo is insignificant to the overall Invesco operating results. Given Intelliflo is the U.K. subsidiary, the loss is not a taxable event. As such, we anticipated the effective non-GAAP tax rate for the third quarter to be closer to 29%. The effective tax rate for the quarter was 11.2% as we were subsequently notified late in the quarter of a favorable resolution of a certain tax matter, including the reversal of a reserve for uncertain tax positions which had a significant impact on our third quarter non-GAAP effective tax rate. For the fourth quarter, we estimate our non-GAAP effective tax rate will move back to the 25% to 26% range, excluding any discrete items. The actual effective rate can vary due to the impact of nonrecurring items on pretax income and discrete tax items. Andrew also noted that the sale of a majority interest in our India asset management business is expected to occur in the fourth quarter, potentially at the end of October. Post closing, given we will retain a minority interest India's AUM, which is near $15 billion and future asset flows will not be reported in our results. In addition, India's operating results will no longer be reported as part of Invesco's overall operating results including the associated revenues and expenses. Our 40% share of the joint venture's net income will be reported in equity and earnings of unconsolidated affiliates going forward. We currently expect $140 million to $150 million in cash proceeds from the sale. I'll wrap up on Slide 9. As I noted earlier, we continue to make considerable progress on building balance sheet strength. During the third quarter, we repaid $260 million of the $1 billion in bank term loans used to fund the $1 billion repurchase of preferred stock held by MassMutual earlier this year. The $260 million repayment reduced the 3-year term left to $240 million. And as I noted earlier, we're in a position to repay the remaining balance by the end of this month, leaving only $500 million [ in ] the 5-year maturity term loan. The full impact of the $14.8 million reduction in the preferred dividend was realized in the third quarter and the go-forward run rate preferred dividend is $44.4 million per quarter. The $14.8 million reduction is now earnings available to common shareholders. We also continued common share repurchases in the third quarter buying back $25 million or 1.2 million shares during the quarter. We intend to continue a regular common share repurchase program going forward and expect our total payout ratio, including common dividends and share buybacks to be near 60% this year as well as in 2026 as we continually evaluate our capital return levels. The partial repayment of the bank term loan improved our leverage ratios for the quarter with the leverage ratio, excluding and including the preferred stock, improving to 0.63x and 2.5x, respectively. Going forward, we expect this ratio to continue to improve as we repay the term loan and redeem the $500 million senior note maturing in January. To conclude, the strength of our net flow performance and diversity of our business is evident again this quarter, driving strong revenue growth. This, combined with well-managed expenses resulted in significant operating leverage and a sizable improvement in our operating margin. We're pleased with our progress on building a stronger balance sheet. And we are committed to driving profitable growth, a high level of financial performance and enhancing the return of capital to shareholders. With that, I'll ask the operator to open up the line for Q&A. Operator: [Operator Instructions] And the first question comes from Bill Katz with TD Cowen. William Katz: Okay. Thank you very much. I excuse my voice this morning. Maybe it's on the QQQs. I'm sort of curious if you could maybe put any kind of meat on the bone a little bit around where you are relative to the quorum or the approval rate and the development with the SEC in terms of re-categorizing and reclassifying where you're going to account for the marketing spend. Does that raise the probability of getting to the required vote to make the shift? Thank you. Allison Dukes: We can't give you details on where we are relative to the quorum or the approval rate, but as we noted in our disclosures, we're very pleased with the progress, and it's an overwhelming majority that's voting in favor of the fee change. We're pleased. It's not unexpected that these things take a lot of time, especially for a fund as large and widely held as this one. It takes a little more time to get to the quorum, but we're pleased with the progress we're making. On the second question, as it relates to the marketing expenses, no, there's nothing in that that really changes anything, to be frank. This is entirely related to the comments from the SEC on the proxy, some of the language changes, putting that back through an accounting review, and we determined this is the most accurate and appropriate place to reflect those marketing expenses. Going forward, I don't think it really has any impact whatsoever on how people are thinking about the proposal. There's no change at all to operating income. Again, it's still approximately four basis points, and the way the marketing expense will work is as disclosed in the proxy filing, which is a discretionary amount of marketing expense within the range that we provided in the proxy. Operator: Our next question comes from Brennan Hawken with BMO Capital Markets. Brennan Hawken: It's just a follow-up on Bill's question. I understand that you guys are using a proxy voting firm to help drive participation. I just want to confirm, is that considered a marketing expense of the fund, and is there any sort of spend threshold where over that it starts to become an operating expense for Invesco? Allison Dukes: Yes, we are using a proxy solicitation firm, and it is considered a marketing expense of the fund. Those expenses are accrued in the fund. I don't foresee that happening with those expenses bleeding over into operating expenses for Invesco. There can be some timing differentials in terms of how we accrue within the fund, month to month, versus just timing, I would say, on fund expenses versus operating expenses for Invesco. Right now, I do not see that as being a risk to Invesco's operating expenses, especially if we continue on the path to the meeting on December 5 as scheduled. Brennan Hawken: Got it. Okay. Thank you. This might be a little granular, but I'm going to give it a shot anyway. I understand that there's three proposals in the proxy vote. Are all three proposals progressing similarly, or is there any divergence in between one, two or three? Allison Dukes: No, there's no divergence. They're all progressing similarly. I think that is a very granular question. There's one in particular everybody's focused on, but fair question. No, I think it's all progressing consistently. Operator: The next question comes from Glenn Schorr with Evercore. Glenn Schorr: So your fixed income flows have been pretty good. Your performance is very good. There has obviously been some volatility around the potential of lower rates and the potential of credit issues rising. It has been a while since any of the channels had to deal with that. I am curious what you saw in October and things like bank loans. More importantly, in general, given the global nature of your flows, what you expect on a go-forward basis just across the fixed income platform. Andrew Schlossberg: Sure. Let me start. We did not see any material implications from some of the events you described in October. We're continuing to see real strength in our fixed income business. It's a $680 billion platform, it's up from $625 billion at the start of the year. That's come through mostly organic growth. We've had over $30 billion in platform-wide fixed income flows. We mentioned in the prepared comments that's really been broad-based. Our SMA platform in the U.S. has probably been the strongest piece here in the United States. But overseas, we've seen a good movement out of some shorter duration strategies into some longer duration strategies, global bonds, investment-grade bonds. We're seeing that pick up materially in Asia and EMEA. We continue to go from strength to strength. I'd say some of the bank loan flows were a little weaker at the back end of the quarter, but it continues. We continue to be a leader in that space and continue to do well in the bank loans and also in CLOs. Anything you want to add? Allison Dukes: No surprise and no secret. Markets have been a little bit jittery on the credit side in the month of October. I do think we see some softening, maybe some outflows on the bank loan side in the month of October. We'll see how this plays out as we continue to try to evaluate if this is a rather specific risk or something broader-based. I would say nothing notable. Overall, we continue, as Andrew said, to see things perform pretty well. In particular, the strength in our CLO platform and some of the launches across the third quarter and the demand coming into the fourth quarter still remains high. Andrew Schlossberg: And investment performance is pretty strong across the whole platform. So as demand picks up, as some of this cash starts to potentially move off the sidelines, we should be well positioned. Operator: Our next question comes from Alex Blostein with Goldman Sachs. Alexander Blostein: I was hoping you could maybe unpack the two divestitures you made -- earlier that you mentioned, both on the Intelliflo side as well as the JV in India. Maybe one, with the use of proceeds, obviously, you guys have been deleveraging, and there's more to do there, but maybe talk a little bit about capital return priorities as you look out over the next 12 to 18 months. As we start to look out into 2026, what are the implications maybe for expense growth on the back of those divestitures? Allison Dukes: Sure. Maybe I'll take that in a couple of different directions. Let me start with India. India, as we noted, we're expecting proceeds there of $140 million to $150 million. Maybe just a little bit of color getting to kind of what's the impact on some of the expense, and I'll say operating income trajectory from there. India is a business that, from a revenue perspective, runs around $13 million a quarter. Expenses run around $7 million a quarter, call it, operating income of roughly $6 million a quarter. As we noted, that will come out of our operating income results, and we will reflect that 40% ownership below the line in equity and earnings going forward. The AUM of about $15 billion in the flows will no longer be reported in those results either. Intelliflo, we're expecting, as I noted, about $100 million in proceeds. That's before any potential future earnouts. We expect that one to close later in the fourth quarter. That one, operating income runs anywhere from breakeven to $1 million or $2 million loss a quarter. Call it very negligible to results overall. That would be removed entirely from our results. Total proceeds of around $240 to $250 million. In terms of our capital priorities, they remain balanced. We remain focused on improving the balance sheet, returning about 60% of our capital to shareholders, and investing in our own growth capabilities. We're getting to a place where we're starting to create more and more capacity for ourselves. We're pleased with the progress we're making on the balance sheet. I don't think we're totally where we want to be yet. We are seeking to continue to improve that leverage ratio, particularly while we have these strong operating cash flows that we have. I'm very pleased with the ability we have to pay down the remainder of the three-year term loan by the end of this month. That's all from operating cash flow and before any of these proceeds. These proceeds give us the flexibility to continue to launch new products going into next year. We're highly focused on our capital planning for 2026 and working with our teams across the firm as we think about what's going to drive revenue most aggressively going forward. It gives us flexibility to keep doing all of those things, investing in ourselves, creating flexibility on the balance sheet, managing these debt levels lower, and returning capital to shareholders. In terms of expenses next year, I'd say expect them to continue to be really well managed, and we'll certainly be giving you more color as we get into 2026. Operator: Our next question comes from Dan Fannon with Jefferies. Daniel Fannon: Great. So I guess another question on expenses just with regards to the Alpha platform and integration. We've got $10 million to $15 million, I guess, in the fourth quarter of ongoing implementation costs. Can you talk to next year in terms of the pace versus what we've seen this year? Ultimately, I think it's about reducing future cost growth. Can you give us kind of the end state as you think about what this integration will do in terms of how to think about long-term expense growth? Allison Dukes: Yes. As we noted, we are highly focused through the hybrid platform implementation on completing this by the end of 2026. There is aggressive planning underway right now. We do expect the pace of implementation and implementation costs to remain high throughout 2026 as we seek to move all of our assets onto the collective platforms by the end of the year. I would say, as we think about '26, and again, we'll give you more color as we get closer, we would expect some of the costs to modestly increase related to Alpha and the hybrid platform implementation. That gives us the opportunity to then start to look at what we decommission, how do we streamline our operating systems. I wish we could be turning off more along the way, but we have to complete a lot of these things before we can actually decommission and stop renewing certain other aspects of our overall operating platform. That really becomes a 2027 opportunity. I'd say it's certainly early to be giving guidance around 2027. What I will say is I expect these run rate expenses that are associated with the hybrid implementation to peak in'26, and then we will begin aggressively planning for how we streamline our operating platforms going into '27. Against that backdrop, and I'll reiterate this, I think you can look back over the last few years and see our overall expense base has been extremely well managed, even while we've been putting in these systems. It has been a heavy lift, and there has been cost associated with it. We've really been able to improve operating margin significantly against this. Revenue growth has helped, no question, but the expense base in particular has been very well managed along the way. We're not going to take our foot off the gas there. We've got real opportunity to continue to manage that going into the next few years. Andrew Schlossberg: Yes. And we're really pleased with the progress of the implementation on the hybrid solution since announcing the change in the spring. We brought on a pretty significant piece of the equity business onto the platform. It's, you know, things are going well in terms of the implementation and the teams working together. Operator: Our next question comes from Benjamin Budish with Barclays. Benjamin Budish: Maybe just another follow-up on the expense side. It looks like markets are constructive. Your flow profile has been looking increasingly healthy. If the QQQ vote goes through as it sounds like you're optimistic it does, there's going to be kind of even more flowing to the bottom line. So I guess, maybe just kind of -- again, following up on the last couple of questions. How are you thinking about variable expenses going into '26 and '27? Obviously, there is the [ ports and ] pieces you can control. But how are you thinking about opportunities to drive more operating leverage given the -- what looks like a healthy backdrop for top line revenues? Allison Dukes: Sure. I'll take that. I mean variable expenses, as we've noted in the past, they run about 25% for us. So that certainly is the first port of call, if you see pullback in revenue and it is where we see expenses really moving up as we see increases in revenue. So as we think about what that means going forward, I mean our focus is really on how do we keep managing, maybe we fixed expense base because the variable in many respects is what it is, and we're pleased for that to fluctuate up and down. The fixed expense base is where we spend a tremendous amount of time really looking at how do we continue to unlock value there and taking a hard look at every aspect of it. I think a lot of the work we've been doing over the last couple of years, and you're seeing the fruits of that is the simplification work. And where we can reduce redundancies and simply our operating platform across all of our investment capabilities by unifying teams, by looking at where we can be more global as a firm and a little less regional reducing some of the duplication that came with some of that structure in the past. Those are the opportunities we've had to continue to interrogate our fixed cost expense base, and we will continue to do that. That's really a part of our rigor now. And so as contracts mature, as opportunities arise, as people leave the firm, as markets change, we really look at how do we continue to simplify and collaborate better and collapse some of our platforms perhaps together so that we can go to market in a single fashion. And that's going to be -- that's work that -- it's in our blood now, it's in our DNA, and it's the work we're going to continue going into the next couple of years. Andrew Schlossberg: Yes, I think we -- clarifying our strategic priorities that we've shared with you over the past year or two has been helpful to energize the firm towards those. And while managing expenses in a very disciplined way, as Allison mentioned, also investing in the business, whether that's in the product line, our private market capabilities and distribution efforts, what we're doing in our ETF platform, we've been able to invest over the last 18 months on a net basis as well. Benjamin Budish: Really helpful. Maybe just one separate follow-up if I may. Andrew, I think you addressed one of the questions around credit more broadly. Just curious with the launch of this new fund with MassMutual, any specific feedback on that one? I know there's a healthy component of direct lending in there. And just in terms of distribution, maybe remind us what the sort of rollout looks like, whether it's wires versus RIA, how should we see things start to flow in? Andrew Schlossberg: Yes, no problem. The fund -- we repurposed a legacy fund that has about $250 million in assets in it, and we'll get an infusion for MassMutual as well. So it's starting with a decent asset base, it has a good record. And it's going to be targeting all of those U.S. wealth management clients that you mentioned. So traditional financial advisers, RIAs, et cetera. We've only been in market for a couple of weeks. So it's a little too early to say with regard to where progress is. But I will say the notion of it being dynamic, meaning it cuts across all sides of the credit spectrum, the ability for it to leverage both the strengths of Barings and Invesco. And it's well priced and relatively liquid. I think those are all attributes that we've heard soundings from the wealth management marketplace that they're looking for a little more of a one-ticket solution. And that's how we're putting it into the marketplace and we'll report on it as we go forward, and we're already working on product too. Operator: Our next question comes from Patrick Davitt with Autonomous Research. Patrick Davitt: Another follow-up on the expense question. Sorry if I missed this and all the discussion. But I think non-comp, in particular, was still well below expectations in 3Q. So is that a good run rate to think about how things are tracking in 4Q at least? Allison Dukes: Yes. Thanks. I would say I think non-comp, probably a little low in the third quarter. It could be a touch higher in the fourth quarter. I think we typically do see some seasonality when you think about marketing expenses and the professional services, some of the things that come in there at year-end. So it's not significantly higher, but I think I would expect non-comp to be modestly higher in the fourth quarter very modestly. I think comp to rev is probably -- or compensation expense as you think about compensation as a percentage of revenue, it's probably the one that's maybe a bigger driver as you think about just the fourth quarter and the overall year compensation is highly dependent on revenue. We'll see how the fourth quarter shapes up. But it's probably -- so far this year, we're accrued to about 43.4% year-to-date. We really manage it on a full year basis. I think it's probably something in the 43% context. It could be a touch under 43%. That's how I would think about fourth quarter expenses overall. Patrick Davitt: Great. And then as a quick broader follow-up, I guess you mentioned a bunch of active ETF launches. Any sense of AUM into those kind of products more coming from existing products or existing wrappers, cannibalizing existing wrappers or do you sense that it's actually new AUM in the system? Andrew Schlossberg: Yes. I mean, it's a couple of billion dollars. So it's not unmeaningful. It's hard to tell exactly where it's coming from. I'd say the strategies we brought forward have been a combination of new strategies and some that are existing strategies in another format. So -- and most of it has been actually in new strategies. So I think it's incremental growth, quite frankly. It's similar advisers, though. So the higher net worth advisers that we work with across private markets and ETFs in general are interested in those active ETFs, too. But our expectation is that this is very early and it will develop over time and that it's not just a U.S. phenomenon. I think this is something that the world is kind of acknowledging that. The ETF vehicle has some significant benefits. And it's a good vehicle for both passive strategies and active strategies and things that are hybrids of the two, which I think will come in time. Operator: The next question comes from Brian Bedell with Deutsche Bank. Brian Bedell: Great. Maybe just right along that -- the last question from Patrick on the ETFs. As you expand those strategies and move more of that or I should say, as RIAs in particular, adopt the strategies, are you -- is that moving more into the ETF and index bucket? Or should we think about this over the long term as propelling growth in that ETF and index bucket? Or is that factoring into fundamental equities? Andrew Schlossberg: Yes. I mean, look, at the moment, it's -- we're seeing a lot of growth in the past in the index side of the business. The active side is kind of just getting going. I think you'll see it across the piece. And I don't think it's just going to be ETF wrapper. I think you're also going to see the SMA wrapper and then model portfolios, which incorporate a lot of ETFs, currently passive, but I think in the future active. You'll see all of those vehicle types grow, and the underlying investment capabilities will include all of the categories, you know, that we have outlined whether it's fundamental equity, fundamental fixed income and ultimately, maybe some of the alternative private assets, too. So I think you'll see it both in the vehicles that I mentioned being the expansive vehicles and I think across the capabilities. Fixed income has been a place where we've seen a good amount of growth in our ETF lineup, both passive and active. So equity is probably the one that needs to -- will pick up the pace here as we go forward. But fixed income has predominantly been where the flows have come. Brian Bedell: Great. Just a couple of housekeeping. On the India sale, is there a segmentation of where that $15 billion is coming out of in the categories? Just on the QQQ ETF, if that is approved on December 5, when would you expect that conversion to happen to the P&L, is it right, subsequent to that? Or do we have to get through more approvals and that's beginning of next year? Allison Dukes: Sure. So on your first question on the India AUM, that shows up on the China and India -- sorry, that shows up in the China JV and India AUM category. So you expect to see that $50 million -- $15 billion come out of that category. And then the second question -- that would convert immediately following the shareholder meeting. So assuming we have the quorum, once we have the quorum and the shareholder vote, requires both, in that meeting, then it would convert effectively the next day. Operator: Our next question comes from Michael Cyprys with Morgan Stanley. Michael Cyprys: Want to circle back to India. I was hoping you could speak to the sale of a majority interest. Just curious if you could elaborate what led to that decision. It's a major market where many are quite bullish on the long-term prospects. So why reduce the stake? Maybe you can elaborate a bit on your partner and just blend how you decided to partner with them, how you see them helping drive accelerated growth from here? Andrew Schlossberg: Yes. Thanks for the question. We've had great success with partnerships and alliances and JVs, notably the one we have in China over the last 22 years. And so we look at the Indian market and it's growth, but we also look at how local that market is. Us having a domestic business there and seeing the market trends and development that we're bullish about, finding a partner that in both financial institution as well as a large brand and a well-known local operator in the Hinduja Group was just a good combination and marriage together. It will allow us, as Allison said, to participate in the growth from a profitability standpoint, but it will also allow us to see that business grow and for us to participate hopefully with sub-advising assets into it, especially those assets that will be beyond the local Indian managed assets. So I think as global equities or global bonds come into that market and Invesco will be hopefully, the underlying manager of those strategies, and that's the expectation of the partnership. So it really was just a classic sort of 1 plus 1 equals 3 and an ability for us, as we mentioned, to really focus our resources and energy on a full basis in other areas and participate in the Indian market as it grows and develops. Michael Cyprys: Great. And then just a follow-up question on China, where you're seeing quite robust flows. I was hoping you could elaborate on the success that you're seeing there, the steps that you've taken to drive this improved momentum? What sort of demand are you seeing for passive versus active in China? Maybe remind us of the complexion of the business today. Gregory Ketron: Yes, sure. So, look, I think some of our success in China is a function of us being there for 22 years and staying committed and focused on developing a full-fledged retail asset management business there, which we have. And so the $122 billion in assets that we have under management there is an established platform, one of the larger ones in the market, a well-known brand, well thought of for its compliance and investment integrity. And so as markets improved and as demand has started to improve from those retail investors in the market, we're seeing the benefits of that. The business is pretty diverse. So as a reminder, it's about 30% equities, 30% bonds, 20% balanced and 20% money markets. And to your question on ETFs, I think it's around $12 billion or $13 billion now of ETF. It's a business we only -- or the JV only started in the last few years. The growth has been still largely in the active part of the business, but we're seeing a pickup in the ETF flows as well. And we're trying to meet that demand by launching new product, as I mentioned. So I think the ETF part will continue to develop as will their models area, as will the traditional equity business, it's really evolved over the course of those 22 years. And so as we're getting a little more favorable outputs from China in terms of the easing signals from the government or the pushing forward of consumption, less reliance on the property sector. And importantly, for us, the development in time of a retirement market there and a more robust capital market, we think that JV should continue to go from strength to strength. And just as a reminder, it's a domestic to domestic business exclusively. Operator: Our last question comes from Ken Worthington with JPMorgan. Kenneth Worthington: Okay. Great. So M&A is back in investor dialogue, given Trian's offer for Janus as you sort of reflect on Invesco in the industry, where has consolidation been successful and where has it fallen short? And given your balance sheet is strong, your fundamentals are strong, is it a good or a bad time for Invesco to think about M&A to further strengthen your position and kind of get to your strategic priorities more quickly? Andrew Schlossberg: Yes, thanks. We're -- we've been very focused on all the organic opportunities that we have inside the company. And hopefully, we demonstrated throughout this call in the last few quarters, of the progress that we're making. And we still think there's quite a bit of progress we can continue to make in time organically. The business is global. It's diverse. It's in the asset classes where there's demand and we continue to believe we can grow that organically. I think Allison mentioned the priorities that we have for our use of capital and what our focuses are at the moment. We want to continue to invest in ourselves, and we want to continue to improve our balance sheet. We'll keep our eye on M&A. We'll continue to keep our eye in particular in places like the private markets areas where we have a strong business today with $130 billion in assets but also expectations for future growth. So I don't think it changes much our focus and our dedication as a company. Operator: Okay. And back to you, Mr. Schlossberg. Andrew Schlossberg: Okay. Well, thank you. And in closing, we are unlocking value across the organization for the benefit of clients and shareholders. This includes looking at how we fundamentally operate leaving no opportunity unexamined as we strive to improve client outcomes, generate operating leverage and profitability, continue building a strong balance sheet and enhancing our ability to return capital to shareholders. We have resilient operating performance across many key value drivers. Our global footprint with a significant and unique Asia Pacific presence and a strong performing EMEA business, coupled with our scale and breadth of products positions us well to perform through shifting market dynamics. We continue to demonstrate that we have durable performance and reason to be optimistic about the future. We want to thank everybody for joining the call today, and please reach out to our Investor Relations team for any additional questions. And we appreciate your interest in Invesco and look forward to speaking with you all again soon. Operator: Thank you. That concludes today's conference. You may all disconnect at this time.
Tuukka Hirvonen: Okay. [Foreign Language] Good afternoon, and welcome to Orion's earnings conference call and webcast for the financial period of January-September 2025. My name is Tuukka Hirvonen. I'm the Head of Investor Relations here at Orion. In a few moments, we will start with the presentation by our CEO and President, Mrs. Liisa Hurme, after which then we will have a Q&A session where you can post questions both to Liisa and also to our CFO, Rene Lindell. [Operator Instructions] And just before I let Liisa to take the stage, I'd like to draw your attention to this disclaimer regarding forward-looking statements. But with that, it's my pleasure to hand over to Liisa. Liisa? Liisa Hurme: Thank you, Tuukka, and welcome to Orion Q3 webcast on my behalf as well. Here are some highlights from quarter 3 2025. Nubeqa received approval from European Commission for use of darolutamide and ADT, androgen deprivation therapy in patients with metastatic hormone-sensitive prostate cancer. Nubeqa also reached all-time high royalties and product deliveries to Bayer during Q3. Generics and Consumer Health business had a strong quarter, supported by good availability of products in our major markets and very successful new launches. Unfortunately, ODM-105, tasipimidine Phase II trial for insomnia didn't reach its efficacy target, and we decided to discontinue the development of that program. And Q3 financials are here. And before I go deeper into the financials, it is good to remember that the comparative period Q3 2024 was an exceptional quarter. We received EUR 130 million worth of milestones last year's Q3. There was a EUR 70 million sales milestone from Bayer related to Nubeqa and EUR 60 million milestone related to the MSD agreement on opevesostat. So these are quite difficult to compare to each other. And now as I go along, I will talk about the base business. So the business without the milestones. The base business growth was 24% from quarter 3 '24 to this year's quarter 3, totaling to EUR 423 million. The operating profit growth was even stronger, 68%, up to EUR 121 million. And our cash flow grew 15% and was being very solid. Of course, last year's -- during last year's Q3, the milestones were booked, but yet not paid. So they were not yet cash in our bank. And when we look closer, the net sales bridge, we can see the kind of a net effect of the difference between the quarters here regarding the milestones in Innovative Medicines column, which is EUR 59 million, but underlying net sales increased by EUR 71 million. So I think the growth, as I earlier said, of Nubeqa product sales and royalties was very strong, but it didn't fully compensate the previous year's milestones. We can also see here that all other divisions positively developed positively, strongest being Generics and Consumer Health, but also Branded Products and Animal Health showed positive development. And Fermion was more or less on par. And here on the operating profit bridge, we can see the full -- kind of a full effect of the last year's milestones, EUR 130 million, but also the positives on the change in sales volume and change in prices and cost of goods and product mix of almost EUR 20 million. And then the royalties of EUR 50 million. We can also see that our fixed cost increased as well, but this is all planned. It's mainly R&D and sales and marketing costs here. Now let's take a view for the first 9 months from January to September. Again, a very nice 22% growth during the first 9 months and 7.8% growth even though we would compare to the previous year's quarter 3, including the milestones. And the first 3 months ended up with EUR 1.2 billion of net sales. Regarding operating profit, EUR 57 million -- 57% growth and slight decrease if we compare to the numbers, including milestones in previous year. And again, a very positive development on cash flow during the first 9 months. Now to Innovative Medicines. This is a bit different picture than you've used to see. There is the shaded area, which tries to tell you the comparison between the quarters, including everything else, but the milestones from the previous year. And 71% of growth is very healthy for Innovative Medicines and also almost 75% growth during the first 9 months. And on the right side here, you can see this all-time high royalties plus product deliveries ending up to EUR 166 million. And I always remind looking at this picture, the very, how would I say, year is very late ended loaded -- back-ended loaded -- back-end loaded for Nubeqa, as you can see here, when you look at the '24 from the first quarter to the last quarter, but here as well. But I would like to remind that in comparison to '24, we already reached the higher royalty rate in the previous quarter with Nubeqa. So we are not going to see a similar shift and change in the royalty rate as we saw last year between the Q3 and Q4. Branded Products growth during Q3 was somewhat slow. It was 3%. And this slowliness in the growth is mainly due to timing of deliveries to our Stalevo partners. And that will be fixed during the rest of the year. So it's kind of a temporary change here. And the growth for the first 9 months is a healthy 9%. And in Easyhaler portfolio, budesonide-formoterol combination product was the clear driver for the growth. And then on the CNS portfolio, Stalevo Japan contributed to growth in Branded Products. And as I say, Generics and Consumer Health quarter 3 was very, very strong. 5.4% growth is extremely good for any generic business, but especially here when we remember that Simdax and Dexdor are included in this business, and they are constantly sliding down facing the generic competition. So we are able to compensate that decrease, but -- and at the same time, increase and grow our sales. And the reason for good quarter is really the good availability of the products in our Nordic countries. The service level is the thing in the Generic business. You need to have the products at the time of the tender where they should be, and you would need to be able to deliver also for all the different countries in the specific timings of tenders or pricing processes. And also, we had a good launch, for example, for Apixaban in Finland. Animal Health continued the good growth trend, although here, we see a bit of a similar slowdown as with Branded Products, and that partly has to do with deliveries as well. But when we look at the first 9 months, it's a very strong 2-digit number growth. And our top 10 product list is as it has been. Nubeqa, there as a flagship with 83% or 84% growth. Easyhaler product portfolio growth was close to 8% and entacapone products grew close to 5%, mainly due to the Japan sales. And our HRT product, Divina, performed very well here on the row 5, growing almost 23%, continuing the strong growth from earlier this year and some oldies like Trexan even 10% -- close to 10% growth and Quetiapine products, 10% growth. And currently, our business divisions are very healthy. The balance between business divisions is very healthy, approximately 30% for Innovative Medicines and Generics and close to 20% for Branded Products. Now Orion's key clinical development pipeline has clearly become oncology focused as we decided to discontinue the ODM-105 project for treatment of insomnia. We have also removed ARANOTE from this list as it's approved both in U.S. and EU. So we now have the DASL-HiCaP study on this list. and then the 2 OMAHA studies with opevesostat that MSD is responsible for. It's good to mention here for these 2 opevesostat studies that their design or primary endpoints have changed since we last presented this so that for the OMAHA3, which is for the later line patients, the primary endpoint is now overall survival. So the progression-free survival has been demoted and overall survival is the primary endpoint. Also, there are changes for the frontline patients study 004, so that the progression-free survival is now a primary endpoint for this study. And these are changes that our partner, MSD, has done, and it looks in all possible ways very logical. Then we have Tenax levosimendan study for pulmonary hypertension proceeding in Phase III. They are planning to start also another Phase III study by the end of this year, another global study for this indication. And then we have another study for opevesostat for metastatic castrate-resistant prostate cancer and 3 studies ongoing, Phase II studies ongoing for several or 3 different hormonal cancers, women's hormonal cancers, breast, endometrial and ovarian cancer. And still, we continue the CYPIDES, which was the Phase II study that formed the basis for those 2 opevesostat 3 and 4 studies for prostate cancer. And our TEAD inhibitor, ODM-212 for solid tumors is proceeding well in Phase I, and we are preparing to start the Phase II program on the first half of next year. Then a few words on the sustainability this time about decarbonization targets. We have set an ambitious target to reduce absolute Scope 1 and 2 greenhouse gas emissions by 70% by the year 2030, and also have 78% of our suppliers, meaning Scope 3 emissions covered by our targets. Then how do we do this? I think for the Scope 1 and 2, we have very concrete actions ongoing. The steam production is one of the most energy-consuming phase in the chemical industry, especially in the API industry. And we are changing the energy source for steam production in all of our facilities -- manufacturing facilities. In Turku, we are electrifying the steam production. In Oulu, we are changing to biofuels from the fossil fuels. And also, we will start an electrifying project in Espoo. So very, very concrete examples here, and we have even done a lot of concrete actions and projects before this, for example, in our Hanko plant. And in the supplier management, we are targeting to our highest emitting suppliers who are not yet aligned with SBT. And here, we try to offer support and practices and technical expertise with our suppliers. And we have specified our outlook today. Our operating outlook for operating profit, we have narrowed from EUR 410 million to EUR 490 million. So nothing drastic. We've been able to narrow it as the year has -- 10 months have already passed. There are 2 months left, and we have a much clearer view on how the year will pan out. And for the net sales, our outlook is from EUR 1.640 billion to EUR 1.720 billion. And here, you can see the upcoming events for next year. And I thank you on my behalf, and welcome Rene here with me to answer your questions. Tuukka Hirvonen: Thank you, Liisa, for the presentation. As we said in the beginning, we will first take questions from the conference call lines, and then we will turn to the questions you can type in through the chat function in the webcast. But at this point, I would like to hand over to the operator with the conference call. Operator: [Operator Instructions] The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have 4 questions. We'll take this one by one. Firstly, starting from the guidance. Can you elaborate on what is driving the small revisions to the lower and upper ends of the guidance ranges? Is this about third quarter actuals? Or have you also updated your forecast for the fourth quarter? Liisa Hurme: Well, of course, the first thing is, as I mentioned, that we know now how the first, say, 10 months have passed, and there are only 2 months left. But there are, of course, uncertainties for the latter part of the year. Nubeqa is a big moving factor in this, also R&D costs. And the tariffs are not that big of a matter here. We do think that they wouldn't have any effect to this year '25. But there are still uncertainties for the rest of the year. So still, we have this range, but there are less uncertainties, and that's why we were able to narrow the range. Sami Sarkamies: Okay. Then moving on to growth momentum at Branded Products and Animal Health. Third quarter growth rates are clearly weaker than we saw in the second quarter. How would you explain that? And what is your expectation regarding Q4? Liisa Hurme: Well, yes, you are very correct that the Branded Products and Animal Health showed a slower growth than previously this year. And it's mainly due to some delays in our deliveries to partners. We have both Animal Health. Animal Health is actually working closely with. We have some very big partners that we are working with. So there might be a 1-day or 2-day delay for the deliveries, and it has an effect clearly even on the quarter if there are big deliveries going on. Same goes with Branded Products. We deliver still to our Stalevo partners across the world. And it's the same thing. I think we've experienced this earlier years as well that sometimes it just happens that we are not able to ship during the quarter that we had planned. But this should be -- we should be able to sort this out by the end of the year during the Q4. Sami Sarkamies: Okay. Then moving on. The third question is on ODM-208. You mentioned that Merck has been changing primary endpoints for the OMAHA studies. When was this change made? Liisa Hurme: This change became public, I think, a month ago, 3 weeks ago, maybe. Tuukka Hirvonen: It was a few weeks ago. In early October, they changed the protocols. It was visible in the ClinicalTrials.gov. So nothing material because we didn't come out with at that point. But of course, something that is very interesting for all of you. So we wanted to highlight it here. Sami Sarkamies: Okay. And then finally, regarding the R&D pipeline, thinking of next year, can you give a bit more color on when you're expecting Phase I readout for ODM-212? And when would you expect to initiate the first Phase II study for that molecule? And then secondly, at CMD, you talked about 3 biological preclinical programs moving into Phase I during next year. Just wanted to check if these projects are still live as you are currently guiding for at least one new program during next year. Liisa Hurme: Yes. I'll start with ODM-212. The Phase I is almost completed. We are looking at the results, and we are basing our Phase II planning on those results. And of course, we will report the results in some forthcoming scientific meeting. Those are usually on embargo until we release them for the scientific audience. And regarding the Phase II program, it's currently under plans. We have filed IND for that and hope to be starting by hopefully mid-'26. And what was -- then there was one more question. Tuukka Hirvonen: About the biologics status. Liisa Hurme: Biologics. Indeed, yes, we told that we have 3 biologics close to advancing to clinical pipeline. And we think that we will be able to proceed with at least one of them to the Phase I next year. Operator: [Operator Instructions] The next question comes from Shan Hama from Jefferies. Shan Hama: Three from me. Also happy to take them one by one. So firstly, could you perhaps give us some, I guess, guide as to the impact on your OpEx from the ODM-105 failure? I mean I know you weren't planning to take it to late-stage development yourselves. So I assume it's not significant, but perhaps any guidance on the provisions set aside there would be helpful. Rene Lindell: Yes, maybe I can take that one. So of course, ODM-105, it was -- we got the results and in such a way, you could say the project was completed. So for this year's perspective, not a big impact in terms of how we expect this year's R&D expenses to be going as it was in our plans and it was completed. Then of course, for next year, you can obviously think that there is a change in how the budget is allocated. 105 million, of course, is not moving forward. There are some tail costs for next year that we'll be taking in this year. But overall, we see it as being quite neutral for this year in compared to whatever we save and whatever provisions we take for costs that would have occurred next year. Shan Hama: All right. And secondly, I mean, you're able to specify your guidance on this increasing visibility on the performance of the businesses. I assume the visibility on the milestone should also be better. Could you perhaps speak a bit on your expectations for this and whether that visibility has shifted slightly from last quarter? Liisa Hurme: Well, as we have stated, we think that we will receive the milestone next year, '26, but it is possible that we receive that milestone already '25. But it's still not possible to state that as a fact that we get it this year. So we remain where we have been to this date that it's possible this year, but we are -- in our plans, it's next year. Shan Hama: Understood. And then finally, given the delay that you mentioned in the deliveries in Branded Products and Animal Health, is it fair to expect a slight boost to 4Q, assuming those deliveries are made as well as the normal business expected in 4Q? Or is it more of a pull-through dynamic? Liisa Hurme: Now I didn't quite get the question. Is it... Tuukka Hirvonen: It's about the timing of shipments in Branded Products and Animal Health since we now saw some headwinds. Will there be a boost in Q4 now that... Liisa Hurme: No, I think it's just -- it's according to plan that we get them out here. So it's not boosting the Q4. Operator: The next question comes from [ Matty Carola ] from OP Corporate Bank. Unknown Analyst: It is [ Matty Carola ]. I ask 2 Nubeqa related questions. First, regarding the U.S. situation and the pricing. I know you are not willing to say a lot about it, but maybe could you a little bit say about the political atmosphere. Do you or your partner get the pressure to lower the price? Or what's your kind of look right now if you look on another side of the Atlantic? Liisa Hurme: Well, I think that's a good question regarding the U.S. business environment. However, I think a question whether our partner gets pressured or needs to change price, I think it's fair to say that, that needs to be asked from Bayer. It's not my place to comment that matter. But in general, there are a lot of things happening in U.S. regarding the pricing, the most favored nation initiative and also, of course, the tariffs. So we follow the situation carefully. Unknown Analyst: All right. Then the second one, you received the latest permits in the U.S. during the summer and also in Europe regarding the latest indication. Have you seen kind of significant volume change or kind of any change about the sales during the Q3 if we speak about the kind of adoption rates or any other kind of sales indication, which is visible after you got the final sales permits? Liisa Hurme: Well, we don't -- of course, we see that the volumes are increasing. That's a very positive thing. But we don't have a kind of a step change if you're referring to that with the new indication. It's more of a linear growth. So it's very positive. I'm sure ARANOTE has a positive effect as it can be used also without docetaxel. But to have a kind of a step change or big growth there, such we don't see exactly. Operator: [Operator Instructions] The next question comes from Anssi Raussi from SEB. Anssi Raussi: One question from me, and it's just to double check something you said during the presentation about Nubeqa royalties in Q4 compared to Q3. So I understood that we shouldn't expect similar growth as we saw last year, but anything else to add or comment on Q4 royalty rate? Maybe I didn't catch up everything you said in that comment. Liisa Hurme: Very good that you asked. I was trying to explain that last year, the royalty rate changed between Q3 and Q4. So... Tuukka Hirvonen: During Q4. Liisa Hurme: During -- yes, not exactly between, but during Q4. So it had an impact so that the Q4 was clearly higher in Nubeqa sales or royalties to us. But this year, we already reached that royalty rate during Q3. So even though the royalties will be -- or the sales will be growing, so there will be a kind of a double effect of sales growing and royalties -- royalty percentage increasing during quarter 2. So that's the difference. I don't know if I explained it well or if my colleague wants to explain it even better. Anssi Raussi: Got it. And so is your royalty rate hit the cap during Q3? Was it at the end of the quarter? Or was the average rate already capped and will be similar in Q4? Or is it like the run rate at the end of Q3? Tuukka Hirvonen: We reached the cap during Q3, not going to specifics at which point of time. But like Liisa said, kind of the message is that one should not expect similar step-up as you saw last year between Q3 and Q4 because in Q4 last year, we got the step-up coming from the royalty rate increase, but now that won't be happening between Q3 and Q4. So that was kind of the message that we expect the growth to continue, but similar kind of step-up as you saw last year, one should not expect. Operator: There are no more questions at this time. Tuukka Hirvonen: All right. Thank you, operator. Then we turn on to the chat questions. We have a couple here. You still have time to type in more if you have anything on your mind. Let's start with one. This is actually already covered, but just to let you know that [ Aro ] is asking, is it still realistic to think that the EUR 180 million Nubeqa milestone would come already this year? And actually, you, Liisa, already addressed that question. So that's covered. Then we are having one coming from Iiris Theman from DNB Carnegie. Regarding Nubeqa, have you received any feedback from Bayer how ARANOTE sales have developed? What are Bayer's comments? Liisa Hurme: I think not specific comments on ARANOTE . I think we are more or less following the all sales development. And as I said, it's linearly growing. So there, we haven't really seen any step-up due to ARANOTE. And let's remember that there might have been already off-label use with Nubeqa for this patient segment. So it might be that -- it might not be that dramatic, and that's what we've been trying to tell all along while we've been waiting for the ARANOTE approval. Tuukka Hirvonen: All right. Thank you, Liisa. We have no further questions in the chat, but I got a message. Well, actually, now Iiris has a follow-up here. So why administration costs were lower year-on-year? And what should we expect for Q4? Rene Lindell: Yes, There are typically quite many line items there, and some of those are -- can be just shifting from quarter-to-quarter. There can be also some definition changes, what is considered admin and what is considered in the other line items. There are quite minor changes in terms of the overall admin expenses. There's nothing big changing the normal inflation, which is across the board. But yes, I wouldn't expect any drastic differences. Tuukka Hirvonen: All right. Thanks, Rene. Then we have a follow-up from Sami Sarkamies from Danske. So following changed endpoints for ODM-208, so opevesostat, OMAHA trials, do you still foresee an interim readout in '26? Before you answer, of course, we need to point out that we have never estimated or foreseen that there will be a readout. Liisa Hurme: Interim readout. No, no, no. But I think that's public, the readout for the full year. It's that when... Tuukka Hirvonen: Yes. Yes, the full readout, yes, but interim readout. Liisa Hurme: No, no, no. We are not going to comment that or we have never commented that. But the readout from both studies should be in 2028. Tuukka Hirvonen: Yes, that's correct. Then we have a follow-up from Heikkila. He says that Orion's R&D costs have been increasing clearly. At which point do you expect these increases to show as a growth in terms of net sales? And to which development programs are you focusing the most after Nubeqa? Liisa Hurme: We clearly focusing the development programs that are in our hands, and that's ODM-212 now and of course, the biologics that are following that. And when can we expect that program to turn into sales? I would say that would be early 2030s. Tuukka Hirvonen: All right. Thank you, Liisa. Now we have exhausted all the questions from the chat. And also, I got a message that there are no follow-ups in the conference call lines. So it's time for us to wrap up. Thank you for joining us today, and have a great rest of the day and week. Liisa Hurme: Thank you.
Operator: Good day, everyone. Welcome to the conference call covering NBT Bancorp's Third Quarter 2025 Financial Results. This call is being recorded and has been made accessible to the public in accordance with SEC Regulation FD. Corresponding presentation slides can be found on the company's website at nbtbancorp.com. Before the call begins, NBT's management would like to remind listeners that, as noted on Slide 2, today's presentation may contain forward-looking statements as defined by the Securities and Exchange Commission. Actual results may differ from those projected. In addition, certain non-GAAP measures will be discussed. Reconciliations for these numbers are contained within the appendix of today's presentation. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded. I will now turn the conference over to the NBT Bancorp President and CEO, Scott Kingsley for his opening remarks. Mr. Kingsley, please begin. Scott Kingsley: Thank you. Good morning, and thank you for joining us for this earnings call covering NBT Bancorp's Third Quarter 2025 results. With me today are Annette Burns, NBT's Chief Financial Officer; Joe Stagliano, President of NBT Bank and Joe Ondesko, our Treasurer. Our operating performance for the third quarter reflected the positive attributes of productive asset repricing trends, the diversification of our revenue streams, prudent balance sheet growth and the additive impact of our merger with Evans Bancorp completed in the second quarter. Operating return on assets was 1.37% for the third quarter with a return on equity of 12.1% and an ROTCE of 17.6%. Each metric demonstrates continued improvement over the linked and prior year quarters, and importantly, reflects the generation of positive operating leverage. Our tangible book value per share of $25.51 at September 30 is 7% higher than a year ago and above the level it was at when we announced the Evans merger 13 months ago. This continued capital strength has us very well positioned to support all our strategic growth initiatives. The continued remix of earning assets, diligent management of funding costs and the addition of the Evans balance sheet resulted in an improvement in net interest margin for the sixth consecutive quarter. We are pleased with our progress to date with net interest margin expansion. However, recent and expected changes to Fed funds rates will likely challenge future margin improvements compared to our most recent quarters. Growth in noninterest income continues to be a highlight with each of our nonbanking businesses achieving productive improvements in both revenue and earnings generation year-over-year. We were also pleased to announce an 8.8% improvement to our dividend to shareholders earlier in the quarter, marking our 13th consecutive year of increases. This reflects our strong capital position and our generation of consistent and improving operating earnings. As we have stated before, our capital utilization priorities are to continue to support NBT's organic growth and the consistent improvement to the quarterly dividend we pay our shareholders. In addition, we appreciate the opportunity to evaluate and partner with other like-minded community banks. Returning capital to shareholders and opportunistic share repurchases is also part of our capital planning. And as such, we renewed our $2 million share repurchase authorization through the end of 2027. Before turning the meeting over to Annette to review our third quarter results with you in detail, Joe Stagliano will provide some additional color on our progress in the Western region of New York and other initiatives across the markets. Joe? Joseph Stagliano: Thank you, Scott. We continue to build on the momentum of our successful Evans Bank integration. Since the merger, we've experienced solid growth in deposits in the Western region of New York and we are retaining key lending relationships despite experiencing approximately $30 million of net contractual runoff in the portfolio. Customer sentiment remains strong, and employee engagement is high. Let me walk you through some of our key market developments. In Buffalo and Rochester, we've had success recruiting and onboarding talented professionals across all lines of business, which complements the strong team we already have in place. Our new Webster branch in Greater Rochester opened in April, and it's off to a promising start. To support growth -- to support our growth initiatives in Rochester, we plan to open a financial center in the market during 2026. Additionally, we are exploring locations in the Finger Lakes to fill in our branch network in this attractive region. In the second half of 2026, we expect to break ground on a new branch location near the planned Micron chip fabrication site in Clay, New York. In addition, our current team of bankers and network of locations in the Mohawk Valley are well positioned to support the growth anticipated from Chobani's plans for a new facility expected at 1,000 jobs to the area. Our new Malta, New York branch near GlobalFoundries is seeing excellent traffic and growth. In the Hudson Valley, IBM has announced plans to expand the Poughkeepsie and we are seeing positive demographic shifts in the region. We entered this market through our merger with Salisbury Bank and are eager to improve our concentration characteristics in this region. Earlier this year, we opened our fourth branch in Burlington, Vermont, and we are seeing good momentum. We are set to open an additional branch office in Portland, Maine in early 2026. We've also secured a site in Torrington, Connecticut that will connect our presence in West Hartford with our locations in Litchfield County in early 2026. In addition, we remain focused on scaling our operations in New Hampshire, supported by the strong team of bankers we have in place there. Our team continues to evaluate both new locations and branch optimization using an active and structured process. This dual focus ensures that we remain agile and responsive to market needs as we maintain operational efficiency. I will now turn it over to Annette. Annette Burns: Thank you, Joe, and good morning. Turning to the results overview page of our earnings presentation. In the third quarter, we reported net income of $54.5 million or $1.03 per diluted common share. Excluding acquisition expenses, our operating earnings per share were $1.05, an increase of $0.17 per share compared to the prior quarter. Revenues grew approximately 9% from the prior quarter and 26% from the third quarter of the prior year, driven by improvements in net interest income, including the impact of the Evans merger. The next page shows trends in outstanding loans. Total loans were up $1.6 billion for the year, including acquired loans from Evans. Excluding consumer loans and a planned contractual runoff status and the loans acquired from Evans, annualized loan growth in 2025 was approximately 1% higher from December 2024. Growth in commercial, indirect auto and home equity loans were partly offset by declines in residential mortgage balances. During 2025, we have experienced a higher level of commercial real estate payoffs while production has remained strong. We have captured quality lending opportunities across our markets, which has also provided growth in core deposits. This gives us flexibility to remain disciplined in our loan pricing and focus on holistic relationships. Our total loan portfolio of $11.6 billion remains very well diversified and is comprised of 56% commercial relationships and 44% consumer loans. On Page 7, total deposits of $13.7 billion were up $2.1 billion from December 2024. Excluding the deposits acquired from Evans, deposits increased $250 million from the end of 2024, with growth in checking and money market accounts. 