加载中...
共找到 39,042 条相关资讯
Operator: Good morning, and welcome to the Seven Hills Realty Trust Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Mr. Matt Murphy, Manager of Investor Relations. Please go ahead. Matt Murphy: Good morning. Joining me on today's call are Tom Lorenzini, President and Chief Investment Officer; Matt Brown, Chief Financial Officer and Treasurer; and Jared Lewis, Vice President. Today's call includes a presentation by management followed by a question-and-answer session with analysts. Please note that the recording, retransmission and transcription of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on Seven Hill's beliefs and expectations as of today, October 28, 2025, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, or SEC, which can be accessed from the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we will be discussing non-GAAP financial numbers during this call, including distributable earnings and distributable earnings per share. A reconciliation of GAAP to non-GAAP financial measures can be found in our earnings release presentation, which can be found on our website at sevnreit.com. With that, I will now turn the call over to Tom. Thomas Lorenzini: Thank you, Matt, and good morning, everyone. On today's call, I will provide an overview of our third quarter performance and recent developments, and I will then turn the call over to Jared for an update on our pipeline and market trends; followed by Matt, who will review our financial results before opening the line for questions. We delivered solid third quarter results supported by a fully performing loan portfolio and disciplined capital deployment. Distributable earnings for the third quarter were $4.2 million or $0.29 per share, which came in at the high end of our guidance range. And earlier this month, our Board declared a regular quarterly dividend of $0.28 per share, which equates to an annualized yield of 11% on yesterday's closing price. Recent transaction activity during the quarter included the closing of a $34.5 million first mortgage loan secured by 100% leased mixed-use retail and medical office property in Manhattan's Upper West side. In addition, we also executed a loan application for $37.3 million secured by a student housing property at the University of Maryland, which we expect to close in the next few days. Student housing assets at major universities continue to perform well while allowing for enhanced spreads when compared to traditional multifamily. As of quarter end, our portfolio consisted of $642 million of floating rate first mortgage commitments across 22 loans with a weighted average all-in yield of 8.2% and a weighted average loan-to-value of 67% at close. Our weighted average risk rating at the quarter end was 2.9, with all loans current on debt service, no 5-rated loans and no nonaccrual balances. During the quarter, we received a full repayment of 2 loans totaling $53.8 million, and we may see one additional loan repaid before year-end with an outstanding balance of $15.3 million, but the majority of near-term repayments are expected to occur in 2026. Full year portfolio growth is estimated to be approximately $100 million net from year-end 2024. We continue to see a more active lending environment as short-term rates move lower and investors anticipate further rate cuts before year-end. This has led to greater borrower engagement and transaction volume across our pipeline, which we expect will continue to grow over the coming quarters. As SOFR continues to decline, we will see our SOFR floors begin to become active, providing a benefit to earnings and helping to partially offset the impact from declining rates. While competition remains elevated, we continue to find compelling opportunities that meet our return thresholds and align with our underwriting standards. Overall, we believe our disciplined approach, strong sponsor relationships and underwriting and asset management expertise will allow us to continue generating attractive risk-adjusted returns. With borrower demand and transaction activity improving, we remain focused on deploying capital into opportunities that we believe offer the best relative value in the current environment. Our platform is well positioned to deliver consistent execution and drive sustainable value creation as market conditions evolve, and we look forward to sharing our continued progress in the quarters ahead. With that, I will now turn the call over to Jared for an overview of current market conditions as well as our pipeline. Jared Lewis: Thanks, Tom. During the third quarter, we saw a notable improvement in market sentiment following the Fed's rate cut in September, which helped to drive new financing activity. The initial rate cut prompted many borrowers to move forward with financing decisions that had previously been placed on hold and with expectations of 2 additional rate cuts before year-end, buyer and seller expectations are beginning to come into closer alignment, which has led to an increase in overall transaction volumes. Demand for floating rate bridge financing remains strong driven primarily by 2021 and 2022 vintage floating rate multifamily loan maturities, which will continue well into 2026. In most cases, borrowers are choosing to refinance debt but continue to require flexible floating rate debt solutions to allow time for business plans to play out and property operations to stabilize. We are also beginning to see more instances of new buyers acquiring properties at a reset basis that better reflects current rent growth and operational expectations, helping drive additional transaction volumes. While multifamily continues to account for the majority of current opportunities, it also remains most competitive. CRE CLO issuance has accelerated meaningfully over the year and debt funds, mortgage REITs and insurance companies are all pursuing similar loan opportunities. Furthermore, the material tightening of corporate bond spreads has made real estate credit an attractive relative value investment, which has resulted in an influx of capital to the CRE debt sector providing liquidity and causing competition among lenders. Despite these competitive dynamics, we remain selective and disciplined in our approach to new originations. We continue to find opportunities in industrial, necessity-based retail, hospitality and student housing. We are seeing more attractive spreads on loans with strong credit characteristics. Furthermore, with transaction volumes expected to increase in the first half of 2026, we expect to see significant opportunities for lenders with flexible capital to invest. Our pipeline is robust and well diversified, and we are currently evaluating over $1 billion of loan opportunities. Importantly, the composition of our pipeline has shifted toward a higher proportion of acquisition financing compared to refinancing activity, a trend that we view as a key indicator of renewed market confidence and a constructive environment for new lending. Our disciplined investment process supported by the broad RMR platform will allow us to identify attractive opportunities to maintain strong credit performance as market dynamics continue to unfold. I will now turn the call over to Matt for an overview of our financial results. Matthew Brown: Thank you, Jared, and good morning, everyone. Yesterday, we reported third quarter distributable earnings of $4.2 million or $0.29 per share coming in at the high end of our guidance and in line with consensus estimates for the quarter. As it relates to third quarter distributable earnings, loan repayments since April 1 impacted distributable earnings by $0.06 per share whereas loan originations over the same period contributed $0.03 per share. The $53.8 million of loan repayments in July contributed $0.01 of distributable earnings to third quarter results. We expect the loan originated in September and the loan origination under application to contribute $0.03 of distributable earnings per share in the fourth quarter. Overall, we expect fourth quarter distributable earnings to be in the range of $0.29 to $0.31 per share, taking into account this loan activity and current SOFR expectations based on the curve. As Tom mentioned, all but one of our loans contain interest rate floors ranging from 0.25% to 4% with a weighted average floor of 2.59%. With continued decreases in SOFR, certain of our loans will be subject to the floor, providing SEVN with earnings protection, whereas none of our secured financing facilities contain floors. At quarter end, none of our loans had active interest rate floors. However, with SOFR now hovering just below 4%, certain of our floors have become active. Please refer to Page 17 of our earnings presentation for further details. We ended the quarter with $77 million of cash on hand and $310 million of capacity on our secured financing facilities. Our portfolio has an all-in yield of SOFR plus 397 basis points and a weighted average borrowing rate of SOFR plus 215 basis points. Our CECL reserve remains modest at 150 basis points of our total loan commitments, unchanged from last quarter and is supported by a conservative portfolio risk rating of 2.9, which is also unchanged from last quarter. Our portfolio remains well diversified by property type and geography and all loans are current on debt service. We did not have any collateral dependent loans or loans with specific reserves. This highlights the strength in our underwriting and asset management functions to provide long-term value for shareholders. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] We have the first question from the line of Matthew Erdner from JonesTrading. Matthew Erdner: Could you rehash through the repayments that you were expecting for the remainder of the year? I picked up the $15.3 million, but was there another loan that I was missing in there? Thomas Lorenzini: No, Matt, that's the only one that we expect to come back potentially before year-end. Everything else really will be 2026 with the bulk of our scheduled repayments in Q3 and Q4 of '26. Matthew Erdner: Okay. Got it. Yes, that makes sense. And then based off of the College Park loan closing, I've got the portfolio around $680 million, seeing that last year at the end of the year was about $640 million. So that leads me to believe that you guys are expecting a couple more loans to close throughout the year. Could you talk a little bit about how you guys are sourcing those. And just speak a little more on the competition of what's causing you guys to win loans over certain people and just the characteristics that you guys are bringing to the table. Thomas Lorenzini: Sure. So I'll start with how we're sourcing those loans. The majority of the transactions are coming in through the traditional channels, such as the mortgage banking community, the JLLs, the CBs, Newmarks of the world, et cetera. A certain percentage of our transactions also come in direct from sponsorship. It's probably 80% from the brokerage, 20% direct, something along those lines. And as far as how we're winning those transactions, really, I think that a couple of things. I think we have a solid reputation in the marketplace that we deliver as advertised, which is critical to sponsors today and especially to the brokerage community. They certainly want to align themselves with lenders that will close as advertised. And also, I think we're also -- we've been very judicious about trying to uncover loans with a little bit higher yielding. We can follow upon the expertise here at the broader platform, learn something about the asset, the market and really lean in and take the deal away from a competitor because maybe we have a better understanding of it. So all that translates really across the product types for everything that we're looking at currently. As you saw, we're just -- we're under app on the student deal. We like that business. We continue to chase multifamily, grocery-anchored retail, select hospitality opportunities certainly exist out there as well. So for the foreseeable future through the end of the year, I think we're looking at probably another 3 to 4 loans that we're comfortable with that we're going to close upon. Operator: [Operator Instructions] We have the next question from the line of Christopher Nolan from Ladenburg Thalmann. Christopher Nolan: For Matt, does the CECL reserve change or does the requirements under CECL for the allowance go down with lower rates, lower SOFR specifically? Matthew Brown: They could. There's a lot of factors that impact the CECL reserve. I think it's important to note that we add back any CECL reserve to our distributable earnings because it is a noncash item, and we have not -- we do not have a history of recording any loan losses for SEVN. So there's macroeconomic factors. There's factors with our existing portfolio based off property level performance, repayment activity, origination activity. So it's a blend of factors that are driving that. Overall, we're 1.5% of total loan commitments, which we think is very conservative for our business. Christopher Nolan: Because my thinking is if SOFR is going down and your loans are spread over SOFR from that, we can -- it's an increased probability that the allowance reserve as a percentage of loans will go down. Is that -- does that follow or not? Matthew Brown: It does. But like I said, there are a lot of factors that go into it in addition to just SOFR. Christopher Nolan: Got it. Okay. And Jared, thank you for the overview of the market. For multifamily and your comments on multifamily debt, does this also imply increased demand for multifamily equity as well? Or is there sort of -- is that a different market in terms of its dynamics right now? Jared Lewis: Well, I would say there's certainly always a demand for equity capital. Given the amount -- just the sheer volume of loan maturities from '21 and '22 vintage assets, a lot of those deals are going to require either additional equity. So if you're refinancing a property and if it doesn't refinance the current standards, then it may require additional equity capital. So sponsors and borrowers are outsourcing additional equity for those opportunities. But then there's also on the acquisition side, plenty of capital that's been raised over the years that is seeking to be deployed in the multifamily sector because of its attractiveness and liquidity. So that's going to also help drive financing activity. So it's sort of a 2-way street. Yes, there's going to be the requirement for new debt going forward in the multifamily sector. But with that comes the requirement of additional equity as well. So I think there is a lot of capital chasing those opportunities because of the underlying fundamentals. And so I expect that to continue into 2026 and '27. Christopher Nolan: Great. And final question on that line. In your observation, are you seeing banks become less participant in multifamily, debt markets or more? Any characterization there? Jared Lewis: Yes. So the larger banking community, the money center banks are very active today and they've become competitive, and they're another cohort of lenders that are chasing these opportunities, specifically in the multifamily space. Smaller regional banks may not be as active. As you've read in headlines, I mean, there's still a concern or questions over bank balance sheets in certain sectors. And so I think some are still taking a more conservative approach. But generally speaking, the larger banks are active, smaller banks are a little bit more selective. Operator: We have the next question from the line of Chris Muller from Citizens Capital Markets. Christopher Muller: Congrats on a solid quarter. So cash balances jumped up a little bit in the quarter. I guess the question is, is that due to timing of repayments coming in? Are you guys holding a little bit of extra liquidity ahead of some of those originations you expect in Q4? Matthew Brown: It's really driven by the sources and uses of the quarter. We had $54 million of repayments come in, in July, and we only put out about $34 million of new loans. As we noted, we do have a $37 million loan opportunity that we expect to close in the near future. But that cash balance also allows for the additional originations that Tom noted through the end of the year. Christopher Muller: Got it. And I guess, I like the slide you guys have with the EPS bridge in the deck. Does that $0.03 include origination fees? And then I guess, a follow-up question on that is, what does a typical quarter look like for origination fees? Is it kind of that $0.01, $0.02, $0.03 type number? Or can we see that ramp up if you guys can really start deploying capital in 2026? Matthew Brown: Yes. The origination fees are baked into the yield. Christopher Muller: Got it. And is that just like a $0.01 or $0.02 a quarter? Is that the right way to think about that? Matthew Brown: Yes. At best, it's probably $0.01 a quarter is my guess. Christopher Muller: Got it. And I guess just the last one I have here. So on the NIM compression, the other slide you guys have in your deck, it's been trending lower since the peak of the market when rates were at 0, which makes sense. But do you guys feel that you're either at or near a trough on NIM compression there? Or could there be some more pressure in the coming quarters? Thomas Lorenzini: Yes. I don't -- I think we're at the -- I would say that we're probably at the trough there. Part of that really just comes down to us identifying the appropriate transactions to invest in, right? So we're certainly mindful of that. And again, I think we've been very good about sourcing outsized returns when we're able to do so. And that's obviously the goal going forward. So we're expecting that to bottom out and if not, almost reverse itself. Christopher Muller: Got it. Appreciate you guys taking the questions and congrats again on a solid quarter. Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Lorenzini, President and Chief Investment Officer, for any closing remarks. Thomas Lorenzini: Thank you, everyone, for joining today's call. Please reach out to Investor Relations if you are interested in scheduling a call with Seven Hills. Operator, that concludes our call. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the V.F. Corporation Q2 Full Year 2026 Earnings Call. [Operator Instructions]. I will now hand the call over to Allegra Perry, Vice President of Investor Relations. Please go ahead. Allegra Perry: Hello, and welcome to V.F. Corporation's Second Quarter Fiscal 2026 Conference Call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today's call will be on an adjusted constant dollar and continuing operations basis, which we've defined in the presentation, that was posted on Investor Relations website and which we use as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the presentation which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Joining me on the call today will be V.F.'s President and Chief Executive Officer, Bracken Darrell; and EVP and Chief Financial Officer, Paul Vogel. Following our prepared remarks, we'll open the call for questions. I'll now hand over to Bracken. Bracken Darrell: Thank you. Thank you, Allegra. We picked a strange day to do a video conference call because many of us were up for 18 straight innings of baseball. And probably the -- even though this is the most important event happening today is our conference call in the world, the second most important event will be one of the two Major League Baseball games that's also happening today because it's never happened, I guess, or maybe rarely. You'll hear more later as Paul talks about it. Let me talk you through the financials, but at a really high level. It was a good quarter. We delivered on our commitments, and we made further progress on our turnaround. And we delivered this performance despite admittedly a pretty uncertain and unpredictable environment around the world. Total revenue was up 2% in reported dollars and down 1% in constant dollars, a little better than planned and showed an improving trend versus last quarter. Operating income was $330 million, well above our guidance range of $260 million to $290 million. Net debt, excluding lease liabilities, was down $1.5 billion versus last year or down 27%. We're focused on returning the entire company to growth. Last quarter, I highlighted that 60% of our business by revenue was growing, up from just 10% in the prior year. In Q2, so this quarter, that figure expanded to over 65%. And if you took out Dickies, that would be almost 70%. Speaking of Dickies, during the quarter, we announced our plans to sell the brand. I'm confident it's a very good move for the company and for our shareholders. As we've said before, we'll always evaluate any offer we receive, reflecting our commitment to shareholder value creation. We had an inbound with a very good price of $600 million. We've done a lot of terrific work behind the scenes on the brand and the product portfolio, and I believe this positions the brand well for growth. This was a unique opportunity. On our end, we'll use the proceeds to pay down debt, consistent with our capital allocation priorities. This allows us to accelerate our path towards our medium-term leverage target of 2.5x or below. We're well on track. Let me now give you some of the highlights from the quarter on our biggest brands. Let's start with the North Face. The brand delivered another quarter of growth with revenue up 4%. All three regions grew versus last year. We grew in wholesale and in DTC. In terms of categories, Performance Apparel was up in every region with momentum in core styles. Transitional outerwear was strong and footwear continues to gain traction and grew double digits in every region. Across categories, product innovation, newness and elevation drove growth as we continue to show the extraordinary reach of the North Face from the summit to the street. We also celebrated 25 years of the Summit series, expanding the collection with innovation, adding exciting new colors and designs. This was supported by an athlete-led campaign, featuring our incredible stable of North Face athletes, including the mountaineer Jim Morrison, who recently with Jimmy Chin became the first person ever to climb and ski down the North Face of Mount Everest. Across our marketing strategy, we're driving high consumer engagement and brand experiences and amplifying that through social channels. In addition to Ultra Trail du Mont Blanc or UTMB, this included ClimbFest in San Francisco, community hiking events in APAC and a Beijing 100K Ultra Trail race. As you know, as good as I feel about the North Face, I can't help but express what an enormous opportunity remains to be realized. We have potential in new categories and ability to develop the women's business and to build across all seasons of the year. Timberland revenue was up 4% in Q2 with growth across both wholesale and DTC as well. Americas was up double digits, reflecting a strong back-to-school period. In terms of product, demand for the 6-inch premium boot remains very strong. But today, the premium 6-inch icon represents only about 20% of our global revenue. So we have a lot of opportunity for growth. We can continue to grow the 6-inch business through colors, materials, innovations, collaborations and more, while we also pursue the huge opportunity to grow this brand across other footwear and apparel categories. Closer to home, the strategy is already showing up with our recent launch of the Timberland 25, a lightweight version of the boot, which is very small now, but it's resonating well in its early weeks in our stores. A step further away from the boot, we're building our growing business around boat shoes. These sales are growing very strongly in all regions as we diversify the product lineup and give the brand more versatility of fire power during the warmer seasons. Timberland's adoption of a social-first marketing strategy has been instrumental in driving brand heat globally. During the quarter, the brand launched its Advice of an Icon campaign with high visibility events in New York, London, Shanghai and Tokyo. Brand interest grew during the summer months with consumer search interest positive in key markets in the U.S. and in EMEA. The opportunity in Timberland is really significant because we can continue to grow the boot, we can grow in other footwear franchises and we can unlock apparel around the world, all at the same time. And in the U.S., especially, this will be supported by expanded and enhanced distribution. We have the game plan to do that now. Altra accelerated further with revenue up over 35% versus last year, the third consecutive quarter of strong double-digit growth for the brand. Key franchises that represent a mix of road running and trail running styles show our broad-based approach to building this brand. The growth opportunity for Altra across both road and trail is significant. We're fueling this growth and driving higher brand awareness with targeted marketing investments, which, as a reminder, our awareness is less than 10% in the U.S. and even lower in other regions. Let me repeat that. Our brand awareness in the U.S. is less than 10%, yet we still have this size business, and it's growing fast. This is helping e-commerce deliver particularly strong growth, driven by higher traffic and stronger conversion. Altra is on track to exceed $250 million in revenue this year, and I'm confident the brand has a long, strong runway for growth for many years to come. Let's turn to Vans. Performance was a little better this quarter with revenue down 11% versus last year. We're really focused on getting the commercial moments right as we upgrade our portfolio of products. I told you that Sun's impact on product to be visible in the back-to-school period, and it is. Product newness across footwear is drawing in new consumers, particularly women, but also youth and kids. In terms of new styles, non-icons are up in the quarter, driven by the Super Lowpro, which continues to perform well. The new skate loafer, which I decided to show you this one because I bet many of you haven't seen it, which had a very strong debut and is sold out in most sizes and the Crosspath XC, which has had a very strong launch. Within existing styles and icons, we're also beginning to realize the impact of elevation, innovation and newness. For example, the Authentic is up globally as a franchise, helped by the halo effect of the Valentino collab, which drove positive search trends in key markets. Within the Old Skool franchise, newness has driven higher sales of women's styles. And just last week at ComplexCon, the largest event for young shoe dogs in the world, I think, mostly guys, by the way, it's in Las Vegas. In that event, Vans had one of the longest, if not the longest line of people waiting for the Pearlized Old Skool shoe we launched there. This is just the start. More newness is coming as we head into holiday and into spring of 2026. In the meantime, our shift in marketing strategy is starting to yield results. Digital traffic trends improved in the Americas and EMEA, particularly during relevant consumer moments like back-to-school, when digital traffic was up in the Americas. And looking ahead, we're excited about the recently announced new partnership with SZA as the brand's first-ever artistic director. It's early days, but in coming season, she'll add her voice and her touch to product and marketing. To wrap it up on Vans, each quarter, we're making great progress. We took actions to clean up the marketplace and set the stage for a very exciting product pipeline that started to roll in and is delivering early results. I'm as confident as ever in Sun and her team leading us to return to growth at Vans. Looking ahead, we're making progress on the turnaround of V.F., and I'm super confident in our ability to deliver both our near-term and our medium-term targets. Our teams are energized for the upcoming holiday season. I'll now hand it over to Paul, who will dive in deeper into the numbers. Paul? Paul Vogel: Great. Thanks, Bracken. Let me first by building on Bracken's comments about Dickies. As he mentioned, this is just a great opportunity for the company. While we are big fans of Dickies, we believe this divestiture will help further accelerate the transformation of V.F. back to being a growth company while also further enabling us to pay down our debt. We believe this will create increased and faster shareholder value. Dickies is a great asset, and we know the work we have done to date sets the brand up for a return to profitable growth. In fact, it is the work we've put in that has created an environment for others to be interested in the asset. With that in mind, the offer we received of $600 million is incredibly attractive. Based on fiscal '26 estimates, this equates to an EV to sales multiple of 1.2x and an EV-to-EBITDA multiple of over 20x. Going a little deeper into the transaction, we will incur deal-related expenses as well as the small tax considerations, but we will also save on future planned capital expenditures as well as see a reduction in our net interest expense. After considering all of these moving parts, we expect the overall cash benefit to V.F. to be greater than $600 million. Importantly, the Dickies sale will help us strengthen the balance sheet and bring us closer towards our medium-term leverage targets. It will also help us focus time, energy and resources on our brands as we continue to make progress towards a return to growth. Now let's turn to the review of the second quarter. We are pleased with our results in the second quarter. Revenue finished slightly ahead of our guidance, while our operating profit outperformed nicely. Back-to-school was encouraging across our key brands. Q2 revenue was $2.8 billion, up 2% on a reported basis. On a constant dollar basis, revenue was down 1% year-over-year, a little bit better than our guidance. By brand, the North Face grew 4%, led by growth in both DTC and wholesale. Vans revenue in the quarter was down 11%, a little better than we expected, but still reflecting the impact of channel rationalization actions, which accounted for more than 20% of the reported decline. And finally, Timberland continued to see good momentum with revenue up 4%, reflecting growth across all channels, in particular, DTC. By region, the Americas region was down 1%, EMEA region was flat and APAC was down 2%. And lastly, by channel, DTC was down 2%, while wholesale was flat. Our adjusted gross margin for the quarter was flat versus last year as the benefit from fewer discounts was offset by FX headwinds. There is minimal impact in our P&L from tariffs in the quarter. Our gross profit dollars were higher than expected on the back of revenue coming in ahead of guidance. SG&A dollars were up 1% year-over-year, but are down 1% in constant dollars. In the quarter, we increased back-to-school marketing year-on-year, which was mostly offset by cost savings across the business. Overall, SG&A was a little bit lower than expected. Our adjusted operating margin for the quarter was 11.8%, up 40 basis points year-over-year. And both interest and tax were up versus last year as per guidance. And finally, our adjusted earnings per share was $0.52 versus $0.60 in Q2 of last year. Now moving on to the balance sheet. Inventories were down 4% or $86 million at the end of the quarter, excluding Dickies from both periods. Excluding the impact of FX, inventories were down 5%. Overall levels are down year-on-year as we continue to improve the quality of our inventories. Free cash flow through Q2 was negative $453 million, in line with our expectations for the year. And as a reminder, given the seasonality and working capital needs of our business, we typically start generating cash in Q3. It is also worth highlighting that first half cash flow includes the payments of roughly $60 million of incremental tariffs in addition to the usual seasonal increase in inventory at this time of year. Overall, we are right where we expected to be for free cash flow. Net debt, including lease liabilities, was down $1.5 billion versus last year or down 27%. Turning to the outlook for the third quarter. Now note, this excludes Dickies in both this year and last year. We expect Q3 revenue to be down 1% to down 3% on a constant dollar basis. We are well positioned across our brands heading into the peak holiday period. Moving down the P&L. We expect Q3 operating income to be in the range of $275 million to $305 million. For reference, last year, Dickies adjusted operating income was approximately $5 million in Q3. Gross margin will be down versus last year, reflecting the initial impacts from tariffs, which are partially offset from lower discounts. While we have taken some initial pricing actions, the majority of these will be reflected starting in Q4. Reported SG&A dollars are expected to be slightly up versus last year. However, on a constant dollar basis, SG&A is expected to be broadly flat versus last year. Finally, we expect Q3 interest of approximately $40 million and an effective tax expense that is approximately double the prior year. This is in line with my recent comments about the increasing trend in our tax rate over the next 1 to 2 years and quarterly fluctuations as a result of the changes in global tax rates and in our geographical mix. As a reminder, this higher tax rate will have minimal impact on cash taxes. Now moving to fiscal '26, we continue to see operating income up versus last year for the year as a whole, inclusive of all known anticipated tariffs. And second, on cash flow, we continue to expect operating cash flow and free cash flow, excluding the sale of noncore assets to be up year-on-year. This includes all expected tariffs and after the negative impact from the sale of Dickies, which we estimate to be $35 million. As I said last quarter, we are working on a number of initiatives that are expected to improve our free cash flow throughout the year, which gives me confidence we will achieve our guidance. And last, we are progressing towards our medium-term targets of $500 million to $600 million of operating income expansion in fiscal '28 and a leverage ratio of 2.5x or below by fiscal '28 that we introduced a year ago. Overall, we've made meaningful progress on simplifying work to unlock creativity, building deep functional capabilities and resetting the culture across the organization. We are confident we will achieve our targets. So in summary, this quarter marks another quarter of meaningful progress. The year and our turnaround are progressing according to plan. While we acknowledge the greater uncertainty in some of our markets as we head into our peak trading period, we are confident in our strategy and ability to execute in any environment. We remain focused on getting each of our brands back to sustainable and profitable growth and continuing to make progress towards our medium-term goals. I will now hand it back to the operator to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Jay Sole with UBS. Jay Sole: My question is about Vans. You talked about how you had some improvement in sell-through in the Americas wholesale channel in the full-price stores. Can you just talk about the path back to growth for Vans. I mean you said you have a lot of confidence in what Sun is doing, can you talk about the path back to growth and maybe within the second quarter guide. Just give us a sense of where you think Vans will be for revenue growth. Bracken Darrell: Second quarter guide? Yes. Our expectation is, it's pretty much the same story we've been giving, which is, we're going to increase the amount of newness. You started to see that coming. In fact this quarter, Super Lowpro, as we said last quarter, it did really well. continues to be very, very strong. In fact, I mentioned it in the script in the beginning, we're also starting to see some pickup even on the Old Skool with women, in particular, with our women's-only styles. It grew strong double digits, I think, over 20%. So our expectation is as we keep rolling in newer and newer product into the stores, we're going to see more and more performance, and yes, we're obviously also upgrading our marketing. If you're watching us on Instagram and TikTok, you're seeing it. If you're not, please do. You'll see a shift away from the skate-only marketing into really that plus a lot more. You'll see surfers, you'll see a lot more product. We've got a lot more product to talk about, especially as we go into Q3 and into Q4 and into Q1 of next year. So we're just going to keep pouring it on. This is a fundamentals business. You got to be in the right places with the right products with the right story. And we think we're really going to have that as we go forward. Paul Vogel: Yes. And then on the numbers, if you look at Q2, down 11% in constant dollars. We talked about 20% of that was related to the actions we've talked about around the value channel. So that would imply sort of a decline of high single digits for the quarter. I would expect Q3 of kind of a similar pace in Q3. Also keep in mind, we mentioned that Q3 will be the last quarter where we really see this impact. So it will be in the quarter, not entirely, but most of that quarter. And then by Q4, the dynamic around the value channel has moderated mostly. Bracken Darrell: Yes. And I'd also add, I feel you can see in our -- we mentioned in the script that we were -- we had traffic up in the -- online during the back-to-school period, which is a good sign. It shows you we're executing better. We're starting to get the message out there. Winning in these commercial moments is really key for Vans, even more than the other brands. Operator: Your next question comes from Jonathan Komp with Baird. Jonathan Komp: Paul, I'm hoping maybe you could give a little bit more color on gross margin, some of the puts and takes in Q2. And then if you could quantify either the tariffs or some of the positive offsets from less discounting. Just any more of the pieces you see? And then maybe bigger picture around the cost discipline and shifting into Phase 2 of some of the savings. Can you share any updates on progress either broadly for the organization or even for Vans specifically as you think about some of the next phase of cost savings? Paul Vogel: Yes, I'll start. So on the gross margin side, there wasn't really that much of note. little negative impact from FX, a little positive impact from lower promotions. That was really most of the puts and takes when you think about the impact of -- on the quarter in terms of gross margin. In terms of -- second part of the question was on just the longer-term initiatives, the medium-term initiatives? Jonathan Komp: Yes, that's right, really shifting to Phase 2 and some of the expectations there. Paul Vogel: Yes. So we're making great progress. We'll hopefully give you guys a more detailed view of how we're doing on all the initiatives at year-end. We actually thought about trying to give some. It's tough to give them out exactly in the middle of the year. But we're -- everything is on plan. As I said, we reiterated our guidance in terms of what we gave at the Investor Day a year ago in terms of our ability to hit those targets, whether it's our debt leverage or our operating margin. So we're on track with all of that. So everything is on pace. Again, we're -- on the gross margin side, we've got the markdown management and integrated business planning. On the SG&A side, we've got things like store management and optimization and things on the technology side as well as the overall SG&A side. So we're making progress on everything. So we feel like we're on pace. And like I said, we'll give you more detail as we get to year-end exactly how we're trending at the end of this year and how we're tracking for fiscal '27 and '28. Operator: Your next question comes from Brooke Roach with Goldman Sachs. . Brooke Roach: I wanted to follow up on John's question to talk a little bit more about promotional recapture, particularly in the Americas business. Paul, can you give us a little bit of a sense of where you are in the promotional recapture journey and the plans for pricing and promos this holiday and the opportunity on a medium-term basis? Paul Vogel: Do you want to take it? Bracken Darrell: I can start. I think generally speaking, we're well on track. We had another good quarter, I think, of really having improvement versus a year ago on our promotion levels. especially around the world. I think as we go forward, we're going to be aggressive though. We're going to make sure if we have to give a little bit back in the Americas in particular, we will. But generally speaking, we continue to think we can operate in a lower promotional environment we have in the past, and that's our game plan. Paul Vogel: Yes. I think we'll continue to see benefit for the rest of the year on the promotional side in terms of the cadence this year versus what we had last year. So that will be part of it. The pricing will kick in, in Q4 in terms of the impact for tariffs. And so you'll see some impact on gross margins more from the tariff side, not the promotional side in Q3. So we need to be clear about what we're going to see in Q3 there. But the promotional environment has -- year-over-year has gotten better, and you'll continue to see that throughout the rest of the year. And as I mentioned kind of on one of the earlier questions, if you look at the gross margin in the quarter, promotional environment actually was a benefit to gross margin, but that was offset by FX, which impacted us negatively on the gross margin side. Bracken Darrell: I'll add one more comment, Brooke. I think on Vans in particular, we're benefiting -- we're going to be in a better position from a promotional standpoint simply because we're not being aggressive in raising price to lower end price points, and so unless we see a requirement to do that, we're going to try to avoid that. Operator: Your next question comes from Michael Binetti from Evercore. [Operator Instructions]. Michael Binetti: I was wondering if you could just dissect Asia a little bit more for us. It's the first time we've seen a negative number there in total in a little while. I'm wondering if there's any kind of a timing element there? Or maybe how do you think about that over the next few quarters? Just to help us understand what you're seeing in that business. And then on -- Paul, I wanted to clarify, I think you said if I take out the 20% Vans from the actions you had in the value channel, gets you down about high singles in 2Q as the underlying run rate and should be about the same in the third quarter. Is that an ex currency comment? And does that take into effect what I think you mentioned before was that some of those mitigation efforts start to wane a little bit in the third quarter before going away in fourth quarter? Maybe just kind of help us so we understand kind of exactly what you're thinking reported revenues should look like in the fourth quarter -- sorry, in the third quarter. Bracken Darrell: Yes, I'll take the first one and Paul will take the second one. I think my experience with APAC in general and especially China within APAC is you have these long periods of run-up and then you kind of stabilize for a while and then you have the long period start again. I think we're in one of those stabilizing periods. We've had a very long run -- long strong run of growth in China, particularly in the North Face. And I think that's going to stabilize for a little while. The good news is we have so much opportunity in the rest of the world, especially in the Americas. I mean I feel really lucky to be in a company right now where, honestly, one of our biggest growth opportunities longer term is the Americas. We're just underdeveloped in many of our brands and in some of our channels. If I take Timberland, for example, we really are terribly underdistributed in the U.S., and yet we're growing very strongly. We got good brand heat. So we're going to address that going forward. And so overall, I feel good about where we're going to be from a global profile. But I think APAC, it wasn't going to grow that strongly forever. It will flatten out for a while and then probably come back. Paul Vogel: Yes. And then just a couple of things. So one, just as, I guess, a blanket statement. All the numbers I quote are, they are almost always in constant dollars. So if it's not that, I will let you know, but it's -- yes, so it is constant dollars. On the Vans side, down 11% in constant dollars. So -- and we -- what I said was about 20% of the decline is related to the actions we've been talking about around the value channel. So that gets you to -- and as well as store closures. That gets you to sort of a negative high single digit for the quarter in terms of an actual run rate. The run rate, we believe, will be kind of similar in Q3 as well. What I also said was the impact from the value channel changes and the door closures will also impact us in Q3, not quite as much as it did in Q1 and Q2 because it starts to -- we start to annualize or anniversary it in Q3. And then by Q4, these impacts we've been talking about for the most part, go away. So it won't be entirely, but mostly a true underlying trend by the time we get to Q4. And hopefully, we'll get away from having to back anything out for you guys. Operator: Your next question comes from the line of Ike Boruchow with Wells Fargo Securities. Irwin Boruchow: Just curious on -- I know it's early in holiday, but any initial signs from how retailers are behaving with orders or order books? Is there any difference by channel or region? Just kind of curious how your partners are kind of looking at the initial holiday season from an orders perspective and a demand perspective. Bracken Darrell: It's a little too early for us to say. It's -- we also have a lot of direct-to-consumer, too. So just a little too early to say. This is always the period when it's really, really exciting in this business because things start to ramp up, it starts to get cold. There's a lot of good things that happen between now and Thanksgiving. So it's a little too early for us to say, but we're really excited about it. We feel like we've got a good plan. We've got good products. And yes, so we're optimistic, but it's too early to say how it's going to play out. There's a lot of -- as you said, there is uncertainty out there about the overall macro environment. There's the shutdown, et cetera. But I think I said in a conference a couple of months ago, the consumer has been stubbornly positive, and I'm hoping that will happen again. Operator: Your next question comes from the line of Adrienne Yih with Barclays. [Operator Instructions] Adrienne Yih-Tennant: Okay. So Bracken and Paul, the 3-year long-range plan was sort of anchored to FY '24. And so we've had 4 quarters -- consecutive quarters of op margin expansion. And this fifth quarter because of tariffs, we now have kind of a reversal of that trend. So historically, you've always kind of talked us to look at half years. And I guess a couple of questions. You talked about back-to-school being strong. Just wondering what you're seeing kind of on the exit of that. You talked about the consumer being still resilient. And then last quarter, you had mentioned sort of like how you think about philosophically demand elasticity. We're going to start to see price increases, Paul, in the mid-single-digit range, low single-digit range, if you can help us out with that. And what are you thinking about with respect to kind of how the volume plays into that? Bracken Darrell: Yes. Why don't I take -- I think your first question was kind of what do we see coming. It's a little hard to answer. Maybe I'll come back to Timberland since it's an interesting one to talk about. I think Timberland, we probably have more growth potential than we're going to get because we're -- you saw this quarter, 4% growth. I think for the rest of the year, you can expect kind of low single-digit growth. That's not because the brand heat is not out there. It's out there. We're just going to really control our expansion. And we're going to make sure that we're very deliberate about executing. Right now, we have only, for example, only 6 full-price stores in the United States where there is very strong demand. We could go out and expand aggressively into our wholesale -- new wholesale, et cetera, but we're really not going to do that. We're going to very deliberately open new stores. It's going to start later in Q3 and into Q4, although they won't really kick in and be high performing until next year. So we're really trying to think in terms of driving growth longer term, not just what we can do this holiday and in Q4 so that's our mindset on this whole business is really how do we -- I hope you're starting to get a feel for that. We're going to execute in the key commercial moments, but our real game plan is longer term than that. We're going to put -- systematically put these building blocks in place that are going to deliver for years and years to come. Paul Vogel: Yes. And on the gross margins, I think I had the question. Bracken Darrell: Elasticity in gross margin. Paul Vogel: Yes. So on the gross margin side, so as you get to the next couple of quarters, so obviously, we've had some good gross margin expansion. We've lapped a lot of the work we've done to reset our inventories, get inventories in a better position. We've talked about a better promotional environment for us in terms of discounting. So that's all been productive. You get into Q3, you do have some impact, as I said, from the tariffs, which we won't really start to mitigate tariffs until Q4 from a pricing perspective. So you will have that. You also are lapping all of the work we've done over the past year or so. So you've got -- you're starting to get tougher "comps" in terms of the gross margin improvement. We still think there's more there, obviously, and we've talked about getting to 55% or better in our longer-term targets. But we did make a lot of progress over the last year and a lot of the reset actions and cleanup we've done. So that will impact us in the next couple of quarters. And then there was one other part to that question. Bracken Darrell: Elasticity. Paul Vogel: Elasticity, yes. Bracken Darrell: Single digit. How much we raised? Paul Vogel: Yes. We don't really get into the exact amount of pricing. But you can think about it a couple of ways. One is there's always going to be a part of this between working with our vendors, working with our wholesale partners and then pricing. So it's going to be a combination of all 3 of those things, which is probably not a surprise to any of you. We'll also be targeted and thoughtful by brand, right? So it's not going to be a uniform price increase across the board. Each brand is going to take it differently in terms of product, in terms of how they do it, in terms of where they do it, and we'll give them the flexibility to do that. And in some areas, as Bracken mentioned, excuse me, you've got places where Vans where maybe it's not so much on the pricing side, but we've been much better on the discounting side, so that can have an effect of better pricing year-over-year just based on lower discounting. Adrienne Yih-Tennant: All right, thank you very much, very helpful. Bracken Darrell: Yes, if you wanted one headline on that, I'd say surgical. We're still assuming pretty normal elasticity, but we're very surgical in the pricing. Adrienne Yih-Tennant: And it's U.S. only, correct? Or is am I incorrect? Bracken Darrell: Yes, generally speaking. I mean, there's always some kind of pricing happening around the world, but certainly U.S. Operator: Your next question comes from Anna Andreeva from Piper Sandler. [Operator Instructions] Anna Andreeva: We had a question on where are we with the number of doors. So you guys have closed own doors globally and also exited a number of wholesale doors in the U.S., but also added some doors. So are we now in a stable kind of a number of doors environment, both in wholesale and DTC? Do you think there's an opportunity to further rein in own doors, especially at Vans, where I think you still have 600 doors or so globally. And then we had a follow-up. Did you quantify the earlier wholesale demand in 2Q? Bracken Darrell: I'll let Paul take the second one. On the number of doors, yes, I think we're pretty stable going in. Now we're going to increase the number of doors, especially in Timberland, but also in North Face. And there will be some -- continue to be churn on Vans. But as I've said before, but the biggest reduction is kind of in the past now. So -- and that will start to dissipate, especially in Q4. Our total number of doors, I think we're in the U.S., we're at about 500 -- 580 globally, I think about 480 in the U.S., which is consistent with what we said before and about 90 in EMEA and not too many in APAC, although we have partner stores in APAC. So most of that looks like our door even if it isn't technically. Paul Vogel: Yes. And then I think just overall in the stores, so I think we're down about 5%, but it's the majority of that is Vans. We're actually growing in North Face and other areas. And then the second question was the question on the wholesale in Q2, how much that impacted the increased demand? Was that the question? Anna Andreeva: Yes, if you can quantify that impact. Paul Vogel: Yes. So it was probably about -- it was about 50, 60 basis points on the revenue side. So if you look at the revenue number and the outperformance relative to our guidance, there are really two main factors. call it, half of it or so was that was that we had some orders where the demand came to ship in September versus October. And the other was just some better DTC, particularly around back-to-school, did a little bit better. Those are the two big factors. Operator: Your next question comes from the line of Matthew Boss with JPMorgan. [Operator Instructions]. Matthew Boss: So maybe 2 questions. Bracken, could you speak to health of the North Face brand and market share opportunity you see across the outdoor channel? And then just to circle back on Vans, underlying revenue is down high singles, excluding the reset actions. I mean, what do you see still constraining the brand despite the product improvements that you've cited? Bracken Darrell: Yes. So on TNF, I think the brand is very healthy. The key now is we just have to keep doing -- playing out the initiatives we've been talking about, which is not just playing in the winter quarters, but really playing year-round, making sure really getting to women, taking full advantage of these categories we're performing in like footwear, for example, where we had strong double-digit growth again this quarter around the world. So really, we've just got opportunity. We've just got to execute right through everything. So TNF, I feel I'm excited about. In terms of Vans, I think it really does come back to -- you asked me to talk about something more than product, but I'll go back to product. It really is -- this is a product business. We got to have great product. And I'm excited about the Super Lowpro I think the skate Loafers is going to do well. You'll see. I see more and more, it's funny when you think you've got something original, you realize you were actually right on a trend and you see it from -- especially in the luxury segment, and we're seeing Loafers come in across the luxury segment. I remember when we were working on this, we were -- I thought, well, this is really original, and I kind of scratched my head and looked at Sun said, "sure, you want to do this." She says, "Oh, yes, it's going to work." And it did really well in very small quantities in the beginning, and we'll see how it does as we go through the holiday season and on into next year. So it's about product, product, product and then making sure our marketing is relevant and powerful. And I think our marketing is getting stronger and will get stronger and stronger as we go through. We're more and more socially centered. I think SZA, both on the product side and the marketing side will be helpful. But getting right product out there for guys and women and kids is the game at Vans, and we're going to keep pouring it on. Operator: Your next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: A question for Paul, just back on tariffs. I think you had talked about mitigating about 50% of the gross impact this year. Now that you've been going through some of the initial pricing actions. Just any updated thoughts on that? And then I think you had spoken to offsetting tariffs in their entirety at some point in fiscal '27. Just if you could put a finer point on that in terms of timing. Paul Vogel: Yes. The -- on the -- we haven't really raised prices yet. There's very little -- there's really nothing in Q2, very little in Q3. The pricing really comes in Q4. So I really don't have any -- not much I can comment on in terms of the impact of pricing. We'll see it as it comes through. But like I said, we're going to have the impact of tariffs hit us the most in Q3 just from the standpoint of not having the offset of revenue. The offset will come in Q4. And then yes, we think we'll be able to offset tariffs within fiscal '27. We haven't been more specific on that as we get to the end of '26, again, as we see some of the elasticity stuff, so the pricing and see where we end the year, we'll have probably more clarification at year-end. But again, nothing has changed at all from the comments we made last quarter about the impact of tariffs, our ability to mitigate and the timing of when all this comes through. Operator: Your final question comes from Trevor Tompkins with Bank of America. [Operator Instructions] All right. We will move on to John Kernan from TD Cowen. [Operator Instructions] We will move on to Tom Nikic with Needham. Tom Nikic: All right. I want to ask about the ongoing debt deleveraging on the balance sheet. And you've now sold a couple of brands and you've divested some noncore assets. Is it now just a function of fundamental improvement and growing the EBITDA? Or is there kind of anything else you can do from a kind of non-EBITDA perspective to bring the debt leverage down? Bracken Darrell: Let me make a quick comment, and then I'll let Paul answer in a little more detail. Overall, we feel good about our ability to delever down to 2.5x. Now Paul and I have said, we'd like to be below 2.5x because neither one of us is a particularly big fan of debt in general. So -- but 2.5x seems like a reasonable leverage ratio, and we're on a path where in '28, we will be there. As you said, just executing our plan. Do you want to add anything? Paul Vogel: Yes. No, I think a couple of things to be clear. One, we firmly believe we will be able to get to our targets with or without the sale of Dickies. So the sale of Dickies will help speed that up, will help us get there faster. But we 100% believe we would have gotten there on the fundamentals either way. So that's number one. Number two is, yes, I mean, a lot of it moving forward will be continued improvements in EBIT and EBITDA. We will also continue to work on improvements in working capital, better inventory management things that we can bring down. I think we can bring our inventory days down further. I think we can probably improve our overall working capital management as well. So it will be mostly on the pure fundamentals of growing the business. But also, I think there's other things we can do that will help free up cash moving forward. Bracken Darrell: Okay. I guess that was our last question after a couple of extra innings there. Well, look, to close, it was a really good quarter, and we delivered on our commitments again as we try to always do. We made further progress on the entire turnaround plan. And looking ahead, we're going to continue to focus on generating value across our brands and returning the company to sustainable and profitable growth. So we're excited about the future. Looking forward to talking to many of you in meetings throughout the rest of this month and next month here and in Europe and then again next quarter. Thanks again. Paul Vogel: Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to Seacoast Banking Corporation's Third Quarter 2025 Earnings Conference Call. My name is Desiree, and I will be your operator. Before we begin, I have been asked to direct your attention to the statements at the end of the company's press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the securities at Exchange Act, and its comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded. I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may begin. Charles Shaffer: All right. Thank you, and good morning, everyone. As we proceed with our presentation, we'll refer to the third quarter earnings slide deck, which is available at seacoastbanking.com. Joining me today is Tracey Dexter, our Chief Financial Officer; Michael Young, our Chief Strategy Officer; and James Stallings, our Chief Credit Officer. The Seacoast team delivered another exceptional quarter, which clearly demonstrated the progress we are making towards enhancing our return profile, while delivering strong growth on both sides of the balance sheet. Our competitive transformation has fully taken hold with loan and deposit growth near 8%, the result of a focused effort to recruit the most qualified and capable bankers across our footprint. I was particularly pleased with the growth in noninterest-bearing DDA accounts and a balanced approach to loan growth with our commercial production spread across C&I and CRE with multiple asset classes and industries. The team also delivered strong performance across multiple revenue streams, including a record-breaking quarter in Wealth Management, and solid performance in treasury management fees, SBA, interchange and insurance agency income. And impressively, the team accomplished all this while successfully closing and converted the Heartland transaction as well as closing the Villages transaction on October 1. Asset quality remains sound, nonperforming loans declined and net charge-offs were lower than our prior guidance, reflecting our continued focus on disciplined underwriting and proactive risk management. We have very limited exposure to shared national credits or NDFI. And just to remind you, our portfolio is almost entirely franchise quality relationships made to borrowers in our footprint, including consumers, businesses, nonprofits and municipalities that we have deep relationships with. And lastly, capital and liquidity are industry-leading, and our liquidity profile will be further enhanced with the Villages transaction. We remain committed to our fortress balance sheet principles and continue to operate one of the strongest banks in the industry. And in closing, I want to express my sincere appreciation to our dedicated associates for their commitment to advancing our growth and profitability goals. Their focus and executions continue to drive our success. We operate one of the best banking teams in the Southeast across some of the best markets in the United States with an exceptionally strong balance sheet. I remain confident in our growth outlook and our ability to continue to deliver continued improvements in returns into 2026. With that, I'll turn the call over to Tracey Dexter to walk through our financial results. Tracey? Tracey Dexter: Thank you, Chuck. Good morning, everyone. Directing your attention to third quarter results, beginning with Slide 4. The Seacoast team delivered a strong quarter with adjusted net income, which excludes merger-related charges increasing 48% year-over-year to $45.2 million or $0.52 per share. Organic deposits, excluding brokered and Heartland acquired deposits, grew $212 million, or 7% annualized and that organic growth included $80 million in noninterest-bearing deposits. Loan production continued to be strong with organic growth in balances of 8% on an annualized basis. The pipeline has reached