58% of our deposit portfolio consists of no and low-cost checking and savings accounts, while 42% is held in higher cost time and money market accounts. The next slide highlights the detailed changes in our net interest income and margin. Our net interest margin in the third quarter increased 7 basis points to 3.66% from the prior quarter primarily driven by the continued improvement in earning asset yields. Net interest income for the third quarter was $134.7 million, an increase of $10 million above the prior quarter and $33 million above the third quarter of 2024. The increase in net interest income from the prior quarter was largely attributed to the first quarter impact of the Evans acquisition, along with earning asset yield improvement. As a reminder, approximately $3 billion of earning assets repriced almost immediately with changes in the federal funds rate while approximately $6 billion of our deposits, principally money market and CD accounts remain price-sensitive. The opportunity for further upward movement in yields will depend on the shape of the yield curve and how we reinvest loan and investment portfolio cash flows. The trends in noninterest income are outlined on Page 8. Excluding securities gains, our fee income was $51.4 million, an increase of 9.8% compared to the previous quarter and an increase of 13.5% from the third quarter of 2024. The seasonally higher third quarter also benefited from a full quarter of Evans activity. Our combined revenue from retirement plan services, wealth management and insurance services executed $32 million in quarterly revenues. As a reminder, and consistent with historical trends, the fourth quarter is typically our lowest quarter in revenue generation for these businesses. Noninterest income represented 28% of total revenues in the third quarter and reflects the strength of our diversified revenue base. Total operating expenses, excluding acquisition expenses, were $110 million for the quarter, a 4.4% increase from the prior quarter and reflected a full quarter of Evans activity. Salaries and employee benefit costs were $66.6 million, an increase of $2.5 million from the prior quarter. This increase was primarily driven by the full quarter impact of Evans, higher incentive compensation and higher medical costs. Slide 10 provides an overview of key asset quality metrics. Provision expense for the 3 months ended September 30, 2025, was $3.1 million compared to $17.8 million for the second quarter of 2025. The decrease in provision for loan losses during the quarter was attributable to $13 million of acquisition-related provision for loan losses in the second quarter, partially offset by net charge-offs returning to a more normalized level in the third quarter. Reserves were 1.2% of total loans and covered 2.5x the level of nonperforming loans. In closing, growth in our net interest income and fee-based revenues drove our record performance in the third quarter and contributed to our meaningfully improved operating performance for the first 9 months of 2025. We are in a strong capital position, have growth opportunities across all our markets and are well positioned to take advantage of them. Thank you for your continued support. At this time, we welcome any questions you may have. Operator: [Operator Instructions] It comes from the line of Feddie Strickland with Hovde Group LLC. Please proceed. Feddie Strickland: Just wanted to start on expenses. You've got a full run rate of Evans, now on the expense line. I was just wondering if you could talk about where you're at in terms of cost saves and maybe what we should expect in terms of the total expense line over the next quarter or so. Annette Burns: Sure. Happy to take that. We think that our cost saves are essentially achieved during the third quarter. So we don't expect to have any additional meaningful impact related to those on a go-forward basis. The run rate that we had in the fourth -- in the third quarter of $110 million is an appropriate run rate as we look forward. Just as a reminder, we typically see merit increases starting in the first quarter and running off our typical expense increase going forward, typically runs somewhere between 3.5% and 4.5%. That's kind of how we think about 2026. Feddie Strickland: Got it. That's helpful. And just wanted to ask, thinking about loan growth, it sounds like you've got some new hires there that should help the pipeline longer term. What should we think over the next couple of quarters in terms of net new loan growth and keeping in mind what's the level of runoff that you expect in the residential solar and other consumer book? Scott Kingsley: So let's attack that one together. In terms of our activity for the last 2 quarters, it's actually been very robust. We experienced a much higher level of payoffs than we had anticipated. And quite frankly, than we had experienced in a year ago. But I think as we roll into early to mid-2026, low to mid-single-digit growth rate is probably appropriate for our markets. Stand-alone, our markets still have really good activity levels in them. And our pipeline, quite frankly, is very good. Getting things on the construction side to a closing outcome, as you know, in our weather, we probably don't close a whole bunch of those in December through February. But quite frankly, we like where the pipeline is with that and think there's really good opportunities. We will look at where we are from a balance sheet perspective right now and really like where we're centered holistically, which means an 85% loan-to-deposit ratio for us, quite frankly, is more comfortable for us than something in the '90s. We think it gives us longer-term optionality from an invested asset standpoint. So at that level and where we are in those expected growth rates, we could still move up earning assets, they might just not all be loans. So -- but we're very comfortable with that from an outcome standpoint and think it's probably almost as important for us that we've continued this steady growth on the funding side, mostly on the core deposit side. So that's how we're kind of framing where we think the balance sheet moves. Operator: Our next question comes from the line of Steve Moss with Raymond James. Stephen Moss: Maybe just start off, Scott, maybe just following up on expenses here. You guys mentioned the recruitment of talent here and the de novo branches as well. Just maybe curious as to if you can size up what your expected talent recruitment is going to be and kind of how you're thinking about how many de novo branches you may add over the next 12 months or so? Scott Kingsley: So I kind of frame it this way, Steve, and I'll ask Annette and Joe to comment if I've left something out. I think in terms on the brand side, I think we're thinking 4 to 6 a year to improve our concentration in some of the markets that we're either new to or where our concentration is, quite frankly, not robust enough. So as an example, I think we've said that from the beginning that Rochester, New York, as an example, is one of those markets where when we partnered with Evans, their concentration was we'll see on the east side of Rochester in some great spots, but building that out across sort of Central City, Rochester and maybe even to the west side maybe there's a concentration of 2 to 4 more sites for us over the next couple of years to use that example. I think that's also a spot for us where the recruiting of additional talent in the Western region of New York State has been very productive for us. We had this -- let's hold stuff in from Evans posture for the first 5 or 6 months, and we think we've done that, and we think our team has done very well on that. And now we're in a position to be a little bit more assertive and add some people to the mix that we think can move up some of our long-term expectations on the growth side. Annette Burns: I would just say from a expense management, I think we look at branch optimization to kind of offset some of the growth initiatives and then as well as technology investments to help improve efficiencies. So given that, I don't think that we would see an outsized expense growth than what we historically see from NBT. Stephen Moss: Okay. That's helpful. And then just in terms of maybe just thinking about your presence across upstate New York, just kind of curious, are you interested in additional M&A deals or just kind of how you're thinking about things at the current time. Scott Kingsley: Steve, I'd frame it kind of both ways saying that we are interested in building out the franchise that now goes from Buffalo to Portland and Wilkes-Barre, Pennsylvania to Burlington. Fill-in strategies for us are probably first in our mind. Would we move the franchise another 50 miles West, South, East for sure. But frankly, filling in some of those from an opportunistic build-out standpoint, including the potential for M&A is absolutely primary for us. So we are -- we have the opportunity to have discussions with like-minded smaller community banks. And we're hoping that we've left a good impression in that if long-term independence is not in their plans, they'll see the value proposition of talking to us. Stephen Moss: Appreciate that, Scott. And then maybe just 1 on the core margin here, just kind of curious, any updated thoughts around purchase accounting accretion going forward here? And could we see any incremental core margin expansion here? Annette Burns: Great question. So from an accretion standpoint, I think that's fairly stabilized and appropriate run rate. So I don't think we'll have any material change of that over the next, let's say, 4 quarters or so. As we think about the margin, in the short term, with the potential for multiple rate cuts, in our near future here. We think there might be a little bit of margin pressure, and that's really because even though we're neutrally positioned, our assets reprice almost immediately, while we have to actively manage our deposit repricing. As a reminder, $6 billion of our assets of our deposits that we're able to reprice about $1.4 million of those are in CDs. So it might take a little like a full quarter to work through those to help offset those asset repricing. So the fourth quarter could see a little bit of pressure and then looking out into 2026, especially if we see an improvement in that shape of the yield curve, we could see some margin improvement jumping off of the fourth quarter. Stephen Moss: Okay. And just 1 follow-up there. Just what percentage of loans are variable rate these days? Annette Burns: Somewhere around $3 billion are variable rate. Scott Kingsley: Yes. And Steve, that includes all of our assets that are variable. So the loans are probably $2.5 billion to $2.6 billion, which quick in my head, that's a little over 20%. And then there's probably $100 million to $150 million worth of investment securities that's are variable. And then currently, we find ourselves in a Fed fund sold position. So those overnight funds obviously move with changes in SOFR or Fed funds changes, and that's a couple of hundred million for us. Operator: Our next question comes from the line of Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: Just wanted to follow up with a question on the solar loans. I guess I'm curious, is there any way to kind of accelerate the exit of those? Is there kind of any depth to the market to sell those loans? Scott Kingsley: That's a really good question and something we spend a lot of time with. Today, Mark, the answer is no for that. There is desire potentially for that asset. In other words, people still like the asset class a lot despite all of the volatility and future volatility associated with new originations. But remember, we still have a fair portion of our loans that were originated in the 2020 to 2023 operating years and they contain yields that are lower than the market is demanding today. So for us to move that on an accelerated basis, we would have to embrace a fair value loss today. And that's something we need to do. Those assets are performing, again, not utopian yields, but those assets are performing the way they're supposed to perform and our credit characteristics have been exactly in line with what we expected. Mark Fitzgibbon: Okay. And then I guess I'm curious, are you seeing any pressure at all on the auto loan delinquencies right now? Scott Kingsley: Not significant at all. Quite frankly, it's been very consistent. Remember, we're in the A and B paper classes. I think both from an origination standpoint, we might see this going forward with a couple of the industry announcements that capacity for C&D lending might be more substantially impacted over the next 3 months, 12 months period of time. But for us, it's been great. And remembering, we're making our indirect auto loans in our footprint. And most of our footprint doesn't have meaningful public transportation. So people are making their car loan payments so they can go to work. Mark Fitzgibbon: Okay. And then 1 for Annette. Annette, your comments earlier, I think you said with respect to the margin, it'd be challenging to improve it. Should we take that to mean that the margin will decline? Or do you sort of think you can hold the margin somewhere close to the current level? Annette Burns: So for the fourth quarter, that's where we're reflecting it might be a little bit of a challenge to hold but a few basis points for one direction or the other. And then I think we kind of stabilize pending no further rate actions and have the ability to see a little bit of margin improvement quarter-over-quarter as we still have some opportunity to reprice our loan book. Scott Kingsley: And Mark, we've been very deliberate about making sure that we're holding spreads on new assets that we're winning. We don't think at this point in time, in sort of the credit cycle, which is probably closer to mature is the right time to be reaching for growth. Mark Fitzgibbon: Okay. And then lastly, no updates on the timing for the Micron technology project. Scott Kingsley: Yes. $64,000 question so thanks for asking it. Today, we still expect shovels in the ground at the site here late in the fourth quarter. But if you know our ZIP code very well, the shovel has to have a lot of pressure on it to get into the ground in the next couple of months. Our perspective today on that, Mark, is that the site will be improved relative to taking on the fill and because this site, quite frankly, is a touch wet so I think the next 5 to 7 months are site fill in making sure that the activity has been compressed with the expectation that building actually starts mid-to late 2026. Operator: Our next question is from the line of Matthew Breese with Stephens Inc. Matthew Breese: A few kind of margin-related questions. First, do you happen to have the spot cost of deposits either at quarter end or most recent date and then I was hoping you could provide some color on the roll-on versus roll-off dynamics of fixed and/or adjustable rate loans today. Scott Kingsley: On the spot side, now let's get back to you. We don't have that sitting in front of us today. I will say this, we're pretty sure because we made some adjustments to deposit costs after the Fed rate change in September that October's cost of funds are probably slightly lower than September's. But my guess is it's measured in single basis points. So let's reframe your second part of your question if you would. Matthew Breese: Yes. For your fixed rate and adjustable rate loans, what is the roll-on versus roll-off rates? Annette Burns: Maybe I'll take that based on book. So for our commercial portfolio, we probably have about a 50 basis point differential now between our portfolio yields and our origination rates. For indirect auto, we're just about there. And really, that's dependent on the belly of the curve and where we price those auto loans. So if you look at our presentation, we're probably a little bit lower on our new origination rates than our current portfolio yield. So that's going to probably fluctuate from quarter-to-quarter. And then where we have the most room is in our residential mortgages, which is about -- still about 160 basis points of room between our portfolio yields and our new origination rates. Matthew Breese: Okay. And then this 1 kind of leads into my next question, which is your securities yields are still pretty low relative to what you could go purchase something at today. When do we see a more pronounced pickup in securities yields as the back book starts to reset or mature? Scott Kingsley: So our portfolio today is very much a cash flowing portfolio. So it's mostly mortgage-backed securities. So it's pretty orderly. It's in the line of a couple of hundred million dollars a year from a cash flow standpoint. So we don't think that changes much. But we will acknowledge your comment that our portfolio yields are now below our peer group because we think we're the last ones in the peer group that did not do a onetime charge or a restructuring. Matthew Breese: Okay. And just last one, Scott, your comments on perhaps earning asset growth beyond loan growth. I felt like it was a not so subtle hint that we might see some securities growth near term. To what extent might that happen? And to what extent do you lean into kind of your excess cash position to do that? Scott Kingsley: Yes. That's a terrific question. I think today, we have that flexibility today. And maybe over the last couple of years, we didn't enjoy that flexibility at the same level. So I think it's a duration-based risk/reward for us, Matt, that today, when you stay in the short term end setting aside expectations as short-term rates may come down a little bit. There's really not much of a penalty to stay in Fed funds or something very short term. That probably gets a little bit more definition to it after the expected changes in Fed funds rates here in the fourth quarter, and we'll assess it from there. When we kind of look at that is we've never taken a real mismatch in terms of duration in our portfolios. So I wouldn't expect to start that in this cycle. But I do think an opportunity does present itself for us to continue to analyze if we can leg into that a little bit more. Remember we are very deliberate about how we handle the investment portfolio that we inherited from Evans and where we push those cash flows to what we disposed of and what we decided to retain. Our construct around investment securities continues to be making sure we have enough latitude to support the collateralization for our municipal deposits. So that's more of our focus points than whether we have incremental earnings opportunity associated with a $50 million, $60 million, $100 million leg in on the security side. Operator: Our next question is from the line of David Konrad with KBW. David Konrad: I wanted to switch gears a little bit and talk about fee income. I thought it was a really good quarter, particularly in insurance. Just maybe -- I know it's seasonally probably your strongest quarter there, but highlight what's going on there? And maybe is 7% in annual growth rate that you can think about in 2026. Annette Burns: Good question. So for our insurance business, our third quarter is our most seasonally high, probably to the tune of about $1 million, and that's just some seasonality of some of our municipal customers. So the first and third quarter are typically higher for our insurance business. The growth rate of around 7%, I would say somewhere those high mid-single digits is an appropriate run rate seeing some good commercial growth across our business line. Commercial business -- our insurance business is very integrated with our banking business. So a lot of referral opportunities as it relates to that, and that's what drives the growth there. Scott Kingsley: And to follow that, David, the rate of change on rate increase that the insurance companies have been able to be approved for is a little bit less than we experienced over the last couple of years. So in other words, new rate structures, we're generating growth for most agencies in the 4% to 6% rate before you even add new customer development. David Konrad: Got it. And then maybe last question and follow-up here. Help us out a little bit on next quarter and your outlook as we get a little bit more seasonally challenged in the fourth quarter for the total fee income business. Scott Kingsley: Yes. So historically, and Annette will remind me if I'm wrong on this, historically, fee income for benefits administration and insurance has typically been 6% to 8% lower in the fourth quarter than it was experienced in the third quarter. And there's nothing for us today telling us that we'd be outside of that expectation. Annette Burns: And I would also just remind there's probably about $1.5 million of unique items to the quarter gains in the third quarter. So that also kind of made the third quarter a little higher. Operator: [Operator Instructions] We have a question from the line of Feddie Strickland with Hovde Group. Feddie Strickland: Just had a quick follow-up on capital. You talked a little bit about M&A down the road already. But just wanted to get your thoughts on capital management, any sort of capital ratio number you're trying to manage to? And could we see buybacks executed beyond the level of offsetting the stock-based comp? Scott Kingsley: So thank you for the question and good reference point. Over the last 2.5 years, we've been really, really deliberate on capital retention because we were going through the completion and closing of both the Salisbury transaction as well as the Evans transaction. So we weren't active -- real active in a lot of our other attributes because we wanted to make sure we had the purchase accounting right and that our estimates of impact on dilution were appropriate. We've gone through that. We're very comfortable. A matter of fact, we've exceeded our expectations on getting back to pre-announcement levels of capital. Holistically, right now, we're really comfortable from a capital position. And I would argue on most days, we have too much. And just given the risk attributes of our balance sheet, but that being said, I think we're in a spot from a maintenance standpoint of our capital levels holistically and specifically at the bank, where there's -- we can embrace every opportunity that we have without worrying about that. To your question, historically, we always try to cover equity-based compensation plans with repurchases so that we didn't dilute ourselves on a creek basis. Today, given where valuations are for high-quality earnings generation characteristics like we have suggest that maybe we should be a little bit more active with repurchase activity. Has never been our principal focus relative to capital management, but we find ourselves in a position today where we're not sure the market has fully recognized our capacity for earnings. Feddie Strickland: All right. Great. And just one last one on the margin. I understand the dynamics of repricing loans versus deposits and a lag on deposits. But it sounds like if we get some level of steepness in the yield curve and a couple more cuts, and you start to get the benefit of those deposit costs lower, maybe in the mid '26. I mean, could we see initial pressure on the margin near term, but maybe margins start to come up a little bit over time with maybe some backup loan repricing, the deposit lag piece and assuming we have some level of steepness in the curve. Annette Burns: I think that's a good summary of how we're thinking about margin and potential for margin improvement, was just a reminder that you're probably not going to see the same level of benefit that we saw in 2025 just because a lot of our loan book has repriced. And so it's really less of an opportunity than what we've seen. Operator: And as I'm not showing any further questions in the queue, I will turn the call back to Scott Kingsley for his closing remarks. Scott Kingsley: Thank you. In closing, I want to thank everyone on the call for participating today and for your continued interest in NBT and at least for this week, go build. Operator: And, thank you, Mr. Kingsley. This concludes our program. You may disconnect, and have a great day. Scott Kingsley: Thank you.
Operator: Good morning, and welcome to Olin Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Steve Keenan, Olin's Director of Investor Relations. Please go ahead, Steve. Steve Keenan: Thank you, operator. Good morning, everyone. We appreciate you joining us today to review Olin's third quarter 2025 results. Please keep in mind that today's discussion, together with the associated slides as well as the question-and-answer session that follows, will include statements regarding estimates or expectations of future performance. Please note these are forward-looking statements and that Olin's actual results could differ materially from those projected. Some of the factors that could cause actual results to differ from our projections are described without limitations in the Risk Factors section of our most recent Form 10-K and in yesterday's third quarter earnings press release. A copy of today's transcript and slides will be available on our website in the Investors section under Past Events. Our earnings press release and related financial data and information are available under Press Releases. With me this morning are Ken Lane, Olin's President and CEO; and Todd Slater, Olin's CFO. We'll start with some prepared remarks, then we'll look forward to taking your questions. In order to give everyone an opportunity, we will limit participants to one question with no follow-ups. I'll now turn the call over to Olin's President and CEO, Ken Lane. Kenneth Lane: Thank you, Steve, and thanks to everyone for joining us today. Let's start with Slide 3 and our third quarter highlights. During the third quarter, we delivered robust results, reflecting strong performance in our Chlor Alkali products and Vinyls business, partially offset by ongoing weakness in our Epoxy and Winchester commercial ammunition businesses. We remain disciplined in our value-first commercial approach and operated our assets safely, reliably and efficiently. Team Olin is more committed than ever to executing our value-first commercial strategy, maximizing cash generation and delivering on our capital allocation priorities while preserving our strong leverage to a demand recovery. During the third quarter, we continued to generate positive operating cash flow and with a focused effort by Team Olin achieved a significant milestone by securing our eligibility for Section 45V clean hydrogen production tax credits, which Todd will discuss shortly. Now let's turn to Slide 4 and review our Chlor Alkali Products and Vinyls results. Third quarter ECU values remained stable as did global caustic soda demand. The main end markets for caustic soda have held up well. Some weakness in pulp and paper has been largely offset by good demand in other markets such as alumina and water treatment. As expected, caustic soda remains the stronger side of the ECU. Adding to the good results for CAPV was improved operating performance and lower costs. We are beginning to realize the benefits of our optimize the core strategy. During the quarter, we announced the dissolution of our Blue Water Alliance joint venture with Mitsui at year-end. Mitsui has been a long-term partner for Olin, and that will continue to be the case. However, we believe the complexity of a joint venture is not needed for us to strategically manage our participation in the EDC market. Aligned with our value-first commercial strategy, we will reduce our spot EDC exposure and focus on longer-term structural relationships offering higher returns across the cycle. Looking forward to the fourth quarter, we expect seasonally lower demand and our Chlor Alkali team is focused on preserving ECU values. In support of that, we are taking aggressive steps to adjust our operating rates, which will also help us deliver on our target to reduce working capital. Now let's turn to Slide 5 for a look at our Epoxy results. Global Epoxy resin demand remains weak, and we continue to face significant headwinds in both Europe and the U.S. regions, facing subsidized imported resin from Asian producers. U.S. demand has been more resilient than Europe. And with the removal of Epoxy resins from Annex II tariff exemptions, we are seeing traction with U.S. price increases. In spite of these market dynamics, Olin's third quarter formulated solutions volume improved sequentially. Fourth quarter planned maintenance presents a $14 million sequential headwind to Epoxy earnings. As we execute this turnaround safely and efficiently, the Epoxy team will focus on cash management as they reduce year-end inventories. Olin's new Stade, Germany supply agreement will provide improved economics for our European production, similar to the benefits from our integrated operations at Freeport. Starting in January 2026, the new agreement is expected to provide an annual adjusted EBITDA benefit of approximately $40 million. With rationalization of capacity in Europe, we are seeing opportunities to grow our participation and we'll do so at a value that is attractive. Next, we move to Slide 6 for an update on our Winchester business. As we discussed last quarter, our commercial ammunition business has been hit by a perfect storm, rising costs, elevated channel inventories, lower out-the-door retail sales and falling market prices. We estimate that high retail inventories have decreased Winchester commercial sales by approximately 5% to 10% so far this year. In the face of weak consumer sales, retail inventories have been slow to correct. As a result of this market environment, commercial margins have dropped dramatically, with half being attributable to lower volume, while the other half is a combination of lower pricing and higher costs. We are seeing some positive pricing trends developing for the fourth quarter. Given the recent run-up in metals and manufacturing costs, commercial margins will not be restored until demand recovers and inventory levels have been rightsized. In contrast to weak commercial demand, Winchester's military business continues to show strength. Domestic military and international military demand continues to grow as NATO countries expand their defense budgets. Our Next Generation Squad Weapon ammunition facility project at Lake City is well underway, and we are on course to complete construction in late 2027. In parallel, we are developing and delivering components and equipment to support the Army's accelerated fielding plan. Recognizing that the commercial market is not improving as quickly as we had hoped, we are adjusting our operating model to make-to-order versus make to inventory. As a result, we will see a reduction in Winchester working capital that will be sustained until we see demand improve. As part of this change, we will extend our typical holiday plant shutdowns to further reduce supply and reduce inventory. This will shift Winchester closer to a just-in-time manufacturing model. I'll now turn the call over to Todd Slater for a look at our financial highlights. Todd Slater: Thanks, Ken. Let's review our sequential quarterly adjusted EBITDA bridge. Third quarter 2025 adjusted EBITDA included a $32 million pretax benefit, primarily related to the clean hydrogen production tax credit under Section 45V as part of the Inflation Reduction Act of 2022. Excluding the Section 45V tax credit, our third quarter adjusted EBITDA was $190 million, which was an 8% sequential improvement. Chlor Alkali Products and Vinyls results improved, driven by lower operating costs and higher ethylene dichloride volumes while preserving ECU values as we navigate through this prolonged trough. Our Epoxy business continued to grow its formulated solutions volume as persistent headwinds from subsidized Asian imports impacted both the United States and European markets. As expected, Epoxy's third quarter results included higher operating costs from unabsorbed fixed manufacturing expenses incurred from planned inventory reductions. Winchester's third quarter segment results reflected the continued weakness of commercial ammunition volumes and margins, which more than offset improved military and military project earnings. The typical third quarter seasonal growth in commercial demand was muted. Now turning back to the 45V tax credit. We recognize this benefit as a result of our team's dedicated efforts over the last 3 years. During the third quarter, we received notification from the Department of Energy regarding our provisional carbon dioxide emissions rate, marking a significant milestone for tax credit recognition. The Section 45V tax credit pertains to qualified clean hydrogen produced and either sold or used at certain of our Chlor Alkali plants. Looking forward, we expect an annual benefit in adjusted EBITDA of $15 million to $20 million for the years 2026 through 2028 with lower amounts through 2032. Next, let's move to Slide 8 for a review of our liquidity. During the third quarter, we fell short of our cash flow and working capital targets, resulting in an increase in net debt for the period. This was primarily due to unforeseen payment delays from the U.S. government related to Lake City military business. These payments were subsequently received in October. For 2025, we continue to expect working capital to be a source of at least $100 million of cash, excluding the timing of tax payments. Consistent with what we previously discussed, by year-end 2025, we expect net debt to be flat with year-end 2024. Finally, we remain committed to our disciplined capital allocation approach and our priorities are clear. First and foremost, we retain our investment-grade balance sheet. Second, we fund sustaining capital spending to maintain the safe and reliable operation of our assets. And third, we are committed to maintaining our quarterly dividend. And then fourth, any available free cash flow is returned to shareholders through either highly accretive growth opportunities or share buybacks. Our teams continue to focus on cash generation, maintaining cost discipline and supporting our Beyond250 cost savings initiative. Our strong financial foundation enables Olin to continue executing our value-first commercial approach while adhering to our capital allocation priorities and prudent capital structure with a strong balance sheet and cash flow. Ken, I'll now hand the call back to you. Kenneth Lane: Thanks, Todd. Let's finish up with Slide 9 and our outlook for the fourth quarter. In our CAPV business, through actions we're taking, we expect to see stable ECU values in the face of seasonally weaker demand. Our Epoxy business remains challenged, but will begin to see improvement as we enter the new year and benefits accrue from our new Stade supply agreement, some pricing improvements in the U.S. market and volume gains in Europe following capacity rationalizations. In Winchester, we have a very strong legacy and an industry-leading brand that has supported the U.S. and allied militaries for more than 150 years. We will see resilience in this business and are taking actions to accelerate that in the fourth quarter by adjusting our operating model, driving price increases and finding new opportunities in our international military business. The current trough has been a test of our commercial model and our commitment to operating discipline. We've stayed the course and developed ways to further help ourselves through improvements in our cost structure that are beginning to show benefits. We will provide a more detailed progress report during our fourth quarter earnings call in early 2026. But as we shared during our Investor Day, our Beyond250 initiative is built upon 3 pillars. First, the structural rightsizing and cleanup of our production assets. Recent rationalizations have left behind inefficiencies or remnant costs. This will be implemented in close coordination with our planned outages in the coming years. Second, we must streamline our operations and maintenance practices to work more efficiently and reduce our dependency on contractors. Third, we will redouble our efforts to be the industry leader in operating efficiencies. These Beyond250 pillars are embedded in every employee's incentive so that we create a culture of ownership and performance-driven accountability that is aligned to our values, including being the safest and most reliable operator in the industry. Finally, during the fourth quarter, we will realize a $40 million EBITDA penalty to reduce inventories and support our value-first commercial strategy. Including this, we expect our fourth quarter 2025 adjusted EBITDA to be in the range of $110 million to $130 million. Operator, we are now ready to take questions. Operator: [Operator Instructions] And today's first question comes from Hassan Ahmed with Alembic Global. Hassan Ahmed: A question around -- I know it's early days to start thinking about 2026. But I mean, if I sit there and take a look at what your guidance implies for 2025, excluding sort of the inventory penalty, you get to around $734 million to $754 million in EBITDA, and that's obviously ex the inventory penalty. So I'm just trying to figure out via self-help, via stuff that's in your control, how much of an increment could we see in 2026? Obviously, you guys have the Dow contract in place. There won't be the turnaround in the Epoxy business. And obviously, you guys have the whole cost-cutting side of things as well. Kenneth Lane: Hassan, this is Ken. Listen, I'll start and then maybe Todd can add a little bit. As we look at what we're doing going into the fourth quarter, we've talked a lot about things that we have to do to help ourselves just because we're not seeing the market environment improve really in any of our businesses so far. So the focus on Beyond250 and the cost reductions that we're going to realize there is something that the entire organization is really driving to make sure that we can deliver that. So we've talked about a $70 million to $90 million run rate coming out of this year into next year. And that does include the Dow agreement at Stade, the new agreement that we've got that's -- we're going to be seeing that in the P&L in the first quarter. It actually took effect on October 1. But with all of that, we do see some upside to the $70 million to $90 million in 2026. So we're going to be giving you a little bit more color around that in the fourth quarter earnings call at the beginning of the year next year. So stay tuned for that, and we'll give you a little bit more details. But at the end of the day, we've really got to buckle down here and do what we can do to help ourselves. Todd, do you want to add anything to that? Todd Slater: Hassan, as we look into 2027, you mentioned turnarounds. I'll remind everyone on the call that we do have our 1 in every 3-year major turnaround on our VCM, Vinyl Chloride Monomer unit that will happen generally in the first half of next year. So that's probably a headwind relative to what we've seen this year. Operator: Thank you. Our next question today comes from Josh Spector at UBS. Joshua Spector: I apologize if I missed this earlier, but I also wanted to ask on the 45V credit. I mean, the $32 million in the quarter, how much of that is catch-up for earlier in the year? And really, the question is, what's the ongoing benefit we should be modeling in for Olin into next year or further out? Todd Slater: Josh, it's Todd. Thanks for the question. Yes, it is ultimately a catch-up. The $32 million, we were finally able to realize that because of getting our final CO2 emissions information from the Department of Energy. We've been working on this candidly for the last 3 years. As we go forward, we would look at 2026 through 2028. We think you'll see adjusted EBITDA benefit in the $15 million to $20 million range each of those years. Operator: And our next question today comes from Matt DeYoe with Bank of America. Salvator Tiano: This is Salvator Tiano filling in for Matt. Can you talk a little bit about the working capital situation in Q3? I think there was a very big increase in some of the working capital buckets. Why this happened? And given that, is it safe to assume that Q3 operating rates, especially in Chlor Alkali were better than you expected in the initial guidance? And ultimately, what does this mean for your Q4 operating rates versus your -- how you've been running the past few years? Kenneth Lane: So listen, let's talk a little bit more detail about this inventory reduction. We're going to take a $40 million penalty in EBITDA in the fourth quarter. What that's going to do is going to free up about $150 million in cash. And that benefit that we're going to see in cash is something that really was built up over the full year. So we've seen increases in working capital in all of the businesses. Some of it was back at the beginning of the year when we were expecting demand to be stronger, particularly when you think about Winchester. And we just didn't see the inventories coming down as fast, and now we're going to have to take some aggressive action to reduce that. In Chemicals, it's a combination of timing around turnarounds and needing to build some inventory during the third quarter in order to be ready for turnarounds in the fourth quarter. So you're going to see that come back out in the fourth quarter. But frankly, some of it is just us continuing to show discipline in supporting our commercial first -- our value-first commercial strategy and being sure that we continue to be disciplined with that. So Todd, I don't know if there's anything you want to add related to that. Todd Slater: The only comment I would remind everyone, and thanks for the question, Sal, was that we did have a penalty on working capital at the end of September related to delayed payments from the U.S. government for our Lake City military business. Ultimately, those have been received here in October. But that was candidly the biggest driver by far on why working capital moved up in the third quarter compared to the second. Operator: Thank you. And our next question today comes from Frank Mitsch with Fermium Research. Frank Mitsch: I'd like to flesh out this $40 million negative impact due to inventories in the fourth quarter. It looks like it's a combination of Chlor Alkali and Winchester. So wondering if you could size it to. Is this more of an Olin issue? Or do you feel like the industry overall is holding much too much inventory, so we should expect lower operating rates from the industry overall? And how confident are you that the $40 million is the right number? And then as we start 1Q '26, you can go back to operating as you normally would? Kenneth Lane: Frank, thank you for the question. So listen, just to add a little bit more color maybe to that EBITDA penalty that we're facing. Like I said, a lot of the working capital build was related to Winchester. And so that's a totally different animal than when you talk about the chemicals, value chains and whether the industry there has got too much inventory in the chain. So let me talk about Winchester first. We've been talking about high inventories in the retail chain since this time last year. Those levels of inventory came down at the beginning of the year, but they have not continued to fall. They've sort of leveled off at a relatively high level. And if you couple that with the fact that there was sort of a wave of imports that came in prior to the tariffs of ammunition, that also added to that issue. So Winchester is a bit unique. There is a lot of inventory in the chain there that needs to come out. And what we're going to do is we're not going to continue to use our balance sheet to carry that inventory if that inventory is somewhere else in the chain. That's just what we have to do to be disciplined and support our balance sheet. Now for chemicals, it's really hard to have visibility. What I would say right now is I'm not concerned about too much inventory in the chain -- in the chemicals value chains. That's not something that we've seen. But what I would say is there's always a risk when you get into the fourth quarter because that's seasonally the weakest quarter. There's always a chance that people do start to pull inventory even if they have low inventories, they can take the inventories really very low, very quickly. And so we want to be prepared for anything here. We want to make sure that we rightsize our inventory levels, really reduce them to the minimum level. At the same time, we are going to reduce operating rates and show the discipline around being able to move the volume at the value that we like. And that strategy is not changing. Operator: Thank you. And our next question today comes from Aleksey Yefremov with KeyBanc. Aleksey Yefremov: You mentioned the opportunity to sign EDC supply agreements. Do you have anything in place today? Or is your entire EDC volume on a spot basis? And also, are there any agreements that are fairly close to getting over the finish line soon in this area? Kenneth Lane: So listen, we -- obviously, we are working on more structural term agreements, term contracts for EDC. If you look at the EDC values today, one of the biggest variances we've got versus prior year is the EDC price that we see in the market today. Now fortunately, we're the cost leader in producing EDC. So we're able to weather that better than others. But when we think about this across the cycle, it does make more sense for us to have more contracted positions than what we have today. We do have contracted business today. A lot of that runs through our joint venture with BWA. We announced that we're going to be unwinding that between now and the end of the year. Mitsui has been a great partner, but the complexity of running that business through a joint venture versus the value that we were realizing and the option for us to control that channel to market exclusively to ourselves, the trade-offs just were not in our favor. So that was really what drove our decision to unwind that joint venture so that we can go out and make these structural deals. We'll still be working with Mitsui as a counterparty. That's not going to change. But we are looking at bigger opportunities to be able to place volume, and we should be able to have more to be able to say about that in the coming weeks. But yes, we are shifting the portfolio, but we will still have an exposure to the spot market. It's not going to go to 0, but it will be less than what we've had in the past. Operator: Thank you. And our next question today comes from John Roberts of Mizuho. John Ezekiel Roberts: Could you give us an update on the [indiscernible] propellants contract bidding process? And also maybe an update on your hedging in metals and what you're expecting there? Kenneth Lane: Yes, I'll give you a quick update there. Like anything with the government, it's a slow process. And with the government being shut down, it's basically not a running process right now. It's a little bit frustrating when you're dealing with the government here, especially when they're not paying you sometimes. But we're going to continue to look at that as an opportunity. All it is, is a working capital investment for us. It doesn't require any real capital to speak of. They've issued a preliminary RFP. They've received comments from industry and now they're going back and they're revising that. So there'll be another draft RFP that's coming out in the not-too-distant future. Let's see what happens with the government shutdown. And then there'll be another iteration. So I don't expect there's going to be anything decided regarding this until late next year at the earliest, which means there probably won't be any transition to a new operator, assuming that's the choice that they make until sometime in 2027. And I can't predict when that's going to be. But it certainly is an opportunity that we're still very interested in. As I said in my prepared comments, Winchester has been a strong supporter of the U.S. and NATO allied militaries over many years. We believe that with our chemical-based core businesses, along with the advantages that we have with our Winchester brand, we're the best person to be able to operate that. But we're going to do it for a value that makes sense for Olin and Olin shareholders. Now, I'll let Todd talk about the metals hedging. Todd Slater: Thanks, Ken. As everyone, I believe, on the call knows, we are a hedger, and we would expect metal costs to be a headwind in 2026 relative to 2025. We do operate at least a rolling 4-quarter hedging program. And I happened to look this morning at copper, and it was, I don't know, $510. So as you know, those prices eventually feed into our system slowly but do. And so -- and copper has been up. So as we think about raw material costs, raw material costs will be a headwind have been a headwind, and we expect that headwind to continue. Operator: Thank you. And our next question today comes from Patrick Cunningham at Citi. Patrick Cunningham: Maybe just on Epoxy. Obviously, still continues to be challenged by some price competitive Asian imports. Maybe you're getting a little protection here that gives you a platform for price. But how should we think about earnings levels into next year? You have some nice savings actions at Stade. You have maybe some incremental volume opportunities with competitors leaving the space in Europe. So I'm just how are you thinking about the framework for next year on Epoxy? Kenneth Lane: Patrick, thank you for your question. I hate to get too far out over my skis here, but I'm probably more optimistic on Epoxy than I have been in the last 1.5 years. But that's not because the market is improving. It's really because of the actions that we've taken as Olin over the last few years to be able to rightsize our cost base, rightsize our capacities. We do have a very good integrated business that has allowed us to survive when others can't. And so that's what happens in the trough. You start to see people that are not as competitive close capacity until demand begins to recover, and we're positioned very well as that happens. But in the meantime, with all the cost reductions that we're going to realize, both in Europe and frankly, in the U.S., along with a little bit of a tailwind around tariffs, I do expect that going into next year, we're going to see a pretty significant improvement from a very low level for Epoxy. But I think that's a business where, yes, I'm going to be very eager to see that improvement next year, which should be quite positive versus this year. And as a percentage, will probably be better than any other business we've got. Operator: Thank you. And our next question today comes from David Begleiter with Deutsche Bank. David Begleiter: Ken, on Slide 14, your ECU profit index was down in Q3 versus Q2, but your Chlor Alkali EBITDA was actually up in Q3 versus Q2 even after the onetime benefit. So why was that? Kenneth Lane: Glad to hear you. So listen, that index obviously has got a lot of moving parts to it. A big issue with that is mix, and we've seen that in other quarters. And what I'll tell you is it's all just related to mix in the portfolio. So you've seen it sort of going up and down quarter-to-quarter, but it is not something that I expect to see any further deterioration. Like I said, we expect ECU values to continue to be stable into Q4. Nothing that I see is changing that. But depending on which customers are operating plants or taking volume, that number is going to move around. But it is not something right now that is indicating any trend one way or the other. Stability is the way that I would be thinking about that. Operator: Thank you. And our next question today comes from Pete Osterland with Truist Securities. Peter Osterland: Within Winchester, could you talk a bit more about your plans to shift production towards the international defense markets? Is this intended to be a permanent change in strategy just given the stronger growth opportunities that you're seeing within defense? And where do you see the revenue mix between commercial and defense going for this business over the medium term? Kenneth Lane: Pete, thank you for the question. Yes, this is -- if you go back to our Investor Day, we were very intentional talking about growing our defense business, and we have seen very positive developments in that market, especially around the NATO countries increasing the amount of spending that they're going to be or the investments that they're going to make in the coming years for their own defense, there's an opportunity for us to participate in that. Now there's 2 things. There's a short term where we're getting a lot of inbound and the backlog for international military is growing quite substantially, and we are actively working with our partners to be able to secure that demand and the orders for the coming year. So we're going to continue to see robust growth in the short term. But we're also thinking more strategically about how do we participate in this in the longer term. And there are ways that we can do that, whether it's through partnerships or long-term supply deals, we're going to be looking at that. We do see that as a strategic opportunity for us. We also talked about earlier in this year that the fact that military was going to become a larger part of our portfolio in terms of revenue. That's also driven largely by the project that we've got running at Lake City. So there's a lot of project revenue that's showing up there that's skewing the sales number for Winchester towards military. It's got a relatively low margin because it's a project-based fee that we're basically earning for executing that project. Now having said that, I do think that it's going to be a while before we see commercial demand come back. I think we're just continuing to see that consumers and consumer spending is still challenged around discretionary items such as ammunition. But we will see this growth in international military. So that's going to keep our military portfolio stronger in the portfolio than what we maybe had thought a year ago. Good news is international military margins are attractive. So we're really excited about that. Todd Slater: As you think about revenue, you're probably sitting today 62% military and the remainder, commercial. That is higher than it has been over the last several years. Candidly, I would expect that to tick up a little bit as we move forward with the shift toward more military sales, both internationally as well as project. Operator: Thank you. And our next question today comes from Mike Sison with Wells Fargo. Michael Sison: When you think about what needs to happen for a recovery in chemicals, are you seeing anything that might give you some confidence that there could be a recovery in '26? And then I know you don't talk about operating rates anymore, but how much volume is in the system that could recover? And maybe help us understand the earnings power of that volume now versus the past? Kenneth Lane: So listen, the fact of the matter is, like I had said earlier, we are going to continue to adjust our operating rates to meet the demand that we see and manage our working capital in the chemical space accordingly. We are not going to carry inventory in this environment other than for things like turnaround. So all that I'll tell you is that our operating rates are differentially lower than the rest of the industry, and that shouldn't surprise anybody. That's our operating model, and we're going to continue to execute on that. So in terms of what is it going to take to see a recovery, you can focus in first on North America and you can look at housing. Obviously, housing is a big driver for chemicals, especially a lot of the chemistry that chlorine goes into. And once we see housing start to really recover, it's anybody's guess when that may occur. I hope it's next year. But right now, I just don't see any signs that really there's a big turnaround in the housing market on the horizon. that's sort of North America. I think that's what's going to drive the market here in North America. But when you think beyond our shores and you go to Europe or into Asia, you've got to see both of those markets begin to grow as well. And we haven't seen any signs yet of consumption really taking off in -- particularly in China, the largest market to be able to absorb a lot of this new capacity that they've been bringing on. So they are a big exporter now of PVC, which makes them a bigger exporter of things like caustic. And all of that is going to need to find a home with demand growth. So we need to see the global economy growing as well to be able to help absorb a lot of that additional supply that's coming on in China. I know we've talked a lot about anti-involution and all of those things. Those are great theories and they're great policies that I hope we see the Chinese government begin to execute on. But so far, it's been not as much directed to chemicals as we had hoped that it would be. Maybe that changes in the new year. But right now, we need to see higher demand in Asia and some more rationalization there as well. Operator: Thank you. And our next question today comes from Kevin McCarthy of Vertical Research Partners. Kevin McCarthy: Ken, I was wondering if you could provide an update on your thoughts about the U.S. caustic soda market. On Slide 9, it appears as though you're baking in some price improvement for caustic in the fourth quarter. Maybe you could speak to how much of that is seasonal uplift as chlorine operating rates or demand presumably comes down seasonally versus any cyclical or structural uplift that you may see unfolding in caustic? Kenneth Lane: Kevin, thank you for the question. Yes, so we are expecting to see higher values for caustic in the fourth quarter. As I said in the prepared remarks, the caustic market is relatively stable. So we have seen some softening around pulp and paper, but we continue to see a robust market around alumina. And if you look at the aluminum market, prices for aluminum still are holding up quite well, which indicates healthy demand, and that's a very positive thing for caustic. So the demand side, I would say stability is the key word. On the supply side, yes, you're going to see less supply in the fourth quarter. Some of that is going to be related to some of the things -- some of the actions that we're taking with our portfolio. Some of it is also related to other industry outages that normally happen in the fourth quarter. That's going to be the case here as well. So between lower demand for chlorine derivatives, which is naturally going to pull down operating rates and the normal sort of seasonal turnarounds that occur in the fourth quarter, that's going to restrict supply, and that should give support for caustic values in the fourth quarter. Operator: Thank you. And our next question today comes from Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: You talked about a large turnaround in VCM. I think this year, your forecasted turnaround costs are $125 million. Is maybe something like $175 million next year, up $50 million a reasonable first draft? Kenneth Lane: So listen, turnarounds this year was pretty heavy. We are going to be updating our modeling data for 2026 at our fourth quarter earnings call here coming up at the beginning of the year. But -- that is a very large turnaround for us. It happens every 3 years, like Todd had mentioned. But there are other puts and takes as well. We're currently finalizing our schedule for turnarounds in 2026. So I don't have a final number to give you today. Some of that is still moving around. And once we do, like I said, we will get you a new outlook for 2026 at the beginning of the year. Operator: And our next question today comes from Vincent Andrews at Morgan Stanley. Vincent Andrews: Wondering if you could just talk a little bit, Todd, I know you went through your capital allocation priorities. But if we look at trailing 12-month leverage at the end of the year based on the fourth quarter EBITDA guidance, it pushes you close to 4. So does that change anything in terms of what you're going to be able to do? Are you going to continue to repurchase stock? Or are you going to hold off a little bit and see how 2026 develops? How should we be thinking about that in terms of your desire to maintain your investment-grade credit rating? Todd Slater: Yes. Thanks for the question. We would expect, as we've said, to have a significant cash flow in the fourth quarter and be able to reduce debt back to even where we started the year. So net debt flat year-over-year. We do -- we have clearly curtailed the level of share repurchases this year compared to what we have done over the last several years. I think you saw us buy $10 million the last couple of quarters. So I wouldn't be surprised if we don't continue at a modest pace, but we are going to clearly prioritize that cash flow that we generate in the fourth quarter toward our reduction of debt from where we sit today. Operator: Thank you. And our next question today comes from Arun Viswanathan with RBC. Arun Viswanathan: You guys are roughly at a $700 million annualized EBITDA run rate here. So -- and then we've seen kind of flattish Chlor Alkali index numbers. So what do you think it's going to take you to get to maybe $1 billion? Is that maybe roughly $50 million in Epoxy and Winchester uplift and then maybe $200 million or so in Chlor Alkali? And how does that -- maybe you can help us bridge that gap, that would be great. Kenneth Lane: Thank you for the question. Listen, if you just think about where we are year-to-date, the biggest delta versus prior year was or is Winchester. So Chlor Alkali has held up quite well, and that's a really positive thing for us as a company. It's one of our -- it is, as Todd says, the engine that drives the bus. And so I'm very happy to see that. So yes, you're going to see -- over time, you're going to see ECU values improve off of trough levels. And with our operating rate leverage that we have, that's where you've got the biggest leverage right now in the portfolio overall. There will be a recovery in Winchester at some point. We've got to get through some of these cost headwinds. We've got to get to a point where we see stronger consumer spending for discretionary items improve. I'm not sure that we're going to see that in the short term. But the good news is -- we are and the Winchester team is very focused on adjusting their operating model to the new environment that they're in. We did not think we would be here a year ago. We thought we were going to see demand recovering in 2025, and we just have not seen that. We've seen it go the other way. And so we'll adjust that model, and I expect that we'll start to see some recovery there. But again, I go back to what I said earlier on Epoxy. I'm probably more optimistic on Epoxy than any other business right now, not because, again, we're seeing lots of positive signals in demand in the market. That is still challenging. But with rationalization of capacity that's happening in the industry, some of the challenges that you see with higher glycerin costs in Asia, which is putting a floor under pricing, you get the tariff headwinds. You get the self-help that we've been implementing over the last several years, we start to see some really positive momentum into next year for the Epoxy business. So that's kind of how I think about where you're going to see the improvements going into 2026. And from there, I think things are going to move higher, but it just depends on what's the rate of change is going to be largely dependent on what's the global economy doing as well. Operator: Thank you. And our next question today comes from Matthew Blair at TPH. Matthew Blair: In light of the slower production outlook for Winchester, how are things going on the AMMO acquisition? And do you still expect to realize -- I think it was previous guidance of about $5 million EBITDA in the back half of the year from AMMO. Is that still realistic? Kenneth Lane: Thank you for the question. Listen, we still feel very positive. We actually -- when we look at the business case around that acquisition and what we have talked about before, the synergies with the capability to build shell cases at that facility has proven to be as good, if not even a little bit better than what we thought. So the synergies that we talked about, yes, very confident in delivering them, not just for this year, but that $40 million level in 3 years' time, we feel very positive about that. The asset is in great shape. The employees have really been great coming into Winchester. I think they're excited to be part of the Winchester brand and that has been a very positive acquisition for us. So we feel really good about it. Operator: Thank you. And our next question today comes from Roger Spitz at Bank of America. Roger Spitz: Todd, how should we see -- expect to see the clean hydrogen benefit in EBITDA? Will you start putting into EBITDA maybe 25% each quarter? Or will you periodically be showing us a bigger once a year number in the EBITDA? Todd Slater: Yes. Thanks for the question, Roger. You should start now that we have received the real -- the key determining factor, which was our emissions information from the Department of Energy. You should start to see the 45V tax credit just be included as part of our normal earnings as a reduction to cost of goods sold every quarter. So there -- it won't be called out like it is today. It will be -- this was really the catch-up for this year because we finally got the emissions data. So as you think about next year and the next 3 years of a $15 million to $20 million benefit, that will just run through as a reduction to cost of goods sold on a quarterly basis. Operator: As there are no further questions, this concludes our question-and-answer session. I'd now like to turn the conference back over to Ken Lane for closing comments. Kenneth Lane: Thank you, Rocco. And listen, thank you, everyone, for joining us this morning. We appreciate your interest in Olin, and we look forward to speaking with you at the beginning of the year next year. We wish you all a very safe and prosperous week. Thank you. Operator: Thank you. And we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Greetings, and welcome to the NETSTREIT Corp. Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Matt Miller, Capital Markets and IR. Please go ahead. Matt Miller: We thank you for joining us for NETSTREIT's Third Quarter 2025 Earnings Conference Call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and an updated investor presentation. Both can be found in the Investor Relations section of the company's website at netstreit.com. On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our Form 10-K for the year ended December 31, 2024, and our other SEC filings. All forward-looking statements are made as of the date hereof, and NETSTREIT assumes no obligation to update any forward-looking statements in the future. In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions of our non-GAAP measures, reconciliations to the most comparable GAAP measure and an explanation of why we believe such non-GAAP financial measures are useful to investors. Today's conference call is hosted by NETSTREIT's Chief Executive Officer, Mark Manheimer; and Chief Financial Officer, Dan Donlan. They will make some prepared remarks, and then we will open up the call for questions. Now I'll turn the call over to Mark. Mark Manheimer: Thank you, Matt, and good morning, everyone. We appreciate you joining us today to discuss our strong third quarter results, which were highlighted by record quarterly investment activity, well-executed capital markets transactions and consistent performance from our defensive net lease portfolio. Looking ahead to the fourth quarter and beyond, we expect to remain highly acquisitive due to our improved cost of capital, our attractive opportunity set and well-capitalized balance sheet. With that in mind, we are increasing our 2025 net investment guidance range to $350 million to $400 million from $125 million to $175 million. Additionally, our year-to-date disposition activity has us well ahead of schedule to exceed our year-end diversification goals as evidenced by our top 5 tenancy declining 600 basis points this year to 22.9% at quarter end. Our momentum on the external growth front picked up considerable pace in the quarter as we closed a record $203.9 million of investments across 50 properties at a blended cash yield of 7.4%. These assets, which are primarily within resilient sectors such as grocery, auto service, convenience stores and quick-service restaurants have an average lease term remaining of 13.4 years and more than 1/3 of these investments are occupied by investment-grade or investment-grade profile tenants. Our weighted average lease term now stands at 9.9 years, up from 9.5 years a year ago, providing a strong foundation for predictable cash flows. Our ability to quickly ramp investments after raising capital in late July illustrates the inherent strength of our relationship-driven investment underwriting and closing teams. We would also note that our later start in the quarter did result in a substantial number of investments closing in the last week of the quarter, which limits their impact to the full year results. On the disposition front, we sold 24 properties for $37.8 million at a 7.2% cap rate, allowing us to recycle the proceeds into higher-yielding opportunities as we have done every quarter in our existence. Please note that we see the fourth quarter as our last quarter of elevated disposition volume due to our focus on diversification as we plan to return to our more normal disposition volumes focused on credit risk and opportunistic sales. Turning to the portfolio. We ended the quarter with 721 investments with 114 tenants in 28 industries generating more than $183 million in ABR across 45 states. With more than 62% of our ABR being generated from tenants with investment-grade ratings or investment-grade profiles and only 2.7% of our ABR expiring through 2027, our portfolio should continue to produce consistent and predictable cash flow. Our active portfolio management continues to contribute to our occupancy rate remaining at an industry-leading 99.9% with no material tenant disruptions. With that in mind, we expect to have our loan vacant property, a former Big Lots, leased by the fourth quarter to an investment-grade tenant at more than a 20% increase in rent with rent to commence later in 2026. While we have been able to generate highly favorable cash yields on investments as a public company, we are proud of our best-in-class credit loss statistics as we again had no credit losses in the quarter. On the left side of the balance sheet, we believe our job is to find assets that generate the best risk-adjusted returns available, which is supported by our creative multipronged investment approach, proven underwriting method and proactive asset management process. By adhering to those core competencies, we aim to provide attractive and consistent cash flow generation for our investors. Looking at the right side of the balance sheet, we had an active quarter adding long-dated unsecured debt, further extending our debt maturity profile and decreased our leverage with significant equity raising, which has accelerated our ability to accretively grow our portfolio and in turn, enhance our earnings power as we look out to 2026 and beyond. Ending with the macro, while we have seen softness develop in the lower and middle-income consumer and some noise in the private credit markets, our focus remains on accretive investments in high-quality and less volatile necessity-based retail properties. We believe our tenant quality, diversification and emphasis on opportunities with the best risk-adjusted returns positions us well for any and all macroeconomic environments. With that in mind, we are currently seeing the most attractive opportunity set that we have seen since going public over 5 years ago, and we are excited to have the dry powder to execute and drive growth well into the future. With that, I'll turn it over to Dan for more details on our financials and outlook. Daniel Donlan: Thank you, Mark. Looking at our third quarter earnings, we reported net income of $621,000 or $0.01 per diluted share. Core FFO for the quarter was $26.4 million or $0.31 per diluted share, and AFFO was $28 million or $0.33 per diluted share, which was an increase of 3.1% over last year. Turning to the expense front. Our total recurring G&A in the quarter increased year-over-year to $5.1 million, which is mostly a result of our staffing levels normalizing after restructured various roles last year. That said, with our total recurring G&A representing 10.6% of total revenues this quarter versus our 11.1% quarterly average last year, our G&A continues to rationalize relative to our revenue base, and we expect this rationalization to accelerate in 2026 and beyond. Turning to capital markets activities in the third quarter. We completed a 12.4 million share follow-on offering in July, which raised $209.7 million in net proceeds. Turning to the ATM. We sold 1.2 million shares for $20.6 million of net proceeds in the quarter. And subsequent to quarter end, we sold an additional 1.6 million shares for $29.7 million of net proceeds. Looking at the balance sheet. Our adjusted net debt, which includes the impact of all forward equity, was $623.5 million. Our weighted average debt maturity was 4.2 years, and our weighted average interest rate was 4.45%. Including extension options, which can be exercised at our discretion, we have no material debt maturing until February 2028. In addition, our total liquidity was over $1.1 billion at quarter end, which consisted of $53 million of cash on hand, $500 million available on our revolving credit facility, $431 million of unsettled forward equity and $150 million of undrawn term loan capacity. From a leverage perspective, our pro forma adjusted net debt to annualized adjusted EBITDAre was 3.6x at quarter end, which remains well below our targeted range of 4.5 to 5.5x. Moving on to 2025 guidance. We are reiterating our AFFO per share guidance range of $1.29 to $1.31 and are increasing our net investment activity range to $350 million to $400 million from the prior range of $125 million to $175 million. We continue to expect cash G&A to range between $15 million and $15.5 million. Additionally, with our outstanding forward equity increasing to $430 million this quarter from $202 million last quarter, our AFFO per share guidance now assumes $0.015 to $0.025 of dilution from the treasury stock method. Lastly, on October 24, the Board declared a quarterly cash dividend of $0.215 per share. The dividend will be payable on December 15 to shareholders of record as of December 1. With that, operator, we will now open the line for questions. Operator: [Operator Instructions] Our first question is from John Kilichowski with Wells Fargo. William John Kilichowski: Mark, you made the comment in the opening remarks that you're currently seeing the most attractive opportunity set that you've seen. Maybe could you dive deeper there in terms of the assets that you're looking at pricing and then maybe the cadence that you think you can achieve going forward from here? Mark Manheimer: Yes, sure. Good to hear from you, John. Yes, so I mean, very similar types of assets. I mean, we're looking at a lot of C-stores, quick-service restaurants, grocery, QSR, similar to what we've really kind of done in the last several quarters. Pricing very close to what we did in the most recent quarter. So I think we're probably going to be in the 7.3%, 7.4% range. Maybe a little bit more investment grade so far. We'll kind of see what we source from here on out, but pretty confident that we should be able to be at the high end of the acquisition range provided. And then looking forward to 2026, I'm not giving guidance on acquisitions at this point, but I think you can expect the dispositions to come in quite a bit. We'll continue to opportunistically sell some assets and focus on potential credit issues down the line and try to get ahead of that, which we did even when we were in diversification mode, but we've really accomplished the goals that we set out at the beginning of the year on the dispose side. So it feels like the net investments should be a little bit higher next year. William John Kilichowski: Okay. That was very helpful. And then just from a pricing perspective, I know this quarter, there was a step down, but you had communicated that several times intra-quarter. I'm just curious, are the cap rates that you're seeing today a better run rate for the business going forward? Mark Manheimer: Yes, I think so. And yes, I mean, I appreciate your comment there. We did try to make that clear in the second quarter that the 7.8% was not going to be repeated, and we've returned back to that kind of 7.4%, 7.5% type cap rate range. I think right now, the 10 years come in from, call it, 4.5% to 4%, inside 4% right now. And so a little bit more competition in the space. So I think it's reasonable to assume that there could be another 10 basis points of compression looking forward into 2026, but that's always difficult to predict outside of, call it, 60, 90 days on a go-forward basis. Operator: Our next question is from Michael Goldsmith with UBS. Michael Goldsmith: Lots of activity in the quarter, but the guidance didn't really move. So can you just talk a little bit about what are the factors that maybe didn't move the 2025 AFFO per share outlook? And I guess, how will that impact the earnings growth kind of going forward? Mark Manheimer: Yes. Michael, I think there's really 2 drivers to the guidance. The first being that while we had a ton of activity in the third quarter, the timing of that activity was -- on the investment side was heavily weighted to the back half of the quarter. We closed basically $100 million on the last 2 days of the quarter, whereas the loan payoffs and the dispositions were heavily weighted to the front end. And you can see that on the income statement. Our total revenues went up $22,000 quarter-over-quarter. So certainly, timing has played a big part in that, whereas in the second quarter, it was the exact opposite was true. And the other is just the unknown nature of the treasury stock dilution. I mean we clearly know how much we've raised. We know how much we're thinking about raising. It's just the price at which the stock is going to average over the quarter is unknowable. And so we certainly baked in a ton of conservatism. What I can say is if the stock kind of stays were to open this morning, obviously, the bottom end of the range would be nowhere possible. But hopefully, that's not the case. And we think our stock price should continue to season and move higher from here, just given the growth that we see coming in 2026 from everything that we're doing here in 2025. I'm sure, as you know, what you do in the third and the fourth quarter has a very big impact on what can happen in the following year, and we're cognizant of that, too. So I certainly think looking at where our cost of capital is today, where we've already raised capital in terms of our term loans, we have another $150 million we can draw down on, basically in the mid-4s. And assuming we can get an IG rating coming up here shortly, that moves down even further from there. So as you think about that accretion, we feel pretty strongly we can get back to certainly an above-average growth rate in 2026 and beyond. And just a little bit of color on the extreme nature of the timing of our acquisitions in the quarter. We raised capital at the end of July. So we're -- we don't want to get over our skis and start deploying capital before we raise it. So we really had a couple of months to deploy the capital. We were really only planning on doing a little bit more on top of the -- covering the dispositions that we did, but raising capital at the end of July kind of put us in a spot where we had 2 months to close, and we're still able to hit pretty good numbers. But to Dan's point, that was all very late in the quarter. Michael Goldsmith: Got it. I really appreciate it. And my follow-up question is just on the equity that needs to be settled. How are you thinking about that? And then what would be kind of the accretion on that equity associated with future deals? Daniel Donlan: Yes. So in terms of the forward equity, as you think about it, you also got to think about where we raised the prior equity versus where our prior cap rates were. In the first half of the year, we averaged 7.7%. So some of the equity raise that was at lower stock prices than we are today, the spread is still fairly high on that anywhere from 135 to 150 basis points when you think about where we raised the term loan capital. As we sit here today, our spreads are closer to, call it, 165, 170, which is still a very healthy spread when you think about the historical average for the sector over the last 20-plus years. So I think for us, that should allow us, again, to continue to grow AFFO per share as we look out to 2026 at a fairly healthy pace and then should ramp up further, hopefully, in 2027 as some of the lower-priced forwards get settled over the course of 2026. But for modeling purposes, I think you should settle somewhere around 8 million to 9 million shares at the end of the fourth quarter. And then we should get rid of most of what was raised over the course of 2024 and 2025 ratably over the course of 2026. Operator: Our next question is from Greg McGinniss with Scotiabank. Greg McGinniss: So although we weren't surprised by the lower cash cap rates achieved this quarter because of the commentary that you guys have been providing, we were a little surprised by the limited increase in IG or IG-like acquisitions. Now it sounds like you're not really expecting much of an increase on that front going forward either. Could you just help us understand what you're seeing on pricing for the IG or equivalent assets and potential for increased acquisition levels within that subset as your cost of equity improves? Mark Manheimer: Yes, sure. So I'd say there's probably about a 50-basis-point difference in terms of the investment-grade and investment-grade like assets that we acquired versus the non-investment grade. So enough of a delta there where as long as we're not taking much more risk, that's something that we're more than comfortable doing. And there just is a lot more attractive opportunities in the non-investment-grade side at this point. I am expecting the fourth quarter to be a little bit more heavy on the investment-grade side than what we've done for this year. But the reality is investment grade is just not really something that we focus on. We're looking for the best risk-adjusted returns that we can. In some quarters, that's going to be high and some quarters, that's going to be low. And we're really kind of focused on getting the best pricing that we can, managing the portfolio and then not having credit losses, which I think we've been able to accomplish both really strong pricing with minimal loss. Greg McGinniss: Are you seeing any trends in terms of what you're looking to acquire from that standpoint on an industry level in terms of where you're seeing the better risk-adjusted returns now versus maybe historically? Mark Manheimer: Yes, sure. I mean we certainly have seen more opportunities on the convenience store side. Quick-service restaurants is another area that has been a focus. Grocery, auto services, that's really been kind of the main 4 food groups that we've had the most success, but there's always a deal here or there that's outside of those. We've added a bit more tractor supply. You saw that move up quite a bit. We're adding a little bit more in the fourth quarter, but it's a pretty broad diversified mix what we're adding in the fourth quarter. Operator: Our next question is from Haendel St. Juste with Mizuho Securities. Haendel St. Juste: I wanted to ask about competition. Certainly quite a bit on the call so far this quarter, you mentioned that you're seeing a bit of competition from private equity. I'm curious what you think of -- what you think their investment strategy is, where are they deploying more capital versus where you are looking to deploy and if and how you'll be able to insulate yourself from that a bit? Mark Manheimer: Yes, that's a great question, Haendel. It's been a big topic. I think every private equity firm is a little different. You saw a couple of larger private equity firms kind of get in the game a few years ago and didn't really make much of an impact, quite frankly. And then you've seen a couple more in the last couple of years, really kind of smaller teams going out elephant hunting. A lot of those have been more focused on industrial, but even on the retail side, kind of looking for the larger transactions to put a lot of capital to work. So we're not really running into, obviously, the industrial side, but also if someone's kind of doing 9-figure type transactions, that's not going to be where we play. More recently, we've seen one large player focused on smaller transactions, but further down the credit curve than really where we like to play, although we have seen them a little bit on the sale leaseback side, but there's more than enough opportunity where -- and especially being that they are looking at a different credit profile for the most part than what we're looking at, not going to have a big impact on us, but they're really the first one that we've seen out there in the investment world. But I think with how fragmented the net lease retail space is and how little institutionally owned it is, there's just a lot of opportunity for even more groups to come in without having a large impact on the pricing that we're seeing. Haendel St. Juste: Appreciate the thoughts there. Maybe as a follow-up, I was curious, maybe an update just more broadly on your strategic plans to reduce your Dollar General, Walgreens and CVS. It looks like you made quite a bit of progress in your quarter. Curious how the pricing came in versus prior sales versus your expectations. And then looking ahead, any other category that you're looking to call a bit into next year, understanding that much of the heavy lifting has already been done? Mark Manheimer: Yes. I mean I think the heavy lifting, to your point, is really already done. We made a big move on the dollar store side. Pricing was pretty attractive. We did do a little bit more with some institutions where the cap rate was maybe slightly higher than the 1031 market. So I think the remaining sales that we have in that space are going to be 1031 driven. We were already in a pretty good spot going into the quarter as it relates to pharmacy. So we're being a little bit more selective on pricing there. And so we've hit our goal on Walgreens getting that below 3%, just about there on CVS. Certainly, we'll be there here in the next couple of weeks. So getting those down, we can be a little bit more choosy when it comes to the pricing and not feel as much pressure there. So I'd expect us to continue to run the portfolio with tenants below 5%. Walgreens will continue to decrease over time, a little bit less of a -- a little bit less pressure there, but that will still continue to come down with a sale here or there and then with us not adding to either of those sectors, just increasing the asset base will decrease those exposures over time. Operator: Our next question is from Smedes Rose with Citi. Bennett Rose: I just wanted to understand maybe the opportunity set a little better. I mean you significantly increased the acquisitions outlook, obviously, for the year. I know part of that is driven by better cost of capital. But also, I mean, is the overall market kind of expanding? Because I mean we just hear from other companies, too, it seems like the acquisitions outlook just continues to sort of accelerate. I'm wondering if you think that's sort of going to continue indefinitely? Or is there anything in particular that's driving that? Mark Manheimer: Yes. No, it's -- yes, we certainly are seeing a lot more opportunity. I think to your point, others are saying the same thing on their call. So I don't think it's just us. And thinking through really what's driving that, rates have come in enough where you have the 10-year has gone from 4.5% to 4%, the 5-year, which is probably more important to 1031 buyers, down around 3.6% or wherever I even looked today. But I mean, that's an area where it pencils on the debt side. So I think we're at a point where rates aren't really restrictive to getting deals done. So I think that's kind of opened up the -- maybe not the floodgates, but I think on the margin, we are seeing more opportunity across the board with every different approach to acquisitions that we take, we're seeing more opportunity really everywhere. Operator: Our next question is from Linda Tsai with Jefferies. Linda Yu Tsai: Yes, it makes a lot of sense to continue diversification in your portfolio, reducing the drug and dollar stores and AAP exposure. That being said, where do you think spreads between acquisitions and disposition cap rates could trend into '26? Mark Manheimer: Linda, yes, I mean, it's probably a little bit difficult to say because we're going to be more opportunistic on the disposition side. So the cap rates could come in a little bit if we're -- if we see some good opportunities there. We had some pressure on our -- put some pressure on ourselves by setting some diversification goals where we're selling assets in industries that were maybe a little bit out of favor. So I think that made it a little bit more difficult, but certainly, a strong 1031 market allowed us to be able to hit those goals a little bit ahead of time. So -- but the dispositions really aren't going to drive much next year. We'll probably return to a $15 million to $25 million pace, which I think is historically what we had done coming into 2025. But overall, I think the cap rates will probably be a little bit lower on the disposition side. Linda Yu Tsai: And then just in terms of your investment spread at 160 bps relative to your WACC, how do you think that could trend, say, by like the second half of '26? Daniel Donlan: Yes. I mean, you tell me where the stock is going to go, Linda, I can give you that answer. I think as we look at cap rates, as Mark said, we think cap rates may -- could potentially drift down 10 basis points over the next 6 to 8 months. It's really unsure. I think we have a very good value proposition here. We've got our cost of capital back. We can continue to grow earnings at a healthier clip and a stronger clip than we did last year. So it really just all depends on kind of the stock price and then to a lesser degree, the -- where debt is. I mean we've basically satisfied our debt needs for the next, call it, 12 to 15 months. So any type of our capital raising and/or our usage of debt is going to be relegated to the credit facility as well as just bring -- settling the forwards over the course of 2026. So I'm hopeful that -- we're hopeful the stock price can continue to move higher, just given the opportunity set that we're seeing. And so I think spreads can hang out where they are or move higher. But I think the one thing we feel confident in at least over the next 6 months is that cap rates should remain in and around kind of where they have been. Linda Yu Tsai: Just one last question. Your tenant credit outlook versus a year ago, how does that compare? Mark Manheimer: Yes, not much different. I mean, I guess, a year ago, we had Big Lots, which we knew was something that we had to work through. Right now, we don't really have anything on the credit watch list. Some coverages have moved around a little bit here or there, but nothing that we're concerned with. Operator: Our next question is from Jay Kornreich with Cantor Fitzgerald. Jay Kornreich: I wanted to go back to the pace of growth going forward. You mentioned a robust opportunity set and net investments to pick up in 2026. I'd be curious just about how you think about your goals for next year. Are you more focused on getting to a certain quarterly investment pace? Is it more about achieving a certain earnings growth level? Just how do you think about that now that you've returned to that opportunity set? Mark Manheimer: Yes. I mean I think you have to evaluate what the opportunity set is. And right now, it's robust. We expect that to continue. And then you have to consider your cost of capital, which is improving, certainly not quite where we want it to be. And you need to consider your team and what we're capable of. And I think we're capable of significantly more than what we've done in the past. And so I think there's an opportunity as our stock has continued to recover and get better that we can ramp acquisitions beyond what we've done historically. To what level remains to be seen. I guess we'll decide when we want to give AFFO per share guidance and acquisitions guidance at a later date. But I think right now, that's trending to a larger number. Jay Kornreich: Okay. And then just as a follow-up, you referenced the prospects of getting investment-grade rating. Can you just give an update as to where that process stands and potential timing to achieve that? Daniel Donlan: Yes. I mean I think what we said all along is that we would hope that we have some type of discussion this year. And I think that still remains true. But obviously, nothing is set in stone. And so I think we'll continue to say, hopefully, we can do something by the end of the year. Operator: Our next question is from Wes Golladay with Baird. Wesley Golladay: Looking outside of traditional acquisitions, are you seeing any development opportunities? And do you have any appetite to increase the loans? Mark Manheimer: Good question, Wes. So yes, we are seeing good opportunities, both on the loan side and the development side, but really not seeing enough of risk-adjusted return on the development side to really kind of ramp that. We've continued to work with a few tenants directly on some development. That's been pretty good. And I think we'll probably see 1 or 2 new tenants kind of pop up in our top tenant list in 2026 from that, but it's -- I don't think it's going to be as big a piece of what we've done historically. The loan book, we've decided to kind of bring that down a little bit over time. And -- but we're still seeing some pretty good opportunities to replace some of the loans that are being paid off. Operator: Our next question is from Upal Rana with KeyBanc Capital Markets. Upal Rana: Just one quick one for me. I want to get your thoughts on the auto parts exposure as it makes up about 2.5% of your ABR, just given some of the recent bankruptcy news out there. Mark Manheimer: Yes, sure. I mean, so we've got really 3 tenants there, Advanced Auto, which has been brought down quite a bit closer to 1% at this point. O'Reilly's and AutoZone. We don't really think that the most recent bankruptcy is something that is going to impact them or even really tangential to them. Really, the bankruptcies that we've seen and kind of the cockroaches that people are talking about, we haven't seen the spread of the cockroaches at this point. And some of that is really due to fraud, which we don't think is really indicative of what's really going on in the economic market. Operator: Our next question is from Jana Galan with Bank of America. Jana Galan: Given the increased competition for net lease retail strategies, are you seeing any changes in lease structures, whether it's term or escalators or options? Just curious if people are trying to compete on something other than price. Mark Manheimer: We haven't really seen any change. I mean I think the institutional capital that's come to the space, I think they're pushing to try to get a lot of the same things that our public peers are trying to get, which is longer leases with good rental escalations. So we haven't really seen much of a change in terms of lease structures. Operator: Our next question is from Daniel Guglielmo with Capital One Securities. Daniel Guglielmo: Based on the commentary and results, you are exiting the recycling phase and headed back into a growth and scaling phase. Looking back on the recycling efforts, are there any learnings that you're going to take with you as net acquisitions ramp back up? Mark Manheimer: Yes. I mean I think we've always been confident in our ability to reduce exposures. And I think maybe the lesson learned for us is having some larger concentrations with publicly traded companies that are constantly in the news cycle at the tenant level, even if you've got really strong assets that generate a lot of cash flow, sometimes it doesn't matter and can still impact your cost of capital, which matters as an external growth vehicle like we are. So I think we're going to be a little bit more cognizant of allowing some exposures to get higher, which is a little bit easier to do now that we've got about $2.5 billion of assets. So being a little bit bigger does help that. Daniel Guglielmo: Okay. Great. I appreciate that and makes sense. And then we always like to look at the ABR by state slide. So when you think about the existing pipeline, are there states or regions where you see better investment opportunities over the next year or so? Mark Manheimer: Yes. I mean we're somewhat agnostic to what state an asset is in. We're focused a little bit more on the micro market of does that location have the demographics to support not only the use of the asset that we're buying, but also potentially future uses and future tenants. And I think overall, we're probably seeing a little bit more opportunity in the Sunbelt where you're seeing more population growth. Texas is a big state. So that being our #1 state. We kind of think of Texas as kind of being like 2 or 3 states, depending on what region of Texas you're in. And so kind of breaking that up by state, sometimes I think you see a lot of our peers also have Texas as the #1 state. But I wouldn't draw too many conclusions from what's in the pipeline or where we're looking to grow. I think it's really just where the opportunities are, where we can get the best risk-adjusted returns and that can be in really any state. Operator: There are no further questions at this time. I'd like to hand the floor back over to Mark Manheimer for any closing comments. Mark Manheimer: Well, thanks, everybody, for joining today. We appreciate the interest in the company and look forward to meeting up with everybody in the conference season. Take care. Operator: Thank you. This concludes today's conference. We thank you again for your participation. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Residential Trust Third Quarter 202 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Kristen Griffith, Investor Relations. You may begin. Kristen Thomas: Thank you. Good day, everyone, and welcome to NexPoint Residential Trust's conference call to review the company's results for the third quarter ended September 30, 2025. On the call today are Paul Richards, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; and Bonner McDermett, Vice President, Asset and Investment Management. As a reminder, this call is being webcast through the company's website at nxrt.nexpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's most recent annual report on Form 10-K and the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect any forward-looking statements. The statements made during this conference call speak only as of today's date, and except as required by law, NXRT does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes an analysis of non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measures, see the company's earnings release that was filed earlier today. I would now like to turn the call over to Paul Richards. Please go ahead, Paul. Paul Richards: Thank you, Kristen, and welcome, everyone, joining us this morning. We appreciate your time. I'll kick off the call and cover our Q3 results, updated NAV and guidance outlook for the year. I will then turn it over to Matt to discuss specifics on the leasing environment and metrics driving our performance and guidance. Results for Q3 are as follows: Net loss for the third quarter was $7.8 million or a loss of $0.31 per diluted share on total revenues of $62.8 million. The $7.8 million net loss for the quarter compares to a net loss of $8.9 million or $0.35 loss per diluted share for the same period in 2024 on total revenue of $64.1 million. For the third quarter of 2025, NOI was $38.8 million on 35 properties compared to $38.1 million for the third quarter of 2024 on 36 properties. For the quarter, same-store rent and occupancy decreased 0.3% and 1.3%, respectively. This, coupled with a decrease in same-store revenues of 0.6% and same-store expenses of 6.2% led to an increase in same-store NOI of 3.5% as compared to Q3 2024. As compared to Q2 2025, rents for Q3 2025 on the same-store portfolio were down 0.2% or $3. We reported Q3 core FFO of $17.7 million or $0.70 per diluted share compared to $0.69 per diluted share in Q3 2024. During the third quarter, for the properties in the portfolio, we completed 365 full and partial upgrades, leased 297 upgraded units, achieving an average monthly rent premium of $72 and a 20.1% return on investment. Since inception, NXRT has completed installation of 9,478 full and partial upgrades, 4,925 kitchen and laundry appliances and 11,389 tech packages, resulting in $161, $50 and $43 average monthly rental increase per unit and 20.8%, 64% and 37.2% return on investment, respectively. NXRT paid a third quarter dividend of $0.51 per share of common stock on September 30, 2025. For Q3, our dividend was 1.37x covered by core FFO with a 73.2% payout ratio of core FFO. On October 27, 2025, the company's Board approved a quarterly dividend of $0.53 per share, a 3.9% increase from the previous dividend per share payable on December 31, 2025, to stockholders of record on December 15, 2025. Since inception, NXRT has increased the dividend per share by 157.3%. Turning to the details of our updated NAV estimate. Based on our current estimate of cap rates in our market and forward NOI, we are reporting a NAV range per share as follows: $43.40 on the low end, $56.24 on the high end and $49.82 at the midpoint. These are based on average cap rates ranging from 5.25% on the low end and 5.75% on the high end, which remained stable quarter-over-quarter. Turning to full year 2025 guidance. NXRT is reaffirming guidance midpoints for loss per diluted share, core FFO per diluted share, same-store rental income, same-store total revenues, same-store total expenses and same-store NOI and tightening guidance ranges for acquisitions and dispositions. Loss per share core FFO ranges are as follows: loss per diluted share of negative $1.22 at the high end, negative $1.40 at the low end, with the midpoint of negative $1.31 and for core FFO per diluted share, $2.84 at the high end, $2.66 at the low end with affirming the midpoint of $2.75. This completes my prepared remarks, so I'll now turn it over to Matt for commentary on the portfolio. Matthew McGraner: Thank you, Paul. Let me start by going over our third quarter same-store operational results. Same-store total revenue was down 60 basis points, albeit with 5 of our 10 markets averaging at least 1% growth, with Atlanta and South Florida leading the way at a positive 2.8% each. We are also pleased to report continued moderation in expense growth for the quarter. Third quarter same-store operating expenses were down an impressive 6.3% year-over-year. Payroll and R&M declined 7.5% and 6.1%, respectively, with year-over-year and total controllable expenses down a meaningful 6%. Insurance was also favorable by 19%, driven by the team's efforts here and market improvement on the property casualty side. Real estate taxes also decreased 8.7% due to favorable protest outcomes, most notably in our Nashville portfolio. Third quarter same-store NOI growth continues to improve in our markets with the portfolio averaging a positive 3.5%. A markable improvement from down 1.1% last quarter. 7 of our 10 markets achieved year-over-year NOI growth of at least 2.5% or greater with Nashville and Atlanta leading the way at 26% and 7.8% growth, respectively. Our Q3 same-store NOI margin registered a healthy 62.2%. The portfolio experienced improved revenue growth also in Q3, with 5 out of our 10 markets achieving growth of at least 1% or better. Our top 5 markets were Atlanta and South Florida at 2.8%, Tampa at 2.4%, Raleigh at 2.1% and Charlotte at 1%. Renewal conversions for eligible tenants were 63.6% for the quarter, with all 10 markets executing positive renewal rate growth of at least 75 basis points or better. 646 renewals were signed during the quarter at an average of 1.81%. On the occupancy front, the portfolio registered a 93.6% occupancy as of the close of the quarter. Market competition from lease-up assets on down the spectrum remain our biggest challenge, but clear skies are forming ahead. As of this morning, our portfolio is 93.6% occupied and 95.8% leased with a healthy trend -- 60-day trend of 92%. Even though we saw elevated pressures to occupancy and concession utilization, top line rent beat our internal forecast by 20 basis points for the quarter and bad debt continues to stabilize with a meaningful 32% year-over-year improvement for the quarter. Again, on expenses, they continue to moderate and finished the quarter down 6.4%. Payroll declined 7.6% this quarter and continues to trend downward as we implement centralized teams and AI technology. Our centralized platforms for renewals, screening, call centers, alongside AI applications deployed across various aspects of the resident experience are all driving greater efficiency and enabling reductions in on-site staffing, particularly within the leasing offices. As mentioned previously, we are now focused on optimizing our maintenance operations to drive similar efficiencies across our markets. Insurance, real estate taxes, R&M and G&A were the other categories that saw meaningful year-over-year improvement for the quarter with all categories improving at least 6% or more. Now turning to our updated view on supply. We believe we're close to the end of a record national new multifamily supply cycle. CoStar sees annual net deliveries having peaked at 695,000 units in the trailing 12-month period ending Q3 2024 and Q4 2024. This compares to annual net delivered units of 351,000 on average in the prior 5 years that prior 5 years being Q3 '14 through Q3 '19 and 282,000 units on average since 2001. CoStar forecast net deliveries reached 697,000 units in 2024 and expected to be 508,000 units in 2025 before falling significantly year-over-year in 2026 by 49% and 2027 by an additional 20%, a critical Q3 for deliveries followed by a steeper drop-off. For Q3 of 2025, deliveries are 17% down quarter-over-quarter and is the last quarter with more than 100,000 units delivered. An increased expectation for 3Q '25 deliveries is followed by a significant drop-off to Q4 2025 deliveries that is now forecasted at just 69,000 units, down 52% year-over-year and 41% quarter-over-quarter. This ushers in the start of the lengthy period where deliveries are expected to be below the long-run average and more bullish long-term forecast versus prior years. 2027 and 2028 delivery forecasts have also fallen. CoStar now expects 2027 deliveries of 234 units that compares to forecast from December of last year of 283,000 units and 231,000 units for 2028 that compares to prior forecast of 308,000 units. That's down 27%. On the whole, cautious optimism best fits our rental market outlook. Looking better in places still challenged, but we have come to the time where market fundamentals are coalescing to support a more bullish outlook for multifamily. We expect the rental market will take the lion's share of new household formation and outperform the for-sale market on the near term. While some markets still have supply issues, particularly in our fast-growing Sunbelt markets, demand is still there. We're absorbing units at a very strong clip right now, and part of that is due to the affordability challenge in the for-sale market. It's about twice as expensive on a monthly basis to own a home as it is to rent at the average apartment in the U.S. During the quarter, the team re-underwrote each of our assets as if we were to buy them new today with a particular view on the submarket competition for lease-ups. We tried to estimate based on historical lease-up trends when each of our submarkets that have supply pressures would indeed stabilize. We define submarket stabilization as 92% occupied with new construction deals being at least 70% leased. Our analysis showed that 5 of our 10 markets should stabilize in the first quarter, 6 of the 10 in the second and 8 of the 10 in the third quarter of next year with all markets stabilizing by year-end. Indeed, this could happen sooner as NXRT markets are littered with major job and corporate relocation announcements almost daily across finance, technology, defense, logistics, manufacturing and research. Billions of capital and thousands of jobs across names such as Align Data Centers, AllianceBernstein, Apple, Bell Textron, Fujifilm, Goldman, Intel, Microsoft, Oracle, TSMC, Wells Fargo have all hit our markets in the past 6 months alone. Again, more reason for cautious optimism. On the transaction front, buyer sentiment for multifamily purchasing continues to improve in Q3 according to CBRE and our own experiences. Institutional investor allocations to real estate are expected to tick up to 10.8% in 2026 according to Institutional real estate allocations monitor. Firms like Blackstone remain bullish on commercial real estate investments given muted supply growth and lower cost of capital in the form of lower rates and tightening spreads. Indeed, Blackstone, in particular, believes we're now approaching a steeper point in the price recovery, and we share that view. We continue to actively monitor the sales market for opportunities and stay close to any movements on cap rates in our markets. Many investors remain sideline, but we see opportunity to return to the market as fundamentals improve. We're expecting to recycle capital in the next couple of quarters against this transaction backdrop and are excited to announce that NXRT has been awarded the opportunity to acquire a 321-unit multifamily community in the high-growth suburbs of Northern Las Vegas. This asset features a unit mix focused on 2- and 3-bedroom floor plans ideal for young families and roommate situations. Recent large-scale developments have driven significant expansion, job growth and residential revitalization in North Las Vegas, which is now the Las Vegas Valley's most prominent industrial market. Nearby, over 15 million square feet of industrial space is currently under construction or planned, supporting the creation of approximately 8,000 jobs in this submarket alone. We have evaluated this asset to be structurally sound, well located and prime for value-add execution that is the best we have underwritten all year. We believe the asset has potential to generate a 7% same-store NOI CAGR over the next 5 years. Our plan will be to acquire the asset in late Q4, utilizing available capacity on the facility. And then we expect to execute one or more sales transactions in the first half of 2026, utilizing tax-efficient 1031 reverse exchange mechanics, thereby initiating our capital recycling growth strategies as we head into 2026. We expect this strategy to modestly be accretive for 2026 while yielding stronger core FFO growth throughout the 2027 to 2030 period. Capital recycling to generate growth is our primary external objective, selling mature assets with limited potential into newer growth, nicer and higher growth assets within our familiar market geographies. Transforming the portfolio and unlocking gains for tax-efficient capital recycling into high conviction assets to grow NOI at an outsized rate is consistent with the company's historic execution. We expect to continue scouring the market for the best opportunities, but we will absolutely prioritize stock buybacks as well in the low 30s over the near term. To summarize and reiterate a couple of points. On the macro outlook, we see the market signaling a steeper recovery ahead. On operations, revenue is moderating but at a decelerating pace, and we continue to demonstrate strong expense control driven by R&M, labor and insurance. We have stabilized bad debt and view the financial health of our tenant demographic is quite strong and resilient to market pressures. We have full conviction we can hit our same-store guidance expectations, and we are positioned for improved performance heading into 2026. On the balance sheet, we're cognizant of the swap maturity overhang on our earnings forecast, and we continue to monitor that daily for opportunities. We expect to act in replacing the swap book over the near term and certainty before any expirations. And on our path to growth, we see green lights ahead as it relates to our capital recycling strategy. Good deals are available. We are confident in our ability to underwrite, capitalize and execute on them, and our team will be heavily focused on doing just that heading into 2026 as well as, again, importantly, buying back stock in the low 30s. In closing, in the near term, we will continue to prioritize a balanced approach, driving occupancy, maintaining disciplined rent strategies, managing controllable expenses to support steady NOI growth while we look to accelerate our capital recycling strategy and portfolio transformation to drive external growth as conditions on the field are set to improve. Looking ahead, we are confident in the long-term fundamentals of our Sunbelt positioned workforce housing assets, which we see to be well positioned to outperform other geographies given our favorable trends in population migration, job creation and wage growth. That's all I have for prepared remarks. I appreciate our team's work here at NexPoint and BH for continuing to execute. And that concludes our prepared remarks. So at this time, I'll turn it back over to the operator and open up the call for questions. Operator: Your first question comes from the line of Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: On the operating expense side, again, things look like they're going really well. Could you just talk a little bit about if that is going to be sustainable on a going-forward basis? And I just asked that in the context of full year guidance, where the midpoint of guidance suggests that FFO growth in -- or FFO in the fourth quarter will be $0.61 versus your current $0.70 run rate, which is being helped by better-than-expected expense control. Matthew McGraner: Yes. I think the -- there's a couple of categories that [ tries ] us back. We think that we'll have continued improvement in sustainability on the noncontrollable side with insurance. We also feel good about the real estate tax protests that are going on and see potential upside in that number. On the payroll and R&M side, we don't see anything changing materially and expect that to be consistent as well. For what it implies for core, I think we're cautiously optimistic that we'll exceed expectations as usual. And that's -- we're doing everything we can to beat on the expense side in the face of these supply pressures. I don't know, Bonner, if you have anything to add to that? Bonner McDermett: Yes. I would just add, I think on the real estate taxes, we received one pretty significant settlement that's kind of one time in Q3. So that's not necessarily the run rate for taxes there, but it does. If you'll remember, Nashville is on a 4-year revaluation cycle. So we fight this battle every 4 years that occurred last year. We've been in the process of litigating those. We've got court dates on a couple of the other deals, but we don't expect to see any dramatic shift there. So some of the real estate tax savings that you see in the quarter is more onetime in nature. But I agree with Matt, particularly on payroll and repair and maintenance expenses, those are heavy focuses for us controlling. So I do think that we can continue at least through the first quarter on the payroll run rate. We've made the strategic initiatives to centralize a lot of the operations. So most of that activity on the P&L hit kind of April 1 and going forward. Omotayo Okusanya: Got you. Can you quantify that onetime benefit in 3Q? How much that was? Bonner McDermett: Yes. The total there was about $820,000. Omotayo Okusanya: Got you. Okay. That's helpful. Then my second question is, again, your self-disclosed NAV, again, you guys -- whether you're at the low end or the high end, depending on the cap rate you're using, I mean the stock has been persistently trading at this kind of huge discount to NAV. And I guess when you guys look at that over a long-term period, if that gap is not necessarily made up over time, how do you kind of think about kind of what next for NXRT and how you try to create shareholder value if you just kind of get assigned this perpetual large discount to NAV, granted a lot of the sector is already trading that way. So this is not unique to you, but just curious how you're thinking about that. Matthew McGraner: Yes. Look, we've been very clear since we became public in 2015 that we view the company as a growth company. But we also -- I mean, we also have the company set up to transact as well with floating rate debt. Our goal is to hit $170 million of NOI by 2027. It's that simple. And the terminal value, at least in our mind, will always be there. We think that the portfolio is hard to replace and scale. We think we have the best job -- best exposure to the highest job growth markets. And we have -- we believe that if the discount isn't closed, then we'll close it. We own 16.5% of the company. We're highly aligned to do so. And what we absolutely know is that even in a muted transaction environment, there's still a bid for multifamily. The transaction market is still kind of a 5 cap market and especially for assets like ours. So while the public markets are discounting multifamily stocks, we think that, that will change dramatically in 2026 as new lease pricing inflects. I think that's going to be the catalyst of it. I see that happening in the second quarter probably of 2026. And I think our stock will start to perform into that bid of new lease growth. But if it doesn't, we're confident that there is a terminal value and a bid for the company. We know that for sure. So we'd like to continue to grow the earnings stream and think we can. But if not, there's a bid there. Operator: Your next question comes from the line of Buck Horne with Raymond James. Buck Horne: I apologize. Did you guys give out the splits on new lease rates, renewals and the blend for the quarter? Matthew McGraner: No, we did in the supplement, but we'll update it for you. The new -- for the quarter, new leases were down 4.06% or $58. Renewals were up 1.94% or $29, almost $30. That's a blended negative 44 basis points. Buck Horne: Got it. Appreciate that. And by the way October? Matthew McGraner: October is kind of trending the same way. Buck Horne: I got it right here. Matthew McGraner: New leases were down 3.78% or $54. Renewals were up about 70 basis points or $10 for a blended down 1%. Buck Horne: Perfect. You already beat me to my next question. I appreciate that. Step ahead of me. I want to also touch a little bit on the CapEx spend, just kind of the maintenance CapEx, both recurring, nonrecurring, I think it added to about $9 million in the quarter. Do you see that starting to taper off anytime soon? Or is that kind of the run rate that you expect the portfolio to be on for at least a few more quarters? Matthew McGraner: Yes. I mean I think we're -- it's a little bit elevated. And the reasons for that is because we haven't been able to recycle as much of the portfolio as we typically do. So there is a little bit of more maintenance CapEx going into it. Bonner, do you have anything to add to that? Bonner McDermett: Yes. I'd also say if you're referencing Page 22 of the supplement, you'll see the interior spend is up, particularly in the third quarter. That's up, but it's also up on a smaller dollar improvement. So our market upgrade program where we're not doing the full enchilada of premium upgrades with hard surface counters and things like that. We're focused more on kind of that on average, it was about $4,000 upgrade. So to some units that we touched in the past or needed some help to be competitive. We're spending about $4,000. We're getting a $70 premium. So it's not quite the historical run rate for spend on interiors, but we're still getting to that kind of 20% annual return. So we think that, that makes sense short term while pricing is under pressure. And then we -- I think we referenced this on the last call, the large refinancings that we did with Freddie Mac, we got new property condition assessments, those kind of dictated some larger nonrecurring CapEx spends, some milling and paving of drive lanes, some siding repairs, some roofs. We're also doing -- we're redoing a pool in Raleigh. So we've got some, I would say, larger projects this year. I think we're more focused on streamlining that spend going into next year. Matthew McGraner: And those are more onetime in nature anyway, so it should moderate. Buck Horne: Perfect. That's great color. I appreciate that. And again, congrats and great job on controlling the expenses in this environment, a lot of progress there. I think I want to go back to Omotayo's question about capital allocation and just thinking about the NAV discount. But I guess the question really is why go after a new asset in Vegas at this point when you could buy the existing portfolio probably at an equal or better kind of combined NOI yield and growth rate going forward? Just kind of what's the -- help us walk through the rationale of why buy an asset right now when you can buy the existing portfolio? Matthew McGraner: Yes. I think -- I don't think they're mutually exclusive. I think we can do both. As I said, I think over the near term, until we close on this deal, we're going to aggressively buy back stock given where the capital is. But our view also is we do need to show some external growth in terms of capital recycling. We're not going to be net acquirers, so to speak. So we're not going to just go out and buy willy-nilly. The difference with this deal is, given the situation of the asset, it's basically going in almost a 6 cap that we believe we can drive to a 7.5% or an 8% cap over the course of our 3-year value-add campaign. And those opportunities don't really exist on a large scale. This is a very precision-based investment. And I don't think it cannibalizes anything we're doing on a stock buyback program. Our free cash flow yield is still strong. And I mean, I meant what I said when we're trying to hit $170 million of NOI in 2027 by the end of that year. I think that that's possible. And if we do that and we apply the terminal cap rate, I think we'll all be very happy. Operator: This concludes today's question-and-answer session. I would now like to turn it back over to the management team for closing remarks. Matthew McGraner: Thank you very much for everyone's participation today and look forward to speaking to you all live in December at NAREIT. Thanks again. Operator: This concludes today's call. You may now disconnect.
Sarah: Good morning and welcome to PayPal Holdings, Inc.'s third quarter 2025 earnings conference call. My name is Sarah, and I will be your conference operator today. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Steve Winoker, PayPal Holdings, Inc.'s Chief Investor Relations Officer. Please go ahead. Steve Winoker: Thanks, Sarah. Welcome to PayPal Holdings, Inc.'s third quarter earnings call. I'm joined by CEO Alex Chriss and Chief Financial and Operating Officer Jamie S. Miller. Our remarks today include forward-looking statements that involve risks and uncertainties. Actual results may differ materially from these statements. Our commentary is based on our best view of the world and our businesses as we see them today. As described in our earnings press release, SEC filings, and on our website, those elements may change as the world changes. Over to you, Alex. Alex Chriss: Thank you, Steve. Good morning, everyone, and thanks for joining the call. PayPal Holdings, Inc. is a fundamentally stronger company today than it was two years ago. Focus and execution have enabled us to drive a positive inflection across our business. Take transaction margin dollar growth, excluding interest on customer balances. We are on pace for 6% to 7% growth in 2025 compared to negative growth just two years ago. Revenue growth has accelerated in the past two quarters as a result of our deliberate strategy to focus on profitable growth. Operationally, we are winning new customers and deepening engagement across our existing base. We have reinvigorated unprofitable and underperforming parts of the business. We're leveraging our incredible brands to innovate and expand our addressable market beyond online payments. Thanks to our omnichannel initiatives, we've accelerated branded experiences TPV growth to be between 7% and 8% on a currency-neutral basis over the past four quarters. Our BNPL business is sustaining 20% volume growth quarter after quarter. Venmo revenue growth has accelerated 10 points compared to two years ago, while we have also continued to grow our user base. Our enterprise payments business has turned a corner, returning to volume growth and consistently contributing to company transaction margin dollar growth. We have delivered this acceleration in our business while remixing inefficient spend into growth investments and returning capital to shareholders. In total, we are on pace to deliver at least 15% non-GAAP EPS growth this year. All of this gives us confidence in the business's longer-term growth potential and ability to deliver high single-digit transaction margin dollar growth and non-GAAP EPS growth in the teens or better over the longer term. I'm also excited to announce that we are initiating a dividend. Our overall capital allocation priorities remain the same. We will continue investing first and foremost in our business's growth and transformation. We see this dividend as strengthening our overall capital return program, working in conjunction with our ongoing share buybacks. Our free cash flow generation and balance sheet are strong and give us ample room to both deploy capital to drive growth and return capital in a disciplined way to shareholders. Put simply, this is the new PayPal Holdings, Inc., built for faster, more profitable growth. Our strong foundation, differentiated competitive advantages, and clear strategic direction position us to capture a massive and growing addressable market. With building execution momentum, we are driving innovation at a remarkable pace and scale. This makes us exceptionally well-placed to win into the future. Turning to our third quarter performance, we delivered at or above the high end of our guidance range for transaction margin dollars and EPS. Importantly, our TM dollar growth continues to come from multiple areas of the business, including branded experiences, PSP, and Venmo. Non-GAAP earnings per share increased 12%, reflecting the flow-through of our transaction margin performance. The strength of our two-sided platform is evident in how customers are choosing to deepen their relationship with us. Monthly active accounts grew 2%. When you look at transactions per active account growing 5%, excluding PSP, you see the real story. Customers aren't just signing up; they're incorporating PayPal Holdings, Inc. and Venmo into their daily lives. This engagement depth makes us a valuable partner to merchants and will drive sustainable, profitable growth. Now I'd like to discuss the progress we are making in our four strategic growth drivers: winning checkout, scaling Omni, and growing Venmo, driving PSP profitability, and scaling our next-gen growth vectors. As you can see on slide four, PayPal Holdings, Inc.'s TM dollar growth, excluding interest, has not only accelerated, it is coming from a far more balanced mix across our business. This is important to appreciate the strategy underpinning the value our teams are working to create. Compared to last year, win checkout's contribution increased, and PSP, Omni, and Venmo's contributions are a multiple of what they were in the past. This is a direct result of the work we have done to build more holistic, healthier merchant relationships, to scale our omnichannel presence, and to monetize Venmo. The innovation and momentum across the company are increasingly visible, as you have seen in our recent announcements and as you will hear today. I plan to move quickly so that we can go deep in a few key areas like BNPL and Venmo, while also leaving ample time for Q&A. Let me start with branded experiences, which covers our first two growth drivers: online and in-store branded checkout. Our strategy is to meet our customers everywhere they shop, whether online, in-store, or agentic. We are focused on delivering the best checkout experience so consumers can pay how, where, and when they want. It means they can pay online with PayPal Holdings, Inc., Buy Now, Pay Later, Venmo, crypto, or soon a partner wallet through PayPal World. It means they can pay in-store with a PayPal Holdings, Inc. or Venmo debit card, BNPL, or Tap to Pay. It also means building for a future where consumers can pay through AI agents powered by Google, OpenAI, Perplexity, and others. Last September, we launched PayPal Everywhere in the U.S. to move beyond our legacy in online branded checkout into an omnichannel world. A year in, and the results show our strategy is working. Branded experiences TPV grew 8% on a currency-neutral basis in the quarter. This includes PayPal Holdings, Inc., Buy Now, Pay Later, Venmo, and our debit card programs, and is the single most important metric to track the progress on transformation from an online payments company to a commerce company. We need to be available everywhere a consumer wants to make a purchase. This is about more than being present across channels. It's fundamentally expanding what PayPal Holdings, Inc. means to our customers and the total spending we can capture. Historically, PayPal Holdings, Inc. was synonymous with online retail payments. Today, we're evolving the way consumers pay for all of their commerce needs, moving beyond retail into services, subscriptions, bills, everyday expenses, and more. We're now playing for a much bigger addressable market. Our confidence in the financial impact of this strategy comes from the flywheel effects we see across our ecosystem. When customers start using PayPal Holdings, Inc. or Venmo offline with our debit card, their online activity increases as well. ARPA goes up, profitability improves. In Q3, our PayPal Holdings, Inc. debit card actives transacted nearly six times more and generated nearly three times the ARPA of checkout-only accounts. We see a similar pattern with BNPL. Its use drives an uplift in overall activity and engagement. The data clearly validates our strategy and gives us confidence to increase our growth investments. Most of our product initiatives, plus our marketing investments over the past year, have started in the U.S. It's worth examining our U.S. proof points as they demonstrate the potential for our business as adoption scales internationally. For example, in the third quarter, we reached 10% branded experiences volume growth in the U.S., more than double our growth the same quarter a year ago. That acceleration comes from two things: growing omnichannel adoption and sustained improvement in the U.S. online branded checkout trends, supported by our improved experiences. We have the right set of drivers and initiatives in place. Now our focus is on adoption and investing to amplify our impact. As we move into 2026, we will be leaning more into these efforts and expanding across key international markets. Let me address online branded checkout in more detail. TPV grew 5% in the third quarter on a currency-neutral basis. That's solid growth, especially with the choppy global macro trends we continued to see this quarter. Given the competitive intensity online, we know more work is needed to close the gap between our performance and overall e-commerce growth. Our strategy moving into next year centers on three priorities: continuing to scale our redesigned checkout experiences, improving how we are prioritized across merchants, and importantly, driving biometric adoption. We are also leaning into new verticals and geographies that expand our addressable market and avenues for growth. All of this will be complemented by a consumer value prop with a highly competitive rewards program aimed at increasing frequency and selection rate. We also have a powerful growth lever with Buy Now, Pay Later and Venmo, which I'll discuss further shortly. This year, we've made significant progress deploying our redesigned pay sheet experience, which now covers close to 25% of our global checkout transactions. We're moving quickly, but untangling a decade or more of legacy integrations is complex and taking more time than planned. In the cohorts where we are now optimized in the U.S., we continue to see close to one point conversion improvement. This gives us confidence. It's a win, not if we see more benefit from this monetization. At the same time, it's critical that we keep improving PayPal Holdings, Inc.'s prioritization across merchants and scaling biometric login, both of which have been proven to increase conversion. On the prioritization side, we are focused on scaling upstream messaging on product pages, driving adoption of our payment-ready API that allows merchants to target high-converting PayPal Holdings, Inc. users when they land on their site, and improving PayPal Holdings, Inc.'s placement at checkout. Improved prioritization and presentment are powerful. In testing, when our Buy Now, Pay Later options are presented upstream on a product page, we see a nearly 10% lift in branded checkout volume on average. That improvement drives incremental sales for our merchants and customer loyalty with repeat use for PayPal Holdings, Inc. Within biometrics, we are focused on scaling biometric login, including passkeys, and driving mobile app adoption, which enables seamless authentication during checkout. In ongoing testing to date, these authentication efforts, when paired with the redesigned pay sheet we've been scaling, have shown improved conversion between 2% to 5%. Consumers benefit from a mobile checkout experience that is second to none, while merchants see a higher customer satisfaction and sales. It's a win for both sides of our network. The bottom line, the initial results we have seen to date in the U.S. make us confident we're on the right path and have the right initiatives in place, both to drive acceleration and increase growth investments as we move through next year. Now that I've covered some of the foundational work underway, let me dive deeper on two important growth levers that I mentioned: BNPL and Venmo. The shift towards Buy Now, Pay Later is a fundamental change in how consumers want to pay, and we are extremely well-positioned to capture this shift. In the markets where we offer BNPL, our solutions are available nearly everywhere PayPal Holdings, Inc. is accepted. It's a reach and scale