a record high, reflecting the success of recent hiring and the increase in the balance sheet following the completion of the Villages acquisition in October. Net interest income was $133.5 million, an increase of 5% from the prior quarter, and net interest margin excluding accretion on acquired loans expanded 3 basis points to 3.32%. Tangible book value per share increased 9% year-over-year to $17.61, remarkable given that the Heartland acquisition included 50% cash consideration. Our capital position continues to be very strong. Seacoast's Tier 1 capital ratio was 14.5%, and the ratio of tangible common equity to tangible assets is 9.8%. We completed our acquisition of Heartland Bancshares on July 11, adding 4 branches and approximately $824 million in assets. The technology conversion was fully completed in the third quarter. And on October 1, we finalized our acquisition of Villages Bancorporation, adding 19 branches and over $4 billion in assets. We expect the full technology conversion to happen early in the third quarter of 2026. Turning to Slide 5. Net interest income increased by $6.6 million or 5%, compared to the prior quarter and by $26.9 million or 25%, compared to the prior year quarter. The net interest margin declined 1 basis point to 3.57% and excluding accretion on acquired loans expanded 3 basis points from the prior quarter to 3.32%. In the securities portfolio, yields increased 5 basis points to 3.92%. Loan yields declined 2 basis points to 5.96%. Excluding accretion, loan yields increased 3 basis points to 5.61%. The cost of deposits remained near flat with only a 1 basis point increase during the quarter to 1.81%. And overall cost of funds is down 3 basis points from the prior quarter. With strong momentum in loan growth, deposit costs now lower and stabilizing, additional liquidity and accretive acquisitions, we expect net interest income to continue to grow. Consistent with our previous guidance, we expect to exit the year with the core net interest margin reaching approximately 3.45%, inclusive of recent acquisitions. Moving to Slide 6. Noninterest income, excluding securities activity was $24.7 million, increasing 5% from the prior year quarter. Fee revenue continues to benefit from our investments in talent and expansion of treasury management services to commercial customers with service charges on deposits increasing 12% from the prior quarter. Our wealth management team delivered a record quarter in new AUM, continuing its strong performance and reinforcing its position as a key growth driver for the organization. $258 million in new AUM was added in the third quarter, the highest quarterly result in the division's history and $473 million in new AUM in 2025 year-to-date. BOLI income increased to $3.9 million in the third quarter and included $1.3 million in benefits. Other income totaled $6 million, and included higher gains on SBA loan sales and higher loan swap fees. Looking ahead to the fourth quarter, we expect noninterest income in a range from $22 million to $24 million. Moving to Slide 7. Again, the Wealth division continues to grow entirely organic and with significant referrals from our commercial teams, with total AUM increasing 24% year-over-year and a 25% annual CAGR in the past 5 years. On Slide 8, noninterest expense in the third quarter was $102 million, an increase of $10.3 million, and the third quarter included $10.8 million in merger-related expenses. Higher salaries and wages reflect continued expansion and the addition of Heartland as well as higher performance-driven incentives. Outsourced data processing costs totaled $9.3 million an increase of $0.8 million, reflecting higher transaction volume and growth in customers, including from the acquisition of Heartland. Other categories of expenses were in line with expectations. Our adjusted efficiency ratio improved to 53.8%, down from 55.4% in the second quarter, demonstrating continued operating leverage. We continue to remain focused on profitability and performance and expect continued disciplined management of overhead and the efficiency ratio. With the addition of the Villages beginning in October, we expect adjusted expenses for the fourth quarter, excluding direct merger-related costs to be in the range of $110 million to $112 million. Turning to Slide 9. Loan outstandings, excluding the impact of the Heartland acquisition, increased at an annualized 8%. The Pipelines increased 30% to $1.2 billion, and we continue to see strong broad-based demand across our markets. Loan yields declined 2 basis points with lower accretion on acquired loans with the prior quarter impacted by elevated payoffs. Excluding the effect of accretion, yields increased 3 basis points from the prior quarter to 5.61%. Looking forward, the pipeline remains strong, and we expect continued high single-digit organic loan growth in the coming quarter. With the addition of the Villages in the fourth quarter, we expect loan-to-deposit ratio at year-end 2025 to be below 75%, allowing significant continued growth opportunities. Turning to Slide 10. Portfolio diversification in terms of asset mix, industry and loan type has been a critical element of the company's lending strategy. Exposure is broadly distributed, and we continue to be vigilant in maintaining our disciplined, conservative credit culture. Nonowner-occupied commercial real estate loans represent 34% of all loans and are distributed across industries and collateral types. As we have for many years, we consistently managed our portfolio to keep construction and land development loans and commercial real estate loans well below regulatory guidance. These measures are significantly below the peer group at 32% and 223% of consolidated risk-based capital, respectively. We've managed our loan portfolio with diverse distribution across categories and retain granularity to manage risk. Moving to credit topics on Slide 11. The allowance for credit losses totaled $147.5 million, with coverage to total loans remaining flat at 1.34%. The allowance for credit losses, combined with the $102.2 million remaining unrecognized discount on acquired loans, totals $249.7 million or 2.27% of total loans that's available to cover potential losses. Moving to Slide 12, looking at quarterly trends in credit metrics, which remain strong. We recorded net charge-offs of $3.2 million during the quarter or 12 basis points annualized. Nonperforming loans declined by $3.6 million during the quarter and represent only 0.55% of total loans. Accruing past due loans moved slightly higher to 0.19% of total loans. The level of criticized and classified loans stands at 2.5% of total loans, generally in line with prior periods. As Chuck mentioned in his opening remarks, Seacoast continues to have very limited exposure to shared national credits or nondepository financial institutions. We have no exposure to private equity debt funds. Moving to Slide 13, and the Investment Securities portfolio. Net unrealized losses in the AFS portfolio improved by $36 million during the third quarter, driven by changes in long-term rates. The portfolio yield increased 5 basis points to 3.92%, reflecting $385 million in purchases of primarily agency mortgage-backed securities with an average yield of 5.03%. Turning to Slide 14, and the Deposit portfolio. Seacoast continues to benefit from a diverse deposit base. Customer transaction accounts represent 48% of total deposits which continues to highlight our long-standing relationship-focused approach. Our customers are highly engaged and have a long history with us and low average balances reflect the granular relationship nature of our franchise. On Slide 15, organic deposit growth, excluding changes in brokered deposits and the acquired Heartland deposits, was $212.3 million, or 7% annualized, of which $80.4 million was noninterest-bearing deposit growth. Cost of deposits increased slightly by 1 basis point to 1.81%. The Heartland acquisition added over $700 million in a strong core deposit franchise and the #1 market share in Highlands County. We continue to build share across our markets with a focus on core relationship deposits. For the fourth quarter 2025, we expect low to mid-single-digit organic deposit growth. And finally, on Slide 16, our capital position continues to be very strong. Tangible book value per share has grown to $17.61, and the ratio of tangible common equity to tangible assets held strong at 9.8%. As expected, return on tangible common equity decreased reflecting the impact of the Heartland acquisition. And in the fourth quarter, we'll see the initial impact of the Villages acquisition on these metrics. Into the first quarter of 2026 and moving forward, we expect to see meaningful improvements in return on equity measures. Our risk-based and Tier 1 capital ratios remain among the highest in the industry. Results this quarter reflect our ability to deliver strong sustainable performance. Our balance sheet is well positioned and our capital position is strong. We'll continue to execute on our organic growth and profitability goals as we integrate recent acquisitions and grow the franchise. I'll now turn the call back over to Chuck. Charles Shaffer: All right. Thanks, Tracey. And operator, I think we're ready for Q&A. Operator: [Operator Instructions] And our first question comes from the line of Will Jones with KBW. William Jones: So I just wanted to start on the growth outlook. It's impressive in a quarter where you're closing and converting a deal and closing another one that you're still able to just so consistently produce this mid- to high single-digit growth. And as I look back on the first half of the year, it's so consistent with what you produced this quarter. But at the same time, it feels like pipeline momentum being at all-time highs and then just kind of the added flexibility you're going to have with the Villages balance sheet, that there may be opportunity to kind of accelerate growth as you look into 2026. Could you just maybe talk about your willingness to scale up the growth opportunity to the extent that, that does present itself next year? Charles Shaffer: Thanks for the question, Will. And that was one of the things I thought was most impressive about the quarter is not only did the team grow strongly both sides of the balance sheet, we also converted a Heartland transaction, which went exceptionally well. And we continue to move with tremendous momentum. When you look at the building the pipeline, the building growth, we have a slide in there that shows the net loan growth quarter-to-quarter, and you're seeing consistent improvement. When you kind of combine the liquidity we're picking up with the Villages transaction, which just to remind you, is a very granular, diverse, lower-cost deposit portfolio and connect that with what I think now is one of the strongest commercial banking teams across Florida and maybe in the whole Southeast is a really strong combination to put together to drive earnings as we move forward. The team we've built over the last 3 years has matured now. And if you recall, we've been pretty hard at work recruiting consistently now for a good 36 months. We've moved past solicitation constraints and other things that the bankers would have had in terms of contractual arrangements. And they're now fully available to go out and call and build business. We've also moved to the point of where from a lending perspective, some of the very low-yielding loans that were kind of locked into some of those balance sheets that would be moving business from have reached maturity and/or have amortized down to the point where they're willing to refinance those arrangements. And so when you put all that together, I just feel very confident about our ability to deliver our guide, which was high single digit as we move forward. I think I'd stick with that guide for now. I think that's an appropriate guide as we move through time. But I feel really confident in our ability to deliver that in the coming quarters. Michael Young: And Will, this is Michael. I just wanted to add, I think when you compare that to what you're seeing in the industry right now, we did a lot of work over the last 2 years, and we're derisked kind of our portfolio, made sure that everything that we have is what we want to have going forward. I think a lot of others are going through that right now. And so just our production is leading to more net growth as we add new relationships and grow the book. William Jones: Yes. That's fair enough. Certainly an envious position to be in. And I guess, maybe more holistically, as you think about 2026 and the flexibility that villages will provide to you, as we kind of think about the size of the balance sheet next year, do you -- would you characterize 2026 more as a year of optimization and maybe you don't need as intensive of deposit growth to kind of just leverage the balance sheet on the loan side? Or do you still expect to see some modest balance sheet growth in 2026? Michael Young: Will, yes, let me -- I'll take that one. This is Michael. I'll call out one trend in the fourth quarter quickly, and then I'll move to 2026 for a little bit of color there. So in the fourth quarter, we did add a little bit of leverage in the third quarter to prebuy some securities for the Villages restructuring about $350 million that was purchased that Tracey mentioned earlier. So we have about $167 million of brokered deposits at about 4.2% that will run off in November and another $175 million of FHLB advances at about 4.2% that will run off in November as well. So -- we will delever just a little bit here in the fourth quarter at higher yields and expanding margin. But then as we move to 2026, we really think that across the franchise, there's a lot of deposit growth opportunity. We've opened about 5 to 6 new locations by year-end across the footprint here. And then also with the villages continued expansion and growth with them opening new town centers and having a lot of net new and migration there as well. There's just a lot of tailwinds to deposit growth. So we will remix a little bit, but deposits are still likely to grow at a pretty decent clip in 2026. So the balance sheet will be expanding kind of in line with that deposit growth that we forecast for 2026. William Jones: Yes. Okay. I appreciate that detail, Michael. And then just lastly for me. You guys have been expanding into Atlanta more recently, and correct me if I'm wrong, maybe your first meaningful expansion outside the state of Florida, just in terms of where you have boots in the ground, that wholesale market that's seen quite a bit of M&A turnover in the past couple of months here. Maybe, Chuck, if you could just frame what you would like to see in terms of the build-out of Atlanta and where there may be opportunity to add talent here? Charles Shaffer: Sure. Thanks, Will. And you're right, what we see in that market and what we see as we entered it a few years ago is the opportunity to take advantage of what we think will be significant consolidation in the Northern Arc of Atlanta. We, about 3 years ago, began to enter that market carefully with the commercial real estate team. We saw a lot of success uniquely or maybe not uniquely, but interestingly, we found a lot of connectivity between Atlanta and Florida with a lot of -- particularly on the commercial real estate side, some of the institutional quality commercial real estate investors and developers doing a lot of work in Florida. So it's a natural segue. As that continued to build, we've bolted on a C&I team that continues to grow in that market. I would expect us to ultimately open a handful of branches in the probably 3- to 5-year period as we move through the coming years and expand into the market. We've had a lot of success at this point. We're onboarding a lot of high-quality customers. And so I would expect us to build out that Northern Arc. Beyond that, I don't think we have any plans outside of that at this point. That's kind of our focus in Atlanta. And then we still have markets to fill in around Florida that we're focused on as well. We're still getting a lot of inbound demand by bankers and banking teams wanting to join the franchise. We're carefully taking advantage of that as we move through time. And potentially, as there is more of market disruption consolidation, we'll have very good opportunities to bring on really high-quality talent. Operator: Our next question comes from the line of David Feaster with Raymond James. David Feaster: I wanted to touch on the Villages deal. I just kind of hoping to get maybe some of an update. I mean this is a transformational deal and an extremely exciting time for you all. How has the deal gone early on, right? I mean we're only a couple of weeks into it, I know. But where are you seeing the most opportunity to add value near term, the time line to cross-sell some additional products across the existing footprint? And then just maybe how are you prepping for that conversion to minimize disruption and ensure a seamless integration? Charles Shaffer: Great question, David. It's the most exciting thing that's ever happened to Seacoast. I really -- I am not overstating that. We are really excited to be in the Villages MSA. We've had a very great -- good reception in that market. The team there is -- fits incredibly well within Seacoast. The cultures are very much aligned, very customer focused. We've been really excited to have the team join us. It's gone incredibly smooth. Having done a lot of these through my career, this one is a good one, and it's going exceptionally well. As we look at that market, as you mentioned, the most important thing we can do is have a very clean, smooth, easy conversion for the Villages customers. Citizens First customers, and that's what we're focused on. That will happen about July next year. We gave ourselves plenty of time to do lots of data integrity work, lots of mock conversions, lots of work. There's a full team here that is heads down on that. It is the most important thing we can do as we come into that year. And the quality of that customer franchise we're acquiring is tremendous. And so we want to make it incredibly smooth for them, incredibly smooth for the Villages community in general and highly focused on that. We're also doing -- going to be doing lots of coffee meetings and training for the customer. I mean we have all kinds of things planned, events, cocktail parties, everything you can imagine. So we're going to be deeply involved in the Villages and the growth of the Villages. And then we want to get this one right because we have Villages too coming that we're going to build alongside with. So lot of upside to getting that right, a lot of benefit in the coming years. We think we can build a bank that is twice the size of the bank there over time as it gets built in that market. And so we're super excited on it. That's step one. Step 2 will be building around that franchise in terms of wealth management. We've got a wealth team built at this point. We've acquired a full team up in that market that is now calling in that market, and we're starting to already win business, particularly on the trust side. So we're off the races up there. Things are going incredibly well. I think the balance sheet came in a little bigger than we expected. Deposits are growing, and we're probably outperforming a bit of our model at this point. David Feaster: That's terrific. And then on the other side, too, I mean, we touched on it a bit, but the pipelines continue to grow. It's at record levels. How much of that is just, a, I mean, obviously, Florida is a really strong market. How much of that is just the market backdrop versus maybe more confidence from your clients to start investing and maybe down rates some projects might pencil today that didn't before versus just like you talked about market share gains from your new hires. And then just how is the complexion of the pipeline today, just both by segment and geography? Just kind of curious where you're seeing the most opportunity. Charles Shaffer: Yes. Market is strong. Demand is strong. We're seeing sort of broad-based demand, C&I and CRE. Pipeline is a mix of about 50-50 CRE and C&I. So it's pretty wide. It's pretty broad. The industries are pretty wide, too. So kind of across the board, market demand remains really good. It really hasn't slowed down as a result of tariffs or anything, we're still seeing quite a bit of demand. We've seen no real impact in terms of demand as a result of that. So we're feeling very good about market demand. And then probably more importantly, what we're seeing a significant amount on is offloading customers out of larger bank balance sheets onto our balance sheet as we continue to have the banking team mature into the investments we made a number of years ago. And I'll just reiterate what I said to Will's question. A lot of those loans were locked in at very low rates. Customers are coming up on their terms. They've got to refinance and rather than going back to the bank they're at, they're falling their banker to Seacoast. And that is very exciting as we move forward. Combining that with the liquidity we're bolting on through the M&A is incredibly accretive in the years to come. David Feaster: Okay. And then maybe just stepping back, kind of a higher-level question. I mean you've had pretty massive growth over the past several years. We went from -- looking back at the start of 2020, you were a $7 billion asset bank. Today, you're north of $21 billion in just 5 years organically and through the inclusion of several community banks. Just given that massive growth, right, as you step back and look where you stand today and you think about how are you going to compete maybe against more some of your larger brethren -- curious, is there anything that you're missing or that you need to invest in, especially as you continue to move upstream, whether that be technology, infrastructure, product offerings? Just kind of curious what you're working on today and being a much larger institution, if there's anything that you need to add or where you're looking to invest? Charles Shaffer: I would say the good thing or the smart thing we did over the last few years is we invested heavily in building out our Line 2, Line 3 risk function. So we have a very strong ERM function that supports being a larger midsized bank. We continue to make investments over that period of time. I feel very confident in where we stand in regard to our overall enterprise risk management, our governance, the structure of the organization. We've also made a lot of investments on the technology side, particularly customer-facing technology. There's probably some things we need to continue to build on, particularly around our commercial treasury stack that we remain focused on here as we move forward. We're working on getting Zelle for business inside the company. That's an important technology product that's important to our small business customers in particular. So there are things we're bolting on, David, that we'll be doing in the coming years. But I think at this point, the good news around our size is that $21 billion, we have the ability to compete up market in a meaningful way. So we've brought in large regional bank quality talent into the organization, combine that with a really high-quality treasury management team, and you see that pulling further in our TMCs, and then we're letting them go to work and have the ability, the capacity now to go out and compete on market and win business. And so I largely feel like we're there. There's investments we need to make, we'll continue to make. There's investments we need to make to continue to harden and build our IT infrastructure and other things as we get larger. But I think we've got that all in the plan. I think we've managed that and pace that appropriately and feel very good about our investments in the coming year and our earnings profile. Operator: Next question comes from the line of Russell Gunther with Stephens Inc. Russell Elliott Gunther: I wanted to start on the margin discussion. So I think the core NIM for this quarter came in a little bit lighter than this guide. Could you walk us through the glide path that gets us from 3.2% to that 3.45%? Maybe touch on where the September NIM shook out, if you could? And then what does this consider for continued excess liquidity deployment going forward? Michael Young: Russell, this is Michael. I'll take that one. Yes. So we've been talking about a 3.45% NIM in the fourth quarter for a while. We were kind of unsure of the date of the close of the legal transaction with Villages that came in a little earlier. So that's certainly beneficial. I mentioned the wholesale funding that will pay off here in November, early November that will benefit the margin as well into the fourth quarter. And then I think from there, just the completion of the securities restructure in the fourth quarter will be the other main driver. We are down in cost of funds. Our September cost of funds was about 1.92% versus 1.96% reported for the quarter. So we're already benefiting from the rate cut that happened in September, and then we'll add on the low-cost deposits from Villages as well that we talked about would add roughly about 10 basis points in total to the fourth quarter cost of funds improvement and therefore, NIM. So I think we're right on schedule. Obviously, if we get a couple of rate cuts here, if we get October and December, that's beneficial to our slightly liability-sensitive balance sheet. So those give you some of the moving pieces, I think, as you move through the fourth quarter. And we still expect expanding margin, obviously, into 2026 with the securities reposition behind us and the low-cost deposit franchises that we've acquired. Maybe one other piece there as you look out, while we're not giving 2026 guidance yet, we do expect the deposit beta to come down a little bit. We've really outperformed there at about a 48% deposit beta through these first 100 basis points of cuts through late last year. But we would expect with the lower cost deposit franchise, maybe we're closer to 30% beta going forward. Obviously, we hope to outperform that, but that's probably where we would model going forward. Russell Elliott Gunther: Okay. Super helpful, Michael. And then maybe just a reminder in terms of what's left to do on the securities restructure, where that sort of pro forma securities to average earning asset contribution would likely shake out in 4Q? And then the type of progress you would expect to make toward ratcheting that down over '26? Michael Young: Sure, Russell. So high level, we closed the deal October 1, and we began restructuring the securities book at that time. We've made a lot of great progress there, and we'll continue to do so throughout the fourth quarter with a focus on best execution versus speed to completion. But we're in good shape there and no real changes versus our initial expectations. The one positive is that original modeling of the deal, we recall that in April of this year, the tariff tension was going on and credit spreads were much wider and rates were higher at that point in time as well. And so as those have compressed to deal close, we would expect a lower AOCI than what we originally anticipated. So we should have a little higher book value and capital, which we hope will make the deal less dilutive. And then getting more detailed into kind of the timing of the repositioning of the balance sheet in total in the fourth quarter, we expect the loan-to-deposit ratio, as Tracey mentioned, to be below 75%. But as we grow throughout 2026, we would expect some positive remix. Again, if you did just a high single-digit loan growth number for next year, that would be about $300 million more than kind of a low to mid-single-digit deposit growth number. So that kind of gives you an order of magnitude on what could happen next year. Obviously, with higher loan growth, we might remix faster. Russell Elliott Gunther: Yes. Okay. Absolutely. Very helpful, Michael. And then just last one for me. I appreciate the look at where 4Q expenses could shake out. As we think about the pro forma franchise, maybe bigger picture, how should we contextualize sort of a decent core growth rate for Seacoast going forward? Michael Young: Russell, this is Michael again. I think what we've said historically and continue to expect to be the case on just the organic side would be something in pace and in alignment with inflation, kind of a 3-ish, 3% to 4% growth rate on the core underlying. And then it depends on the success in sort of banker hires from there. As Chuck mentioned, we do expect some merger disruption across our footprint in the Southeast broadly. So we may see a better appetite and a better opportunity to invest. As Chuck has mentioned before, we've had a lot of pipeline of opportunities to hire bankers, but we wanted to balance that hiring with profitability delivery to shareholders. I think you'll see, obviously, into '26, we're going to have strong profitability delivery to shareholders. So it gives us more capacity and ability to continue to expand and hire bankers and expand our commercial banking franchise. So I think those are kind of the things you want to think about. We're not giving 2026 guidance yet. We'll give more color on that in January. Operator: Next question comes from the line of Stephen Scouten with Piper Sandler. Stephen Scouten: So appreciating you're not giving 2026 guide at all, but in the same vein, you did give like a 2026 kind of high-level run rate number in the Village slide deck. Do you feel like that [ 250 ] number you kind of disclosed there is probably on pace and maybe it even sounds like potentially ahead of schedule based on the deal closing sooner, better loan growth and those sort of things. Is that kind of a fair way to think about expectations versus that disclosure? Michael Young: Yes, Stephen, this is Michael. I think we feel really comfortable with what we laid out originally. I think what you may see is, again, given kind of the rate movement, we may see better book value or less dilution than we initially expected, but we're still finalizing those rate marks, obviously, and everything right now. But that's -- as we currently model, that would be the biggest change on the earnings front, we still feel really comfortable with where we're headed and what we have initially laid out. Some obviously variability with how many rate cuts we get and what you all are modeling, but we feel really comfortable with the 246 number. Charles Shaffer: Yes. If you go back to that deck, Stephen, just to reiterate with some confidence, that's where we expect to land. Stephen Scouten: Fantastic. Perfect. And then just thinking about the balance sheet remix path over time, you guys have highlighted a couple of times this 75%-ish loan-to-deposit ratio, so a ton of potential to remix over time. Does that lead you to pursue any different paths? I mean I think the answer is no based on knowing you guys over time. But do you think about any loan portfolio purchases? Or I mean, you've always had a really low CRE exposure with this Atlanta push, do you think about maybe adding more CRE than you have in the past? Just kind of any changes to strategy around loan growth given all the dry powder you have to put to work? Charles Shaffer: I think a high single-digit guide is still appropriate, Stephen. We'll be disciplined and focus on granularity, focus on diversity and be thoughtful over time. Certainly, we'll have a lot of capacity to lend. But the way I'd describe it is we'll do it prudently and thoughtfully over the coming years. Stephen Scouten: Okay. Fair enough. And then just lastly for me, on the fee side of things, it looks like SBA had a particularly strong quarter. Were any of the hires in the recent past within that division? Is that something that we could see like sustainable strength in? Or was that more episodic in nature? Charles Shaffer: Within the Wealth Management division you focus on, or SBA. Stephen Scouten: SBA. Charles Shaffer: No, we've not added anything there, just volumes that come back. Teams remain focused, but it's the same group we've been operating with for a couple of years. Unknown Executive: Yes. Gain on sales spreads there, Stephen, have gotten a little bit better, which is probably one of the drivers in that line item this quarter. Stephen Scouten: Okay. Great. And I guess the last thing is the conversion, I think you said is set for maybe third quarter '26 on Villages. So is that where we would expect to see more of the lion's share of the cost saves come out at that point in time? Tracey Dexter: That's right. The conversion is currently planned for early in the third quarter of '26. So looking still to achieve all those cost saves in the second half of '26. Operator: Next question comes from the line of David Bishop with Hovde Group. David Bishop: A quick question. Chuck, maybe comment on what you're seeing out there in the market in terms of loan pricing and spreads. I know it's still pretty competitive with credit holding in fairly nicely. Just curious what you're seeing on credit spread for us? Charles Shaffer: It's really low. It's definitely gotten hypercompetitive. I would say we're cautious around that, being thoughtful. But yes, credit spreads are incredibly tight, particularly for high-quality stabilized commercial real estate and really high-quality, strong cash flowing operating companies. It's remarkably tight. And it's -- everybody is back in the game in a big way. We saw after '23, some of the banks pull back. Now it feels like everybody is back in. And so credit spreads are super tight. We're navigating that carefully, picking our spots carefully, but it is -- credit spreads are remarkably low across the board. Unknown Executive: Particularly in low-risk areas where we're most involved. David Bishop: Got it. And you had mentioned the opportunity for the Villages 2 build-out. Just remind us of the time line and maybe I don't know if you ring-fenced the deposit or loan opportunity there? Just curious, just some more details around the Villages2 . Charles Shaffer: Yes. We think Villages 2 probably builds out over the next 10 to 15 years. It will take some time. They've got, Michael, correct me if I'm wrong, I think 2 town centers open at this point. We are opening our branch in that town center now currently. So I would expect -- I think they -- largely, if you think about it this way, they grew a $4 billion bank in Villages 1 with some inflation just on money in general, you could probably grow a $4 billion to $6 billion bank in Villages 2 over the next 10 years. David Bishop: Got it. And final question, Chuck. It doesn't sound like it to this point, but obviously, there's a lot in media and papers about the impact of rising insurance costs in Florida. Are you seeing any sort of impact in that impacting shovels in the ground or borrower behavior? Charles Shaffer: Not really. It's noise. It's complicated. We actually are seeing insurance premiums stabilize, if not coming back down at this point. We've had premiums got to the point of where it brought a bunch of new entrants back into the market as well as there was some tort reform that went on about 18 months ago that, that's pulling through at this point as well. So we've seen a fair amount of start-up capital come back into the market to provide insurance buydown policies from the state of Florida Citizens Win Pool. And so I do feel like insurance is still expensive. I mean, on a relative basis for sure, but it's stable. And in some cases, we're seeing it come down. It's still challenging for older properties, that's going to be your most expensive spot. But if you're buying or building a brand-new home, it's actually really inexpensive at this point. So it's kind of bifurcated inside the marketplace, but it isn't near as bad as it was, call it, 24 months ago. Operator: That concludes the question-and-answer session. I would like to turn the call back over to Mr. Chuck Shaffer for closing remarks. Charles Shaffer: Okay. Thank you all for joining us this morning. I just want to reiterate my thanks, appreciation to the Seacoast team. Proud of our company. We produced an amazing quarter. I think our outlook is really good and just super, super excited to be where we are. So thanks to our team for everything they've done. Thanks to our shareholders for supporting us, and thank you all for joining this call. That will wrap us up, operator. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Arcutis Biotherapeutics 2025 Third Quarter Financial Results and Investor Day presentation. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Brian Scholkoff, Head of Investor Relations. Please go ahead. Brian Scholkoff: Thank you. Good morning, everyone, and thank you for joining us today to review our third quarter 2025 financial results and business update. And for our extended Investor Day presentation, slides for today's call are available on the Investors section of the Arcutis website. Joining me on the call today are Frank Watanabe, President and CEO of Arcutis; Todd Edwards, Chief Commercial Officer; Patrick Burnett, Chief Medical Officer; and Latha Vairavan, Chief Financial Officer. We will also be joined later in the call by Douglas DiRuggiero, a certified physician assistant and doctor of medical science, who has specialized in dermatology for the past 25 years and is the founding President of the Georgia Dermatology Physician Assistant Society. I would like to remind everyone that we will be making forward-looking statements during this call. These statements are subject to certain risks and uncertainties, and our actual results may differ. We encourage you to review all of the company's filings with the Securities and Exchange Commission, including descriptions of our business and risk factors. With that, let me hand it over to Frank for a brief introduction of today's call. Todd Watanabe: Thanks, [ Brian], and thanks to all of you for joining us today and freeing up some additional time in your calendars for what we believe will be a compelling review of the strong foundation of our business today and a more in-depth look at our strategy to sustain our growth in the future. We'll start today's call by reviewing our commercial and financial results for the third quarter. As you'll hear from Todd and Latha in a moment, we achieved yet another strong quarter with robust net product revenue growth and continued steady growth of prescriptions across all approved formulations and indications for ZORYVE. We'll then move on to the Investor Day presentation, where we'll do a deep dive into why we are excited by and confident in the future of Arcutis and our unique potential to address key unmet needs for patients impacted by immune-mediated dermatological diseases. Today's discussion on our corporate strategy is timely and pertinent as we approach cash flow positivity, enabling us to self-fund investments in our business that will sustain the continued growth of Arcutis. Our excitement is grounded first in the outstanding growth opportunities for ZORYVE, a revolutionary topical agent that is already reshaping the treatment of chronic inflammatory skin diseases and impact we foresee only amplifying in the years ahead. As you'll hear today, we have multiple opportunities to grow and further expand our ZORYVE business, and we have the capabilities and resources to exploit those opportunities. We'll also go into more detail today about our exciting pipeline building efforts, starting with ARQ-234, a novel biologic with best-in-class potential to address a large unmet need in atopic dermatitis. Complementing the ZORYVE franchise, ARQ-234 and future pipeline opportunities will enable us to extend our mission to champion meaningful innovation for patients impacted by immune-mediated skin conditions and strengthen Arcutis' position as one of the industry's most consequential medical dermatology powerhouses. I'd also like to take a moment to thank the Arcutis team for their efforts and commitment to bringing better outcomes to patients living with serious skin diseases. Their unwavering dedication underlays our achievements to date and will be the foundation for the ambitious plans we discussed today. So thank you all again for taking the time to join us today. And now I'll turn the call over to Todd for our Q3 commercial update. Todd Edwards: Thank you, Frank, and good morning, everyone. Turning to Slide 6. As Frank noted, we continued to deliver strong revenue growth, driven by the increase in adoption of the ZORYVE portfolio by both patients and clinicians across all improved indications. In the third quarter, we generated net product revenues of $99.2 million, reflecting 22% sequential growth and a 122% increase compared to the same quarter of 2024. The substantial revenue expansion was fueled by growing demand for ZORYVE supported by rising prescription volume across all products in our portfolio. This accessible launch is a reform for the treatment of plaque psoriasis, the scalp and body contributed meaningfully to the expansion in demand and helped to offset typical third quarter seasonality headwinds. Improved gross to net rates during the period also contributed to sequential sales growth driven by reduced utilization of patient co-pay programs as patients progress through their annual deductibles earlier in the year than anticipated. As a result, we expect the quarter-on-quarter gross to net improvement will be more limited in the fourth quarter, consistent with historical trends with only modest additional benefit expected from co-pay program usage. On Slide 7. Consistent with previous quarters, our Q3 growth was driven by sustained demand growth across all strengths and indications. Total prescriptions for ZORYVE increased by 13% compared to Q2 and by 92% versus Q3 2024. Weekly prescriptions on a rolling 4-week average basis reached a new record high with over 17,000 scripts. Following the FDA approval as the [ reform ] is 0.3% of the treatment of plaque psoriasis, the scalp and body in May and a subsequent launch in June, we experienced particularly strong performance from the foam product, with product revenue increasing by more than 25% versus the prior quarter. The inflection in total ZORYVE volume following the launch as illustrated in the graph, demonstrates the significant impact of this new indication launch. Importantly, we also continued to see steady and growing volume for ZORYVE cream 0.3% during the period, reflecting sustained demand across both formulations in plaque psoriasis. Overall, our sustained momentum in Q3 highlights ZORYVE's exceptional utility, the growing confidence in our brand among both clinicians and patients and more importantly, the broader treatment shift driven by steroid conversion. In today's presentation, we will further discuss the dynamics behind the shift away from topical clinical steroids. And I look forward to sharing the additional actions we are taking to catalyze and accelerate this transition in the near term. Looking ahead to the fourth quarter, we anticipate continued strong net sales growth driven by increased patient demand, even as we expect only nominal improvements in our gross to net rate compared to the third quarter. This growing demand will be further supported by the launch of ZORYVE cream 0.05% for atopic dermatitis, age 2 to 5 years old. With that, I'll turn the call over to Latha to review Q3 financial results. Latha Vairavan: Thank you, Todd. I'm now on Slide 8. As Todd just reviewed, we generated net product revenues in the third quarter of approximately $99.2 million which is up 122% from Q3 of 2024 and 22% from Q2 of this year. Cost of sales in the third quarter were $8.7 million compared to $5.5 million in Q3 2024, primarily driven by increased ZORYVE rev sales volume. For the third quarter, our R&D expenses were $19.6 million versus $19.5 million for the corresponding period in 2024. Our R&D spend was consistent with prior year as clinical expenditures shifted from ARQ-255 to pediatric [ reforma last ] studies. Moving forward, we expect an increase in our R&D spend in 2026 as we continue to advance ZORYVE life cycle management, clinical development activities and initiate our Phase I trial of ARQ-234. SG&A expenses were $62.4 million for the third quarter of 2025 versus $58.8 million in the same period last year, a 6% increase attributable to investments in our continued commercialization efforts of ZORYVE, but SG&A expenses were down approximately 10% as compared to the second quarter of 2025 primarily due to a decrease in promotional and marketing spend resulting from timing of expenditures between quarters. Net income for the quarter was $7.4 million compared to a net loss of $41.5 million for the same period last year and a loss of $15.9 million for the second quarter of 2025. The net profit generation in the quarter was driven by the $17.7 million of sequential increase in net sales concurrent with a $5.4 million reduction in operating expense. While we do not expect our net income to remain positive in the near term, the improving operational leverage that we demonstrated in the quarter with growing net sales contribution from ZORYVE outpacing increases to our core expense base speaks to the profit generation capacity of the ZORYVE franchise. We previously communicated that we anticipated achieving cash flow breakeven in 2026. However, the continued momentum of ZORYVE net sales growth, combined with our expense discipline has facilitated the acceleration of this important milestone, and we now expect to achieve cash flow breakeven in the fourth quarter of 2025. Now turning to Slide 9. Our cash and marketable securities balance as of September 30, 2025, was $191 million, with cash burn from operations of $1.8 million for the period. We have total debt of $108.5 million and have the option to withdraw another $100 million in whole or in part at our discussion through the middle of 2026 providing us with the flexibility to invest in the continued expansion of our business. The success of the ZORYVE franchise and the economies of scale we are generating will permit us to invest in the business for the sustained growth over the years ahead. I will elaborate on this when discussing our capital allocation strategy later in today's presentation. With that, I'll turn the call back over to Frank to kick off the Investor Day portion of today's call. Todd Watanabe: Thanks, Latha. We founded Arcutis in 2016 to address what we saw as a significant innovation gap in the immunodermatology drug development space. We recognize that the vast majority of dermatology patients were being treated by older therapies that offered inadequate efficacy, did not target specific disease mediators and/or carried substantial safety and tolerability issues. So we set out to identify, develop and commercialize best-in-class molecules that would address unmet needs in dermatology by directly targeting immunological mediators of inflammatory diseases. We have been extremely focused, deliberate and successful against this goal, steadily executing on the promise of ARQ-151 and ARQ-154, now known as ZORYVE Cream and ZORYVE Foam as a true pipeline in a molecule opportunity. As we approach the significant milestone of achieving cash flow breakeven, we've been thoughtfully planning Arcutis' next phase where we will apply the same focus and dedication to ensuring long-term growth, success and most importantly, continued impact for patients. As outlined on Slide 11, Three pillars provide the strategic framework for sustaining our company's near- and long-term growth. First, we will continue to grow our core ZORYVE business as we establish ZORYVE as the foundational therapy for adults and children who need ongoing therapeutic solutions for managing psoriasis, [ cebroid ] dermatitis and atopic dermatitis. A significant component of the grow pillar is our sustained efforts to meet the increasing calls for safer, more targeted topical alternatives to topical steroids. A topic we will be spending a good deal of time today talking about. This pillar also includes our efforts to expand into primary care and pediatrics and in-line growth opportunities, such as our recent launches in scalp and body psoriasis and pediatric atopic dermatitis and incremental data generation opportunities to bolster ZORYVE's position for our currently approved indications. Second, we plan to expand the ZORYVE franchise through strategic life cycle management. Specifically, we are evaluating new potential indications that represent significant unmet needs and where patients would benefit from ZORYVE's unique profile. Our new indication exploration, a core tenet of our clinical development strategy will be guided by a large body of case reports from clinicians who have used ZORYVE in various other inflammatory dermatosis and have seen encouraging signs of efficacy. And finally, we will build our pipeline advance by advancing other innovative medicines for patients, leveraging the best-in-class clinical development and commercialization capabilities we have developed at Arcutis. Our focus initially will be on ARQ-234 and in parallel on potentially sourcing promising external innovation. As you'll see on Slide 12, we've designed today's agenda to align with these 3 strategic pillars I just reviewed. We'll cover sustainable growth drivers for ZORYVE's current indications. As part of the presentation, Patrick will host a Q&A with the imminent dermatology physician assistant, Douglas DiRuggiero to gain a clinician's perspective on the changing treatment landscape. We'll follow this with an overview of our expansion efforts, including our exploration of potential new indications for ZORYVE with initial efforts in vitiligo and [indiscernible]. And finally, on the ZORYVE re front, we'll provide some insights into peak sales potential. We'll then move forward to a discussion of our pipeline building strategy, which will include a review of ARQ-234 and its opportunity to address a significant unmet need in atopic dermatitis and an overview of our framework for evaluating business development opportunities. Lastly, we'll wrap up with a review of our capital allocation and balance sheet strategy before opening up the call to Q&A. With that, let's dive right into the agenda. Turning to Slide 13. It's been just over 3 years since we received our first FDA approval for ZORYVE. Since that time, and as we've demonstrated yet again today with our Q3 financial results, we've achieved meaningful and sustained growth in our 3 current indications through a steady drumbeat of new formulations expanded adoption within those syndications and strong execution, leading to consistent prescription growth quarter-on-quarter. But beyond these individual milestones, it's important to consider ZORYVE from a 30,000-foot view. And what we see from that perspective is that there has never been a product as uniquely suited to the treatment of immune-mediated inflammatory skin diseases as ZORYVE. As we outlined on this slide, ZORYVE's unique profile, which is truly exceptional amongst topical agents can be categorized into 3 key buckets. First is ZORYVE's [ pleotropic ] mechanism of action, combined with its variety of formulations. Patrick will go into more detail on the MOA later in the presentation. But at a high level, [ PDE4 ] has demonstrated the potential to impact multiple inflammatory cytokines, decreased neuronal itch signaling and increased melanocyte activity. Second is ZORYVE's rapid and robust efficacy, spanning multiple dimensions in multiple dermatosis. As you might imagine, the first and second bucket gives ZORYVE remarkable potential utility across a wide breadth of inflammatory skin conditions, not only psoriasis, atopic dermatitis and [ set ] derm but potentially well beyond our 3 initial indications. And third and critically is ZORYVE's safety and tolerability profile, which enables its use anywhere in the body and for any duration. Safety with chronic use is a key differentiator versus topical steroids and an essential characteristic for the treatment of conditions that often require therapeutic solutions, not just for a month or 2, but for years and often a lifetime. This unique profile is set against the backdrop of an emerging sea change in dermatology where the prolonged use of corticosteroids, historically the standard of care across many inflammatory dermatosis and is facing increased scrutiny and where there's a call to action by a growing number of dermatology clinicians and patients for long-term targeted nonsteroidal treatment strategies. For immune-mediated inflammatory skin conditions, ZORYVE is the right drug with the right profile at the right moment. And because of this convergence of factors and the opportunity for ZORYVE [indiscernible] growth is vast. I'll now turn the call over to Todd to review ZORYVE's opportunity through market landscape lens. Todd Edwards: Thanks, Frank. Slide 15 provides a clear illustration of the sizable and realistic market opportunity for ZORYVE. In the U.S., across our currently approved indications of psoriasis, sender and atopic dermatitis, the diagnosed population totals approximately 30 million patients. Of these patients, about 19 million people are already receiving topical treatment, primarily topical corticosteroids prescribed by clinicians in every specialty. Within this group, roughly 8 million are being treated in a dermatology specialty setting. The area where acute has concentrated its commercialization efforts to date. As a result, the serviceable obtainable market of patients who are already under dermatology care and are already receiving a topical prescription for their psoriasis, AD or seb derm is both substantial and highly addressable. The key question then is what share of this market will ZORYVE recapture? Given ZORYVE's differentiated clinical profile, the strong foundation established during the early phases of commercialization, broad reimbursement coverage, the shifting treatment landscape and the strategic actions we are taking to drive both prescribing breadth and depth, we believe increasing the ZORYVE share to 15% to 20% of topical steroid prescriptions or potentially more is both realistic and achievable. As we'll outline further today, there are compelling reasons to believe ZORYVE is positioned for significant and sustained growth in the years ahead. Now turning to Slide 16. The foundation of our conviction is rooted in what we are already seeing playing out in the market. On the left side of the slide, you can see that over the last 6 quarters, the branded [ non-sola ] has been carving out a meaningful foothold in the topical market. During this period, the [ non-serotopical ] volume, shown by the middle grade has increased over 60%, while topical steroids represented by the yellow line, has essentially remained flat. Within the non-sorted class, ZORYVE is clearly the growth driver, with volumes increasing nearly 200% for the same period as shown by the top most line. Corticosteroids still account for the vast majority of topic descriptions today, which is not surprising, given they have been the topical standard of care for chronic inflammatory skin conditions for over 70 years. However, the treatment landscape is shifting in both the U.S. and globally, there is a growing demand for innovation in the topic of [ second], innovation that can -- that can deliver improved outcomes and safety. As a result, we are beginning to see erosion to the topical steroid share within the topical market. Importantly, this version is in its early stages, and there remains a substantial base of topical steroid prescriptions available for conversion. The chart in the center shows nearly 70% of the 24 million annual prescriptions for psoriasis, AD and seb derm written by dermatology specialists are still for topical steroids. This acquaints to roughly 17 million topical steroid prescriptions each year, a substantial base that will continue to fuel ZORYVE's growth for the years to come. And that does not yet account for the PCP MP opportunity. ZORYVE's outsized growth compared to the broader nonstretopical classes already translated into a meaningful increase in market share. As shown on the right-hand side, nearly half of all brand topical prescriptions are now written for ZORYVE. With this leading position, ZORYVE is exceptionally well positioned to capture the ongoing shift away from steroids. Next, Patrick will do a deeper dive on the state of the conversion of topic steroids and the factors driving the shift in practice. Patrick? Patrick Burnett: Thank you, Todd, and good morning, everyone. We want to spend some time expanding on the momentum behind steroid conversion. First, because it signals a crucial paradigm shift in the treatment of immune-mediated inflammatory skin diseases. And second, because it provides a key data point to support our obtainable market thesis that Todd outlined. So what exactly is driving this conversion? And why does it matter? The first successful use of corticosteroids for chronic inflammatory skin diseases was reported in 1952. In more than 70 years, we've seen remarkable scientific and medical innovations across many therapeutic areas and treatment modalities. But topical steroids have remained a mainstay in the management of conditions like atopic dermatitis and psoriasis. The introduction of biologics has represented a major advancement in the treatment of immune-mediated inflammatory skin conditions. However, even as the introduction of these novel therapeutics has benefited the subset of patients with more severe diseases. Topicals overwhelmingly remain the first-line therapy for the vast majority of patients. And even patients on biologics often continue to rely on adjunctive topical treatments in order to manage residual disease and breakthrough flares. There's an increasing recognition among health care providers, professional societies and patients that the long-term use of topical steroids can be associated with serious adverse effects that can both be local and systemic and this is at the stage for intensifying calls to limit long-term topical corticosteroid use and embrace innovation in the topical modality. So that you can understand, what is galvanized this loud global call of concern about the use of topical corticosteroids, I want to help frame the problem at hand. And to accomplish this, we've adopted a slide from a recent review article written by Douglas DiRuggiero who I was speaking to later in this program. On the left-hand side of Slide 17, we see the list of common local adverse effects of chronic steroid treatment. Most of these were well documented all the way back into the 60s and include skin barrier damage, atrophic changes like stria or stretch marks, cataract formation and delayed wound healing. Importantly, adverse effects related to topical corticosteroids are not limited to local effects. What you see on the right hand of the slide is the list of systemic effects, which are broad and deep, including disruptions in reproductive endocrinology growth suppression, osteoporosis and bone fracture, diabetes and ophthalmic effects, including cataracts and glaucoma. The clear association of cumulative topical steroid exposure and increased risk of bone fracture and diabetes have only been fully appreciated more recently as topical multiple publications emerge that validate the growing concern that long-term adverse effects of topical steroid use are not that different from the well-known adverse effects that have made systemic steroids a treatment of last resort for most inflammatory diseases. While the risk of these effects increases with steroid potency and duration of use, there have been cases reported with low potency agents or short periods of use. Additionally, infants and children may be most at risk because their skin disease typically involve a higher body surface area than adults and their immature skin barrier can result in greater permeability. And lastly, patient populations at even higher risk include those who use topical corticosteroids on the face or genital areas, as [ center ] skin is not only more prone to local adverse effects, but is associated with greater skin permeability and drug absorption, especially in those with atopic dermatitis, separate dermatitis, given the skin barrier dysfunction inherent in these diseases. Clinicians are often increasingly realizing that many patients are not only exposed to topical steroids, but also may be using other steroid treatments like inhaled, intranasal and even oral steroids and this total cumulative steroid exposure dramatically increases the risk of adverse steroid effects. Given all this, you can also understand why we are so passionate about addressing these mounting concerns and leveraging scientific innovation to bring more targeted therapeutic solutions to patients that is both effective and safe. As you can see on Slide 18, in August of this year, 2 of the primary professional dermatology societies in the U.S. The Society of Dermatology Physician Assistance, the SDPA, and the Society of Dermatology Nurse Practitioners, the SDNP, issue statements recognizing the emerging evidence of these potential adverse effects and the importance of incorporating advanced topical targeted therapies that reduce the reliance on chronic topical steroid use. These statements are the latest in a growing list of high-profile calls for the limited use of topical steroids due to the adverse effects, including calls from regulatory agencies in Canada, United Kingdom and India, other professional societies, such as the International [ Eczema Council], British Dermatological Nursing Group British Association of Dermatologists and the American Academy of Family Physicians, patient advocacy groups like National Eczema Society and National Eczema Association as well as several recently published physician expert consensus panel recommendations. As you can see, this represents not merely an isolated regional appeal, but a global groundswell. In the U.S., the recent acknowledgment by the SDPA and the SDNP is particularly important given the key role physician assistance and nurse practitioners play in treatment decisions for patients with chronic inflammatory skin conditions. Next, we'd like to share a conversation I recently had with Douglas DiRuggiero on the evolving topical treatment landscape for immune-mediated dermatosis. Douglas DiRuggiero is a certified physician assistant and a doctor of Medical Science, who specialized in dermatology for the past 25 years. Douglas practices with the skin cancer and cosmetic dermatology center, nationally recognized provider of advanced adult and pediatric dermatology care in Northwest Georgia and Southeast Tennessee. Douglas is also the Founding President of the Georgia Dermatology of Physicians Assistance Society and recently was named a national Honoree by the National Psoriasis Foundation, the first time a physician assistant ever received this award. He's written and spoken extensively on the topic of potential adverse effects from prolonged use of topical corticosteroids. I think it might be good to frame the conversation with Douglas by highlighting the role that physician assistance and nurse practitioners play in the dermatology field. NPs and PAs are providing an increasing amount of direct dermatology care, including prescription writing, this expanding role is in part being driven by heightened demand for dermatological care as dermatologists provide care in medical dermatology as well as surgical procedures and cosmetic services. These NP and PA providers are failing critical gaps and ensuring patients with skin conditions have access to the vital and high-quality care they need. Well, Douglas, I want to thank you for joining me here and being willing to come on and share some of your insights over the almost 30 years of practice that you've had. And especially, I want to talk to you coming out of your paper that you published on the impact of topical corticosteroids systemically. I found that to be a really excellent review, learned a lot from it. I thought it would be great to have you come on and share your perspective that led to that. Patrick Burnett: Next, on Slide 20, I want to come back to an analysis that we shared in 2023 on historical analogs, where newer classes of medicines disrupted established treatment paradigms, unset unseating entrenched generic standards of care. These are 4 different diseases that had firmly established generic standards of care that were disrupted by safer, more effective or more convenient innovative treatments, across the market for anticoagulation, depression, GERD and schizophrenia. It required between 5 and 10 years before the newer innovative therapies were able to capture 50% of the serviceable obtainable market. It's just been over 3 years since we received our initial indication in psoriasis just under 2 years for seb derm in only 15 months since our launch in AD. We're just getting started and look forward to the continuing evolution of the treatment paradigm for these diseases. Imagine the growth potential if the topical anti-inflammatory market only converted half as much as these other markets. Now on Slide 21, we highlight key aspects of the topical steroid profile that have driven their wide adoption in dermatology so that we can understand the profile that a nonsteroidal alternative needs to achieve in order to successfully compete. It really comes down to 2 key characteristics. First, like topical corticosteroids, the drug needs to be effective in resolving both inflammation and itch and it needs to do so quickly. Second, topical steroids work on many of the most common skin diseases like atopic dermatitis, psoriasis and cebra dermatitis, as well as many of the more rare conditions, where there may not currently be any FDA-approved treatment. So like topical corticosteroids, the drug also needs to work broadly across indications. This is distinct from the expectation for a systemic treatment where a more targeted therapy is desired. Now consider what characteristics a drug would need to move beyond competing with topical steroids, but rather displacing them as a superior therapy for chronic inflammatory dermatosis. Patients with these chronic conditions desperately need topical drugs that can be used safely over an extended period of time to avoid flare ups, while mitigating the risks and adverse effects associated with prolonged topical corticosteroid use. In addition, the treatment needs to be safe and convenient to use in multiple areas of the body, including topical including difficult-to-treat areas like the scalp and sensitive areas like the face and growing, all of which can be affected by inflammatory dermatosis. I'll walk through ZORYVE's MOA in detail a bit later in my presentation. Like steroids, ZORYVE has a broad impact on multiple biological processes implicated in immune-mediated inflammatory skin conditions. This distinguishes ZORYVE from biologics that target very specific pathways and other branded topicals that work on a narrower set of mechanisms. And in fact, as Frank mentioned earlier, ZORYVE as a potent inhibitor of [ PDI], has even broader effects than steroids, directly impacting neuronal itch signaling and melanocyte function in addition to reducing inflammation. We've amassed a substantial body of clinical data supporting our 6 FDA approvals that demonstrate the safety and efficacy profile of ZORYVE with prolonged use across multiple disease states and essentially every area of the body. As you can see, ZORYVE checks all the boxes for the ideal profile, not only to compete with, but also to potentially replace topical steroids, helping explain why ZORYVE continues to rapidly gain share from topical corticosteroids. I'll now turn it over to Todd to discuss our ongoing commercial efforts in the primary care physician and pediatric specialties. Todd Edwards: Thank you, Patrick. I'm now on Slide 22, expanding the breadth of prescribers beyond dermatology will be a key driver of ZORYVE's continued growth. Our initial focus was on dermatology practices, which provided a time and resource efficient rollout, given that the relatively small base of dermatology prescribers account for roughly half of all topical scripts for inflammatory dermatosis. While we continue to make strong inroads among dermatology practitioners, we have also ramped up efforts to expand the reutilization in primary care and pediatric settings, where over 13 million topical prescriptions are written a year for our current indications. These initiatives are being advanced through our partnership with [indiscernible]. In the primary care and pediatric setting, many providers have had limited exposure to topical nonrate treatments, intended default to prescribing steroids. [indiscernible] team is deploying a targeted high-frequency approach to drive initial trial and ultimately, adoption of ZORYVE among these providers and their patients. As our thyroid conversion movement continues to gain momentum and visibility, we expect it will increasingly influence prescribing habits in these settings. While the overall universe of providers in primary care and pediatrics is vast, our joint commercial strategy with [indiscernible] is both strategic and highly focused. As shown in the pie charts on the right side of this slide, of the more than 0.5 million total PCP and pediatricians in the U.S. The top 30,000 prescribers were about 5%, right, 4 million prescriptions or nearly 1/3 of all prescriptions in these segments. These high-volume prescribers are the focus of our efforts and give us confidence that we will be able to officially drive growth with this strategy. Our activation in primary care and pediatrics is still in the early days. And we are determined to drive ZORYVE's penetration in these settings to ensure this large pool of patients is provided with alternative treatment option to topical steroids. I will now turn the call back over to Patrick, who will discuss in more depth the opportunities to continue growing ZORYVE and psoriasis setter and AD through targeted clinical activities. Patrick? Patrick Burnett: Great. Thank you, Todd. We'll now turn to the growth opportunities for ZORYVE presented by further extension of our current indications, ensuring that we can deliver ZORYVE to as broad a number of patients with psoriasis, [ cebra ] dermatitis and atopic dermatitis as possible who would benefit from the unique profile of this drug remains a key priority. Our planned and ongoing label expansion efforts to support pediatric patients with plaque psoriasis and pediatric and infant patients suffering with atopic dermatitis are central to advancing this goal as we've outlined here on Slide 23. Pediatric and infant atopic dermatitis patients urgently need innovative alternatives to topical corticosteroids. Unlike other inflammatory skin conditions, atopic dermatitis often presents at early ages for patients. Nearly 10 million children in the U.S. are impacted by atopic dermatitis with roughly 60% developing symptoms in their first year of life. Atopic dermatitis presents unique challenges in these younger age groups not only because the skin is more sensitive, but also because the condition often covers a greater percentage of their total body surface area compared to adolescent in adults. Parents of these pediatric patients are particularly sensitive to potential negative effects from topical steroids. These concerns range from the impact of chronic steroid use on the child's growth and bone development to more immediate complications like application to the child space or contact with the eyes and mouth and can be difficult to control. Given the size of the patient population and the acute need and desire for safer and more tolerable therapeutic interventions, we've been methodically pursuing label expansions for ZORYVE to younger ages of atopic dermatitis patients. Earlier this month, we received approval of our supplemental NDA for ZORYVE Cream 0.05% for the treatment of children aged 2 to 5 years old with atopic dermatitis, a population of about 1.8 million patients. Commercial launch efforts are underway, and we're excited to be bringing this important new -- this new therapeutic option to clinicians and most importantly, to pediatric patients and their caregivers. We're simultaneously pursuing development of ZORYVE Cream 0.05% in atopic dermatitis for even younger AD patients, ages 3 months to 24 months. Enrollment in our integument infant trial for this age range has been brisk and exceeded typical enrollment patterns and our expectations, confirming that there is significant interest in nonsteroidal treatment options. In addition to atopic dermatitis, we're also pursuing a label expansion to treat pediatric plaque psoriasis patients. While this patient population is smaller than that of pediatric atopic dermatitis there is still an acute need for better therapeutic options that we're always trying to meet. On September 2, we announced that we are submitting a supplemental NDA for ZORYVE cream 0.3% to expand its indication to the treatment of plaque psoriasis in children ages 2 to 5. If approved, the ZORYVE cream would be the first and only topical PDE4 inhibitor indicated for plaque psoriasis in children as young as 2, offering patients and caregivers, an important alternative to topical steroids and vitamin D analogs. ZORYVE Cream is uniquely formulated to be effective, safe and well tolerated for all areas of the body, including sensitive areas such as intratrigenous skin, where plaque psoriasis often presents in children. There are very limited FDA-approved treatment options for plaque psoriasis for children under 6. We're very proud of this clinical data package and that we have compiled to support this sNDA, and we look forward to the FDA's decision. Next, on Slide 24, I'll discuss incremental data generation opportunities that our clinical team is pursuing to further bolster ZORYVE's position within our currently approved indications. The utility of these efforts is to produce a clinical data that can be referenced with health care providers that further support the robust and diverse effects of ZORYVE in plaque psoriasis, atopic dermatitis and separate dermatitis. The intent of these efforts is to enhance the label of current indications by establishing ZORYVE among health care providers as a foundational choice amongst various options in controlling these dermatoses. Examples of note in this effort include polymer plantar psoriasis, nail psoriasis, and cicatricial or scarring alopecia, when it occurs alongside a seborrheic dermatitis. Like nail psoriasis, [ palmoplantar ] psoriasis is a manifestation of plaque soriasis in a particular body area and both conditions are part of our indicated patient treatment population for ZORYVE. [ Palmar-plantar ] and nail psoriasis present unique clinical challenges and have historically been less responsive to standard of care topical therapies and even available systemic therapies. However, we've received indications from the field, both through formal case reports and informal dialogue with HCPs that ZORYVE is impactful in addressing these challenging locations. Our intention is to validate this impact through a generation of data that could be made available to the HCPs we engage with. We believe that demonstrating efficacy in these difficult-to-treat patients will incline practitioners to default towards the use of ZORYVE in their preferred topical therapy for their psoriasis patients. Now currently, scarring alopecia, a group of related conditions, leading to the irreversible hair loss have no FDA-approved treatment. Clinicians tell us that many patients with scarring alopecia also present with seborrheic dermatitis, and there's a belief that these 2 conditions may be linked. This comorbidity is particularly well documented in publications that demonstrate that over half of patients with central centrifical sycatritial alopecia, also known as [ CCCA ] 1 form of scarring alopecia, also have seborrheic dermatitis and researchers have proposed that aggressive management of their receptor may reduce the disease incidence, reduce its severity and a psychological burden in patients with CCCA. Again, if the clinical data that we produce validates a unique efficacy profile for patients with seborrheic dermatitis and scarring alopecia we believe that it will drive preferential usage of ZORYVE versus other sebderm treatments. This incremental data generation opportunity requires small data sets, a minimal investment while driving depth of prescriptions in these underserved subpopulations. As such, they're highly resource efficient. This effort will help further guide clinical treatment decisions. Now turning to Slide 25. We you can see select images from case reports that we've received in both palmoplantar psoriasis and nail psoriasis. While the meaningful effect of ZORYVE represented in these pictures needs to be validated through our own clinical evaluation, it's easy to see why we're receiving such excited feedback from the field on the potential for these subsets of patients. So I'll turn it back over to Todd to contextualize the impact that the components of our strategy we have reviewed so far to grow and expand ZORYVE will have on our market opportunity. Todd Edwards: Thank you, Patrick. Turning to Slide 26. This morning, we've highlighted the key drivers that sustained ZORYVE's growth in our current indications, continued conversion from steroids expansion into the PCP and pediatric specialties label expansion and generation of intraretinal data for patient subpopulations. These levers of growth will expand our market opportunity in 2 distinct ways. First, our tenable market will increase to 17 million patients as we continue to broaden our focus beyond the dermatology setting, doubling the patient population across specialties where we have a commercial presence. Second, we expect to drive continued expansion in ZORYVE's share of total topical prescriptions. To frame the opportunity just within the subset of health care providers, we target across dermatology primary care and pediatrics. Every 1 percentage point of share gain in topical steroid prescriptions equates to approximately $150 million in annual net sales. As we build share from our current position to the 15% to 20% range that we believe is achievable, ZORYVE will establish itself as a blockbuster franchise across these 3 indications alone. Now Patrick will discuss our plans to expand ZORYVE into new markets. Patrick Burnett: Thank you, Todd. Transitioning now from growing our core ZORYVE business in our currently approved indications to expanding the ZORYVE franchise by exploring potential new indications for ZORYVE. Pursuing new patient populations that may benefit from ZORYVE has been a principal focus for our clinical development strategy from the outset. This is evidenced by the 5 expansions we have secured across plaque psoriasis, seborrheic dermatitis and atopic dermatitis following our initial plaque psoriasis approval in 2022. We believe that there are additional skin diseases that may respond to and more patients who may benefit from ZORYVE. This belief is not only supported by our understanding of ZORYVE's broadly applicable anti-inflammatory and antipruritic properties as well as its potential impact on stimulating melanocytes, but also by the direct and ongoing feedback we've received from health care providers in the field on their real-world ZORYVE experiences. So that you can understand how and why ZORYVE has potential across such a breadth of skin diseases, I want to take a moment to reorient you to ZORYVE's MOA, its mechanism of action. Notably, it's pleotropic nature. ZORYVE inhibits phosphodiesterase 4 or PDE4. It's an enzyme that plays a key role in inflammation. PDE4 regulates inflammation by increasing levels of cyclic adenosine monophosphate or cyclic AMP an intracellular messenger in immune cells. The increase in cyclic AMP in turn impacts multiple biological processes implicated in immune-mediated inflammatory skin conditions. Specifically, it reduces the expression of multiple key pro-inflammatory cytokines, including interferon gamma, type 1 interferon alpha, TNF alpha, IL-4, IL-6, IL-17 and IL-23, which spans signaling through the TH1, TH2 and TH17 immune-mediated responses. PDE4 also plays a key role in sensory neuron activation. So inhibiting PDE4 likely direct likely directly mediates the itch sensation. PDE4 inhibition also normalizes keratinocyte activation and differentiation, which can lead to mitigation of the epidermal barrier dysfunction that occurs in many inflammatory dermatosis. And finally, it increases melanocyte proliferation, melanocyte gene and protein expression and protects melanocytes from apoptosis. The breadth of mechanisms and pathways that ZORYVE impacts stands in stark contrast to the very limited and specific pathways targeted with biologics for inflammatory dermatosis. These targeted therapies generally impact one or a handful of cytokines involved in the inflammatory cascade. This narrow focus limits the ability of these therapeutics to be applied widely across dermatosis in the same way that ZORYVE. For example, inhibiting IL-23 is wonderful to treat psoriasis, but it has no impact on atopic dermatitis or many other inflammatory dermatoses, ZORYVE's unique pleiotropic MOA may also be an important differentiator between it and other topical anti-inflammatory treatments. Critically, ZORYVE affects this broad set of inflammatory pathways in inflammatory dermatosis without causing systemic immune suppression and thus avoids the deleterious effects that often a company knocking down the immune system broadly with systemic therapeutics. It also avoids many of the deleterious side effects of topical steroid usage, including local skin adverse effects as well as systemic adverse effects such as HPA access suppression, glycemic rate dysregulation, osteoporosis and osteoporotic fractures and ophthalmological AEs. ZORYVE's comprehensive MOA, coupled with a very favorable safety and tolerability profile enables us uniquely to have broad application across an exceptionally wide range of indications and patient populations. To date, this spanned plaque psoriasis, AD and seborrheic dermatitis. It may also enable us to treat diseases where topical corticosteroids have no impact or not used, such as hidradenitis separative and [ Haley Haley ] disease or where their efficacy is low and use is limited due to topical adverse events, as is the case in vitiligo and cutaneous lupus. Now I'd like to talk about how ZORYVE [ pleatropic ] MOA translates broadly in the clinical setting. As part of our obligations as a manufacturer of ZORYVE, our medical team monitors this clinical feedback. To date, as shown on Slide 29, we've identified more than 40 published case reports from clinicians who've used ZORYVE in a multitude of other inflammatory dermatosis that have seen encouraging signs of efficacy. These clinicians have experienced a safe, tolerable, versatile and effective profile of ZORYVE in their psoriasis, AD and seb derm patients that have independently chosen to investigate novel applications of the therapy. The efforts of these clinicians serve as valuable initial signals that our life cycle management process then builds upon. This pursuit of potential new indications is aligned with our original understanding of ZORYVE's pipeline in a molecule opportunity, our approach to assessing these potential opportunities is stepwise and resource efficient as outlined by the simple graphic on the right-hand side of this slide. As indications of interest come to light, we'll conduct exploratory Phase II proof-of-concept studies where appropriate to evaluate the degree of response and understand potential safety and efficacy. Based on the results of these initial studies, our analysis of the unmet need and the addressable patient populations for a given disease as well as discussions with regulatory agencies will then decide if proceeding with a registrational trial is prudent use of capital given the anticipated return on investment. Importantly, the investment we plan to make in pursuit of these additional potential indications involves very efficient deployment of capital. For the FDA to approve ZORYVE for these additional patient populations, we would immediately realize operating leverage on our existing sales force, supply chain and operational foundation already in place to serve patients for our core ZORYVE business. As we reviewed on our Q2 call, we selected 2 initial exploratory indications, vitiligo and [ hydranitis ] super tivo or HS, and our underway with proof-of-concept Phase IIa studies, and we anticipate initiating several other Phase II studies in 2026. On Slide 30, you can see select images from compelling case reports, we've received in patients with just some of the skin diseases that were listed on the previous slide, lupus, [ Haley Haley ] disease and neurodermatitis of the scalp. Now I'd like to turn to the unmet needs and potential opportunity in vitiligo and hydrants [ Superteva]. The first 2 potential indications we're exploring based on case reports from the field, starting with vitiligo on Slide 31. The immune-mediated inflammatory condition, this immune mediated inflammation condition is characterized by the loss of pigment or melanin and patches of the skin, resulting in white or light colored areas. In vitiligo, the body's immune system mistakenly attacks and destroys melanocytes, which are cells responsible for pigment production and skin pigmentation. There are several vitiligo types based on patterning distribution of depigmented patches and nonsegmental or generalized is the most common. There's no cure for vitiligo. Topical corticosteroids have been standard of care but have limited efficacy and the prolonged use side effects can be a challenge. Opzelura received approval by the FDA in 2022 for the treatment of nonsegmental vitiligo and nearly half of Opzelura's current usage is for this indication. You'll recall that as part of the multi-pathway MLA, PV4 inhibition with roflumilast, the active ingredient in ZORYVE that only regulates inflammation, the underlying cause of vitiligo, but also increases melanocyte proliferation, melanocyte gene and protein expression and protects melanocytes from hepatosis. In line with the MOA, we've been highly encouraged by multiple case reports from clinicians who pursued vitiligo as a novel application of ZORYVE and showed success treating vitiligo with ZORYVE 0.3% cream once a day. In the ongoing Phase II proof-of-concept study, we plan to enroll 20 patients in determining whether to advance the program to a Phase III trial, we'll consider the clinical profile we see in the Phase II trial, along with data observed in the field. A rigorous evaluation of the commercial opportunity we would expect based on clinical results and how that compares to results from our other life cycle management trials. For vitiligo, in particular, a clinical result that we may find compelling could be Opzelura-like efficacy with more rapid onset of symptom relief and a more convenient dosing regimen. While we, of course, need input from regulatory agencies in determining what an appropriate Phase III trial design might look like, we anticipate the size and cost of registrational program would be similar to those that we've conducted with ZORYVE approved indications. However, the duration of treatment on how quickly the disease respond to treatment could impact development cost. We believe that there are aspects of ZORYVE's profile that would make it a compelling therapeutic option relative to the current available treatments such as a once-daily dosing and the fact that ZORYVE is not contraindicated with therapeutic biologics or immunosuppressants. Now let's take a look at ZORYVE's potential opportunity in [ hydriditis superativa], or HS, on Slide 32. HS is a chronic recurrent and inflammatory skin condition that causes painful nodules, abscesses and tunnels. Currently, diagnosis and treatment rates remain low as treatment options are limited. HS involves disregulation of several key immune pathways addressed by ZORYVE's MOA, including TNF alpha, IL-6, IL-17 and 23 and interferon gamma. Topical and oral antibiotics are common first-line therapies for mild HS, but provide insufficient relief with a high proportion of patients not improving or relapsing. Beyond antibiotics, options are limited to systemic therapeutics, including corticosteroids, expensive biologics or difficult surgical procedure-based therapies. It's also worth noting that there are extensive off-label experiences with a [indiscernible], an oral PDE4 inhibitor in the treatment of HS. In short, this is a painful, very difficult to manage chronic disease with many patients not served by the currently available therapeutic approaches. It's our belief that an effective nonantibiotic topical anti-inflammatory would be an important therapeutic option in the treatment paradigm of these underserved patients, particularly at the milder end of the severity spectrum. In the ongoing Phase II proof-of-concept study, we plan to enroll 20 patients, evaluate the efficacy, tolerability and rate of relief onset provided by ZORYVE how we approach the decision on whether to advance the program to a Phase III trial will be equivalent to the approach in vitiligo. We'll evaluate the strength of clinical data and implicit commercial opportunity and hold that against other opportunities we have across our life cycle management program. The addressable patient population is also compelling with a 3 million to 3.5 million patient prevalence. Unfortunately, the diagnosis rate amongst these patients is low at less than 15%, in part driven by a dearth of effective therapeutic interventions, which are available. Industry projections predict substantial expansion of the diagnosis and treated HS population over the next decade based on the belief that much like psoriasis and atopic dermatitis before it, new therapeutic options should drive greater disease awareness, diagnosis and broader treatment. Currently, development of novel therapeutics for HS is most concentrated in the more severe stages of disease and primarily consists of systemic treatments. We believe that ZORYVE, if it demonstrates activity in the clinic, could be an important topical therapy for mild to moderate disease and used in complement to systemic treatments currently approved and in development. Now on Slide 33, you can see compelling examples of the impact of ZORYVE in patients with vitiligo and HS. On the left-hand side, there's visible repigmentation in 2 vitiligo patients over a period of 7 and 5 months. On the right-hand side, you can see meaningful clearance of [ hidradenitis super teva ] lesions over just a 30-day period with reduction of inflammation and also a normalization of pigment. These select examples help demonstrate the encouraging signals that we're receiving from clinicians and why we are excited to further validate the effects of there for these conditions in a controlled clinical setting. I'll now turn it over to Todd. Todd Edwards: Thank you, Patrick. I'm now on Slide 34. As we look to the future and potentially expand the ZORYVE portfolio, it is pertinent to reemphasize the competing effect of additional indications on prescriber behaviors that we have previously highlighted. We have observed that clinicians who prescribe ZORYVE across multiple indications generates significantly higher prescription volume overall, as they recognize both the broad disease management benefits and exceptional tolerability profile ZORYVE provides their patients. We expect the potential introduction of additional label expansions and communications or further compound this trend, serving as a key driver of depth of prescription writing among HCPs is supporting sustained volume growth for ZORYVE in the years ahead. Now to Slide 35. The important efforts being undertaken by the clinical team at Arcutis have the potential to expand the patient population that can benefit from ZORYVE. Should these clinical efforts prove successful and regulatory approval is secured. We will see increases to our total serviceable and [indiscernible] market that drive increased commercial opportunity for the franchise. I'll now hand it back to Frank. Thank you. Todd Watanabe: Before shifting gears and spending time on our vision for building our clinical pipeline, I want to take a minute to pull together all the foundational elements of the exceptional opportunity that we have with ZORYVE. We are pursuing a massive treated patient population with more than 17 million patients in the obtainable market. In ZORYVE we have a drug that shares all of the most important qualities that have led to TCS as being a backbone in dermatology for decades, primarily its magnitude of efficacy across multiple inflammatory dermatosis. But what ZORYVE delivers that TCS don't is the characteristic of being safe and tolerable for prolonged use in these chronic diseases, the ability to be used in every area of the body and mechanistic dimensions with respect to neuronal signaling and melanocytes that aren't part of the TCS profile. And we're bringing this therapy to market at a time when there is a seismic shift occurring and how clinicians and patients think about the appropriate use of topical steroids to manage these diseases. This confluence of factors gives us tremendous confidence in the meaningful and sustainable growth prospects of ZORYVE. Taken together, we see a future for ZORYVE where our share of the topical steroid market increases from the 3% roughly level where we're currently sitting to a share of 15% to 20% or greater. This growth of share will not happen overnight. As we discussed earlier, this type of therapeutic conversion takes time to effect. But the reasons discussed -- for the reasons discussed, we are confident that we are on a course to achieve this level of penetration. What's more, as we approach this inflection point of generating positive cash flows from our core business, we will have additional resources to reinvest in ZORYVE to catalyze the share growth. Beyond the immediate opportunity offered by our currently approved indications, the peak potential for ZORYVE will also be driven by expanding our indicated patient population through life cycle management, as Patrick just walked us through. With consideration of both of these dynamics, we see a peak market potential across the ZORYVE portfolio of somewhere between $2.6 billion and $3.5 billion. We'd like to now move to the final pillar of our corporate strategy, building for the future through a pipeline of innovative medicines. As I touched upon at the outset of today's presentation, our mission is to bring meaningful innovation to patients impacted by immune-mediated inflammatory skin diseases. As we approach sustained profitability, we are well positioned to extend our focus to building and advancing an innovative pipeline to address additional unmet needs in line with our mission. These pipeline efforts include initiating the Phase I clinical study of ARQ-234 in atopic dermatitis and ongoing efforts to evaluate externally sourced assets. Patrick will come back now on to walk through us through both of these components of our innovative pipeline strategy. Patrick Burnett: Thanks, Frank. I'm now on Slide 39. As we highlighted in our last call, we achieved an important milestone with our IND submission in Q2 for ARQ-234 as a novel systemic treatment for moderate to severe atopic dermatitis. As we gear up to initiate our clinical study of ARQ-234. We want to spend some time today highlighting the untapped opportunity in the atopic dermatitis market and important potential role that this molecule may play in it. ARQ-234 is an agonist of the CD200R immune checkpoint, which is a clinically validated target found on activated immune cells. The use of the immune checkpoint inhibition in oncology revolutionized the treatment of many cancers, harnessing the body's own immune system by inhibiting immune checkpoints such as PD-1, PD-L1 has transformed the paradigm for how oncologists approach and think about treating many cancers. By acting upon the CD200R mechanism, we're looking to use immune checkpoints in reverse, agonizing versus inhibiting the immune checkpoint in order to reestablish homeostasis of the immune system and patients experiencing excessive immune activation that drives autoimmune diseases. This sort of checkpoint [ agonism ] represents a novel and potentially powerful approach to the control of atopic dermatitis and other autoimmune diseases. While there's reason to believe that this mechanism could be impactful across multiple autoimmune and inflammatory diseases will first evaluate its impact in atopic dermatitis, where clinical validation is strongest. AD still offers a compelling opportunity for the development of new biologics for 2 primary reasons. First, compared to other inflammatory dermatosis like plaque psoriasis, penetration of biologics is in the early stages. Roughly 25% of eligible patients receive systemic therapies for plaque psoriasis while only 10% of eligible patients receive systemic therapy in AD. There's reason to believe that as new biologics enter the category, the total biologic penetration of the market will expand in turn, as was observed in plaque psoriasis, where the market grew by nearly 300% from 2014 to 2024 to approximately $23 billion following the introduction of IL-23 and IL-17 targeting therapies. Similar growth is anticipated in AD in the years ahead with projections reflecting a greater than 10% CAGR through the end of the decade, resulting in greater than 80% growth in U.S. sales for this indication. Second, and related, clinicians are eager to be equipped with biologic options beyond dupilumab and dupilumab is a leading biologic approved for AD currently. However, a significant unmet need remains. But we have heard clearly in our conversations with clinicians is the desire for new mechanisms to address atopic dermatitis in patients who do not adequately respond to dupilumab, which works by blocking the inflammatory mediators IL-4 and IL-13. CD200R agonism represents a unique mechanism of action, complementary to and differentiated from other AD therapies targeting IL-4 IL-13 or OX40 and OX40 ligand. ARQ-234 has the potential to differentiate on multiple metrics, including efficacy, responder sets, durability of response, frequency of dosing and safety. What's been demonstrated in clinical development efforts from other biopharmas targeting the CD200R access is that the durability of response off treatment after final dose is promising. This may be a unique benefit of restoring immune homeostasis more broadly with the checkpoint mechanism versus targeting specific cytokines or other components of the greater immune cascade. The development landscape for CD200R is relatively nascent but I will still highlight a few aspects of our candidate that we believe give us the potential to differentiate our program from other CD200R programs being or previously having been pursued. ARQ-234 targets a different and we believe optimized binding site at the native location. It also has a higher affinity as a fusion protein versus a monoclonal antibody. We also observed an extended half-life for the molecule driven by selective mutations engineered into the fusion protein. Given its unique profile, ARQ-234 has the potential to be a class-leading program and highly differentiated from other systemic therapies in the AD market, a market we believe will produce ample and compelling opportunity for new therapeutic entrants for years to come. And considering a recent setback in development programs targeting other MOAs in AD such as [ OX40], time is right for us to move this program into clinical development. From a portfolio strategy perspective, we also believe there are compelling reasons to advance a program like ARQ-234 that has been -- that has best-in-class potential for more severe diseases to complement the strong position we've already established with ZORYVE. I'd like to touch on our framework for evaluating potential external oil innovations. And from the outset, our stated strategy at Arcutis was to identify, develop and commercialize best-in-class molecules against validated targets, enabling us to develop differentiated products in less time at lower cost and at substantially lower risk than other approaches. As you can see on Slide 20, the strategy remains unchanged and continues to guide our business development evaluation framework. In addition to clinically validated targets and differentiated product profiles we're seeking opportunities that are at a stage where the clinical and commercial expertise we've already amassed will create shareholder value. And perhaps most importantly, we're interested in opportunities that will deliver substantial innovation to address significant unmet medical needs in immune-mediated disease. Finally, as Frank has stated previously, given the number of internal opportunities in front of us, we see business development as an attractive opportunity, but not as a strategic imperative. So we will remain disciplined in evaluating business development opportunities and in deciding whether to acquire additional assets. I'll now hand the call over to Latha to discuss our 2026 sales outlook and our capital allocation strategy. Latha Vairavan: Thank you, Patrick. I'm on Slide 42. As we detailed at the opening of today's call, Q3 2025 was yet another strong quarter for ZORYVE, tailwinds from our ongoing product launches and continued demand growth despite the typical seasonality led to substantial sequential growth. We are confident that this momentum will continue through the end of 2025 into 2026 and beyond. As we began to exit the launch period across our ZORYVE indications, we anticipate more predictability in our rate of growth, allowing us to be more precise in anticipating the trajectory of sales for future periods. Considering this, today, we will provide sales guidance for the first time. In 2026, we anticipate full year net product revenues to be in the range of $455 million to $470 million. We also anticipate continued strong net sales growth in the fourth quarter of 2025, driven by increased patient demand, even as we expect only nominal improvement in our gross to net rate compared to the third quarter. Turning now to our capital allocation strategy. As we highlighted earlier today, we anticipate achieving the meaningful milestone of cash flow breakeven beginning in Q4 of this year. The expense base considered in these cash flow forecast contemplates our continued investment in growing and expanding ZORYVE as we detail today and the advancement of ARQ-234. We are confident that we will be able to fund these investments with the capital produced from our core ZORYVE business. This will be enabled by a dynamic where the timing of continued improvement of cash flow generation from the ZORYVE franchise lines up with increasing resource requirements. We will continue to be protective of shareholder capital and be attentive to managing our capital allocation to ensure that this dynamic plays out. We are fortunate to have a portfolio of high ROI investment opportunities paired with a cash flow-generating franchise, like ZORYVE. I will now hand the call back to Frank for some closing remarks. Todd Watanabe: Thank you, Latha. We are at an exciting inflection point at Arcutis. We have built a solid foundation for our business with the successful launch of ZORYVE and look forward to sustained and substantial growth with the franchise. Our initial success with ZORYVE will not only allow us to reinvest in that core business, but also to invest in expanding to potential new indications to ensure that sustained momentum and also allow us to continue to build and advance a pipeline of innovative therapies to bring new solutions to patients impacted by immune mediated skin diseases, the grounding mission and guiding force of our enterprise. And with that, we'll open up the call to Q&A. Patrick Burnett: And I think a good place to start is just kind of what is your personal experience been with the use of topical corticosteroids over the time that you've been in practice, you've seen a lot change and our understanding of therapeutics change. So what's your -- been your personal experience and also a little bit about how that may have evolved over that time? Douglas DiRuggiero: Well, first off, an honor to be here. Thank you for inviting me. when I stepped into dermatology 26 years ago and have been there ever since. I was very easily [ would ] into topical corticosteroids as being the medication that is for all things. And it's had an impact, I would say, on the trajectory of dermatology, probably more than any other product in our specialty. And so it's -- and it's been around for a long time, 1952 when it was first compounded into something that we could use on the skin, and it's been used ever since. And so my experience when I got into this in 1999, it was a topical corticosteroids were a mainstay of therapy, first line, second line, third line, maintenance therapy, all of the above. But we didn't have the targeted therapeutics we have now to address some of these systemic diseases with systemic therapy. So we were using a lot of topical steroids and topical tar and [ Anthera ] lot of compounded things in phototherapy and a lot of the old traditional systemic medications. So the playing field has changed tremendously, not just with targeted systemic therapeutics, but now with vehicles, with delivery systems to the skin and with active ingredients that are finally giving us the efficacy of steroids without the side effects that we have always known about have largely not largely, but I'd say, to a certain extent, maybe turn a blind eye to and we simply can't do any longer. There's just too much data out there, both to the public knowledge and to the prescribers knowledge that we have to face the facts that steroids carry a lot of dangerous. And we can't transfer that danger or at least I can't transfer that danger any longer on to my patients without really having a lot of information to give them. So it's a shared decision-making process. Patrick Burnett: Yes. That was one of the things I really took away from your paper. I think that historically, there's been a lot of conversation around local side effects. And I think a lot of people felt somewhat comfortable, especially when there wasn't another option with that. But I think one of the things that you really highlight well in the paper are some of the new areas of data that have come out kind of highlighting these systemic effects. Is there kind of like one aspect of that in particular that impacted you the most? I know in the paper, you talked about diabetes, you talk about bone fracture and osteoporosis. Any particular area that was impactful for you? Douglas DiRuggiero: Well, I'll tell you 2 stories that drove that, and I'll answer that question indirectly through this. I had a patient who is a 13-year-old boy, who came in for eczema, atopic dermatitis and I put them on triamcinolone, which is a very commonly prescribed mid-potency prescription steroid and he was a type 1 diabetic. He had been since he was about 6. So he had a pump and he had a monitor, and he was able to watch his sugars closely. And the mother came in, this is about 3 years ago and told me that we can put [ triamcinolone ] on his 2 forearms, and we can watch his blood sugar go up 40 points in 40 minutes. And I was just like shocked by that, that they could see that rapid of a rise in his glucose levels with the application of a topical steroid cream, on about 5% to 7% of his body service here, not like this whole body. I began doing some research on this and say, what are really the systemic side effects to this. We are focused in dermatology, and we do a good job of counting our patients against the cutaneous side effects. If you use it too long, and in the wrong areas and unfolds, it could extend the skin, what we call [indiscernible], you could have [ strand ] stretch marks, you would get steroid-induced acne or folliculitis, you get unwanted hair or hypertrycosis. It could create dyschromia, discoloration. I asked all of these very experienced derm providers. If a mom wants steroids and she's demanding to have them, what reasons will you give her or to an adult patient, what reason would you give them on why they should not have more steroids topically. And they all listed all of those things. No one listed anything systemic because we [ fastly ] associate all the systemic side effects with giving them systemic steroids. And we do not and have not been trained and do not recognize the whole body of information is out that shows that these medicines are highly absorbed, and they act like a systemic drug like you're taking it orally or injecting it. And so yes, we have a lot of data out there that shows that it will raise blood sugar, diabetes, it can create something called [ cushanoid ] syndrome or adrenal insufficiency. But the surprising one for me is the data out there on developing a vascular necrosis of the hip. 20 and 30-year olds that have only been on topicals, no other systemic case reports, having had hip replacements. I highlighted a couple of those in the recent lecture I gave. [ Osteopritic ] fractures, I did -- talked about a case report an 11-year-old we've been using mid- to high potency corticosteroid creams only, no systemics, just topicals for 3 years and had a [ wrist ] fracture and a full body osteoporosis like an 80-year-old and this kid's 11 and had [ osteopretic ] fracture. And so we are seeing now that increase in ocular pressure in the eye. We used to think that if you just use steroids around the eye, you increased your chance of that now. We know you can use steroids anywhere on the body and increase your risk of glaucoma and increased ocular pressure. So we can't turn a blind eye any longer to the internal systemic impact of using an external topical steroid because it is acting like we're giving it internally, and we've got to face those facts. And it should change the way we prescribe and it should change the way we educate our patients about these things. Patrick Burnett: What are you hearing from your peers on this idea of the role of topical corticosteroids and how that may be changing over recent times? Douglas DiRuggiero: It's really a lot of shock to be honest with you, when they see the data because it's not something that's being talked about in the clinic that these trials and these case reports and these meta-analysis and the system analysis of are not really being championed and put forth. And quite frankly, we're being forced by insurance companies in a lot of areas to use topical corticosteroids first line before we can go and use the medicines that we feel like are safer and work just as well. And so some of it is for step through therapies and some of it is just simply lack of knowledge. So the reaction I get is using one of like, I just cannot believe. And when I present this information, I really present it in a very self-reflective way because I have been one of the top [ riders ] of topical corticosteroids in my state for many years. So I mean I'm looking in the mirror and saying, how much have I contributed to these things without knowing it but I can't willingly continue to contribute to it. And so I think that's what a lot of people have. I've got a lot of incredible comments, e-mails, people have called me to tell me about the impact that this data has had on them and how it's changing the way that they are [indiscernible] patients, how they're beginning to keep track of the grams of steroids that they're giving out how they're asking about other forms of steroids that the patients are getting. These are just not things that we've been used to slowing down and monitoring what we were calling this corticosteroid stewardship in order to catch up to some of our colleagues that are overseas or in Canada where they're beginning to heavily monitor these products and give patient warnings when they're dispensed from the pharmacy. Other countries are beginning to see this and have already begun to be proactive with educating and monitoring these things in the U.S. really needs to take a role in this, in my opinion. And I feel like a lot of us in dermatology have the ability and now have some momentum to make this happen. Patrick Burnett: And you made reference to these advanced targeted topical therapies like ZORYVE. How do that they've kind of played into this evolution and this change over the course of your practice, given that topical corticosteroids are still the majority of the prescriptions that are written for patients with some of these chronic inflammatory skin diseases like atopic dermatitis, psoriasis and [indiscernible]? Douglas DiRuggiero: In the second quarter of 2025. So I don't have the third quarter numbers, but in the second quarter, so fairly recently, how many prescriptions do you think were field of topical corticosteroids by dermatology practices? So just derm providers, not family care, not any other specialty. Most -- the highest number I have people guess is 500,000 in a quarter. Most we're guessing 200,000 to 300,000 written by the 20-or-so thousand derm providers that are out there. And when I tell them it's 2.9 million not over the span of a year, but in 1 quarter, 2.9 million prescriptions of topical corticosteroids filled, not even written filled by patients that are receiving the prescriptions from derm providers. I mean you talk about jaws dropping when they realize how much of this we are contributing to this. And so I mean, even if I can change 1% of that, I mean, at 1%, 29,000, if even if you can less than 29,000, that's a huge, I think, impact over 1 quarter time. So I think the numbers are really alarming to us in dermatology when we are faced with them and we realize how much we are contributing to this to this problem. And so now we have such fantastic alternatives like ZORYVE. I mean we have had nonsteroidal topical [indiscernible] inhibitors, TCIs, I mean the first 1 was approved in 2000. And so then the next one was improved in 2001. And so we had these 2 topical cases. The problem was is that the tolerability is hard particularly [ tacrolimus ] is things and burns and not as much with [ pericularmas], but they don't work very well. It's just their efficacy was very lackluster and then we had a PDE4 inhibitor first generation, I would call it an old generation that came out in around 2014, '16 and again, tolerability, low efficacy. And so patients want to get clear, and we want to see them get clear. So it was hard to put peculate but now have something that is like ZORYVE, a medication that's in my hands right now that I can say this works as well as a mid to high potency steroid in my experience and the studies can back this up, and this is once a day, and you can use it anywhere. That's the beauty of a product like ZORYVE is that there's no limitations from how long a patient can use it. There's no limitations on where they can use it. We have been -- I have been contributing to such a complex regimen of care where you can use this low potency stereo interface and you're going, this mid-potency steroid here. This one is for your scalp because it's a solution. This is a ointment if it's really thick. This one is a [ remit ] -- and these patients have these draw pools of cranes in all of these written out plans on red lights and green lights and when to use it and not to use it. And you should see the relief on their face say, "This is one cream that you can use anywhere, at any time, it's only once a day and it's got great clearance, and it's going to create itch data and great clearance of disease, whether that's atopic dermatitis or psoriasis." Patrick Burnett: So in that setting, what do you see as the biggest barrier then for some of these advanced targeted topical therapies? What do you see is kind of that barrier, you've talked about some of the differences in the profile between them and steroids. And we -- I talked about that earlier as well. But is it really a profile issue? Or are there other things that are playing into this kind of transition that you're talking about? Douglas DiRuggiero: Well, I've mentioned this earlier, and that's step-through therapies. Our largest barrier are insurance plans forcing us to write things that we don't want to write first or to try them or to make it very difficult to get these things approved. So really, the issue when a rep comes in, it's not where you give us a trial or you try medicine. They really need to be saying for almost every medication now is, will you fight for us. Just to try it is 1 thing. The try it just means they're going to get denied, and then you move on back to your generic prescribing habit. But he's going to have to rise up a little bit and fight for a product that you know is safer and works well. That's how these insurance companies are going to be convinced that the demand is there. I think it's easy to convince patients of the safety. I think it's easy to give them samples or to get them started on something and they see it works. So I think the 2 main categories is always safety. Safety is always in the driver seat and anything in efficacy or its effectiveness is ride and shotgun. So those are the 2 things in the front seat, you want to be safe and you want it to work. And then in the back seat of any car, is it convenient? Can you get it filled, does -- will the patient be compliant and when you got something once a day, compliance is high. You've got something that doesn't burn or [indiscernible] compliance is high. You've got something that works. Compliance is high. What's not compliant is often an insurance company trusting us to be doing the name we think is best for our patient. And I think that's one of the larger blocks. Improvements are being made I will say the words out, I have a lot more patients coming in because of TikTok. I know we kind of throw TikTok and Google, Dr. Google under the bus a lot, but there are some ways where it's been very beneficial. And in terms of informing patients about corticosteroid withdrawal and all the dangers of it, I have a lot of patients who come in and they are -- they sit there and they asked me, what is what you're writing me a steroid stairway because I don't want my child on a steroid. They're now preemptively saying, "I don't want to be on a topical steroid." And so I've seen a shift in the last 2 years, in particular, when more and more patients despite their insurance, despite their economic status. They themselves are beginning to say, "I don't want to be on this. And I'm in [ World Georgia]. [indiscernible] not like there's a high [ fluting ] area, where you'd expect that to happen." I'm in a very rural area, and I still have patients on a weekly basis who are questioning me, is this more [indiscernible] steroid because I don't want to be on that. Pediatricians already tried. I don't want my chart on it. I don't want to be on it. I had a guy came in the other day when they talk of dermatitis, he's 40 years old, had it since he was -- birth. He says, if you're going to write me a prescription for [indiscernible], this would be the last time you've ever seen me. It was his first visit with me. I was like, well, okay. Well, I don't plan to do that, but it's nice to know to convince you and says, "My wife makes you come in every 2 years to see if there's anything new that's out. Tell me what I've got, list my options." And so -- so we're seeing a shift. It may not be as fast as we want it to be, but it's happening. It's happening. Unknown Attendee: Thank you, Frank. Unfortunately, Todd is under the weather today and will not be able to join us for the Q&A session, but I am joined by Frank, Latha and Patrick. [Operator Instructions]. So we'll jump right in. First question for the team here on the conversion of topical steroids. You spoke in the call to the evolution in treatment paradigm with topical corticosteroids starting to be displaced with nonsteroidal topicals. What actions are you taking or do you plan to take to accelerate this transition? Brian Scholkoff: This is, I think, an extremely important question given the criticality of this process to the future for ZORYVE. And I think it's really important to emphasize that this trend towards topical stewardship and being more judicious in the use of topical steroids for really short duration treatment is a trend that's being -- that's emerging in dermatology and it's really being driven by the dermatology clinicians themselves. And as you heard from Patrick and Douglas on the call today, there's this growing body of evidence that demonstrates the serious adverse effects that come from prolonged topical corticosteroid use, both locally and systemically, the side effects and dermatology clinicians are learning about that as Doug shared, they're talking about it and they're adjusting their practice. I was actually at the fall clinical conference this past weekend, and there was quite a bit of discussion from the podium about this Patrick mentioned the SDNP and the SDPA statement. So this is something that's happening organically and it's going to benefit the entire [ non steroid ] topical class as a whole. But specifically, it's going to help us given our very strong share of that nonsteroidal market. In terms of what Arcutis specifically is going to be doing to accelerate that trend. I think really there are 3 levers you can think about. I think the first one is the sales force. The second is on market access and the third is around our marketing activities. We're already in a very good place vis-a-vis the sales force and market access. We added about 40 reps last year around the atopic dermatitis launch. So we have a very strong field presence that covers the dermatology clinicians that are writing about 90% of all the topical prescriptions in dermatology. And then from access -- from an access standpoint, I think folks know, we have very strong coverage across commercial beneficiaries as well as Medicaid beneficiaries and we're working on expanding the Medicaid even further, and we're also hoping to start obtaining Medicare coverage as well. So I think we're in a really good place from a coverage standpoint. And then finally, with regard to marketing, again, I think we're in a very strong position. We've been very thoughtful as a company about our marketing investments. because we have to be careful about how we allocate capital, but also because we've been benefiting from this organic shift that I mentioned before that's happening from the grass roots in dermatology. So I think as ZORYVE, the franchise starts generating cash, as Latha mentioned, this is probably 1 of those areas where we'll be making some incremental investments in our marketing spend. Unknown Attendee: Great. Thank you. The next question here relates to the commentary on peak sales. The question is, as part of your peak sales guidance, you said you can reach 15% to 20% share of the topical corticosteroid market. What gives you confidence that you can grow from your current roughly 3% share position to that range? And any commentary on how long that process and that share gain will take? Brian Scholkoff: Sure. So you're going to hear from me a lot since Todd is sick today. But I think the best indicator this transition is already happening and it's going to continue to -- is the rate with which we're already seeing the nonsteroidal topicals take share from topical corticosteroids. As mentioned earlier in the call, the non-steroidal class is growing very rapidly albeit from a small base, but taking into account the fact that the nonsteroidal market has grown 50% roughly just in the last year alone, right? So there's a very, very strong growth trend and a lot of that's being driven by ZORYVE. I think that it's important to remember that while we're seeing this very strong growth trend in steroid conversion and this conversation with a topical steroid stewardship, it is a very recent phenomenon. If you think about it, the [ led wall ] paper just came out in January of this year, the SDNP and SDPA statements just came out a few months ago. So these conversations are happening right now, and they really weren't happening nearly as much a year ago. So I think we're really just at the very beginning of seeing the impact of this change in the thinking amongst dermatologists. In terms of specifically what's going to be the drivers for ZORYVE's market share going forward, again, I think the most important driver is the increased focus on stewardship of topical steroids that we just talked about and that's going to rely -- it's going to necessitate a much greater reliance on nonsteroidal topicals like ZORYVE. And again, we stand to differentially benefit from that shift given our [indiscernible] share of the non steroidal class and our growing share of the non-steroidal classes we've discussed already. I think a second lever is our expansion into new treatment settings as we continue to gain awareness and adoption in primary care and pediatrics via our [ Cola ] partnership. Third, I think the incremental data generation that Patrick highlighted today is going to be a driver of prescriber behavior for certain key populations like patients with nail psoriasis or palmoplantar psoriasis, which are in our current indication, but we don't have all that much data around that yet. So that will be an important incremental data set. On the access front, we're in a great place with the reimbursement, but we have further opportunities to go in terms of expanding our Medicaid coverage and also picking up Medicare coverage. And then lastly, actions that we take that really highlight or drive patient awareness to reinforce the trends that we're already seeing where patients are coming in and asking their doctors for something that's not a steroid, right? There's a great deal of public conversation around this topic. And I think that's going to be another important driver for [indiscernible] forward growth. From a timing perspective, again, if you look at the analogs that Patrick spoke about earlier, these paradigm shifts in treatment practice do take time to effect. I think we're very encouraged by the rate of adoption that we're seeing already. And I think the demand growth that you saw this quarter is a good data point to show that that's happening. But the shift from these outdated topical steroids to the newer advanced topical therapies is going to take some time. If you look at the analogs somewhere between 5 and 10 years for that to happen, and we're still very early in that process with the topical steroids. So I think it's hard to say, but it's not going to happen overnight, but I think we're very confident is going to happen for all the right clinical reasons, and we're already starting to see these trends play out. Unknown Attendee: Okay. Great. And we'll shift gears here to ARQ-234. We've had a few questions come in on this, several of them just making reference to any clinical evidence that already exists derisking the class or the target. But more specifically a question regarding ARQ-234. Eli Lilly discontinued its CD200R agonist after stopping the Phase II trial in atopic dermatitis for strategic reasons. Are there any learnings you've taken from that program that can be applied to 234 or any comments you can make on differentiation between the 2 programs? Todd Watanabe: Yes. So Patrick, do you want to take that one? Patrick Burnett: Yes. Thanks, Frank. Yes. No, we've watched the [ OLE ] program very, very closely. And I touched on this a little bit in the presentation. I think one of the key reasons why we are confidently moving forward with ARQ-234 really has to do with the structure. The Lilly molecule was a monoclonal antibody that bind outside of the native binding site, whereas we're a fusion protein