that's hard to replicate. This quarter, BNPL volume continued to grow more than 20%, with particular strength in the U.S. This puts us on track to process close to $40 billion in BNPL TPV in 2025. Monthly active accounts climbed 21%, and our net promoter score globally is 80. People love this product. We have everything we need to win this market. We are investing to transform our BNPL business from a payment option that consumers discover in the PayPal Holdings, Inc. Wallet after they made a purchase decision into a customer acquisition channel. This means moving to the beginning of the shopping journey through marketing and upstream presentment so that consumers know they can increase their purchasing power with BNPL. This focus and investment will expand our right to win in BNPL and further accelerate growth. We are also expanding BNPL to new geographies and introducing new product offerings, both online and in-store. We have successfully expanded BNPL into Canada and extended payment terms in Italy and Spain to up to 24 installments. After proving the model in Germany, we brought Buy Now, Pay Later (BNPL) in-store to the U.S. through the PayPal Holdings, Inc. mobile app, seamlessly connecting online and offline shopping. We are building the future of flexible payments, and we're doing it at scale. Moving to our Venmo business, Venmo isn't just another payment app. It's the money movement platform of choice for the next generation. One of the things that continues to set Venmo apart is its user base, young, affluent, digitally native consumers who are shaping the future of commerce. With nearly 100 million total active accounts growing mid-single digits, Venmo has tremendous scale in this attractive demographic. We have a deliberate, sequenced strategy that's changing how these users engage with Venmo. At the core is maintaining our leadership as the best P2P platform in the market, attracting more funds into the Venmo ecosystem, driving omnichannel spending, and seamlessly integrating commerce into the Venmo app. We are already seeing results. Venmo is at a clear inflection, with TPV growing 14% in the third quarter, continuing to accelerate from 12% in Q2 and 9% in 2024. Pay with Venmo just hit a milestone: $1 billion of TPV in September alone, and Pay with Venmo monthly active accounts grew by nearly 25% in the quarter. We hit a new record with our Venmo debit card, which attracted 1 million first-time users in Q3, thanks in part to our college partnerships. Monthly Venmo debit actives grew by more than 40%. This has resulted in overall Venmo monthly active account growth accelerating to 7% year over year to nearly 66 million monthly active accounts. From a financial perspective, Venmo is on pace to generate $1.7 billion in revenue this year, excluding interest income. That's up more than 20% and a 10-point acceleration from two years ago. Under the surface, we are also changing our revenue mix and growing in high margin areas. Over the past two years, we've doubled Pay with Venmo and Venmo debit card revenue. Not only can Venmo become a more significant revenue driver as it scales, but it is also accretive to transaction margin. Here's what makes this so compelling. We're still in the early innings of monetization. Today, Venmo's average revenue per monthly active account sits at just over $25. While over 90% of Venmo's users engage with P2P, only 5% to 10% are using our debit card or Pay with Venmo, and less than 5% have set up recurring funds in. For the subset of accounts engaged across P2P, debit, and Pay with Venmo, which is still small today, ARPA is about 4x higher. For accounts that are also bringing funds in through direct deposit or instant add, ARPA is 6x higher. In other words, the upside on Venmo's revenue is a multiple of where we stand today. The good news is that adoption is accelerating. For example, new users today are adopting our debit card at nearly 4x the rate they were two years ago, giving us massive runway as we continue driving attachment of these high-value products. This is one of the reasons why we are investing in our college partnerships and introducing unique, personalized rewards that drive multi-product adoption and encourage balanced spending within the Venmo ecosystem. We're also expanding Pay with Venmo into new high-value use cases like our built partnership for rent payments. At Investor Day, we discussed growing Venmo revenue to more than $2 billion by 2027, and it's clear that the team's execution will allow us to deliver well beyond this over time. Taken together, these businesses, online branded checkout, BNPL, Venmo, and Omni, drove branded experiences TPV growth of 8% on a currency-neutral basis. Moving to our PSP business, our PSP volume growth accelerated to 6% from 2% last quarter, demonstrating that we are accelerating growth after rebaselining. This growth is profitable and contributed to transaction margin dollar growth in the quarter. We are doing this by continuing to build holistic relationships with merchants. Value-added services like payouts, adaptive payment optimization, and FX as a service deliver real, measurable value, including improvements to authorization rates and cost reduction. We're seeing merchants not only willing to pay for these capabilities, but actively requesting more of our services as they begin to recognize the benefits for their business. As we continue to expand our unified enterprise payments platform globally, we are bringing these margin-accretive services to new merchants from day one. We expect accelerated growth in this business as we expand the adoption of value-added services across our existing customer base and launch with Verifone as our first omnichannel solution provider in Q4, strengthening our position in the PSP market. While we accelerate growth in branded experiences and PSP, we are also aggressively innovating in agentic, ads, stablecoins, and digital wallet interoperability through PayPal World to establish avenues for future growth. I'll highlight just a few of our recent developments. We continue to partner with leaders across the agentic space, including Perplexity earlier this year, and in September, we announced our expansive multi-year partnership with Google to create new AI shopping experiences. This morning, we announced a significant partnership with OpenAI to expand payments and commerce in ChatGPT, including adding PayPal Holdings, Inc. branded checkout for shoppers and payment processing for merchants using instant checkout. This is a big win for PayPal Holdings, Inc. and our customers. Today, we also announced our own agentic commerce services, which help merchants sell through multiple AI platforms, including Google, OpenAI, and Perplexity. Merchants will have one integration to access consumers through multiple LLMs. Agentic commerce will take time, but we do believe consumer behavior will shift. PayPal Holdings, Inc. is building for that future. Finally, I'm very excited to share that PayPal World is officially in its pilot stage, and the first test transactions are happening this week. I'm proud of the progress that we've made this quarter, from partnerships to new product innovations to continuing to strengthen our profitability. With that, let me turn it over to Jamie to go into the financials in more detail. Jamie S. Miller: Thanks, Alex. Moving to slide 10, PayPal Holdings, Inc. delivered another quarter with good execution and real momentum across the underlying business. TPV and revenue growth both accelerated by 2 points from the second quarter. Transaction margin dollars, excluding interest, grew 7%, continuing the momentum we built through the first half. The drivers of that growth have been broad-based, led by strong credit performance, branded checkout flow-through, improvements in PSP profitability, and Venmo monetization. Growth across these areas was partially offset by higher transaction losses in the quarter. The diversification and quality of this growth is a meaningful improvement from where we were at the start of the company's transformation. We have clear opportunities to build on this progress with investments that strengthen our competitive position and drive durable, profitable growth. Moving back to third quarter financials, non-GAAP operating income grew 6%. Strong operating income, share buyback, and a favorable tax rate more than offset headwinds from lower interest rates, contributing to 12% growth in non-GAAP EPS. Adjusted free cash flow, which excludes the timing impact from the origination and sale of pay later receivables, was $2.3 billion or $4.3 billion year to date. Turning to slide 11, we are driving deeper, more active relationships with our customers. Monthly active account trends showed steady progress, up 2% year over year to 227 million. Transactions per active account, excluding PSP, which is a good proxy for engagement, accelerated to 5% growth. Moving to slide 12, total payment volume accelerated to 8% growth at spot and 7% on a currency-neutral basis to over $458 billion. We've moved branded experiences to the top of this slide to reflect the importance of this metric to our more expansive strategy and value creation. Looking across the product portfolio, we see encouraging signs that our initiatives are gaining traction and making an impact. Branded experiences TPV, which includes online checkout, PayPal Holdings, Inc., and Venmo debit, as well as Tap to Pay, posted another quarter of 8% growth. As Alex mentioned, U.S. branded experiences TPV growth accelerated to 10% in the quarter, benefiting from both omnichannel adoption and better trends in U.S. online branded checkout. While debit card and Tap to Pay spend represent a small portion of branded experiences volume today, they are growing rapidly, up 65% year over year, accelerating from last quarter. Venmo TPV growth accelerated two points to 14%, marking the fourth consecutive quarter of double-digit growth. On an online-only branded checkout basis, volume grew 5% on a currency-neutral basis. Compared to last quarter, there was less pressure on volumes from Asia-based marketplaces selling into the U.S. At the same time, this improvement was offset by pockets of softer consumer discretionary spending in Europe and the U.S. later in the quarter. Overall, we have seen relatively consistent growth in the number of checkout transactions, but basket sizes or average order value has decreased. While still early in a back-end loaded quarter, we've observed this trend continuing through October. We remain focused on the initiatives we can control. We're confident in our branded checkout strategy and the roadmap that our teams are advancing. The early results in the U.S. demonstrate that we're on the right path with our initiatives, including our redesigned experiences, Buy Now, Pay Later, and Pay with Venmo. We're laser-focused on execution across the three key areas Alex Chriss discussed: scaling our redesigned experiences, improving prioritization, and driving biometric adoption. All of this is increasingly complemented by a compelling consumer value prop that differentiates PayPal Holdings, Inc. and Venmo as one of the best, most rewarding ways to pay. While this work is complex and takes time, we fully expect to see our efforts build as we move through the next year and scale these initiatives. Pay with Venmo and Buy Now, Pay Later continue to outpace the market, taking share from other payment methods, growing 40% and 20% respectively. These results give us the confidence to begin making targeted investments in the fourth quarter that amplify the impact of these and other initiatives throughout the portfolio. Turning to PSP, which spans both enterprise and SMB processing, as well as parts of our vast portfolio like payouts, invoicing, and point-of-sale solutions, volume growth accelerated to 6% from 2% in the first half of the year. Our focus on prioritizing healthy, quality growth within our enterprise payments business is contributing to steady improvement in both revenue growth and transaction margin dollars. We expect to see ongoing improvement in the quarters ahead, supported by profitable frontbook business, our existing merchant base, and the attachment of value-added services. Moving to more financial detail on slide 13, transaction revenue accelerated to 6% growth on a spot basis to $7.5 billion. Other value-added services revenue grew 15% to $895 million, driven by another quarter of strong performance in consumer and merchant credit. We've also been encouraged by growth in customer balances and the impact of our initiatives designed to encourage customers to bring more funds into the ecosystem. While lower interest rates are still a headwind, a portion of this impact has been offset by higher balances. We continue to be pleased with the quality, diversification, and performance of our credit portfolio. In September, we took another step forward in line with our balance sheet light model for credit, externalizing a portion of our short-term U.S. pay later receivables with Blue Owl Capital. We ended the quarter with $6.4 billion in net loan receivables, down 8% sequentially. Transaction take rate declined by three basis points to 1.64%, driven largely by product and merchant mix as well as the impact of foreign exchange hedges. This decline was an improvement relative to last quarter and included less impact from foreign exchange hedges and enterprise processing. Online branded checkout take rates continue to be relatively stable year over year, reflecting our transaction and merchant mix as well as our focus on profitable growth. As I mentioned earlier, TM dollars ex interest grew 7%. TM dollar growth included a one and a half point headwind from higher volume-based expenses, largely transaction loss provisions resulting from the temporary service disruption in August, which primarily impacted Germany. There was also a slight benefit, less than one point, from the Blue Owl pay later externalization I referenced earlier. Setting aside the impact of loss provisions related to the August service disruption, we've seen an improvement in transaction loss rates relative to last quarter. Non-transaction related OpEx increased 6% as we continue to actively manage our cost structure while reinvesting in key growth initiatives. Non-GAAP operating income grew 6% in the quarter to nearly $1.6 billion. Moving to capital allocation, as you saw in our materials and heard from Alex, I'm excited to share that we are initiating a dividend as part of a disciplined capital allocation strategy. Our strong free cash flow generation and balance sheet give us ample room to both deploy capital for growth and return capital to shareholders. In general, we continue to target about 70% to 80% of our free cash flow for capital return, with the vast majority going to buyback. The dividend serves as a complement to our existing buyback plans and will be calculated based on a 10% payout ratio relative to net income. This quarter, we completed $1.5 billion in share repurchases, bringing share repurchases over the past four quarters to $5.7 billion. Finally, we ended the quarter with $14.4 billion in cash, cash equivalents, and investments, and $11.4 billion in debt. Moving to guidance on slide 14, following another quarter of strong financial performance, we are raising our full-year guidance for TM dollars and non-GAAP EPS. For the fourth quarter, we expect currency-neutral revenue growth in the mid-single digits. We expect fourth quarter TM to be between $4.02 billion and $4.12 billion, which represents about 3.5% growth at the midpoint. Excluding interest on customer balances, we expect TM dollars to grow by about 5% at the midpoint compared to 7% year to date. Setting interest rates aside, there are a few factors to highlight that impact our fourth quarter outlook. First, we have seen strong credit outperformance over the past year, driven by good execution from the team, as well as a more benign loss environment. We expect to see year-over-year comparisons start to normalize more in the fourth quarter. Second, given the performance of some of our key initiatives, we see an opportunity to lean into our competitive differentiation with additional investment to drive faster growth over time. In the fourth quarter, we will begin increasing investments designed to drive product attachment and habituation. Some of these investments are linked to volumes and therefore recorded as contra revenue, impacting TM dollars and designed to drive additional growth over time. Other growth investments, such as global brand awareness campaigns, typically sit within marketing and non-transaction OpEx. Lastly, on TM, our fourth quarter guide assumes some deceleration in branded checkout growth relative to our third quarter average. From a volume perspective, the most important weeks and months of the quarter still lay ahead. That said, we are planning prudently given recent spending trends and the uncertain macro backdrop. We are also cognizant of lapping strong consumer spending in the fourth quarter of last year. Moving to OpEx, we are planning for low single-digit non-transaction OpEx in the quarter and expect about 3% growth for the full year. We expect to deliver fourth quarter non-GAAP earnings per share in the range of $1.27 to $1.31, up 7% to 10%. For the full year, we are raising our transaction margin dollar guidance by $100 million at the low end and $50 million at the high end to a range of $15.45 to $15.55 billion, which represents 5% to 6% growth. Excluding interest, we expect transaction margin dollars to grow between 6% to 7%. We are raising our full-year non-GAAP earnings per share guidance to a range of $5.35 to $5.39, growing at 15% to 16%. Our guidance continues to project approximately $6 billion in share buyback and full-year adjusted free cash flow of approximately $6 to $7 billion, which excludes the timing impact of the origination and sale of pay later receivables. I'd like to wrap up by thanking the PayPal Holdings, Inc. team for their hard work and execution this quarter. We are making tangible progress across the business, and the foundation we're building positions us well for continued growth ahead. With that, back to you, Alex. Alex Chriss: Thanks, Jamie. We are operating from a position of strength. The results you're seeing are proof that our strategy is working. We built a more balanced, profitable growth engine across branded experiences, PSP, and Venmo, and that's exactly what we set out to do. We're investing in high-impact growth initiatives that will move the needle and future-proofing the business with critical partnership, while simultaneously returning value to shareholders through our buyback program and our newly launched dividend. We've moved this business from defense to offense, from stabilization to acceleration. We know exactly where the opportunities are, and we are laser-focused on executing our strategy. With that, Steve, let's go to Q&A. Steve Winoker: Before we open the lines for Q&A, I'd like to ask everyone to limit themselves to one question so we can get through as many of your fellow analysts as possible. Sarah, please open the line. Sarah: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tien-Tsin Huang with J.P. Morgan Payments. Your line is open. Tien-Tsin Huang: Hey, thanks a lot. Good morning here. I just want to ask about agentic commerce. It's a popular topic here at Money2020, and I'm not sure how to ask it, Alex and team, but maybe I'll just rapid-fire a few, if you don't mind. Has agentic commerce changed PayPal Holdings, Inc.'s strategic priorities in any way? What's your right to win? Can you fully fund investments here without sacrificing your incremental margins? Of course, you've announced a lot of key partnerships like OpenAI today, Perplexity, Google, et cetera. Do you have the coverage you need to drive ubiquity, or is there more work to do on the partner front? It seems like there's a lot of talk about collaboration, and you guys are definitely in the center of all that. Just love to hear your thoughts on all of that, if you don't mind. Thanks. Alex Chriss: Love it. Thanks, Tien-Tsin, and hope you're enjoying Money2020. We've got a good contingent there as well. To hit on a few of those, first, from a prioritization, from a priority question, not really, right? Our strategy we've laid out very clearly is that we want PayPal Holdings, Inc. to be available anywhere and everywhere that consumers want to pay, and we want merchants to be able to sell to consumers anywhere and everywhere. We've talked about this even back at Investor Day, where we laid out we want it to be online, we want it to be in-person, and we want it to be agentic. Agentic is just an evolution of this strategy. In terms of our right to win, we actually think we're extremely well-positioned to win here. Let me just lay out a couple of the different components. First, on the merchant side, merchants are going to need to figure out how to integrate with each of these LLMs. That's hard because there's multiple LLMs that are out there. Whether you're a large enterprise or a small business, you really don't have the bandwidth to go figure out how to integrate with each and every one of these LLMs, make your catalog available, understand the identity and fraud protection that comes with each of these different elements. What we announced today was our PayPal Holdings, Inc. agentic commerce services, which enables merchants to integrate once with PayPal Holdings, Inc., a partner that they've known and loved and integrated with for years, and be able to orchestrate their services to every LLM that's out there so that they get full coverage of consumers. That is a huge win for merchants. We give them seller protection. We give them the ability to scale across all the different LLMs. From the consumer standpoint, we're, again, very well-positioned. We've got the largest wallet ecosystems that are out there, and our ability to give consumers the trust, the safety, the buyer protection, and the ability to get access and make purchases on any of the LLMs they want to is a huge win. They get to use the wallet that they know and love and have a great end-to-end experience, which includes not only the purchase through the LLM, but also then all of the things that happen afterwards, whether it's package tracking or customer service or returns. That's, again, a big win for consumers. For the LLMs themselves, it would take over a decade if they wanted to go and try to build the same kind of merchant ecosystem of the head, the torso, and tail of merchants that PayPal Holdings, Inc. has established over the last couple of decades. Instead, they get to partner once with us and get access to tens of millions of merchants with identity authentication, fraud protection, and payment processing on a global scale. We really feel like we are connecting this ecosystem together. It will take time for agentic to eat into overall purchasing, but if you think about it, we want to meet customers where they are: online, offline, agentic, and PayPal Holdings, Inc. is in a very strong position there. As far as investments, Jamie, do you want to hit on that? Jamie S. Miller: Sure. These partnerships do entail some level of investment, whether that's in product and tech or around co-marketing, things that really drive usage and habituation around the product. I mentioned in my prepared remarks that we would be reinvesting, begin reinvesting some of our margin dollars in the fourth quarter to really amplify some of our product initiatives. Between the push into agentic and that, some of those investments are likely to be a near-term headwind to how fast transaction margin dollars or earnings grow next year. We are really excited about understanding what's working and really putting our dollars behind that and the core business, in addition to really advancing our initiatives across the business on things like agentic. Alex Chriss: The last part of your question was ubiquity. We obviously feel like we've got the largest breadth of merchants. We obviously have the largest breadth of consumers. Now with the partnerships, we've already announced OpenAI, Perplexity, Google. As we look to partner with any of the LLMs that are out there, we think we've got actually quite good scale and ubiquity across the ecosystem. We are very well-positioned to win as agentic commerce continues to evolve. Sarah: The next question comes from Harshita Rawat with Bernstein. Your line is open. Harshita Rawat: Hi, good morning. I want to ask about branded. I know you highlighted some headwinds and the 5% growth number. You highlighted some kind of deceleration in the fourth quarter. I'm also thinking you have some benefit from Pay with Venmo and the Buy Now, Pay Later promotion in the holiday season. Going back to the Investor Day, you laid out the path to branded acceleration. I know it's not linear. How should we think about just the overall path from here? Should we focus more on slide four, right, that you highlighted, which is very helpful, which focuses on more diversified drivers of growth? Thank you. Jamie S. Miller: Yeah, Harshita, maybe I'll answer that in two parts. I'll talk about fourth quarter and then really talk about the broader investor framework. We've had consistent mid-single digit growth in branded checkout for multiple quarters now. For the quarter, we've seen really good momentum across our growth initiatives with Buy Now, Pay Later, with Pay with Venmo. We've seen continued U.S. growth at higher rates as well this quarter. When we got into September, we began to see macro-related deceleration, and that is both in the U.S. and in Europe. I talked about it in my prepared remarks, but really a relatively consistent number of transactions. We're seeing basket sizes just trade down, average order value being down, particularly in retail where consumers are just being more selective. That behavior has continued into October. Obviously, it's really early in the fourth quarter. The holiday season is very back-end loaded. It's something we're watching. We did call out, and you're right, our guidance assumes a rate of growth lower than that of third quarter. When you look at that macro, and I pivot now to talking about the broader framework, we've seen very good progress. I think what I'm most excited about is we know what's working, and we're really doubling down against that. Alex has talked a lot about Buy Now, Pay Later. We've talked a lot about Pay with Venmo. Importantly, year to date in the U.S., our growth rates are higher than what we saw year to date last year in the U.S. We're really seeing nice progress. That macro piece of it, whether it's tariffs or some of this deceleration, is offsetting our progress. We set those 2027 targets, assuming a consistent consumer macro environment. Ultimately, that's how we'll measure progress against that. What I am excited about is we have scaled our initiatives in the U.S. first. Where we see progress, we've got real confidence as we scale outside of the U.S. and internationally. I think we've invested in the right products. We're seeing customer adoption and engagement around the things we've talked about, in addition to things like omnichannel initiatives and places where we get other halo effect. The investments we're making are really predicated on our confidence and our ability to continue to build on our progress as we get through the next couple of years. Sarah: The next question comes from Dan Dolev with Mizuho. Your line is open. Dan Dolev: Hey, guys. Great results, as always. Just wanted to ask a quick question in a very, very short follow-up. On Buy Now, Pay Later, huge momentum here. Can you maybe give us sort of the lay of the land, like how you view, Alex, the industry? Who are you gaining share from most and in what territories? I just have a super quick follow-up for you, Jamie, on the investments next year. If there's any way to quantify that, that would be great. Those are my questions. Thank you. Alex Chriss: Great. Thanks, Dan. Look, we're very excited about BNPL. We see this as one of those generational shifts that's happening now. We're seeing not only in the results, but also just as we talk to customers, particularly a younger generation is moving more and more towards debit and BNPL as the way that they want to make purchases. We think we're incredibly well-positioned to win there. As you said, we're seeing good growth. We're actually seeing growth across the board. U.S. MAs are up 21% in Q3. TPV continuing to grow pretty consistently over 20%. This is a product that people love. An NPS of 80 is quite incredible. From a strategy and a share perspective, we think we have something unique. We have a brand that people know and love. We have a global scale. Not only seeing good gains in the U.S., but we continue to expand our global footprint. It just expanded to Canada within the last week or so and continuing to expand the offerings across the board and across Europe. We're also moving to where customers want to pay as well, not just online, but moving in store. We started in Germany and are now expanding that in the U.S. We really see BNPL as one of those growth drivers for us. The other big shift that I would want you to be aware of is most of our BNPL, and again, we're on track to do $40 billion or so of TPV in 2025. Most of that has come almost after they've chosen the PayPal Holdings, Inc. button choice. For many customers, that's actually too late. They want to make a choice upfront when they're making that purchase, and they want to see what that payment could look like if it was split into a few payments. Strategically, we're now meeting our customers where they are, and think we have a really exciting expansion opportunity to be upstream in presentment. Again, with a brand that people know and love, with a product that they're already familiar with and using, when we get upstream into some of these purchases, we think we have the opportunity to continue to accelerate. Very, very excited with BNPL and something that we're going to invest in to win over the next few years. Jamie S. Miller: Dan, with respect to the second part of your question, it's early. We are still working our 2026 plan, and we plan to take you through that on our February earnings call. When you look at the types of investments that we're talking about, these are targeted really around product attach and habituation. Things like merchant co-marketing, cashback offers, and rewards, and things around better placement and presentment drive right back into the business and around growth. We'll have some more information for you on that in a couple of months. Sarah: The next question comes from Sanjay Sakhrani with KBW. Your line is open. Sanjay Sakhrani: Thank you. I want to dig into the really strong growth momentum at Venmo, where the revenues have been consistently growing 20%. Alex, you mentioned sort of the multiplier of upside from here. Could you maybe map that out for us in terms of how we should think about the growth rate you've posted recently and what you could do next year and beyond, given all the different initiatives you have in place inside of Venmo? Alex Chriss: Yeah, thank you. We, Sanjay, are equally excited about the trajectory that Venmo is on. Let me just pull back and talk a little bit about where Venmo was a couple of years ago and the contours of where we're moving. Venmo a couple of years ago was an incredible P2P product, a brand in the U.S. that was a verb. It was the way a younger, very valuable demographic was moving money amongst themselves. That was a very strong starting position. The challenge was we really weren't meeting customers where they are. Money was moving from a P2P perspective, but if you were splitting a meal, you couldn't actually pay for that meal in person. You had to use a different instrument. We've expanded what Venmo means to this demographic. We're now meeting them where they are and enabling them to make purchases in person, online, move money between each other, as well as starting to think about different experiences that they're having together. I'll touch on that in a minute. If you look at what that means, it means that not only are we continuing to grow our active base, so MA is up 7% year over year at 66 million. That's very strong. Now we're starting to see real penetration into two of our monetization levers. Debit card MAs are up 43%. Pay with Venmo MAs are up 24%. This is starting to drive ARPA up. ARPA is up mid-teens year to date. When you put all of that together, I still feel like we're just scratching the surface. If I look at us versus peers from an ARPA perspective, we are a third to a quarter of what I believe our potential is over time. We're starting to now see really good adoption of the cards that we're putting in, the debit card and Pay with Venmo. All of the trajectory is moving in the right direction. What you're going to start to see on top of that is new products and services coming in. The way that we've talked about it is Venmo is a social product. It's the product that you're using oftentimes with other people. You look at the announcement that we made yesterday with Built to be able to make rent and mortgage payments. Oftentimes, this is a demographic where they're making rent payments because they're living with others. They were using Venmo after the fact to move money across. Now we're enabling them to make their rent payments and split their rent payments upfront with that kind of partnership. You are going to see more of those types of things from us over the coming months as we start to think about all of those experiences that this incredible demographic is using to be able to move money across. We think we are just scratching the surface of the ARPA that is available. We have good proof points of the monetization levers of debit card, Pay with Venmo, and now we are expanding into other experiences where folks can go. Our go-to-market campaigns are working as well. You have seen the success of the college partnerships that we put out that drove over 1 million FTUs of debit card in Q3 alone. We are really, really excited about where this is going. It is starting to bring in very, very valuable merchants as well. Whether it is eBay or Ticketmaster, Sephora, Taco Bell, DoorDash, TikTok, these are all merchants that really want access to this demographic. Venmo is the best way to get access to them. We are just getting started, excited about the growth trajectory, and we expect this to continue well into the future. Sarah: The next question comes from Darrin Peller with Wolfe Research. Your line is open. Darrin Peller: Hey, guys. Thanks, and congrats on the OpenAI and the dividend announcements. I just want to touch on the exit growth rate of the year for a minute. I know you're guiding 2% to 5% for transaction margin growth. Maybe the puts and takes of what that could compare when you think about trending into 2026 and how we should think about next year in the context of the exit rate. I know you talked about investments being made, obviously, for all these initiatives. How does that impact our thought process on operating leverage and just overall investment EPS potentially for our next year as well? Whatever you can comment. I know it's early. Thanks, guys. Jamie S. Miller: Yeah. Good morning, Darrin. I'll stay away from giving 2026 guidance, but I will give you some color on the fourth quarter transaction margin dollars and what we expect to see there. You know, to some level, we've got some impact from interest rate cuts coming in the fourth quarter. In the credit business, we've got tougher comps. You may remember that we really got that business back to growth in the fourth quarter of last year, and we just have tougher comps coming into the fourth quarter this year. I mentioned some level of investments in growth initiatives as well. With what we're seeing on macro, you know, we want to be prudent in terms of how we guide there. Across the portfolio, the product initiatives, I think what's probably important to call out is that some of this goes through transaction margin dollars. Other parts go through OpEx. Things like investment in product and tech and brand marketing, things like that go through OpEx. As we work our plan, you know, we work across all of that to really get to the right mix as we get into it. We'll take you through more in a couple of months, but hopefully, that's some color for you. Alex Chriss: Hey, Darrin. I want to, without going into the details for next year, I do though want to set a mindset for us because this is what we're thinking about internally. You know, I've mentioned, and we've talked about it so far on this call, a couple of big shifts that we see in the market. I want to call that out. We see three pretty significant generational shifts right now. One is a massive shift to digital wallets, and this is globally. The second is a real shift to Buy Now, Pay Later. Again, a younger generation that's now moving the way they're spending. This, we think, can start to take share away from credit cards and be the way that this new generation is going to start to pay. The third shift we've talked about is towards agentic commerce. These are all three massive shifts that can recast the entire commerce landscape. We think we're extremely well-positioned in all three of them. If you look at digital wallets, we have leading wallets such as PayPal Holdings, Inc. and Venmo we just talked about, and we have our expansion into PayPal World, which continues to connect wallets around the world. In Buy Now, Pay Later, we just talked about upstream presentment. We talked about the expansion and the trajectory we have there. We've talked earlier about agentic commerce and the shift that's happening in our ability to lean in and win. The mindset that we have from a company is these are generational shifts that we are well-positioned and we must win in. We are going to invest appropriately. Those investments may very well lead to some near-term headwinds in how fast transaction margin dollars and earnings grow in 2026. We'll come back with more details as we think through that. Our goal is to win these markets and set ourselves up for faster, durable growth in the future across all of commerce. I just wanted to set that tone. Sarah: The next question comes from Jason Kupferberg with Wells Fargo. Your line is open. Jason Kupferberg: Good morning, guys. Thanks for taking the question. You obviously had a nice beat here on transaction margin dollars in the quarter. It seems like the branded business came in right in line with your expectations. The OWAS revenues were quite strong. I wanted to just unpack the sources of transaction margin upside in the quarter a bit. If you can give us a relative sense on how much of that upside came from the credit products versus some of the other drivers, and then just any quick comments on how you see cadence of additional penetration of the new checkout experience moving beyond the 25% level as we move into next year. Thanks. Jamie S. Miller: Thanks, Jason. Good morning. Really, when you look at third quarter transaction margin dollar performance, we had meaningful contribution across each of branded checkout, Venmo, PSPVAS, and credit. What's important there, and we really tried to highlight this in our prepared remarks as well, is that we've got nice diversification not only on the revenue side, but on the margin sources. I think that's demonstrative of that. Alex Chriss: Yeah. On the penetration, we've talked a little bit about it. Just to set the tone, we really started in the U.S. We now are roughly 25% of global transactions. Even under that 25%, though, about half are actually optimized. We're really working through how do we nail the overall pay sheet improvement, the biometrics that we're starting to put together. When all of that comes together, the pay sheet and the biometrics, we're actually seeing conversion rates increase 2% to 5%. We know we have a winning product. It just is taking time. I'm as impatient as anyone. I want to see this move as fast as we can. We're talking about bending the curve on over half a trillion dollars of spend, and it's just taking time to get there. We have confidence, as Jamie mentioned earlier, U.S. branded checkout is growing faster year to date than it did in 2024. We know the experiences are working. We're now rolling it out in Europe. We expect that to continue through 2026. In the meantime, we're leaning into BNPL growing north of 20%, Pay with Venmo growing north of 40%. We know that overall in branded checkout, we're on the right path. It's just taking time. Sarah: The next question comes from Will Nance with Goldman Sachs. Your line is open. Will Nance: Hey, I appreciate you taking the question. I wanted to dig in a little bit on the BNPL volumes. Just a couple of questions here. I guess first, if you could just quantify some of the run rate financial impacts you're expecting on the Blue Owl offloading, just any help with the geography of those impacts on the P&L if we think about that going forward. Maybe a big picture question on the BNPL growth. Obviously, very strong. I think you've said in the past that the branded numbers or the branded volumes are roughly 40% U.S., 60% international. Do the BNPL volumes skew meaningfully differently? Any color on what you're seeing from a geographical perspective in terms of adoption and penetration of branded volumes in BNPL? Thank you. Alex Chriss: Yeah. Let me take that second part, and then Jamie can lean in. BNPL, right now, we're looking at less than 30% of originations in the U.S. This is still a very global business. It's one where, as I mentioned earlier, what we're excited about is really an expansion of our strategy into upstream presentment. We think that's going to be a big, big shift and opportunity for us, as well as a change as we start to expand into omnichannel. Being able to move Buy Now, Pay Later into in-store, you know, it's interesting. The dynamics of how we're seeing people shop is it's not just hard lines of in-store or e-commerce. There are a lot of people that are shopping on their phone and then wanting to pick up in-store, and that's where they get the opportunity to do their Buy Now, Pay Later purchase. All of this is coming together in a holistic product. Again, we're seeing the flywheel effect of BNPL as well. When somebody starts to leverage BNPL, there's a lift in engagement. Their TPV is up 35%, and we start to see their ability to use us for all purchases. This is, you know, it's very interesting just to see the dynamics of purchase behavior. I think in the past, as e-commerce and commerce in general was evolving, there were much harder lines. What we're seeing from customers now is they want to pay when they want to pay. Sometimes it's pay now. Sometimes it's pay later. Where they want to pay, online, in-store, or agentic, and how they want to pay, whether it's with their friends, whether it's with crypto, whether it's the wallet from their home country. We now have a strategy that enables us to meet them everywhere they are. Exciting trajectory there. Again, you're going to see us lean in even more into BNPL over the coming years. Jamie S. Miller: Yeah. With respect to the first part of your question on Blue Owl, we had a small impact in the quarter, but that was net neutral to operating income, which both raised margin a bit, but also was offset in OpEx. With respect to 2026, there's a small impact to 2026 OpEx in terms of increasing the run rate. Alex Chriss: Hey Sarah, let's make time. I know we're past the top of the hour, everybody, but let's make time for one last question if we can. Sarah: Thank you. Your last question will come from Timothy Chiodo with UBS. Your line is open. Timothy Chiodo: Great. Thank you. I think we've covered some great numbers on the BNPL business today. I was hoping we could round it out with a few more, and this would help us in comparability to some of the competitors in Affirm and Carta. I was hoping you could give a little bit on the mix of paying for versus some of your longer-term pay monthly loans. Also, maybe touch on the loss rates. What I think investors really want to get down to is balancing those losses and potentially more favorable funding mix for the repayment. What really is the transaction margin dollar net take rate per unit of BNPL volume so that we can compare that to metrics like RLTC as a % of GMV for Affirm? Thanks. Jamie S. Miller: Good morning, Tim. You've packed a lot into that, so I'm hoping I remember it all. Let me start with sort of thinking about unit economics on the core product. First, with respect to what type of product is it, most of this is paying for, pay monthly. We've got about an average turn on the portfolio of Buy Now, Pay Later of about 40 days. When you think about that compared to peers, the duration of the portfolio is a much higher turn than maybe some of the others you look at. Secondly, as we price it, our economics are on par or better than our peers. The thing I'd really point you to here is when we look at Buy Now, Pay Later, we do run it at the business level, but we look at it much more holistically at the total branded checkout or PayPal Holdings, Inc. level around how do we habituate and engage our consumers around the brand and across the brand and drive sustained lift or a halo across that with Buy Now, Pay Later adoption. It just drives stickiness. We really see. Alex Chriss: to 40% sort of incremental usage of branded checkout, and that stays with us as the consumer continues to spend with BNPL. We're expanding through new geographies, as Alex mentioned, really focused on driving consumer experience and marketing dollars. Hopefully, that gives you a little bit of color as to how to compare. Steve Winoker: Hey, Alex. Any final thoughts before we wrap? Alex Chriss: Thank you, everyone, for your questions. As you can hear from us, it is an exciting time at PayPal Holdings, Inc. We mentioned some of these significant generational shifts, and that makes it exciting to be at the forefront and a leader in this space. We have got the right plan. We are making great progress and delivering results along the way. I look forward to updating you as we continue to make progress. Take care, everyone. Jamie S. Miller: Thank you. This concludes today's conference. Thank you for participating. You may now disconnect.
Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the PHINIA Third Quarter 2025 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Kellen Ferris, Vice President of Investor Relations. Kellen Ferris: Thank you. Good morning, everyone. We appreciate you joining us. Our conference call materials were issued this morning and are available on PHINIA's Investor Relations website, including a slide deck that we will be referencing in our remarks. We're also broadcasting this call via webcast. Joining us today are Brady Ericson, CEO; and Chris Gropp, CFO. During this call, we will make forward-looking statements, which are based on management's current expectations and are subject to risks and uncertainties. Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. We caution listeners not to place undue reliance upon any such forward-looking statements. And with that, it is my pleasure to turn the call over to Brady. Brady Ericson: Thank you, Kellen, and thank you, everyone, for joining us this morning. I'll start with some overall comments on the third quarter and then provide some thoughts on the remainder of the year and beyond. Chris will then provide additional details on our third quarter financials and discuss our updated 2025 guidance. We will then open the call for questions. The highlights of the third quarter include the closing of our acquisition of Swedish Electromagnet Invest or SEM, our first acquisition as a public company, delivering our second quarter in a row of year-over-year net sales growth with Q3 being over 8% higher than prior year. This led to a record quarter for adjusted sales and adjusted EBITDA dollars as a public company. For the first time, our results are mostly being compared like-for-like against the prior year quarter as we had substantially exited all TSAs and contract manufacturing from our former parent in the third quarter of 2024 and nearly all of our corporate structure and costs were fully in place. And finally, with our strong adjusted free cash flow, we were able to acquire SEM and returned $41 million to shareholders via dividends and share repurchases while maintaining ample liquidity and our net leverage of 1.4x EBITDA. Let's start with SEM. In June, we announced plans to acquire the company, and we were able to quickly close the transaction in August. SEM is a 100-year-old leading provider of an advanced natural gas, hydrogen and other alternative fuel ignition systems, injector stators and linear position sensors to the commercial vehicle and off-highway sectors. With SEM, we have expanded our ignition and electronic control capabilities, broadening our system offerings. By combining PHINIA's expertise in engine management systems with SEM's deep knowledge of advanced ignition technologies, we are creating a powerful platform for innovation and efficiency. We're excited to welcome SE to the PHINIA family and look forward to growing with them. Moving to our results. Our third quarter performance reflects steady progress in executing our strategic priorities and our ongoing commitment to returning value to shareholders in the form of dividends and share buybacks. We are executing several structural initiatives to enhance efficiency and data visibility. We are consolidating 4 ERP systems into a single global SAP S/4HANA platform, which we will phase in across the globe over the next several years. Additionally, the integration of SEM and our ongoing cost savings initiatives are laying the groundwork for a more agile, efficient organization. Although the macroeconomic and industry outlook remain uncertain, we are focused on what we can control through operational and cost efficiency initiatives, providing value to our customers and driving sustainable performance across all our markets. Net sales in the quarter were a record $908 million, up 8.2% from the same period of the prior year as we benefited from the SEM contribution, favorable FX, customer pricing related to tariff recoveries and increased volume in Asia and the Americas. Excluding SEM and FX, revenue increased 5%. This is the second consecutive quarter where both segments reported higher year-over-year sales. We reported adjusted EBITDA of $133 million with a margin of 14.6%, a 30 basis point year-over-year expansion. The margin expansion was primarily due to lower R&D expenses and strong performance from our Fuel Systems segment. This was partially offset by unfavorable product mix and increased employee costs. The $133 million of EBITDA was also a quarterly record as a stand-alone company. Fuel Systems delivered a strong quarter with adjusted operating income up 33% and the margin expanding 190 basis points, which is partially diluted from the SEM acquisition. AOI was driven by research and development savings, overhead cost control measures and efficiencies. Those are partially offset by unfavorable product mix. Aftermarket margin was down 80 basis points. The decrease was primarily due to unfavorable product mix. Our combined Fuel Systems and Aftermarket segment adjusted operating margin was 14%, an 80 basis point increase when compared with the third quarter of 2024 and a new record for a quarter as a stand-alone company. Adjusted earnings per share, excluding nonoperating items as detailed in the appendix of our presentation, was $1.59, up from $1.17 in the same period of the prior year. Finally, as we disclosed in an 8-K last week, we reached an agreement with our former parent company to equitably resolve our litigation and move forward in a positive manner. We expect that a substantial portion of the settlement payments will be offset by collection of pre-spin VAT refunds, tax credits and various other tax recoveries. As a result, we do not believe that the settlement will have a material impact to our capital allocation strategies, liquidity or our net leverage ratio. This quarter marks an important milestone for PHINIA. It's our first quarter of fully comparable year-over-year results since the spin with all transitional service agreements and contract manufacturing now complete and nearly all corporate costs were in place. The third quarter reflects the true underlying performance of our business. As a general overview and consistent with recent quarters, our results in the third quarter highlight the strength and resiliency of our business in the face of a challenging and unpredictable environment. This is consistent with the benefits of having a truly diversified industrial business with diversity in customers, markets, industries and regions in which we support. Our innovation strategy remains at the center of our growth story. We continue to invest heavily in R&D, roughly $200 million annually or about 6% of sales, and our customers reimburse us for about half of that through software and calibration services, demonstrating our position as a true development partner. In turn, we are making important investments in our business that are advancing our competitive position in the key markets and allowing us to capture incremental growth opportunities and support our customers. Our brand is strong in the market and customer preferences for our products remain high. Our excellent service is supporting our growth with both new and existing customers. Let me highlight a few of the new business wins on Pages 6 and 7. The new next-generation canister technology with leak detection devices for a leading North American OEM on two hybrid light commercial vehicle programs. a brushless alternator for industrial applications to a leading off-highway OEM in Asia for mining haul trucks; a conquest gasoline direct injection, or GDi, fuel rail assembly and controller for a light passenger vehicle applications, securing our first win and new business with a major Chinese OEM. Moving next to our aftermarket business, as shown on Slide 7, we're winning both new business and expanding relationships with existing customers. Importantly, these wins are across diverse geographies. Expanding our market-leading product coverage and grew share of wallet with a major Middle Eastern customer, signed an agreement with a new large customer in the United Kingdom for braking and suspension components new starter and alternator business with additional distributors in North America. Our value proposition is differentiated and continues to attract new customers as well as deepen relationships with existing customers. As shown on Slide 8, our business is diverse by end markets and geographies. Most recently, we've expanded into the aerospace and defense industries. As I've mentioned on prior calls, this is an emerging and exciting adjacency for us. We're launching multiple programs with a key aerospace customer that leverages our existing engineers and manufacturing infrastructure. We have started initial shipments on our first aerospace business award and expect our second program to launch in early 2026. These wins validate our strategy to extend core combustion and control technologies into adjacent markets. Now moving on to Slide 9 for a discussion of capital allocation. We have taken a disciplined approach to capital allocation while remaining opportunistic about M&A. We will continue to evaluate selective M&A opportunities that enhance our product offerings in precision machine components and assemblies, electronics and controls as well as increasing our presence in key markets and industries such as aerospace, commercial vehicles, off-highway, industrial and the aftermarket. Our approach remains opportunistic and disciplined. Consistent with our capital allocation priorities to invest in our business for long-term profitable growth, we invested $26 million in capital expenditures during the third quarter with funds expended primarily on new tooling and equipment. Also on the capital allocation front, during the quarter, we returned $41 million to our shareholders, including $11 million in quarterly dividends and $30 million in share repurchases. We have $194 million remaining under our current repurchase authorization, and we expect to continue to evaluate the best use of capital on a quarterly basis. Since the spin-off in July of '23, we repurchased approximately 20% of our outstanding shares. Even with the acquisition of SEM, capital investment in our operations and capital return to shareholders, our balance sheet remains solid with cash and cash equivalents of $349 million, total liquidity of approximately $900 million and our net leverage ratio remaining at 1.4x, which is under our target of approximately 1.5x. This was possible due to our strong adjusted free cash flow of $104 million in the third quarter. As we look to the remainder of the year, we see some market and tariff risk as CV tariffs are coming into effect on November 1. Importantly, we will continue to work with our customers on recovery and similar to the auto tariffs, we expect to substantially recoup the costs from our customers because CV OEMs are also qualifying for the same 3.5% rebate as are the auto OEMs. We have adjusted our 2025 outlook to account for the SEM acquisition and some external factors. On the revenue front, the midpoint of our outlook is up $40 million from our prior guide, driven by approximately $15 million from SEM and the remainder from favorable FX, volumes and pricing. The midpoint of our adjusted EBITDA guidance is up slightly as it continues to be constrained by tariff-related revenue that carries 0 margin. Adjusted free cash flow has been a good story for us, and we're raising the midpoint of our 2025 outlook by $10 million. To wrap up, we've continued to build momentum across our diversified end markets while maintaining disciplined cost and cash management. Our teams are executing our long-term strategy that is focused on product leadership, stable growth, financial discipline and total shareholder returns. With that, I'll hand it over to Chris, who will walk us through our Q3 results and discuss our outlook for this year. Chris? Chris Gropp: Thanks, Brady, and thank you all for joining us this morning. As a reminder, reconciliations of all non-GAAP financial measures that I will discuss can be found in today's press release and in the presentation, both of which are on our website. Beginning on Slide 11. Our financial results in the quarter were solid and include the contribution from SEM, which closed in August, as Brady mentioned. The external environment has not changed dramatically from the prior quarters. However, we continue to see strength in our OE sales across the globe, enhanced by strength in aftermarket sales in select markets. We are pleased that the teams have responded appropriately and delivered strong revenue and EBITDA in the quarter. Specifically, we generated $908 million in net sales, an increase of 8.2% versus a year ago. Our top line benefited from favorable foreign exchange tailwinds of $19 million and an $8 million contribution from SEM. Excluding these impacts, net sales increased 5%, a result of better pricing, tariff recovery and increased volumes in Asia and the Americas. Let me now bridge our adjusted revenue and adjusted EBITDA for the third quarter, which you can find on Pages 11 through 13 in the presentation. Fuel Systems segment sales were up 13.4%, including prior year contract manufacturing sales or 13.7%, excluding the effect of contract manufacturing, which ended in Q3 of 2024. The increase in Fuel Systems revenue was also attributable to foreign exchange, customer tariff recoveries and the contribution from SEM of $8 million. Segment margin was 13.3%, up 190 basis points year-over-year, primarily due to supply chain savings, productivity improvements and reduced engineering costs. Our aftermarket segment sales were up slightly year-over-year on positive European results, combined with a small amount of tariff recovery. This revenue was partially offset by lower volumes in North America and Asia. With respect to profitability, the aftermarket segment margin of 15% was down 80 basis points from the prior year and impacted by unfavorable product mix. On a consolidated basis, our Q3 segment adjusted operating margin and adjusted operating income were healthy at 14% or up 80 basis points and 11.1% or up 70 basis points year-over-year, respectively. Our teams worked hard to cut costs and improve productivity despite some volatile market conditions. Our adjusted net earnings per diluted share in the third quarter were $1.59, an increase of $0.42 per share for the quarter. These amounts exclude nonoperating items, which are described in the appendix of our presentation and influenced by lower share count as we continued share repurchases. On August 1, our team was excited to welcome new colleagues to the PHINIA family with the close of the SEM acquisition. Total paid was $47 million, comprised of $15 million in cash proceeds to seller and $32 million used to extinguish debt assumed through the acquisition. While we expect SEM to contribute sales annually of approximately $50 million and adjusted operating income of $10 million, we anticipate the first year sales and resulting returns may face some initial headwinds given SEM's reliance on a challenged CV market and potential distractions from ongoing integration efforts. In addition to SEM, we settled a claim regarding the tax matters agreement with our former parent following the close of the quarter. Our full year 2025 guidance, which we will discuss, has incorporated the impacts of this settlement appropriately. We expect that a substantial portion of the settlement payments will be funded through refund payments we receive from various tax authorities related to certain indirect tax payments made prior to the spin-off with the remaining portion funded with available liquidity. As described in last week's 8-K, the settlement with our former parent also provides clarification on the company's ability to obtain and use the benefit of certain tax attributes. This has the potential of providing us with additional flexibility as we continue to optimize our tax structure. Intense focus by our teams delivered a strong balance sheet, providing substantial current liquidity despite all the extra activities in the quarter. Cash and cash equivalents were $349 million, while available capacity under our credit facility remained at approximately $0.5 billion for a resulting liquidity of approximately $900 million. Cash flow from operations was $119 million in the quarter, and adjusted free cash flow was $104 million, a significant increase from $60 million in the same period of the prior year. We continue to remain confident in our ability to generate free cash flow to support our capital allocation priorities. As such, we paid $11 million in dividends and repurchased $30 million in our stock in Q3, bringing our year-to-date returns to shareholders to $202 million. This balance consists of $32 million in dividends and $170 million in share repurchases. Now moving to Slide 14 for a discussion of our refined full year 2025 outlook. As Brady indicated, we have adjusted our outlook slightly to account for the acquisition of SEM, minor tariff changes and other macroeconomic factors. We are adjusting our 2025 sales guide, increasing the high end of the guide to $3.45 billion and bringing up the low end of guide to $3.39 billion for an increased midpoint of $3.42 billion. We are narrowing our adjusted EBITDA range with a high end of $480 million and low end of $465 million for a slightly higher midpoint of $473 million. In addition, we are taking the midpoint of our adjusted free cash flow up by $10 million to $190 million and improving our tax rate for the second quarter in a row. Our expected adjusted tax rate is now projected to be in an improved 33% to 37% range from the prior projection of 36% to 40% as ongoing tax structuring projects gain traction and progress. We do not expect this change to have a material impact on cash taxes in 2025. Overall, we continue to be confident in delivery of solid returns as we deal with 0 or low-margin tariff recoveries, choppy markets and foreign exchange movements. As Brady mentioned, as we look forward, we are also disclosing implementation of a strategic effort to align our legacy structure to more effectively match the business as it develops globally. As such, we anticipate a step-up in restructuring charges, approximating $35 million in infrastructure rightsizing, professional fees and other costs to yield an estimated $25 million in annual savings, a less than 2-year payback once all projects are fully implemented. This is complementary to our normal ongoing work to ensure our operations and corporate functions are agile and meet the future needs of our invested constituencies. We are operating from a strong financial foundation and executing on clear strategic priorities. In closing, we remain firmly committed to building sustainable value for all our stakeholders. Thank you all for your attention today, and we will now move to the Q&A portion of our call. Operator, please open the lines for questions. Operator: [Operator Instructions] We'll take our first question from Bobby Brooks at Northland Capital Markets. Robert Brooks: So excluding the acquisition and currency impact, sales were up 5.1% year-over-year, a really, really healthy number. I was just curious if we could dive a little bit deeper into that 5.1%. Like how much of that was pricing and tariff recoveries versus increased volumes or even just new products being shipped out? Brady Ericson: Yes. I mean it's a balance between kind of all three of them. I mean pricing and tariffs is going to be about the same as volume is the same. There's a little bit of FX kind of headwind. So not a lot of difference between the three. It's kind of equally balanced. Robert Brooks: Got it. Got it. And then just with the pricing, is that pricing -- like you said pricing and then tariff recovery, so it seems like those are two separate silos. On the pricing, is