that's engineered for an extended half-life and also has 2 high-affinity modified CD200 ligand. So really a very different molecular approach. And we have preclinical evidence that suggests that we're getting a higher affinity. So we feel very good about that and as well as this kind of extended PK half-life that we think could have benefit with regard to our dosing frequency. Of course, that has to be proven out in this study that we're planning to get started at the beginning of 2026. So we have watched that program very carefully. And again, a lot of times, it comes down to also execution of a study, and we've conducted many studies in atopic dermatitis. And I think we have an excellent clinical development and clinical operations team. And so I think that will also help us to get a very clear understanding. The [ GWAS ] data and the kind of early like evidence that pushed Lilly into atopic dermatitis still remains. We think that, that's very compelling. And we think the ARQ-234 is the right molecule and atopic dermatitis is the right disease for us to serve further. So we're looking forward to getting that kickoff. Unknown Attendee: Okay. Great. The next question here is on the LCM activity. With vitiligo and HS, the question is, as you're investigating ZORYVE in vitiligo and HS, how do you think about competitive dynamic with other drugs that are already approved or in development for those indications? And then as a second part to this question, can you say more about trial design, example, size, whether or not it's controlled and duration of study? Todd Watanabe: Sure. Yes. Patrick, I think that's probably the best handled by you again. Patrick Burnett: Okay. Sounds good. Yes. So looking at our life cycle management and competitive dynamics with the HS and vitiligo. I think the best place for us to start is to look at these indications where we're already approved and already in a competitive situation with both topical corticosteroids and branded topicals. And here, what are the elements of our profile that have allowed us to be so successful. And it really comes down to efficacy, safety, tolerability once daily in ease of use, pretty much anywhere on the body as well as our commercial execution and our access. So we have a lot of confidence in our clinical development and our commercial execution and our ability to leverage these capabilities for both of these new indications. Now thinking specifically about vitiligo, this is a disease where I believe that once daily dosing is going to be really important for patients. Vitiligo patients have to treat for a long period of time, months typically before they start to see benefit with pretty much any treatment. And so the ability to do that just once a day is going to -- it's typically offered improved compliance compared to daily dosing. Now for the same reason, the rate of repigmentation is another key potential differentiator. So this is something we're going to be looking at really closely as we conduct this next study, and we'll have to see those results once they get into the clinic. So turning to [ hidradenitis suprtiva]. Here, there's a lot of white space for a topical therapeutic that's targeting inflammation. Right now, treatments are primarily topical antibiotics and then patients kind of leap all the way to a systemic therapy. So being able to have an effective topical treatment that could be used in the earlier stage patients as monotherapy and for later-stage patients in as adjunctive treatment to complement their systemic therapy is a very, very strong profile. And that's similar to what we've seen in atopic dermatitis and psoriasis. And in fact, [ hidradenitis Supertea ] systemic therapies leave a lot of room for some adjunctive therapy to really help patients to get to their target treatment. So we're very optimistic about how this profile fits with both of those indications. Unknown Attendee: Perfect. Okay. So moving on to next question here, and this is focused on the results for quarter 3, specifically on net sales. And the question is, can you bridge us from the 13% sequential total prescription demand growth to the 22% sequential revenue growth for the quarter? Todd Watanabe: Yes. Sure. It's a great question. I think that the primary thing that's driving the nonvolume component of the growth of our product revenue is really improvement in gross to net. I think what we saw in the quarter was, if you think about it, if a patient is still in their deductible for the year, we're buying them down to $0 or $35. And so Arcutis is having to pick up that additional cost from their deductible until they reach their annual deductibles. What we saw in Q3 was that patients have progressed through their annual deductibles, probably at a rate higher than we had expected. And so we're seeing reduced usage of our co-pay program, and that directly translates into more revenue per prescription, happened earlier than we had anticipated. But I think that also probably means that there might not be as much improvement in Q4 on that component as we saw in Q3. So I think we expect [ GTN ] to be very stable, probably between Q3 and Q4. And I think it's important to emphasize that all of the other things that can contribute to non-demand revenue growth really were not material in this period. So it's really just the demand growth and then the improvement in gross net, which is driving this outperformance. Unknown Attendee: Okay. Great. The next question here is on the topic of external innovation and business development. The question reads, Frank mentioned sourcing external innovation. Would you elaborate on the stage of development the type of assets from a modality perspective, and then therapeutic categories that you're interested in, specifically, are you looking for something more adjacent to ZORYVE or more distant from ZORYVE from a diversification perspective? Todd Watanabe: Yes, sure. So Patrick is leading all these efforts. So I think I'm going to ask Patrick to take that one. Patrick Burnett: Yes. I think if you look at our pipeline, we have ARQ-234 that's just going to be entering into the clinic and then not spending a lot of time talking about the life cycle management opportunities for ZORYVE. So ideally, we'd be looking for an asset which is kind of fitting in between those 2. But I think we're really opportunistic with regard to most importantly, finding something that we are very confident about, and we're very excited about is fitting an unmet need. Again, we're prioritizing dermatology because we think that fits best with our expertise. But just given the breadth of knowledge across the team and experience outside of dermatology we're not limiting ourselves to dermatology. So we're really looking across inflammation at adjacencies there for assets that would fit very well into our development pipeline. So I think what we're really -- as I mentioned in the discussion, what we're really looking for is the right asset, and we don't feel compelled to necessarily bring one in just because of where we are with our pipeline. Because we feel they are confident about moving 234 forward and all the opportunity that we have with the ZORYVE life cycle management. Unknown Attendee: Okay. Great. And then -- and staying maybe for a moment on 234, A question came in here. Will ARQ-234 target in AD patients overlap with the ZORYVE target population for that indication? Or how should we think about that? Todd Watanabe: Yes, Patrick, that's probably back to you again. Patrick Burnett: Yes. So our approved indication for atopic dermatitis, goes down to the age of and is in the mild to moderate space. So development in systemics and biologics, in particular, typically focuses on moderate to severe. So there is some overlap between the 2 of them. But I think most importantly, one of the advantages of the ZORYVE profile is that whether it's label, with its safety profile, it's not excluded from being used with systemic therapy. And so that's one of the areas that we've heard from a lot of our customers that they found it to be helpful. And oftentimes, patients who are in that moderate to severe area will get pushed down into a more mild to moderate category where they would be, while on a biologic or systemic would be appropriate for use with ZORYVE. So we don't see them necessarily as competitive just as we don't see ourselves competing with systemic treatments, but more as complementing each other in the kind of ability to be able to maintain a patient for this chronic disease for their lifetime without having them resort to topical corticosteroids. Unknown Attendee: Okay. Great. The next question here is back on the topic of BD, and I think we hit on this a little bit, but given your foothold in dermatology offices, would you consider adding a biologic against a novel dermatology target to develop or would you also consider partnering one already in the development for U.S. rights, just to better kind of titrate on what we're looking at there. Todd Watanabe: So that was a 2-part question, right? I think the question was would we consider a biologic in AD? And would we consider partnering commercial stage product? Unknown Attendee: Correct. Todd Watanabe: Yes. So look, on the first one, we absolutely would consider partnering a biologic in the space in and I think that's really the long and the short of what Patrick was just talking about. We're really agnostic to modality and our Arcutis treatment modality. So whether it's an oral and injectable or a topical, we can work on any of those. And so we're evaluating that full landscape in terms of our business development efforts. In terms of partnering on something that's already commercial stage and in the marketplace, I wouldn't say never, but it's probably not the highest priority. We've built an exceptionally strong development organization at Arcutis across clinical and manufacturing. You think about 9 successful Phase IIIs, 6 FDA approvals and I think this team has proven time and again, its ability to execute development programs and create shareholder value. And part of our thinking around business development is how we continue to leverage this really very strong development engine that we've built. In a commercial stage is more leveraging the commercial organization that we have, but the commercial organization we have is pretty busy with launching all these various indications for ZORYVE. So I would say that's probably a lower priority for us in terms of the business development and commercial stage products. Unknown Attendee: Okay. Great. And then another one here, staying on the BD topic, and this one is more about how we think about potential size constraints. So is there any limit in terms of size that we would consider? And then depending on the size, different considerations from financing strategy to support that? Todd Watanabe: Well, I would say with the stock performance today, we -- it's probably a little bit bigger. But Latha, you want to maybe take that one? Latha Vairavan: Absolutely. So I think -- our core focus is on the balance sheet is based on ZORYVE trajectory [ builds], we will, as I said, focus on our milestone of hitting cash flow breakeven in Q4 of this year. And from more focus on our grow and expand, as Frank outlined today, and funding those activities. And then next, if you think about innovative BD, we have quite a bit of flexibility with our debt facility with SLR and also depending on the asset and the quantum and as Frank said, based on today's stock price, we'll think about the funding mechanisms that are optimal to our capital strategy and how to allocate them for BD. Unknown Attendee: Okay. Great. Next question here is going back to the topic of life cycle management for ZORYVE. And this is a 2-part question. First, across the different indications that we highlighted in the presentation earlier, how do we think about prioritizing those? Kind of what is the framework for choosing where we would go next? And then the second is -- how do you think the addition of new indications will potentially benefit your commercial efforts in psoriasis, sebderm in atopic dermatitis? Todd Watanabe: Yes. So maybe I'll take the second half of that question and then Patrick, I'll turn it over to you to talk about the first one. I think that as you think about really replacing topical steroids as the go-to topical therapy in dermatology. The more opportunities the doctor has to write our product, the better it starts becoming a habit. It's the default treatment choice, right? And you see that in the data that we presented before in terms of what happens when a doctor goes from writing ZORYVE for 1 indication to 2 indications to 3 indications, right? It doesn't go up in steps that goes up exponentially. 1 to 2 is threefold. 2 to 3 -- 1 to 3 is a tenfold increase in their prescribing. And we would expect to see a similar kind of dynamic when they're using -- when they can use ZORYVE for almost every patient they have walking through their office door. So I think that there will be a synergistic effect with our existing indications as doctors use ZORYVE even more and more. And one of the things that we've actually found, particularly in the access front, I would say, is the more doctors use ZORYVE, the more they use ZORYVE, right? Because they know how effective it is, how well tolerated it is, and most importantly, I think how easy it is to get for their patients there's a growing confidence with familiarity. And I think expanding indications, we should see something very similar happen with that in addition to the growth from the new indication itself. And then Patrick, do you want to maybe address the prioritization question? Patrick Burnett: Yes, absolutely. So as we think about prioritizing and we're starting with HS and vitiligo. But those are not the extent of the indications that we're looking at, and we shared kind of this broad list. And I think that is one of the key components for replacing steroids as you can't replace steroids if they work across many, many indications with a treatment that only works across 1 or 2. So I think that's a really critical part of our topical corticosteroid replacement. As we think about prioritizing those, it really comes down to what's the clinical profile that we're seeing? What's the efficacy and the safety that we're seeing and that will come from both -- are studies that we're conducting as well as from reports coming in from the field. And every day, we're hearing more and more about those, and that shapes our kind of understanding of what's the level of unmet need. And what is the kind of profile and efficacy that we expect to be able to see. And then it's combining that with the commercial assessment so that we can really understand how that profile fits. And I touched on that just a little bit with the kind of the first question we had about life cycle management, about what do we want to see in vitiligo, what do we want to see in HS. And that really gets at trying to fit in that commercial assessment to make sure that we're developing in an indication where we're going to have a market when we get to the other side. But we know for both HS and vitiligo that these are very favorable. We'll do the same kind of activity as we look towards new indications beyond those. Unknown Attendee: Very good. So turning now to the recent launch of ZORYVE Foam 0.3 and scalp and body involve plaque psoriasis. So the recent growth for the cream 0.3% was more muted compared to the foam. This is in quarter 3. Is this a result of plaque psoriasis switching to foam from cream? Or how do you see that dynamic playing out between the 2 products? Todd Watanabe: Yes. We've gotten this question on a number of occasions. And I think it's very unlikely that a patient who is stable on the cream is going to switch to the foam. I certainly have heard of patients who have received prescriptions for both products, and there's no reason why patients can't -- if you had a plaque on your elbow and a plaque on your scalp, maybe the doctor gives you both although you can use the foam on the body and it works just the same as the cream. I think we continue to see growth in [ NRxs ] for the cream. So I don't think that we get this question about cannibalization. I don't think there's any cannibalization going on because the cream is still growing. What I do think we're probably seeing is that for new patients who haven't been on ZORYVE yet, more patients now, especially psoriasis patients are getting the foam and those in some cases are patients maybe who might have gotten the cream in the past. I think it's also important to emphasize and I've said this before, but from a shareholder standpoint, it really doesn't matter which SKU they get as long as they're getting ZORYVE, right? The COGS is essentially the same across the products. The price is the same. The access is very similar. So as long as total ZORYVE volume is growing, shareholders are benefiting from that growth. And I think having both the cream and the foam has options in psoriasis and now having 2 different presentations for atopic dermatitis tailor for those patients and having the phone for seb derm is we're just giving doctors more and more opportunities to use ZORYVE treat their patients with inflammatory skin diseases. Unknown Attendee: Okay. And then we probably have time for just one more question here, and this final question will be on the incremental data generation opportunities that Patrick was referring to in the presentation earlier. And the question is for the data generation opportunities in your current indications, the patient figures indicated on the slide, are those incremental new patients that will be covered and add to the market opportunity? Or how do we think about that? Todd Watanabe: Yes. Another great question. So in terms of incremental data generation, those are really patients that are already in our serviceable obtainable market. So for example, the nail psoriasis patient population, we talked about 3 million to 5 million psoriasis patients having nail crisis. That is part of the already targeted psoriasis market that we talked about. But what we do expect is that will drive a differentially greater uptake in these subpopulations, particularly the really hard subpopulations, nail psoriasis is one of the hardest things to treat. Even with a biologic, it often doesn't clear palmoplantar psoriasis is another form of plaque psoriasis that is often very difficult to treat. And so if we can generate very strong data on ZORYVE's efficacy in those very tough to treat patient population, you would expect to see even greater adoption of ZORYVE in those subsets of patients. And that's why we think that this incremental data generation is so important. And Patrick, I don't know if you have any other thoughts that you wanted to add to that? Patrick Burnett: No, I completely agree. If you see a patient come in with psoriasis and you always check their nails, every psoriasis patient gets their nails and elbows checked. And you've seen nail psoriasis and the first thing that you think about is that ZORYVE is going to benefit that and nobody else with a topical therapy, and you might not have to stick them on a systemic therapy. I think that is a huge advantage for us and really kind of changes someone's perception of the profile in an even more favorable way. So I totally agree with what you said, Frank. Unknown Attendee: Okay. Great. And that will take us to time for the Q&A session. We'd just like to thank you all again for making time in your busy schedule today to join us for this Investor Day.
Operator: Good morning and good afternoon, and welcome to the Novartis Q3 2025 Results Release Conference Call and Live Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Ms. Sloan Simpson, Head of Investor Relations. Please go ahead, madam. Sloan Simpson: Thank you, Sharon. Good morning and good afternoon, everyone, and welcome to our Q3 2025 earnings call. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the U.S. Securities and Exchange Commission for a description of some of these factors. The discussion today is not the solicitation of a proxy nor any -- nor an offer of any kind with respect to the securities of Avidity Biosciences or SpinCo. The parties intend to file relevant documents with the U.S. SEC, including a proxy statement for the transactions and a registration statement for the spin-off. We urge you to read these materials that contain important information when they become available. Before we get started, I want to reiterate to our analysts, please limit yourselves to one question at a time, and we'll cycle through the queue as needed. And with that, I will hand over to Vas. Vasant Narasimhan: Great. Thank you, Sloan, and thanks, everybody, for joining today's conference call. If you turn to Slide 5, Novartis delivered solid sales and core operating income growth. And I think importantly for us, important pipeline milestones through quarter 3. Sales were up 7%. Core operating income was up 7% with our core margin at 39.3%. And in the quarter, we were able to deliver some important approvals, including Rhapsido, our FDA approval in CSU for our BTK inhibitor. As well as important Phase III results, which we'll go through in a bit more detail, Ianalumab, Pluvicto, Kisqali's 5-year data as well as positive opinions for Scemblix and then also positive data that came out relatively recently on Cosentyx in PMR and Fabhalta in IgAN. Now moving to Slide 6. Our priority brands drove robust growth in the quarter. So I think really, while we, of course, are contending with our LOEs that particularly Entresto, but also Tasigna and Promacta, what I hope we can get the focus to be on is on our strong underlying growth of our key growth drivers. Here, you can see growing 35%, really excellent performance from Kisqali, Kesimpta, Pluvicto, Scemblix, solid performance from Leqvio and Fabhalta. So I think we're on a solid track to drive growth through the coming years. Now moving to Slide 7. Now taking each brand in turn, Kisqali grew 68% in quarter 3, outpacing the market and our CDK4/6 competition. If I could draw your attention to the center panel, our total to brand NBRx now, as you can see, is in a market-leading position, particularly driven by the early breast cancer launch. Our U.S. growth was up 91% in quarter 3. We are the metastatic breast cancer leader in NBRx and TRx. And in early breast cancer, our share is 63%, and we're leading both in the overlapping populations with our competitor and the exclusive population. In particular, I see -- I'd say we see significant growth potential in that exclusive population where we estimate more than 60% of patients are currently not on a CDK4/6 inhibitor. Outside of the U.S., we saw 37% growth in constant currency. We are the NBC leader in NBRx and TRx share across our key markets. Our early breast cancer indication now is approved in 56 countries. And so we'll start to see the effect of the early breast cancer launch in the next few quarters ex U.S. Now I think it's a good indicator of what we see as possible outside the United States. Our Germany NBRx share is already at 77%. And I think that helps demonstrate the kind of power that we have to drive Kisqali's utilization and enable women to prevent breast cancer recurrence across the globe. I'll close by just reminding you, we have a Category 1 NCCN guideline support as the only preferred CDK4/6 inhibitor with the highest score in early breast cancer and metastatic breast cancer. Now moving to Slide 8. Just wanted to say a word about Kisqali's 5-year data, which we showed at ESMO. There was a 28.4% reduction in the risk of recurrence in the broadest population of early breast cancer patients that have been studied. You can see here the data is very consistent across tumor Stage 2 or Stage 3 in node-negative patients and node-positive patients. I'd also note that our OS data, while still maturing, has reached a hazard ratio of 0.8, and we see a narrowing confidence interval, as you can see here in the third bullet, just a little bit above 1 on the upper bound of the confidence interval. So a clear trend favoring Kisqali. The safety is consistent. We also had some notable important trends in the data continue to demonstrate a reduction in distant recurrence to distant metastases, which is excellent to see. So we'll continue to follow these patients and continue to provide updates on this data as it matures. Now moving to Slide 9. Kesimpta grew 44% in quarter 3, and this was primarily demand-driven growth, particularly in the United States. U.S., we had 45% growth in Q3, robust TRx growth outpacing both the MS and B-cell markets. We have broad first-line access now almost 80% of the patients receiving Kesimpta are first line or first switch. Outside of the U.S., we had 43% growth, and we're the leader in NBRx share in 8 out of the 10 major markets that we participate in. And we see a significant opportunity now looking ahead for Kesimpta outside of the U.S., where approximately 70% of disease-modifying treated patients are not currently being treated with a B-cell therapy. So as we continue to get that B-cell class up with Kesimpta having leading share in many markets, we see the opportunity to drive dynamic growth ex U.S. We did present some additional data at ECTRIMS that show the benefit of Kesimpta. I think I'd highlight that 90% of naive patients receiving Kesimpta showed no evidence of disease activity at 7 years, really demonstrating the durability of the response to this medicine. Now moving to Slide 10. Pluvicto grew 45% in constant currencies in quarter 3. That's really momentum driven off of the pre-taxane castrate-resistant prostate cancer approval, which we recently achieved. The U.S. growth is driven -- so the Q3 sales in the U.S. were up 53%, driven by new patient starts increasing to 60% versus prior year. 60% of our new patients in the pre-taxane setting are -- with market share already surpassing chemotherapy. So really driven now by the pre-taxane launch. The key enablers to sustain our growth now in the U.S. is really to drive community adoption. We have 60% of our TRx in the community. We have 9 out of 10 patients within 30 miles of a treating site, so over 730 sites. We believe that we need to get to around 900 sites to also support the HSPC indication. So we're well on our way. Our rollout of the pre-filled syringe is really positive, around 70% of sites using the pre-filled syringe already. And outside of the U.S., the rollout continues. We see good growth in the post-taxane setting in Europe, Canada, and Brazil. And we also received a Japan approval and expect the China approval in quarter 4. So all on track for Pluvicto to reach its peak sales potential. Now moving to Slide 11. We presented last week the PSMAddition data, where we demonstrated that Pluvicto plus standard of care reduced the risk of progression or death for standard of care alone by 28%. The primary endpoint was met, clinically meaningful 28% reduction in these patients with a compelling p-value, a clear positive trend in OS with a hazard ratio of 0.84, and that's even with crossover. So I think that really demonstrates we're having the attended effect the time to progression to castrate-resistant prostate cancer was delayed, which demonstrates we are achieving disease control. And overall, the Pluvicto tolerability profile was consistent with the Phase III trials in PSMAfore and VISION. So we would see global regulatory submissions in quarter 4 of this year. So moving to Slide 12. Leqvio was up 54% in the quarter, on track for over $1 billion in sales in the year. In the U.S., we're up 45%, outpacing the advanced lipid-lowering market. We had solid TRx gains of 44% versus prior year. And our key focus is particularly in Part B accounts and accounts that have a high interest, of course, in using the buy-and-bill Leqvio model to drive more depth in those accounts, particularly as we've now evolved our field model to better support those accounts. Outside of the U.S., we see a continued strong performance, 63% growth. driven by a number of markets, particularly China out of pocket, but we also see strong uptake in Japan, strong uptake in the Middle East and the Gulf countries. So all of that taken together, I think, really portends well for Leqvio in the medium to long term. We did achieve some important regulatory and clinical trial highlights. Our U.S. monotherapy label expansion, removing the statin prerequisite in the primary prevention population was added to the label. The V-DIFFERENCE data was presented at ESC, which showed Leqvio helps patients get to goal faster. I'd also note that our pediatric submissions are on track, which, of course, supports our longer-term LOE profile. Now moving to Slide 13. Scemblix grew 95% in constant currencies in quarter 3. It's on track to be the most prescribed TKI by NBRx in the U.S. Focusing on the middle panel, you can see that our all line of therapy, NBRx has now reached 39% and is steadily climbing built off of that first-line approval. In first line specifically, we've reached 22% share. So we're now approaching NBRx leadership in first line. We already are the NBRx leader in second line and third line plus with 52% and 53% share, respectively. Outside of the U.S., our focus currently is on the third line plus setting, where we have 68% share. But we do have the early line now approved in 26 countries, including China and Japan and a positive CHMP recommendation from October. So we would expect now to start to see our ability to reach patients in the first-line setting picking up outside of the United States. As an indicator of that, you can see here our strong launch momentum in Japan, first-line share already up to 18%, second line at 25%. So we continue to be very optimistic about the outlook for Assembly. Then moving to Slide 14. Now Cosentyx had a mixed quarter. Our growth was impacted by a onetime effect in quarter 3, which I'll go through in a moment. But most importantly, we remain on track for mid-single-digit growth in full year 2025 and are confident in the peak sales potential of the brand. So you can see that in constant currencies, our growth was down 1%. In U.S. dollars, we're more or less flat. Now when you remove the onetime RD adjustment of $74 million, our global sales growth was around 4% in constant currencies. In the U.S., when we adjust for that onetime RD, our growth goes from plus 1% to plus 9%. Cosentyx continues to be the #1 prescribed IL-17 across indications. In HS, now we see a stabilization of the performance, 52% share in naive and 50% overall. So when the competitor came in, we did see a dip in that share, but that's now stabilized. And we are better able now to manage patients alongside physicians to achieve step-up dosing rather than switching off of Cosentyx. And I think that will be important. And so we can really turn our focus to market expansion in HS with the stable share that we've been able to achieve. Outside of the U.S., we were down 3% in constant currencies, but this again was driven by a onetime price effect in the prior year. Importantly, we saw 4% volume growth, and we're the leading originator biologic in Europe and China. So overall, I think the key message is we're confident in the $8 billion peak sales potential. We expect continued market growth in our core indications and rollout of the recent launches in HS and IV. But I think also importantly, we did achieve a positive Phase III readout in polymyalgia rheumatica. It's the second most common inflammatory disease in adults over 50, an estimated 800,000 patients in the U.S. and 1 million patients in Europe to have the condition. So this is a market that's on par with the HS market when you think about the size of the segment. We have global regulatory submissions planned in the first half of 2026, and we'll be working to accelerate them as well and really hope to drive rapid uptake in PMR. We believe the data is compelling. We demonstrated, as you saw in the press release, a positive clinically meaningful primary endpoint, and we also hit all of the secondary endpoints. So we're looking forward to presenting that data and taking this launch forward. Now moving to Slide 15. Our renal portfolio continues to gain traction in the U.S. We had a positive Fabhalta eGFR data, really the first oral therapy to generate such compelling eGFR data. So looking forward to presenting that. We see steady growth in the U.S. Our IgAN portfolio grew 98% versus market growth of 23%. Our NBRx share is now 18% climbing steadily. We see strong uptake as the first approved therapy in C3G. Outside of the U.S., we're beginning to get the key approvals, particularly in China, where there's a large market for IgAN therapies. And turning to the Phase III APPLAUSE-IgAN study, we saw a statistically significant clinically meaningful improvement in eGFR slope versus placebo. It's the longest renal function data for IgAN to date. So we're excited to present that data at a future meeting. And this data should support a full approval -- traditional approval with FDA. Now moving to Slide 16. Rhapsido was approved by FDA as the only oral targeted BTK inhibitor for CSU. I think many of you know the medicine well. It's something we're quite excited about. It's indicated for the treatment in adult patients who remain symptomatic despite antihistamine treatment. And we estimate that patient population to be around 400,000 patients uncontrolled out of 1.5 million treated patients. We achieved a clean safety profile with this medicine, no box warning, no contraindications, no requirements for routine lab or liver monitoring. oral administration, 25 milligrams twice daily with or without food. So a really good profile for these patients. I would want to highlight as well. We're very excited to have a medicine with rapid onset in a highly symptomatic condition. These patients have to deal with itch, loss of sleep, discomfort. And so if you can have a medicine that has a really rapid efficacy benefit that's really, I think, something that could drive rapid uptake. Our initial patient -- physician feedback is excellent, and we're already seeing a steady increase in start forms. Our goal will be to improve the access environment for the drug as fast as possible, and then we would start -- expect to see rapid uptake over the course of next year. And then lastly, in both EU and China, we've completed our submissions and our Japan submission is slated for also later this year. And moving to the next slide. Ianalumab, we announced our positive Phase III studies earlier in the quarter. Yesterday, we released our top line data. The full data set will be presented soon, I think, tomorrow. And then our Analyst Day to discuss this data as well as the Rhapsido data as well as other immunology data, including our CAR therapy platform for immunology. Immune reset platform will be on Thursday. So I hope you'll be able to join that, and we'll give you a lot more detail on the secondary endpoints, on post half endpoints, on biopsy data, et cetera. But here, just on the top line, the Phase III endpoint was met in both studies, statistically significant improvement in ESSDAI. I do want to highlight here, there's a lot of focus, a lot of report on the aggregate ESSDAI from a patient standpoint and a physician standpoint, what matters is where the individual patients are and how much we're able to improve their relative disease. And also what is the starting point for the ESSDAI score. So the fact that we've achieved two positive Phase III trials, I think, will really enable us to roll this out to patients. And then as patients see the symptom benefit given their profile, they'll hopefully be able to get the benefit and stay on the medicine. We have consistent numerical endpoints, improvements in the secondary endpoint, a favorable safety profile. And as I mentioned, the data will be provided shortly. So regulatory submissions are on track for the first half of '26. And moving to Slide 18. Overall, I think a strong innovation year for the company. You can see all the various milestones that we've reached. Also, we've been, I think, the leading player in the sector in terms of deals bringing in medicines at all stages from preclinical to Phase I to late-stage assets, also continuing to bolster our technology platform. So we'll look forward to giving you a full innovation update and technology update at Meet the Management in November. So with that, let me hand it over to Harry. Harry Kirsch: Thank you very much, Vas. Good morning, good afternoon, everybody. As usual, I will take you through the financial results now for the third quarter, the first 9 months and the full year guidance. And as always, unless otherwise noted, all growth rates are presented in constant currencies. So if we go to our Slide 20, you see a summary of the financial performance. In the third quarter, net sales grew 7% versus prior year. Core operating income was also up 7%. In the U.S., we had some negative gross to net true-ups first time since the year. Prior, we had mostly positive. But they were mainly related to Medicare Part D redesign, which was new for the industry this year based on invoices for prior periods, mainly quarter 2. And excluding these true-ups, the underlying growth would have been 9% on the top line and 11% on the bottom line as the priority brands and launches continue to offset the increasing generic erosions, mainly for Entresto, Tasigna, and Promacta in the U.S. Our core margin was 39.3% in Q3 and core EPS came in at $2.25, reflecting a 10% increase and free cash flow totaled $6.2 billion. For the first 9 months, obviously, as we had less generic erosion, net sales grew 11%, core operating income 18% and the core margin expanded 250 basis points to reach 41.2% and with core EPS at $6.94, up 21%. Free cash flow reached after 9 months already $16 billion, growing 26% in U.S. dollars versus prior year. Moving to next slide. Speaking of free cash flow, up 26% billion, as I mentioned, already close to actually prior year full year $16 billion after 9 months. So it really shows continued strong conversion from profits to cash flow. And of course, cash flow remains a strategic priority as it increased further our ability to convert strong core operating income growth and robust free cash flow and gives us the capacity to reinvest in our business organically, pursue value-creating bolt-ons like the proposed acquisition of Avidity and return attractive shareholder -- attractive capital levels to our shareholders through growing dividends and share repurchases. Speaking of capital allocation, let's go to the next page, right? It's really unchanged. And again, based on very strong free cash flow, we really can optimize both a significant investment in the business to drive top and pipeline and returning capital to our shareholders at attractive levels. In the first 9 months, aside from Avidity, we have executed multiple bolt-on M&As, smaller in size, but still very important and -- which strengthened our key platforms and pipeline for our four therapeutic areas. And of course, we also continue to invest in our internal R&D engine. On the capital return side, we successfully completed our up to $15 billion share buyback program early July and have launched a new up to $10 billion buyback program targeted for completion by the end of 2027. We also have distributed $7.8 billion in dividends during the first half of this year as part of our annual dividend. Turning to the next slide. We reaffirm our full year guidance. We expect high single-digit growth in net sales and low teens growth in core operating income, even after accounting for negative gross to net true-ups in the third quarter. And to complete our outlook, we now anticipate the core net financial expenses is slightly higher at $1.1 billion before we had $1.0 billion, a bit higher hedging costs. But overall, nothing dramatic. And the core tax rate continues to be in this range of 16% to 16.5% so far in the first 3 quarters at 16.2%. Now let's move to the next slide. So usually, we don't provide so much level of quarterly guidance, right? Quarters are a bit more volatile than the full year usually. But given that we have U.S. generics entry in the middle of the year for three of our brands, of course, the biggest being Entresto, but also Promacta and Tasigna were, of course, blockbusters, it results in very different quarterly dynamic this and next year. And so as a reminder, in quarter 4 of last year, we benefited from significant positive gross to net adjustments, which added back then about 3 points of growth. So it makes for a very high prior year base. Adjusting for these one-timers, we expect quarter 4 underlying growth to be low single digit on the top line and mid-single digit on the bottom line, reflecting the increasing generic erosion from a full year impact of Entresto U.S. generics but better, obviously, than what we expect to report, including the prior year gross to net adjustments. We provide full year guidance for 2026, of course, next quarter with the full year results, but you can imagine it will be a year of two halves. The first half of 2026 will be depressed due to the impact of generics with still a high prior year base, but we expect to emerge much stronger in the second half, but much more on that as we go -- as we report our full year results early February. Now let's move to our currency estimate impact of currencies should -- currencies remain where they are basically late October. Then we expect a full year in '25 impact of 0% to 1% on net sales and minus 2% points on core operating. You see also the quarter. And we roll this forward to '26. So in '26, we would expect with these exchange rates, a slight positive 1% point on net sales and basically no material impact on core operating income. And as you know, we publish this on a monthly basis as it is quite difficult to forecast this from the outside in, and we hope you find it helpful. And then lastly, I hope you were able to join our presentation on the proposed acquisition of Avidity yesterday. If not, I would encourage you to listen to the replay. And -- adding Avidity, as we mentioned yesterday, raises our '24 to '29 sales average growth rate from 5% to 6%. But of course, even more importantly, further supports our mid-single-digit growth over the long term with main impacts, of course, in the 2030s and beyond. And it brings, of course, these near-term product launches two with multibillion blockbuster potential with LOEs in the 2040s and no IRA impact. Now we also mentioned yesterday that we do expect some short-term core margin dilution given Phase III trials are basically now starting to run or up and running shortly in the range of 1% to 2% points for the next 3 years. But we are confident that we return to the 40% margin, which we already achieved this year also will return them back to that in 2029. And please make sure that you also model this 1 to 2 points core margin dilution as you finalize your 2026 models for us. This deal, of course, overall is expected to deliver very strong sales and profit contributions post -- starting in '29 and then even more and therefore, driving significant shareholder value with a small price to pay over the next 3 years on the margin dilution as part of the investment. That's all I had for now and handing back to Vas. Vasant Narasimhan: Great. Thank you, Harry. So moving to Slide 28. In summary, solid sales and core operating income growth in the quarter despite generic headwinds. So I think we're navigating that well with strong underlying performance of our priority brands, which is reflecting the strong execution, a strong pipeline progress. We delivered strong pipeline progress in the quarter. And we also reaffirm our 2025 guidance and remain highly confident in our mid- to long-term growth, which is further bolstered by our proposed acquisition of Avidity, not just through the end of the decade, but into the next decade and beyond. I want to just quickly remind you as well, we have our immunology pipeline update on October 30, and our Meet Novartis Management on November 19 and 20, in person in London. So thank you again, and we'll open the line for questions. Operator: [Operator Instructions] We will now take the first question. And the question comes from Matthew Weston, UBS. Matthew Weston: I hope you can hear me. It's a question about policy, Vas. And we've seen now two companies do deals with the White House around Medicaid and tariffs. And I wondered from your perspective, how much you felt we could see the industry do a cookie cutter of those deals or whether there are meaningfully greater challenges for some companies and when we should expect something from Novartis? And if Harry, I can steal, I guess, an extension of the same question. Can you walk us through CapEx over the next 5 years given the investments that you've announced in the U.S. and how we should think about modeling that as part of cash flow? Vasant Narasimhan: Thank you, Matthew. So I think from an industry-wide perspective, I think the pharma industry's view is that the proposed negotiations or proposed actions are not going to address the underlying issues here, which, of course, we believe are PBMs, 340B and importantly, perhaps most importantly, G7 countries and related countries outside the United States properly rewarding innovation and properly assessing the appropriate price for innovation. That said, I think, as you point out, there are I think now three companies that have reached agreements with the administration. I'd say Novartis has -- I can't speak to what other companies are doing. We've been in conversations with the administration since the beginning of the year as we've had the various turns in these discussions. And I'd say we're meeting with the administration weekly to look at what are the best solutions we can come up with. It is important to note that the President was very clear on the four parameters, and I think those are the four parameters that are in discussion. And we'll have to see in the coming weeks and towards the end of the year if we can come to a proposed approach that makes sense for all involved. And in terms of CapEx, Harry? Harry Kirsch: Matthew, I think as we mentioned when we also introduced the $23 billion over the 5 years commitment, we made it clear that the majority is actually not CapEx. Majority is R&D OpEx, where we have the choice to invest in the U.S. or anywhere else in the world. And we choose, of course, to have a strong commitment also for R&D in the U.S. And then there's a portion, yes, it's CapEx, but it's actually part of our overall worldwide financing plan also for -- and we choose basically incremental to invest in U.S. to build up there our manufacturing base to supply the U.S. from the U.S. instead of further expanding, for example, European sites. So from that standpoint, overall, I don't expect a significant or meaningful CapEx increase. We are always in this range of 2.5% to 3% of sales, actually quite a low end of the industry given our very focused and efficient manufacturing setup. And it's always -- there can be annual fluctuations, but nothing meaningful. Also, we have further opportunities in cash flow and inventory. They are usually on the high side. We keep that as a bit of a buffer in certain times. So overall, in short, I would not expect a significant CapEx increase. And I would expect free cash flow to grow roughly in line with core operating income growth. Operator: Your next question comes from the line of Peter Verdult from BNP Paribas. Peter Verdult: Pete Verdult, BNP. Only one, so I'll keep it topical for Vas. Just on the market reaction to that ACR abstract, I think you've alluded to it being disappointment and you perhaps sharing a different view. So just pushing you on -- do you think the market depreciation of the data set will improve once we see the full details tomorrow? And just could you remind us, I'm sorry to get technical, of the 12 domains that make up the ESSDAI index, which ones are seen as the most important to patients and physicians? Vasant Narasimhan: Yes. Thanks, Peter. I mean, I think for us, the most important thing is that we make a compelling proposition to patients and physicians. And then if we deliver a strong launch, then I think, obviously, the markets will do what the markets will do, but presumably will follow. I think -- we will present detailed data on Thursday, and I think that will help at least understand where our conviction comes from. I think very important for us is the individual patient benefit. I think practicing physicians and patients don't measure an ESSDAI. They're actually looking for symptomatic benefits in things like fatigue, in salivary flow, in activities of daily living. And I think looking at that -- the global assessment of physicians and how they see patients benefiting is going to be really important for this launch. It's a highly variable disease. So a lot of this will depend on finding those groups of patients that have a significant benefit. And I think important for these patients as well is to feel like they don't need the same level of steroids that they typically are using, which can be hugely disruptive for their lives. Sleep is another topic as well. So we'll present that information. But I think we feel confident that there is a high willingness even from the physicians that we're talking to now in Chicago, a high interest and a high willingness to make this option available for patients. And assuming we can make patients materially feel better versus the current standard of care, which is frankly just high-dose steroids, we expect to be able to drive significant growth from this medicine. Operator: Your next question comes from the line of Stephen Scala from TD Cowen. Steve Scala: It seems like there may be a subtle change in the messaging on Cosentyx in HS. While Novartis grew overall market share quarter-over-quarter on Slide 12 of the Q2 deck, Novartis noted continued HS market growth. And in the Q3 slide deck, that was not stated explicitly. It's clear Novartis has been playing defense on share. But with that now stabilized, is the point that you need to grow the market and it's not growing at the pace that you expected? So is that the contour of the market? This would seem to be a factor in whether Novartis grows earnings in 2026. And when Harry was talking about 2026, he didn't say that specifically. Vasant Narasimhan: Yes. Thanks, Steve. So what I can say is that we feel confident that our share has stabilized after the competitor entry. I think we have not seen the market growth that we had originally hoped for that we -- there's clearly a lot of patients who can benefit from biologic therapy with HS. We continue to see this as a $3 billion to $5 billion-plus market, but it's clearly going to take longer for that market to develop. And so I think we probably did not do the careful analysis that you did on our slides, and I'll look to our IR team to do that more carefully in the future. But I think your point is absolutely on that we need to see -- we need to grow this market, and that's what really both companies should really be focused on and get more patients on these therapies. Now with respect to earnings, we don't comment on 2026. We're focused on clearing out 2025. And so once we get there in January, we can provide you our outlook. I would say that I think I would focus much more on the dynamic growth you saw in the quarter on Kisqali, Pluvicto, Scemblix, Kesimpta, all of which, to my eyes, were ahead of consensus. And I think that's where I think the focus should be now looking ahead for the company. Next question, operator? Operator: Your next question comes from the line of Shirley Chen from Barclays. Xue Chen: Can I ask about Pluvicto. So congrats on a great quarter. Could you please help frame where you are in the launch curve for pre-taxane new label? And how do you expect the inflection in 4Q and also next year? Can you remind us your peak sales ambition of this drug? And when do you expect Pluvicto to reach at the full potential within the PSMAfore population and also potentially PSMAddition population? And also in addition, you -- I think you previously mentioned a few challenges for commercialization, such as reimbursement, education of staffing and referral networks. And how do you find where you are tackling these challenges? Vasant Narasimhan: Yes. Thanks, Shirley. So for Pluvicto overall, I think we're on the steep part of the curve right now. We see -- as you saw, very strong growth in quarter 3. We would expect very solid growth in quarter 4. It's important to note in quarter 4, we always have a slowdown in the Thanksgiving and Christmas holidays. So in effect, lose 2 to 3 weeks because of those holidays, simply because patients don't want to "have a nuclear medicine, radioactive medicine that prevents them from being around children or family members, so for a period of time." So important to note that. But that said, we do expect continued strong performance in quarter 4. And then going into next year, we would expect solid growth, but I think as always with these launches, good growth, but maybe not the same levels of growth you're seeing in quarter 3 and quarter 4, kind of an S-shaped curve. And then our plan would be to bring on the HSPC indication, which will then propel us, we believe, to the $5 billion peak sales that we've guided to. So we fully are confident on that. We see high levels of now receptivity. And that, I think, brings me to your point on the structural challenges, which I think we've successfully tackled now with the PSMA and VISION launch, we struggled to get into the community in a way that was scaled. Now through years of effort by our U.S. commercial team, we've successfully, as I noted, have over 700 prescribing clinics across the country. 9 out of 10 patients are very close to a center that can provide Pluvicto. We're adding centers just to be on the safe side. We've done careful mapping to know the referral pathways. Physicians are much more comfortable now using the PFS, a pre-filled syringe and dealing with some of the other logistics associated with radioligand therapy. So we're in a very good spot in that sense. And that's what gives us confidence that the pre-taxane launch can propel us into the $3 billion-plus range and then the HSPC launch will propel us into the $5 billion-plus range and will be where we expect. We continue in the as well in the oligometastatic setting as well to go earlier. We also have a number of Phase IV studies, including in the mCRPC setting in combination with ARPIs to give physicians even more options. So we're doing all of the work as well to fully build out the data package to maximize this medicine. I think while I'm on Pluvicto, I think all of that builds the base for our radioligand therapy platform more broadly. We have that full range of 10 -- around 10 different indication medicines that are advancing in the clinic. And now as we bring those forward, we have that infrastructure built in the U.S. and now increasingly Japan, China, and other markets to make those other launches successful. So I think all on the right track. It was a very important element for us to strategically solve. And in my view, we have solved the challenge of rolling out radioligand therapy in the United States. Next question, operator? Operator: Your next question comes from the line of Florent Cespedes from Bernstein. Florent Cespedes: A question on Rhapsido. Could you maybe share with us how you see the ramp-up of the product as you have a clean safety profile, convenient administration? And do you have any feedback from the Street even though it's still early days? And any thoughts for the situation in Europe, the adoption knowing that the product will be compared with much cheaper drugs? Vasant Narasimhan: Yes. Thank you, Florent. So we're in the early stages of the launch. Right now, our focus is on sampling through patient start form, getting through patient start forms and negotiating with payers to ensure broad access in the early part of next year. I think once we get to the early part of next year, we get that base up through sampling in this initial phase, we would then start to expect a more rapid uptake through Q2 forward next year, where I think there will be the opportunity then to really drive uptake. We would expect initial uptake to be in patients who are not responding to biologic. But then our goal very much is to be positioned pre-biologic. That's really where the opportunity is for this medicine, and that's what we're going to be our long-term focus in the U.S. and really around the world. I think in Europe, you raised an important point. I mean, a lot of this will come down to our payer negotiation. And I think in light of the current situation in the U.S., it will be absolutely our goal to hold the line and ensure that Rhapsido is appropriately reimbursed for the innovation it's bringing and not have it be compared to old generic drugs, but really compared to what it is a pureless oral twice-a-day option for patients that really need a rapid onset of action. And we're hopeful that European payers will realize that and then appropriately reward it, and then we'll be willing to be patient to achieve that. But then I think once we get access, all of our indications, there's a lot of enthusiasm in both the allergists and the derm community for a safe oral option, and we should see rapid uptake there as well. So I think overall, very excited about the medicine. As you know, we're progressing as well in CINDU. We would expect that readout next year. We're progressing in food allergy. We're progressing in HS. So we have a number of opportunities now ahead of us as well for this medicine. Next question. Operator: Your next question comes from the line of James Quigley from Goldman Sachs. James Quigley: I've got a follow-up on Ianalumab, please. So one question we've had is that, obviously, the slide suggests in NEPTUNUS-1 that statistical significance was only achieved in the last two blocks of data. Was that just because of when the tests were run? Or is that sort of what you're expecting as well in terms of when you're planning the study? And a second quick one on Ianalumab as well, hopefully not to preempt tomorrow or Thursday. But you talk about the sort of secondary endpoints and fatigue and salivary flow being more important, but the secondary endpoints were not statistically significant. So again, was this a case of hierarchical testing or anything else? How can you show that when you -- when the drug hopefully gets approved and you talk to physicians about the data? Vasant Narasimhan: Yes, absolutely. I mean, I think the endpoint here is at 52 weeks. And so I think we were trying to indicate all of the time points to reach nominal significance. But given that endpoint, the goal here is 52 weeks, and both studies achieved the prespecified primary endpoint at 52 weeks in the independent analysis and in the pooled analysis. So no issues there. And so we feel from a regulatory standpoint, we've -- 48 weeks, excuse me, 48 weeks the standard. So I think you can see here on Slide 17, 48 weeks was hit in both trials. And then -- separate from that, there is hierarchical testing here as often is the case. And so if one of the secondaries are hit, even if they hit from a nominal standpoint and lower the hierarchy, it's no longer valid from a pure statistical hierarchy standpoint. It could be nominally statistically significant, but wouldn't reach the threshold from a regulatory standpoint. That said, I mean, I think as I've tried to articulate, there's the regulatory standpoint here. And in a disease that's never had an approved drug, there's really what our patients and physicians looking for. And we've really tried to understand once we hopefully can get the regulatory approval, then what do we need to educate physicians and patients on. So you'll hear more about that on Thursday, but our team has done a range of analyses to look at secondary outcomes, look at post-hoc outcomes, look at also biopsies and really try to demonstrate that you're seeing the benefits that patients want. I myself have spent time talking to patients with Sjögren's. And I think what really matters to them is quality of life metrics and very specific quality of life metrics that varies patient to patient. So I don't think that for them that the ESSDAI score is going to make the difference. It's going to be whether or not their symptoms are getting better and they can live their daily life day in and day out better. Next question. Operator: [Operator Instructions] Your next question comes from the line of Richard Vosser from JPMorgan. Richard Vosser: One on Kesimpta, please. Just whether you're seeing any impact in the U.S. from the OCREVUS subcutaneous launch. It doesn't seem like it, but just wondering what you're seeing here. And linked to that, there's some discussion from you about your new formulation. Just wondering on details of treatment interval, whether this could be a new BLA and how this could protect from potential biosimilars down the line. Vasant Narasimhan: Yes. Thanks, Richard. So on OCREVUS subcu, we don't see an impact to date, as you can see on our overall performance. We're holding share in a growing market. I think -- the overall market growth for multiple sclerosis drugs has been solid. Within that, the B-cell class continues to steadily increase with a bigger opportunity outside of the U.S., but still we see the opportunity. I think 25% of patients in the U.S., give or take, are still not on B-cell therapies that could be. And so we're really benefiting from the market growth. We are doing a lot of work now to get better at targeting physicians that we think would be more amenable to a patient self-administered administration rather than the various other options available. But I think overall, this is a growing market where the medicine is holding its share, performing really well. It's all volume-driven growth. From a life cycle management standpoint, we are advancing our Q2-month formulation. And so we'll keep you updated as we progress, but that's something that's a trial that's currently on rolling. And then we're exploring other options, no details I can get into at this point to get into longer intervals as well potentially with novel technologies. And I think as those progress and if there is the opportunity to get those launched before biosimilar entry, that's something that we're highly, highly focused on, absolutely. But I think it's premature to comment on that at this point. Next question, operator? Operator: Your next question comes from the line of Thibault Boutherin from Morgan Stanley. Thibault Boutherin: Just a question on abelacimab, the injectable Factor XI acquired with Anthos. I think we're getting the first Phase III data in AFib next year. This is for patients at high risk of bleeding and for whom oral anticoagulants is not adequate. Can you just sort of frame the opportunity in terms of size? And are you looking to potentially go into a broader patient population with this asset? Vasant Narasimhan: Yes. Thanks, Thibault. So this is the -- as you know, the antibody that we acquired back from Anthos is originally a Novartis-originated antibody. So we know it quite well. As you know, the study next year will be in patients who are ineligible for DOACs, NOACs. And so the opportunity here is for these patients, which is a reasonable sizable patient population to provide them a significant option with monthly dosing. I think the opportunity here will really -- the size of the opportunity, we believe is multibillion, but the scale of that multibillion-dollar opportunity will really depend on how the oral Phase III program from one of our competitors performs. I mean, clearly, if that oral medicine, which is an all comers in a very large study, if that is unsuccessful, then we would have a very significant potential with our medicine. I think with an oral and an antibody, we'll be much more than focused on these more refractory patients and the opportunity won't be quite as large. But I think in either case, it will be a multibillion-dollar asset we can bring into our cardiovascular portfolio. And we're -- yes, we're quite excited about it. Next question, operator? Operator: Your next question comes from the line of Michael Leuchten from Jefferies. Michael Leuchten: If I could please go back to Cosentyx. Could you tell us, please, what your pricing assumptions, the net pricing assumptions are for the U.S. into the fourth quarter? Do you expect any drag? And just trying to understand the increase in step-up dosing comment on your slides around HS, the 25% utilization. Could you put that into context? What was that maybe at the half of the year? And how has that developed? Vasant Narasimhan: Yes. Thanks, Michael. So on Cosentyx pricing, we don't expect any shifts going into quarter 4. And I'd say, overall, we expect stable gross to nets as well going into next year. I mean it's relatively mature brand, but also with multiple new indications and a solid payer position. So I think we should be stable on that front. We are also monitoring the impact of the Part D redesign, but most of the impacts we've seen on Part D redesign have actually been on Entresto earlier in the year, and then I think that will fade away now as generics enter. On HS, this really referred to the fact that early on with the competitor launch, what we were seeing is with patients who were on the monthly dosing, if they weren't seeing the effect that they are, physicians weren't seeing the effect that they hoped for, the effect was wearing off, they were switching rather than updosing Cosentyx every 2 weeks. And so now we see about 25% of patients on Cosentyx moving up to that every other week dosing. And that's something we'd like to get even higher over time because I think that really demonstrates patients are persisting on Cosentyx, and that's going to be important for us to retain our greater than 50% NBRx share and then the correlating TRx share as well. So that's very much in focus for us. And then I'd come back again that we also just need to work on growing the market. I think if this ends up being two competitors just trading the same group of patients, that would be disservice to this patient community. I think we have to get better now at reaching patients who have either fallen out of the system or for whatever reason are being identified as biologic appropriate patients and get them on therapy. Next question, operator? Operator: Your next question comes from the line of Simon Baker, Rothschild & Co Redburn. Qize Ding: I hope you can hear me okay. So this is Qize Ding speaking on behalf of Simon Baker. So I have one quick question. So one quick question on the rebate adjustment. Is there anything you can call out other than the Cosentyx? And also, did any drug benefit from the rebate adjustment in the Q3? Vasant Narasimhan: Yes. Thank you for the question. I'll hand that to Harry. Harry Kirsch: Yes. Thank you for the question. So overall, of course, when you see the amount that is prior period is roughly $180 million. You see that this has about this 1.5 almost rounding the 7% to 9%, if you will, effect on the quarter. And Cosentyx is a big piece of it. Another big piece of it is Entresto actually where patients got quicker into the catastrophic as part of the Medicare Part D redesign. And of course, that part really should go away as Entresto kind of goes away. And there has been some smaller elements, including like really going back into '24 with some inflation penalty part. But the two biggest ones are Cosentyx and Entresto. Vasant Narasimhan: Thank you, Harry. So Sharon, next question. Operator: [Operator Instructions] And your next question comes from the line of Rajesh Kumar from HSBC. Rajesh Kumar: Just trying to understand the margin cadence over 2026. I know you're not giving a '26 guidance at the moment. But very helpfully, you said it will be a year of 2 halves. So given what you know about Part D now and how generics are coming and what sort of operational gearing you're getting on your Kesimpta, Pluvicto, and other, drugs which are growing. If you were not cutting the costs, would the cadence be a lot more steeper? And what have your actions done to offset that impact? So what is the mix impact versus self-help? If you could help us quantify as well as the seasonality of Part D cadence? Because this year, you have done a prior period adjustment that might not be the next year because you have some accrual history now. So you will base your quarterly accruals on the evidence you have. So it would really help us model out first half, second half for '26. Harry Kirsch: Yes. Thank you, Rajesh. A very thoughtful question, of course. And so in our business with our mix, we usually do not have Medicare kind of related different gross to net levels quarter-by-quarter other than when we have a gross to net true-up, right? So when channel mix changes, when a product goes quickly into the catastrophic and those -- if there are -- I mean, there are always some deviations, right? We have over 20 billion RDs in U.S. But when these are significant or meaningful, then we let you know, right, how much it is, like in quarter 4 of last year, it was 3 points of growth, which is now impacting as a high base. Quarter 1 was 2 points to the positive and quarter 3 is now 2 points to the negative. So we show you that stuff. But that's basically true-ups. The underlying is not changing quarterly dynamics for us. So for next year, you will have a very high base Q1 right, with the 2 points of growth that we got from the -- and you will have a relatively low base in Q3 from the 2 negative points this year. And other than that, it's all about launch uptake and generic erosion of the three main products. Maybe long-winded, but I hope it was addressing your question. Vasant Narasimhan: And we'll do our best, I think, at the full year earnings as well to provide more guidance on how best to think about the full year 2026. Next question, Sharon. Operator: Your next question comes from the line of Matthew Weston, UBS. Matthew Weston: It's just a quick follow-up actually to one of the prior questions. Harry, Kesimpta looks like a very strong quarter in Q3 that looks somewhat off trend. And I'm just making sure that as we go into Q4, we aren't going to learn that it was lumpy one way versus the other. Can you just confirm that was underlying operational growth? Vasant Narasimhan: Absolutely. Harry? Harry Kirsch: Yes, it was mainly underlying operational growth, a little bit of inventory, but not much. Vasant Narasimhan: Just a strong global volume, I think, in both U.S. and ex U.S. for this matter. Next question. Operator: Your next question comes from Simon Baker, Rothschild & Co. Redburn. Qize Ding: Just one quick question on the Ianalumab in Sjögren’'s disease. So we observed the placebo response in the Sjögren’'s trial tend to be plateau at week 48. So why did it reverse in the first trial of those two Phase III trials, please? The Phase III trial is called NEPTUNUS 1. Vasant Narasimhan: Yes. I think the question is regarding the placebo response. I mean I think -- look, I think these were both adequately controlled, well-designed studies, global studies. This is just a highly variable disease. And so you're going to see some variability in how the placebo responds. When we look at background therapy as well, it's very comparable across the studies and so also versus normal standard of care. You do see as well that the month data looks much better than the Q3-month data, but you do see as well the dose response that we would expect. So I think that's all positive. And so we'll have our experts on the line on Thursday. So if you want to get into more detail, and they'll also be able to go through some of the background on the study design and baseline characteristics. But I think, obviously, I can't comment more until the full data is presented. Next question, Sharon? Operator: Your next question comes from Stephen Scala from TD Cowen. Steve Scala: Novartis raised the long-term revenue guidance yesterday, half of which was attributed to the existing business. Of the half attributed to the existing business, how much is due to currently marketed products? And how much is due to higher sites for the pipeline agents? Vasant Narasimhan: Yes, Steve, I think we can provide better midterm guidance on that and meet the management. But most of that is in-line brands. Obviously, you see the strong performance of Kisqali, Kesimpta, Pluvicto, Scemblix, I think solid performance on Leqvio. And there is probably some in there of what we expect will be a strong launch for remibrutinib, so Rhapsido and the label expansion for Pluvicto. Yes, I think that's roughly the breakdown more or less. I think any other pipeline assets we would expect to have limited ramp in this period, just given how long it takes to ramp up these launches when you think out to '29. And we will provide guidance as well out to 2030, as I said yesterday, and meet the management as well as update our peak sales guidance on our various brands where appropriate. Next question, Sharon? Operator: Your next question comes from the line of James Quigley from Goldman Sachs. James Quigley: Just a quick one for me. I mean you may have already answered it, Harry, but again, it's coming back to the Cosentyx, the rebate adjustment. Which prior periods does that relate to? Is that a Q1, Q2 this year? Or is that a 2024 thing? I'm just trying to think in terms of modeling for next year as we look at Cosentyx. Is there a slight headwind from where there was a higher price that you realized in Q1 and Q2 that then reversed out in Q3? And also what does that mean sort of going forward into 2026? Again, I appreciate there is going to be other dynamics with PMR and HS, but just wanted to clarify that from a modeling perspective. Harry Kirsch: Thank you, James. It's mainly quarter 2 this year, most of it. And -- but the quarter 3 underlying, that's why we gave you the quarter 3 underlying is what the underlying is already taking into account if such channel mix would continue to prevail. So from that standpoint, it gives you a good basis for future modeling. Vasant Narasimhan: I think, Harry, if I'm correct, if you net out the prior period upside versus this that really the year-to-date is relatively clean. Harry Kirsch: Across the whole portfolio. Vasant Narasimhan: Across the whole company, the year-to-date is close to red. Harry Kirsch: Quarter 1, we had 2% upside. Now we have almost 2% downside, right? It's a bit different brand by brand. But that's why we've given you on the brand that has most of it and is -- Entresto is deteriorating, of course, but this one, of course, is a brand that will stay long with us. That's why we gave you the underlying, which gives you the real underlying at the moment for quarter 3. Vasant Narasimhan: Sharon, next question. Operator: Your next question comes from the line of Sachin Jain from Bank of America. Sachin Jain: So firstly, just a clarification on margins for Harry. So 3Q margins were a little bit below Street. I guess, partly on gross margin, which is sort of first impact from generics. I wonder if you could just talk about gross margin, EBIT margin as we think about a full year of Entresto impact in '26. My simple question is, can you maintain margins stable next year through the full year of generics before we model the underlying Avidity dilution? And then given, I might just take an additional one on pipeline for Vas. You flagged good uptake in IgAN. You have the Phase III for the APRIL, BAFF next year. So I wonder if you could just talk to your excitement on that and differentiation and what's the competitive landscape? Vasant Narasimhan: Great. Harry? Harry Kirsch: So on the margins, of course, when you have a product like a small molecule, high-priced products like the 3 going off patent, especially Entresto being so big, there's a slight negative mix effect. Now Kisqali is also a super high-margin product, right, and growing significantly. So that's partly offsetting. But we have also a significant productivity efforts, especially in our manufacturing and supply chain. So as I mentioned before, there will be, as we go forward, some pressures on the gross margin. On the other hand, we do also expect that our SG&A becomes even more efficient as we go forward, offsetting that. Now for the next couple of years, this year, we will be around 40%. And quarter 4 is usually a bit lower. Historically, we have been in the first 9 months at 41%. So Q4 bring that in the range of around 40%. And then for the next 2, 3 years, we said because of the Avidity proposed acquisition, 1 to 2 margin points down from the 40% and returning to 40% in 2029. So with that, basically -- but it's driven by development investments. And overall, to close that long answer on a short question, basically, the gross margin headwinds, I do expect to be offset by SG&A productivity. Vasant Narasimhan: And then Sachin, was your second question around the anti-APRIL antibody, I didn't catch it. Sachin Jain: Yes. Sorry, in the introduction, you talked about the strength of the existing IgAN launches, but I wonder if you could touch on the APRIL BAFF with data next year and how that wraps out your portfolio. Vasant Narasimhan: Yes, absolutely. So first to note, ours is an anti-APRIL antibody. Our competitors are anti-APRIL, BAFF. And so I think one question, of course, will be to see the profile of those two drugs and does BAFF add anything and also differences in safety profile. But I would say, overall, we expect to see proteinuria in the range, we hope of what the others have seen. And certainly, our Phase II data -- final Phase II data indicated we have very strong proteinuria reductions. We will be third to market in all likelihood. And so for us, it's really going to come down to a portfolio opportunity that we bring to patients, physicians, payers, firstly physicians' offices and payers because we'll have the opportunity to have an endothelin antagonist with Vanrafia. We have the Factor B inhibitor with iptacopan and then with Fabhalta, and then we have the anti-APRIL antibody and bringing that entire solution set to the clinic and then also the opportunity for us to run combination studies. So we're already now evaluating what would be the right combination studies to run, generate that combination data so that nephrologists know what would be the right combination agents to optimize care for these patients. So these are all the opportunities I think we're looking at. But it's going to be important for us to think through those given that at least in the anti-APRIL space, we'll likely be third to market. Next question, Sharon. I think it's the last question, if I'm not mistaken. Operator: It is. Your final question for today comes from the line of Stephen Scala from TD Cowen. Steve Scala: Given the proof of concept established by the CANTOS trial 8 years ago, what new evidence compelled Novartis to go down the same pathway and acquire Tourmaline at this time? Vasant Narasimhan: Good question, Steve. So I think we clearly understand that IL-1 beta and hitting the inflammasome has a powerful effect on cardiovascular risk reduction. But in that trial, where we did an all-comers study of patients who had a prior event without, I think, focusing down, you saw the challenge of having a significant CVRR. Now IL-6 has the opportunity to be a little bit further downstream of IL-1 beta. And the idea here is to get within the first few months to max 6 months to a year after an event when -- if patients are at that point in time with an elevated hsCRP, the knocking down that CRP can lead to a significant -- we believe the opportunity exists to lead to a significant impact on cardiovascular risk. So I think it's really -- we've learned from the CANTOS study. We understand a lot more about the biology based on that. And we think by targeting now prospectively patients right after an event who are at elevated CRP levels as a marker of elevated inflammation, we can then have a much more compelling cardiovascular risk reduction than the kind of 14%, 15% that we saw in the CANTOS study. Now we do have a competitor ahead of us, but a lot of our focus is designing, we think with our expertise, a study that can really maximize the opportunity for the IL -- the Tourmaline asset, the anti-IL-6. All right. Well, thank you all very much for attending two calls in 2 days, but we have another call coming day after tomorrow. So we hope you will attend that as well to learn more about our immunology portfolio. We will talk about Rhapsido. We'll talk about our Ianalumab data and importantly, also talk about our immune reset portfolio, which I think is quite exciting. So thank you again for your interest in the company, and we look forward to catching up soon. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Angélica Garnica: [Audio Gap] consolidated sales of Grupo Carso totaled MXN 45.5 billion, decreasing 5.8% in the quarter. Grupo Sanborns and Grupo Condumex increased its revenues by 1.9% and 1.2%, respectively, related to summer promotional activities and higher volumes of industrial products. Zamajal hydrocarbons operation, which started consolidating in the second quarter of last year and is in developing process contributed with additional MXN 546 million, growing 27%. On the other hand, Elementia/Fortaleza, Carso Energy and Carso Infraestructura y Construcción decreased its sales 1.1%, 3.2% and 34.2%, respectively. This last division due to the conclusion of major infrastructure projects. Consolidated operating income totaled MXN 3.1 billion versus MXN 5.3 billion in the third quarter 2024. This 39.7% fall reflected lower exchange rate, higher salaries, wages and inflation in general. Grupo Sanborns additionally is implementing a new IT platform and Zamajal started depreciating major investments. Consolidated EBITDA for Grupo Carso from July to September 2025 decreased 20.4%, reaching MXN 5.6 billion compared to MXN 7 billion a year ago. The EBITDA margin decreased from 14.6% to 12.3%. Consolidated controlling net income decreased 78.4%, totaling MXN 651 million, lower than MXN 3 billion last year, reflecting lower operating results and a foreign exchange loss compared to a foreign exchange gain last year. Regarding the performance by division, Grupo Sanborns recorded higher sales with a 1.9% increase related to promotions carried out in the month of August and September. Operating income totaled MXN 443 million compared to MXN 535 million a year ago. This reduction in profitability was explained by an increase of 8.3% in expenses related to higher wages and salaries and the investment in different IT platforms to improve customer experience. EBITDA went down 6.8% with an EBITDA margin of 6.2%, while net income dropped 9.3%. In the Industrial Division, Grupo Condumex sales increased 2.2%, reaching MXN 13.2 billion versus MXN 13 billion in the same quarter of last year. This improvement was obtained by higher volumes of fiber optic cables for the CFE and automotive cables. Regarding operating income and EBITDA, these items reached MXN 967 million and MXN 1.2 billion, respectively, recording lower profitability compared to MXN 1.4 billion and MXN 1.6 billion a year ago. Carso Infraestructura y Construcción's sales totaled MXN 7 billion with the best performance coming from pipelines, where the construction of the Centauro del Norte gas pipeline started in the north of the country. Manufacturing and services for the oil and chemical industry had lower drilling activity and infrastructure concluded large projects. It is important to mention that currently new replacement projects are being recorded in the backlog due to recent bids, one such as the contract for the construction of the passenger train in Saltillo and new finance drilling services for oil wells. The operating income and EBITDA in Carso Infraestructura went down 95.5% and 78.9%, respectively. The controlling net result was a loss of MXN 629 million compared to a net income of MXN 649 million a year ago. The projects currently in place are the construction of shopping centers such as Pavilion Polanco, Star Medica Hospital, Plaza Carso 3-apartment building, telecom installation services and the construction of the Centauro del Norte gas pipeline. The backlog totaled MXN 70.4 billion compared to MXN 21.6 billion a year ago growing 267.9% since new projects were allocated such as the construction and design of 111 kilometers of the Saltillo-Nuevo Laredo passenger train segments for 13 and 14, Saltillo to Santa Catarina and the onshore and offshore drilling services of up to 32 wells for Pemex. The sales of Elementia/Fortaleza decreased 1.1% from MXN 7.7 billion in the third quarter 2024 to MXN 7.6 billion in the third quarter 2025. This was related to the exchange rate with a relevant part of revenues generated outside of Mexico, either from exports or from companies abroad. On the other hand, cement was affected by adverse weather conditions with heavy rains and hurricanes in some regions, which affected construction and cement demand. Therefore, operating income decreased from MXN 1.3 billion to MXN 1 billion and EBITDA decreased 14.9% due to the same reasons. Carso Energy's performance in the third quarter reduced 3.4% with total sales of MXN 867 million. This was attributable mainly to the exchange rate. The operating income and EBITDA of Carso Energy were MXN 659 million and MXN 773 million, decreasing 5.5% and 3.3%, respectively. The net result totaled MXN 371 million with a 10.8% reduction. Lastly, beginning in the second quarter, the oil operations to explore and exploit the Ichalkil and Pokoch fields on the Campeche Coast are being recorded and consolidated within the Carso numbers, where additional MXN 546 million were recorded in revenues at the Zamajal division. The operating result was a loss of MXN 439 million, while EBITDA totaled MXN 59 million. Zamajal continues its activities in the Ichalkil and Pokoch shallow water fields, increasing production and reducing operating costs and expenses. However, there were impacts of around MXN 250 million recorded in depreciation this quarter coming from significant capitalizations. With this, I finish my general comments to proceed to the Q&A session. We will make [Foreign Language] in Espaneol. But I want to remind you that the financial media can stay, but cannot make questions. The questions for the media will be addressed by Renato Flores Cartas from AMX, which help us with the media inquiries. Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Executive: [Foreign Language] Unknown Analyst: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Executive: [Foreign Language] Angélica Garnica: [Foreign Language]
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Northwest Bancshares, Inc., Q3 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Michael Perry, Managing Director, Corporate Development and Strategy and Investor Relations. You may begin. Michael Perry: Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares Third Quarter 2025 Earnings Call. Joining me today are Lou Torchio, President and CEO of Northwest Bancshares; Doug Schosser, our Chief Financial Officer; and T.K. Creal, our Chief Credit Officer. During this call, we will refer to information included in the supplemental third quarter earnings presentation, which is available on our Investor Relations website. If you'd like to read our forward-looking and other related disclosures, you can find them on Slide 2. Thank you. And now I'll hand it over to Lou. Louis Torchio: Thank you, Michael, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. It was a busy and productive third quarter, and I'm pleased with our results and the team's performance. At the end of July, we closed the Penns Woods merger, the largest transaction in our company's history and completed customer and data conversion, and financial center rebranding. This is Northwest's first quarter as a combined entity with about 2/3 of a full quarter of combined company results. Deal synergies are as expected and the various financial impacts of the merger, including cost savings are all on target or better than expected. I would like to thank and congratulate our team on the successful execution and integration of this merger. In early August, in celebration of that achievement and joining the ranks of the nation's 100 largest bank holding companies, we rang the NASDAQ opening bell in New York City. During the third quarter, we continued to make strategic additions to our leadership team. We welcomed a new Chief Legal Officer, Treasurer and the Head of Wealth Management, a new role to lead our expanding wealth management team. We now have more than 150 financial centers across Pennsylvania, New York, Ohio and Indiana. And yesterday, we had an official groundbreaking ceremony for our first de novo financial center in the Columbus market, and we're joined by the Mayor of New Albany and the Chair of its Chamber of Commerce. This is the first of 3 new financial centers we'll be opening in the Columbus market next summer. We're already building out our Columbus de novo teams to support local deposit gathering, customer acquisition and developing business relationships for a fast ramp-up when we open our doors. Our newest de novo financial center in Fishers, Indiana, which we opened in June, is performing well and on target. And as we look out over the next 12 to 18 months, we expect to open additional new financial centers in key locations in the high-growth Columbus and Indianapolis markets. I'll now walk through some of the highlights of the third quarter, directing everyone to Slide 4. I'm pleased with the performance of our first quarter as a combined company with the team staying focused on executing our strategy and delivering on our commitment to sustainable, responsible and profitable growth. The merger enhanced our balance sheet scale. At quarter's end, we had $16.4 billion in total assets, $13.7 billion in deposits and $12.9 billion in loans. We delivered more than 25% year-over-year average commercial C&I growth with strong progress on our continuing strategic rebalancing of the portfolio. We're in the third year of our commercial banking transformation, and we're seeing the benefits of that focus and investment with progress in our specialty verticals, commercial deposits and continued growth in SBA lending. Northwest was recently named as a top 50 SBA lender nationally by volume. We delivered $168 million in revenue for the third quarter, a record in the company's history, resulting in more than 20% year-over-year revenue growth. Net interest margin improved 9 basis points quarter-over-quarter to 3.65%, benefiting from higher average loan yields and purchase accounting accretion. Our EPS on a GAAP basis was up $0.08 or 15% for the 9 months ended September 30, 2025, and our adjusted EPS increased $0.16 or 21% for the same period. Turning to credit, which we know is currently a topic of significant interest across the industry. For the record, we have no direct exposure or known indirect exposure to any of the companies with high-profile credit issues that have recently been referenced in the media coverage on regional banking. The headline is that we continue to manage risk tightly, and our credit costs continue to be in line with our expectations. We're happy with our progress in reducing the level of our criticized and classified loans that we highlighted last quarter. Prior to accounting for acquired loans, which resulted in an increase of $9 million to classified loans of the combined company, legacy Northwest classified loans decreased by $74 million this quarter, and we've seen further improvement post quarter end as we continue to manage our loan book in a focused and methodical manner. And finally, as we have for the previous 123 quarters, the Board of Directors has declared a quarterly dividend of $0.20 per share to shareholders of record as of November 6, 2025. Based on the market value of the company's common stock as of September 30, 2025, this represents an annualized dividend yield of approximately 6.5%. This quarter's results are the product of an extremely talented team's hard work. I want to thank our entire Northwest team for their continued dedication to our company's success. Looking forward to the final quarter of 2025, we continue to focus on managing the factors within our control, serving our core customers and communities, building on our strong financial foundations and maintaining tight cost controls and risk management discipline. Now I'll hand it over to Doug Schosser, our Chief Financial Officer. Doug? Douglas Schosser: Thank you, Lou, and good morning, everyone. As Lou indicated, we are pleased with our financial performance. This is the product of the efforts of our entire team working tirelessly to deliver these results while also ensuring that our merger and conversion activities went smoothly for our new customers and associates. Now let's continue on Page 5 of the earnings presentation, where I'll walk you through the highlights of Northwest's financial results for the third quarter of 2025. As a reminder, we closed our merger on July 25. So this quarter includes approximately 2 months benefit from the merger. The fourth quarter will be our first full quarter of reporting as a combined entity. Given the overall size of this transaction, our fully completed conversion and opportunities as a combined organization, we don't intend to disaggregate results unless doing so would aid in the explanation in this first combined quarter of reporting. Our GAAP EPS for the quarter was $0.02 per share, which reflects the merger and restructuring charges related to the merger. On an adjusted basis, our EPS was $0.29 per share for the third quarter. Net interest income grew $16.5 million or 14% quarter-over-quarter with the net interest margin improving to 3.65%, benefiting from higher average loan yields, increased average earning assets and the benefit from purchase accounting accretion. Noninterest income increased by $1.3 million or 4% quarter-over-quarter, driven primarily from an increase in service charges. These items combined drove total revenue to a record of $168.1 million in the quarter, a $17.7 million increase quarter-over-quarter. Additionally, we saw an increase in our adjusted pretax pre-provision net revenue, which came in at almost $66 million, an 11.5% increase quarter-over-quarter and a 36% improvement from third quarter 2024. And finally, our adjusted efficiency ratio of 59.6% in third quarter '25 improved by 80 basis points quarter-over-quarter and 520 basis points year-over-year. Turning to Page 6, I'll spend a moment covering the highlights of our Merger. We successfully completed all remaining merger conversion activities in third quarter 2025. All acquired branches are operating under the Northwest Bank name. All associates have been onboarded and the strong cultural fit is as we anticipated. All customers are converted and are being served under the Northwest brand. Deal synergies are on target and our capital position remains strong. Tangible common equity to tangible assets of 8.6% at quarter end is better than originally projected. This is a good time to cover a few other points that are important. First, I'd like to cover our liquidity position that is very strong. We have readily available incremental sources of liquidity that would cover approximately 250% of the company's uninsured deposits, net of collateralized and intercompany deposits at quarter end. As for capital, we have disclosed our current preliminary CET1 ratio at 12.3%, which is only about 60 basis points lower than the level recorded in second quarter 2025 and significantly in excess of the levels required to be considered well capitalized for regulatory purposes. Turning to Page 7 and the Purchase Accounting Impacts. Loan mark accretion was $2.7 million in the third quarter of 2025 and based on projected contractual cash flows is expected to be $1.9 million in the fourth quarter of 2025. We provided some additional information covering contractual accretion for 2026 and 2027. Actual results will vary with customer activity. Day 1 non-PCD and unfunded provision expense was $20.7 million, and our core deposit intangibles or CDI, were $48 million with $1.6 million of CDI amortization in the third quarter of 2025. The preliminary goodwill created was $61.2 million. On Page 8, we cover Loan Balances. Average loan balances grew $1.32 billion quarter-over-quarter, benefited from the acquired loan balances. Loan yields increased to 5.63% in third quarter 2025, growing by 8 basis points quarter-over-quarter. We have provided information by loan category throughout our investor presentation. I will also note that the increase in CRE balances did not meaningfully change our overall regulatory CRE concentration. On Page 9, we cover Deposit Balances. Deposit balances similarly benefited from the acquired balance sheet as average total deposits grew by $1.14 billion quarter-over-quarter, while broker deposits decreased $2.2 million quarter-over-quarter. Cost of deposits remained flat at 1.55%, benefiting from proactive management of the overall portfolio and still near best-in-class relative to our peers. We saw growth of deposit balances in most categories while maintaining reasonable deposit costs, and we are pleased with our progress here. We also saw no appreciable change in our deposit mix other than small increases in demand deposits, offset by minor reductions in borrowings. Moving to Slide 10 and our Net Interest Margin. Net interest income increased 13.8% quarter-over-quarter or $17 million, inclusive of the benefit from purchase accounting accretion, with NIM expanding 9 basis points to 3.65% in third quarter 2025. Purchase accounting accretion net impact equated to 6 basis points of our margin expansion. This continues our track record of growing both net interest income and improving our net interest margin by focusing on our loan pricing and our funding cost as the rate environment has been more favorable in 2025. Securities portfolio yields continue to increase as we reinvest cash flows at higher yields than the current portfolio. This is clearly a bright spot for our bank and will further improve many of our key profitability and return metrics. Slide 11 provides some details on our Earning Asset & Funding Mix. You will notice a few changes from last quarter. We've seen a modest shift in our earning asset mix as the acquired loans drove changes in our fixed and periodic repricing categories, while our funding mix was largely unchanged. You'll also note our time deposits have a very short duration, allowing us to continue to benefit from future repricing opportunities in a falling rate environment and lower interest expense. We hold a granular diversified deposit book with an average balance of over $18,000. Customer deposits consist of over 728,000 accounts with an average tenure of 12 years. The similar average customer balance and tenure pre and post-merger illustrates the similar high quality and granularity of the acquired deposit book. On Slide 12, our securities portfolio continues to be a strong source of liquidity for us. The yield on our securities portfolio continues to increase as we continue to reinvest cash flows at higher yields in the runoff portfolio, yields increased 10 basis points to 2.82% in the quarter. Slide 13 contains details on our noninterest income, which increased $1.3 million from last quarter, driven by an increase in service charges and fees benefiting from a larger customer base resulting from our acquisition and other operating income, primarily from a gain on equity method investments. Noninterest income increased 15.7% or $4.4 million year-over-year, driven by a $3 million increase in other operating income and continued growth across other fee income categories. Slide 14 details our noninterest expense. We incurred approximately $133 million of expenses on a GAAP basis, which included about $31 million of merger-related costs this quarter. Core expenses of $102 million are up $11 million from quarter 2 levels, resulting from higher levels of compensation and other expenses from the newly acquired employees and facilities. Additionally, core expenses also increased in the third quarter as we incurred additional expenses related to accruals for performance-based compensation. Our adjusted efficiency ratio of 59.6% after excluding those merger and restructuring expenses is an improvement from the 64.8% in the prior year period. This reflects our continued focus on managing expenses without an impact on our core operations or sacrificing customer service while still investing in talent to support future growth. On the next few slides, we'll cover credit quality. On Slide 15, you can see our overall allowance coverage ratio has increased to 1.22%, up slightly from second quarter of 2025 with provision expense of $11.2 million, net of day 1 non-PCD impacts versus $11.5 million in the second quarter of 2025 due to individual assessments within the commercial portfolio. Our annualized net charge-offs of 29 basis points for the quarter are in line with expectations and guidance. We believe our coverage is appropriate, prudent and in keeping with our rigorous credit risk management approach. On Slide 16, you will note that our 30-day plus loan delinquencies increased slightly from 1% to 1.10%, mostly from acquired loans within the consumer book. This increase does contain some more administrative consumer delinquencies as customers need to manage certain changes in online bill pay and other electronic payment methods resulting from impacts from the conversion. We expect this trend to decline over time. NPAs increased by $26.3 million, approximately $17 million of which is attributed to the acquired loans. Our NPAs as a percentage of loans outstanding plus OREO has increased to 100 basis points. We provide some additional details on the drivers of this change on that slide. Turning to Page 17. We've included some additional information on changes within the classified loans reported this quarter. The third quarter 2025 increase in our classified loans is a result of the acquired loan book, but overall classified loans declined as a percentage of total loans. Northwest legacy classified loan book decreased $74 million quarter-over-quarter, resulting primarily from payoffs. Net charge-offs remained within guidance at 7 basis points or $9.2 million for the quarter or 29 basis points annualized. We included our commercial loan distribution and CRE concentration information on a slide in the appendix. As Lou alluded to earlier, we have no direct exposure or known indirect exposure to Tricolor, First Brands or Cantor Group. Regulatory CRE concentration is approximately 156% of target Tier 1 plus ACL, up slightly from the prior quarter at 152%. On Slide 18, we have provided an updated perspective on our outlook. We continue to be confident about Northwest business and would expect to maintain our net interest margin at the third quarter 2025 levels of the mid-360s. Future NIM will be a bit more volatile as prepayments of the acquired loans will accelerate purchase accounting accretion, making it difficult to forecast. We are effectively reaffirming the rest of our previous fourth quarter 2025 guidance, including noninterest income expected to be $32 million to $33 million, noninterest expense expected to be in the range of $102 million to $104 million, tax rate expected to remain flat at the 2024 tax rate. And finally, net charge-offs to average loans expected to end the year at the low end of the 25 to 35 basis point range, which could mean net charge-offs up to $13 million in the fourth quarter of 2025. As a reminder, we said last quarter, we will not have fully realized all the cost savings from the merger in the fourth quarter of 2025, but expect to achieve 100% of the savings by second quarter 2026. We will provide full year 2026 guidance during our fourth quarter 2025 earnings release call in January 2026. Now I'll turn the call over to the operator, who will open the lines for a live Q&A session. Operator: [Operator Instructions] Your first question comes from the line of Daniel Tamayo with Raymond James. Daniel Tamayo: Maybe we start on the loan growth side. I don't know if I heard any commentary on loan growth expectations. But as you address that, just curious if you could talk about the new de novo branches that you're adding in Indianapolis and Columbus and how that kind of fits into the loan growth guidance? Douglas Schosser: Okay. I'll start, and then I'll let Lou comment on the new branches and expansion. So this quarter, we would have had a big impact from the acquisition, and we didn't disaggregate all of that movement. But I would say for next quarter, we are looking, again, to hold the balance sheet stable. To the extent there's opportunities to create some balance sheet growth on the loan side, of course, we'll take advantage of that, but the overall environment has been pretty good, our pipelines look pretty good. But again, closings in any given quarter are a little bit hard to predict. So certainly looking to continue to grow the franchise, and we'll look to that in the fourth quarter as well. Louis Torchio: Daniel, it's Lou. Thanks for calling in. On the de novo strategy, we're already out in the market. We've hired commercial real estate business bankers. We're recruiting for the wealth team, and we'll start the deposit gathering sometime in '26 in anticipation of the new launches. We did break ground yesterday at the -- in the high-growth suburb of New Albany, Ohio. As you know, we opened suburban Indianapolis last quarter and so yes, we would -- we look to plan to grow in-market that it will be -- and use our national verticals that we created to be complementary. And again, in January, we'll give '26 guidance on loan growth, but we feel really comfortable with all the different levers that we have and where our pipelines currently are, including our commercial pipeline. Daniel Tamayo: That's helpful. I guess just to dig in a little bit more. I know you're not giving guidance in '26 yet, but you're thinking it was -- legacy growth was pretty flat in the third quarter, and you're saying flat again in the fourth quarter. I'm assuming you're hoping to grow in '26. I mean, is that a fair statement? Is it -- should we be looking for something in the low to mid-single-digit range? Or do you think you can do a little bit better than that? Douglas Schosser: Yes. I mean I definitely think we're going to -- when we provide that guidance, you would expect to see a loan growth number that would look pretty comparable to GDP growth. So I think that's fair kind of thinking right now. I think the other thing to keep in mind is we are working through the criticized classified assets that's obviously going to have an impact on our ability to show growth as well. So as those refinance off the book, of course, that creates a little bit of a tailwind to actually showing growth in the portfolio. So I would just mention that as well. Again, as we talked about last quarter and we kind of continue the conversation this quarter, we're hoping to see a good amount of movement on that portfolio. In our opening comments, we talked about, that was $75 million of change this quarter alone. Daniel Tamayo: And then maybe just touching on the expenses here, the number was better than I was looking for in the third quarter and guidance looks pretty good for the fourth quarter. Again, you talked about continued cost savings coming through the beginning of next year. How should we think about expense numbers going forward? If that run rate is still -- what is it -- is it stabilis, you think, off of the fourth quarter number into 2026? Or because you've got the hirings or the de novo branches opening that you'll be growing expenses at a decent clip next year? Douglas Schosser: So I think that's a good way to think about it. Again, we'll get into more details when we do guidance for '26. But I think the way Lou and I think about it right now is we really want to focus on continuing to manage positive operating leverage. So -- and we want to continue to invest for growth. So the de novos being a good example of that. So I think next year, we need to take a look at where our revenue growth is going to be, and then we want to continue to invest to grow. So we would definitely hold some level of ability to think about our expenses in that way, but we're certainly not talking about a significant increase from here. And then we will have the benefit of those costs on the Penns Woods side starting to become a little bit more rationalized as we get into the third quarter, again, so we've got some opportunities there as well. But I think the way you're thinking about it around does it make sense to kind of hold them at these levels? Yes, but we'll obviously try to do better than that. Operator: Your next question comes from the line of Brian Foran with Truist Securities. Brian Foran: Just on the tangible common equity ratio and CET1 coming in better than expected post the acquisition, could you just give us your updated thoughts on kind of the levels you think you would target over time? And as you look to next year, how you're thinking about trade-offs between buybacks, potential acquisitions, maybe just running with a little bit of excess, just how we should think about managing that capital position in the next 12 to 18 months? Douglas Schosser: Yes, sure. I mean, clearly, we're at -- we're well in excess of regulatory minimums for capital, and we like that position. I think that just helps support safe and sound banking franchise. The other thing I would say is it also -- as we want to be able to take advantage of any opportunities in the market, we would hold that capital level there. We've never gotten into capital level targets per se, but I think we're significantly comfortable with the capital levels that we carry now. And as we find opportunities to deploy that capital because obviously, that would -- your returns on tangible common equity would be benefited if you had a little bit less capital, similar returns, we obviously think about that. But I wouldn't say that you're looking at a massive change in the capital position for the company, just kind of normal operating. But we like having a strong capital base certainly to operate from. Brian Foran: And then on the margin commentary, I definitely heard you on the -- I think the word used was volatile, but the difficulty managing or forecasting purchase accounting accretion, outside of the quarter-to-quarter moves and paydowns in the PAA book, does it feel like the second half of this year is kind of a good run rate? Or should we build in a little bit of haircut as PAA and rate cuts and all that factors through? Douglas Schosser: Yes. No, I think we said that there was about 6 basis points impact from the purchase accounting side, so that would take our core margin, if you will, to like a 359 bps level. So when I sort of guided to that mid-360s bps, that was conceptually thinking about that 359 bps. We feel pretty good about that and being able to maintain that. You'll get a couple of basis points here or there depending on a quarter-over-quarter, if you had more paydowns and purchase accounting acceleration in one quarter versus another, that was the fees of the volatility I was thinking about. But I think we're pretty well positioned as it relates to kind of rates and are comfortable that we can keep that 360 bps core, like right around 360 bps and then we have some -- a little bit of movement from purchase accounting here or there. Does that help? Brian Foran: That's great. Maybe one last one just on the credit slide. Just kind of comparing to last quarter, it seems like the nursing home book had some nice payoffs as you alluded to the fourth quarter, potentially seeing additional payoffs of classified loans. Is it still concentrated there? Is it spreading a little bit? And related to that, when you talk about up to $13 million of charge-offs, is that just a mathematical statement? Or are you kind of saying, look, we've got maybe a couple of larger resolutions we're working through and fourth quarter might be a little higher than 3Q? Douglas Schosser: It was a bit of both, right? I think what we wanted to clarify is when we came out in the second quarter, we said expect a couple of quarters in the $11 million to $13 million range and that we were expecting to have total charge-offs at around that low end of our guidance or 25 basis points of loans. In order to kind of be clear about what that could mean in the fourth quarter is that could mean $13 million, and we'd still hit all of that guidance. So we just didn't want anybody to sort of say, "Oh, $9 million and then $9 million." We wanted to say, "Yes, well, as we work through this book, we may have some elevated charge-offs for a period of time, but not elevated to the extent that we felt like we were going to be above or even within that sort of 25 bps to 35 bps range that we said." We said we'd be at the lower end of that range for around 25 bps. So it's more doing the math. I think there is a little bit of work to do on credit classified loans as we work some of them out. So we would expect that there'll be some impact there, but we feel pretty good that we're reserved for all of that. But again, when you hit a charge-off versus reserves, we just wanted to be clear. Operator: Your next question comes from the line of Tim Switzer with KBW. Timothy Switzer: First question I have is a follow-up on the credit in terms of the consumer portfolio. I'd love to get an idea of like what trends you guys are seeing there? And then maybe even outside of the loan book, what you're seeing across your deposit accounts in terms of like activity and behavior just because there's been some noise around the health of the consumer, particularly at like the lower end of the credit spectrum, which I don't think you get that much exposure to, but if you could update us on that, too, please? Douglas Schosser: Sure. So first of all, on the consumer side, I think we referenced it in our comments that we have a little bit of elevated delinquencies as we brought on the Penns Woods customers and the acquired loans. However, some of that is definitely administrative in nature. So if you think about going through a conversion, be able to reestablish their payment channels through new online portals and other things. So you do tend to see a little bit of incremental activity there. We continue to see that sort of work its way through the system. So we don't see that as being a negative trend on the overall consumer book, just more a process of some administrative things that are going on with the customer base. So that would be one thing. I'd also say that we continue to be very comfortable with our consumer exposure beyond that. Our auto loan book is very high credit quality; super prime book, very low delinquencies on that book, and we have not seen a meaningful change in those delinquency rates between the second and third quarter. And then the only other thing I might comment on is I don't think we're seeing any significant impact from any of the government showdown -- slowdown activities, and we wouldn't have expected to see it this early either but generally speaking, I think we're seeing the consumers be very similar in the third quarter as they were in the second quarter sort of across the book. Timothy Switzer: And the other question I have is, I know you guys just closed Penns Woods, but how do you think about scaling up the bank from here? Is there a target size for the bank where you hit optimal efficiency or returns over the next 5 years or so? And you have a management team with a lot of experience at larger banks. So how would you like to get there through organic growth, de novo or M&A? Louis Torchio: Yes. Tim, this is Lou. I'll take that. So as you know, at this point, we're looking at really maximizing the integration and the efficiency and then the accretion of the Penns Woods merger, which being the largest in franchise history is really important on the execution side. It's going extremely well. As you noted, we have -- we now have an executive management team that we're really comfortable with being able to go out to the market and do M&A. Notwithstanding an M&A strategy, I would say that's just -- it's complementary. We are focused on improving our financial returns, our metrics at the core organic bank. And I think that the de novo branching opportunity, while meaningful for us in higher-growth markets that we currently don't have a large presence in, i.e., Columbus, Ohio and Indianapolis, Indiana, will continue to be a focus of ours, but we will have to do complementary, whether it be look at acquiring a branch deal, opportunistically M&A in order to scale that. So I think that we're focused on, as we've stated in the past, a dual strategy, run the bank organically, continue to create efficiencies. We think there's some upside there and then look for M&A that's in and around our market that either fits us strategically, geographically that can add value to the franchise and then to the shareholder. Operator: Our next question comes from the line of David Bishop with Hovde Group. David Bishop: I appreciate the details on Slide 11 regarding the funding mix. Just curious in terms of the short duration nature of the CD, maybe what you're seeing in terms of weighted average cost rolling off over the next year and what you sort of put on rate these days? Douglas Schosser: Yes. I don't know that I have that number right at my fingertips. So what I would say, though, over 90% of that CD portfolio will mature before the middle of next year. So that does give us quite a bit of flexibility around what the new rates would go on as the overall interest rate environment sort of goes down theoretically with these rate cuts. So we like the way that book is positioned right now. We don't have a ton of really long exposures there. So we should be able to take advantage of sort of the rate curve wherever it is and still be fairly priced for our customers. David Bishop: And then in terms of the funding of expected loan growth, securities runoff expectations here in cash flows. Is that going to be securities funding that? Do you think deposit funding could cover the funding? Just curious how you're thinking about sort of the balance sheet ebbs and flows on sort of cash and securities. Douglas Schosser: Yes. I mean I think we would -- we have the ability to fund as much loan growth as we want. We have pretty low positions overall in brokered CDs. And in fact, we've been able to pay down a lot of that. So we've got plenty of funding capacity. Certainly, opening up some of these branches, we have to have that result in deposit growth. And we continue to focus on our ability to continue to help our customers on the commercial side with deposits. So we feel good about the opportunity to grow deposits organically. It's always super competitive, though, but we have other sources of funding, including the securities portfolio if we would need it. So I don't -- we don't have any real concerns or constraints in that place that we see right now. David Bishop: Looks like the security is about 13% of assets. Do you think it holds around this level or maybe builds or fall slightly. Just curious how you see that trending over time? Douglas Schosser: Yes. We can provide a little bit more color on that. We don't really have a target that we've ever talked about publicly. But depending on what opportunities exist and how we want to manage our interest rate position and liquidity position, we'll make those determinations. Operator: Your next question comes from the line of Matthew Breese with Stephens Inc. Matthew Breese: Doug, do you happen to have the most recent kind of spot rate of deposits either at quarter end or more recently? And then maybe I was hoping for some color or expectations for deposit betas over the next, call it, 12 to 18 months. Douglas Schosser: Yes. So we gave total cost of deposits at that 1.55% level, and they've been very stable. We actually were able to bring on some -- a good set of deposit mix from the acquisition, which helped. So again, I don't think we're seeing any upward pressure there. I think you're seeing -- money market promotional rates would be obviously higher than that, they might be in the 4s. But again, we're able to sort of manage that mix. And again, we operate in some really good markets that have a bit less competitive intensity than a lot of other markets. But again, we have to respond to market rates just like everybody else does. What was the second part of your question? Matthew Breese: Just expectations for deposit betas, particularly given the low overall cost of deposits here? Douglas Schosser: Yes. We feel -- I think our overall deposit beta has been in the mid-20s through this rate cycle, and we don't see it. We still have room when we kind of think about our opportunities as -- because we have a generally fixed or periodic repricing on the asset side, we are able to benefit as rates go down and sort of hold those margins pretty comparable with the amount of funding that we have available on the deposit side that does pay rate like CDs, money market rates, et cetera. So we feel pretty neutral position right now for the next series of rate cuts. Matthew Breese: And then you had also mentioned that pipelines were good or pretty good -- could you just better quantify for us what that looks like? And maybe within the pipeline, what are you seeing in terms of pockets of strength or areas that might grow a little bit more than other? Douglas Schosser: Yes. I mean I would say our pipeline commentary, we have nice developed pipelines in all of the national verticals that we support, and those continue to be strong. And again, that is an ability to pull from businesses sort of all around the country in those specialty areas that we have. Those would be sports finance, franchise finance, our equipment financing business, and a couple of others. We also feel pretty good about where our commercial real estate exposure is. There's obviously room there. So we would look to all of those businesses to drive some decent support. I think if you looked at our pipelines, you'll probably see a little bit more pipeline growth or support in the national verticals versus the end market, but that ebbs and flows over time. But I think that pipeline has been pretty consistent for the last couple of quarters. Matthew Breese: And then just on that last point, the specialized verticals, particularly the national one sports equipment finance. What is the total within C&I that you kind of consider in the national or specialty verticals? And how much of that or how much of those are participations versus kind of stand-alone relationships? Douglas Schosser: Yes. So those would be in the 20% range of the C&I book. And I would say generally not significant amounts of participations within that side. That would be more in our corporate finance book where we would have those, which is not one of the newer verticals that we built. Louis Torchio: And I would just add that we're very prescriptive and very measured in how we're growing those businesses. I would, in general terms, describe them as complementary. We're scaling them. They're scaling nicely. The performance -- the credit performance is very good. As Doug mentioned, limited participation activity. What we're looking to do is notwithstanding the equipment finance group, we're looking to also gather deposits and fees in those businesses. We have hired experts that have long-standing reputations in those industries, and they include sponsor, restaurant, finance, SBA lending group, equipment and sports. So we're watching those closely. We're scaling them appropriately within our credit risk tolerances, and they're performing wonderfully to date. Matthew Breese: Just last one, if I could sneak it in. On the pipeline, what are you seeing for overall blended loan yields? There have been others, perhaps your peers that are discussing a little bit of spread compression and I'm curious if you're seeing that as well. Douglas Schosser: Yes. I mean I would say overall rates coming on the book are in the 7s, low 7s. Certainly, it's competitive out there. As everyone is expecting rate reductions, obviously, we're pricing a lot of that on forward curve, so you would expect to see those yields get -- come under a little bit of pressure as well as you get into future environments that would have lower rates, but they're certainly not bad. Operator: Your last question comes from the line of Daniel Cardenas, Janney Montgomery Scott. Daniel Cardenas: So just a couple of quick questions here. On the expansion efforts, the de novo expansion efforts, do you have the talent already identified to run those new offices? Or is that kind of a search in progress right now? Louis Torchio: Yes, Daniel, I would say that it is a search in progress. It's a little early. We have gone out to the market here in Columbus with tangent business partners. We're currently evaluating wealth talent, small business talent. We've hired in the commercial space, middle market, CRE. And then as I stated, in '26, when the calendar turns, we'll be out with some deposit gathering campaigns so that we can fully load the branches and when we open the doors hit the ground running. But as far as we have a few people internally identified that will lead the early retail efforts. And then, of course, it's a little early to go to the marketplace and hire the other staff that are needed for the branch development. Daniel Cardenas: And then last question for me is just in terms of the Penns Woods transaction, can you provide any color as to, what the runoff on the loan and deposit portfolios is looking like? Is it in line with expectations, not as great as you thought? Or any color would be helpful. Douglas Schosser: Yes. No, it's definitely in line with our expectations. I would say maybe it's slightly better, but certainly not materially different from where we thought it would be. Again, I think new market, we have different credit standards than where the original franchise would have been. So that's going to take a little bit of time to work its way through the market, but we have not seen significant spikes that have concerned us at all. So I would say it's sort of steady as she goes, and we're comfortable with what we've seen come through thus far. Louis Torchio: Yes. In addition to Doug's comments, we have been very focused on integration and execution. We spent a lot of time in the marketplace, our senior leadership. Culturally, it has developed exactly like we thought. We are -- as I think we pointed out both in the release and verbally, achieving the cost saves that we expect. We expect also to get to the marketplace with an improved product set, SBA lending, Penns Woods didn't have some other products and services, trust and wealth. So we're pleased with the upside that the future we think from the Penns Woods acquisition will bring from a value standpoint. Operator: That concludes our Q&A session. I will now turn the call back over to Lou Torchio for closing remarks. Louis Torchio: Thank you. On behalf of the entire leadership team and the Board of Directors, thank you for joining our call this morning. With strong and stable financial foundations, tight cost controls and risk management discipline that we've described, additional scale from a larger balance sheet, we are well prepared to capitalize on the opportunities for driving sustainable, responsible and profitable growth. I look forward to updating you on the progress on our fourth quarter earnings call early next year. Have a good day. Operator: Ladies and gentlemen, thank you all for joining, and you may now disconnect. Everyone, have a great day.