it reasonable to think that, that's going to be sticky moving forward? Or how should we think about that? Brady Ericson: Yes. I mean obviously, they're linked directly because as we have tariffs, we're passing on price, and so that's the bulk of it. And that's going to be sticky because unless the tariffs are going away, it's going to stay there. And again, that's one of the reasons why our EBITDA is not going up as much is because those are basically at breakeven EBITDA or margin and a little bit of headwind in that. But we don't see it going away. We think it's going to be there. We just got to continue to drive productivity and other efficiency improvements to get our margin back to where we expected. Chris Gropp: Bobby, on the tariffs, one of -- some of the things that we have been doing is in lieu of tariff pass-through, we've actually gotten concessions on some other areas. So I mean, we've gotten pricing. Obviously, on the aftermarket, it is more of a price increase game. But it's not huge. It's not material. It's just a couple of million dollars when you look at the pricing and strip out just the tariff going through, just trying to make sure we get recovery on all of those. Robert Brooks: Got it. That's very helpful color. And then last one for me. It's great to hear you begin shipping components for your first aerospace program. That's really exciting news. Do you think achieving this milestone will sort of serve as a cowbell to alert other aerospace companies, your legit and certified potential supplier? And maybe asked a different way, do you feel there are potential customers waiting in the wings to see you successfully deliver those components for the first couple of projects before stepping in and placing an order? Brady Ericson: Yes. And absolutely true. I think ever since we've announced them and then at the Paris Air Show in June, the level of interest, the RFIs and RFQs coming to us has gone up substantially. And as I mentioned, I think in the last call, we fully expect to get additional awards here in the coming quarters that will continue to support that expansion. And so we're having conversations with pretty much every of the major engine manufacturers out there and see some good opportunities for us to continue to grow in that space. Operator: We'll move next to Joseph Spak at UBS. Joseph Spak: I wanted to -- I had a couple of questions. I guess, one, maybe just on the implied guidance in the fourth quarter, maybe a little bit softer than expectations. Just wondering if you could give us a little bit more detailed commentary on the organic end market. And then related to the guidance, but also just want to understand the business going forward, it implies the guidance about $7 million in the fourth quarter from SEM, which is, I guess, $1 million below the third quarter despite it being a full quarter in the fourth quarter. So is that -- is there some seasonality to that? Or is that some of that sort of softer demand you talked about and for that first year of owning the business? And if so, is $7 million, $8 million a good sort of run rate to start to think about for '26? Brady Ericson: Sure. On Q4, I think we're -- we always talk about seasonality in general, and we haven't had a normal season for a while. But I think this is looking to be more a normal seasonality where Q1 and Q4 are lighter. I think our Q1 this year was probably lighter than normal. I think Q4 typically is anywhere from 5% or so lighter than Q2 and Q3. And so I think we're kind of getting back to that normal seasonality. Obviously, still a little bit of noise here in Q4 on volumes on what people are going to do around shutdowns. So we're kind of taking that into account as well and making sure that we're in a good position on Q4 in general. SEM, we're still kind of learning their seasonality. We are finding that their second half of the year is a lot lighter than their first half of the year, along with a little CV softness. They tend to -- they shut down in the summer and don't come back until later in August and the expectation they're probably going to shut down earlier in December. So their windows in the second half tend to be a little bit lighter. We're still confident that they're going to -- as we mentioned earlier, around that $50 million. we're confident they're going to kind of get back there when the market recovers a bit and see them delivering on our expectations. We just have the initial kind of hit right now. We've got a number of folks kind of going in there, getting their systems and processes up to speed and probably adding more cost to their cost structure and then beginning to kind of ramp them up to what our expectations are. So not a lot of material difference to the overall company, but we do see them coming back stronger next year as the market recovers, and we'll provide more insight in our Investor Day meeting next year as we give guide for 2026, and we'll give that additional clarity on SEM as well. Chris Gropp: And Joe, I'll add a little bit to it because I think that with so much going on in the market, our units are just being very, very cautious on what they're putting out there because you named the issue. I mean we are not being hit materially by any -- like the JLR issues. That's not a big issue for us. But -- CV tariffs coming in, there's a lot of things out there. None of them hit us materially, but our units get a little cautious. And so we're just trying to be a little conservative in Q4... Brady Ericson: The other one is the aluminum supply issue for Ford. Joseph Spak: Very fair. Fair enough. I guess just in the quarter, Chris, you sort of talked about some of the factors driving the results. Specifically in Fuel Systems, I just want to understand, you had plus $37 million volume mix only $1 million flowed through to EBIT. And I know you sort of talked about negative mix, but it feels like there has to be something more than that in there. Is there anything else we should be thinking about that sort of really weighed on the flow-through there? Chris Gropp: No. A lot of it, Joe, has to do with -- if you see, we actually specifically call out ECU because as a part of the separation from BorgWarner, we sell ECU from them, and that literally has no margin on it. Now those contracts are coming up in the next couple of years or those restrictions come out, and we're relooking at that. But at the end of the day, ECUs, those components are very expensive, and they just -- if we're going to pass them through or we're looking for other ways of do they sell directly. So that's part of it. But if you also look, yes, the contribution margin is low, but the units -- the contribution is based on standard. If you look at the other two lines where you see really good productivity and other costs, those are coming in much better, which means my standard is going to get better next year. So it will shift. As long as my units are covering it, whether if my contribution margin is low and they're covering it with productivity and other cost reductions, I'm okay with that because it just means that I'm getting better, my products are getting cheaper because the units are doing what they should be doing. Joseph Spak: That's helpful color on these. If I could sneak one more in. Just on Slide 8, I noticed you put in power generation and maybe that's been in there all along, but there's definitely been a little bit more focus on turbochargers into power generators and almost all modern turbos have direct injection. Is there -- has there been any increased inquiries into that business? Or is that a growing opportunity and pipeline for you? Brady Ericson: Yes. I mean we're -- that's kind of we throw that in the industrial side as well, whether that's the power generation, the linear generator that we are working on for hydrogen to gen sets, both small to medium and large plug-in or range extending EV power generation units. That's an area we're starting to pick up more business. And again, I think we'll -- as we may have highlighted, we'll probably going to split out our CV and other OE next year as well because that's starting to become a meaningful portion of our revenue. So we'll probably add some more disclosure on that as we head into next year. Operator: [Operator Instructions] We'll go next to Jake Scholl at BNP. Thomas Scholl: Congrats on a strong quarter. I just wanted to circle back to the Ford fuel pump recall from a few months ago. Now that you guys have had a chance to work through that, can you talk about kind of what impact you're seeing on the business, especially on the cash side? Brady Ericson: No cash impacts, no update, still no concerns on our side. We haven't adjusted our warranty accruals and no cash impact at this point. Thomas Scholl: All right. And then can you just provide some color on the timing of the restructuring program you announced? When do you expect that to come out? And then when do you expect to fully realize the $25 million in savings? Brady Ericson: Yes. I mean we see that it's starting to roll out now. We're starting to get -- I think the initial go-live, I think it's starting in 2026. It's going to take us a few years. There's a number of different sites that are at different stages of I guess, their system capabilities that we'll be kind of rolling out. But I think it's fully, I think, Chris, and fully completed by 2028 over that time period. So we see it's going to be a multiyear. It was just -- it was a bigger number than normal. And so we thought it was prudent to go ahead and kind of call it out given the multiyear nature of it and the benefits that we expect to see. And this is also just, I would say, the next stage of us just continuing to drive efficiency and rightsizing the number of data centers, the number of complexity we have in software and systems and really just consolidating that, consolidating them into one instance, one reducing the number of redundant software systems that we have and licenses and really driving a lot of efficiency in our operations and in the systems that we're using. So when we got spun out, obviously, it was old DELCO REMY, old DELPHI Automotive, parts of BorgWarner and now SEM. They're all kind of different. And so we're going to establish a kind of a core standard that then is going to be the standard template that we will roll out for future acquisitions and future locations as well and make it a lot simpler for us. Operator: And that concludes our Q&A session. I will now turn the conference back over to Brady for closing remarks. Brady Ericson: Great. Thanks, everybody, for joining. And just again, a shout out to all of our PHINIA employees, a really great quarter. As we mentioned, with record sales, some great cash flow, first acquisition, continuing to give cash back to our shareholders through dividends and repurchases and still maintaining a very robust balance sheet. And actually, I think our cash balances are up from the prior quarter after the acquisition and the share repurchases and the dividend. So really proud of the team. Looking forward to closing out the year in a very positive manner and continuing the momentum that we have. So thank you very much for joining. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Hello, everyone, and welcome to the Independent Bank Corporation Reports 2025 Third Quarter Results. My name is Ezra, and I will be your coordinator today. [Operator Instructions] I will now hand you over to Brad Kessel, President and CEO, to begin. Please go ahead. William Kessel: Good morning, and welcome to today's call. Thank you for joining us for Independent Bank Corporation's conference call and webcast to discuss the company's third quarter 2025 results. I am Brad Kessel, President and Chief Executive Officer. Joining me this morning is Gavin Mohr, EVP and Chief Financial Officer; and Joel Rahn, Executive Vice President and Head of our Commercial Banking. Before we begin today's call, I would like to direct you to the important information on Page 2 of our presentation, specifically, the cautionary note regarding forward-looking statements. If anyone does not already have a copy of the press release issued by us today can be accessed at our website, independentbank.com. The agenda for today's call will include prepared remarks, followed by a question-and-answer session and then closing remarks. I am pleased to report on our third quarter results as we advance our mission of inspiring financial independence today with tomorrow in mind. Our vision is a future where people approach their finances with confidence, clarity and the determination to succeed. Our core values of courage, drive integrity, people focused and teamwork are the blueprint our employees live by. We strive to be Michigan's most people focused bank. Today, Independent Bank Corporation reported third quarter 2025 net income of $17.5 million or $0.84 per diluted share versus net income of $13.8 million or $0.65 per diluted share in the prior year period. I am proud of our team's performance and pleased to report continued momentum for most of our key metrics. Loan balances grew at an annualized rate of 3.2% and total deposits less brokered time deposits increased by 13% annualized. We achieved growth in our net interest income, both sequentially and year-over-year. In fact, this is the ninth consecutive quarter we have increased our net interest income. Our net interest margin displayed a small decline on a linked quarter basis primarily due to the acceleration of unamortized issuance costs on sub debt we redeemed in the third quarter. I would characterize the NIM is stable when adjusting for this event. Expense management remains a strength as reflected in our third quarter efficiency ratio of 58.86%, which demonstrates the effectiveness of our recent investments. These solid fundamentals supported a 10.2% year-over-year increase in tangible common equity per share and strong returns, including a return on average assets of 1.27% and a return on average equity of 14.57% for the quarter. Despite market uncertainty, our credit quality remains strong with large credits at low levels. Nonperforming assets increased from 0.16% of total assets to 0.38% on a quarter-over-quarter basis, primarily as a result of one commercial relationship where the borrower is experiencing financial difficulties. Our annualized net charge-offs continue at historically low levels, 4 basis points through the first 3 quarters of 2025. The allowance for credit also stands at 1.49% of total loans. I am optimistic, we'll finish 2025 strong and I'm excited about our prospects to grow our customer base and earnings in 2026. Moving to Page 5 of our presentation. Total deposits as of September 30, 2025, we're now $4.9 billion. Overall, core deposits increased $148.2 million during the third quarter of 2025. On a linked quarter basis, business deposits increased by $67.5 million. Municipal deposits increased by $82.5 million. These were offset by a small decrease in retail deposits. The deposit base today is comprised of 46% retail, 37% commercial and 17% municipal. All three portfolios are up on a year-over-year basis. On Page 6, we have included in our presentation a historical view of our cost of funds as compared to the Fed fund spot rate and the Fed effective rate. For the quarter, our total cost of funds increased by just 6 basis points to 1.82%. At this time, I would like to turn the presentation over to Joel Rahn to share a few comments on the success we are having in growing our loan portfolios and provide an update on our credit metrics. Joel Rahn: Well, thanks, Brad, and good morning, everyone. On Page 7, we share an update of the loan activity for the quarter. We had another solid quarter of commercial loan growth with that portfolio increasing $57 million. Total loans grew $33.9 million as both the mortgage and consumer loan portfolio is contracted in the quarter. This is attributable to seasonality as well as disciplined underwriting. . Year-to-date, we've grown the commercial loan portfolio of $188 million, representing 12.9% annualized growth. Our ongoing strategic investment in commercial banking talent continues to supplement our growth. We added three experienced commercial bankers in the third quarter, bringing our team to 50 bankers across our statewide footprint. As noted in previous quarters, our new loan production in each segment continues to come on at yields above the respective portfolio yield. Within the commercial loan activity, the mix of C&I lending versus Investment Real Estate for the quarter was 58% and 42%, respectively. Looking ahead, our commercial pipeline remains robust, so we expect strong loan origination in the fourth quarter. Page 8 provides detail on our commercial loan portfolio. There's not been any significant shift in our portfolio concentrations with the portfolio remaining very well diversified. C&I lending continues to be our primary focus. And as noted on the graph, that category comprises 70% of our overall commercial portfolio at 9/30. Our largest segment of the C&I category is retail, which includes a variety of truck equipment and marine dealerships and is performing well. Another significant C&I category is manufacturing which contains $142 million or 6.7% of the portfolio of automotive industry exposure that we continue to monitor closely for any tariff-related impact. Key credit quality metrics and trends are outlined on Page 9. Overall, credit quality continues to be very good, as Brad alluded to a moment ago. Total nonperforming loans were $20.4 million or 48 basis points of total loans at quarter end, up from 20 basis points at 6/30. This is primarily due to one investment real estate commercial relationship as transit is in workout. Past due loans totaled $5.1 million or 12 basis points, down slightly from 16 basis points at 6/30. It's not reflected on this slide, but worth noting that our net charge-offs are $1.2 million year-to-date or 4 basis points on an annualized basis. At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder of the year. Gavin Mohr: Thanks, Joel, and good morning, everyone. I'm starting on Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. The reduction in our total risk-based capital ratio for the quarter was primarily due to the payoff of $40 million of subordinated debt during the quarter. Turning to Page 11. Net interest income increased $3.5 million from the year ago period. Our tax equivalent net interest margin was 3.54% during the third quarter of 2025, compared to 3.37% in the third quarter of 2024 and down 4 basis points from the second quarter of 2025. The decrease in net interest margin on a linked quarter basis is primarily due to the acceleration of unamortized issuance costs on the subordinated debt we redeemed in the third quarter. Average interest-earning assets were $5.16 billion in the third quarter of 2025 compared to $4.99 billion in the year ago quarter and $5.04 billion in the second quarter of 2025. Page 12 contains a more detailed analysis of the linked quarter decrease in net interest -- or increase in net interest income and the net interest margin. On a linked quarter basis, our third quarter '25 net interest margin was positively impacted by two factors: the change in Earning Asset Mix was 2 basis points and an increase in Earning Asset Yield was 1 basis points. These were offset by a change in funding cost of 4 basis points and the acceleration of unamortized issuance cost on the subordinated debt we redeemed in the third quarter of 3 basis points. On Page 13, we provide details on the institution's interest rate risk position, the comparative simulation analysis for the third quarter '25 and the second quarter of '25 calculates the change in net interest income over the next 12 months under five rate scenarios. All scenarios assume a static balance sheet. The base rate scenario applies the spot yield curve from the valuation date. The shocks in areas consider immediate permanent and parallel rate changes. The base case modeled NII slightly higher during the quarter given earning asset growth and slight margin expansion. Asset yields were augmented by a shift in asset mix with good commercial loan growth partially funded by runoff of lower-yielding investments, mortgages and consumer loans, an increase in overnight liquidity offset some of this mix benefit. Funding costs benefited from the retirement of the holding company subordinated debt issuance. The NII sensitivity position shows slightly more exposure to declining rate environment. Asset repricing increased due to strong growth in variable rate commercial loans, HELOCs and overnight liquidity. Some of the increase in asset repricing was offset by purchase floors, currently 38.4% of the assets repriced in 1 month and 49.8% reprice in the next 12 months. Moving on to Page 14, and Noninterest income totaled $11.9 million in the third quarter of 2025 as compared to $9.5 million in the year ago quarter and $11.3 million in the second quarter of 2025. Third quarter net gains on mortgage loans totaled $1.5 million compared to $2.2 million in the third quarter of '24. The decrease is due to lower profit margins and a lower volume of loan sales. Positively impacting noninterest income was $0.1 million gain on mortgage loan servicing net. This comprised of $0.6 million or $0.02 per diluted share after tax loss due to change in price $0.9 million decrease due to paydowns and a $0.1 million loss on sale of originated servicing rights that was offset by $1.6 million of servicing revenue for the third quarter 2025. The decline in servicing revenue compared to the prior year quarter is attributed to the sale of approximately $931 million of mortgage servicing rights on January 31, 2025. As detailed on Page 15, our noninterest expense totaled $34.1 million in the third quarter of 2025 as compared to $32.6 million in the year-ago quarter and $33.8 million in the second quarter of 2025. Compensation expense increased $1.1 million, primarily due to higher salary costs and higher medical costs that were partially offset by lower incentive-based compensation expense and higher deferred loan origination costs due to higher commercial and mortgage on production. Data processing costs increased by $0.4 million from the prior year period, primarily due to core data processor annual asset growth and CPI-related cost increases as well as the annual increases and other software solutions. Page 16 is our update for our 2025 outlook to see how our actual performance during the third quarter compared to the original outlook that we provided in January 2025. Our outlook estimated loan growth in the mid single digits. Loans increased $33.9 million in the third quarter, a 2025 or 3.2% annualized, which is below our forecasted range. Commercial loans increased in the third quarter of 2025, while mortgage and installment loans decreased. Year-to-date loan growth is $159.5 million or 5.3% annualized, which is within our forecasted range. Third quarter 2025 net interest income increased 8.4% over 2024, which is within our forecasted range of 8% to 9%. The net interest margin was 3.54% for the current quarter and 3.37% for the prior year quarter and down 4 basis points from a linked quarter. The third quarter 2025 provision for credit losses was an expense of $2 million, which is been our forecasted range. Moving on to Page 17. Noninterest income totaled $11.9 million in the third quarter of 2025, which was below our forecasted range of $12 million to $13 million in the third quarter. Third quarter 2025 mortgage loan originations, sales and gains totaled $145.6 million, $101.6 million and $1.5 million, respectively, Mortgage loan servicing net generated a gain of $0.1 million in the third quarter of 2025, which is below our forecasted target. Noninterest expense was $34.1 million in the third quarter, below our forecasted range of $34.5 million to $35.5 million. Our effective income tax rate was 17.3% for the third quarter of 2025. Lastly, there were 13,732 shares of common stock repurchased for an aggregate purchase price, $0.4 million in the third quarter. That concludes my prepared remarks. I would now like to turn the call back over to Brad. William Kessel: Thanks, Gavin. We've built a strong community bank franchise, which positions us well to effectively manage through a variety of economic environments, and continue delivering strong and consistent results for our shareholders. As we move through the last quarter of 2025 and head into 2026, our focus will be continuing to invest in our team investing in and leveraging our technology while striving to be Michigan's most people focused bank. At this point, we would like to now open up the call for questions. Operator: [Operator Instructions] Our first question comes from Brendan Nosal with Hovde. Brendan Nosal: Just starting out here on this quarter's commercial banking hires, I think you said that there were three new hires this quarter. Can you just offer some color on what the area of expertise is within commercial specifically, what markets they were added? And what sort of institutions did they come from? Joel Rahn: Yes, Brendan, this is Joel. I'll take that one. The -- all three of them, very experienced at a minimum level of experience was years, and two of them are over 20 years in Commercial Banking, all in Southeast Michigan. And -- which is one of the areas that we look at strategically, no surprise, is continuing our growth. It's the largest MSA that our bank operates in. And two came from very large regional and one came from a small regional. Brendan Nosal: Okay. Fantastic. Maybe just to piggyback off that. Can you just talk about the continued opportunity set from market dislocation just given another large deal in the state of Michigan, whether it's on the client side or opportunities for additional banker ads? Joel Rahn: Sure. That recipe has worked really well for us, Brendan, being an attractive culture for bankers that find themselves part of a larger organization, primarily that want to get back to more of a community banking organization. That has worked well for us. We continue to look for those opportunities. And it looks like the market is going to provide more of those as the industry continues to consolidate. So we think there is ongoing opportunity for us to garner talent. And strategically commercial banking relationships as well. Brendan Nosal: Okay. Perfect. I'm going to sneak one more in here. Just looking at funding costs for the quarter, a couple of basis points of an uptick, which I've certainly seen from a handful of others, if not many others this quarter. Maybe just talk about how competitive the environment for core funding is in your markets and how you think you and the market at large in your state will respond to additional Fed cuts? Gavin Mohr: Well, I'll let -- our growth for the quarter -- Brendan, this is Gavin. Thanks for the question. Our growth for the quarter came in municipal and commercial. So I'll let Joel maybe talk high level how his treasury management team is viewing that and then I can maybe fill in if I have something to add. Joel Rahn: It's no surprise. It's quite competitive. And we just continue to focus our we can't control the overall market. We've got to be competitive to win those relationships. But our team is just focused on comprehensive relationships to really grow both sides of our balance sheet. So the commercial team, including our country management group is very focused, and we continue to make good inroads in the market. So -- but yes, it's competitive, and we're not seeing that landscape changing. Gavin Mohr: I would add, Brendan, for the 6 basis point increase for that had to do with change in mix. And then two of it was just where deposits were landing in the tiers. So we saw a very, very healthy deposit growth. A lot of those were municipal funds tax collection for the quarter, and they were -- they're slotting in those deposits at the higher rate tiers within the product offering. Operator: Our next question comes from Nathan Race with Piper Sandler. Nathan Race: Yes. So maybe a question for Gavin to start just starting on the margin. If we strip out the impact from the sub debt, the margin was roughly stable and I think last quarter, you mentioned one or two cuts in the back half wouldn't have a significant impact on the margin. So I guess do you still feel the margin can remain roughly stable even with an additional cut in December and just how you're thinking about the margin in 2026? Gavin Mohr: Yes, I do. So A couple of comments on the quarter. We had -- we disclosed the 3 basis points relative to the cost associated with the sub debt issuance. And the other piece, we were a little heavier in liquidity than we maybe would target. So if I said we had excess liquidity of $50 million. That had another 3 basis points of impact on the margin for the quarter. So going in here to the year-end with the forecasted cuts, I do anticipate to expect the margin to be fairly stable or in this -- around where we're at today. For the 2026, just on a longer-term horizon, we still have benefits of the remixing coming from just lower yielding assets. and then the repricing effect of lower-yielding assets. So the there's still tailwind there that we're really optimistic about. Nathan Race: And could you remind us how much you have in terms of securities or lower-yielding fixed-rate loans repricing over maybe the next 12 months? Gavin Mohr: Yes. So the security portfolio is about $138 million at 3%. And then if I look at fixed rate loans, I'll just give you -- I don't really have it broken out in the strata by yield, but fixed rate loans will be -- in total, there'll be $438 million repricing in the next year. With an exit rate of 5.59%. So we're calculating that's about 120 basis points of pickup. Nathan Race: Got it. That's super helpful. Maybe just switching to credit. I was wondering if you could expand on the one investment real estate commercial relationship you called out that migrated to nonaccrual during the quarter, maybe just what industry, how large is the exposure? And if there was a specific reserve allocated during the quarter? And just any color there? William Kessel: Nathan, this is Brad. I'll jump in on that. So first off, I'd say that we've had -- the portfolio has been so clean for so many quarters, year after year. That this one stands out. And so it -- we are probably going to be somewhat, I'd say not sharing a lot on the details other than -- we feel like we are more than adequately reserved on the credit, and we are working with the borrower to get from point A to point B. And and we're optimistic we can get through this. So I think we'll limit our comments to that. Operator: Our next question comes from Peter Winter with D.A. Davidson. Peter Winter: I wanted to just follow up on credit. It really has garnered quite a bit of attention this quarter that we had a few profile loans that went bad, but the question is, are you starting to see any signs of credit weakness in commercial borrowers are as you approve loans during loan committee. I mean if I think about economic growth, it's slowing job growth has been weakening, just credit in general, please. William Kessel: Yes. Peter, that's a great -- I'm going to let Joel take the first shot of that and what you just share what you're seeing. Joel Rahn: Yes. Peter, I appreciate the question. And as Brad said, we've got to -- and we were very straightforward to say it's one primary borrower that has popped up this quarter. If I look at the rest -- or as I look at the rest of our customer base, performance at the individual business level still continues to be solid. I don't have any sort of systemic industry-specific issues that we're watching. And our watch list, absent the one credit that we've highlighted, our watch list overall percentage is still extremely low by historical standards. So we're just -- we're not seeing it. And which I'm pleased about. But yes, the economy in Michigan is still -- I would characterize it as stable. We watched the automotive industry very carefully, especially in the early part of this year. That actually has held up quite well. Our team was just updated with an automotive industry analyst comments last week at a team meeting. And there's some turmoil within the supply base in terms of EV versus internal combustion. So if someone had all their eggs in the EV basket, they might be feeling strained. We've not seen that in our customer base. It's pretty well diversified. And so the Michigan economy, I would characterize is still very stable. William Kessel: Yes. And I think it's really good to all. And I would just put in context, so the loan book today is $4.2 billion. What Joel was referencing was 50% of that is commercial. And then the other, the balance, 36% is mortgage, and then we have 13% installment. An exercise that we do several times per year is rescore the credit scores and the entire portfolio of retail, so mortgage and installment. And in the rescores, we're not seeing really a significant decline in our borrowers' payment performance. So we feel good about that. So we like the diversity. And we are -- continue to be very bullish about Michigan and in our outlook as we go forward. Peter Winter: Great. That's great color. If I could follow up. You guys have done a really nice job managing expenses. I mean it's well on track to come in below guidance that you outlined in January. Can you maybe talk about expense management because expenses have been coming in below the low end of the quarterly range each quarter, and then secondly, I realize it's early, but maybe Gavin, any color you could provide in terms of expense growth next year? Gavin Mohr: Yes. So I'll start with the second question. We are right in the middle of getting the budget. We're in the second round of drafts for the budget of next year. So things are still moving around. So I'm hesitant to comment there at this point in time. But I will say that, as you're aware, a big portion of our compensation expense is based on incentive compensation. And so we've seen this year -- at this point in time this year, if you're comparing us to last year, the expected payout is coming in lower than we were at this point in time last year. So that's having an impact on it for 2025. The other thing I would just say is we continue to try to manage the technology spend is as good as well as we can. We are continuing to invest in technology. And then with that, we're finding the efficiencies and usually through not replacing individuals through attrition. So yes, I think we're spending a lot of time in that area, and we hope to continue to be able to contain it. Peter Winter: Got it. And then just one last question, just a quick question. Just -- Gavin, would you a chance to have the spot rate on interest-bearing deposits? Gavin Mohr: I do. So as of 9/30, the spot rates on total interest-bearing was $217 in total for -- does that help? Operator: Thank you very much. That concludes the Q&A session. I will now hand back over to Brad for any closing remarks. William Kessel: Thanks, Ezra. In closing, I would like to thank our Board of Directors and our senior management for their support and leadership. Also I want to thank all our associates and continue to be so proud of the job being done by each member of our team each member -- each team member again, his or her own way continues to do their part toward our common goal of guiding our customers to be independent. Finally, I would like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. Have a great day. Operator: Thank you very much, Brad, and thank you to Gavin and Joel, for being speakers on today's line. Thank you, everyone, for joining. You may now disconnect your lines.
Operator: Good day, and welcome to the Third Quarter 2025 Zebra Technologies' Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead. Michael Steele: Good morning, and welcome to Zebra's third quarter earnings conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least 1 year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially, and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of the slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year on a constant currency basis and exclude results from recently acquired businesses for 12 months. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Bill will begin with a discussion of our third quarter results, Nathan will then provide additional detail and discuss our outlook. Bill will conclude with progress on advancing our strategic priorities. Following the prepared remarks, Bill and Nathan will take your questions. Now let's turn to Slide 4 as I hand it over to Bill. William Burns: Thank you, Mike. Good morning, and thank you for joining us. Our team executed well in the third quarter, delivering results above our outlook driven by solid demand, lower-than-expected tariffs and strong operating expense leverage. For the quarter, we realized sales of $1.3 billion, a 5% increase from the prior year, and adjusted EBITDA margin of 21.6%, a 20 basis point improvement, and non-GAAP diluted earnings per share of $3.88, which was 11% higher than the prior year. We realized solid growth in our Asia Pacific, Latin America and North America regions and had relative outperformance in printing, mobile computing and RFID. Our retail and e-commerce end market was a bright spot. Healthcare cycled a strong compare and manufacturing remained relatively soft. We achieved double-digit earnings growth by driving operational efficiencies as we continue to invest in our leading portfolio of solutions. While we see growth across most of our business, our customers continue to navigate in uncertain macro environment, resulting in uneven demand across some geographies and vertical markets. As we look at our broader business prospects, we are excited about our profitable growth opportunities, including our recent acquisition of Elo Touch Solutions which enables us to accelerate our vision for the connected frontline. Our strong balance sheet and free cash flow profile also enables us to commit $500 million to share repurchases over the next 12 months as we drive long-term value for our shareholders. I will now turn the call over to Nathan to review our Q3 financial results and Q4 outlook. Nathan Winters: Thank you, Bill. Let's start with the P&L on Slide 6. In Q3, total company sales increased approximately 5%, with growth across most product categories and services and software recurring revenue business grew modestly in the quarter. Our Enterprise Visibility & Mobility segment grew 2%, led by mobile computing, and our Asset Intelligence & Tracking segment grew 11%, led by RFID and printing. As we disclosed in our earnings press release this morning, please note that effective in the fourth quarter, we are reporting under 2 new segments: Connected Frontline and Asset Visibility & Automation. Bill will cover how this view aligns to our strategy and how we manage the business. Historical results have been recast in the appendix. We realized strong sales growth across most of our regions. In North America, sales grew 6% with double-digit growth in mobile computing and RFID, offsetting weakness in Canada. Asia Pacific sales increased 23%, led by Australia, New Zealand and India. Sales increased 8% in Latin America with broad-based growth across the region. In EMEA, sales declined 3%. Regional performance was mixed, with softness in Germany, balanced with relative strength in Northern Europe. Adjusted gross margin declined 90 basis points to 48.2%, primarily due to higher U.S. import tariffs. Adjusted operating expenses as a percent of sales improved by 110 basis points. This resulted in second quarter adjusted EBITDA margin of 21.6%, a 20 basis point year-on-year improvement. Non-GAAP diluted earnings per share were $3.88, an 11% year-over-year increase and above the high end of our outlook. Turning now to the balance sheet and cash flow on Slide 7. Year-to-date, we generated $504 million of free cash flow. As of the end of Q3, we held more than $1 billion of cash with a modest debt leverage ratio of 1 and $1.5 billion credit capacity. We have been deploying capital consistent with our allocation priorities. Through October year-to-date, we have repurchased more than $300 million of stock and acquired 3D machine vision company, Photoneo and Elo Touch Solutions with cash on hand and our existing credit facility. We continue to maintain excellent financial flexibility for investment in the business and return of capital to shareholders. And as Bill highlighted, we are planning $500 million of share repurchases through the third quarter of 2026. On Slide 8, we provide an update on the anticipated impact from tariffs on our products imported to the United States and our progress on mitigation. For the full year 2025, we're now assuming approximately $24 million for gross profit impact after mitigation with a $6 million net impact expected in Q4, which is an improvement from our prior guidance. Our forecast assumes the current effective rates and exemptions remain in place. We have a track record of successfully navigating supply chain challenges, including tariffs and expect to substantially mitigate the current U.S. import tariffs entering 2026 as a result of actions taken by our team, including previously announced pricing adjustments, yielding about 1 point of sales growth, reducing U.S. imports from China to less than 20%, rationalizing our product portfolio and strong progress on driving overall supply chain efficiency and resilience. Let's now turn to our outlook. We anticipate between 8% and 11% sales growth in the fourth quarter, including approximately 850 basis points of contribution from our Elo and Photoneo acquisitions and favorable FX. Our second half demand assumptions have not changed from our prior business update. Our fourth quarter adjusted EBITDA margin is expected to be approximately 22% which assumes a $6 million net impact from U.S. import tariffs and non-GAAP diluted earnings per share is expected to be in the range of $4.20 to $4.40. Our fourth quarter outlook translates to full year sales growth of approximately 8%. Our full year adjusted EBITDA margin is expected to be approximately 21.5% and non-GAAP diluted earnings per share is expected to be approximately $15.80 based on our Q4 guide, a 17% year-on-year increase. Please reference additional modeling assumptions shown on Slide 9. With that, I will turn the call back to Bill. William Burns: Thank you, Nathan. As we turn to Slide 11, Zebra remains well positioned to benefit from secular trends to digitize and automate workflows and with our portfolio of innovative solutions, including purpose-built hardware, software and services. Our solutions intelligently connect people, assets and data to assist our customers with business-critical decisions. I would like to spend a minute on our new reporting segments. Zebra operates in a greater than $35 billion served addressable market, encompassing the connected frontline and asset visibility and automation. Each segment has a 5% to 7% organic growth profile over a cycle, supported by megatrends, including artificial intelligence, mobile and cloud computing and the on-demand economy. The connected frontline is about equipping the front line of business with tools and digital touch points necessary to drive efficiency, optimize collaboration and improve the consumer experience. Our solutions portfolio includes enterprise mobile computing, rugged tablets, frontline software and AI agents. Our acquisition of Elo adds key capabilities in self-service and point of sale, increasing our addressable market in this segment to greater than $20 billion. Asset visibility and automation is primarily focused on digitizing environments and automating operations across the supply chain through advanced data capture, printing, machine vision, RFID and other solutions. These are complementary and synergistic segments that digitize and automate operations and solve our customers' biggest challenge. Turning to Slide 12. Zebra solutions enable our customers across a broad range of end markets to drive productivity and efficiency and improve service to their customers, shoppers and patients. I would like to highlight RFID, which has been a consistent bright spot in our portfolio, growing double digits over the past several years. As a market leader, we are encouraged by the continued momentum we are realizing. Our largest customers in retail and e-commerce as well as transportation logistics and manufacturing have been expanding their adoption of Zebra's RFID solutions to additional workflows and categories due to the improved business outcomes they are achieving. Supply chain visibility, inventory accuracy, increased productivity, improved profitability and reduced waste are key outcomes that are driving increased adoption of the technology deeper into all end markets. RFID continues to be an important area of growth for us, enhancing our broader set of solutions offerings and demonstrating how our evolving portfolio enables us to solve increasingly complex challenges. Turning to Slide 13. Our industry leadership puts us in a unique position to be the supplier of choice of AI solutions for the frontline. We can deliver an entirely new experience for frontline workers through mobile computing, coupled with wearable solutions and the cognitive capabilities of AI. Imagine handheld and wearable solutions that can see, hear and understand the environment while interacting with the frontline worker in a conversational way. This is the direction AI for the front line is headed and we are starting this journey with our Zebra companion offerings. We are excited by the opportunity to transform the way work gets done as we collaborate with our strategic partners across the AI ecosystem. Last month, more than 100 senior leaders of companies representing a variety of industries attended our inaugural frontline AI Summit. During the event, we presented our AI vision and the benefits Zebra can bring to our customers to accelerate AI adoption and impact across their frontline operations. We have active pilots with our customers, validating the benefits of our new AI solution. A specialty retailer is actively utilizing an advanced pilot of our AI companion agents to provide assistance with product recommendations, resulting in better sales conversions and upsells, faster employee onboarding and elevated shopping experience. We believe that our AI agents will be attractive to any customer who strives to improve the productivity and effectiveness of their frontline associates. A large transportation logistics company is digitizing and accelerating proof of delivery with immediate feedback and enhanced compliance powered by our on-device AI suite, a digitized environment, leveraging AI is fundamental to transforming workflows across a multitude of industries. These are early examples of the significant benefits our AI solutions can deliver to our customers. And elevate Zebra, as a leading AI solutions provider for the front line of business. We are looking forward to demonstrating our solutions with the National Retail Federation trade show in January. Turning to Slide 14. We are excited about the opportunity to enhance the connected frontline experience with our recent acquisition of Elo Touch Solutions. Our combined capabilities enable us to offer more ways to digitize operations across more touch points and drive increased business with our enterprise customers. Elo is a pioneer in touchscreen technology and a leading provider of point-of-sale solutions, self-serve kiosks, interactive displays and industry tailored offerings. Elo's modular solutions deliver cross-generational compatibility and their enterprise-ready platform and software tools seamlessly integrate into customers' existing ecosystem. Together, we can deliver better customer experiences through the intersection of frontline mobility and self-serve technology. This acquisition further elevates our strategic positioning across retail, hospitality, quick-serve restaurants, healthcare and manufacturing through the breadth and depth of our complementary portfolio of solutions. Over time, Zebra will offer a common platform across mobile and fixed digital touch points that improve frontline efficiency. Together with Elo, we are better positioned to deliver a complete solution and leverage AI to empower associates and elevate consumer experience. In closing, our confidence in sustainable long-term growth is underpinned by several themes that drive demand for our solutions, including labor and resource constraints, track and trace requirements, increased consumer expectations, advancements in artificial intelligence and the need for intelligent operations. We are well positioned to address these critical requirements in our customers' operations with our leading portfolio of solutions. As we move forward, we remain focused on advancing our industry leadership with our innovative solutions that digitize and automate our customers' workflows and driving profitable growth. I'll now hand it back to Mike. Michael Steele: Thanks, Bill. We'll now open the call to Q&A. We'll have to 1 question and 1 follow-up to give everyone the chance to participate. Operator: [Operator Instructions] The first question comes from Andrew Buscaglia with BNP Paribas. Andrew Buscaglia: So demand trends seem strong and -- are relatively strong in Q3. And I noticed your Q4 guidance implies organic growth somewhat decelerating. I know you're facing a tough comp, but I'm wondering if you can kind of walk through what you see demand-wise and just additional commentary by end market would be helpful. William Burns: Yes. I would say that if we look at Q3, the team executed well, driving sales near the high end of our outlook. And that was backed up by kind of solid demand across the business. I would say the second half is really playing out as we expected with some customers that bought products early to deliver their peak season a bit earlier than we had originally expected. I would say that if you look across the regions, we saw solid growth across North America, AsiaPac and Latin America. If we think of the vertical markets, really, the quarter was led by retail and e-commerce from an end market perspective. And as we called out in Q2, weakness in EMEA continued through Q3. I would say from a product perspective, relative strength in mobile computing and printing, and RFID a bright spot. But I would say overall, second half is playing out as we expected, just the timing of those orders coming a little early into Q3. Andrew Buscaglia: I see, helpful. And can you comment on EVM, the growth was rather modest in the quarter. What are you seeing specifically in that segment? And can we still expect that to grow exiting the year? William Burns: I would say EVM from a mobile computing perspective, we saw strong growth in Q3 with large deals in North America, Asia Pacific and Latin America continue to be positioned for long-term growth and opportunities across mobile computing, including device in the hands of more associates overall. Next-generation product deliverables around wearables and RFID technology. We continue, as we talked about in the prepared remarks, an opportunity mid- to longer term inside AI as we see opportunities there to leverage AI in the front line. I would say that from a data capture perspective, which is also the other element of the largest -- the second largest element of that is we saw decline based on a difficult compare, I would say, across the scanning portfolio. So I think that really was the story of EVM, a combination of strong mobile computing, but difficult compare from a scanning perspective, which then impacted overall EVM in Q3. Operator: The next question comes from Piyush Avasthy with Citi. Piyush Avasthy: With the understanding that you're not providing 2026 guidance, but it would be helpful if you could provide some puts and takes on the construct itself, like how different or similar to 2026 be from your long-term financial targets? I know that visibility is somewhat limited, and there is still some macro uncertainty but based on your conversations with your clients, how would you characterize the demand outlook heading into '26 across your different verticals? William Burns: I'd say today, while our customers remain cautious in the near term, and we're experiencing some uneven demand across different environments, I think EMEA and then overall places like Canada. So we're seeing uneven demand manufacturing from a vertical market perspective across our different vertical markets. Our solutions basically remain fundamental to our customers, and they remain essential for digitizing and automating environments. So longer term, AI represents an opportunity to continue to advance our solutions. And we're well positioned to drive sustainable profitable growth into next year is what I'd say. Piyush Avasthy: Got it. And you guys mentioned digital AI features. Again, like I understand it's like very early, but how soon can these features become a catalyst for growth for the company? I think you have talked about a refresh cycle at some point. Do you think -- do you get the sense that there is demand and appetite from your customers to invest in software, which means when the next refresh cycle comes, it translates to not only hardware upgrade, but also like strong software. Any comments there? William Burns: Yes. I would say from an AI perspective, we see 2 opportunities, as you've called out. One is certainly the hardware environment with next-generation handheld devices, coupled with -- we're the leader today in wearable technology inside the enterprise. So we see that playing out as the way AI is delivered to the front line. It starts with mobile devices, and it's likely coupled with wearable technology from a hardware perspective. We're in pilot now, as we talked about in our prepared remarks, with our Zebra companion and our AI suite overall in different applications with customers in retail and T&L as we talked about. So that creates a software opportunity for us across our AI agents and early customer pilots or they're seeing significant value to those. I would say first revenues likely in '26 and then ramping in '27 and beyond is where we'd see as we're -- want to get through the pilots, demonstrate the value to our customers ultimately and then begin to drive revenue and scale those into our customers. But the opportunity, as you said, is in 2 areas: hardware, upgrade of those hardware, new hardware in the idea of wearable and then ultimately in software as well. Operator: The next question comes from Damian Karas with UBS. Damian Karas: I was wondering if you could maybe speak a little bit to the large project funnel, what you're seeing out there, what conversations you're having? Has there been any -- obviously, the fourth quarter, it doesn't appear you're expecting much large project activity. But just in terms of the funnel, is there any increase in customer conversations? And any hope that maybe you could see some of that stuff get awarded in the fourth quarter? Or are we likely going to be waiting sometime longer? William Burns: Yes, I'd say as we've talked about, I would say the demand trajectory has remained pretty consistent with our outlook from the prior quarter. And I would say customers have generally maintained their capital spending for the most part and projects continue to move forward. I would say some have -- and I think we talked about this last quarter as well, some have spread projects and purchases over multiple quarters, again, driven by caution that still remains out there as our customers are navigating the global macro uncertainty and specifically some of the ultimate ramifications to a certain trade policy that's in place today. I would say this has driven this uneven demand across some verticals and geographies. But we feel good about the business overall and continuing to extend our lead. But the demand environment hasn't changed much. I think we saw some orders earlier in the year than we anticipated. We continue to monitor our customers and not only opportunities for year-end, but what's happening across EMEA, the tariff situation, government shutdown. So there's a lot of things happening in Q4 that we feel good about our guide being balanced for the quarter and overall. Damian Karas: That makes sense. And Bill, on your point about some of this pull-forward demand, in the third quarter, -- any particular reason why you think some orders might have come in earlier in the second half? Anything to do with tariffs or sort of price optimization on the part of your customers? Just curious why that might be. William Burns: Yes. No, I would say, again, the timing is always -- isn't always exact, right? And we anticipated Q3, we called the guide for that. We overachieved that guide really is some customers just need a product earlier to meet their peak demand. I think that's a good thing, right? We're seeing e-commerce demand, retail continue to be strong in Q3, and I think that drove some earlier orders. I wouldn't call it pull in as much as just timing of the need for the product when they would have normally ordered a bit later. They said, Hey, I'd like to have this product earlier to meet the Q3 demand for peak. And I think that's the balance between Q3 and Q4, it's just played out in a timing perspective. I think the demand is as we expected. I mean I think we feel good about the year overall. We're going to deliver almost 6% organic revenue growth, 17% EPS growth. So the year is kind of playing out as we expected as well. So I think we feel good. It's just timing, not really pulling as much. Operator: The next question comes from Tommy Moll with Stephens. Thomas Moll: For the fourth quarter, I want to unpack the assumption around budget flush. So maybe we could take it in 2 parts. Can you quantify what you're assuming for Elo from a top line perspective in Q4? And then if we back that out, what does the sequential quarter-over-quarter look like there? I think typically, you see some year-end flush, but I just want to hear you talk about what you're assuming for this year. Nathan Winters: Yes, Tommy, I'll take that. I think as Bill mentioned, we're -- I would say the first thing is holding the full year organic growth rate consistent to what we had guided back in August, and we believe that provides a balanced view of the current environment that Bill had talked about relative -- and with some of the -- some of those orders being realized a bit earlier ahead of the quarter. So if you look at our Q4 guide, 9.5% growth, as we said in the prepared remarks, about 8.5 points of that is just due to the Elo as well as Photoneo and FX. Elo, we have in the guide of $100 million, so in line with what we had talked about last quarter in terms of their overall revenue profile. And we're getting about 1 point of price, which really leaves that organic demand flat if you look at it from a year-on-year perspective. And I'd say the way to think about it is we see year-end spend just similar levels as we saw last year. If you recall, we had a nice year-end as we exited 2024, and we're seeing similar levels of spend and pipeline here as we go towards the year-end. So that's obviously one we're playing close attention to as well as, as Bill mentioned, monitoring what's going on within Europe, the government shutdown and everything else that's going around the world. But I think that's the way to think about the Q4, which is excluding FX, pricing and M&A, you really have kind of a flat demand really driven by that year-end project spend being at similar levels to last year. Thomas Moll: Thank you, Nathan. I wanted to ask about RFID. You framed some of the recent success there. There's been a pretty high-profile announcement recently in the fresh category from one of the omnichannel leaders. I'm curious, are you able to comment if your business should benefit from that recent update? Or maybe if you're not, anything you can do to comment on forward visibility on RFID? Are there things in your pipeline that are continuing to suggest some of those elevated growth rates? William Burns: Yes. I'd say, Tommy, we clearly have seen strong double-digit growth rates on RFID over the past several years, and we continue to see a pipeline of opportunity across the entire supply chain, whether it's across retail or now T&L continues to deploy projects across RFID, manufacturing, government. I would say in retail, we're seeing grocery, as you said, fresh opportunities. So in retail beyond general merchandise, opportunities into quick-serve restaurants, into health care. So I would say the broader track and trace across supply chains, across multiple verticals, all creates growth opportunities for us. As you know, we're the -- we have the broadest set of RFID solutions in the market today across fixed and handheld readers across new releases of our mobile computing devices that have RFID integrated within them, our printing portfolio, the labels associated with that. So all of that allows us to continue to be excited about RFID and moving forward. And yes, I think things like fresh and grocery and others just create more and more demand for our solutions. I think the customers that have deployed solutions to date continue to see value and continue to expand the use cases that they've deployed already inside their environment. So RFID, I think, continues to be a growth driver for us moving forward. Operator: The next question comes from Keith Housum with Northcoast Research. Keith Housum: Bill, I just want to unpack a little bit more of your commentary regarding AI and the opportunity there, understanding that it's the long game here. It sounds like the opportunity from a hardware perspective is adding more wearable devices, but also perhaps an acceleration of the refresh cycle. I guess, one, is that true? And then second, will these devices under the AI world, will they need a more higher-end device compared to what perhaps they're using today? William Burns: Yes. So I think you hit it spot on. I think the opportunity is certainly with higher premium devices, higher-end devices, which we look to drive higher ASPs. And over time, we would see that being a driver for the refresh cycle as new technology would be that. So think faster processor, more memory on mobile devices. We see that we're the global leader today in wearable technology for enterprise, and we see there's an opportunity there as well to pair, think body cam type devices with a mobile device, things that can sense the environment, see the environment. So we'll be leveraging the mobile device in certain applications, but also wearable technology could be almost watch-like technology that we've released recently as well. So different form factors and wearables as we're seeing across the customer base today. So hardware clearly, mobile computing and wearable and then software offerings. So I think if we kind of wind all the way back, Zebra solutions of digitizing and automate the environment become kind of fundamental for AI collecting data on the front line that allows this sense analyze act, right? -- sense what's happening at the point of productivity, so you can analyze it with AI and take the next best action within your business. So our solutions fundamentally drive models in AI. That's what we do, provide data. So you got to start there, AI used throughout multiple solutions today across different applications of software, robotics, 3D quality inspection today. So traditional AI used across our portfolio, the revenue you talked about from mobile devices and wearables and then software on top of that. So think of our Zebra companions and what we're doing in our AI suite that layers on top of software offerings on the mobile device to either manage those models for our customers. So think models on the device need to be managed or think of it actually applications that Zebra provides in the idea of AI agent all create opportunities for us. And as I said, likely first revenues in '26 and scaling from there. Keith Housum: Great. I appreciate that detail. And just as a follow-up, retail and e-commerce probably run a fifth or sixth quarter at least of contributing to the growth of the company. Is there a visibility to how long that's sustainable? And you looking at historical information, is that you see over a 2-year period that these things go through a refresh cycle, then kind of another vertical is going to be expected to kind of take over and drive growth from there? William Burns: Yes, not necessarily. I would say that we've seen strength in retail and e-commerce, but we got to remember that e-commerce continues to grow, right? So that -- we talked about some of this product being used for peak, it really driven some of that by the e-commerce players as they continue to deploy devices to meet peak demand. I would say this whole idea of refresh cycle, everyone is on a different time frame and cycle, whether that's retail or T&L or postal or others. And they're all on their own cycle, meaning that every retailer is on a different cycle and every e-commerce is more -- they don't do that same type of refresh. They buy over time. But I would say T&L the same way. So I don't think it switches from one vertical to the other. I think, look, we'd like all geographies and all vertical markets to be up all at the same time. It just doesn't quite work that way. Today, we're seeing strength in retail and e-commerce. Transportation logistics has gone to more normalized levels, and we're seeing growth there. Manufacturing pretty flat, tough compare in health care. So I think that while we'd like to see everything up in the right all the time, I don't think there's a transition away from retail and e-commerce to something else. I think we'd like to see growth across all of them, and there's no reason why not. But I think things like manufacturing remains pretty challenging in the short term. Operator: The next question comes from Jamie Cook with Truist Securities. Jamie Cook: I guess my first question, just the margin divergence between the 2 segments, Asset Intelligence and Tracking, the margins seem to be doing better this year, whereas last year, the 2 segments were flat. So just