Operator: Good morning, and welcome to the Travelzoo Third Quarter 2025 Earnings Call. Today's conference is being recorded. [Operator Instructions] The company would like to remind you that all statements made during this conference call and presented in the slides are not statements of historical facts constitute forward-looking statements and are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary materially from those contained in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in the company's Forms 10-K and 10-Q and other SEC filings. Unless required by law, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's website for important information, including the company's earnings press release issued earlier today. An archived recording of this conference call will be made available on the company's Investor Relations website at travelzoo.com/ir. Now it is my pleasure to turn the floor over to Travelzoo's Global CEO, Holger Bartel; its Chair, General Counsel and CEO of Jack's Flight Club, Christina Ciocca; and its Financial Controller, North America, Jeff Hoffman. Jeff will start now with an overview. Jeff Hoffman: Thank you, operator, and welcome to those of you joining us. Today, I'm stepping in for Lijun, our Chief Accounting Officer. Please refer to the management presentation to follow along with our prepared remarks. The presentation in PDF format is available on our Investor Relations site at travelzoo.com/ir. Let's begin with Slide 4. Travelzoo's consolidated Q3 revenue was $22.2 million, up 10% from the prior year. In constant currencies, revenue was $21.9 million, up 9% from the prior year. Operating income, which we as management call operating profit, decreased as we invested more in growth of Club Members. Q3 operating profit was $0.5 million or 2% of revenue, down from $4 million in the prior year. Let me explain the rationale for our significant increase in marketing expense, which lowered EPS. Slide 5 shows that investments in the acquisition of Club Members are attractive as they have a quick payback. On the left side, you see that the average acquisition cost for full paying Club Member was $28 in Q1, $38 in Q2 and $40 in Q3. On the right side, you see that we get this money back fast. The member pays in the U.S. case here, their $40 annual membership fee right at the beginning of the membership period. Additionally, we generated $15 in revenue from transactions in the same quarter. This full payback doesn't even consider an increase in advertising revenue and future membership fees and other revenues. Now Slide 6 shows as a reminder, that with subscription businesses, membership fee is recognized ratably over the subscription period, whereas acquisition costs are expensed immediately when incurred. Slide 7 shows the effect. While we have a quick payback, reporting -- the reported EPS is different. Higher member acquisition expenses, coupled with only a portion of revenue recognized in the quarter reduced EPS this quarter. In the case of Q3, that effect was a reduction of $0.15. As shown on Slide 8, our strategy is fueling member growth at a rate of 135% year-to-date. New Club Members come roughly half from Legacy Members and half from those new to Travelzoo. On Slide 9, we break down our main categories of revenues, advertising and commerce and membership fees. Advertising and commerce revenue was $18.6 million for Q3 2025. Revenue from membership fees increased to $3.6 million. Membership fees, which are more stable and predictable, are adding revenue and are becoming a larger share. Next year, we expect them to account for about 25% of revenue. On Slide 10, you can see that revenue growth came from all reporting segments. With favorable ROI on member acquisition in the U.K., we invested heavily there. Jack's Flight Club revenue increased 12%. Operating profit was lower in both our North America and Europe segments and was slightly less in our Jack's Flight Club segment. On Slide 11, you can see that GAAP operating margin was 2% in Q3 2025. Acquiring more club members has the effect of lowering GAAP operating margin. Still, given the favorable ROI, our goal is to further grow the number of Club Members to accelerate Travelzoo's growth. Slide 12 shows the investment in Club Members occur in all key markets. Over time, we expect margins to return to previous levels or even exceed them. On Slide 13, we provide information on non-GAAP operating profit as we believe it better explains how we evaluate financial performance. Q3 2025 non-GAAP operating profit was $1.1 million. That's approximately 5% of revenue compared to non-GAAP operating profit of $4.9 million in the prior year period. Slide 14 provides information about the items that are excluded in the calculation of non-GAAP operating profit. Please turn to Slide 15. As of September 30, 2025, consolidated cash, cash equivalents and restricted cash was $9.2 million. Cash flow from operations was negative $0.4 million. We reduced merchant payables by $0.7 million and repurchased 148,602 shares. Now looking ahead, for Q4 2025, we expect year-over-year revenue growth to continue. We expect revenue growth to accelerate as a trend in subsequent quarters as membership fees revenue is recognized ratably over the subscription period of 12 months, as we acquire new members and as more Legacy Members become Club Members. Over time, we expect profitability to substantially increase as recurring membership fees revenue will be recognized. In the short term, fluctuations in reported net income are possible. We might see attractive opportunities to increase marketing. We expense marketing costs immediately. Now I'm going to turn the discussion over to Holger. Holger Bartel: Thank you, Jeff. We will continue to leverage Travelzoo's global reach, trusted brand and our strong relationships with top travel suppliers to negotiate more club offers for Club Members. Travelzoo members are affluent, active and open to new experiences. We inspire travel enthusiast to travel to places they never imagined they could. Travelzoo is the must-have membership for those who love to travel as much as we do. Today, I would like to share a bit more information about the Travelzoo Club membership. Please turn to Slide 17. The Travelzoo is becoming the must-have membership for travel enthusiasts. Membership empowers you to live your life as a travel enthusiast to the fullest while respecting different cultures. Membership provides access to high-quality and highly valuable club offers. Our global team negotiates and vets them rigorously. These offers cannot be found anywhere else. Membership also provides complementary access to airport lounges worldwide in case your flight is delayed. Culinary travel deals curated for the travel enthusiast coming soon. Slide 18 shows a few of the many exclusive club offers that we created for Club Members during Q3. For example, Travelzoo members could head to an all-inclusive vacation in the Caribbean for $499 (sic) [ $399 ], which even includes round-trip flights or attend the Futuristic ABBA Voyage show in London at a special member price. In Rome, Travelzoo members would pay EUR 99 for 2 nights at the 4-star hotel while the general public would pay 3x as much. Trips to high-end luxury resorts like the Fairmont Mayakoba here are particularly popular with members. These are all offers that you can only get as a Travelzoo member. You will not find them anywhere else. Slide 19 shows the worldwide complementary lounge access in case of flight delays. It's perfect for the travel enthusiasts. Slide 20 provides information about Travelzoo members. Travelzoo is loved by travel enthusiasts who are affluent, active and open to new experiences. Slide 22 provides an overview of our management focus. We are working to grow the number of paying members and accelerate revenue growth by converting Legacy Members and adding new Club Members. Retain and grow our profitable advertising business from the popular Top 20 product. Accelerate revenue growth, which drives future profits in spite of temporarily lower EPS. Grow Jack's Flight Club's profitable subscription revenue, and develop Travelzoo META with discipline. Now Christina, will provide an update on Travelzoo META and Jack's Flight Club. Christina Ciocca: Thank you, Holger. We continue to work on the production of the first Metaverse travel experiences. They will be browser enabled. As stated in previous earnings calls, we are conscious of developing Travelzoo META in a financially disciplined way. We will provide additional updates in due time. For Jack's Flight Club revenue increased 12% year-over-year, and the number of premium subscribers increased 8%. We continue to invest in the growth of premium subscribers. We expect to see a greater increase in premium subscribers year-over-year in Q4 due to promotional activities that took place in Q3. I'm now handing over to the operator for questions for Jeff, Holger and me. Operator: [Operator Instructions] We'll take our first question from Theodore O'Neill from Litchfield Hills Research. Theodore O'Neill: I'm looking at Slide 9. And it's clear here that if I look at the advertising and commerce revenue on a rolling 4-quarter basis, the numbers are rising. And obviously, the fees are rising on the same basis. So clearly, this is all working in your favor, and I was wondering what do you think is driving the popularity of these the options that you're providing out there for travel and experiences? Because in light of economic uncertainty, I think a number of us would have thought these numbers would be going in the other direction. Holger Bartel: I think the slide that shows the offers that we are negotiating for our members shows that very well. The travel opportunities you receive from Travelzoo, and they are exclusive to our members are so much better than what the regular person can get that they motivate people to travel. They motivate people to travel even more. They make it also more affordable. And even they allow our members to go, as you saw with this example from Fairmont Mayakoba to go on luxury vacations, when they normally could only afford a relatively inexpensive trip. So travel enthusiast are people who love to travel. They can't get enough of it. And I think the Travelzoo membership is what enables them to live that to the fullest. And I think that's why we are seeing the popularity of the membership continuing to increase. Theodore O'Neill: And looking at the membership numbers, which are clearly increasing here, is that -- how does that reconcile with your expectations for that growth? Holger Bartel: It's in line with expectations. And please remember that the number that's shown on this slide includes also Jack's Flight Club. Jack's Flight Club is not growing quite as fast as Travelzoo membership. Travelzoo membership is even growing much faster than what you might think when you look at this data on the right. But in general, we're in line with what we are expecting. We obviously always want to grow faster, and we are very optimistic with the return that we are receiving on our marketing investments that we can even accelerate the growth more because as we say here, we expect next year membership revenue to account for at least 25%. Membership revenue is recurring, it's attractive and the combination of membership revenue and a continued strong advertising business will ultimately create a Travelzoo business that is more profitable than in the past. Operator: Our next question comes from Michael Kupinski from NOBLE Capital Markets. Michael Kupinski: I see that the cost of customer acquisition has gone up a little bit. And I was just wondering if you could just talk a little bit about what's driving that? And at what price would you say that you're not getting the benefit? I know $40, you're still getting a benefit from the membership. But at what price do you think that you're not -- would not see an attractive return from that? Holger Bartel: Sure. It didn't change that much from $38 to $40. I think it's just minor fluctuation, but I'll let Christina comment a bit more on what's driving the success in member acquisition. Christina Ciocca: Sure. So I agree with what Holger said. It hasn't gone up too much. The only reason that I believe it would have gone up even the $2 is just we're scaling and spending more and that's kind of just what naturally happens as you start to scale up and spend more on member acquisition on certain channels. But we are doing everything we can to counteract that by finding optimizations that will enable us to not have that kind of cost per acquisition go up to much more. And yes, I think in general, we have been finding ways to optimize the channels that work for us. And it also helps that we have such strong club offers, to what Holger said previously, that's really what's working for us as people see these amazing club offers and they want to join, and that helps us to get to our efficiencies. Holger Bartel: Also also, Michael, 4 times a year, we have Member Days. Member Days, what special about the offers on Member Days are these are offers that only Club Members can see. You could see other offers if you just get a preview of the offer, but these offers on Member Days are offers that you can only see once you are a paying Club Member. They drive member acquisition. But on the other hand, what's important here is these are offers that some of our travel partners like to create and make even more aggressive because they know these can only be seen by a very, very small select and very close group of members. So put yourself into the shoes of this luxury hotel. And do you want to name out to millions of people on Expedia that you're offering a discount? No, you don't want to. Travelzoo provides the opportunity here for these luxury hotels and similar travel partners to create offers that are hidden away from the public but that can be enjoyed by people who love them. So that's why, for example, these Member Days have been quite critical in driving member acquisition and what we are seeing is that during those periods, and we are looking to boost these even more during those periods, CPA is even substantially lower than the $40 we see here. So in short, it's really the strength of offers and the better the offers are, that's what's impacting the CPA. And of course, over time, our marketing efforts will also become more efficient. So we also think there's a good chance that we can drive CPA in certain quarters, even lower than the $40. But as long as we see this attractive payback, which we illustrated a couple of times before, we will continue to invest because if we get the money back within a quarter, if the profitability is there long term, even if it's in the short term -- even in the short term, we see a hit on profitability, it's the right thing to do, and we're actually quite happy that we are in this situation. Michael Kupinski: Thanks for the color there, Holger. Can you talk a little bit about the current advertising environment? I would have thought that it would have been a little bit stronger in the quarter. But can you just talk a little bit about how you see that and whether or not it might be improving, especially now in the North America given that we're seeing the Fed rate cuts and so forth. Do you anticipate that it will improve? Or do you think that -- just kind of give us your general thoughts about the advertising environment? Holger Bartel: Look, we have a good eye, Michael. Yes, this quarter was a bit slower on the advertising revenue side as it normally be. Q3 is generally our slowest quarter, but yes, there were a couple of advertisers who pulled back. But we have these fluctuations from one quarter to the next all the time. Sometimes it's more, sometimes it's less. In general, the feeling in the U.S. is quite good, where we really see hesitance is in the U.K. and not just us, and I'm hearing this from other companies as well, travel companies and any kind of consumer company in the U.K., there is probably an announcement about quite aggressive tax hikes at the end of November. But until people hear what exactly is going on, they are hesitant. The businesses are hesitant to spend. Consumers are hesitant to buy. So yes, there, I would say we are seeing a relatively soft advertising business in general. In all the other markets, what we are seeing, I would not overinterpret that, it's just a natural fluctuation from one quarter to the next. Operator: Our next question comes from Patrick Sholl from Barrington Research. Patrick Sholl: Could you maybe talk a little bit on some of the retention efforts around subscribers that became paying members in either Q4 of last year? I realize that's a really small cohort or the legacy members that became paying members at the start of this year. Just any sort of like commentary around like retention metrics or how you would expect like the retention costs relative to initial acquisition costs? Holger Bartel: Really good question. Christina, do you want to respond to that one? Christina Ciocca: Sure. Of course, we're constantly tracking retention and renewals. I will say that the volumes have not been massive just yet, and we expect much more renewals, especially for the Legacy Members that joined in Q4 of last year. They actually did not start their membership until January 1. So I think we'll be expecting to have many more renewals starting in Q1 of next year. So we're working on implementing different strategies to kind of ensure they renew. But the main thing is just making sure we get them content and information about the club membership while they are a member and hit kind of their preferences so that they see value in the membership and want to stay. And so far, we are seeing fairly good renewal rates, especially coming from Legacy Members that became Club Members. So we're hoping that trend will continue next year when we have larger quantities of renewals. Patrick Sholl: So isn't like they're actively opting in to make sure that it's renewed because they wouldn't have -- they would have until end of year to cancel. I guess, how do you... Christina Ciocca: For the ones that joined -- that's a good point. For the ones that joined previously, not necessarily on any specific promotions, we're starting to see some renewals. I guess, many of them are not Legacy Members, but new to Travelzoo. But we are seeing other kind of conversion rates and things for Legacy Members that are trending in the right direction. Holger Bartel: If I understand Pat's question might be about renewal itself. It's an automated renewal. They don't have to actively renew. So they will automatically renew unless they cancel. And then as you mentioned, Pat, as you mentioned very correctly, we have a very large group of renewals coming up at the end of this year and then again at the end of Q1. Those are really large numbers of renewals, and we can see already from like we can already see a little bit -- we can forecast renewals rates quite well because we can look at how many of these members have already deactivated their automated renewal. On these 2 groups it's actually very, very small because they've been with Travelzoo for a long time. But the reason I also mentioned it at that point of time when they renew the membership fee comes in, and that's why we are expecting also quite a nice income of cash at the end of this year and then again at the end of Q1. We're also looking and will most likely increase the membership fee in certain markets next year, maybe already at the beginning of the year because the $40 just seems maybe a little bit too low. And people who use the membership really love it. And from what we are hearing is we have an opportunity to increase the membership fees there. It's not decided yet, just to be clear, but we are looking into it very seriously. Patrick Sholl: Okay. And then just on the advertising and commerce components of revenue, could you maybe talk about like maybe just how the mix of that has shifted maybe over the last 4 quarters? Holger Bartel: It's really a relatively small portion where we have the opportunity to buy travel inventory, for example, hotel rooms in advance, which is where that then has an impact on cost of revenue, but it's a relatively small -- relatively small part, and it hasn't really changed dramatically nor do we expect it to change dramatically. Patrick Sholl: So like that goes into cost of revenues, and that was about like a $2 million increase year-over-year. So is that kind of like that component that we should be thinking about that as being relatively lower margin and that would kind of be the, I guess, delta on the advertising side then? Holger Bartel: Yes. Patrick Sholl: Okay. And then just on like the overall travel environment, are you seeing like any like kind of difference between the types of travel services offered in terms of what's more, I guess, active in offering deals, whether it's like flights or hotels? Holger Bartel: We are not seeing any changes. It's still the same. Consumers in general, and particularly our travel enthusiast, they're looking for value. They're looking for amazing offers, and they're looking for experiences and they want to do something new. They are not looking for something boring. They are looking for locations that reward them, that are exciting for them. But most of all, they are really looking for great value, as I said, and that's where the Travelzoo membership comes in and offers them exactly that and offers them more opportunity to travel because that's what they would like. Operator: Our next question comes from Steve Silver from Argus Research. Steven Silver: Holger, the presentation cites additional advertising revenues as a potential incremental value driver over time. I'm curious whether there's any color you can provide on your thinking just in terms of the time line for reaching some of the thresholds to reach that critical mass or whether you think that those opportunities might be either more near, immediate or longer term based on the current member acquisition rate? Holger Bartel: In the past, we've seen a roughly time delay of 1 year. It's difficult to predict this, Steve, and that's why we didn't put a number on it. So we just illustrated on the slide as, obviously, if I have more members, if I have a bigger audience, I can increase my advertising fees. But right now, it's not something we are so focused on incredibly, probably more maybe 2026 or 2027, because right now, our main focus is really on getting the number of Club Members up and providing them a service that they absolutely do not want to give up on. Steven Silver: That's helpful. And one last one, if I may. There's been a lot of chatter, particularly in North America, just in terms of flights being delayed, whether it's the shutdown or a shortage of air traffic controls, all of those types of issues. Curious as to whether there is the risk of any capacity issues at these airport lounges, if there was an increase in flight cancellations, those types of things? Or whether like airport lounges are equipped to take on a higher number of potential people if flights are delayed at that kind of pace? Holger Bartel: So far, we haven't heard about any issues or problems. Our members would certainly let us know. Well, Thanksgiving is at the end of November is the big travel period. So hopefully, all these travel issues will be resolved by then and people can travel safely and without too much interruption. But it's nice for our members to know that this service and this benefit exists when they need it. Operator: Our last question comes from Ed Woo from Ascendiant Capital. Edward Woo: Yes, a little bit more on what you're seeing out in the travel environment with all the economic issues and stuff. Are you seeing any change in the consumer, either they want to travel spending down or traveling less? And also on the supply side, are you steering much from your hotel or travel providers that they are having issues filling seats with consumers or they have to lower their prices? Holger Bartel: Last week, I read a report that there's increasing disparity between more affluent consumers who continue to travel and travel even more. And those really, really have to watch their budget. Luckily, our luckily, our members, Travelzoo members are very affluent. I mean you saw like a really high percentage of them that have incomes over $200,000. So our members are not cheap. They are not on the low income side. So they are more in the group of people who travel more. So as long as we provide them with excellent opportunities and with fantastic offers they will continue to travel. Edward Woo: Great. Are you hearing any concerns from the travel suppliers, either that they feel like they have to advertise more to fill their rooms? Or are there any concerns? Or do they feel optimistic heading into the holidays and next year? Holger Bartel: We haven't heard anything that really changes how they are looking at it. I think they are more focused now on keeping occupancy rates high compared to the COVID period when it was just normal that the hotel was not busy. So yes, I mean, I would not say it goes much more beyond what we seasonally have seen in the past. But the economy in the U.S. particularly is still doing well, and let's see what happens in 2026. As we said in the past, if we have more travel suppliers for example, hotels, as you say, that have trouble being full, they come to us and they will create offers for us. And now that we have disclosed user group that allows them to do this very discretely we are really positioned to be a great partner for them. Operator: Okay. This concludes the Q&A portion of today's call. I would like to turn the call back over to Mr. Holger Bartel for closing remarks. Holger Bartel: Great. Dear investors, thank you again for your time and support today. We look forward to speaking with you again next quarter. Have a great day. Operator: This concludes today's Travelzoo Third Quarter 2025 Earnings Call and Webcast. You may disconnect your lines at this time, and have a wonderful day.
Operator: Greetings, and welcome to the Leggett & Platt Third Quarter 2025 Webcast and Earnings Conference Call. {Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephen West, Vice President of Investor Relations. Thank you. You may begin. Steve West: Good morning, everyone, and welcome to Leggett & Platt's Third Quarter 2025 Earnings Call. With me today are Karl Glassman, CEO; Ben Burns, CFO; Tyson Hagale, President of Bedding Products; and Sam Smith, President of Specialized Products and Furniture, Flooring and Textile Products. This call is being recorded, and a replay will be available on the Investor Relations section of our website. Yesterday, we issued our press release and a set of slides containing third quarter financial results. Those documents supplement the information we will discuss this morning, including non-GAAP financial reconciliations. Remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements. Actual results may differ materially due to risks and uncertainties, and the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to sections in yesterday's press release and our most recent 10-K and 10-Q filings entitled Risk Factors and Forward-Looking Statements. And with that, I will turn the call over to Karl. Karl Glassman: Thank you, Steve, and good morning, everyone. I'm pleased with another quarter of solid results, reflecting nearly 2 years of disciplined cost structure improvements despite an ongoing soft demand in residential end markets. Importantly, we are reaffirming the midpoint of our full year sales and adjusted EPS guidance, which Ben will discuss in more detail later. Our third quarter was also marked by significant progress on our key strategic initiatives. Our team has done a terrific job driving results through the execution of our restructuring plan, disciplined cost management and improving operational execution. These efforts have culminated in improved cash flow, which allowed us to significantly strengthen our balance sheet. On August 29, we completed the divestiture of our Aerospace business, aligned with our goal of optimizing our portfolio. We used proceeds from the sale, along with a portion of our operating cash flow to pay down all of our remaining commercial paper and substantially lower our net debt to trailing 12-month adjusted EBITDA ratio. Our restructuring plan is nearing completion and is meeting or exceeding our initial expectations. We made considerable progress on the second phase of the flooring consolidation during the quarter and expect the consolidation to be completed by the end of the year. In Hydraulic Cylinders, we completed the rightsizing of our U.K. facility. Beyond our formal restructuring plan, in early September, we announced the consolidation of our Kentucky adjustable bed manufacturing operation, which will be consolidated into our Mexico operation by the end of this year. This decision was driven by lower volume and tariffs on imported components, which resulted in a cost disadvantage for our domestic production in a category that primarily competes with imported products. Throughout the quarter, we continued to navigate a very dynamic environment. We still believe tariffs will be a net positive for us, but remain concerned that wide-ranging tariffs could drive inflation, hurt consumer confidence and pressure consumer demand. We are actively mitigating some of the negative impacts experienced in a few of our businesses, such as supply chain disruptions that can have an indirect impact on us and our customer demand disruptions. Our teams are actively engaged with customers and suppliers across our global footprint to reduce tariff exposure and minimize impacts. In general, import issues are an ongoing risk, especially for our Bedding Products segment, but we are encouraged that some recent enforcement actions support fair competition for domestic manufacturers and importers alike. U.S. Customs and Border Patrol recently dismantled a Chinese mattress transshipment scheme estimated to have evaded more than $400 million in duties. The Consumer Product Safety Commission has also recently issued recalls and product safety warnings for certain imported mattresses that fail mandated U.S. flammability standards. Now more than ever, misclassification of shipments and understated product values are additional problems that domestic manufacturers face when competing against imports. While we continue to believe that imports have a role in the U.S. bedding market, the domestic industry must be able to compete on a level playing field. Amid these initiatives and macroeconomic challenges, our teams remain focused on providing high-quality innovative products to our customers, keeping our employees safe and continuously improving at everything we do. I'll now turn the call over to Ben. Benjamin Burns: Thank you, Karl, and good morning, everyone. Third quarter sales were just over $1 billion, down 6% year-over-year due primarily to continued soft demand in residential end markets as well as sales attrition from both the divestiture of our aerospace business and our restructuring efforts. Looking at sales by segment, Bedding product sales decreased 10% year-over-year but improved 3% sequentially versus the second quarter and sales accelerated through the quarter. Specialized product sales declined 7%, while Furniture, Flooring and Textile product sales were flat year-over-year. In Bedding Products, as anticipated, sales weakness at a certain customer and retailer merchandising changes drove volume declines in adjustable bed and specialty foam. U.S. spring unit volume was in line with both mattress consumption and domestic mattress production volumes, both of which we estimate declined low single digits. U.S. mattress industry production improved sequentially versus the second quarter, marking the second consecutive quarter of improved domestic production volume. While we are encouraged to see sequential improvement, third quarter domestic volume remained negative year-over-year. It is worth noting that the improvements we have seen are not consistent across the industry. Certain channels and market participants are performing better than others. We have also started to see stabilization in demand patterns between holiday promotional periods. In the fourth quarter, we expect U.S. domestic mattress production to slow sequentially due to normal seasonality and to remain negative on a year-over-year basis. Total market consumption for the full year is now expected to decline low single digits with domestic production down mid- to high single digits. Within our Specialized Products segment, we experienced modest sales declines in automotive and hydraulic cylinders with the divestiture of Aerospace making up the largest sales drag during the quarter. Looking ahead, multiple global automotive supply chain risks such as availability of aluminium, certain semiconductors and access to rare earth minerals have materialized as we moved into the fourth quarter and has begun impacting both the industry and our business. However, we have experienced no material impact to date. Finally, within Furniture, Flooring and Textiles, continued sales growth in textiles and Work Furniture was offset by declines in home furniture and flooring. We anticipate continued year-over-year strength in the geo-component side of our textiles business, while current trends and seasonality will likely continue in the other businesses within the segment through the remainder of the year. As mentioned last quarter, aggressive competitive discounting, particularly in Flooring and Textiles has led to pricing adjustments that will negatively impact us in the fourth quarter. Third quarter EBIT was $171 million and adjusted EBIT was $73 million, a $3 million decrease year-over-year, primarily from lower volume, partially offset by metal margin expansion and restructuring benefit. Third quarter earnings per share were $0.91. On an adjusted basis, third quarter EPS was $0.29, a $0.03 decrease year-over-year. Third quarter operating cash flow was $126 million, an increase of $30 million versus the third quarter of 2024. This increase was primarily driven by working capital benefits. Moving to the balance sheet. We reduced debt by $296 million in the third quarter to $1.5 billion, bringing our total debt reduction for the year-to-date to $367 million. As Carl noted, we reduced our commercial paper balance to 0, significantly strengthening our balance sheet and lowering our net debt to trailing 12-month adjusted EBITDA ratio to 2.6x. Excluding Aerospace on a pro forma basis, the ratio is about 0.3x higher. At September 30, total liquidity was $974 million, comprised of $461 million of cash on hand and $513 million in capacity remaining under our revolving credit facility. We ended the quarter with adjusted working capital as a percentage of annualized sales down over 200 basis points year-over-year. Moving to our restructuring update. We have nearly completed the execution of the plan, which has delivered significantly better EBIT contribution with lower associated costs than originally announced. We remain on track to realize EBIT benefit of $60 million to $70 million on an annualized basis. This positive EBIT contribution is despite approximately $60 million in sales attrition. And we remain on track to generate real estate proceeds of $70 million to $80 million. Since plan inception, we have realized $43 million of proceeds and now expect up to an additional $17 million in the fourth quarter of 2025 with the balance in 2026. Despite the current dynamic operating environment, I'm pleased to say we are reaffirming the midpoint of our sales and adjusted EPS guidance while narrowing the previous guidance range. Sales are now expected to be $4.0 billion to $4.1 billion or down 6% to 9% versus 2024. Earnings per share of $1.52 to $1.72 and adjusted earnings per share of $1 to $1.10. Adjusted EBIT margin is expected to be between 6.4% and 6.6% and cash from operations is expected to be approximately $300 million. Our CapEx will be lower than usual this year at $60 million to $70 million, which is primarily due to customer-driven delays of some growth initiatives and due to our focus on executing and wrapping up our restructuring plan. Annual CapEx should return to more normalized levels going forward. In the near term, we plan to continue to use most of our excess cash flow to reduce net debt while also considering other uses such as small strategic acquisitions and share repurchases. Longer term, our priorities for use of cash remain consistent, investing in organic growth, funding strategic acquisitions and returning cash to shareholders through dividends and share repurchases. With that, I'll turn the call over to Karl for his closing remarks. Karl Glassman: Thank you, Ben. In a relatively short time, we have made significant progress on our strategic priorities. We have strengthened our balance sheet by adjusting our capital allocation to prioritize debt reduction. Through our restructuring plan, we have created a leaner manufacturing footprint that can meet customer demand when it rebounds and support strong incremental contribution margins. We have simplified our portfolio through recent divestitures to improve focus on core operations. All of this has been accomplished with a consumer who has seemingly been in a recession for more than 3 years, compounded by the complexities of a dynamic tariff landscape. Leggett & Platt has been at the forefront of innovation for a very long time. Today, we have a robust innovation pipeline and relatively new products that are just gaining traction. We have also closely partnered with many of our customers to develop innovative products designed to meet their specific needs. These efforts, combined with meaningful cost reductions and operational improvements position us well to aggressively pursue longer-term profitable growth opportunities that will create value for our shareholders. With that, I would like to thank all of our employees for their continued hard work and dedication to position Leggett & Platt for a very bright future. Operator, you may now open the line for Q&A. Operator: [Operator Instructions] Our first questions come from the line of Susan Maklari with Goldman Sachs. Susan Maklari: My first question is, I want to talk a bit more about the benefit that you're seeing from the cost actions and the restructuring that you've undertaken in the last 2 years or so. It seems like you're really getting a nice lift from that in the margins despite the volume and the demand environment that we're in. Can you just help us kind of parse out how those are coming through, what the upside is as we think about the forward quarters? And anything else that's notable as it relates to that? Benjamin Burns: Yes, Susan, this is Ben. Thanks for the question. As we said in the prepared remarks, our teams have done a great job executing the restructuring plan, and we're really nearly complete at this point. And as we look at the metrics that we laid out at the beginning in our original expectations, -- we're meeting or exceeding them in really all categories, including EBIT benefits, costs, sales attrition and real estate sales. So really good execution. With all of that, we've had no customer disruptions. And it's important to remember, this touches not only our Bedding segment, but also we've had significant actions in home furniture and flooring, hydraulic cylinders and also an initiative to reduce our corporate G&A expenses. So as we look forward, we're very confident in our $60 million to $70 million of annualized EBIT benefit. I think in 2025, we'll end up around $60 million of that benefit already realized with another up to $10 million coming next year. The sales attrition that we laid out at the beginning, we thought was about $100 million. Now we've got that down to $60 million. So that's good news. And then from a real estate perspective, we still expect $70 million to $80 million of cash proceeds. We've had $43 million to date, and we expect up to $17 million possibly later this year with the remainder coming in 2026. So really good execution. And then the other thing I would say is these are all cost outs. As we think about going forward and volume recovery, contribution margins should be strong for us. We think 25% to 35% as we go forward with that incremental volume. So we can't say enough about how appreciative we are of all of our employees' efforts in this area. Susan Maklari: Yes. Okay. That's great color, Ben. And then I want to turn to Bedding. Can you talk about the demand environment and how that came through during the quarter? I think you said that you did see things improve each month in the third quarter. But it seems like that's coming despite the headwinds that we are seeing in the housing market and the volatility in consumer confidence. How do we sort of weigh those different factors out there? And can you just talk a bit about what you think is actually going on out on the ground? Karl Glassman: Susan, thanks for the question. Before we go down that path, though, I'm going to turn it over to Tyson, but I want to stop for just a second and congratulate Tyson and his team for the tremendous job that they've done in the Bedding segment. The restructuring has been a challenge, the demand headwinds. The team has come together. We have an innovation pipeline that is more robust than it's ever been in our history. And when you think of -- they still have issues, Tyson will be very candid on these issues regarding specialty foam and adjustable bed. But when you look at the financials, you can see to your earlier question, the restructuring benefits, you can see cost management, operational efficiency improvements, metal margin expansion through the trade sale of trade rods. And like I said, the early in the year, we talked about the benefit of customer product launches. We're seeing that. It's ramping up. But most notable is what the teams have coming into the near future. 2026 is going to be really robust from innovation, evidence of our team's capabilities. So with all of that, Tyson, why don't you go ahead? J. Hagale: Sure. And thanks, Karl. Susan, I'll start just with some comments about the market. And I think we would characterize things right now as more stable than seeing a lot of recovery, although in both the second and third quarter, Ben mentioned this, but we saw sequential improvement in both quarters, which was coming off a pretty tough first quarter, but still that's a trend we haven't seen in quite some time. But really, it's getting us back to more of a stable place, but still in the third quarter, especially looking at the domestic market, down low single digits when we talk about units. A few things, though, that I think are worth mentioning. Kind of within that stability, first of all, we've talked about this in some past calls that we see some pretty high peaks when we get to the promotional holidays and then some pretty tough valleys when we come off of those. But we're seeing more stability month-to-month. So we see some improvement around the promotions, but we don't see quite the big drop-offs, which I think is notable and something we'll continue to watch. The other thing is that although things are reaching more of a stable level, we don't see consistent performance across all retail channels and brands. It is pretty choppy. And from our view, that's coming from a variety of factors with industry consolidation that's been going on, new program launches, advertising changes. All of those things are resulting in a lot of movement, which makes it a little more difficult to track exactly what's going on, but I think that's another thing we'll watch going forward. But big picture, I think we still have to continue to watch it. You mentioned it, Susan, but the big macro factors that tend to drive bedding and furniture are still a pretty big challenge. Karl talked about this, too, the consumer is dealing with a tariff environment, but still pretty tough housing, wages dealing with inflation and just general consumer confidence. Those are all big picture things that for us to plan for an actual more recovery type environment, we have to see those things start to flip to be more positive. Susan Maklari: Yes. Okay. And then maybe turning to the cash and the balance sheet. It's really nice to see how the leverage has come together. You mentioned, Ben, that the CapEx is going to be lower this year. How do we think about your plans for spend in 2026, some of the growth opportunities that maybe are coming in there and then maybe the potential for some resumption of shareholder returns? Benjamin Burns: Yes, sure. Thanks, Susan. Yes, our CapEx is a little bit lower based on the factors I mentioned in the prepared remarks. As we go forward, with a smaller, leaner footprint, we do think a more normalized level of CapEx is something like what we started to guide the year on this year, which was about $100 million. So obviously, there'll be puts and takes in any given year and timing factors in, but that $100 million is probably a decent way to think about it. And then as we think about growth initiatives going forward, as -- as Karl mentioned in his remarks as well, we do have some opportunities that we're pursuing. And so we'll continue to fund those. We've been funding whatever growth opportunities come along. And we'll provide more specific outlook on 2026 in the next call. Susan Maklari: Yes. Okay. And then, Ben, I'm going to sneak one more in for you. Can you just walk through how you're thinking about the segment margins for this year? Benjamin Burns: Sure thing. On the bedding side, we now believe segment margins will be up 200 basis points. I think the last call, we were saying 150 basis points. So we're seeing a little bit more improvement there. On the Specialized segment, we are saying margins should be up about 50 basis points year-over-year. And then on the Furniture Flooring and Textile side, we're now predicting margins to be down 150 basis points. which is compared to what we said previously of 100 basis points down. Operator: Our next questions come from the line of Peter Keith with Piper Sandler. Alexia Morgan: This is Alexia Morgan on for Peter. My first question is on the Furniture segment. It looks like there was some sequential improvement within Home Furniture, down -- volumes were down 5% in Q3 versus down 12% in Q2. I was wondering how you interpret that sequential improvement and if you think it indicates any underlying improvement within the broader category. R. Smith: Go ahead, Karl. Karl Glassman: No, I was going to say go ahead, Sam. R. Smith: Okay. This is Sam. So if you remember back to last quarter, we talked about how those April 2 tariffs really upended our home furniture business and caused a pretty significant drop in volume year-over-year. So what we saw this quarter is more of a normalization, a return to kind of business at a more consistent volume level. And I'll just kind of comment a little bit on the volume versus where I think the market is. And I've read some really interesting Q3 retail surveys and some credit card data that I'm going to refer to. One survey suggested that year-over-year retail sales could be up 6% to 7% with the surveyed retailers. And it also showed that tariffs caused those same retailers to raise their prices and that weighted average price increase was up 9% to 10% -- so if you take the 6% to 7% sales increase, compare that back to the 9% to 10% price increase, and I think you could say that unit volume for that survey is down probably around 3%. And then next to the credit card data that I saw, it showed that retail furnishing sales were up about 2%. Again, I think you got to apply some level of price increase to mitigate those tariffs. And when you apply the price increase to mitigate the tariffs, I think you can also assume unit volumes down low to mid- digits, and that's pretty much in line with our performance year-over-year. And I think from a positive news standpoint, we started up our new factory in Vietnam at the end of Q3, and we started shipping product from it early this month. And as we ramp up that plant, our products are going to be in a favorable tariff position, and that's really good for our customers and it's good for us. Alexia Morgan: Okay. And then staying within Furniture, could you elaborate on any shift you've noticed in end customer behavior across different price points? Specifically, are you still observing a divergence in performance between the lower price points versus the middle and the higher price points? R. Smith: Yes, we are. We still continue to see the higher price points be more stable on a week-to-week, month-to-month basis. And there continues to be a lot of pressure at those lower price points. It's very consistent with what we were seeing last quarter with the exception that tariff announcement in April seems to have passed us by, and we're past that now. Alexia Morgan: Great. And then one more. Moving to the Bedding segment, it looks like steel rod volume dropped off significantly, inflecting negative to down 20% in Q3. Can you talk about the drivers for that inflection? J. Hagale: Sure. Happy to. And it's really -- it's pretty simple. Actually, trade rod volumes were pretty stable. The biggest change, and we've talked about this in the past, we also sell some semi-finished products called billets from time to time. And last year, we had a relatively strong amount of billet sales in the third quarter. And this year, because of both internal and external demand, we haven't had to resort to selling billets. So really, the full drop there is just an elimination of the billet sales. And overall, actually, our trade rod mix was pretty strong and helpful for us because it trended towards high carbon rather than low carbon. So although the headline there looks negative, it actually was a pretty strong result for us with the rod mill. Karl Glassman: Which is a contributor to the profitability of the segment because the non-value-added of selling a billet versus the value added of selling a rod. And someone may question, why did you sell billets last year? And the answer was to keep the rod mill going, keep our employees employed. We don't have that problem right now. Volume is pretty darn good. Operator: Our next questions come from the line of Bobby Griffin with Raymond James. Robert Griffin: This is Alessandra Jimenez on for Bobby. First, I just wanted to touch on kind of the growth opportunity for here -- from here. Now that the majority of restructuring is near complete, where do you see the most opportunities for organic growth, assuming the macro environment is supportive? Karl Glassman: Well, longer term, I'm going to surprise you a little bit. I appreciate the question. Longer term, I see our largest growth opportunity probably in finished bedding. It's a long tail to sell that product through, but we're gaining momentum. We're replacing some lost volume. So again, I'm not calling this being a fourth quarter or first half of next year even. But longer term, that private label work that we're doing on finished bedding, I think will reap significant benefit. J. Hagale: And this is Tyson. I agree with Karl. The private label finished mattress opportunity, especially with where we've seen the biggest volume declines in our bedding business, but also as we see consumers get more confident in returning to bedding and furniture products, Karl referenced this in his opening comments, but some of the investments that we're seeing in innovation and giving consumers a reason to come back and do some shopping, we feel pretty good about those right now. And this is purely anecdotal. There's not a lot of data to support it, but just seeing the workload that our teams have right now in bedding, they are really busy working with our customers right now. And at least from a feel standpoint or gut, it seems like this is as busy as we've been working on new product development since at least the start of the pandemic. I mean, since then, it's been a lot of VA/VE or just trying to spec products to replace things in the supply chain, but we're seeing more activity around getting new products into the market, which hopefully is a signal of our customers getting ready to put more products on retail floors. R. Smith: Alessandra, I'll add on to that from a home furniture perspective. I was at the High Point Furniture market this past weekend. We had a big team there. We got a showroom, and we have a tremendous amount of customers to exhibit there. So as we walk through our customers' showrooms, we -- Home Furniture had more new product in our customer showrooms than we've had in quite a few years. Our teams have been really, really working hard and working closely with our customers in driving product innovation that's going to matter to consumers. And this -- these slow times have been a great time to do it. And I think we're in a great position for profitable growth when our residential markets recover. And from a Work Furniture standpoint, we continue to have a lot of new near-shoring opportunities that our team are working through and winning some programs that I think will feel the impact for in 2026 and as we move into 2027 as well. Robert Griffin: Okay. Awesome. That is very encouraging. And then I wanted to switch to kind of a follow-up on capital allocation. With the rest of the long-term debt termed out pretty well, could you remind us on like the long-term leverage targets? And then any further details on capital allocation priorities? And maybe a follow-up on like what areas do you see an opportunity for potential bolt-on acquisitions? Benjamin Burns: Sure. This is Ben. I'll be happy to answer that. So yes, our long-term net debt leverage target is 2x. So our capital allocation strategy will continue to be to reduce that net debt as we go forward. But we're also considering other uses of cash, including small strategic acquisitions. So to your question there, I think the most likely area would be in our textiles business. We've been very successful at having fairly modest purchase price acquisitions and bringing those in and driving immediate synergies. And then we'll also be considering share repurchases as we look forward. No specific timetable on that at this point, but that's on the top of our mind as well. Operator: [Operator Instructions] Our next questions come from the line of Keith Hughes with Truist Securities. Keith Hughes: Question on the -- just back to bedding. U.S. Spring was only down a point or 2 in the quarter. That's starting to feel like what you're saying in the industry is, do you think it will start to track more what the industry does over the next near term? J. Hagale: Keith, this is Tyson. Yes, that's something we've talked a lot about. It's been tough to track with all the moving parts. But we've talked about, especially some of our higher-value products have tracked really closely with the market. And overall, with more stability in open coil when you kind of get the total mattress cores, it sort of feels like we're trending kind of in the same direction with the domestic mattress market. And even within kind of the big picture view of our unit volumes, there are some pretty encouraging things that are going on. We've talked about our content gains, which goes back to the long-term decline of open coil, but then the addition of our Comfort Core products and some other things we've been introducing in the market. And starting to see that come through, especially in the third quarter, and that's where you see some of our profit improvement as well. But we're really starting to see some momentum from that. In the third quarter, we saw a significant boost in our Quantum share of Comfort Core, but also our semi-finished business grew more than 20% versus last year. So even when you look at the volume comparisons unit per unit, we think we're tracking pretty well, but also picking up some content. Karl Glassman: Keith, if you don't mind, Tyson, while we're on that subject, much has been written about lost market share. Talk about that, if you don't mind. J. Hagale: Well, and I think a lot of that comes from the moving pieces with the imported finished mattresses and how much are actually being consumed within the course of the year. It's been a tough thing to track, but we're seeing more stability with the imported finished mattresses, especially after some of those things were loaded up in the first part of the year ahead of tariffs. So it's a little easier to get a view of that now, Karl. But on top of that, we've seen some different moves with some of the brands and industry consolidation, but that's where we feel at least from the U.S. Spring point of view. Keith Hughes: And if you look at adjustable and specialty, I know there's a customer issue. When do you lap that, when will that start to look more like a chance to do better than the industry or like the industry? J. Hagale: Yes, Keith. So it is a consistent commentary from what we shared last quarter. I'll talk just a little bit more about it. It's largely 2 customers, and they're the same ones for specialty foam and adjustable bed. The first one is Mattress Firm. And once the consolidation has been complete, with specialty foam, there was a private label mattress program that was taken internal. And then second to that, with our adjustable bed business, we still sell some product there, but we've seen a change in the merchandising plan and where some of the sourcing of that product is coming. So those have been both impactful to both specialty foam and adjustable bed. And it will really take fully through next year before we'll fully get through that part of it. The second big challenge again for both businesses is not a market share loss, but it's more just of a headwind of a large customer of ours that impacts both foam and adjustable bed. Now it's hard to say exactly when we anniversary those because it's more of just a specific customer challenge, but not lost market share. Keith Hughes: Okay. And I think it was Karl, your commentary on the sector, you were seeing some retail do better than others. Could you talk about that a little bit more of what type of retail is seeing some at least sequential improvement? I was still down year-over-year? And what areas are still struggling? Karl Glassman: Yes, that was actually Tyson. Go ahead, Tyson. J. Hagale: Sure, Keith. Well, it's probably what you would suspect. On the online channel, see quite a bit of strength in some of the lower-end online e-commerce. There's a lot of volume moving through there. In brick-and-mortar, see quite a bit of activity happening in big box and through Mattress Firm. But it's not as we've kind of talked about here, it doesn't seem to be a rising tide lifting everybody at the same level. It is inconsistent, but see stronger unit volumes at least through those channels. Keith Hughes: Okay. And one other question on textiles. It was up in the quarter, up several quarters now. I think you talked about potential price pressure there along with flooring. I think I know what's happened in flooring, but if you could talk about textiles, where you see that going? R. Smith: Yes. Sure, Keith. This is Sam. We've got a little bit of bifurcation in our textile business. The traditional side that services furniture, bedding, fabrics, that's where we're seeing a tremendous amount of price pressure, just as you would see in flooring as these markets continue to be down from demand standpoint. So that's kind of where we see that. Where the growth is really coming from is from our GEO side. The U.S. civil construction is up really nicely year-over-year and what we call our engineered materials markets, which are automotive, filtration, some building -- some specific building products outside of geotextiles. Those volumes are looking really good for us and helping drive some of that growth. Operator: Our next questions come from the line of Susan Maklari with Goldman Sachs. Susan Maklari: I just have a couple of follow-ups. The first is just building on Keith's question on textiles. You have seen a lot of really nice growth in there. And I think, Ben, you mentioned that as a potential for some bolt-on M&A. Can you talk a bit more about how you're thinking about the future trajectory of that business? What kind of deals you could possibly be interested in and how we should think about what that will mean for growth? R. Smith: Sure. And do you want to say? Or do you want me to jump in? Benjamin Burns: Well, I'll start off, Sam, if you want to pile on, that would be great. But Susan, just to answer your question, I think what we've seen in that business for over 20 years is really our ability to acquire small businesses, bolt them on and really drive immediate synergies through our purchasing, which we do really well with. So I think that is something that has been very successful for us. We look for applications of the raw materials and how we can convert them and really service customers on a just-in-time basis. And a lot of it also can be a geographic strategy to serve areas, new geographies with similar products. But Sam, what would you add on to that? R. Smith: I think you covered it perfectly, Ben. Benjamin Burns: Yes. Susan Maklari: Okay. And then going back to Bedding, you've talked a lot about innovation and the product pipeline that you have, and it sounds like that's gaining some really nice momentum. As we look out, how do we think about the benefit that you can see from a price mix perspective? And what that could mean for the business even if we remain in a tougher macro where we have those continued headwinds on overall broader demand? J. Hagale: Yes, Susan, I kind of referenced this a little bit already. But even with the semi-finished and content gains we've seen in U.S. Spring, you're kind of seeing some of it now. I mean versus third quarter last year, roughly half of our EBIT improvement comes from just fixed cost reductions and restructuring. The other half is mostly from margin enhancement. Some of that from trade rod business. But the other part is just from exactly what you said, of already seeing the benefits of improved content through our spring business, and that comes from products we talked about on previous calls. But on top of that, when I talked about working with our customers and our customers starting to lean in more towards differentiating their product line, a lot of that comes through improving the content, the comfort or even just the inclusion of specialty foam along with the innerspring units. So all of those end up being multiples in terms of the selling price for us versus kind of more the historic innerspring business that you think about. And that's where even as we've seen some volumes be even down slightly or where we've been in the last couple of years, that's where we see the opportunity for profit improvement and feel more of that is possible going into the future. Operator: There are no further questions at this time. I would now like to turn the floor back over to Stephen West for closing comments. Steve West: Thanks, everyone, for joining us this morning, and we look forward to hosting you next quarter as well. And we are scheduled to issue our fourth quarter earnings release on February 11 after the market closes, and our conference call will be on February 12 at 8:30 a.m. Eastern Standard Time. In the meantime, if you have any questions, just reach out to me any time. Thanks. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.
Operator: Good morning, everyone, and welcome to Sysco's First Quarter Fiscal Year 2026 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. With that, I would now like to turn the call over to Mr. Kevin Kim, Vice President of Investor Relations. Please go ahead, sir. Kevin Kim: Good morning, everyone, and welcome to Sysco's First Quarter Fiscal Year 2026 Earnings Call. On today's call, we have Kevin Hourican, our Chair of the Board and CEO; and Kenny Cheung, our CFO. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 28, 2025, subsequent SEC filings and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can also be found in the Investors section of our website. During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. [Operator Instructions] At this time, I'd like to turn the call over to Kevin Hourican. Kevin Hourican: Good morning, everyone. We appreciate you joining our call today. I'm pleased to report that Sysco delivered a strong financial quarter to start fiscal 2026 with solid performance on the top and bottom line. Most importantly, we have inflected positive in our U.S. Broadline local business, and we are building momentum in our local business across the board. During our call today, we will share insights into the progress that we are making and highlight key growth initiatives that are fueling our performance improvement. After my update on our business progress, Kenny will highlight our financial results, and he will communicate why we are confident that we will deliver our full year financial guidance. In fiscal 2026, we plan to deliver profitable growth across USFS, International and our SYGMA segments, even in a macro backdrop that is less than compelling. So let's get started with our financial results on Slide 4. In Q1, we exceeded our financial plan and delivered our second consecutive beat relative to consensus expectations. For the quarter, our strong performance was driven by volume improvement, coupled with expanded gross margins and solid expense control. Most importantly, in the quarter, our local volumes improved sequentially every month of the period. During the quarter, our rate of local volume improvement was more than 2x the overall industry traffic rate of improvement. The positive inflection versus industry traffic was the strongest in September, once again conveying the progress that we made throughout the quarter. Our Q1 results were driven by sales growth of 3.2% on a reported basis and up 3.8% to last year when excluding the divestiture of Mexico. Gross profit grew 3.9% and adjusted EPS grew 5.5%. Our financial outcomes were anchored by another compelling performance from our International segment, excellent work by our merchandising teams on gross profit expansion, strong productivity improvement from our supply chain and a sales organization that is increasing their stride and growing our local business. Momentum is building at Sysco across the board, and we are confident we will accelerate that momentum throughout 2026. Given the importance of our local street business, I would like to go a bit deeper on our performance as seen on Slide #8. The chart displays our meaningful sequential progress in U.S. local over the past 3 quarters. Our Sysco Broadline local business inflected positive in the quarter, delivering volume growth of 0.4%. The USBL performance was 130 basis points stronger than our Q4 results which significantly outpaced the improvement in restaurant traffic during the quarter. Per Black Box, restaurant traffic in Q1 improved by 60 basis points. As a result, Sysco improved more than 2x the overall industry in the quarter. We are pleased that industry traffic improved, and it is even better to see Sysco improving at a faster clip. As I mentioned earlier, September was the strongest month of the quarter for Sysco and the strongest month of positive variance versus the industry. Importantly, Sysco has continued to make progress in October. Given the strong start to Q2, we anticipate that we will improve our total U.S. local by at least an additional 100 basis points in Q2 versus Q1, continuing our positive momentum. In Q1, our USFS total local business posted a negative 0.2% case volume result in the period. A friendly reminder that our U.S. Foodservice volume reporting includes an ongoing negative impact from an intentional business exit within our FreshPoint business, as previously communicated on our Q4 call. In Q1, the FreshPoint business exit negatively impacted our total local performance by over 50 basis points. When excluding this headwind from this quarter, our USFS total local business grew 0.3%. Turning from local to our International segment. We are extremely pleased with the performance being delivered by our International team. We delivered outsized sales growth of 4.5% on a reported basis and up 7.9% when excluding the divestiture of Mexico. International continues to deliver positive customer mix benefits, growing the local segment much faster than our total book of business. In fact, our International business posted local case volume growth of approximately 5% for the quarter. The customer mix shift to local helped drive adjusted operating income growth of 13.1% and representing the eighth consecutive quarter of double-digit profit growth. The P&L strength was delivered from every single region in our International portfolio. Sysco's International portfolio is delivering strong top and bottom line growth within every major market we operate. Sysco's International business is a strong standout in the overall food-away-from-home industry, and will be a tailwind for Sysco for many years to come. It is equally important to note, as Kenny has said previously, over the past 3 years, we have doubled the profit margin rate of our International business and we will continue to work to increase International profitability while simultaneously taking share and growing the top line. We call this performing for today, while transforming for tomorrow. Sysco's International team is doing a great job of embodying that ethos. Before I segue into a brief update on our growth initiatives, I would like to do a quick shout out to our entire supply chain organization. Year-to-date, in 2026, we have greatly improved our customer service levels, on time and in full. And we have improved our health and safety performance by reducing accidents in our warehouses and on the road. Additionally, our operators have reduced product shrink, and they have increased colleague productivity across the board. In my 6 years at Sysco, this is the strongest quarter our supply chain has delivered from a service and cost perspective. I thank our entire supply chain for the great job they are doing. I have full confidence that the strong results will continue throughout 2026. Doing so will help us win new business and increase the retention of the customers we serve today. I would like to now transition into a brief update on select growth initiatives that highlight the progress that we are making as a company. Let's start with our colleague population. In our first quarter, sales consultant retention improved meaningfully versus 2025 and versus our exit velocity of Q4. We have fully stabilized our sales colleague population, and we expect the overall productivity of our sales force to improve throughout 2026. As outlined in our recent proxy, our colleague engagement scores have strongly improved. Our colleagues are expressing positive sentiment in regards to overall engagement, team inclusion and working in a rewarding and motivating culture with a compelling compensation program. These engagement drivers improved strongly year-over-year. We are bullish about our ability to continue our local progress momentum given the stability of our sales force. Our sales organization is stable, and many talented industry sales professionals are becoming increasingly interested in working at Sysco. During our recent quarter, we introduced AI360, our AI-empowered sales tool, and we are very pleased with the initial impact in colleague receptivity. Approximately 90% of our SCs are actively using the tool on a daily, weekly basis. While it remains early days, our outcomes data suggests that there is a strong correlation between high colleague engagement with the tool and improved volume and selling performance by those same colleagues. The work our sales teams do every day is hard. Each sales consultants serve dozens of customers, and the day of an SC is very dynamic. Throughout an average day, SCs answer questions, provide consultative services to restaurants, solve problems for their customers and they actively sell. AI360 helps balance these activities and improve overall customer service levels while simultaneously increasing time for selling activities. The customer could ask if there are gluten-free options for their menu. They could ask for advice on seasonally relevant proteins for their upcoming menu change, or they could ask for cost savings ideas and suggestions given the overall inflation in the food basket. Our best SCs are seasoned at answering these types of questions while proactively selling. AI360 helps all sales colleagues to manage these conversations productively, reducing administrative barriers and increasing the amount of time that they can spend actively prospecting and selling. Another important initiative is our customer loyalty program, Perks 2.0. Perks targets our local street customers that buy the most, buy the most often, and deserve the absolute best from Sysco. Over the past quarter, we have enrolled all eligible customers into the new Perks program, introduced the benefits to our customers and have greatly increased our colleague visit frequency to these accounts. We have improved supply chain service levels to Perks accounts and our 24/7 help desk is resolving Perks questions in the first time, 98% of the time. In Q1, we experienced an improvement in customer retention with Perks customers versus our broader book of business. Over time, we are very confident that Perks will be a differentiator for these customers. And as such, we will improve customer retention rates and Perks will help us penetrate these customers with additional lines. In Q1, we can see the green shoots of positive impact of these initiatives on our local business. During the quarter, we increased the number of new accounts opened versus prior year and we simultaneously decreased the number of lost accounts versus prior year. That performance enabled an increased spread between new and lost of more than 220 basis points versus the prior year. The new-lost positive spread was an incremental improvement of 40 basis points versus Q4 with September being the strongest period of the quarter. Our improved retention of colleagues is also helping us drive increased penetration of lines with existing customers. From Q4 to Q1, our penetration with existing customers improved by 90 basis points. This can be directly attributed to the increased selling skills of our team and the assistance they are receiving from technology tools. As I wrap up my prepared remarks, I submit we are very pleased with our Q1 results. We are building momentum across sales, merchandising and operations. Our team is increasing their pace month-over-month, quarter-over-quarter. We expect this progress to accelerate even further throughout 2026. While the external market is important, the improvement we are delivering at Sysco is being driven by growth initiatives within our control. Sysco Your Way is 3 years live in the market and continues to drive success. Total Team Selling is now 2 years in market and is continuing to accelerate progress in market share. We expect our new initiatives of AI360, Perks 2.0 and Pricing Agility to build upon the success of Sysco Your Way and Total Team Selling and therefore, fuel continued positive momentum in our local business. With that, I'd now like to turn the call over to Ken. Ken, over to you. Kenny Cheung: Thank you, Kevin, and good morning, everyone. Our performance this quarter was strong, representing a continuation of the improved operational momentum we established last quarter. In Q1, results included sales growth of 3.2% and adjusted EPS growth of 5.5%, reflecting continued momentum across customer segments and geographies. This diverse customer and geographic mix is a competitive advantage for Sysco and a leading factor in why our company has grown annual sales in 54 of the past 57 years. Our strong performance highlights the powerful combination of Sysco's portfolio breadth and the ability to drive operational execution necessary to deliver compounding rates of improvement. Our Q1 beat and the momentum with volume growth and margin management gives us confidence to deliver our FY '26 guidance. Our adjusted EPS growth in Q1 included benefits from our disciplined strategic sourcing efforts leading in the delivery of 3.9% growth in gross profit, translating to 13 basis points of gross margin expansion year-over-year. The increase in both dollar and rates reflects structural improvements that we expect to carry over into upcoming quarters. Additionally, we continue to see returns from our investments in sales headcount and capacity expansion alongside benefits from ongoing efforts to optimize cost and prudent tax planning. This ultimately rendered outsized profit growth with adjusted EPS growth of 5.5%, coming in ahead of our expectations. This beat to consensus included higher sales and adjusted operating income as well as net benefit from below-the-line items, of which the majority was driven by a lower effective tax rate. Results this quarter highlights the power of our organization's collective effort to delivering profitable growth, allowing us to weather volatility in the current macro backdrop. Furthermore, our stabilized retention rates, paired with important Sysco-specific initiatives, generated business momentum that accelerated throughout the quarter and are expected to add to compounding improvements over time. The success generated by our International segment is a great example of the power behind the Sysco playbook. The positive momentum over the past few years continued in Q1 with sales growth of 4.5%, gross profit growth of 6.7%, and adjusted operating income growth of 13.1%. Our strategy is driving results across all geographies, underscoring the significant operational advantages enabled by our size and scale. We also recently expanded our specialty capabilities with the successful acquisition of Fairfax Meadow in early October, one of the U.K.'s leading center-of-plate protein suppliers. This addition follows last year acquisition of Campbell's Prime Meat and favorably positions our team in Great Britain to unlock incremental growth by leveraging center of plate and specialty capabilities through Total Team Selling in the North and South regions. We expect our positive momentum in International to continue this year as we leverage our investments to unlock future growth. Now let's discuss our performance and the financial drivers for the quarter, starting on Slide 12. For the first quarter, our enterprise sales grew 3.2% on an as-reported basis, driven by U.S. Foodservice, International and SYGMA. Excluding the impact of our divested Mexico business, sales grew 3.8%. The Total U.S. Foodservice volumes increased 0.1% and local volume decreased 0.2% in the quarter. U.S. Broadline volumes increased 0.6%. These results were sequential improvements as compared to Q4. For our USFS local business, this represents a sequential volume improvement of 120 basis points, outpacing the industry's 60 basis points traffic improvement for the quarter. It remains early in our fiscal second quarter, but I am encouraged to share that we are seeing continued year-over-year momentum in volume growth rates during the month of October. As Kevin highlighted, the benefits of our stabilized colleague population are fueling this performance alongside our newer sales professional, making meaningful contributions as they leverage training and tools to work up the productivity curve. These factors directly contributed to an acceleration in new account growth for the quarter. In fact, this was the highest rate of new account growth over the past 12 months, helping drive continued improvement in new-lost spread. Again, another reason for our confidence in delivering our FY '26 guidance. These sequential volume improvements also benefit our USFS segment results. Stable gross profit performance also included continued investment in our USFS segment. The year-over-year trends are an improvement versus FY '25 results, and we expect to deliver improving financial results in 2026 and beyond. Before moving along, I want to discuss a minor but important upgrade to our case volume reporting. As shown on Slide 14, we are updating our reported case growth figure to now also include volumes related to our center-of-plate Buckhead, Newport meat and seafood specialty platform. Our reported results for this quarter and the prior year period includes the update. Historically, these volumes were measured in pounds sold and therefore, not able to be reflected in our reported case growth figures. The change is relatively minor. And as you can see on the slide, it accounts for an approximate 0 to 10 basis points impact on average over the last 5 quarters. This change enhances our reporting to be more holistically reflective of our entire portfolio with the inclusion of an important growth engine. Important growth projects like Total Team Selling have the opportunity to shift cases from broadline into specialty channel, and this upgraded volume reporting will provide more external visibility to contributions from this program. The reporting it matches the agility of One Sysco world-class service to our customer across our portfolio. Additionally, SYGMA results this quarter were outsized. This included 4% sales growth and 39% operating income growth. While we expect more moderate results for the remainder of the year, SYGMA growth for FY '26 will be driven by operating efficiencies. Sysco produced $3.9 billion in gross profit, up 3.9%; gross margin expansion of 13 basis points to 18.5% and improved gross profit per case performance. This notable margin improvement reflects effective management of product cost inflation and a mentality of continual improvement with cost savings driven by our strategic sourcing initiatives. Inflation rates in USBL were approximately 2.6%. International inflation on a constant currency basis was slightly higher for the quarter at 4.5%. Overall, adjusted operating expense were $3 billion for the quarter or 14.2% of sales, a 14 basis point increase from the prior year. The increase was driven by planned investments in higher growth areas of the business with fleet, building expansion and sales headcount along with lapping $10 million in incentive compensation from the first quarter of the prior year, which negatively impacted adjusted operating expense growth by approximately 100 basis points and adjusted EPS growth by approximately 150 basis points. Corporate adjusted expenses were up 1% from the prior year, reflecting continued investments, lapping incentive compensation from last year and other costs. This was balanced with accretive productivity cost out and corporate efficiencies, including improved insurance costs. Overall, adjusted operating income grew to $898 million for the quarter, reflecting continued strong growth in our International and SYGMA segments. For the quarter, adjusted EBITDA of $1.1 billion was up 0.1% versus the prior year. Now let's turn to our balance sheet and cash flow. Our investment-grade balance sheet remains robust and reflects a healthy financial profile. Our $3.5 billion in total liquidity remains well above our minimum threshold and offers flexibility and optionality. We ended the quarter at a 2.9x net debt leverage ratio. Turning to our cash flow. We generated approximately $86 million in operating cash flow, up 62% on a year-over-year basis, reflecting working capital optimization. Our free cash flow in the quarter was a negative $15 million, reflecting typical seasonality and the timing of CapEx. Now I would like to share with you our expectation for FY '26 as seen on Slide 19. During FY '26, we remain on target with key guidance metrics. This includes reported net sales growth of approximately 3% to 5% and to approximately $84 billion to $85 billion. These assumptions include inflation of approximately 2%, which we are seeing now, volume growth and contributions from M&A. We continue to expect full year 2026 adjusted EPS of $4.50 to $4.60, representing growth of 1% to 3%, which includes an approximate $100 million headwind from lapping lower incentive compensation in fiscal 2025, an impact of roughly $0.16 per share. Similar to last year, we are providing full visibility to the carryover impact from incentive compensation for the year and by quarter as outlined on Slide 20. In Q1, this carryover impact included a $10 million headwind, which equates to approximately $0.02 per share to adjusted EPS. These headwinds impact year-over-year comparability for expenses in FY '26. That being said, we are pleased that our compensation system is a pay-for-performance program and that our structure is in place to properly motivate behavior and drive positive performance in the business and fiscal year 2026. Excluding the negative impact of the incentive compensation on 2026 our outlook for the adjusted EPS growth will deliver approximately 5% to 7%, with the midpoint in line with our long-term growth algorithm. To help with phasing for Q2, based on the current environment, we expect EPS growth of approximately 4% to 6%, with the midpoint in line with the current consensus EPS of approximately $0.98. This includes positive total and local USFS volume performance. As Kevin highlighted, we currently expect our USFS local volume improvement to improve at least 100 basis points sequentially quarter-over-quarter in Q2 of 2026. As previously disclosed, Q2 reported sales growth rates will also be impacted by the divestiture of our Mexico JV, which we fully lapped in December this year. This financial guidance assumes improvements to be driven by our Sysco-specific initiatives with industry foot traffic and macro environment similar to what we have seen over the past couple of quarters. We are proud of our strong track record of dividend growth and dividend aristocrat status. For FY '26, we remain on target for shareholders return through approximately $1 billion in dividends and approximately $1 billion in share repurchase planned for the year. This is all based on our current expectations and economic conditions and could flex based on M&A activity for the year. Specific to our dividend, our expected payout for FY '26 equates to a 6% year-over-year increase on a per share basis. In terms of leverage, we continue to target a net leverage ratio of 2.5 to 2.75x and maintain our investment-grade balance sheet. Now turning to a few other modeling items. For FY '26, we expect a tax rate of approximately 23.5% to 24% and adjusted depreciation and amortization now to be approximately $850 million, reflecting a now relatively longer useful life for our fleet assets balanced against underlying D&A related to continued capacity expansion domestically this year as well as international markets over the coming years. Interest expense is expected to be approximately $700 million, while other expense is now expected to be approximately $65 million. CapEx is expected to be approximately $700 million, representing less than approximately 1% of sales. This includes growth and maintenance CapEx as we grow into our investments we've made over the past few years while also maintaining an eye towards driving ROIC by optimizing spend levels across the enterprise. Looking ahead, we are confident in our position and remain focused on leveraging our strength as the industry leader to drive customer growth while continuing to create value for our shareholders. With that, I will turn the call back to Kevin for closing remarks. Kevin Hourican: Thank you, Kenny. We are pleased with the strong performance we delivered in Q1 and more importantly, the significant progress we are making as a company across sales, merchandising and operations. We posted a strong exit velocity in the quarter, and that momentum has continued into October. Our leadership team placed tremendous focus on improving our local business, strengthening our gross profit through strategic sourcing, and tightly managing our expenses through strong supply chain productivity improvement. The team stepped up and delivered a beat across all 3 areas. The strong performance from sales, merchandising and operations enabled a compelling adjusted EPS growth year-over-year. I'm proud of the team for their performance and the momentum that we are building. As we look toward the remainder of 2026, we expect to build upon the Q1 momentum and deliver against our targets. Our top line results will further strengthen based upon sequential improvement in our local business throughout 2026. We have a diversified business with #1 market share in the non-commercial sectors of food-away-from-home. Non-commercial continues to grow year-over-year, and this segment is much more resilient in a challenging economic cycle. Our strong International segment performance gives us another form of diversification. Food-away-from-home is a good business. It takes share from the grocery channel every year. And as I've said before, the pie is getting bigger and Sysco intends to take a bigger slice of that expanding pie. We are confident shareholders are positioned to benefit from our industry-leading dividend, compelling ROIC, intentional share buybacks and improving financial results. Our performance in Q1 displays strong progress in the early innings of improving our local business. The momentum will continue throughout 2026. I'm thankful for our leadership team and our entire 75,000 colleague population for the strong efforts to start the year. The collective team's hard work is poised to have a positive impact in 2026. With that, operator, we're now ready for questions. Operator: [Operator Instructions] We'll go first this morning to Alex Slagle of Jefferies. Alexander Slagle: A question on the local sales force productivity. If you could talk more about what you're seeing there? And any metrics behind where we are on the curve. I guess specifically, the percentage of new hires that are now over that 12- or 18-month hurdle when productivity really inflects and I know leveraging new tools is a piece of this, but how this tenure and retention really correlates to the local case growth step-up that you saw in September and October because I know the industry was a little more sluggish during that period. Kevin Hourican: Alex, thanks for the question. This is Kevin. Yes, I'll just start with some of the key stats and facts. Plus 130 basis points of progress in Q1, a rate of improvement, 2x the overall traffic improvement to the market, positive inflection in local, really important to communicate what we shared on our prepared remarks, October stronger than Q1, which Kenny then reiterated in his prepared remarks, we anticipate to make at least an additional 100 basis points of progress in Q2 versus Q1 because we're building momentum. That is the main point of our call today is building momentum. It starts and ends, Alex, with your question, which is stabilized retention. We are exceeding our retention target year-to-date for our sales colleagues, which is enabling us to have less churn of our sales force coverage to our customer population. We're absolutely working hard on improving overall productivity of our sales consultant population, and we're pleased with the progress that we're making in that regard with more progress still to be made year to go, as you just annotated because of the percentage of folks that work for us that are new versus what would be historical. We will continue to make progress in productivity. Key growth initiatives are helping in that regard, but I want to be fundamentally clear, it's the stability of the workforce that is creating the biggest force of positive momentum. With that, growth initiatives like Sysco Your Way and Total Team Selling are continuing to produce. We have Perks 2.0 and AI360 that are helping us build momentum. Most notably, as I said, Q2, an additional minimum of 100 basis points of progress that we will make. Kenny, anything else you'd like to share? Kenny Cheung: Yes. So Alex, this is Kenny. I agree with Kevin. I'll add a few more points here. The bumper sticker is we are extremely confident in our momentum in our local case growth. As I said earlier, 100 basis points sequential improvement quarter-over-quarter in terms of volume. And so the question would be, why are you so confident? There's a few proof points from our side to what you just said, our product -- our SCs are becoming more productive as they climb up the productivity curve. And that's the reason why this quarter, you saw the highest increase of new customer onboarding, which is driving that new-lost spread that Kevin spoke about earlier. Number two is, and as you know, there's a trailing benefit as well. Obviously, when you sign up a new customer, they help with a new/loss, but they also drive penetration. And this quarter, we saw that pick up for us, 90 basis points improvement quarter-over-quarter. So that helped a lot as well. Then last but not least, right, the retention playbook that Kevin mentioned earlier, we're seeing that in our 12 to 18 months kind of our new SCs, but we're also seeing that with our experienced SCs. So you have the entire portfolio of SCs climbing up the curve, which drives overall productivity. Alexander Slagle: And I just had a follow-up [indiscernible] a really strong quarter and the outlook for the second quarter looks pretty strong. So I mean is there additional conservatism in the back half guide on earnings? You're up 5%, 6% or so in the first half. So I just wanted to clarify? Kevin Hourican: Yes. Yes. So I guess the question we had, the question is how confident are you in your guidance? And how should we think about the rest of the year? So from our vantage point, we are really confident in our guide as we're coming off of a quarter beat. This is 2 quarters in a row that we beat. And just to clarify, the $0.03 beat this quarter, $0.01 of it was driven by higher expected sales flowing down to OI and the other $0.02 was driven by prudent tax planning below the line. So that's, again, it's a nice beat all around the P&L. In terms of our confidence in the guide, Alex, we are extremely confident, and there's 3 reasons why. Number one is momentum, right? We continue to see, as Kevin said, September being the strongest month for us, and we're seeing the SCs climb up the productivity curve. In our national business, we're also seeing momentum there as well. We're seeing nice recent wins, really strong retention as well, and we have really solid start ship dates coming up, and we expect national to pick up starting with Q2. And we are taking share, and we are taking share profitably. The second piece why we're confident is most of the growth that we expect this year is really driven by initiatives within our control. We expect the macro environment to be similar to the past couple of quarters. So again, this includes the commercial productivity, the supply chain productivity that Kevin mentioned earlier. So again, we feel very, very good about the robustness of our P&L. and then last but not least, just the whole -- just the fact that we have a strong IG balance sheet and a very diversified portfolio that positions us well in any environment. Operator: We'll go next now to Edward Kelly of Wells Fargo. Edward Kelly: I wanted to follow up on -- really on case volumes, I guess. As we think about total case volumes, the improvement there was more modest than what we saw in local. Can you maybe just speak to what you're seeing on the total case volume side excluding the local, maybe what you're seeing by customer type? And then as we think about things moving forward in the guidance, I'm curious, you highlighted local volumes being better by about 100 basis points or so in Q2. Is that what you saw in September and October? And then Kenny, I thought I heard you say something about national account maybe picking up. I'm curious as to how you think about that total local spread moving forward as well, that should be somewhat similar or if local picks up with -- sorry, total picks up again. Kevin Hourican: Okay. Ed, thank you for the questions. This is Kevin. So I'll start. And yes, I will pick up on some of what Kenny mentioned relative to our national sales business. As it relates to your question about September and October, I'm not going to provide additional by-month commentary for Q1 other than to say the following. Every single month in Q1 was better than the prior month. And June was -- excuse me, July was better than June. So it's each month sequentially better exit velocity continuing into October. October being stronger than September. And as Alex mentioned a moment ago, the overall market is not stronger in October versus September, which again shows that the improvement we're making is because of initiatives within our control. September for the overall market was not stronger than August, but September for Sysco was stronger than August. So it's a point of confidence on the progress that we're making is within our control, being driven by the stability of our workforce, being driven by key initiatives. And as I just said a second ago, October is stronger than September and the confidence in our ability to say that Q2 will be at least 100 basis points better is directly fueled by what we're seeing in our performance outcomes quarter-to-date in Q2. As it relates to national sales, just a little bit more color on what Kenny said. We're confident we will improve our volume in national sales year to go for the following reasons: number one, we have an incredibly high customer retention rate in national sales, greater than 98-plus percent. We have an incredibly strong national sales customer retention; number two, noncommercial within national sales continues to perform really well. So that's food service management, travel and hospitality. Our government business, all falling within noncommercial continues to do well. The business that's under pressure within national, and this shouldn't be a surprise to anyone on this call, our large national chain restaurants. That business is down on a year-over-year basis from a traffic perspective and it's down year-over-year from a volume perspective. We're growing our national in total because of strength that we're producing and delivering within non-commercial. To be clear, as it relates to the P&L, national restaurants will be the least profitable portion of the business. And therefore, as you're somewhat communicating in your question, a tilt to growth in local being higher from a contribution perspective is a net positive in the P&L. As we think about the rest of the year from a national sales perspective, Kenny mentioned this a moment ago, I'm just going to reiterate it. We have strong wins already signed that have start ship dates in the year-to-go period. And when we include the strong retention of existing customers, plus the start ship dates that are coming in the year to go, our volumes will pick up in national for the full year. If you think about the year in aggregate, and I believe it's we have national and local growing similarly for the full year. And over the longer course of time, we would anticipate local growing faster than national, but for fiscal 2026 growing roughly in parity. Last comment for me on national. We are definitively taking share in total in the national segment, which includes non-commercial. If I throw in International as a part of the answer to this question as well, similar pattern happening in our global business. I mentioned in my prepared remarks, our local business in International, up 5% from a volume perspective and that growth is happening in every single geography internationally. We're doing extremely well in local, taking share in local in every international geography. And the national segment within International is similar to what we're seeing in the U.S. where national restaurants in the global setting are slightly down, but we are very pleased with the profit growth that we're delivering in large part because of that growth in local internationally. Kenny, is there anything else you'd like to say? Kenny Cheung: Yes. No, I agree with Kevin. Just one thing to add, Ed, is just to clarify, Sysco, we improved every month from a growth rate standpoint in local throughout the quarter, and we inflected versus the market, the greatest actually in September, and that has continued based on the first few weeks of October. And just to recap the phasing for the year in terms of local, first quarter was USFS was down 0.2%. We expect to step up sequentially by at least 100 basis points in Q2. And given the momentum that we have and the initiatives that are within our control, we'd expect that step up even further in the back half of the year for the full year to be positive. Operator: We'll go next now to John Heinbockel of Guggenheim. John Heinbockel: Kevin, two questions. So if you adjust for FreshPoint, right, it looks like Q2 is probably up, I don't know, 1.3%, 1.4%, 1.5%, somewhere in that ballpark. And I know the ambition is to get to close to 4%, right, where you're growing your sales force. Maybe you talk about the ability to get there if the macro backdrop stays this week. I don't know how close you can get to that, if there's anything else to tweak to make up for that. So that's question one. And then two, penetration up 90 bps. What's happening with drop size? Has that now inflected positively? And I would think if it has -- that's going to have a positive impact on profitability in the U.S. soon, if -- or pretty soon, I would think. Kevin Hourican: John, thank you for the question. Just to go back to we're crystal clear on the at least 100 basis points of improvement, that's versus USFS. So the starting place is negative 0.2%. We will improve USFS total local volume by at least 100 basis points in Q2. That is what we're communicating today. And we're building momentum each month better than the prior month. We do not believe that external environment improving is required to continue to perform and to continue to improve because of the stability of our workforce, the lapping of lost customers a year ago and the increased impact of our initiatives that we launched throughout Q1. So that's the clarity on USFS volume. As it relates to penetration, improvement driving drop size improvement, on a year-over-year basis, we increased penetration with existing customers. So absolutely that had a positive pull-through to drop size. And as I said in my prepared remarks, I've been here for 6 years now. It was the, by far, strongest quarter we had from the supply chain productivity perspective and service outcomes perspective. We measure service outcomes as a measure of on time and in full -- addition cost per piece shipped. We had a very strong quarter in our supply chain, fueled by two things. Kenny and I talk about this all the time. Retention improvement in our supply chain has been notable and significant and that started more than 12 months ago, this time a year ago, I was talking about a stable workforce in our supply chain. We are now seeing the benefit of that stability of retention in our supply chain, our drivers are more productive. Our selectors are more productive, they're working more safely. They're having fewer accidents out on the road. Shrink results are improved year-over-year. And when you put all that together, cost per piece improved versus our plan, and we had a beat in supply chain cost per piece versus our own plan for the quarter. And job size is a part of that, John. It is a part of it. The more notable part is the improvement in retention and the improvement in productivity from our supply chain workforce. Kenny, anything to add? Kenny Cheung: Yes. Just one thing to clarify, you mentioned the 4% growth or volume on local. That is in perpetuity, right? Assuming if you grow your sales force by 4%, in perpetuity, your volume increased by 4% as well. For this year, we're not expecting that level given the fact that we have a new cohort coming in, it takes 12 to 18 months for them to get to speed. So that is not -- it's a lower number than 4%, but it is positive for the year. Operator: We'll go next now to Jake Bartlett with Truist Securities. Jake Bartlett: Great. Mine was on the composition of the sales growth guidance that you reiterated. And specifically on the food cost inflation, I think you said that you expect -- continue to expect 2%. It was much more, I think, 3.4% in the first quarter. So one is, I want to make sure we're talking about the same thing, initially. Last quarter, you had said that you were at that 2% as of the time of the quarter, but you reported the 3.4%. So trying to just make sure I understand what the trends are in the product cost inflation and making sure I understand kind of your guidance of 2% relative to the 3.4% currently. Kevin Hourican: Yes, Jake, we understand and appreciate the question. We've guided the full year at approximately 2% from an inflation perspective. You're right to point out that the total inflation rate in Q1 was a bit higher than that, mostly from international, which Kenny can provide some additional color in a second. In the spot moment, in the month that we're in, the rate of inflation in the domestic U.S. business has come down from the number that you reported back to that approximately 2% rate, because we're starting to see some deflation in select categories. So poultry on a year-over-year basis is deflationary, dairy on a year-over-year basis because we're lapping avian flu from a year ago is now deflationary, and produce has been deflationary for going on 12 months now. The beef market continues to be inflationary at the high single-digit rates, but also slightly down from where it was, which was higher previously. So Kenny says this all the time. We have 13 attribute groups. The inflation number that we quote is the aggregate of all of them. Our full year peg is approximately 2%. It came in a little bit hotter than that in Q1. We're seeing it reduce to that targeted 2% rate in the quarter that we are currently in. And we're confident we can grow our business profitably and deliver our operating income and EPS growth. In spite of whatever the inflation or deflation is over time, we've proven that over the past 6 years in an inflation cycle, we can expand GP and even in a deflation cycle we can expand GP. Kenny, is there anything you'd like to add? Kenny Cheung: Yes. Yes. Jake, we're currently operating what I would call a normalized inflationary environment. In Q1, USBL inflation was roughly 2.6%. And to Kevin's point, International was roughly 4.5%. That's really driven by two markets, Canada, which is tariff related as well as GB, which is 7% wage inflation mandated by the government. The real takeaway is that even with this environment, we're seeing total GP up 4% and expansion of GP margins by 13 basis points for our company. As Kevin said, we have a diverse set of product categories. We don't over-index on one or two of them. And long story short, we are operating in this environment that sits around 3%, and that bodes well for the overall industry. And the last one that Kevin mentioned is the center-of-the-plate, we do expect center-of-the-plate to moderate towards the back half of the year as well. Operator: We'll go next now to Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. Just curious on the broader restaurant industry. You mentioned easing trends to close the quarter. I think you said, and we've seen industry data that showed September was weaker than August. I think you mentioned that October was weaker than September, yet Sysco going in the opposite direction, which is encouraging. Just wondering if there's any particular drivers of the industry weakness that you've seen, whether by segment or geography or income levels or ethnicity, it seemed like we're moving in the right direction until a couple of months ago. So just wondering the drivers that you've seen that have led to that slowdown? And then I had one follow-up question. Kevin Hourican: Okay. Thank you, Jeff. I'll start. And this data is publicly available. So I'll just reference the Black Box data. Q1 was better than Q4, positive 60 basis points of traffic. So in aggregate, Q1 was better than Q4. It is appropriate to point out that September was softer than Q1 in its entirety, and that has continued into October. It's QSR and larger national chains that are underperforming relative to the overall book of business, independents, this is a good thing for foodservice distributor, independents are performing better. Whether or not that is a secular trend and if that's something that's going to be long -- continued into the future, it remains to be seen. But at the present moment, independents performing better, restaurants independents performing better than large national chains and particularly better than QSR. And you understand our profitability, you understand that, that trend is actually a positive for Sysco. The more important point, though, is our performance relative to the market. While the overall traffic to market was softer in September versus the quarter, we experienced the complete opposite, September being our strongest period of the quarter, which Kenny then referenced as the spread, the positive inflection, the delta between us and the overall market widened and it widened even further in October, and we anticipate that will continue as the year progresses because of the initiatives that we launched, we have an opportunity to take share. Reminder, despite our being the biggest in this space, we have 17% market share. We have a meaningful opportunity to profitably grow our business regardless of the overall macro conditions. You said you had a follow-up, so I'll toss to you for that. Jeffrey Bernstein: Yes. Just on Slide 8, it seems like you guys made a -- draw a line in the sand saying at least 100 basis points of sequential improvement from the down 20 bps in the first quarter. Just wondering whether there's any -- I mean, it sounds like you're encouraged by October. But the industry is clearly volatile. I know some would say it looks aggressive especially when it's not fully in your control. I know you said there's a lot of self-help driven, but your confidence in the 100-plus basis points of the industry were to continue to slow as we've seen in September to October. Again, it seems like a big promise to make with still 2-plus months to go and the industry slowing. Kevin Hourican: We're confident in our ability to deliver the at least plus 100. We're 1/3 of the way through the quarter, October stronger than September despite what the market overall is doing. We have line of sight towards the ability to make progress in the year to go for a host of reasons, the stability of our workforce initiatives, AI360 is not even 45 days old, and our colleagues are increasing their usage of it. They're asking it questions, getting real-time answers. Do you have cauliflower pizza crust in-stock in Cleveland today? It gives them the exact item number, the quantity on hand. They can sell it right then and there. If they want selling tips on how to introduce that product to the customer, they can get the answer to that too. Teach me how to sell this item, on and on and on. And the AI tool gets smarter in each and every at-bat, we have thousands of colleagues using it on a daily basis. So the tool's utility is increasing every day. Just as an example, Perks 2.0, not live for more than 45 days. Our customers are beginning to see the differentiation in the service that they're providing. I want to be really clear about one thing, Perks 2.0 doesn't cost Sysco, any more money. This is about prioritization of these customers over the average book of business that we have. Why? Because they're the most profitable and important customers that we have. So their delivery window is going to be their preferred window. Our on-time rate to that window will be higher. Their fill rate on the products they order will be higher. If they have a damage case on their delivery, we're going to give them credit immediately versus having them have to wait a couple of days. These are thorns in the site in the customer experience. So these initiatives are picking up progress. they're picking up their impact over time. And therefore, we are confident in our ability to deliver on the at least plus 100 in Q2. Kenny, anything you'd like to add? Kenny Cheung: Yes. So agree with Kevin. We're confident Jeff, for two reasons. One is, as you said, right, the majority of our initiatives that yields the 100 basis points improvement is within our control. This is the SC retention. And the other piece is, we're also encouraged by the fact that we continue to see select geographies already hitting our growth expectations, driven by SC additions, improved retention, and that's carrying into Q2 as well. So we have proof points of actual data that certain markets are already hitting that stride. The last thing I would add is that around traffic. Foot traffic, it is a proxy, if you will, of our business, it's important. And we also have a big part of our business that are not tied to restaurants, right? 2/3 of our national portfolio are actually what we called recession-resilient, non-commercial categories, FSM, foodservice management, education, health care and the like. And even within restaurants, if you can think about it, Jeff, right? We have QSR, the casual dining, the fine dining. So we're pretty well diversified from a restaurant, non-restaurant standpoint. And we also have International, which serves as a strategic counterbalance, enhancing the resiliency and stability of our total overall business. Operator: We'll go next now to Sara Senatore at Bank of America. Sara Senatore: I just wanted to -- I guess two questions. The first is I wanted to take maybe the guidance question from a different perspective. Obviously, the top line is very encouraging. But I think, as you said, guidance for 2Q is sort of in line, and you didn't raise the full year. So maybe you could just talk a little bit about the extent to which some of the investments that you're making maybe start to moderate. And so you see a little bit more of that flow through. I don't know if it's later this year or if it's next year? And then I just have a quick follow-up. Kenny Cheung: Yes. Yes. Thanks, Sara, for the question. So your question is more around the investments and what we're seeing around the flow-through around it. So here at Sysco, we are playing the long game, right? We're investing in our business, and we're also seeing incremental return to your point, from the investments we made in previous quarter and periods. So for example, the two biggest investments we made as a company, number one, is the sales force. We've hired 750 people plus in the past couple of years. As we mentioned earlier, we're seeing all of them climb the productivity curve right now and trying new account growth penetration. And that's the reason why you're seeing an outsized growth versus the market in Q1. And we expect that to continue in Q2 and the outer quarters. So nice return on investments and the pacing is there. And we're doing it the right way as well. We're taking share profitably. That's really important, taking share profitably. And that's the reason why you're seeing both dollar expansion on the margin as well as the rate expansion on the margin. In terms of the other big investment that we have in our portfolio, it's the 10 new facilities that we're building around the world, 7 are in the U.S., 3 are in international. And I can tell you firsthand, we have a strong pipeline, robust pipeline that can fill the capacity in the spot, and as time progresses and it kind of goes hand in glove, as SC become more productive, you're still filling the pipeline with accretive cases through our DC. So overall, we feel very confident that, for example, in USFS, as time progresses, we will continue to make strides on operating income, gross profit and volume and achieve leverage in the outer periods. Sara Senatore: Great. And then just on the market share point, I know you talked about having relatively low market share, 17%. I know it's even lower in specialty. As we think about those share gains, should I just think sort of a reversal of what we saw last year, where Sysco obviously ceded some ground just as you have some transition in the SC group. But -- or do you have like a kind of a target market share in mind as you think about whether it's again, broadlines where I think you're closer to the 30% and versus specialty where it's kind of 9% or high single digits. So anything -- any kind of color on how you think about that market share. Kevin Hourican: Yes, Sara, it's Kevin. Great question. To be clear, again, been here 6 years, we've taken market share. We've grown market share each and every year for the past 6 years in total. In the past fiscal 2024 -- excuse me, fiscal 2025, we over-indexed in national, clearly taking share in national, and we underperformed our own expectations in local. This year, we intend to take share in both national and local in total, as evidenced by the positive inflection and we're growing faster than traffic at the present period in our local business. And national, I already addressed earlier with my prepared remarks, so I won't repeat that. As it relates to where will outsized share gains come from, that was the second part of your question, you actually just quoted all the stats. It's going to come from the specialty. We have a very strong, significant and robust broad line business. We have an opportunity to meaningfully grow our specialty produce, our specialty meat, our equipment and supplies, our Asian Foods and our Italian foods businesses. And sometimes, that gets delivered on a broadline truck. So the cases may show up in broadline, sometimes that gets delivered on a specialty truck. The growth is about the following key things: having product available, Kenny talks all the time about these are unique items. These are bespoke items. These are custom cut items. These are the direct request of an end customer items. That's why they're called special. So it's about the product first we definitively have that product available when most broadliners don't. Number two, it's about having a sales colleague, who is an absolute expert in that category, be it produce or protein or any of the other businesses. We have dedicated specialists who know these categories. Part of that incremental headcount investment that Kenny talked about is in that specialty business. The last within specialty is the service model. There are some restaurant customers for those specialty categories want very late in the evening cutoff, and they want to deliver 6, 7 days a week because it's fresh product. They pay for that. We build that into the pricing of those products, which, therefore, have a higher gross margin. And we can check all of those boxes. And we can check those boxes in geographies where broadliners cannot, and we can check those boxes where most smaller specialty entities cannot. And to be crystal clear, that's who we're competing against in specialty. We're not competing against big names. We're competing against thousands of very small companies who have 1 van, 2 vans in a specific geography. To be clear, we buy more local produce, local produce than any other company in the geographies we compete with and we're able to provide that product to our customers in a cost-effective manner. So we're going to meaningfully grow our specialty business. It's approximately a $10 billion business today. We said at our Investor Day, we see $10 billion of growth coming from specialty over the next period of time. Sara, we haven't said what percent of market share that will drive in the next year. We'll save that for a future Investor Day. But we appreciate your question. Operator: And ladies and gentlemen, we do have time for one more question this morning. We'll take that now from John Ivankoe of JPMorgan. John Ivankoe: The question is on independent restaurants and specifically the difference in performance between existing account penetration and new account generation. Certainly, some of the data that we see is that the industry is actually growing at a surprisingly high number of new units and many of those units are actually driven by independents. So firstly, tell us if you see the same? And secondly, it does sound like a number of the tools that you have such as such as AI360 and Perks, sound to be to drive market share at existing business, can you talk about some of the tools that the sales force now have to specifically generate new account penetration? Kevin Hourican: Excellent, John. Thank you for the question. Appreciate it. What we're pleased about in Q1is we saw improvement from the new-lost spread, and we also saw improvement from penetration. We saw a 220 basis point improvement year-over-year in new-lost spread and a 40 basis point improvement in that same metric Q4 into Q1. And the even more important point is that what happened with penetration, we increased our penetration with existing customers by 90 basis points from Q4 into Q1. And I do attribute that to two things, AI360 is increasing our sales colleagues' ability to know what to be selling on that given visit on that given day, to solve problems in a timely manner and to provide suggestions on what could be sold. So it is absolutely a penetration, full direct focused selling effort. Perks is the exact same thing, we are not interested per se in growing the number of Perks customers. We're interested in retaining those customers at a high rate and penetrating even further with those customers because as the other John always says, that's the most profitable case on the truck. So these tools are meaningfully focused on increasing penetration. To the other part of your question, which is, okay, well, what about new? The largest opportunity for improvement there is the incremental headcount investment that we've made. Kenny talked about it, 750-plus people over the past couple of years. Those folks need to build their book of business. We provide them a starter book of business. They need to go fill in that business over time. And the accounts that we seed them with come from existing sales reps. Another thing Kenny talks about is now that existing sales rep can grow their book of business by backfilling that customer that they have transitioned to a net new hire. Equally important, John, by having significantly improved colleague retention year-over-year, we're going to have less account churn at Sysco. So think about last year, if a colleague departed, their book of business was multiple dozens of customers that needed to be reassigned to existing sales reps. That decreased our existing sales rep's ability to go out and prospect. We're now very stable in our turnover. In fact, more new people are interested in working at Sysco than in my 6 years here, that stability improvement increases the ability to be out prospecting. Last but not least, AI360 also includes a tool to help with prospecting. It's essentially a maps app that provides our colleagues with visibility to accounts they should and can be targeting within their selling geography, giving them suggestions on what to sell. For the colleagues that are using that maps app, they are speaking to us specifically saying it's helped them close more customers and helping them do their prospecting work more effectively. Kenny, anything to add to that? Kenny Cheung: Yes. We're really pleased with the progress we've made on AI360 and Perks, right? For example, AI360, we have a correlation usage and the results as well. So that's -- it's a bit early innings right now, but we're definitely seeing a correlation between usage and results. And the other thing I would say is the results is not just driving conversion on sales. It's also reducing -- shortening the lead time, if you will, to be full productive, right? So think of it as a tool that, yes, it can help you identify prospects and drive sales conversion, but it's also a tool that helps the SC learn along the way, a pocket teacher, if you will. So that's a lot of accretion for our P&L as well. So from our standpoint, I think it's going really well and here's an important part. We don't need AI360 or Perks to hit our numbers this year. That's accretion upside to what we currently have. Operator: Thank you, gentlemen. Again, ladies and gentlemen, this will bring us to the conclusion of today's conference call. We'd like to thank you all so much for joining Sysco's First Quarter Fiscal Year 2026 call. Again, thanks so much for joining us and we wish you all a great day. Goodbye, everyone.