if you could sort of unpack that as tariffs hitting one of the segments more than the other? And then I know you talked about being able to cover tariffs for the most part in 2026. Any nuances on how would it impact the segments? And I guess we can talk about it within the new segmentation, but any color on that for '26 as well? Nathan Winters: Yes, Jamie, I wouldn't say there's anything specific driving the gross margin difference between the 2 verticals in terms of unique. I think just some of that is a bit of the mix within the portfolio. You see the strong growth in AIT. So you're getting nice volume leverage there across our printing portfolio. That's also where you have the RFID growth. kind of coming through in terms of the higher margin profile. So I think some of it just timing of mix between the portfolios. As Bill mentioned, data capture was down in Q3 in the EVM segment, which has, again, nice operating -- nice gross margin profile. So again, I think that more just mix within the portfolio quarter-to-quarter versus, let's say, a fundamental shift between the 2. Yes. And I think as we mentioned, we expect to fully mitigate tariffs as we go into next year. So you'd expect maybe a modest amount in Q1, but fully mitigated as we go into the second quarter with some additional actions the team has been working. Again, I think primarily, that will be benefiting within the AIT segment. So that's, again, where we have -- across EVM, that's where we have the mobile computing exemption today. So most of that benefit you'll see in AIT as we cycle into next year with some of the additional actions we have planned later this year and early part of next. Jamie Cook: Okay. I guess. And then just my second question, just on Elo. So I think you said for the fourth quarter, that contributes $100 million in revenues, which is in line with the $400 million of annual sales that you talked about when you announced the acquisition last quarter. Any thoughts -- I mean, I think that's a business that you've said has grown 5% to 7% through the cycle, similar to you guys. Any thoughts on Elo as you're thinking about 2026? William Burns: Yes. I would say that we continue to be excited about the acquisition. It certainly further positions us as a strategic partner to our customers across multiple vertical markets. And the breadth and depth of their portfolio married with ours gives us more strategic partnering opportunities with our customers overall. I would say that as you said, similar growth profile to Zebra, similar value proposition as well, purpose-built hardware, enterprise-ready platform just like our mobility DNA, software tools that seamlessly integrate into an enterprise environment, all those are the reasons why our customers buy mobile computing from us. And it's the same reason why customers buy Elo solutions. We closed in early Q4, I would say, performing as expected in overall at the moment, and we don't see any change to that. We see opportunities into next year, including continued POS rollout or point-of-sale rollout solutions at a very large retailer. We continue to see new opportunities and new wins from their business in the self-serve kiosk and some of the largest quick-serve restaurants around the world. We're continuing -- we're working closely with them, our teams together and progressing our operational synergies, both on the revenue and the cost side. And those are early days, but progressing as we expected. So we feel good overall about their business, their growth profile as we enter Q4 or go through Q4 and then into '26. Operator: The next question comes from Meta Marshall with Morgan Stanley. Unknown Analyst: This is Mary on for Meta. I have 2 questions for you. The first is on the pricing actions related to tariffs. So given the pricing actions that were taken to offset the tariff costs, what kind of impact are you seeing from these pricing actions on customer demand? And then my second question is on the OBBBA tax impact. Can you walk us through how the OBBBA is expected to impact your effective tax rate and cash taxes going forward? Nathan Winters: Yes. So on the first one, maybe I'll speak to the pricing impact. So we're seeing some nice benefit from the pricing actions we announced back earlier this year. So we increased from our prior guide the expected annual benefit, which now expect to be around $60 million or 1 point of growth on an annual basis from our prior guide of $40 million. So again, some nice momentum here as we work through the third quarter in terms of overall price realization. I'd say we haven't really seen that dramatic of an impact on demand. I mean, as Bill mentioned, the year has pretty much played out as we expected, both from first half, second half. So we haven't seen a major shift or pullback in demand. And I think what we hear from our channel partners is that the pricing actions we've taken are in line with a lot of our competitors across the industry where tariffs have had an impact. So again, we feel good about the momentum there. And again, as we said, trying to fully mitigating the impact of the current tariffs as we go into next year. If you look at the impact on the new tax bill, as we said in the last guide, this year, we expect about a $50 million, $60 million reduction in our cash taxes due to the ability to amortize the current R&D deduct R&D and the full amount of that. We expect about over $200 million over the next 2 years, a little over $200 million in the next 2 years of incremental cash benefit from the change in the tax bill. But it did result -- if you noticed in our guide, we increased our expected tax rate to 18%. Part of that is just reflecting the impact of the tax bill with some of the new permanent rate effects as well as just a shift in income. So a modest impact on the overall tax rate. But again, a bigger benefit on the lower cash taxes expected over the next 2 years. Operator: The next question comes from Joe Giordano with TD Cowen. Joseph Giordano: So when you talked last year into the fourth quarter, I felt like you had guided in a way that took the market risk largely out, right? You were guiding to things that were in hand in backlog and kind of volumes came in better than you expected and it was upside to your guide. Now this quarter, you're talking about flows similar to last year, but is that element of like we're not baking in much in terms of what we're not seeing directly in the market? Is that still a fair way to categorize like the nature of how you're guiding? And just curious what the EPS accretion you have from Elo in there is? And then I have a follow-up. William Burns: Maybe I'll start and hand to Nate. I would say that, Joe, overall, customers are generally moving ahead with planned projects. I would say they're hesitant to accelerate future projects. based on kind of macro uncertainty and the trade policy and the secondary impacts of the trade policy clearly on their business. Parcels slowing, for instance, in transportation logistics because of the trade policy, right, is an example of that. So I think while they're generally moving ahead, there's -- we haven't seen an acceleration of projects or moving in projects based on this uncertainty. But I think the discussions with our partners and customers hasn't fundamentally changed. That's why we're saying the demand trajectory feels about the same as it did when we talked last quarter and the need for our solutions certainly hasn't changed as you saw some buying early in peak to be able to meet their demands of our customers. So we're still essential A lot of it's about timing. So I think we saw above the -- close to the high end of our guide for Q3. I think we see Q4 playing out as we expected for the year. I mean, again, as I said earlier, nearly 6% organic revenue growth, 17% EPS growth for the year. But I think that overall, I think the macro environment and the trade policy uncertainty and the ramifications of their business is having customers hold back a little bit on do I advance future projects. Nathan Winters: Joe, maybe a little additional color. I think I'd characterize the guide we had last year, which was, to your point, we assumed very little year-end spend in terms of above and beyond what we kind of had clear line of sight to. And obviously, that came in better than expected as we exited the year, where this year, we're assuming a similar level of year-end spend as we did last year. So obviously, some of that we have in hand, but the team has to go convert pipeline here over the next 6 weeks 6 to 8 weeks to close out the year. So I think characterize -- that's how I'd characterize the difference between this year's guide and last year is in terms of those expectations around year-end. And then just your question on the Elo EPS impact, it's about $0.10. So if you look at the -- for the full year, we raised the guide about $0.30. Some of that was better tariffs, basically split 1/3, 1/3, 1/3 between lower tariff Elo and a little bit of favorability on overall interest rates and share count. Joseph Giordano: And then the follow-up, and we kind of talked about this a little bit, but as you think into next year, I'm not trying to pin you down, but like as we're coming off, you had the big COVID deployments, and you had kind of a multiyear decline as we're kind of bouncing modestly off that, like what reasons, if any, would you kind of like talk us off of thinking that next year, at least from where we're sitting now, like shouldn't be at least in the range that you would see in a cycle? William Burns: Yes. I mean, again, we're not guiding to '26, as you acknowledged. I think that today, we're clearly seeing customers remain a bit caution in the near term. And because of that, we're seeing some uneven demand environments overall. EMEA example, manufacturing across different vertical segments. Some cases, it's just tough compares in case of DCS. But I'd say we feel good about driving sustainable profitable growth into next year across the business. And I think we've got to play out Q4 here, and we'll provide more guidance come first quarter. Operator: The next question comes from Rob Mason with Baird. Robert Mason: Bill, I just wanted to touch on thinking about demand as you go into next year or finish up fourth quarter. A couple of your geographies, you've already talked about EMEA being softer. We saw some of that in the second quarter and it continued on here. I'm just curious maybe what the month-to-month or quarterly trend look like in that region as you entered the fourth quarter? And then also if you could address maybe conversely, just Asia Pac, that's been double digit now for, I guess, 5 quarters. Is that broadening out your customer base there? Is it kind of project specific? I'm just kind of curious what's driving the strength and how you see Asia Pac as you look forward as well. William Burns: Yes. Maybe cover all the geographies. I would say North America, strength in mobile computing and printing, tough compare in DCS, we talked about. Peak demand is -- we're already covered in retail and e-commerce in Q3, a bit of pull in there. Continued strength in RFID, as we talked about the use cases there, large and mid-tier customers and orders were up in North America. I would say, again, as we talk about trade policy, Canada, demand softer in Q3 in North America. EMEA, I would say, about the same as we saw in Q2 when we called out. It's really mixed performance in EMEA, if I added color. I would say Northern Europe continues to do well in retail and transportation logistics. where places like Germany and manufacturing or France retail continues to be challenged. But I'd say mixed throughout EMEA, but ultimately down in Q3. Asia Pacific, you called it out, strong growth in Asia Pacific. We talked about opportunities around the world and leveraging our go-to-market. And we talked about the investment in Japan. So Japan was a strength as we focused in that focus there, new applications in the postal service in Japan, where we won early device wins for postal carriers. Now we're deploying devices in post offices. So again, speak to the strength of our go-to-market organization, shifting resources into places where we have lower market share and want to drive growth. So that's a good example in Asia. Another is India. So we continue to see growth in the India market as others have called out as well, I think around the globe, stronger GDP in India. Australia and New Zealand continues to be a strength in Asia. So feel good there. We don't talk a lot about it, but Latin America, record quarter in Latin America and broad-based strength in the Latin America region. So we feel good about Latin America, even though we don't talk a lot about it typically. So that's kind of the spread and the difference across the different geographies. Robert Mason: That's helpful. Just as a follow-up, you -- obviously, you talked about taking your -- or committed to share repurchases over the next 12 months. You did -- you have seen the stock comp tick up. Nathan, I was just curious if you could kind of address that, how that will trend? Any thoughts into '26 and kind of what's driving the increase in the stock comp? Nathan Winters: Yes. So I think 2 things. We talked earlier in the year was somewhat of just a change in the design of the plan that had us accelerate some of the expense within the P&L. So no change in the overall comp, but just from an accounting perspective, we had to accrue a bit more of it early in the year. So as you see that play out over the next couple of years, you'll see the offset. And then this quarter, in particular, was just a true-up with coming out of our strat plan, truing up the performance and some of the performance shares and doing a kind of an accumulative catch-up. So I think this year -- this quarter was a bit of an anomaly in terms of the higher expense, and we'd expect that to normalize back out as we go into Q4 and then next year start to more normalize back to historical levels. Again, this year had some changes based on the accounting change as well as now just the true-up on the performance shares. Operator: The next question comes from Guy Hardwick with Barclays. Guy Drummond Hardwick: Great job on the supply chain, navigating supply chain challenges. Obviously, it stands out that you intend to take China to below 20% of U.S. imports. Where do you think that goes to long term? And what do you think the kind of the footprint of contract manufacturers will look like, say, a year from now? Nathan Winters: Yes, I can take that. I think -- look, as you mentioned, I think the team has done a phenomenal job over the last -- really, you probably say 6 years, driving that from, as we talk over 80% concentration for North America in China now down to 20% and below that as we go into next year. Look, I think there'll be a certain portion that will remain for -- it's hard to see an exit, just particularly around some of the components that are -- really, there's only one source for those, and we still use those and need to import those for service -- and those types of things. So -- we're probably getting close into the teens where you start to get a -- outside of some major shifts in component manufacturing, you kind of hit a baseline there. So -- but again, I think what we focused on is broader resilience, making sure we have multiple options, whether that's with our supply base, with our contract manufacturers so that, again, whether it's tariffs or any other natural disaster what you might have is a resilient supply chain that we can mix and move production around the world to navigate those challenges. Because that's the one thing I think we've learned over the last 5 years is that there will be something, and we need to have a resilient supply chain to manage through those. And again, I think the team has done a great job of balancing resilience with cost to get us to the footprint we have today. Guy Drummond Hardwick: And just as a follow-up, I know, Bill, you answered a couple of questions on this, but what point does technological obsolescence on the installed base in EMC actually force customers to drive to upgrade if they really want to benefit from Agentic AI, whether it's your products or Zebra products or other people's products? William Burns: Yes. I think that if you're -- again, it creates an opportunity -- AI clearly creates an opportunity for technology-driven refresh on the mobile devices as you want to move to faster processing speeds and more memory, if you want to run the models on the device, which we're seeing many of our customers want to do. We see a combination of leveraging AI on the device and leveraging AI in the cloud depending on the specific application. But in both cases, we think this leads and attributes to the refresh cycle upcoming. The number of mobile devices continues to grow in the marketplace since pre-pandemic. And we see that our customers all upgrade on different refresh cycles, and this will be another reason to go do that. Things like health of their device, longevity, how long it's been in the marketplace, devices just get broken, they get older and others. Technology moves on. Cybersecurity is another driver. But from a technology perspective, AI is going to be one of those. I think we see the refresh cycle opportunity as being really multiyear and driven by driving sustainable growth for our growth profile as a company. And we don't see it the kind of pandemic-based compressed concentrated acceleration cycle. We see it more driving sustainable growth for us as a business, and there will be lots of factors into that and AI will be one of them. Operator: The next question comes from Brad Hewitt with Wolfe Research. Bradley Hewitt: So as it relates to the $500 million buyback that you expect to execute over the next 4 quarters, how dynamic is that number? Should we think of that as more of a minimum threshold? And then how do you think about cadence of deployment and why not execute this as an ASR? Nathan Winters: Yes. So again, I think right now, we're just committed to the $500 million. We'll see that. I think the best way to think about that is spread out over the next 4 quarters, and we'll be dynamic taking advantage of opportunities that we see in the volatility in the stock. But again, making sure we show more of that consistent return over the next several quarters and really wanted to commit to that given we've been kind of silent on the commitment as we move into future periods, but we felt like it was the right time to make that commitment given the overall profile we have and our debt leverage ratio here as we exit the year. And I think we just think that doing it through the open market right now provides more of a benefit, lets us more manage the return and the timing of that versus uploading upfronting that through an ASR. Bradley Hewitt: Okay. That's helpful. And then as we think about the Q4 outlook, it looks like the implied incremental margins are about 25%, both on a year-over-year basis and sequential basis compared to typical 30% plus incrementals. So I guess curious just is that margin outlook embedding a little bit of conservatism? Or is there anything that you would expect to limit the drop-through in Q4? Nathan Winters: No, I think the only thing typically, in Q4, we see a little bit higher mix of large deals. So you see a little bit of mix dynamic as we go from Q3 to Q4, but nothing unusual, I'd say, from a timing or margin profile within either one of the quarters to call out. Operator: The next question comes from Brian Drab with William Blair. Brian Drab: Can you talk a little bit more about the machine vision business? And I know you talked about softness in manufacturing. How has that business been doing? And then kind of the bigger picture is, are there any of these other like RFID and other growth engine type businesses that you'd call out that are in that double-digit growth range or high single-digit range that are being the growth drivers that we want them to be? William Burns: Yes. I would say that from a machine vision perspective, we saw growth in machine vision software as we've got leveraging our differentiation in our software across machine vision. I would say overall, machine vision declined in the quarter for us, really pressured in the areas in which we compete. So we've seen now stabilization in kind of semiconductor manufacturing where we're embedded in those solutions. So that's a positive news moving forward, but certainly negative in the quarter. And then some new areas that we had -- the focus of the go-to-market team has been diversification away from semiconductor manufacturing into new markets. One of those markets was a lot of spend was happening in new builds of EV auto manufacturing, but that has now slowed. So another driver of the weak quarter. I would say that our focus is really on go-to-market initiatives to expand specific markets that are growing. And leverage our advanced technology into use cases where we're leveraging this strength of our software portfolio, along with things like 3D vision to be able to win new opportunities and customers and to be able to then get a footprint in those customers and expand it from there. That's really the focus of our go-to-market teams. We're excited about this market longer term, clearly, doing more in manufacturing from our perspective is important to us, and we think that continues to be an opportunity for us. We talked about RFID already. RFID continues to be a strength for us across the vertical markets. I would say, inside other segments, I think the tablet opportunity within our mobile computing is another opportunity for us. I think the next generation of task management in software is an area we've been focused. So we're a leader in task management software. We see next-generation opportunities to that as we evolve task management into more communication collaboration with our customers to drive software growth over time, leverage with our mobile devices. Operator: The last question comes from Katie Fleischer with KeyBanc. Katie Fleischer: I just had one question just to kind of go back to the margins for 4Q. Is there anything that we should think about for the segments that's different from this quarter? Or is it fair to assume that those margins are pretty steady? Nathan Winters: Yes, they're pretty steady between the segments between Q3 and Q4. So I wouldn't -- we don't see any major changes around the gross margin profile between the segments quarter-to-quarter. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Bill Burns for any closing remarks. William Burns: Yes, I'd like to thank our employees and our partners as they delivered a strong Q3 results. And ultimately, I would like to extend a warm welcome to the Elo team as we kick off our exciting journey together moving forward. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Amerant Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Laura Rossi, Head of Investor Relations. You may begin. Laura Rossi: Thank you, Kate. Good morning, everyone, and thank you for joining us to review Amerant Bancorp’s third quarter 2025 results. On today's call are Jerry Plush, our Chairman and CEO; and Sharymar Calderon, our Senior Executive Vice President and CFO. As we begin, please note that discussions on today's call contain forward-looking statements within the meaning of the Securities Exchange Act. In addition, references will also be made to non-GAAP financial measures. Please refer to the company's earnings release for a statement regarding forward-looking statements as well as for information and reconciliation of non-GAAP financial measures to GAAP measures. I will now turn it over to our Chairman and CEO, Jerry Plush. Gerald Plush: Thank you, Laura. Good morning, everyone, and thank you for joining us today to discuss Amerant's third quarter 2025 results. First, I want to thank everyone for adjusting their schedules to accommodate the rescheduling of our earnings call this quarter. We intend to establish this new time frame as when Amerant will report going forward. So our team has the appropriate time to prepare each quarter end. We greatly appreciate your understanding. So similar to the approach we implemented last quarter during today's call, I'll start with some overall comments, and then Shary will provide commentary on results and asset quality. Then I'll provide several prepared remarks on some strategic updates in order to allow time for Q&A. You will note today that there are several new slides in the deck this quarter that we think show capital levels and asset quality quarter-to-quarter comparisons in an easier to follow format. So, while we continue to make progress in key areas of our strategy, our primary focus this quarter was on asset quality over loan growth. I'll provide more details on this in a minute, but the increase in nonperforming asset levels must be immediately addressed, and I will cover the plan here in the fourth quarter to approach achieving reduced levels in the coming quarters. Clearly, the higher provision from a detailed loan-by-loan review kept us from achieving consensus or better overall results this quarter. We will also provide some color on progress so far here in the fourth quarter on this call. Otherwise, you will see solid performance as shown by an outstanding net interest margin and higher net interest income. Shary will cover the other P&L items in detail shortly. But I do want to note in advance that while core expenses rose $2 million over the prior quarter. This increase was from legal expenses related to trust services and to asset quality resolution efforts as well as higher consulting expenses in connection with our AI governance build-out and ERM enhancements, and we do not expect a continuation of expense at these levels in the fourth quarter. Regarding expenses, please note that in my closing remarks, I'll also provide more color on our planned expense reduction initiatives already underway, which will begin to be seen in the fourth quarter and throughout 2026. On the funding side, our core deposits increased while total deposits remained stable given the planned reduction in broker deposits we previously indicated on last quarter's call. We continue to focus on the quality and mix of deposits as a priority. International Banking continues to strengthen its presence across LatAm. It is worth noting that approximately 50% of the new accounts opened during the third quarter of 2025 originated from other countries, most notably Argentina, Guatemala, Costa Rica, Bolivia and Peru. This expansion reflects the success of our business development initiatives, client relationship management and targeted marketing efforts throughout the LatAm region. Loans declined by 3.4% quarter-over-quarter, as again, our focus was on AQ over growth, but our pipeline build is underway here in the fourth quarter. Approximately $288 million of the loan decline in 3Q was related to payoffs and asset quality-related sales. So as I promised earlier, we'll turn back to asset quality and addressing asset quality head on was and will continue to be our top priority. 3Q was the quarter with the highest volume of annual and limited reviews along with covenant testing with over $3.5 billion in loans review. We did see continued deterioration in both classified and criticized. And while we exited $35 million in nonperforming loans through third-party refinancing payoffs, charge-offs, transfers to OREO and upgrades, as I previously noted, additional downgrades to NPLs were primarily driven by the receipt of borrowers' updated financials and certain covenant failures in the quarter. We are all in on driving progress post quarter end, and we believe we have a line of sight on several significant opportunities to do so already. So for example, we just, as in this past Friday, received an $11.8 million full payoff, which results in an $8.7 million recovery of previous charge-offs, $341,000 of interest income to be recorded in the fourth quarter as well as a recovery of $188,000 in legal expenses, and again, all of which will be recorded in 4Q. Our coverage of reserves over NPLs is at 0.77x due to the increased level of NPLs. However, please note that all NPLs with balances over $1 million were individually evaluated for exposure to charge-offs and our reserves, which explains the increase in provisioning for credit losses in 3Q and in specific reserves quarter-over-quarter. While Shary will provide additional detail on this, I wanted to just put this upfront, and we'll go through more detail in NPLs, ACL and the specifics on the provision for credit losses. Let's turn to capital. And if you look at capital, all levels remain very strong. Our Board declared a quarterly cash dividend of $0.09 per share, reinforcing confidence in Amerant's long-term outlook and capital strength. We also intend to resume share buybacks post earnings when the blackout period ends under the existing remaining authorization and 10b5-1 plan as we continue to execute on our strategy going forward. So with that, let me turn it over to Shary now to cover 3Q results in detail. Sharymar Yepez: Thank you, Jerry, and good morning, everyone. Let's turn to Slide 3. Here, you will see the highlights of our balance sheet. Total assets reached $10.4 billion as of the close of the third quarter. As we guided in the second quarter, we offset lower loan originations, loan payoffs and paydowns with purchases of investment securities. Total investment securities were $2.3 billion, up by $336.8 million, all of which are highly marketable securities and were classified as available for sale. Total gross loans were down by $247.4 million to $6.9 billion, primarily driven by increased prepayments and the sale of a large substandard loan, which more than offset loan production in the quarter as well as the focus on asset quality over production, which delayed the business pipeline materializing. On the deposit side, total deposits were relatively flat, only down by $5.6 million to $8.3 billion, although core deposits increased by $59.4 million. Additionally, as we previously guided, we reduced brokered deposits by $93.7 million and partially replaced this funding with FHLB advances, which increased by $66.7 million. Brokered to total deposits now stand at 6.6% of total deposits, well below our maximum of 10%. Also, in the third quarter, we restructured $210 million of fixed rate FHLB advances and changed the original maturity at lower interest rates. We incurred an early termination and modification penalty of $3.4 million, which was deferred and is being amortized over the term of the new advances as an adjustment to the yields. The net effect is an improvement in the cost of this source of funding. Our assets under management increased $104.49 million to $3.17 billion, primarily driven by higher market valuations. As I've shared in past calls, we continue to see this as an area of opportunity for us to grow fee income going forward. Looking at the income statement on Slide 4, you will see that we had a strong net interest margin, which was higher than projected at 3.92% due to higher average rates for both loans and securities, lower average rates on deposits, lower average balances in interest-bearing deposits, including broker deposits. NIM increases were partially offset by higher average balances in the investment securities portfolio, lower average loan balances and placements as well as higher average balances on time deposits and FHLB advances. Net interest income was $94.2 million, up $3.7 million, primarily driven by higher average rates on loans and securities and lower average balances and rates on deposits. Noninterest income was $17.3 million, while noninterest expense was $77.84 million. On a core basis, however, core noninterest income was $17.5 million, while core noninterest expense was $75.9 million. We had guided noninterest expense for this quarter to be approximately $73 million. The variance to actual results was primarily driven by $2.4 million in expenses on professional fees, as Jerry just described, and $1.4 million in higher other expenses primarily related to earnings credits, which are provided to certain commercial deposits in the mortgage banking industry to help offset deposit service charges incurred. Also adding to the variance of noninterest expenses were noncore expenses of $2.0 million recorded during the quarter, which I will describe in the next slide. Pre-provision net revenue was down at $33.6 million in 3Q '25 compared to $35.9 million in 2Q '25, and core PPNR was $35.8 million, a decrease of $1.4 million or 3.7% compared to $37.1 million in 2Q '25. The core PPNR impact was primarily from the higher expenses we do not project occurring again at the same level in the fourth quarter, as I just referenced. A reconciliation of core PPNR and the impact on key ratios is shown in Appendix 1 included in this presentation. Next up in Slide 5, you can see ROA and ROE this quarter were 0.57% and 6.21% compared to 0.90% and 10.06%, respectively, and our efficiency ratio was 69.84% compared to 67.48%. These ratios were primarily impacted by the decrease in net income and the increase in expenses during the quarter, respectively. This quarter, we had $2 million in nonroutine noninterest expenses, which included $900,000 in losses on loans held for sale carried at the lower of cost or fair value in connection with the sale of one substandard owner-occupied loan, $500,000 in net losses on sale and valuation expense of an OREO in Houston, a single-family property and $600,000 in expenses related to the downsizing of Amerant Mortgage. Turning to Slide 6. As you can see, we have added a new slide, as Jerry referenced, showing the quarter-over-quarter comparison of our capital ratios. As you can see, our capital ratios are very strong and continue to reflect improvement across the board. Our CET1 was 11.54% compared to 11.24% last quarter, mainly driven by lower risk-weighted assets and from net income during the quarter, while partially offset by $10 million in share repurchases and $3.8 million in dividends. We paid our quarterly cash dividend of $0.09 per share of common stock on August 29, 2025, and our Board of Directors just approved a quarterly dividend of $0.09 per share payable on November 28 of this year. During the third quarter, we also repurchased 487,657 shares at a weighted average price of $20.51 per share compared to tangible book value of $21.56 as of June 30. Moving on to asset quality. We added 2 new slides here as well this quarter. As you can see on Slide 8, nonperforming assets increased to $140 million or 1.3% of total assets compared to $98 million or 0.9% of total assets in the prior quarter. I will cover the drivers of this increase in the next slide. Additionally, special mention loans totaled $224.4 million, with the increase primarily driven by 3 commercial loans totaling $106 million, 2 CRE loans totaling $25 million and 3 owner-occupied loans totaling $20 million. All loans have acceptable mitigants in place, including adequate loan-to-value ratios, interest reserves, personal guarantees and other structural enhancements. These increases were partially offset by $31 million in further downgrades to classified loans and $30 million in payoffs. These increases are the result of rigorous efforts by portfolio management, credit and credit review complemented by an independent third-party firm brought in to ensure timely reviews of updated financial information and risk rating, including identification of any possible deteriorated conditions to allow us to be more proactive in expediting resolution. Through these reviews, we covered approximately $3.5 billion in the loan portfolio through covenant testing or annual or limited financial reviews. We expect to continue to prioritize efforts on proactive credit quality measures, including continuing to use independent third-party assistance. Moving on to Slide 9. The increase in nonperforming loans was primarily driven by the downgrade of 3 CRE loans totaling $31 million, of which one is a single-tenant property that is currently vacant and the other 2, which missed contractual milestones. Please note that all 3 loans have adequate collateral coverage and did not require reserves. Adding to the increase in nonperforming loans were 9 commercial loans totaling $38.9 million, downgraded due to updated financials and missed projections as well as other smaller loans totaling $7.2 million. These additions were partially offset by the payoff of 2 commercial loans totaling $21.2 million, charge-offs for the quarter totaling $9.5 million and other net reductions of $4.1 million, which include loan transfers to OREO, upgrades and paydowns. In addition, substandard loans and accruing status increased by $84 million, primarily driven by 2 CRE loans totaling $49.5 million, one due to updated financials and the other due to missed contractual milestones. Both loans have adequate collateral coverage. Adding to the increase were 6 commercial loans totaling $37.1 million, primarily due to updated financials. Important to note that the majority of these loans exhibit adequate payment performance or have other acceptable mitigants in place, including adequate loan-to-value ratios, interest reserves, personal guarantees or other structural enhancements, which support the continued accrual status. These increases were partially offset by $78.2 million from payoffs and $30.5 million in the sale of one substandard loan. In the next slide, we show the drivers of the provision recorded in 3Q and impact to the allowance for credit losses. The provision for credit losses was $14.6 million in the third quarter, including the release of $700,000 in loan commitments. The provision was comprised of $7.8 million in additional specific reserves, $8.9 million to cover charge-offs, $3.6 million due to credit quality and macroeconomic factors, offset by releases of $2.3 million due to the reduction in loan balances and $2.7 million due to recoveries. During the third quarter of 2025, gross charge-offs totaled $9.5 million related to 2 commercial loans totaling $4.1 million, several small business commercial loans totaling $1.8 million, 1 CRE loan totaling $1.3 million, indirect consumer loans totaling $1.8 million and other smaller balance loans. Lastly, the allowance for credit losses coverage ratio increased to 1.37% of total loans, up from 1.20% in the second quarter. Excluding specific reserves, the coverage ratio rose from 1.17% to 1.23%. In the next slide, I'd like to provide some details on our expectations for the fourth quarter of 2025. In terms of loan growth, we currently have a pipeline for 4Q of approximately $350 million via organic production and $150 million via our newly launched syndications program. As we continue to focus on asset quality, we expect some of this loan production and purchases of syndications to be partially offset by reductions in criticized assets as well as payoffs and maturities with the net loan growth for the quarter being between $125 million to $175 million. This represents approximately a 2.5% increase from 3Q 2025. Regarding deposits, we expect growth to be in line with loan growth. We will evaluate a further reduction in brokered as well as other higher cost deposits. Looking at profitability, we project our net interest margin to be approximately 3.75% for the fourth quarter. We continue to project noninterest income to be between $17.5 million and $18 million in 4Q. Regarding expenses, we expect them to decrease to the range of $74 million to $75 million. We expect the efficiency ratio to be in the high 60s given the lower growth from payoffs and asset quality-related reductions. And finally, we project core ROA to be between the mid-80s and low 90s, although we could possibly get closer to 1% given recoveries on collections from previously charged off substandard loans like the one Jerry just referenced. And with that, I pass it back to Jerry for additional comments and closing remarks. Gerald Plush: Thanks, Shary. Finally, turning to the final slide we will cover. I'd like to provide some color on the topics shown here. So first, regarding expense reduction initiatives. We've launched an expense reduction initiative with an initial goal of achieving a baseline of $2 million to $3 million in savings per quarter in 2026. Again, this is a baseline and the analysis of additional opportunities are in process. There's going to be more to come on this. You'll begin to see the start of these reductions in the fourth quarter. Examples of items that we are either evaluating or already implementing include contract reviews, transferring certain tasks from third parties to in-house resources and just outright expense elimination. And again, please note, we're in the process of evaluating every opportunity by detailed line item reviews for additional reductions. So next, regarding commercial banking leadership. I've asked Mike Nursey to step into the Head of Commercial Banking role recently vacated by our former Chief Commercial Banking Officer, as previously announced during the third quarter via Form 8-K. Mike is a seasoned leader with over 35 years of banking experience and is well known and respected in the Florida marketplace. We also intend to further build out our commercial teams in both Palm Beach County and the Greater Tampa market in the coming months. Also, as we just announced last week, the addition of Angel Medina to bolster our in-market leadership and business development efforts here in the Greater Miami County marketplace, and it's been well received as Angel is well known and respected here as a senior leader. He just started with us this week, and we anticipate that he will be a significant contributor to growth opportunities in this marketplace. Next, the heightened emphasis we're placing on reducing nonperforming assets. There is no question this is job one. We are realigning even more select personnel in order to drive resolution as prudently and expeditiously as possible and aligning more personnel to proactively address upcoming covenant testing and financial statement updates. We've complemented our in-house reviews with a well-known third party to expedite risk rating testing in the third quarter and to assess a very significant portion of the portfolio, as I previously mentioned, for any signs of potential concerns. We expect to continue to invest in these reviews in the fourth quarter to ensure timely completion of the review scheduled for 4Q. We've also launched an extended multi-hour all-hands leadership weekly meeting to address special assets as a working group to monitor and drive progress. We will be looking to provide a mid-quarter update on progress via our investor presentation, which we will file ahead of the upcoming Piper Sandler Conference in mid-November. Now, turning to buybacks to give an update. With respect to capital management, while we'll continue to take a prudent approach, carefully balancing the need between retaining capital to support growth initiatives or growth objectives compared with buybacks and dividends to enhance returns, we intend to utilize the $13 million remaining in our current authorized buyback program this quarter, given where our stock is currently trading. In 3Q, we utilized a 10b5-1 plan to repurchase 487,000 shares for $10 million in the quarter, as Shary previously noted, and we intend to do the same thing here in the fourth quarter. So as we wrap up today's comments, I want to underscore the priorities we've outlined and emphasize a number of key underlying strengths here, strong capital levels and outstanding net interest margin, opportunities for additional fee income from growing AUM levels, a heightened focus on driving expense discipline and most importantly, increased focus on accelerating progress on asset quality. We've taken decisive steps this quarter to strengthen risk oversight, and we'll continue to allocate resources and leadership focus to accelerate progress. While this quarter reflected the impact of this proactive approach to credit risk, we remain confident in the strength of our franchise and the opportunities ahead. With leadership changes in commercial banking, further strengthening of bank strength in special assets and credit, targeted growth initiatives in key markets and lines of business and a clear plan for cost reductions and capital deployment, we are positioning Amerant for the better in the coming periods. I'd just like to thank you for your continued support as we execute on these commitments. So with that, I'll stop, and Shary and I will look to answer any questions you have. Kate, please open the line for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Michael Rose with Raymond James. Michael Rose: Maybe I'll just start off with the same question I feel like I've asked the past 2 quarters, just on kind of the lay of the land, where you guys think you are on credit. I know the migration is probably as frustrating to you as it is to us. But if I go back to when you raised capital about a year ago, I think the expectations were for much stronger financial performance. And it looks like the resolution of some of these credits over the next couple of quarters is certainly going to weigh on growth performance, et cetera. So Jerry, I guess the question is, when do you think we kind of hit the inflection point on credit? And when do you think realistically you can get back to a more sustainable, durable 1% plus ROA? Gerald Plush: Sure. Appreciate the question and totally understand where you're coming from. Look, I think the third quarter was the highest peak in terms of -- and I referenced that it was over $3.5 billion in the portfolio, right? So you're basically over half the portfolio was evaluated either for annual reviews, limited reviews or covenant tests in the quarter. It is substantially lower here in the fourth quarter. And as I said, Michael, earlier, I think we've got a very good line of sight. I did give a specific example of a very significant resolution. And I believe both in special mention and in substandard, we are well on our way working through these. Look, the most challenging part, Michael, is the timing of resolution on these items, right? That's the piece that has clearly less predictability. And you can see, look, you're just 3 weeks, almost 4 weeks after quarter end, we have a resolution of a material item. We've got a number of these with a good line of sight. I think with all the comments that I made around -- and I think Shary shares the same belief, the bench strength that we've done, the teamwork that across the areas that's being approached on this, we're heading into having a much better line of sight and a much better path to early identification and resolution rather than seeing the type of flow that's going through the stages that obviously we saw this quarter. And I do think, Michael, a couple of other things. The expense initiatives are critical. We will give more color on that in a couple of weeks at the upcoming investor conference. And as I said, I believe we are a very low baseline that we just wanted to let people know that all of that's identified, and we can apply those reductions in as we look at projections going forward. And we believe there is significant additional opportunity for us. And again, I think that's just realigning priorities that -- and I guess the other good thing to say is you also heard in terms of there's a rebirth on the credit side. We've already had some nice outstandings booked so far in the fourth quarter. And as Shary referenced, you're going to see the beginnings of not just organic growth coming back in, but also the launch of the syndication program, which is critical for us because, again, remember, we're not just looking to buy, we're looking to participate. And so given the size of exposures, we think that, that's smart for not only growth, but also prudent risk management. Michael Rose: Okay. I appreciate all that commentary. Shary, just a quick one for you. The margin guide for the fourth quarter implies a step down. I'm sorry if I missed this, it's a busy morning. But what's going to specifically drive that step down from this quarter's level? Sharymar Yepez: Sure, Michael. So the guidance that we gave for the fourth quarter is close to the 3.75%. A couple of drivers into that number compared to 3Q is we're now going to see a full quarter's worth of repricing on the asset side on the floating rate loans. After the rate cut that occurred in September, we now will see the full quarter showing that impact. We're also including an update in terms of an additional rate cut happening now, which will impact 2 out of the 3 months of the quarter. And then that would be offset by the repricing of our deposits. We continue to see a beta close to [ 40 ] as we did in the past. So we definitely see the assets repricing faster than the deposits. The other thing, Michael, is that within the number that you see in 3Q, we have collections on some special assets, which created a higher level of the NIM. We do expect some of those things to happen in the fourth quarter as we continue to collect on those, but the guidance we're giving is more on the normalized NIM. Gerald Plush: Yes. Michael, and I just would like to add to Shary’s comments that I think you're also going to see production given the rate decrease that happened in September, the anticipated decrease, that will result in lower yields on new production coming in as well. And what it does not include is if there's any recoveries, as I just referenced on that one credit of interest income that previously had been reversed. So if we have recoveries on interest income, that could obviously be a positive. And of course, as we've done previously, we'll disclose all of that as part of it. Michael Rose: Okay. I appreciate the color. And maybe just one last one for me, and this is back to you, Jerry. You've been in the seat for a bunch of years now. I know you're not happy with the performance. I know investors aren't. But just given the health of M&A markets at this point, is there a point in time where you might want to consider strategic alternatives? Gerald Plush: Yes. Look, Michael, I think we've stated all along, we're a publicly traded organization. The way we have to think about things is -- and I think the way the Board needs to think about things, is our ability to execute and drive the results. Obviously, if there are opportunities, that has to be weighed, right? But I mean, our focus right now is on getting things on the right track and getting back to the kind of returns that Shary referenced here in the fourth quarter as a step in the right direction. We do believe we're taking all the right steps given where we are. But look, I mean, I think, obviously, everything has to be evaluated as it comes up. Operator: Our next question comes from the line of Russell Gunther with Stephens. Russell Elliott Gunther: I wanted to just start on the loan growth discussion. I appreciate all the color there. Jerry, maybe as you think about what the kind of go-forward organic opportunity is and the sustainability of that kind of $125 million to $175 million net loan growth guidance. And then maybe just more specifically on the syndication activity. I know you gave us some color as to what we would expect from a growth perspective in 4Q. How should we think about sort of the ebbs and flows participating in versus participating out? Gerald Plush: Yes. Great question. I think it depends on, Russell, the opportunities that the business development, the RMs generate. Our Head of Syndication is working closely on a lot of different opportunities already with the team. Clearly, we demonstrated -- we've participated in our first big deal. I'm sure you saw the participation in the raise acquisition financing where we were also a syndication agent. I think that was a great way to announce that we're willing and able to look at deals like that and be an active participant and also actually participate in helping get the deal syndicated. And I think that's one of the reasons why when we brought Jack on board, we were so excited to be able to attract someone with his contacts and experience. As I look at it on a go forward, I think it is -- again, it's a great tool for 2 ways, right? We did stay upfront that the volume was going to be more purchased than us actively participating away. But my expectation in '26 is you'll see that become a bigger piece because part of what we're trying to do is start to get hold sizes back into the sub-$30 million range on deals. And we are seeing much larger opportunities. And so we think this, again, is a great way for us to not only help assist on the growth side, but I think prudent risk management and maintaining lower hold sizes on a go-forward basis. Sharymar Yepez: And Russell, to complement that, the way we see it is on the short term and short term, I mean, now in the fourth quarter, we're focused on the buy side and creating that 2-way 3 relationship. And then starting 2026, the efforts will be more on the sales side and making sure that when we get opportunities that come to our table, we're able to participate some portions out and be there. Russell Elliott Gunther: Got it. Okay. I appreciate it. And then how should we think about the size of the investment portfolio kind of alongside the net loan growth guide you guys are expecting? Gerald Plush: Yes. Look, Russell, I think -- and again, we gave previous guidance that in the absence of loan growth or I should say to supplement the balance sheet, we elected to expand growth in the portfolio. I think on a go-forward basis, it's pretty clear we would much rather be deploying those funds into loan growth than any continued growth in investments. So if you do see some additional growth this would be the, in my opinion, the last period. And frankly, there probably could be some contraction in this period. One of the scenarios we're actually looking at along the way is how much of that do we still even want to maintain here in the fourth quarter. So more to come as we continue to do analysis there. But I think with the reemergence of the pipeline, the launch of the syndication program here in this quarter with something already done and under our belt, I think you'll start to see that it will be back to the growth coming on the loan side, certainly not on the security side. Sharymar Yepez: Yes. And Russell, to that, the investment portfolio and the way the purchases were made in the last few quarters were on the fixed rate side. So valuation has been really good, and it provides an opportunity for liquidity to be able to redeploy wherever we want, like from a loan perspective or to repay off some higher cost deposits. Russell Elliott Gunther: Got it. Okay. Super helpful. And then just the last one for me would be a follow-up on the asset quality discussion. Charge-offs came in pretty darn close to what you had expected for this quarter. As you address sort of the inflow that occurred in 3Q, what is the outlook for realized loss content over the next couple of quarters? Gerald Plush: Yes. I mean we'll both give some color on that. But in my remarks, what we did was go through credit by credit and do the analysis. And if there was a need for either a charge-off or the addition of specific reserves, they were set. Russell, the one way to potentially think about it is the establishment of specifics maybe where you might see charges. But again, it's already been reserved for. But otherwise, I think our look on charge-off activity, and I'll let Shary go ahead and answer. But on the business book, coupled with the rest of the indirect, it would be back into the... Sharymar Yepez: So we're seeing something close to the 30 to 35 basis points. A portion of that is related to the amount that we still have in the indirect consumer portfolio and some small commercial loans. And then the excess out of that would be if we were to charge off some of the loans that currently have some specific reserves. Operator: Our next question comes from the line of Stephen Scouten with Piper Sandler. Stephen Scouten: I guess maybe one more kind of follow-up around credit would be, I guess my question is, can you give us any color on kind of the vintages of credits that saw maybe incremental reserves or these specific reserves you were just referencing? Trying to get a feel for if this is just lingering credit issues from the past or if these are actually maybe some issues that are burgeoning up on some of the faster growth that we've seen over the last couple of years. Gerald Plush: Yes. Look, I think it's a mix. You can look back to where it was a much lower rate environment. So let me give a good example, where we've looked at credits that are either sort of going into the pass watch or special mention category. We're obviously evaluating given the low rates they're at, what would the potential refinancing risk be, right, under current rates as these things are looking to mature. So I mean, I think you're looking at anywhere from in the 2020 to 2024 range because, again, you're looking at a lower rate environment in those earlier years and then obviously, a higher one more recently. Stephen Scouten: Got it. Okay. And I guess the follow-up to that is and maybe this is just the depth of the portfolio review we spoke to, Jerry, but what gives you confidence today that the worst could be behind us here after, I think, maybe hoping to feel that way like a year ago around this time? And then do you keep a lid on loan growth until maybe there's greater certainty that these issues are kind of in the past? Gerald Plush: Yes. Look, and I'll take the last point you made first, which is kind of where the prioritization was in 3Q. The emergence that you'll see in loan growth, I think we've -- we will tell you, it's much more selective in terms of industry type. We're not really looking -- it's more in the C&I side. It's not really looking at significant growth at all in the commercial real estate side. And I do think that, again, when you look at some of that, a big piece of this would come through as we just referenced on syndication as well. Look, asset quality, I keep coming back to we've allocated more personnel. I think we've got a really proactive effort going on across the organization right now that I think the way we're working through that is probably, to your question, why I have greater confidence on resolution because the open communication and line of sight and proactively going to each of these and working through solutions is really becoming more and more evident in sort of the feeling, I think we have across the organization, certainly internally at this point. Stephen Scouten: Okay. And maybe just last thing for me, just around expenses and the potential expense initiatives. I know -- sorry, you noted some of the expenses this quarter were a bit elevated and shouldn't repeat in some of those categories. But I want to make sure I heard you right. I heard -- I think, Jerry, you said like $2 million, $3 million a quarter. I'm assuming that's like $2 million, $3 million annualized. But kind of how do you think about where you hope the expense base to get in 2026? Is the hope to kind of keep it flat? Or do you think we could see actual net reductions in the overall expense base? Just kind of framing up that potential. Sharymar Yepez: Sure. So I'm going to start first with driving from the 3Q to the 4Q expectation. As I mentioned, there were some expenses that we're not expecting to be recurring like downsizing of mortgage, some legal expenses on the trust side, including surrendering the license in Cayman and some investments in governance like AI and ERM, that takes us to a more, I want to call it, the normalized level of the $74 million. But on top of that, then we are expecting some additional reductions through some initiatives, and this includes things like reviewing third-party contracts. Do we need them? Do we need them at that same level? When we're working on a co-source or outsource approach and we have the knowledge and skill set to do that internally, can we shift that back? And that leads us to the $2.5 million to $3 million. It would be per quarter, not annualized of what Jerry just mentioned. So with that, we're still working into finalizing numbers, but we do expect a net reduction starting 2026. Gerald Plush: Yes. And Stephen, to add to that, the disciplined way that we are approaching it is the $2 million to $3 million were early identification items. The process we're going through right now is a very stringent line by line, component by component are there opportunities? And again, whether it's bringing anything we've done third party internally, do we still need the level of help that we have? I mean it's all over the -- it's -- every single thing is being analyzed and scrutinized and it's a team-wide effort across all of the functions in the organization. At the same time, the one area where we're going to continue to build out and make sure is, obviously, whatever we need on the risk side, we're going to implement. I also referenced that we have business development opportunities to expand in both Tampa and Palm Beach. There are areas of priority where we would [ patent ]. So that puts a heightened emphasis on us to find offsets to those plus to continue to look for reductions to get a greater savings than that [ $2 million or $3 million ] a quarter that we've established as a baseline. So as I referenced, more to come. We'll probably have some additional color, frankly, at the upcoming conference that's in mid-November that I referenced. Operator: Our next question comes from the line of Woody Lay with KBW. Wood Lay: Just had another follow-up on credit. I was just interested, have you all used third-party reviews in the past? Or is this really the first quarter that you've used the third party? Gerald Plush: In the third quarter of last year, we had a limited review. This year, it was a more considerable effort. And our view is that it is designed to give some comfort on accuracy of risk rating and timeliness of risk rating. And so Woody, a lot of this is the scrutiny that you get by being in the regional bracket. This is all part of the build that we wanted to ensure. But frankly, there is a lot of opportunity for -- internally for the teamwork that I've referenced between the line, between credit, between credit review and being in a very proactive way about it. And this was -- I do want to reference again, this was the highest quarter, right, for annual reviews, limited reviews and covenant testing to be done. It's basically over half the portfolio. So it's much less significant in the other 3 quarters of the year. Wood Lay: Yes. So I think just about 50% was reviewed in the third quarter. How much of the loan portfolio do you expect to be reviewed in the fourth quarter? Gerald Plush: Yes. I want to say it's in the [ $1.3 billion to $1.5 billion ] range. And remember, a lot of that is quarterly covenant testing, right? You've probably gone through the bulk of annual reviews at this stage. Wood Lay: Got it. And then when you look at -- I think it was [ 12 ] credits downgraded to NPA in the broader industry, we see some weakness in the subprime consumer and especially auto. When you look at your downgrades, are you seeing any overlying trends that's impacting these borrowers? Or do they seem unconnected? Gerald Plush: Yes. I don't think you see the exposure in a material way that others have. Again, we're not someone that had the exposure that others did to NDFIs. We didn't have any impact from some of the big issues that others have reported on this quarter. We were not involved. I think when you look at ours, particularly, I think, on the commercial real estate side and just where there's probably construction underway, it's whether there's -- are they still on track timing-wise and that sometimes because of delays creates issues. We also -- and I already referenced, do we anticipate there could be some refinancing risk over the next 12 to 24 months. And so we've done early identification of those as well. So just examples on the commercial real estate side. Sharymar Yepez: Yes, Jerry, to complement that, I think it's important that it's not only on the industry side that we're seeing that these loans are across multiple industries, but also the drivers for these items are different, whether it's a covenant that was missed, a milestone in a construction project or a milestone in the repositioning of one. So I think it's important that there's no concentration in terms of that risk. Wood Lay: Got it. Do you feel like -- this is my last follow-up. Do you feel like you're being more aggressive with some of the downgrades than you have been in the past? Or has the strategy been pretty consistent? Sharymar Yepez: Yes. Yes, I think we are. And the -- what we're seeing here is that timeliness and being proactive makes a difference. The earlier we get in front of a customer and try to get to a resolution, the better outcome that we expect to have. So that's what's driving this level of reviews and the timeliness of these things that we're doing. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments. Gerald Plush: Yes. Thank you, Kate, and thank you, everyone, for joining us today to review Amerant’s third quarter results. I hope all of you have a great day. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to the Polaris Third Quarter 2025 Earnings Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to J.C. Weigelt. Please go ahead. J.C. Weigelt: Thank you, Chuck, and good morning or afternoon, everyone. I'm J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2025 third quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer; and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing our 2025 third quarter as well as our expectations for 2025. Then we'll take your questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2024 10-K and other filings with the SEC for additional details regarding risks and uncertainties. All references to 2025 third quarter actual results and future period guidance are for our continuing operations and are reported on an adjusted non-GAAP basis unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Now I will turn it over to Mike Speetzen. Go ahead, Mike. Michael Speetzen: Thanks, J.C. Good morning, everyone, and thank you for joining us today. As we previewed a couple of weeks ago, we delivered strong third quarter results. Sales in the quarter were $1.8 billion, driven by stronger-than-anticipated shipments to meet improved retail and a solid mix of Off-Road vehicles, especially RANGER side-by-sides. Equally important, we made a significant strategic move with the announced sale of a majority stake in Indian Motorcycle. This move allows us to sharpen our focus on our core business where we see the greatest potential for profitable growth across our portfolio. From more efficient plant operations to healthy dealer inventory and improved working capital, the Polaris team is delivering results in the areas we can control. This gives me great confidence that we will move through the stage of the current economic environment. Polaris is positioned to deliver strong earnings and higher returns for shareholders. Sales were up 7%, driven by a richer mix of shipments in the Off-Road segment and higher shipments in Marine, partially offset by increased promotions. Shipment volume and ORV were up approximately 5%, excluding Youth product. North American retail rose 9%, led by strong Off-Road performance, resulting in approximately 3 points of market share gain in ORV. We led the industry by making a commitment over a year ago to reduce dealer inventory, and this last quarter marked a turning point. Dealer inventory is now down 21% year-over-year. Flooring expenses are materially lower for dealers, down over 50% in some cases, and days sales outstanding for Polaris inventory is as low as I can remember, excluding the pandemic era. Not only is our dealer inventory substantially lower, but it is also healthier with aged units and dealer inventory down approximately 60% relative to 6 months ago. This gives us confidence that dealers and Polaris are in a great spot to capitalize on growth and margin expansion when the market normalizes and improves. Adjusted EBITDA margin was under pressure compared to last year, driven by increased tariffs and normalized incentive comp. We continue to manage costs carefully and drive lean and operational efficiencies across our business to exceed our goal of $40 million in structural operational efficiencies this year. Some examples of these efficiencies include lower labor costs driven by lean activities that have increased efficiency and improved material flow in all areas of the plant and lower raw materials and the elimination of a warehouse in Mexico, driven by improved forecasting and demand planning as we see improved material flow. These are just a couple of examples of the many improvements we've seen throughout our plant network. We're still in the early stages of lean deployment, which gives me great confidence in the efficiencies we have in front of us. Adjusted EPS came in at $0.41, driven by a strong mix and operational efficiencies, partially offset by tariffs and normalizing incentive compensation. As we look ahead to the remainder of the year, we're reintroducing full year 2025 guidance. We're closely monitoring consumer health indicators like unemployment, confidence, debt and discretionary spending as well as developing supply chain constraints resulting from global trade tension. Our Q4 expectations are for sales to grow sequentially. However, mix and operating expenses are expected to negatively impact sequential EPS as is increasing tariff costs. Bob will walk you through the details shortly. Looking at the details from this last quarter, retail was up 9%, led by strong growth in Polaris RANGER and crossover vehicles. As expected, Youth experienced headwinds due to our shift in production out of China. We anticipate Youth will continue to be a challenge early in Q4 as we begin to build inventory throughout the quarter and into the holiday season. This summer, we reintroduced the Polaris factory authorized clearance program for the first time since 2019. It was a success with dealers and customers, driving growth without significantly increasing promotional spend. FAC was a powerful marketing tool that successfully reengaged customers and drove increased dealership visits, which resulted in a significant drawdown in our non-current dealer inventory. On-Road was down mid-single digits as we lapped a strong comp with the launch of the new Indian Scout motorcycle in 2024. Within Marine, pontoon retail in the quarter was down low double digits compared to last year. We gained share across Off-Road and On-Road in the quarter. Within our Off-Road utility segment, our family of RANGER side-by-sides continue to grow and take share with the broadest offering of vehicles in the utility side-by-side category. From the all-new Polaris RANGER 500 to the extreme duty Polaris RANGER 1500 XD, we have continued to create and redefine the category that remains unmatched by our competitors. Despite recent product launches from our competitors, the Polaris 1500 XD continues to be the highest performing utility side-by-side in the market. Why does this matter? Because our leadership and product allows us to take over 5 points of market share this quarter in the utility side-by-side segment, which is the largest category of vehicles in the ORV industry. Remember last quarter, when I talked about the Polaris XPEDITION and how this product has helped shape the largest share capture story in ORV over the past 5 years. Well, we continue to write new chapters as we gained an estimated 10 points of share in the quarter within the crossover category. Again, despite recent product launches from our competitors, the Polaris XPEDITION continues to be the only product of its kind in the market. As the industry leader, Polaris sets the bar, and we continue to play offense, bringing innovation that is winning at dealerships. In addition to inspiring current customers to return to dealerships, innovation also brings new customers to the industry. An excellent example of this is the recent launch of the RANGER 500, our new entry-level utility side-by-side that launched in July. To date, over 80% of the customers who bought the RANGER 500 were new to Polaris. This tells us that this is the right vehicle at the right price to get customers into the dealership and in a Polaris vehicle. As you know, I regularly carve out time to get into the field and visit dealers and take part in dealer council meetings. This feedback we received during these meetings is instrumental in helping us keep a pulse on dealer sentiment across the industry. They share what's working, what's not and what they're hearing from customers. Inventory levels have been a regular topic over the last 2 years. My recent takeaways are that dealers are more comfortable with their inventory positions in ORV and are embracing our NorthStar Reward program in record numbers. Given these conversations with dealers and the data we have on dealer inventory, we believe we have reached a point where production, ship and retail should be aligned. While there is still work to do in Snow, which we believe will normalize this quarter, this is a big win for Polaris and our dealers. We continue to have an intense focus on winning at the dealerships with unmatched offerings across vehicles, PG&A, service and financing. We are the global leader in powersports and take that responsibility seriously as we continue to push the industry forward while expanding the addressable market. One way to show leadership is through proven race performance. Recently, Polaris RZR Factory Racing solidified its dominance in desert racing with a third straight victory at the Baja 400, sweeping the UTV overall podium and a commanding performance. This dominance redefines what is possible in racing as we continue to raise the bar even when our largest competitor races their latest top-end performance vehicle. Another way to prove leadership is innovation. Our innovation pipeline is showing no signs of slowing with last week's second wave of 2026 ORV product launches. Leading the charge is the all-new RZR XP S. It is Polaris' most capable trail machine yet, engineered for riders who want to conquer wide open terrain with confidence and style. With a bold 72-inch stance, 25 inches of usable suspension travel and a rugged RZR Pro S driveline, it is built to dominate the toughest trains while delivering a smooth, responsive ride. We also introduced the largest display in the industry with a 10.4-inch screen for RIDE COMMAND on the RZR Pro R. On the utility side, we launched several limited edition Polaris Ranger XD 1500s with the NorthStar Texas and the NorthStar Mountaineer editions tailored to meet the specific needs of customers in key regions. In snowmobiles, we have a robust product pipeline of innovation that we will bring to market in the coming years. And in Marine, we just launched a full redesign of our flagship QX Bennington pontoon. The QX lineup blends timeless design with intuitive technology and thoughtful innovation, again, setting a new standard in the pontoon industry. Another example and one that my family and I will be attending is the upcoming annual Camp RZR event in Glamis. It was one of my favorite weekends of the year and an incredible opportunity to witness our customers' passion for riding and what the Polaris brand stands for. The energy and enthusiasm at Camp RZR is a powerful reminder of the deep connection our community has with our products, and it continues to inspire our team as we innovate for the future. One leaves Glamis feeling confident in who the true leader in powersports is and what a company's impact on the industry can mean. It's an honor to be part of such an amazing company that is the global leader in powersports continues to support the long-term health of the industry with the largest and best dealer network, a team that delivers rider-driven innovation, providing great customer experience and a strategy built to generate shareholder value. Let's shift to the Indian Motorcycle transaction. We announced a definitive agreement to sell a majority stake in Indian Motorcycle to Carolwood with the deal expected to close in Q1 2026. Indian Motorcycle will become a stand-alone business, and we will hold a small equity stake in the company. This move is expected to unlock the full potential for both Polaris and Indian Motorcycle. Carolwood brings strong capital backing and a commitment to investing for the long term, and they brought in an experienced leadership with their selection of Mike Kennedy as CEO. They are poised to take Indian to the next level. We've built something incredible, the #2 motorcycle brand in the U.S., the #1 brand in customer satisfaction, over 600 dealers, over 900 dedicated and talented employees and a strong lineup of motorcycles exemplified by being the market share leader in the mid-sized category. Now it's time for Indian Motorcycle's next chapter and Carolwood is the right partner. For Polaris, the decision allows us to focus on our most promising high-margin growth opportunities. Innovation is key, and we're doubling down, accelerating investment and devoting resources to critical priorities and initiatives, which is very exciting given the product pipeline we have in ORV, Snow, Marine and Slingshot. The focus continues to be on enhancing the customer experience with rider-driven innovation. Shareholders should be excited as well. Post separation, we expect the transaction to be accretive to adjusted EBITDA by approximately $50 million and to adjusted EPS by approximately $1. It's a win-win. Right now, teams are focused on standing up Indian Motorcycle to operate independently from Polaris, and we are committed to making this a smooth transition for Indian Motorcycle dealers and customers. I want to shift gears and talk about what we're seeing related to trade policy as it continues to evolve. Our gross tariff impacts for the year rose by $10 million since July, driven by international retaliatory policies and increased commodity exposure. Despite this, given deferrals and mitigating actions, we don't expect a material change to our 2025 P&L outlook and now expect the impact from new tariffs to be approximately $90 million. We're executing our mitigation strategies effectively with an urgent focus on our China spend with a long-term plan to drastically reduce our spend on all China parts and components. These efforts take time to find suppliers, tool production and validate parts. By the end of 2027, we expect our actual China spend to be down by approximately 80% relative to 2024, which equates to less than 5% of our cost of goods sold coming from China. It's an aggressive strategy that will take time to show up in the financials, but I can assure you that we have a very capable team focused on these efforts and ultimately believe that we will have a more resilient and efficient supply chain because of the moves. I'm going to turn it over to Bob to provide you with more details on the financials. Bob? Robert Mack: Thanks, Mike, and good morning or good afternoon to everyone joining us today. Let's start with the third quarter financial results. Adjusted sales for the quarter were up 7%. This was stronger than our expectations, driven by higher shipments and a richer mix of Off-Road vehicles. Net pricing was neutral with price increases offsetting elevated promotions. International sales grew 2%, led by strength in Europe. PG&A sales were up 20% with record performance in parts, especially oil, which is a great indicator that our customers are actively using their vehicles. Gross profit margin benefited from mix and operational efficiencies as compared to last year, but that was more than offset by $35 million in new tariffs, volume declines and higher incentive compensation relative to last year's depressed level. Accordingly, adjusted EBITDA margin contracted year-over-year as expected due to the previously noted issues impacting gross profit, along with the year-over-year incremental incentive compensation impact in OpEx. As you may recall, we made temporary cuts to incentive compensation in the second half of 2024 due to challenging market conditions. It is important to note this year-over-year headwind in incentive compensation includes cash and stock-based compensation and is mainly recorded at the corporate level. Despite these pressures, we generated $159 million in operating cash flow this quarter, reflecting strong earnings quality and improved working capital management. Year-to-date, we've delivered over $560 million in operating cash flow and approximately $485 million in free cash flow, which is a testament to our strong execution and our low working capital business model. Off-Road sales rose 8%, supported by a richer mix of ORV vehicles, strong commercial volume and PG&A growth. Dealer inventory continues to improve across the industry. As Mike mentioned, we've turned a corner in our core ORV business and now plan to ship in line with retail demand. There are a couple of exceptions to note. For used vehicles, we recently moved production out of China, which may cause some volatility in retail estimates and dealer inventory as we rebuild stock. Snowmobiles are another exception. We reduced ship this year to help manage dealer inventory following 2 seasons of low snowfall in the flatlands. Overall, we expect dealer inventory across the portfolio to be well positioned relative to demand as we head into 2026. We gained about 3 points of market share in ORV this quarter, led by Polaris Ranger and Polaris XPEDITION. Importantly, our successful FAC program didn't require heavier promotional spending than what we incurred in the second quarter. Gross profit margin improved by 104 basis points despite tariff headwinds. Key drivers included operational efficiencies, a better mix of vehicles and positive contributions from warranty and dealer floor plan financing. Moving to On-Road. Sales during the quarter were down 3%, driven by ongoing softness in the broader motorcycle market and within our Slingshot business. Adjusted gross profit was down 23 basis points, impacted by negative mix and tariffs. This was partially offset by a stronger performance at Exim. Marine sales were up 20% against a low comparable last year when we took action to rightsize dealer inventories coming out of the prior selling season. The increase in sales was driven by positive shipments of new boats, including the new entry-level Bennington pontoon. The September SSI data shows that market share held steady for our pontoon business in the third quarter. However, the broader marine industry continues to face pressure from elevated interest rates and macroeconomic uncertainty. We continue to actively manage dealer inventory, which is down 17% relative to the third quarter of 2024. Gross margin declined due to mix, though this was partially offset by positive net pricing. Moving to our financial position. We generated approximately $159 million in operating cash flow this quarter, translating into $142 million of free cash flow. Working capital has been one of the ancillary benefits from our ongoing efforts to reimplement lean in our plants. Through the improvements we have seen in our retail forecasting and clean build rates, we have been able to better align our supply chain and manufacturing processes, reducing inventory across the board. This, along with efforts to optimize payables and receivables, should continue to drive attractive cash generation metrics over time. We expect 2025 ending working capital as a percentage of sales to be in line with pre-pandemic levels with opportunity to improve from there as we continue the lean work in our plants and further localize our supply chain. We remain committed to maintaining investment-grade credit metrics and ended the third quarter well below our covenant thresholds given strong year-to-date cash generation. With our strong performance on cash generation and ongoing tariff mitigation efforts, we are moving to a more balanced split between investments for growth and debt paydown. While we will continue to focus on reducing our debt levels, we will also invest in high-return opportunities to widen our competitive moat in an industry where we already have a strong position with the most innovative portfolio of vehicles. We also continue to remain committed to the dividend and our Aristocrat status. Clearly, the global trade and tariff environment remains dynamic, but we are seeing more consistency in customer demand. Given that, we are reintroducing full year guidance. While this only covers 1 quarter, we believe it helps reduce uncertainty from an investor standpoint and build confidence in our outlook. Although the evolving trade environment required us to withdraw full year guidance earlier this year, we are pleased that excluding added tariff costs, our full year guidance results remain aligned with the expectations we initially set in January. We expect full year adjusted sales between $6.9 billion and $7.1 billion, with growth in Marine and PG&A offset by declines in On-Road. Off-Road sales are expected to be flat. Industry retail is projected to be flat, but we anticipate gaining share, thanks to our strong product portfolio. Adjusted gross profit margin is expected to be around 19% with tariffs representing a 1 point headwind. Other margin pressures include negative net pricing and incentive compensation, partially offset by lower warranty costs and operational efficiencies. For the fourth quarter, there are a few sequential headwinds contributing to our expectations that fourth quarter adjusted EPS will be lower than our third quarter adjusted EPS. Within the gross profit line, tariffs are expected to be $5 million higher and mix is tracking negatively with the timing of seasonal products such as Youth, Snow and Marine. Within OpEx, the timing of certain costs in engineering and legal are sequentially higher. All in, we expect fourth quarter adjusted EPS of approximately $0.05. This assumes no new tariffs that would have an immediate impact on raw material and component costs and that supply chains are not significantly disrupted by trade disputes and other government actions. For the year, we expect adjusted EPS to be a loss of approximately $0.05. Excluding new tariffs, we would expect adjusted EPS to be close to our original estimate of $1.10. In summary, we delivered strong Q3 results in a challenging environment. We have momentum to finish the year strong with a positive outlook on operations, dealer inventory and innovation. The expected sale of a majority stake in Indian Motorcycle will free up resources that we plan to fully dedicate to higher growth and higher-margin opportunities. We remain focused on what we can control and believe this disciplined execution will drive higher margins, stronger cash flow and improved returns on invested capital, ultimately increasing shareholder value. With that, I will turn it back over to Mike to wrap up the call. Go ahead, Mike. Michael Speetzen: Thanks, Bob. I'm proud of our team's performance this quarter. This continues to be a challenging environment, and the Polaris team remains focused on closing out 2025 strong. Let me wrap up with a few final comments. We believe dealer inventories are at healthy levels given our demand outlook. Therefore, outside of a few smaller product lines, we believe build, ship and retail should be aligned going forward. Our team continues to execute against our strategy to improve operations within our plan, and we are on track to exceed our commitment to deliver $40 million in operational savings this year, building on the more than $200 million in savings last year. This cannot be overlooked. We have worked hard over the last 2 years. And while there is still work left to do, we have seen the results and the opportunities ahead of us that should provide a meaningful tailwind to margins when volume returns. The rationale behind our decision to sell a majority stake in Indian Motorcycle allows us to put added focus and resources on our most profitable growth opportunities. We're working to close the Indian Motorcycle transaction in Q1 2026, and we believe it's a win for both companies. Lastly, we remain committed to our long-term strategy to be the global leader in powersports and believe we have established a solid foundation to grow from and increase shareholder value when the industry recovers. Innovation is strong, dealer inventory is rightsized, and we are running more efficiently than before. These are the pieces to build from, and we stand ready to deliver on our goal of higher sales growth, greater earnings power and stronger returns. We appreciate your continued support. And with that, I'll turn it over to Chuck to open the line for questions. Operator: [Operator Instructions] And the first question will come from Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Maybe first on ORV retail strength and kind of the magnitude of outperformance versus the industry in the quarter, up 9% versus up low single digits, particularly on the utility side. Wondering if you could share any thoughts around what drove those share gains in the quarter as well as thoughts around industry retail and kind of the share gain opportunity looking ahead? Michael Speetzen: Yes. Thanks, Noah. I think there's a lot at play. I think we've obviously rightsized our inventory. So we've got the right product at the right dealers at the right price. So that's an important starting point. I think when you look at the RANGER lineup, and I talked about it in my prepared remarks, we've got a breadth that many of our competitors just can't cover. You start with the RANGER 500, as I talked about, brought a lot of new customers, 80% new to Polaris into the fold up to the XD 1500, which at this point is unmatched in the industry and remains a very popular vehicle. And you couple that with the massive improvements we've made in quality. It shows up in much lower warranty costs. We are now hearing dealers play back to us that quality is not something that they have to try and explain. It's something that is a strength and getting associated with our brand. And then as we track customers, we know that the short-term repurchase rates have started to creep up. which says people are out using the vehicles. We can see that with the repair order activity we track, tire consumption, oil consumption. And we know ultimately that people are out using the product. And so they get to a replenishment cycle given a lot of the innovation that we've put out into the marketplace. I talked a little bit about the NorthStar rewards program in my prepared remarks. We had the highest level of what we call 4 and 5 star, which is the highest 2 levels of our dealer program. And that isn't just important from the perspective of dealers earning more holdback. It reflects the fact that the dealer network is performing at a higher level. And I mentioned that because it provides a better customer experience. And that's really important when you get customers in, given the tremendous amount of innovation we have. That can fall apart if the dealer isn't performing on their end. And we see a tremendous amount of retail coming out of these 4- and 5-star dealers. You couple that with the tremendous innovation we've got in the marketplace with the broadest portfolio in that utility segment, and it's not a surprise that we outperformed the industry. Noah Zatzkin: Very helpful. And maybe just one more. Hoping you could share any early thoughts on fiscal '26, either from an industry perspective or Polaris specifically. Obviously, as it relates to Polaris, there are some puts and takes next year. The deal, I think, is expected to be $1 of EPS benefit. And on the tariff front, it seems like maybe mitigation this year is a bit better than expected. So just any high-level thoughts around '26 would be helpful. Michael Speetzen: Yes. I'd kind of look at it in this order. I mean, clearly, the Indian deal is probably going to have the largest impact. It obviously takes about $450 million of revenue away, but it is going to add roughly $50 million in EBITDA and $1 of EPS. So that single event is going to be pretty significant. I mentioned in my prepared remarks that build will equal ship, will equal retail. We're not prepared to make a call on where we think the industry is. But if you think about a flat industry and having ship equal retail, you're talking about several hundreds of millions of dollars of uplift just from being able to ship into the channel, which obviously will provide improved absorption at our plants and additional fall-through. We look at the promo environment. From a competitive standpoint, our largest competitor is pretty much in the same region we are from a dealer inventory standpoint, which is very helpful. We've seen significant improvements amongst the Japanese competitors. They're not perfect yet, but we've seen some of the dramatic things that were being done with rebates and incentives essentially cease, which is good. So we think promo is going to be kind of net neutral as we get into 2026. And then as you indicated, from a tariff standpoint, it's going to be additional cost because we're going to be lapping '25. And if you remember, we barely had any tariff impact in Q1 and Q2. And as we said, we think tariffs are going to be about a $90 million incremental hit in 2025. As we move into 2026, we think tariffs are going to be just north of $200 million. That's all in. That's inclusive of the 301 tariffs that have been in the business since back in 2018. The team is working hard on that. Obviously, we're watching the negotiations that are underway with China right now, but we're not going to wait. We're moving aggressively. As I talked about in my prepared remarks, we're making a dramatic reduction in the amount that we're sourcing out of China by 2027. And we think we're going to be south of 5% of our cost of goods sold by the time we get into 2027, and that will be a pretty massive reduction and certainly a benefit to the business. Operator: The next question will come from Craig Kennison with Baird. Craig Kennison: I wanted to start with a follow-up on RANGER 500. I know it's early, but what can you tell us about the consumer profile of that product line? Are they new to powersports overall, younger? Are they first-time buyers? Just looking for a profile. Michael Speetzen: Yes. I mean you kind of hit on all of it, Craig. And they are prospective customers that have wanted to have a Polaris product, but they really couldn't find the right entry point. Until we introduced this product, you really couldn't get into a Polaris vehicle for under realistically $14,000, $15,000. And this vehicle is perfectly suited for someone who has an acre or 2 wants to use the vehicle to drag trash cans down to the curb and go get the mail. And so that's really what we see is these are either new to Polaris, meaning they might have bought a brand that we don't even talk about as a competitive set that are sold through some of the big box retailers or there are people that would have used a golf cart or something like that and now see an opportunity to own the #1 powersports brand. We think that's great because we view that as an opportunity to continue to evolve them up the product family down the road. Craig Kennison: And then I guess, with respect to that particular customer profile, we have seen some cracks emerge in the subprime auto space. And I'm just wondering with respect to your consumer, if you're seeing any changes in credit availability among that particular credit tier. Robert Mack: Yes. We really haven't, at least. in Q3. Credit metrics were good. Through-the-door FICOs were only -- they were down 2 points relative to 2024. Actually, 12-month losses in the portfolio actually improved versus last year. So we feel like that's peaked from a credit quality standpoint. We're starting to trend back in a positive direction and pen rates and things like that have stayed pretty consistent. Availability of subprime has been decent. We're not seeing a fallout from the lenders. So we're not experiencing that, I think, to the degree auto is right now. Operator: The next question will come from Joe Altobello with Raymond James. Joseph Altobello: I guess first question on retail. Obviously, the FAC was very successful. Any sense or concern that, that might have pulled demand forward? I'm curious what you're seeing in October. I know the FAC, I think, is still ongoing, but it's probably waning in terms of the impact. So I'm just curious if you're concerned there and what you're seeing here in Q4. Michael Speetzen: Yes. I mean the FAC was -- as I talked about in my prepared remarks, it really didn't drive incremental spend. We viewed it as just a way to generate a little bit of excitement, get people kind of reengaged and coming into the dealership. I mean, at the end of the day, door swings of foot traffic are what drive retail. And ultimately, it worked. We didn't add a bunch of cost. The good news is we were able to move, as I talked about, we've drawn down our greater than 180-day old inventory. We've drawn that down 60%. And a lot of what moved in the third quarter was that noncurrent inventory. As we're looking at October, results are pretty good. We continue to see strength in areas like Ranger XD, XPEDITION, ATV. Youth, as we indicated, is going to be a headwind for probably the next month or 2 as we ramp up production down in Mexico heading into the holiday season. And we think retail, excluding youth and ORV in the fourth quarter is going to be up low single digits. And certainly, in October, we're seeing trends that support that performance. Joseph Altobello: Okay. Got it. Perfect. And then just moving on to tariffs. I think, Mike, you mentioned that you expect next year to be all in just north of $200 million, which is only slightly higher, I think, than what you're expecting this year if you include the $301 million. So maybe what's the incremental net impact next year? And what do you think a good incremental margin is for '26? Robert Mack: Yes. I mean we're not ready to start giving guidance for '26 yet. I would say that the incremental is over $100 million versus '25. And as we really got to start to see and get a little closer to the end of the year, see what inventories look like, work through our -- the amount of moves we have coming out of China and the timing of those moves to really get a good incremental number related to 2025. So kind of a $200 million plus all-in for 2026 is sort of where we see it right now. We'll have more detail when we talk again in January. Michael Speetzen: And Joe, remember that also includes pulling Indian Motorcycle out. So there's a number of puts and takes. And as Bob indicated, when we get to January, we'll have a little bit better walk for everyone. Operator: The next question will come from James Hardiman with Citigroup. Sean Wagner: This is Sean Wagner on for James Hardiman. I guess, first, I think initially, fourth quarter was expected to be maybe a lot better than third quarter. Was there any shift in earnings power between the 2? Robert Mack: Yes. A few things, and we alluded to some of it on the -- in the prepared remarks. I mean if you look at Q4, I would say sort of 25% of the impact really is in GP, and that's some incremental tariffs. Tariffs will be the highest for the year in Q4. That's just as they build into inventory and start to flow through the P&L. Vol/mix, volume is okay in the quarter, but mix is negative. Mike talked about Youth. And it's negative quarter -- sequentially for the quarters and year-over-year. Last year, we had a big fourth quarter in Youth, and that's partly because we had had vehicles on hold in '23. And so we had really good retail performance in '24. We're kind of back to that a little bit this year where we'll be shipping really in Q4. We didn't ship any in Q3. Normally, a lot of the youth stuff would have showed up in Q3. But with the move to Mexico, that's been delayed a little bit. So that has probably the most pronounced impact. And then Q4 is always a bit tough from a mix standpoint because we ship a lot of Snow and we ship Marine coming off their dealer meetings. And those are just structurally lower GPs than ORV, whereas in Q3, it was heavy, heavy ORV. Plant performance is a little better, so that helps offset it. The real story is in OpEx, and it's a couple of things. I mean it's the highest quarter as it relates to the incentive comp compensation issue on a kind of year-over-year basis. And then the timing of some engineering, legal and IT spend that is higher in Q4 than it is in Q3. So those are the big pieces as it relates to the -- why Q4's earnings look the way they do. Michael Speetzen: Sean, maybe I misheard you, but I thought in your question, you had said that it sounded like it was worse than we were expecting. We did not guide fourth quarter. I mean we had pulled our guidance. If you go back to some of the prepared remarks that Bob had, you pull the impact of the tariffs out, we are largely executing against what we had conveyed at the beginning of the year when we provided guidance before all the tariff noise came into the environment. So I think some of this is that there are numbers out on the street that were not necessarily based on things that we had said. And as we look at the buildup of our financials and where we knew we were going to be delivering snowmobiles and things like that, I wouldn't say that anything in the fourth quarter is a big surprise from our standpoint. Sean Wagner: Okay. Fair enough. I guess piggybacking off of that from a high level, now that you've round tripped the '25 guide, excluding tariffs, is it anything outside of tariffs that has fundamentally changed this year or any big lessons that you guys have taken away from the year? Robert Mack: Yes. I mean, I think if we sort of step back and look at the year in total, I mean, excluding tariffs, Promo was heavier than we expected it to be for the year. Mix was probably a little -- was better as we continue to really outperform in our -- as Mike talked about, at the high end of these categories, the XD 1500, the XPEDITION, we don't -- the competition doesn't really have anything to go against us there. So those vehicles continue to sell really, really well. That customer base is really strong. And then the plants really outperformed where we had pegged it. We were at $40 million for the year. We're on track to meet or exceed that. And just good solid performance out of the plants in a challenging environment. I would say those are the 3 big things that stick out. Michael Speetzen: Yes. And I just want to add to the last one Bob mentioned, Sean. When I think about going back 2 or 3 years ago, operational execution was not our strong suit. We've realized we were not as lean or as good as we thought we were. And when I look at this year, and I look at the fact that our operational teams have not only met what they originally laid out, but they've exceeded it. And they've done that in an environment where we've had to make some interplant product transitions as a result of the tariffs as well as contending with the tariffs and the mitigation work. It's -- we didn't bring on extra people to do that. We've got our supply chain and operational people working those plans. And the fact that the Polaris organization was able to step up to the challenge and not let the operational improvements waiver and, in fact, accelerate them and put us in a position to exceed, I think, is pretty impressive, and I think gives me a lot of excitement about the future and where we think we can take the company and how much opportunity we have in front of us to improve execution. Operator: The next question will come from Tristan Thomas-Martin with BMO Capital Markets. Tristan Thomas-Martin: One kind of qualification question. Your comment plan to ship in line with retail. Is that just Off-Road? Or is that consolidated Polaris? Michael Speetzen: I think as it relates to Q4, it's really Off-Road. You mean as we -- the comments I made around moving forward, build equals ships equals retail? Tristan Thomas-Martin: Yes, correct. Michael Speetzen: Yes. I think you can take it broadly. I mean the reality is that we have timing differences given the seasonality of our businesses within that. But when we start looking at the macro picture around the business, and Bob hit on some of the stats. You look at how much we've pulled down the Marine inventory, where we're at from a motorcycle inventory, obviously, that will be moved out of the business as well as then ORV and Snow. We feel really good about where we're at. And when you look at it on a full year basis, those -- the build equals ship equals retail should hold. Robert Mack: Yes. As it pertains to the fourth quarter, which as I said in my comments, it's really an ORV comment. Motorcycles obviously ships more in the first part of the year as they get into their seasonality, Snow ships more in the fourth quarter and Marine ships kind of more fourth quarter, first quarter as they look at their season. So -- but on a full year basis, to Mike's point, in '26, that's an across-the-board comment when you look at the full year. Tristan Thomas-Martin: Okay. And then just one more. It kind of sounds like everyone is coalescing around a little more of a conservative industry outlook for next year, but also everyone is expecting to take share. You talked a lot about products. So kind of outside of that, what other levers do you have to kind of protect the share you've gained in the last 2 quarters? Michael Speetzen: Innovation. I think it starts with product, and you can see the results of that. And I think in many instances, our competitors are going to have to catch up in a couple of categories. I think after that comes the strength of the dealer network. We have spent a lot of time, not just tactical things like getting the inventory rightsized, but spending time with our dealers, understanding what works well, what doesn't, what do we need to change. I think our NorthStar program is the best program in the market. We can see it in terms of the dealer engagement. And that starts with somebody walking through the door to look at a new product to somebody coming into the service bay to somebody coming in to buy parts or accessories for their vehicle or shopping online, getting financed, getting an extended warranty agreement. And I think you have those 2 things together. It's a pretty powerful equation, and I think it will work well for us as we head into '26 and beyond. Robert Mack: Yes. I think there's a lot of -- to Mike's point, a lot of maturity in the management of the dealer network right now, a lot of focus on dealer profitability. We're not out trying to add dealers. We're trying to optimize the structure we have, work with those dealers as people want to get out of the industry, working with the strongest dealers out there to take over those points and then looking at how do you have more kind of multi-dealer structures that allow the dealer to optimize how they run their business and how we deliver to their business. So I feel like all of those things are going to help us, and I think we're the farthest along in terms of how we work with the dealer network. Operator: The next question will come from Robin Farley with UBS. Arpine Kocharyan: This is Arpine for Robin. Your margins came in better than expectations, and you, of course, called out sort of favorable mix and positive contribution from warranty expense for the quarter. Could you maybe walk through whether those are recurring benefits to margin as we look into Q4 and more importantly, 2026? I know you mentioned mix reverses to less favorable in Q4. But just thinking about those drivers for next year? And then I have a quick follow-up. Robert Mack: Yes. Certainly, warranty has been a positive story really for all of '25, and I think that trend will continue into '26. The quality of our products continues to improve. We hear that from the dealer base. We see it in the numbers. And you all see it in the warranty as it impacts from a cost standpoint. Plants, obviously, the big step was in '24, but continued improvement in '25, and we think we'll outperform the $40 million that we had as a target. That work will continue. We're still in the early phases of our reimplementation of lean in the plants. And so there's continued work to do there to drive more profitability out of the plants, and we'll see some more benefits of that as volume improves. And mix is kind of a quarterly thing. I mean there's inter-business mix in terms of the different parts of the company and because different businesses have different GP profiles. But in general, mix continues to be a strong story for us given our outperformance given our innovation at the high end of the product lines. So we think mix overall will continue to be a positive as we move forward. Arpine Kocharyan: Great. And then just really quickly, any comments you could give us in terms of early reads into retail environment for 2026? So some of the things that you're looking at that shape your outlook for demand for next year? And maybe any initial comments on cadence of new product intros and where you see opportunity maybe for you to grow a bit above industry growth range for next year? Michael Speetzen: Yes. I mean we're -- we won't get into specifics, but safe to say you can look at the cadence of innovation we've had over the past several years, and we don't expect that to slow down. So we think there will be plenty of innovation opportunities for us as we head into '26. I think it's really more of the same relative to the macro. I think there's a lot of uncertainty around where inflation is headed and resulting interest rate moves. We're not going to pontificate on how many rate cuts and all that type of stuff. But certainly, higher interest rates are a challenge for this category. It's been encouraging to see rate cut direction, and we think we're going to need more of that. And I think that will come as a result of easing inflation, which will be good for our consumers. I talked about in my prepared remarks that we're looking at things like the debt levels and things like that with our customer base. But we also think time plays in our favor. We look at the customer demographics in terms of in terms of purchases and repurchase rates. And we're now past, call it, 5 years past the bubble that was created during the pandemic. And we expect that those customers will start coming back. We know they're using the product. And given the cycles of innovation we've had since those products were purchased as well as time, we fully expect that they'll start to come back into the fold. So we think there's a number of different things. But ultimately, this is going to be a macro-driven phenomenon. I do think people are looking at next year from a cautious perspective. But I think the work we did this year to get dealer inventory rightsized to put us in a position, quite frankly, if the industry is flat, we still believe we can grow just given the position we are from a dealer inventory as well as the innovation we have in the pipeline. Operator: The next question will come from David MacGregor with Longbow Research. Joseph Nolan: This is Joe Nolan on for David. You guys had strong success with the factory authorized clearance program. Just wondering if you can give an update on what sort of promotional activity you're seeing from competitors and just how that develops into fourth quarter and 2026? And also, just in past quarters, you've given an update on competitor channel inventories, if you can give an update there as well. Michael Speetzen: Yes. I'll kind of wrap them all together. We and our next largest competitor, when we look at our DSOs and current, noncurrent, we look very similar, which is helpful because the 2 of us make up a large portion of the industry. The Japanese have been moving in the right direction. We've definitely seen the large promo to move very old product or kind of onetime incentives that were going on in the marketplace. We've seen a lot of that essentially slow down or exit the market. As we head into the fourth quarter and into next year, at this point, we don't see anything that's outsized relative to what has been going on here more recently. And as long as the dealer inventory stays in a good spot or continues to improve with some of our competitors, we expect that promo environmental settle down. We talked about '26. We're assuming that the promo environment will be kind of flattish year-over-year, and we'll see how that continues to evolve given some of the competitors that are still catching up on their inventory levels. Robert Mack: Yes, I would say there's been some talk of lower promo in the industry, but the behaviors haven't demonstrated that that's going to happen. And so right now, our view is that things will remain sort of flat with where they are right now. Hopefully, if we see the level of interest rate cuts that folks are talking about, that may allow some things to normalize as we get into mid-2026, but it will take a while for that to play out. So tough to really forecast right now. Operator: This concludes our question-and-answer session as well as our conference call for today. Thank you for your participation and attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to NextEra Energy, Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Eidelman, Director of Investor Relations. Please go ahead. Mark Eidelman: Thank you, Steve. Good morning, everyone, and thank you for joining our third quarter 2025 financial results conference call for NextEra Energy. With me this morning are John Ketchum, Chairman, President and Chief Executive Officer of NextEra Energy; Mike Dunne, Executive Vice President and Chief Financial Officer of NextEra Energy; Armando Pimentel, President and Chief Executive Officer of Florida Power & Light Company; Brian Bolster, President and Chief Executive Officer of NextEra Energy Resources and Mark Hickson, Executive Vice President of NextEra Energy. John will start with opening remarks, and then Mike will provide an overview of our third quarter results. Our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements, if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release and the comments made during this conference call and the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, www.nexteraenergy.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure. With that, I'll turn the call over to John. John Ketchum: Thanks, Mark, and good morning, everyone. NextEra Energy delivered strong third quarter results with adjusted earnings per share increasing 9.7% year-over-year. In addition, through the first 9 months of the year, our adjusted earnings per share has increased 9.3% year-over-year. The continued strong financial and operational performance at both FPL and Energy Resources positions our company well to meet its overall objectives for the year. America is in a golden age of power demand. The country needs more electricity than ever. New electrons can't get on the grid fast enough. NextEra Energy is uniquely positioned to help lead this pivotable moment for our sector. We develop, build and operate all forms of energy infrastructure. At our core, we're a development company. We have a world-class platform that enables us to quickly build low-cost generation and electric and gas transmission. We're not just recontracting around existing assets, we're also building new energy infrastructure needed to power America. Our 2 world-class companies, Florida Power & Light Company and NextEra Energy Resources are the perfect complement to one another. Day in and day out, we are powering today and building tomorrow. Importantly, we are in a terrific position to continue delivering near-term and long-term value to our customers and shareholders. As we discussed with you earlier this month, our long-term earnings growth drivers are extensive, both inside and outside Florida. Simply put, we have many ways to grow across our platform, both this decade and the next. We are excited to discuss this in much more in greater detail with you at our investor conference on December 8. The Florida economy continues to see significant economic growth and Florida Power & Light Company continues to make smart long-term investments to serve that growth, while keeping bills low and reliability high. We put our customers first and the results speak for themselves. FPL customers experienced top decile reliability that's nearly 60% better than the national average. And typical FPL residential bills are 20% lower than they were 20 years ago when adjusted for inflation. And that's not by accident. FPL's nonfuel O&M costs are 70% lower than the national average and over 50% lower than second best in our industry. And approximately 90% of FPL's power generation comes from the nation's largest gas-fired fleet and 4 nuclear units. This baseload power is the backbone of our system, giving us the flexibility to meet our customers' needs with the lowest cost forms of energy right now, solar and storage. Remember, a robust gas and nuclear fleet means we don't necessarily need nighttime electrons. We need more low-cost electrons to meet our daytime peak, which is why solar and storage are the perfect complement and choice for FPL system and customers today. FPL is also preparing for the future, which will require even more baseload gas generation and perhaps further down the road, nuclear generation. And it's all happening in a state that needs more electricity, not less, just like America. Florida is one of the nation's fastest-growing states and the world's 16th largest economy. It's why FPL plans to invest approximately $40 billion over the next 4 years in new all-the-above energy infrastructure, including 5.3 gigawatts in solar, 3.4 gigawatts in battery storage and a gas peaker plant that is pending regulatory approvals. We look forward to continuing the successful multi-decade approach of adding low-cost generation to meet Florida's growing need for power, while also increasing reliability and keeping customer bills low. This approach is at the heart of our new 4-year rate proposal. As a reminder, on February 28, we initiated FPL's 2025 base rate proceeding for new rates effective in January 2026. We reached a proposed settlement agreement in August with most of the intervenors in the proceeding, reflecting a broad set of constituents across our customer base. The 4-year proposed agreement would provide an allowed midpoint regulatory return on equity of 10.95% with a range of 9.95% to 11.95%. There would be no change to FPL's equity ratio of 59.6%. The proposed agreement also includes a rate stabilization mechanism similar to what we filed in February. The proposed settlement also includes 2 new large load tariffs that are designed to ensure large load customers pay for the incremental generation needed to serve them. We believe the proposed settlement is fair, balanced and constructive and supports our continued ability to provide highly reliable, low-cost service for our customers through the end of the decade. If the proposed agreement is approved, typical residential customer bills would increase only about 2% annually between 2025 and 2029. This means bills would remain well below the current national average, providing our customers with the economic certainty that comes from a 4-year rate agreement. We completed evidentiary hearings earlier this month and expect the Florida Public Service Commission to provide a final decision on the proposed settlement agreement on November 20. This summer, we received a constructive outcome on federal tax credits, providing policy certainty for our renewables build at Energy Resources. We expect to receive tax credits for our renewable development plans through 2030, while our suppliers are positioned to be FEOC compliant. We've also been able to reduce development risk for a large part of our planned build. That's because Energy Resources has approximately 1.5x coverage of the project inventory required to support its development expectations through 2030. This provides us the runway we need to continue delivering low-cost power solutions to our customers, who need power today and tomorrow. Renewables are just the start. We also plan on delivering power through battery storage, gas-fired generation and nuclear. Over the second and third quarters alone, we have originated 2.8 gigawatts of new battery storage opportunities, as we continue to grow the world's leading storage business backed by a domestic supply base with batteries made in America. We're also leading the much-needed development of linear transmission infrastructure, both electric and gas, and our customer supply business has proven integral to serving data center customers. We're tying it all together through our AI-driven world-class development platform and decades of experience. And we are doing it at a time when the combination of development capabilities and a strong balance sheet are more important than ever. It's why we are ideally positioned to work with hyperscalers, who are increasingly looking to power their business by bridging -- by bringing their own generation. We are unique in that we combine a national footprint, a strong balance sheet, supply chain capabilities and experience in building all forms of generation and transmission, together with unmatched customer relationships and an industry-leading team on a development platform second to none and that's what we believe it takes to serve this new customer class, which is investing tens of billions of dollars per project. Hyperscalers, data center operators and load serving entities continue to tell us they need solutions for large load today and tomorrow to address growing energy demand across America. As a leader in serving this demand, I am pleased to announce that we have entered into a 25-year power purchase agreement with Google that pending regulatory approvals, enables us to recommission our Duane Arnold Energy Center nuclear plant in Palo, Iowa, just outside of Cedar Rapids. The 615-megawatt plant is just the beginning and will help power Google's growing cloud and AI infrastructure in Iowa once it returns to operation, which we expect to occur no later than the first quarter of 2029 and perhaps as early as the fourth quarter of 2028. Duane Arnold shut down in August 2020 after safely and reliably serving Eastern Iowa for decades. And because we carefully and methodically went through the decommissioning process, we have confidence in the investment required to restart it. During our evaluation of recommissioning Duane Arnold, we collaborated closely with the plant's minority owners, Central Iowa Power Cooperative, known as CIPCO, which provides power to the local community and Corn Belt Power Cooperative. As part of that collaboration, CIPCO will purchase 50 megawatts of the plant's output on terms and conditions consistent with the Google PPA, and we have signed definitive agreements to acquire CIPCO and Corn Belt's combined 30% interest in the plant, which will bring our ownership to 100%. Restarting Duane Arnold marks an important milestone for NextEra Energy. Our partnership with Google not only brings nuclear energy back to Iowa, it also accelerates the development of next-generation nuclear technology. With the support of the Trump administration, Google and NextEra Energy are creating more than 1,600 jobs and adding more than $9 billion to local economy, creating a win for the U.S., a win for both companies and a win for Iowa. As a demonstration of the pride of working at Duane Arnold and for NextEra Energy, a significant number of Duane Arnold's previous workforce are looking to return to work at the facility. And our team working to recommission Duane Arnold includes many of the same employees who decommissioned the plant 5 years ago. Beyond the nuclear plant, we have ample land available to provide additional power and capacity solutions, including battery storage to support data center build and potential future expansion. As part of the agreement, NextEra Energy and Google have also signed an agreement to explore the development of advanced nuclear generation to be deployed in the U.S., which will help power America's growing electricity needs. Of course, to move that forward, we'll be certain to appropriately mitigate and limit our financial exposure as new nuclear technologies continue to advance. We expect Duane Arnold will be eligible for a nuclear production tax credit with a 10% energy community bonus. And once restarted, we expect Duane Arnold to contribute up to $0.16 of annual adjusted EPS on average over its first 10 years of operation. Duane Arnold is one example of data center hubs we are developing across the country. When you put it all together, our opportunity set is not contained to a single utility service territory. NextEra Energy has a national footprint. We serve America and have relationships with all types of customers, including cooperatives, municipalities and utilities of all sizes looking to attract data center load to their service territories. We are committing to building new infrastructure and building energy for our customers where and when they want it. And I believe there is no team and no company in this country with a comprehensive set of skills and balance sheet better positioned to get the job done. Bottom line, we have many ways to grow, and we remain well positioned not just for the rest of the decade, but into the next decade as well. We look forward to sharing many more details with you in December. With that, I'll turn the call over to Mike to walk you through detailed results from the quarter. Michael Dunne: Thank you, John, and good morning, everyone. For the third quarter of 2025, FPL's earnings per share increased by $0.08 year-over-year. The principal driver of this performance was FPL's regulatory capital employed growth of approximately 8% year-over-year. FPL's capital expenditures were approximately $2.5 billion for the quarter, and we expect FPL's full year capital investments to be between $9.3 billion and $9.8 billion. For the 12 months ending September 2025, FPL's reported return on equity for regulatory purposes will be approximately 11.7%. During the third quarter, we reversed approximately $218 million of reserve amortization, leaving FPL with a balance of roughly $473 million. Looking forward, we expect to use a portion of the remaining reserve amortization balance for the remainder of the year. FPL's third quarter retail sales decreased 1.8% from the prior year comparable period due to milder weather. On a weather-normalized basis from the prior year comparable period, retail sales increased by 1.9% due to an increase in customer growth and underlying usage. Now let's turn to Energy Resources, which reported adjusted earnings growth of approximately 13% year-over-year. At Energy Resources, adjusted earnings per share increased by $0.06 year-over-year. Contributions from new investments increased $0.09 per share, primarily driven by continued growth in our renewables portfolio. Contributions from our existing clean energy portfolio remained unchanged year-over-year despite weaker wind resource due to better performance at our nuclear fleet. Wind resource for the third quarter of 2025 was approximately 90% of the long-term average versus 93% in the third quarter of 2024. The comparative contribution from our customer supply business increased by $0.06 per share, primarily driven by timing of origination activity during the quarter. All other impacts decreased by $0.09 per share, driven by asset recycling during the third quarter last year as well as higher financing costs, mostly related to borrowing costs to support our new investments. Energy Resources had a strong quarter of new renewables and storage origination, adding 3 gigawatts to the backlog. With these additions, our backlog now totals nearly 30 gigawatts after taking into account more than 1.7 gigawatts of new projects placed into service since our last earnings call. We expect the backlog additions will go into service over the next few years and into 2029. This marks the sixth consecutive quarter that Energy Resources has added 3 or more gigawatts to its backlog. We continue to see strong customer demand for ready now capacity solutions as we had our strongest quarter ever in battery storage origination with 1.9 gigawatts of additions to our backlog. Turning now to our third quarter 2025 consolidated results. Adjusted earnings per share from Corporate and Other decreased by $0.04 per share year-over-year. Our long-term financial expectations remain unchanged. We will be disappointed if we're not able to deliver financial results at or near the top end of our adjusted earnings per share expectation ranges in 2025, 2026 and 2027. From 2023 to 2027, we continue to expect that our average annual growth in operating cash flow will be at or above our adjusted earnings per share compound annual growth rate range. And we also continue to expect to grow our dividends per share at roughly 10% per year through at least 2026 off a 2024 base. As always, our expectations assume our caveats. This concludes our prepared remarks. And with that, we will open the line for questions. Operator: [Operator Instructions] The first question comes from Steve Fleishman with Wolfe Research. Steven Fleishman: Congrats on the Duane Arnold news. Maybe just on that topic, John, can you give us any sense on what the cost of restart might be and also the buy-in price of the 30% that you're buying in of Duane Arnold? John Ketchum: Yes. Thanks, Steve. Appreciate the question. So first of all, just the sensitivities, we're not going to go into the CapEx number on this call. But needless to say, we feel very good about our ability to build this to recommission Duane very efficiently. The plant is in great shape. As I said before, the team that will be doing the recommissioning is the same team that did the decommissioning. I've been out there recently tour the facility. It's in good shape. So we'll provide more details on that as we move forward. On your second question on the 30% buyout of CIPCO and Corn Belt, it's really pretty straightforward. I mean that buyout was done in exchange for us assuming their decommissioning liability. It's pretty much that straightforward. And from our standpoint, we have more than ample decommissioning funds that had already been set aside. So I think it's attractive for us. I think it's attractive for CIPCO and Corn Belt as well win-win for all parties involved. Steven Fleishman: Okay. And then one other question, different topic. Just -- it was great to see another 3 gigawatt quarter add, but there was a gigawatt removed from the backlog. Could you maybe just talk about that 1 gigawatt removal and what's driving that? John Ketchum: Yes, absolutely, Steve. This is pretty straightforward. So as you said, we added 3 gigawatts. I mean, another really strong quarter of origination, and we are just seeing a lot of demand for renewables and storage in the market. And remember, so out of that 3 gigawatts, we put 1.7 gigawatts into service in the quarter. And really, I think what you're referencing is the 900 megawatts. Let me just break that down. So we removed 650 megawatts from backlog, which was pretty conservative by us. I think you know we're pretty conservative on how we manage the backlog. We did that for various development reasons. And this is really on some smaller projects that we are really -- that we're continuing to manage, as we move forward. I think we're going to get it all back in '26 and '27 on that 650 megawatts. So it will just come a little bit later. And then there was another 250 megawatts that we just had a little bit of a permitting delay on. So we're just shifting that from '25 to '26. And when you put that 900 megawatts together, it's what, call it, 130 of the backlog, but feel good about getting all of that back. It just comes a little bit later in time. Otherwise, had you included that, we would have been at the bottom end of the '24, '25 range. And I think as investors saw, we've reaffirmed our expectations through '27, including the fact we'd be disappointed not to be at the high end of the range. And so these moves really just don't have any impact on our ability to meet our financial expectations that we've communicated to investors. And as you look out, a lot of positives to see in the backlog. I mean '28 and beyond are shaping up unbelievably well. We just got a great head start on those years. So overall, we're in really, really good shape where we sit now. And I have no concerns about where the backlog sits, and it's as strong as it's ever been. Operator: The next question comes from the line of Shar Pourreza with Wells Fargo. Shahriar Pourreza: John, I just -- I know you kind of mentioned to Steve, you didn't want to get into the actual CapEx numbers at Duane Arnold, but let me try to maybe ask it a little bit differently and just get into the qualitative part of the plant. I know there's obviously a bogey of $1.6 billion for a Pennsylvania plant that's kind of under budget now. You kind of mentioned that this current plant is in good shape. Can you just maybe directionally talk about what you're seeing with that plant and how we should view it without going into the numbers? John Ketchum: Yes. Thanks, Shar, welcome back, by the way. Good -- great to have him back. Shahriar Pourreza: Thanks for having me back. John Ketchum: Yes. Yes, it's great to hear from you. So sure. I mean I'll just kind of -- without going into the numbers, again, we've spent a lot of time going through Duane Arnold, a lot of diligence. And one -- I'm going to go back to what I said before, having the same team that did the decommissioning, leading the recommissioning is an enormous advantage because folks know exactly what was done. And so the plan that we have, we have a lot of certainty around, right? And so I think the scope is pretty well defined, and we know what needs to be done. The facility is, like I said, in really good shape. I mean when I went through it, it was like we just kind of put a lock on the door and got the keys out and opened the lock back up, and then we're going back through it. And there's obviously some things -- some work that has to be done to bring the plant back online. But the plant is in good shape, and we feel very good about our ability to execute against what's in front of us. Shahriar Pourreza: Fantastic. And then, John, just one last one is just, I guess, given the lack of additional nuclear sites to kind of repower for you guys, do you see kind of the next wave of deals moving to CCGTs for energy resources? Are you seeing demand there, especially given the partnership you have with GE? John Ketchum: Yes. Thanks, Shar. So we have many ways to grow, which we talked about a month ago. And I'll talk more about those in a minute. But one of those ways to grow is through new gas-fired technology. Nobody has built more gas-fired generation in this country in the last 20 years than NextEra has. And so we've got a lot of experience at it. And we're really a natural to get back into that area because of our development platform. It's so easy for us to take what we already have in terms of land agents, permitting, all the supply chain capability that we have. You mentioned the partnership that we have with GE Vernova and the strong relationship that we have there, the customer relationships, all the things that go with that development platform, it's easy for us to pivot into gas. And I've said before, we have roughly a 20-gigawatt pipeline already developed because of that development platform and the efficiency that's built into it. And we're excited about what we're seeing on the combined cycle side and some of the opportunities that we have. And we'll talk more about this in December, but a unique advantage that we have is -- because it takes a little longer time to build gas-fired generation, call it, 4, 5, 6 years, a huge leg up that we have that we haven't talked as much about, and again, we'll focus on this in December, is all the renewables and storage that we have. And so when data centers want to get online now and quickly and they want to secure a load interconnect by bringing their own generation, we can accommodate that because we have the solar and the storage that's ready to go and then the gas can come behind it. So we're in a bit of a unique position there in terms of our ability to really kind of hook and anchor data center build-out, as we position our portfolio for these larger scale data center build-outs, we call, data center hubs that can be followed on by gas, maybe SMR technology going back to the collaboration nationally that we have with Google. So just a lot to be excited about. Operator: The next question comes from the line of Nicholas Campanella with Barclays. Nicholas Campanella: I just wanted to ask going back on nuclear. There's a lot of momentum right now for AP1000. And just curious what your appetite would be in participating in something like that? Or if in terms of new nuclear, should we be solely kind of focused on SMR and restarts of current large-scale plants? John Ketchum: Yes. I think for us right now -- I mean, we have Duane Arnold that we talked about. We have Point Beach, we have Seabrook. We have -- we'll be turning our attention to those 2 facilities as we optimize. But one thing that's really exciting is that we probably have 6 gigawatts of SMR capacity across those 3 sites, not to mention back to the development platform. And we are a nationwide development company, right, that has a national footprint. So we also are looking at greenfield sites as well going back to that anchor point around having existing generation ready to go that can accommodate Phase 1, 2, 3 of a data center build-out, as we wait for gas-fired generation to come or SMR technology to come behind that. And we're doing a lot of work around SMRs, and we'll talk more about in December. But I also want to go back to what I said about SMRs, which is that we're going to be very disciplined in our capital allocation strategy and making sure that we have the right commercial and financial structure where we limit any financial exposure that we have, as we invest in those facilities. But when you think about NextEra, I mean, we're really unique because the hyperscaler is investing tens of billions of dollars. This is not like the business 4 or 5 years ago, competing against a lot of small developers. They can't do this, right? The folks that can do this are large-scale developers like NextEra that have a strong balance sheet, a track record, the credibility to be able to match what the hyperscaler needs and the ability to build across generation types, whether it's renewables, whether it's storage, whether it's gas, whether it's nuclear, whether we need to bring a transmission solution to bear, whether we need to build a gas pipeline lateral to enable a gas build-out. I mean, all the things that we bring to the table are pretty unique. And again, combined with that large balance sheet, the team and the customer relationships and the ability to secure load interconnects and work with utilities and co-ops and municipalities, I mean, that really kind of puts us in a pretty small group of folks. And so as we look at the market, really, I think -- I look at the DOE letter that was sent recently over to FERC and more of a focus on bring your own generation. I mean I think that just absolutely plays to all of our strengths and advantages. And it's -- the future is exciting. Nicholas Campanella: That's great. I really appreciate that. Good points. And I know that you've been doing this 6% to 8% outlook for a long time. You've basically been beating that every year. And you look at some other premium companies out there now doing 7% to 9%. What's your philosophy and how you're thinking about long-term growth? And is that a consideration at all, as we are thinking about what could be out there on the Analyst Day? John Ketchum: All great questions, and we'll address those on December 8. Operator: The next question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Congratulations, team. Good to hear from you. Look, I just wanted to follow up on a couple of things here. First, with respect to the gas and contracted gas strategy, can you speak a little bit to what you're expecting or what success you've had thus far? I know this may be digging a little bit into the December update. But to the extent possible, can you discuss a little bit of the latest progress? And should we expect more of these hyperscaler type announcements like Google, but to be parlayed back into contracted gas? And is there a cadence that you'd be care to share as you think about this ramps up? I mean, I know it's early days in that longer-dated 2030-plus time frame, but how would you begin to characterize that opportunity, as it is -- as it stands today? John Ketchum: Yes. So a lot in the hopper is how I would describe it, Julien. A lot of different things that we are working on. And I mentioned our data center hub strategy, which I don't want to spend too much time on today because, again, we're going to get into that in December. Obviously, building out combined cycle units is a big part of that. We think the things that we have in front of us are attractive across the class of hyperscalers that we see. We think the position that we have around our existing renewable portfolio is an enticing way to secure an early-stage load interconnect, as the gas comes later. And so the ability to provide gas with renewables and storage or with SMR technology, the ability to build out the infrastructure necessary to accommodate all that, whether it's transmission, whether it's gas pipelines, I think all plays to our strengths and our advantages together with the supply chain capability that we have. And so in terms of cadence, look -- we look forward to kind of laying this out for you guys in December, but I feel really good about the competitive positioning that we have today because, again, I go back to the fact that there are very few folks that can actually garner the trust, the confidence, the balance sheet, all the things that you saw with the partnership that we have with Google that we're having a lot of success with other hyperscalers as well that looks promising for our future. So more to come. Julien Dumoulin-Smith: Excellent. I appreciate it. And then related here, just to elaborate a little bit further on that net originations discussion here. Can you elaborate a little bit? I mean, obviously, there's been some media attention around Esmeralda and Jackalope, for instance. Can you speak a little bit how that fits in? Were they in your backlog or the position? I mean just trying to juxtapose the broader media conversation, which isn't particularly articulate about this versus what we're seeing in the quarterly update. John Ketchum: Yes, absolutely. So Esmeralda is just a development project. It was not in our backlog. It was a development project for the future on BLM land. I think the BLM was actually pretty clear that -- while they were not looking to permit this as one large project, they were going to entertain applications around individual projects. But remember, we have a massive pipeline, right? So this was just one piece of it. We spent no money on Esmeralda. It's a project in development that we could develop someday down the road. So really, there's really nothing to see there. And then on Jackalope, that project, we'll extend out a little bit more. We continue to work with the customer there. And we'll see what happens. But I mean, again, that's just one small project in the grand scheme of things for a massive backlog that we have. And again, don't forget, I mean, that's why we have 1.5x coverage on our inventory. I don't worry about it at all. We can easily draw from other projects in our pipeline to be able to satisfy customer needs as we go forward. And that puts us in incredibly good position. Operator: The next question comes from the line of Carly Davenport with Goldman Sachs. Carly Davenport: Maybe just another quick follow-up on the backlog. A lot of the additions this quarter coming beyond the 2027 time frame. So just as we think about that potential pull forward in demand related to the tax credits rolling off that you all have referred to, is that strictly a 2028 plus opportunity? Or is there any opportunity to see that impact '26, '27 as well? John Ketchum: Yes. I think -- the pull forward of demand, Carly, I think it just escalates as you get closer to 2030. So you just continue to see step-ups there. And so for '26 and '27, we feel very good about where we sit right now. I think we've got more quarters to go in terms of filling the '27 piece. But again, we look at our financial plan for '26 and '27 in good shape. And what I'm really focused on is that '28, '29, '30 because there's just so many opportunities, as you look to the back end of that decade and that natural pull forward that you mentioned that we've seen historically where we could see a lot of customer demand, not only in '28, but in '29 and '30, and we're so well positioned around FEOC and around our safe harbor position. I think we have some very unique competitive advantages that we will highlight and spend more time on in December. So as I look at the pipeline shaping up around 30 gigs and the way it's shaping up by year, I feel very good about where we sit. Carly Davenport: Great. And then maybe just back on Duane Arnold. The $0.16 of average accretion that you mentioned in the first 10 years of the PPA, is there any color that you can provide on the cadence or if there's significant variability year-to-year that we should be thinking about? John Ketchum: There is not significant variability year-to-year. The reason we said that is -- remember, there's refueling outages for nuclear. And in refueling years, it's not that significant of an impact, but it moves around a little bit around refueling outages. So that's why we use that language. Operator: Next question comes from Bill Appicelli with UBS. William Appicelli: Just going back to follow up on Carly's question around the pull forward. And just maybe you can speak to the development capabilities, right? You've sort of been averaging around this -- around 3 gigs a quarter on the low end of that. Where can that go potentially in terms of just from a capability, supply chain perspective? John Ketchum: Well, we're really well positioned on our -- not only on our supply chain and the things we've been able to do around batteries and the supply chain positioning we have around the rest of the parts and equipment that we plan to purchase. You guys know well, I mean, transformers, electric switchgear, other parts of the supply chain. I mean, I think that's going to create a natural competitive advantage, which goes with having a strong balance sheet and a world-class supply chain capability as we go into '28, '29, '30 that uniquely positions us for the opportunity that can come there, right, which -- because we can do some things that others can't. So I feel very good about, and if you look historically on pull-forward years, we have fared very well on a market share basis compared to our competition there. And also, as we start thinking about being able to not only do what I call kind of the bread-and-butter business around origination, but then also adding on being able to fold in renewables and storage into large load solutions as I've mentioned a couple of times on this call, I mean, it's really an incremental opportunity that we haven't had before, as you think about serving that large load customer. So the demand pull forward is something that we're obviously very focused on and have positioned the business around. And I think we're going to be uniquely capable and positioned to capitalize on the opportunity it's going to bring. William Appicelli: Great. And then just shifting gears on -- at FPL, the large load growth. I guess how is the valuation of that going? I think you've talked about maybe 3 gigs of initial sites or capability. I'm sure you'll speak more to this in December, but any color there around tariff structure or sort of the work and the conversations around bringing those customers in? John Ketchum: Yes, I'll turn that over to Armando. Armando Pimentel: All right. Thank you. So we've got a couple of tariffs that are up for approval at the commission that we are going to hear about on November 20. Regardless of that, we've had folks that have been pinging us all year on availability of getting onto our system, when can they get on to our system and so on. So we are no different at Florida Power & Light than many of the utilities that you guys follow around the nation. These hyperscalers and these data center operators are looking to figure out where they can plug in and how quickly they can plug in. I think what John and Mike Dunne have mentioned before is that this is a potential opportunity at FPL later this decade. And I think for now, that's right. That could certainly change. But we are spending a lot of time doing engineering studies for everyone that you could imagine. And we hope that the environment here in Florida is one that the hyperscalers and data center operators will come to embrace. I mean, why not? We've got a great system at a low cost. So we feel really good about it. Operator: The next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: I was wondering if you could talk about how renewables are interacting with data centers, especially over the next couple of years for projects that you've been working on. I was curious if there's any percentage of power needs that you find are typically covered by renewables when you're powering data centers? Are you seeing any colocation opportunities? And how does battery storage get involved? So curious if you could give kind of a sense of the typical relationship or design that you're seeing there. John Ketchum: Yes, David, what we're seeing there is data centers want to get going immediately, right? And so they want to build out the initial phases of their campus, which could be -- end up being 1,000 -- 3,000, 4,000, 5,000-acre campuses. Every 1,000 acres is about a gigawatt of capacity. But as they think about permitting and constructing their facility, I mean, the first thing they're looking for is load interconnect. And a lot of parts of the country in securing a load interconnect, you've got to bring your own generation. And so what's unique, I think, about what we can do around renewables is we can get them over the hump over those first few years of being able to identify a site, being able to identify a generation solution that's sufficient to get them that load interconnect, whether it's through a combination of renewables or renewables and battery storage. We've seen that in a number of places. We've also seen the ability to leverage like grid alliance, where we can do upgrades on a system that can actually free up additional megawatts needed to secure that initial load interconnect. But that's the key. You got to get the load interconnect to be able to take the power off the grid to be able to satisfy the initial phases. And many of the load serving entities are saying, well, bring your own generation to make that happen. And we're able to do that with renewables, with storage, with grid alliance. And then the plan is to bring the baseload generation behind it. And so when you can combine a comprehensive solution for the hyperscaler, that's what they're looking for and a trusted partner that they know can get it done over time. And we can grow right alongside with them as they're expanding their existing facility. David Arcaro: Got it. Makes sense. That's helpful. And I was wondering if you could talk about what you're seeing in terms of project returns, the trajectory there? And is there a case for higher returns too as we go forward through the end of the year? John Ketchum: Yes, that's a great question. And I said this a month ago, returns have been higher than I've ever seen them in this industry. And I think that's due in part to the unique competitive advantage that we have, and it's exciting for us because as I think about all the opportunities that we have, not only this decade but into the next, recontracting is a big piece of that. And so we have a lot of existing generation that rolls off a contract by the end of the decade that we're going to be able to recontract into the market at much higher premiums. But look, it's just supply and demand. It's that simple. There's a lot of demand out there, and there's just not as much supply to match it. And so that's commanding premiums in the market and high and attractive returns. And that's why it's great to be in a position where we have a really strong pipeline and a really strong supply chain position. And I think we're going to be uniquely positioned going forward to be able to capitalize on what is going to become just a growing market demand, particularly as we get to the end of this decade and into the next. Operator: The next question comes from the line of Nick Amicucci with Evercore ISI. Nicholas Amicucci: Just wanted to touch upon kind of the evolution that we just kind of left upon. So as we kind of think about over the balance of this decade into the next, how should we be thinking about the kind of the portfolio, the kind of culmination of that and kind of if we think about it by energy and generation source, obviously, we saw storage kind of tick up here from a backlog perspective. Just interested in kind of hearing your thoughts around it. John Ketchum: Yes. I mean -- so as I think about the next decade, we've always had Florida Power & Light. And Florida Power & Light benefits from being in fastest-growing state in the United States, 16th largest economy in the world, strong growth as we accommodate all that population that continues to move into Florida. Don't see that slowing down next decade. But as you think about our regulated businesses, it's not just what I call kind of the baseload Florida Power, it's the large load with the large load tariff that we have not had before. It's electric transmission. There's an incredible demand for transmission around the country. We have the leading competitive transmission business in NextEra Energy Transmission. So a lot of CapEx opportunities and growth opportunities for NEET as we go forward. And then you add on gas transmission as well, not only around the existing pipeline assets that we own today, but also, I think, some long-haul greenfield opportunities that we'll be talking more about gas laterals to accommodate hyperscale build-outs. So that really helps to frame even a larger regulated business than we have had historically. And then you think about all the other levers and ways to grow that we have on the Energy Resources side, not just the renewable business that just gets stronger and stronger as we get into the next -- the end of this decade, and then that will carry into the next, but storage as well. We are in a capacity short market. Storage is economically advantaged. It's flexible. It can be built very quickly in 16 to 18 months, whereas gas-fired peakers take 4 to 5 years in many cases. So very flexible, very low cost. And that we are the world's leader in storage and have a unique position with our battery supply agreement that's all domestic and is derisked from a FEOC standpoint. And then I think about nuclear, the agreement that we announced today not only around Duane Arnold, but the collaboration around advanced nuclear nationwide, all the opportunities we have around Point Beach, we have around Seabrook and then greenfield advanced nuclear build-out and then gas-fired generation as well, having been the leader in gas-fired generation development over the last 20 years, leveraging the development platform that we have today, the 20-gigawatt pipeline that's in place. And then you combine all those capabilities into serving the large load customer, which really, as I said before, creates a unique position for us when you combine all the capabilities we have around generation, all the capabilities we have around electric transmission and gas pipelines and also our customer supply business because remember, whenever you're trying to secure a load interconnect, you've got to have a retail energy capability to get that load interconnect from load-serving entities. The customer supply business plays a very important role. You have to be able to do many, many things to be able to enable a large load transaction, and you have to have the balance sheet and you have to have the team. And we also have a 50-state footprint to be able to execute against that, which is really, really unique, given that we've been doing that for 20 years. And then the recontracting opportunity that I mentioned before. I mean we have a massive long power position that becomes open as we get to the end of this decade. And then all the artificial intelligence things that we're doing to really help drive efficiencies and cost savings across the business and revenue opportunities for us as well. So you put all those pieces together, we are in really good shape post 2030. Nicholas Amicucci: Perfect. Yes, that makes a ton of sense. And then just one last quick one for me, too. As we kind of think about now, obviously, just topic du jour with Duane Arnold and the potential restart. How are you guys seeing the nuclear fuel supply chain kind of shape up, as we kind of think about it going forward, just knowing that Russia is going to be coming offline from an enriched uranium capacity in 2028? John Ketchum: Yes. I mean I think the U.S. government is very focused on that. The industry is very focused on that. And we've been very disciplined in terms of how we secure our long-term fuel going forward. So I feel good about where we stand. We baked into our numbers that we gave you on Google our position around where nuclear fuel sits today. Operator: This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Financial Services Corp. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Jim Lally, President and CEO. Please go ahead. James Lally: Good morning, and thank you all very much for joining us for our 2025 third quarter earnings call. Joining me this morning is Keene Turner, our company's Chief Financial Officer and Chief Operating Officer; and Doug Bauche, our company's Chief Banking Officer. Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday. Please refer to Slide 2 of the presentation titled Forward-Looking Statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today. The third quarter was another very solid quarter for our company. As we expected, we saw loan growth return to an annualized level of 6% while deposit growth continued well above this level. This was a continuation of our intentional strategy to lean into our diversified geography and national businesses that allows for our team to focus on the business that fits us the best versus settling for transactional business that achieves certain growth targets. In addition to this, we spent considerable time on the recent closing and systems conversion for the acquisition of 10 branches in Arizona and 2 in the Kansas City area. As a reminder, this acquisition garnered us approximately $650 million of well-priced deposits and $300 million in loans but more importantly, enhances an already strong presence in two strong markets for us. We did experience an increase in provision for loan losses in the quarter primarily due to a $22 million increase in nonperforming assets and net charge-offs. Doug will provide much more detail in his comments but I feel good about our ability to work through these issues and expect our NPAs to return to historical levels over the next few quarters. The recapture of transferable solar tax credits in the quarter caused some noise in our income statement. This investment was a component of our income tax mitigation strategy and is not related to our tax credit loan and fee businesses. Keene will provide details on this and walk you through the accounting treatment in his comments. But I want to reiterate that this project is covered by insurance. With that said, we earned $1.19 per diluted share in the quarter compared to $1.36 in the linked quarter and $1.32 in the third quarter of 2024. This level of performance produced a return on average assets of 1.11% in the current quarter and a pre-provision ROAA of 1.61%. Net interest income and net interest margin both saw expansion in the quarter. Net interest income improved by $5.5 million when compared to the previous quarter, and net interest margin improved by 2 basis points to 4.23%. This was the sixth consecutive quarter that we saw net interest income growth. These results reflect our continued focus on pricing discipline on both sides of the balance sheet, combined with overall steady growth. We continue to improve on striking the correct balance of providing a strategic consultative experience for our clients with appropriate growth. I'm confident that this model will continue to provide for our ability to grow NII for the foreseeable future. On an annualized basis, loan growth in the quarter was 6% or $174 million net of $22 million of guaranteed loans that were sold during the quarter, resulting in a gain of $1.1 million. We continue to see really good progress in our Southwest markets with high-quality growth coming from newer markets like Dallas and Las Vegas. Overall, we originated loans in the quarter at a rate of 6.98%, which continues to be accretive to the overall portfolio yield. Deposit growth in the quarter was exceptional. Net of brokered CDs, we were able to grow deposits by $240 million as impressive was the fact that DDA remained at 32%. While our national verticals provided for much of this growth in the quarter, we have experienced deposit growth from all of our regions year-over-year and would expect to see our typical fourth quarter swell from these markets to finish the year strong. Our ability to continue to grow deposits gives us plenty of liquidity to fund future loan growth while keeping our loan-to-deposit ratio at an appropriate level for our company. Our well-positioned balance sheet continues to be a strength for our company. Capital levels at quarter end remained stable and strong, with our tangible common equity to tangible assets ratio of 9.60%, yielding a return on tangible common equity of 11.56%. This return profile and the continued expansion of our tangible book value per common share, which increased over 15% on an annualized quarterly basis. This level of compounding of tangible book value per share far exceeds our 10-year CAGR of just over 10%. Given the strength of our earnings and our confidence in our ability to continue to perform at a high level, we increased the dividend by $0.01 per share for the fourth quarter of 2025 to $0.32 per share. Our asset quality statistics moved slightly higher in the quarter when compared to the linked quarter. Nonperforming assets increased by $22 million, with the largest component of this being a $12 million life insurance premium loan that is adequately collateralized and just needs to work through the collection process to be resolved. I do not expect any loss of principal on this loan. When accounting for this and the previously disclosed 7 commercial real estate loans in Southern California, these two issues, both of which have high certainty of collection account for nearly 60% of our NPAs. This is why I'm confident that we will see the ratio of NPAs to total assets return to more historical levels in the quarters to come. I want to be clear that we have never had any exposure to the private lending business identified in regulatory filings by two other regional lenders and articles in various publications. As stated in our October 16 8-K and previously discussed in our first quarter earnings call, the 7 real estate loans in Southern California totaling $68.4 million that are directly secured by priority first mortgages on the real properties owned by the single-purpose entity borrowers. We have commenced foreclosure proceedings with respect to the real property and expect to collect the full balance on these loans. We will spend the remainder of the year focused on the cultural integration of our new associates who recently joined through our branch acquisition, along with our new clients acquired in the same deal. Additionally, we'll be focused on continuing the strong momentum we have in our regions and specialty verticals, making sure that we enter 2026 with a great deal of confidence and momentum. Before turning the call over to Doug, I want to briefly comment on what we are hearing from our clients. Last quarter, I mentioned that the impetus for our clients' confidence was the passing of the One Big Beautiful Bill, the downward trajectory of short-term interest rates and further clarity of U.S. trade policy. With the September rate cut behind us and several more on the horizon, we are seeing our clients move forward with more confidence than what we had seen in several previous quarters despite continued uncertainty with some larger trading partners. With that said, I can see our onboarding of new clients and loan production maintaining its current level or possibly accelerating slightly from here. We operate in very good markets, many of which continue to have disruption due to M&A. We've invested in many new associates who are embracing our value-added solutions-based approach, and our balance sheet and deposit generating capability has us positioned well to profitably fund the opportunities that will be presented. I'm excited for how 2025 will end and the momentum that we will carry into the new year. With that, I would like to turn the call over to Doug Bauche. Doug? Douglas Bauche: Thank you, Jim, and good morning, everyone. Over the past couple of months, I've spent considerable time in our major geographic markets, and I continue to be encouraged by both the quality and volume of new relationship opportunities we are seeing. Our brand continues to gain traction in our newer markets of North Texas and Southern Nevada, led by our bankers that are well entrenched and connected to those communities, and we continue to capitalize on the strong economic growth throughout our Southwest region. As Jim mentioned, the September rate reduction and further forecasted easing has seemed to spur some cautious optimism among business owners and real estate investors. Discussions with architects, contractors and developers indicate that their new project pipelines are beginning to build momentum heading into 2026. While volatility continues around trade tariffs with China, our C&I clients have largely navigated this challenging period successfully by adjusting supply chains and pricing to maintain operating margins. On the lending side, loans increased in the quarter, $174 million, net of $22 million in SBA loan sales. We continue to prioritize full relationship wins with disciplined structure and pricing. Sector growth in the quarter is broken down on Slide 5 and was well balanced between investor-owned CRE of $79 million, C&I of $31 million, including SBA owner-occupied commercial real estate and sponsor finance and $73 million in our tax credit lending niche. Growth in the tax credit sector was largely related to scheduled fundings on existing affordable housing tax credit bridge loans. New C&I originations were solid and consistent with the linked quarter as we provided senior debt to both existing and new operating companies across our business lines. However, strong originations were somewhat muted by the exit of a quick service food franchise client in our Midwest region, $22 million in SBA loan sales and a reduction in commercial line of credit usage between the end of June and September. As it appears, our clients are working through some of the excess inventory purchases they made in prior periods when tariff and supply chain concerns were more pronounced. Within the specialty lending business lines, SBA production was stable with the prior quarter and in line with expectations. Sponsor Finance originations slowed in the quarter as we continue our fewer but better approach, while we remain disciplined and committed to this space. Originations in this segment were equally offset by payoffs resulting from sponsors exiting portfolio company investments. LIPF originations were seasonally modest with a strong pipeline of activity heading into the historically strong final quarter of the year. This sector continues to perform well on a risk-adjusted basis and has experienced a 12% year-over-year growth rate. Moving to the geographic markets shown on Slide 6. We posted growth in our Midwest and Southwest regions, while we continue to hold serve in our California markets. Growth in our major geographies came from the funding of a market-leading employee-owned electrical contractor, a privately held distributor of high-voltage electrical components, a manufacturer of high-precision metal parts and several new commercial real estate loans with established developers for the acquisition or refinance of industrial and multifamily projects. Turning to deposits on Slide 7. Excluding the addition of $10 million of brokered CDs, client deposit balances grew by $241 million in the linked quarter, and are up $822 million or roughly 7% year-over-year. Noninterest-bearing accounts increased $65 million in the quarter and represent just over 32% of total deposits. Within the geographic markets shown on Slide 8, we are posting solid customer deposit growth on a year-over-year basis across all regions. Growth has continued to come from our holistic approach to new business development, which rewards full banking relationships rather than transactional lending or high-cost idle cash balances. Our specialty deposit verticals posted strong results, up $189 million for the quarter and $681 million or 22% year-over-year. Our specialty deposits consisting of property management, community associations and legal industry escrow and trust services are broken out on Slide 9. Deposits in the community association and property management specialties totaled roughly $1.5 billion each, while deposits residing within the escrow division, reached $844 million. These businesses provide a diverse, growing and overall favorable cost adjusted source of funding that continues to complement our geographic base. Turning to Slide 10. You'll see that our deposit base is intentionally well balanced across our core commercial, business and consumer banking and specialty deposit channels at 37%, 33% and 30% of total customer deposits, respectively. With deposit clients deeply rooted in treasury management and lending relationships, we're encouraged by our ability to rationally adjust pricing in the current rate environment, while continuing to grow balances across the channels. I'd also like to provide some commentary on asset quality. As Jim noted earlier, nonperforming assets increased $22 million to 83 basis points from 71 basis points in the linked quarter. The increase in the quarter is largely centered around a $12 million life insurance premium finance loan that is 100% principal secured by cash value life insurance. We are in the process of liquidating the policy with the life insurance carrier, and we expect full principal collection. Other notable additions to nonaccrual in the quarter included a $6.2 million sponsor finance credit which was charged down by $3.75 million in the quarter with the remaining $2.5 million book balance expected to be satisfied via the sale of business assets. A $2 million single-family residential real estate loan in Santa Monica and two smaller commercial real estate secured loans totaling $2.5 million in aggregate. On October 16, we filed a Form 8-K, reiterating our position relative to the previously reported 7 commercial real estate secured nonperforming loans totaling $68.4 million in the aggregate to 7 special-purpose entities in Southern California. Our recent foreclosure attempt on October 15 was temporarily stalled due to a second bankruptcy filing. However, we remain confident in our security position and ability to collect the balance of these loans in full. With the satisfaction of the $12 million life insurance premium finance loan and $68 million in aforementioned 7 commercial real estate loans, we expect our nonperforming assets to return to our favorable historical norms in the coming quarter. Now I'll turn the call over to Keene Turner for his comments. Keene Turner: Thanks, Doug, and good morning, everyone. Turning to Slide 11. We reported earnings per share of $1.19 in the third quarter on net income of $45 million. Excluding acquisition costs, EPS on an adjusted basis was $1.20. As Jim noted, we had a recapture of $24 million on solar credits that were purchased as part of our tax planning strategies. Solar tax credits, like many other tax credit programs are subject to recapture from the IRS when certain events occur. Unfortunately, the seller of the tax credits went bankrupt and transferred the solar assets in a bankruptcy sale that triggered the recapture in the quarter. When we acquired the solar credits, we also purchased a tax credit insurance policy to mitigate the risk of loss. The recognition of the tax credit recapture and the anticipated recovery from the insurance policy has created some noise in our financial statements. The recapture is recorded in tax expense, while the insurance recovery is included in noninterest income. When you account for the recapture plus the taxes on the anticipated insurance recovery, the gross up in noninterest income and income tax expense is $30.1 million during the quarter. Since there is no impact on net income for the third quarter, we have excluded these items from the earnings per share bridge on Slide 11. Net interest income and margin both showed strong expansion again in the quarter, benefiting from the increase in both loans and securities. In anticipation of the liquidity from branch acquisition that closed in early October, we had increased our security purchases over the past 2 quarters. Excluding the anticipated insurance recovery, noninterest income decreased due to lower tax credit and community development income. The provision for credit losses increased from the linked quarter, primarily due to net charge-offs and an increase in nonperforming loans, along with loan growth. Noninterest expense was higher in the quarter due to an increase in deposit costs from continued growth in the deposit verticals and higher legal and other expenses associated with the increase in and level of problem loans. Turning to Slide 12 with more details to follow on 13. Third quarter net interest income was $158 million, an increase of $5.5 million from the prior period, reflecting the trend of solid asset growth supported by a growing deposit base and disciplined pricing. Loan interest increased by $3.6 million on higher average balances and level yields. Average balances grew $96 million compared to the linked period and a 6.98% rate on loans booked in the quarter supported the overall portfolio yield. Interest on investments was $2.7 million higher compared to the linked period with average balances increasing more than $200 million and the portfolio yield was higher by 7 basis points. The average tax equivalent purchase yield in the third quarter was 4.99%. Interest expense increased only $0.9 million compared to the linked quarter. Deposit expense increased by $1.6 million due to higher average balances, partially offset by lower rates on interest-bearing accounts. Interest expense on borrowings decreased $0.7 million, mainly due to lower Federal Home Loan Bank advances and customer repo balances, along with lower rates on both. Interest expense also reflected the redemption of our subordinated debt in September that was replaced with a new senior note at a 3% lower interest rate. Our resulting net interest margin for the third quarter was 4.23%, an increase of 2 basis points over the linked period. The earning asset yield declined by 1 basis point, mainly due to the change in the overall asset mix from growth in the investment portfolio. Our cost of funds declined by 4 basis points, driven by lower deposit rates and lower cost of Federal Home Loan Bank advances and repo balances, partially offset by an increase in average brokered deposits. We have focused for several quarters on creating an earnings profile that is less susceptible to changing interest rates, and we believe we have made significant strides. We are well positioned for the current rate environment to add profitable growth to enhance earnings. However, we are slightly asset sensitive, and we expect a 0.25 point reduction in the federal funds rate to reduce net interest margin by 3 to 5 basis points. That being said, we anticipate that most of the recent rate cut will largely be mitigated in the fourth quarter as the branch acquisition is expected to be 5 basis points accretive to our overall net interest margin. And one last comment on margin. Despite the Fed reducing interest rates by over 100 basis points in the last year, we have managed to grow net interest margin over the last 4 quarters from 4.17% in the third quarter of 2024 to 4.23% in the most recent period. This speaks not only to a more favorable operating and interest rate environment, but also to the quality of our business model and the discipline in pricing and structure we have employed while achieving nearly 10% asset growth. Slide 14 reflects our credit trends. We had net charge-offs of $4.1 million compared to $1 million in the linked quarter. But importantly, net charge-offs of 4 basis points for the first 9 months of this year continue to trend below our historical average. The provision for credit losses was $8.4 million in the period compared to $3.5 million in the linked quarter. The increase was mainly due to the increase in net charge-offs, a higher level of nonperforming loans and loan growth. Nonperforming assets increased $22 million to 83 basis points of total assets compared to 71 basis points in the linked quarter. Doug provided a lot of details on the movement within our nonperforming assets, but it's worth reiterating that the largest part of our nonperforming assets continues to be made up of two commercial banking relationships where we expect to be made whole. We reaffirmed this expectation in the Form 8-K that we filed a little over a week ago, stating that we expect to collect the balance of these loans because of our senior secured position. Slide 15 shows the allowance for credit losses. We continue to be well reserved with an allowance of 1.29% of total loans or 1.4% when adjusting for government guaranteed loans. On Slide 16, third quarter noninterest income of $47 million includes the previously mentioned $30 million of accrued insurance proceeds related to the recaptured tax credits. Excluding this, noninterest income decreased $4.1 million from the linked quarter to $17 million, primarily due to lower tax credit and community development income in addition to the nonreoccurrence of a BOLI policy payout received in the second quarter. We sold $22 million of SBA guaranteed loans that generated a gain of approximately $1.1 million in the current quarter. Depending on levels of planned growth and activity in the SBA space, we may take the opportunity to continue to sell SBA loans in the coming quarters. Turning to Slide 17. Third quarter noninterest expense of $109.8 million increased $4.1 million from the second quarter. Deposit costs increased roughly $2.4 million from the linked quarter, primarily due to continued growth in the deposit vertical balances. Legal and professional expenses increased as well. Legal and loan expenses grew slightly and remain at elevated levels as we work through certain nonperforming asset relationships. The resulting core efficiency was 61% for the quarter. Our capital metrics are shown on Slide 18. We grew tangible book value by 4% in the quarter and 12% in the past year. Our tangible common equity ratio was 9.6%, up from 9.4% in the linked quarter, while our strong CET1 ratio of 12% is at the highest level in our history. The strength of our capital position supported the branch acquisition that closed earlier this month and also allowed for the redemption of our subordinated debt that was included in total risk-based capital. We also increased our quarterly dividend by $0.01 to $0.32 per share for the fourth quarter of 2025. This is another strong quarter of solid financial performance and we expect to close out the year from a position of strength. The strategic branch acquisition that closed this month will help drive this performance as we expand our footprint in important markets. I appreciate your attention today and we will now open the line for questions. Operator: [Operator Instructions] Your first question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis: Question on -- I guess, to get a little more specific on these credit relationships, just the workout process. I understand you try to give visibility on the Southern California credits. But the resolution that the life insurance loan and these, could you narrow that into -- I thought I heard a resolution in the coming quarter and quarters there was sort of some mixed terms there. Could you just sort of outline that again, how do you expect those to be resolved time line-wise? Douglas Bauche: Yes. Jeff, it's Doug. First of all, in relationship to the Southern California real estate loan, certainly, with the secondary bankruptcy filing that has been made, the timing of that is a little bit difficult to ascertain. We do feel comfortable that we're going to get some fairly quick remediation from the bankruptcy courts on this. But as we maybe indicated in prior periods, we started down the path of both the nonjudicial and judicial foreclosure process in California in anticipation of a potential block like this. So we're moving down the path as quickly as we can. But I wouldn't necessarily say it's going to be in the fourth quarter. I think it's more in the coming quarters that we'll get resolution on the real estate loans. As it relates to the life insurance premium finance loan, I'd just reiterate, we've got a stellar 20-year track record lending in this space without principal loss. This is unfortunate timing, but a co-trustee of the $12 million life insurance policy filed suit against the insurance carrier. And the insurance carrier is simply delaying their recognition of our demand to honor the obligations to surrender the policy and send us proceeds to pay the loan off. So again, this looks like this may be heading through some litigation. And with that said, I think precise timing of the resolution of that case is a bit uncertain. But what is certain is full coverage of cash surrender value covering our principal balance and collectibility. Jeff Rulis: Appreciate it. And Doug, do you have NDFI exposure in the portfolio, just a figure of percent of loans overall? Douglas Bauche: Yes. Let me say this, Jeff. So as it relates to NBFIs, it's a very broad classification that includes credit exposure to bank holding companies, mortgage warehouse originators, capital call lines for private equity funds and a lot of different types of businesses, including those engaged in our state and new market tax credit lending programs. But I think specifically what you might be referring to is more exposure to private lenders. And I would say this, we have, for years, maintained some very favorable relationship with private lending entities where we take assignments of their notes, security instruments, and that's our primary collateral. Today, that portfolio consists of approximately $260 million or $270 million in balances across, I'll call it, 8 to -- 18 to 20 different relationships. So these private lenders specifically are largely engaged in providing first mortgage secured loans to investors in 1 to 4 family residential real estate. So our process here, Jeff, like everything else, right, these are deep relationships. They're highly experienced and quality leaders. We know them well, and we're very disciplined in our credit underwriting and monitoring process. So hopefully, that captures what you're looking for there in terms of exposures to the private lenders. Jeff Rulis: Sure. That helps, Doug. Keene, on the margin. Sounds like you're largely going to offset this most recent rate cut. And then if we carry forward that 3 to 5 basis points pressure per 25 basis point cut, then you detailed the history of the last year plus of really defending margin when you screen asset sensitive, but the reality is you've done much better than that. Is that still the case if we think about a flat margin into the fourth quarter with those cut versus the branch accretion? And then the go forward, is it -- would you say that the net of that is still some modest pressure, I hope to do better than the 3% to 5%? Any commentary on go-forward? . Keene Turner: Yes. Maybe just as I always think about it, when we talk about asset sensitivity, we're also talking about parallel shifts. And I don't think anybody is expecting a parallel shift. I think we're thinking the short end of the curve comes down. And in that case, that's been good for us, and we've been able to defend that fairly well. I think your comments are appropriate. I think that our view, once we get the branches on here, we're pretty neutral. And when I start looking at both net interest margin and pretax income at risk, if we execute on our mid-single-digit loan and deposit growth for next year, we're growing pretax income and essentially defending or growing net interest income because of the branch deal. So I think when you look at last year's year-to-date period, returns are roughly 125 basis points. We're on top of that in the current period with a little bit worse provision. And I think that our view is that -- if we assume that we rotate out of taking gains on SBA loans, that profile sort of remains the same and with the bigger balance sheet, you're growing earnings per share. So I think we generally expect to defend net interest margin. It might drift a little bit, but you're still flirting with a 4.20-ish margin for most of '26 at least as we see it right now. And we've got -- we're using Moody's baseline, so that has Fed funds going to 3% in the third quarter of '26 and 50 basis points here in the fourth quarter. So I feel like that environment or that forecast also doesn't assume that we get better-than-expected loan growth, which I do think will occur if we start to get rates down to that degree. Operator: Your next question comes from Damon DelMonte with KBW. Damon Del Monte: Keene, just a question for you on the expense outlook kind of here in the fourth quarter and how we think about going into '26. Can you give a little bit of guidance on the expectation from the branch deal and the integration of that? Keene Turner: Yes. So total reported expenses here in the quarter were $110 million. There's some run rate adjustment in there. So let's call the run rate here in the third quarter normalized without onetimers $107 million. And then I think in the fourth quarter, you're going to get roughly $4.5 million of expenses related to run rate on the branch acquisition. And then there's probably 2.5 of onetimers in there. And then I think when you think about full year branch acquisition expenses on a run rate basis, it's just under $18 million. So I think when you normalize through all of that and you take the historical enterprise base and you annualize the branch base, I think we think expenses year-to-year will be up roughly 3.5%. That's kind of what we're thinking. And that's got that Moody's interest rate reduction in that plan where the deposit costs essentially are level kind of year-to-year. Damon Del Monte: Got it. Okay. All right. That's helpful. And then on the fee income, obviously, some volatility in the tax credit income line this quarter. Fourth quarter typically is the strongest point of the year. So how do we kind of think about the rebound off of the modest loss this quarter? I mean maybe look at it on a full year basis? Keene Turner: Yes. I think that we kind of went from the maybe the best case scenario of fee income in the second quarter to, -- I don't want to say worst-case scenario, but certainly a baseline here in the third quarter. And I think the fourth quarter comes somewhere in between it. I will say that there is a -- with the shutdown that's occurred right now, the SBA sale is maybe off the table as a lever here in the fourth quarter, but we do expect the CDE to have a little bit better quarter. Private equity should be in there. And if the tax credit delivers any kind of profitability. I think the fourth quarter should be somewhere between where the second and third quarter were. And you will get a little bit of impact from the branch acquisitions. There's roughly $2 million annually of fees that come in. Now we give some fee income holidays around acquisitions. So you'd only maybe have like a month of that, but that will also provide some benefit there. Damon Del Monte: Okay. So the -- somewhere in between the second and the third quarter, that's on a total noninterest expense basis, not... Keene Turner: I think so. And I think that that's -- we're expecting 50 basis points of rate reductions that should help the tax credit line item in addition to activity. I just -- I don't know if there's going to be an opportunity to sell SBA loans, I think we're going to have -- we would have otherwise had a strong quarter. I'm just not sure if those can get funded and sold and all that stuff. Operator: Your next question comes from Nathan Race with Piper Sandler. Nathan Race: Keene, just going back to your previous comments around noninterest expenses. Can you just remind us what your deposit beta assumptions are just in terms of the ECR costs running through expenses? Keene Turner: Yes, it's 40%, and that's been pretty consistent. So 25 is 10. And that's roughly $1 million quarterly for every 25 basis points. Nathan Race: Okay. Great. And then just turning to capital, and I would be curious to maybe get Jim's updated thoughts on management priorities. Obviously, you guys are in a good capital position, and that should continue to build absent any material deployment. So Jim, just curious to hear what you're thinking on the M&A front these days? And just what the appetite for share repurchases as well. James Lally: Yes, sure. Thanks, Nate. Our priority capital really is to continue to funding our growth and focused on the organic growth, given our markets and what have you. From an M&A perspective, as I talked about in my comments, it's about integration at this time. Systems are working great now. It's a cultural and client integration that we're focused on with our new markets and expansion of our markets in Arizona and Kansas. Relative to other M&A, certainly, like a lot of businesses, we talk to a lot of companies and what have you, but we're looking for the fit, if you will, that allows us to continue to improve the right side of our balance sheet, and certainly stay close to the markets that we're in. And to the extent that doesn't come to fruition, certainly, buybacks are on the table for sure. Nathan Race: Okay. Great. And maybe one last housekeeping question. I don't believe you guys disclosed kind of the core deposit intangible goodwill impact from the branch acquisition. Wondering if you could just update us on what we could be expecting there as we think about pro forma tangible book in the fourth quarter? Keene Turner: Yes. I would just say, high level, the dilution is 5%, Nate, and we expect that maybe that depending on how mark's work moves around a little bit, from where we estimated it, it's going to be roughly $70 million of intangibles. Nathan Race: Okay. Great. And that 5% dilution doesn't include kind of the retained earnings impact in the fourth quarter, I presume? Keene Turner: No, that's just sort of a hard line deal math. I think we'll obviously make some profitability. And depending on what happens with securities fair value may not even see a diminution of tangible book value in the fourth quarter. Operator: [Operator Instructions] Your next question comes from Brian Martin with Janney. Brian Martin: Just Keene, one clarification on the expenses. I think if the -- is your suggestion on expenses, at least kind of a run rate to think about for fourth quarter around 112-ish, is that -- I missed the part about -- you said something about a nonrecurring piece. I know you said it was -- the baseline might be 107 and then you had about 4.5 of pickup from the branches, the kind of that 112-ish level is how we think about where you start for 4Q? Or did I miss something there? Keene Turner: No, that's about right. I mean, I think you got sort of 2.5 the 114 minus 2.5 of integration. So you're in that ballpark, like 111 and 113 is kind of where we're thinking. Brian Martin: Got you. Okay. That's helpful. And then just in general, if we think about the fee income line, Keene, I guess I don't know that the tax line is one item, but just in terms of fee income, kind of where you think -- if we just think bigger picture because there's a lot of moving parts and there are some variable pieces, if we think about it as a percentage of revenue, how you think about where that shakes out as you get into maybe next year on an annual basis? Is it kind of current level, is that how we should think about it? Or I guess is there a better way to think about it, given all the moving parts in there that swing around in a given quarter, but just bigger picture annually, the best way to think about it? Keene Turner: Yes. I think -- I'm not sure I think about it relative to percent of revenue necessarily, just -- it's 10%, 11%, but we're going to expect to grow net interest income and maybe falling on my sword a little bit, we're going to outstrip fee income growth because that's kind of a mid-single-digit grower. I think when I look year-to-year at fee income levels, I think we expect generally that if you stripped out gain on sale of SBA loans, the level is consistent and maybe growth just slightly between 2025 and 2026, and then there's an opportunity to sell SBA loans, call it, from $2.5 million to $5 million depending on what production is to solve for some greater profitability. So I think that's more likely. If I look out and say we're going to get Fed funds down to 3%, I think commercial loan growth is going to pick up. And I think SBA production is going to pick up. We've been on our heels a little bit there. We've been being disciplined on credit, and other factors in all spaces, but especially SBA. And I think with rates down, that will improve pricing on gain on sale as well as just the approval rate for borrowers. And so that will give us a greater opportunity, both for production and for sale. So that's an opportunity, but we're not factoring that into what we're thinking, and it's not reflected in my comments about stable ROA and ROATCE from '24 to '25 to '26. Brian Martin: Got it. Okay. And just big picture on the fees, would you expect fourth quarter to be a relatively -- typically, it's an outsized quarter on the tax credit activity mean not getting into the dollars, but still an outsized quarter in 4Q. Did you say that if you... Keene Turner: I didn't say that. Your comment is right. Typically, it's outsized. I think the tax credit line item with rates moving around and also with how we've repositioned that business to be more of a loan business than a fee business. It's gotten a little bit more volatile and a little bit less aggressive. So look, we could come back and have $5 million or $6 million in that line item. That's not what we're planning. We're hoping we get $1.5 million to $2 million. And so my comments, I think, earlier to Damon were that I thought the fourth quarter total fee income would be somewhere between where the second was, which was a high watermark and in the third quarter, which was sort of the baseline kind of clean quarter minimum from my perspective. So somewhere in the middle of that, I think it's a reasonable expectation for 4Q fee income. Brian Martin: Got you. Okay. Sorry about that. I missed that comment to Damon. So -- and then just one last one, maybe just for Jim, I guess, -- did I hear it right, Jim, in terms of -- it sounded as though on the capital front that the M&A might be more of an interest than the buyback in the short term depending on that? And if that was the case, let me ask that, and I can ask a follow-up if I can, Jim, but did I miss that or is that your priority? James Lally: Yes. I'd say this, that to me, the prioritization is growth, as I said, then we would look at buybacks. And if M&A came about. It was a good opportunity for us to improve the right side of the sheet, we'd certainly look at it. But we're certainly not chasing in that space right now. Brian Martin: Okay. So it's more organic and buyback rather than M&A. And if M&A is there, it seems like less of a priority in the short term. Okay. Got you. And then just the last thing for me, was just the strong growth that you guys have put up in the specialty deposits. Can you just give a sense of what's driving that? And just in terms of where that cost -- where those deposit costs typically are? It sounds like they're maybe on the lower side. But kind of how do those costs shake out relative to the total cost of funds? And just if you expect rapid growth to continue? James Lally: So the answer to that, Brian, is yes, we do. I think it's one of the things we've invested in people. We invested in systems, expertise and all three of those verticals is keeps driving it. So we look at it that it's a variable cost model for us, very profitable, but yet we're garnering share from others just by virtue of being in the market like we are in our other businesses and being present and being problem solvers. And we'll continue investing in that space with good producers. Operator: There are no further questions at this time. I will now turn the call back over to Jim Lally for closing remarks. James Lally: Carly, thank you, and thank you all very much for joining us this morning and your interest in our company. And we look forward to speaking with you again in early 2026. Have a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.