Laura Moon: Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's third quarter 2025 earnings conference call. Last night, we filed our 10-Q and an 8-K that includes our earnings release and unaudited supplemental information for the third quarter of 2025 that is available for your review on our website at piedmontreit.com under the Investor Relations section. During this call, you will hear from senior officers at Piedmont. Their prepared remarks, followed by answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements address matters which are subject to risks and uncertainties, and therefore, actual results may differ from those we anticipate and discuss today. The risks and uncertainties of these forward-looking statements are discussed in our supplemental information as well as our SEC filings. We encourage everyone to review the more detailed discussion related to risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont's future revenue and operating income, dividends and financial guidance, future financing, leasing and investment activity and the impacts of this activity on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements, and these statements are based upon the information and estimates we have reviewed as of the date the statements are made. Also on today's call, representatives of the company may refer to certain non-GAAP financial measures such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and supplemental financial information, which were filed last night. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments regarding third quarter 2025 operating results. Brent? Christopher Smith: Thanks, Laura. Good morning, and thank you for joining us today as we review our third quarter 2025 results. In addition to Laura, on the line with me this morning are George Wells, our Chief Operating Officer; Chris Kollme, our EVP of Investments; and Sherry Rexroad, our Chief Financial Officer. We also have the usual full complement of our management team available to answer your questions. After nearly 4 years of steady losses, U.S. office demand turned around in the third quarter. According to CoStar's data, about 12 million more square feet of office space was occupied than returned to landlords in the third quarter, the first positive figure since late 2021. More impressive was that it was also the largest total since the second quarter of 2019. The broader leasing data continues to validate what Piedmont has been experiencing on the ground. Pent-up demand is resulting in record levels of leasing across the Piedmont portfolio. In fact, 5 of our operating markets experienced positive absorption with Washington, D.C. and Boston being the exceptions. In addition, new tenant leasing velocity has materially strengthened in 2025. The third quarter's total square footage leased on new agreements in the United States, excluding renewals, is estimated to have reached about 105 million square feet and is now within 10% of the 2015 to 2019 national quarterly average of about 115 million square feet. No doubt, after a challenging 4 years, the office sector is turning the corner. One explanation for this sector shift is a surge in large tenant leasing. The limited availability of large blocks of premium space typically sought by major occupiers and corporate tenants is accelerating the decision-making process. Despite generally slow hiring and an uncertain economic outlook, the upward trend in leasing volume signals that tenants still have a strong appetite for office space. With the supply pipeline contracting and prime availability is becoming scarce, more demand continues to chase a rapidly reducing supply landscape. According to JLL, the cycle of footprint reductions is tapering off as today's users of over 25,000 square feet are cutting just 2.2% of their footprint at renewal. Inventory for high-quality space, either new or renovated is increasingly scarce and office construction has been reduced by an additional 20% from the second quarter with new supply not a factor in most of our markets. These market dynamics have limited high-quality supply and growing demand are allowing Piedmont to materially increase rental rates across its portfolio. And with asking rents still ranging from 25% to 40% below the rates required for new construction, we believe existing high-quality office has a long, long runway for rental rate growth. Within the Piedmont portfolio, which comprises newly renovated, highly amenitized buildings paired with our hospitality-driven service model, we are experiencing multiple tenants competing for full floor spaces, providing the backdrop for Piedmont to increase rental rates at our projects by as much as 20% during the year. By way of example, at our Galleria on the Park project in Atlanta, we executed our first $40 per square foot gross rental rate at the end of 2024. In this quarter, we completed numerous transactions in the mid-40s and have increased rents now to $48 per square foot. Across our portfolio, our hospitality-driven environments have allowed us to increase rental rates to such an extent that we now estimate that more than half the portfolio's in-place rents are at least 20% below market. Our strategy to strengthen the Piedmont brand within the tenant community as the landlord of choice is driving more than our fair share of leasing demand, and it's been reflected in our transaction volumes. Having now leased over 10% of the portfolio over the last 2 quarters, more than 1/3 of the portfolio in the last 2 years and an astounding 80% of the portfolio since the beginning of 2020, equating to almost 12 million square feet since the pandemic. Delving into the numbers, we are thrilled with our third quarter results, exceeding consensus FFO by 3% and achieving record levels of leasing. Most exciting is that all the leasing the team has accomplished this year is positioning Piedmont for sustainable earnings growth. Our backlog of uncommenced leases have reached almost $40 million on an annualized basis and substantially all of those leases will commence by the end of 2026. Piedmont executed approximately 724,000 square feet of total leasing during the quarter, including over 0.5 million square feet of new tenant leases. This new tenant leasing represents the largest amount of new tenant leasing we've completed in a single quarter in over a decade and brings our total year-to-date leasing to approximately 1.8 million square feet. Importantly, over 900,000 square feet of our 2025 new leasing relates to currently vacant space, and it's likely this number will reach over 1 million square feet by the end of the year. That level of absorption equates to $0.10 to $0.15 per share of incremental annualized earnings, an indication of the growth we believe our portfolio is poised to experience. Of note, the 3 largest leases completed during the third quarter related to our out-of-service Minneapolis portfolio, where we're experiencing incredible demand, as George will talk more about in a moment. Our leasing success during the third quarter pushed our in-service lease percentage up another 50 basis points quarter-over-quarter now to 89.2%, bolstering our confidence in achieving our year-end goal of 89% to 90% leased. While not reflected in our lease percentage, our out-of-service portfolio, again, comprised of 2 projects in Minneapolis and 1 in Orlando has experienced astounding market receptivity as differentiated amenitized workplaces continue to garner the majority of leasing in the market. At the end of third quarter, Piedmont's out-of-service portfolio stood at over 50% leased and is approaching 70% leased, including those that are in legal stage today. We couldn't be more excited that the leasing pipeline and continued tenant demand for our buildings positions both the in-service and out-of-service portfolios to achieve 90% leased next year. Furthermore, we anticipate the out-of-service assets will reach stabilization by the end of 2026. In addition to the overall volume, third quarter leasing, as expected, resulted in favorable economics with rental rates for space vacant less than a year, reflecting almost 9% and just over 20% roll-ups on a cash and accrual basis, respectively. In fact, as a result of the repositioning of the portfolio, in the past 2 years, Piedmont leased over 5 million square feet with rental rate roll-ups of approximately 9% and 17% on a cash and accrual basis, respectively. Finally, cash basis same-store NOI also turned positive this quarter as some previously executed leases began to reach the end of their abatement period. With over $35 million of annualized revenue currently in abatement and due to start paying cash in 2026, we expect same-store cash metrics to continue to improve. As George will touch on, leasing momentum remains strong, including over 150,000 square feet of leases signed during the month of October and a robust pipeline with approximately 400,000 square feet currently in the legal stage. I cannot emphasize enough that the broader macro factors, along with our successful portfolio repositioning and elevated service model has and should continue to drive Piedmont's ability to grow FFO organically. We're still on track to meet or exceed our 2025 financial and operational goals with confidence in our ability to deliver mid-single-digit FFO growth or better in 2026 and 2027. Before I hand the call over to George, I want to mention that we have once again achieved a 5-star rating and Green Star recognition from GRESB, placing us in the top decile of all participating listed U.S. companies for this prestigious recognition. I hope that you'll take a moment to review our recently published corporate responsibility report, highlighting the team's hard work and many accomplishments that went to achieving this record. The report is available on our website under the Corporate Responsibility section. With that, I will now hand the call over to George, who will go into more details on the leasing pipeline and third quarter operational results. George Wells: Thanks, Brent. Strong demand for Piedmont's well-located hospitality-inspired workplace environments generated exceptional operating results for the third quarter. A record 75 transactions were completed for over 700,000 square feet, well above our historical average for the second quarter in a row. New deal activity surged, accounting for 75% of total volume and topping last quarter's record amount. Like last quarter, large users are driving new deal activity to record-breaking levels with 9 full floor or larger leases executed this quarter with another 6 large deals in late stage. Around 15% of new leases signed this quarter will begin recognizing GAAP revenue this year with the remaining 85% throughout 2026. Our weighted average lease term for new deal activity stayed consistent at approximately 10 years. As we've experienced now for 5 straight quarters, expansions exceeded contractions largely to accommodate customers' organic growth. Atlanta and Dallas were the driving forces behind strong economics. As Brent mentioned, we posted a 9% and 20% roll-up for the quarter on a cash and accrual basis, respectively. Our overall weighted average starting cash rent of nearly $42 per square foot was essentially unchanged from the previous quarter, though we do anticipate more rental growth as our portfolio crosses into the low 90s lease percentage. Leasing capital spend was $6.76 per square foot, up slightly when compared to our trailing 12 months as this quarter's leasing volume was dominated by new tenant activity where leasing concessions are generally higher than renewals. Net effective rents came in at $21.26 per square foot, reflecting a 2.5% increase from the previous quarter. Sublease availability held steady at 5% with a modest amount expiring over the next 4 quarters. Atlanta was our most productive market during the third quarter, closing on 27 deals for 250,000 square feet or 1/3 of the company's overall volume with new lease transactions accounting for 75% of that amount. Most notable, our local team mitigated a large fourth quarter 2025 expiration at Medici with a 35,000 square foot headquarter requirement and achieved the highest cash roll-up for the quarter at 30%. Medici is uniquely located within a luxury mixed-use development catering to wealth managers and ultra-high net worth family offices. We anticipate additional cash roll-ups there, 20% or more as another 40,000 square feet is expiring soon, and our pipeline remains strong. At 999 Peachtree in Midtown, we continue to experience encouraging activity to backfill Eversheds's remaining 150,000 square foot expiration in May of 2026. We currently have 4 proposals outstanding, which total 125,000 square feet at significantly higher rental rates. 999 Peachtree has set a new standard for repositioning assets in Midtown Atlanta, and we remain confident in our ability to backfill this known vacancy at very favorable economic terms. Minneapolis once again was our second most active market, capturing 8 deals totaling almost 200,000 square feet, the vast majority of which was new deal flow into our redevelopment portfolio. The Piedmont redevelopment strategy underway at Meridian and Excelsior is generating tremendous interest with another 125,000 square feet in the proposal stage. Our team has moved asking rental rates up another 5% from last quarter with rates now in the low 40s up 15% from pre-redevelopment phase at the beginning of the year and the highest within its submarkets. We continue to be the clear landlord of choice in the Minneapolis suburbs as many once competitors surrounding projects are now either dated, uninspiring or financially impaired. Meanwhile, downtown is experiencing noticeably more foot traffic as 2 of Minneapolis' top 10 employers, Target and RBC Wealth Management recently increased their mandates to 4 days a week. Deal flow at our U.S. Bancorp is growing, and we're close to signing a new deal that would backfill 1 of the 3 floors being vacated next quarter. Dallas is quite active for us as well with 16 transactions for 156,000 square feet. Most notable was a 56,000 square foot deal with a global data center service provider in one of our 1.5 million square feet Las Colinas portfolio, which has experienced a surge of leasing activity for the year, moving up from 82% at the beginning of the year to 91% at the end of the third quarter with another 35,000 square feet of deals close to being signed. Additionally, we're exchanging proposals to renew Epsilon and the subtenants for roughly 50% of its footprint. Our local team has pushed asking rates there up 15% to 20% over the last 6 months. Overall market conditions in Las Colinas are improving rapidly and led all Dallas submarkets in net absorption for the quarter and year-to-date. With Wells Fargo's 850,000 square foot new campus in Las Colinas being delivered this quarter and no other development underway, Piedmont is poised to see additional rental growth here over the next several quarters. At 60 Broad, we continue to work with the Department of Citywide Administrative Services regarding New York City's long-term extension for substantially all of its space. Unfortunately, additional delays during the planning process will result in the execution of a potential lease to spill over into early 2026. Coming back to the overall portfolio, we remain bullish about our near-term leasing prospects. Our leasing pipeline remains robust even after 2 straight quarters of record new leasing activity. And as Brett mentioned earlier, now has over 400,000 square feet in the late-stage phase with insurance, legal, accounting and financial services driving demand for new deals. Outstanding proposals remain steady as well, sitting at 2.4 million square feet for both our operating and out-of-service portfolios and comparable to last quarter's volume. As I noted on our last call, we have seen a large uptick in full floor users ranging from 25,000 to 50,000 square feet across a wide range of industries and throughout most of our markets. Considering our leasing momentum and a modest number of expirations in the fourth quarter, we remain comfortable in achieving our lease percentage guidance of 89% to 90% for our operating portfolio. Our redevelopment portfolio, which is on track to meaningfully contribute towards 2026 and 2027 FFO growth, saw its lease percentage spike for the second quarter in a row from 31% to 54%. Based on early and late-stage activity, we project this portfolio to reach 60% to 70% by year-end. I'll now turn the call over to Chris Kollme for his comments on investment activity. Chris? Christopher Kollme: Thanks, George. As we have said for several quarters, we remain focused on pruning certain noncore assets throughout our portfolio. We are under contract on 2 of our land parcels. Both are contingent on time-consuming rezonings. So if these are approved, neither will close in 2025. We are actively marketing another small noncore asset that could potentially close around the end of the year. The rationale for this disposition is entirely consistent with recent sales. There are no assurances that any of these will close, and as is our custom, acquisitions and dispositions are not included in any of our projections. On the acquisitions front, we are certainly seeing elevated interest in the sector among more traditional institutional investors. The debt markets continue to improve and differentiated office environments have proven their resilience and durability over the past few years. High-quality office is no longer redlined, and liquidity is growing in the sector. Dallas, in particular, has seen a handful of sizable fully priced transactions over the past 6 months. We remain active in reviewing opportunities in Dallas and elsewhere. We will be disciplined and patient. Rest assured, our team is thinking creatively around compelling opportunities, including evaluating potential transactions alongside institutional capital partners. We do intend to put ourselves in a position to be more active on the transaction front in 2026. With that, I'll pass it over to Sherry to cover our financial results. Sherry Rexroad: Thank you, Chris. While we will be discussing some of this quarter's financial highlights today, please review the earnings release and accompanying supplemental financial information, which were filed yesterday for more complete details. Core FFO per diluted share for the third quarter of 2025 was $0.35 versus $0.36 per diluted share for the third quarter of 2024, with a $0.01 decrease attributable to the sale of 3 projects during the 12 months ended September 30, 2025, and higher net interest expense as a result of refinancing activity completed over the past 12 months. This was offset by growth in operations due to higher economic occupancy and rental rate growth. As I have mentioned on the last several calls, our lease with Travel and Leisure in Orlando commenced in September and will contribute meaningfully to our fourth quarter results. AFFO generated during the third quarter of 2025 was approximately $26.5 million. It was a relatively quiet quarter from a financing perspective. However, as previously announced, we did amend our revolving credit facility and term loan during the quarter to remove the credit spread adjustment from the SOFR-based interest rates applicable to those 2 facilities, thereby lowering the all-in rate on each facility by 10 basis points. As we've highlighted before, we currently have no final debt maturities until 2028 and approximately $435 million of availability under our revolving line of credit. We continue to evaluate balance sheet management options, including traditional bonds and hybrid instruments to smooth our maturity ladder and reduce our interest costs. Based on the current forward yield curve, we expect all of our unsecured debt maturing for the remainder of this decade could be refinanced at lower interest rates and thus be a tailwind to FFO per share growth. To illustrate how powerful this tailwind could be, I'll use the example, if we were to refinance the remaining $532 million of our outstanding 9.25% bonds at current rates, we would generate approximately $21 million of interest savings and be $0.17 accretive to FFO per share. At this time, I'd like to narrow our 2025 annual core FFO guidance from a range of $1.38 to $1.44 to $1.40 to $1.42 per diluted share with no material changes to our previously published assumptions. Please refer to Page 26 of the supplemental information filed last night for details of major leases that have not yet commenced or currently in abatement. As of September 30, 2025, the company had just under 1 million square feet of executed leases yet to commence and an additional 1.1 million square feet of leases under abatement that combined represent approximately $75 million of future additional annual cash rent, which will fuel the mid-single-digit future earnings growth that Brent mentioned earlier, although it does demand additional capital spend in the short term. With that, I will turn the call over to Brent for closing comments. Christopher Smith: Thank you, George, Chris and Sherry. Our portfolio of recently renovated, well-located hospitality-inspired Piedmont places continue to set the standard for the office market, helping us to drive leasing volumes to all-time highs. On that point, you may recall that we started 2025 with an operational goal to lease a total of 1.4 million to 1.6 million square feet, which was inclusive of approximately 300,000 square foot renewal by the New York City agencies. Today, we reiterated our revised guidance of 2.2 million to 2.4 million square feet, but note that, that does not anticipate the completion of the New York City lease this year. In effect, we're on pace to lease 1 million more square feet than we anticipated at the start of the year, and much of that leasing was for currently vacant space, an astounding accomplishment I want to commend the Piedmont team for. With office vacancy declining for the first time in years, quality space is becoming harder to find and new developments are becoming more expensive for occupiers. We believe that the recent investments that we've made in our portfolio, combined with our customer-centric place-making mindset will continue to set us apart in the office sector, enabling us to push rents to all-time highs across the portfolio and generate consistent earnings growth. We will continue to concentrate our resources on driving lease percentage above 90% and increasing rental rates while opportunistically refinancing above-market rate debt to further drive FFO and cash flow growth. With that, I will now ask the operator to provide our listeners the instructions on how they can submit their questions. Operator?[ id="-1" name="Operator" /> [Operator Instructions] Our first question is coming from Nick Thillman with Baird. Nicholas Thillman: Maybe for Brent or George, you commented a little bit on just expansion versus contraction. So I just wanted to clarify, is that within the Piedmont portfolio when you're quoting those numbers? And then as you look at the new leasing and the strength there, has that been more new-to-market requirements? Or has that been market share gains in flight to the Piedmont portfolio? Just a little bit of color there would be helpful. Christopher Smith: In my prepared remarks, Nick, I was referring that 2.2% with the JLL report noting that large users, 25,000 square feet or greater on the U.S. data set was reducing footprint substantially less. So that's that comment, not specific to our portfolio. But George can talk a little bit more to that. We are seeing more expansions than contractions for sure. George Wells: Thank you. It's amazing. It's been 5 quarters in a row we've had expansions. I mean this past quarter, we had 16 expansions versus 2 contractions for a net positive 40,000 square feet. But if you look at the totality for the past 5 quarters, looking at 55 expansions versus 15 for a net of about 120,000, 130,000 square feet. So the dynamics in our portfolio have been quite positive. And in terms of where new leasing activity is coming from, the second part of your question, Nick, I would say that it's mostly intra-market moves in terms of those users wanting to upgrade to higher quality space. Christopher Smith: I think the exception to that might be Dallas, where we continue to see a robust inbound activity. Atlanta, a little less so, still up from where we were pre-pandemic, but Texas does seem to have a little bit more inbound and particularly Dallas. Nicholas Thillman: And those larger requirements, the 25,000 to 50,000 square feet, are those -- if you look at what they're currently in place, what's the size change there? Is that a downsize? Or is it keeping the same sort of footprint? Just trying to get a better understanding of kind of larger tenant behavior. We're hearing about slowing hiring. Just -- I guess, how far are we along in the rationalization of just office utilization as you kind of look within the markets for larger usage. George Wells: This is George, again. Absolutely. Well, let me first hit this. We had -- last quarter, we had 15 deals that were 25,000 square feet or larger for aggregately about 800,000 square feet. And this quarter, we have in terms of proposals outstanding 18 that are fit that size. So it continues to grow within our overall portfolio. I would say it's mixed. I mean in a couple of instances, we're hearing about some consolidations. In other words, companies wanting to create a cost to bring their employees back together for increased collaboration. In some other cases, it might be a small deduct, which is they used to justify moving to a higher quality space and paying higher rents. Christopher Smith: I think that's one thing we continue to see within the marketplace is the desire to upgrade the quality of your space to bring your people back. And that means having an environment and an offering that is compelling. And that's where our renovations and what we've implemented across the portfolio in terms of our service model, while we're garnering our more than fair share of that leasing. Nicholas Thillman: That's helpful. And Brent, you alluded to this runway you have for occupancy growth and mid-single-digit FFO growth at a steady state over the next 2 years. You guys touched a little bit on some of the larger expirations of the portfolio and the coverage you have there. But maybe anything over 100,000 square feet, you guys touched on the Piper, you touched on the Epsilon, you touched on 999. Anything else that we should be looking at as we kind of look at roll over the next 2 years? Christopher Smith: I think from our perspective, the chunky ones, if you will, in 2026 are well known, which does give us the confidence to be able to look into '26, given the prior leasing success, even with those known move-outs to feel confident that there's going to be earnings growth next year. Unfortunately, office REITs were a battleship. It takes a lot to move. But when you do start going, the momentum can carry. As we look ahead into '27, there are a couple of larger expiries. It's a little early to tell overall. They're in Atlanta, which is also our headquarters location and where we have the most depth in the market. So I feel very good about where we're positioned with those, but it's still 20, 24 months out for those. And so it's going to still take a little bit of time to get clarity, but we think we are well positioned for renewal. [ id="-1" name="Operator" /> Our next question is coming from Anthony Paolone with JPMorgan. Anthony Paolone: Brent, just following up on just the conviction level that earnings will grow next year. I know you'll give more specifics when you actually provide guidance. But just wondering, do you think that comes by way of some of the debt refinancing that Sherry talked about potentially existing? Or do you think the core in and of itself can move higher? Christopher Smith: Great question, Tony. And I want to clarify that is organic growth only within a static portfolio. It assumes no acquisitions, dispositions or refinancings. As you know, we don't have any debt maturities really for several years until 2028. But as Sherry noted on the call, we do have a pretty large embedded mark-to-market benefit if we were to refinance those bonds, which she outlined in her prepared remarks. And we will capture that at some point between now and when those mature in '28. But rest assured, from a risk management perspective, the team is very focused on optimizing that transition from high-cost debt to lower cost debt. And what we've laid out in terms of FFO growth, again, is just from organic lease only. The comments that Sheri made is upside on top of what I described as operating growth. Anthony Paolone: Got it. And then maybe, Sherry, on the debt refinancing, what -- I guess, what are the gating factors to doing something there? Because, I mean, you kind of laid out the spread is pretty clear. Just what would it take to kind of go do something there? Sherry Rexroad: Well, as we've discussed before, there are a variety of ways in which you can refinance the 9.25% bonds that are outstanding. You can do a purchase them in the market, you can do a tender or you can do a make-whole. There's no gating factors related to that, but there are processes in place and there are periods of time where you can or cannot be in the market. And so that's really kind of the variables that we'll be considering as we go forward. The spread right now between the 9.25% and where we would refinance if we did alongside is about 400 basis points. And that's what's behind the math whenever we said, if you hypothetically could buy back all of them, that you would achieve an interest savings of about $21 million or $0.17 a share. Anthony Paolone: Got it. Okay. And then just last one, if I could. You kind of talked about being out in the market looking at potential deals out there and the liquidity coming back to office and so forth. I mean what does a typical acquisition that Piedmont might be looking at, at this point look like in terms of cash on cash, type of assets, going in occupancy versus maybe the opportunity? Just kind of what is the type of stuff you're looking at right now? Christopher Smith: Great question, Tony. As we continue to canvass the market, not only the existing markets we're in, but as we've talked about in the past, select other Sunbelt markets where we would consider growing if we took a dot off the map elsewhere. We really see 2 buckets of opportunities within those markets. The first would be, I would call, an opportunistic set. That's the situation where we've talked about in the past of looking for a partner, which we have identified several partners who would be looking for more like 20% IRRs or greater and really probably going in with a lower yield, higher vacancies and a significant amount of capital that needs to go into those. And so that's why we continue to think about a partner in that situation because it would be an earnings drag and an FFO drag and an occupancy drag to bring it in-house initially. But we always have a mindset if we're going to put any capital to work and our time and effort, it would be something we'd want to bring into the REIT over time. And so those situations, we have looked at a few to swung at buying some debt on some situations didn't work out in that scenario. But we continue to work with those partners. I'd say that bucket right now, kind of comes and goes or off-market deals. But right now, I'd say it's in the $500 million range in terms of opportunity set that we're looking in that bucket. And then the other category would be more on balance sheet, what I would consider more value-add in nature, very similar to what we've done in our Galleria project in Atlanta or 999 in that it's going to be on balance sheet. It's going to be a little bit lower IRR, probably call it mid-teens. You'd have an opportunity to go in that would probably be really close to where we trade, maybe a little bit below or a little bit above, but with more importantly, the opportunity to grow that yield by, call it, 300 basis points over a couple of years. again, through our leasing model, our service model and leveraging the platform to drive that value. So they may start with GAAP yields in the 8.5% to 10% range and drive from there and cash might be, let's say, 50 basis points less. But those assets are going to be probably 70-ish percent leased, like I said, and give us a good opportunity to lease up. One thing that we do think is unique about the Piedmont story is while other groups may be chasing particularly private capital, long-term wall, brand-new assets, we do feel like there is a dearth of capital chasing well-located, good bones, but older vintage assets like a Galleria here in Atlanta, where we've had admit success or a 999. And so those campus, large kind of unique ability to create your own environment interest us and then highly accessible, walkable mixed-use environments also interest us. And there are very good opportunities set around that bucket. I'd say right now, we're looking at roughly $800 million or so that I would characterize as that value-add on balance sheet component. And unfortunately, right now, given our cost of capital, we're not able to move on those immediately, but we continue to keep them warm and continue to have dialogue so that when we do feel like we have a green light from the market to grow externally, we're prepared to do so in pretty short order. [ id="-1" name="Operator" /> Our next question is coming from Dylan Burzinski with Green Street. Dylan Burzinski: Most of my initial questions have been asked, but I guess just one quick one. In the past, you guys have sort of talked about taking some noncore assets to market. Just sort of curious where you guys are at in that process and if you're starting to sort of see capital market side of things clear up a little bit as the recovery story in terms of the fundamentals start to pick up here. Christopher Smith: Dylan, thanks for joining us today. And in regards to dispositions, it's kind of -- it's tough. It's still challenging, honestly, given the mindset in the office sector that everybody deserves a deal. And if it's not 10 years of WALT and just built the last 4 years, I would say it doesn't price efficiently, which is great if you're buying assets, not optimal if we're trying to sell. But we continue to be focused on pruning, as you noted, the noncore assets that can sell into this market and/or just we don't have conviction that we'll have and be able to drive long-term value. So we do have an asset in the district that we're in the market with. I would say we continue to feel like the district remains a challenging market that will not likely turn around in D.C. And so we will hopefully execute on that asset and continue to pair back our exposure in the district itself, still very much have conviction in Northern Virginia, and we're seeing good leasing velocity there and uptick in our assets in terms of absorption. But the other markets that we would consider noncore are those where we have very few assets and we can't seem to grow and/or want to grow. And of course, that would be Houston, which has long-term WALT on one of the assets and then Schlumberger great credit in another. We're going to continue to look to dispose those in '26 as well. They've been in the market, and we'll reintroduce them again, hopefully in a more constructive environment. But on that environment, it takes leasing really to give investors the conviction to underwrite an asset, vacant space roll in a constructive manner. And so what does give us positive, if you will, hope that we'll be able to execute on some of this in '26 is that we are seeing more leasing in our markets, and that should give a better underwriting conviction in terms of rates and absorption and not just underwriting vacant space stays there forever. And then finally, we do have our asset in New York City, as we've noted, and that will likely be something we would look to monetize upon a long-term lease at that asset. The overall environment as well as improving, particularly for that asset in the debt capital markets. It would be a chunkier disposition. And so having the ability and you're seeing the strength right now in the secured debt markets will also improve execution, particularly on that New York City asset and when we monetize it. [ id="-1" name="Operator" /> [Operator Instructions] Our next question is coming from Michael Lewis with Truist Securities. Michael Lewis: I'm sorry if I missed this, but did you say why New York City was pushed back again? And with that lease expiration now kind of almost right on top of us, is there any reason for concern there that they might do something surprising, give back space or anything else? Christopher Smith: Michael, it's Brent. Thanks for joining us today. Great question. We hadn't touched on it in specifics. And given it's a live transaction, I don't like to get into a lot of detail. But as we've noted on prior calls, and we are still very highly engaged with both DCAS, the Department of Citywide Administrative Services who runs the leasing process for the city. They're working with OMB. And of course, there's also 3 different agencies within that block. So there are a lot of moving pieces and groups that need to weigh in. As we've noted on prior calls, though, it is a unique envelope that is their own entrance, their own elevator bank, a building within a building, if you would add, you would say. And so the other note would be downtown in Manhattan, there are very now a few large blocks, competitive buildings that we would historically have been competing with. Some of them have been converted to residential as well. And so we feel like it's, I guess, not as much a concern as they would go elsewhere in lower Manhattan. And then the fact that there's an $8 million holdover penalty on top of their current rental rate that's on an annual basis. But if they do trip over into holdover, we reiterated to them as a public company, we will be upholding that in the pandemic, we were a little bit more immediate on that. Of course, if they renew, we're not going to enforce that. But it is a pretty heavy stick that also goes with the care of a building that really suits the agencies well. We do recognize there is a new administration coming in. However, given the Department of Homeless and the other agencies there seem to be more geared towards helping the community, we think there is a strong likelihood that they will continue to stay engaged in this location. But at that point, that's all I can share, and we still remain very positive on a renewal sometime in the early part of '26. Michael Lewis: No, that's helpful. And as far as the $75 million of cash rent that's kind of pending signed but not paying yet. You give a lot of great detail in the supplemental package, but there's a lot of detail. Could you -- at a high level, how should we think about that $75 million coming online, for example, what percentage of that might be might be paying by the end of the first half of '26 versus the back half? And can you just kind of, at a high level, kind of frame how that will flow through? Sherry Rexroad: So Michael, thanks for your question. And the -- most of it is going to hit in the middle of the year. I recommend about 70% within 2026. And note that those numbers are annualized numbers. So I'm trying to see what other clarity I can give you. Does that help? Michael Lewis: Yes. No, yes, that's helpful. And then just my last question. Christopher Smith: I might add real quick -- sorry, Michael, I might add, you think about that $75 million, it's really split into 2 buckets, right? There's $40 million of yet to commence. And that's a pretty wide margin historically that we would say that would be 3% of the portfolio. It's now approaching, I think, almost 5% of the portfolio. And so we're expecting a lot of that, if you will, the $40 million commit next year more towards the middle of the year to the end. So we might realize roughly about $26 million of that $40 million within 2026 itself. On the cash component, which is about $35 million, that's going to lead in on a similar pace as well. So again, $35 million is your annualized number, not all that's going to start paying cash next year. But on that same kind of ratio of about 60% of it, a little bit higher than that, say maybe 70% of it will be realized next year. Michael Lewis: Got it. And then lastly for me, this might be beating a dead horse. You talked about all the office leasing demand. Given the jobs numbers, I guess, back when we used to get jobs numbers, but what we know about jobs numbers and then AI, there was a headline recently layoffs now at Amazon. I saw an article that said more layoff announcements this year in any year since 2000. Is some of the leasing velocity, is it just that REITs like yourself, you had more space to fill, and so that helps explain why there's more new leasing volume? Or it sounds from your comments like it's really a stronger demand, just more space out there looking for a home. Any way to kind of reconcile those 2 things I just said, the jobs and the layoffs and everything that's happening in the broader economy with this -- what feels like a surge in office demand? George Wells: Well I'll start with that. Michael, this is George. It's interesting. We keep seeing announcements with layoffs. But as I kind of reconcile that to what we're seeing in our portfolio, we just -- I'm not seeing that affect us yet. And I get back to the comment that I made earlier, people are still looking to upgrade their space because collaboration and innovation just happens a lot quicker when you were working together. So just to give you some statistics that supports that theme in terms of why we don't see a letdown at all in overall leasing. We talked about overall proposals earlier at 2.4 million square feet overall. That's quite comparable to what we've seen for the past several quarters. But most notable is 2/3 of that is for new space, right? And so that is amazing considering how much new leasing activity we've done for the past 2 quarters that we continue to backfill that pipeline. And then looking even further out, the tour activity is an interesting early indicator of what's happening for demand in our portfolio. We did hit a low point in July for 34 tours, but that's kind of more seasonal than anything else. It recovered in August to 45 tours. September, 41 tours. And here we are sitting 27 days in October at 43 tours with 4 more days to go. So we're just not seeing it right now. Getting to your point about Amazon, it is interesting. It's new information we'd like to absorb. But although we have a large hub in Dallas, for them. They lease a tremendous amount of space through WeWork in other submarkets, which are more on the short-term situation. So if I were to guess, I suspect that those short-term contracts in these co-working operations would probably be first to go. Christopher Smith: And I'd add on that, Michael, really taken a step back, 2 things I think about our portfolio have linked to our success, and they're not just because we had more space available. The first is we don't lean in or have floor plate and buildings designed heavily for just tech use. It is much more of a professional services, fire, conducive amenity set, finish level, floor plate size, et cetera. And so as tech has pulled back from the -- being kind of the incremental lessor in a lot of markets, our assets have continued to perform because we were never beholden specifically to that group. As George noted, we do have tech in our portfolio, particularly in Dallas and Boston, but it's buildings that fit well for a law firm as well. And so that would be one factor. I think the other one is if you look at our portfolio and our strategy of having great assets, amenitized location, but we don't cost as much as new construction. So if you're a firm, a national firm or a local kind of regional firm, if you want to create a presence, regional headquarters, et cetera, and you want it to be fabulous space to bring your people back, but you don't want to pay $65 to $80 gross, you come to a Piedmont building. And so we are much more appealing to a larger segment of the market, in my opinion, and I think the data set shows that. And that's why we also have had so much uptick into our assets. And then you layer on the fact that a lot of landlords are kind of stuck in the capital structure that doesn't allow them to think creatively work with the clients and create the environment in the common areas that are necessary to lease space. So trophy is full and our set of assets are very compelling. I'll give you one last anecdote. We are working our buildings in Minneapolis at Meridian and having great receptivity in the marketplace. A tenant toured that building before the renovations were completed about 4 months ago. end up going to new construction and entering a lease on that new construction, they did come back to us. We don't have that deal, but they are very compelled now to see the completed product and the fact that, that's a 30%, 40% discount to new construction rents that they are about to enter a lease into. And we'll see if we'll get that 60,000 square foot user. But I think there's an opportunity to stag that because our environments are so compelling, we can compete with new construction, and we don't have to charge as much. And again, that goes to my point on our ability to push rate across a lot of the portfolio given we've done this investment, and we've got a service level that is truly differentiated, and it's not just that we have more available space. Michael Lewis: I can't argue with those leasing results. [ id="-1" name="Operator" /> As we have no further questions on the lines at this time, I would like to turn the call back over to Mr. Brent Smith for any closing remarks. Christopher Smith: Thank you. I appreciate everyone joining us this morning. I do want to remind you of 2 important dates. First, this Friday, Happy Halloween to all those. And then the second is in December, we are going to be at the NAREIT event in Dallas on the 8th. We're going to hold an office tour where we'll be sharing and showing off all the success we've had in our Dallas Galleria project. We'll also have additional brokers and others from the investment community, giving their thoughts and insights on the office sector. So please join us, reach out to either Sherry or Jennifer if you're interested in joining that tour and discussion and dinner. Hope everyone has a great week. Again, thank you again. [ id="-1" name="Operator" /> Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and have a wonderful day, and we thank you for your participation.
Operator: Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's Third Quarter 2025 Financial Results Conference Call. Please be advised that this call is being recorded. At this time, I'd like to turn the call over to Mr. Pete DeLongchamps, Group 1's Senior Vice President, Manufacturer Relations and Financial Services. Please go ahead, Mr. DeLongchamps. Peter Delongchamps: Thank you, Jamie. Good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply, conditions of market, successful integrations of acquisitions and adverse developments in the global economy and resulting impacts on demand for new and used vehicles and related services. Those and other risks are described in the company's filings with the Securities and Exchange Commission. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating with me on today's call, Daryl Kenningham, our President and Chief Executive Officer; and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'd now like to hand the call over to Daryl. Daryl Kenningham: Good morning, everyone. Let me start with a few highlights from the quarter before discussing our regional performance. Group 1 delivered an all-time record quarterly revenues driven by record results in parts and service and used vehicles, along with another quarter of very strong F&I performance in both the U.S. and the U.K. New vehicle PRU gross profit performance was solid and customer pay in both markets performed well, supported by healthy repair order growth. We've maintained cost discipline in the U.S. with good SG&A leverage less than 66% on an as-reported and same-store basis. Now turning to our U.K. operation. The U.K. environment remains challenging with inflation, wage and insurance cost pressures and the BEV mandate, which continues to compress margins. While the broader SAAR improved slightly in the quarter, much of that growth was fleet-driven and retail conditions remain soft. New lower-cost entrants are seeing increasing market share performance with cost-conscious consumers. However, this is not yet a significant factor in our business given our luxury leaning portfolio. Despite these headwinds, there are some bright spots in our U.K. business. Our aftersales business continues to expand with healthy customer pay operations. We are applying our U.S. aftersales playbook across our U.K. dealerships. For example, in the U.K., our stores now welcome walk-in customers, which we had previously limited. And we have fully reopened shop schedules, cutting appointment wait times from nearly 2 weeks to just a few days. And we're extremely pleased with the progress we're making in reshaping our U.K. aftersales business. New vehicle margins in the quarter remained steady year-over-year. Our used vehicle volumes in the U.K. were up nearly 4%. Our U.K. used vehicle teams have been successful exercising discipline in our aging and reconditioning process. F&I also delivered an excellent quarter with same-store PRU up $155 or greater than 16% year-over-year. Our team is focused on improving product penetration, which has resulted in same-store financing penetration increasing by over 4%. We're continuing to strengthen our business with initiatives to offset our cost increases. Since the acquisition of Inchcape, we've implemented a series of headcount reductions, systems-integration activities and selective franchise closures and divestitures to improve operational efficiency and to better align our cost structure with current market conditions. Our headcount reductions have included approximately 700 positions across the U.K. and our responsible portfolio management has resulted in the closure of 4 dealerships and the termination of 8 franchises. We're making meaningful progress on systems integration. Across our U.K. business, we've completed the consolidation of 11 DMS platforms, and we're rolling out a new business intelligence system now. We are also completing the final stages of our U.S., U.K. systems integration review spanning approximately 90 different systems company-wide. These actions are improving visibility, operational consistency and data-led decisions across the organization. In the third quarter, we formally notified Jaguar Land Rover of our decision to exit this brand in the U.K. within 24 months. We feel our efforts and some of our real estate can be more effectively utilized elsewhere. We are collaborating closely with our OEM partners at JLR to achieve a positive outcome for them and for Group 1 shareholders. It's our intention that this achieves a positive result for all concerned. Due to this decision, our U.K. portfolio was required to be tested for impairment. As a result, we took a $123.9 million asset impairment in the quarter. Also important to note, this decision was unrelated to the JLR cyberattack, which separately impacted our U.K. profitability by approximately GBP 3 million during the quarter. Those actions reflect our commitment to optimize our portfolio, control costs and focus our resources on winning through operational excellence. We will continue to refine the U.K. business, managing our headcount, rightsizing our network and prioritizing aftersales and F&I while leaning into our luxury platform and geographic diversity. This will position our U.K. business for long-term success. Now turning to our U.K. operation. Our U.S. teams continue to execute very well, maintaining operational discipline and customer focus across our dealerships. As a result, the business delivered another solid quarter of growth with healthy performance across all major lines. Demand remained consistent throughout the quarter, supported by balanced inventory levels and steady consumer interest, which we believe to be relatively healthy in the U.S. Our used vehicle units sold nearly set a record, only 40 units off of our all-time quarterly volume record. Our same-store sales in used vehicle outpaced the industry. F&I was outstanding once again with an all-time quarterly high PRU of nearly $2,500, combined with an impressive 77% new vehicle finance penetration. Aftersales achieved record quarterly revenue and gross profit, underscoring the strength and stability of this high-margin business. Our investment in our aftersales operation continues to capture growth and our initiatives around flexible scheduling, all-day Saturday operations and technician productivity continue to create new capacity and improve retention across our U.S. stores. Same-store technician headcount increased by over 4% due to our recruitment and retention efforts. On a same-store basis, our customer pay revenue increased nearly 8%. Warranty was up 16% versus a prior year comp that saw 20% growth. We continue to believe in the potential of our aftersales business, and we also believe that capacity and productivity are the keys to success. The overall U.S. environment remains dynamic with ongoing policy and trade uncertainty. We're maintaining a cautious but confident stance, balancing discipline in spending with targeted investment where we see long-term return. Our operational excellence is a key advantage, giving us the ability to adjust quickly to changing conditions. Now a word about our capital allocation. In August, we added Mercedes-Benz of Buckhead in Atlanta, Georgia to our portfolio. It's expected to be one of the best-performing stores in the U.S. for Group 1. It's positioned in a growing market and consistent with our cluster strategy and our disciplined focus on pursuing only those opportunities that will create long-term shareholder value. Just as importantly, we continue to opportunistically buy back shares of our company. Since the beginning of 2022, we've repurchased nearly 1/3 of the company's outstanding common shares. The acquisition landscape has been fairly quiet in recent months, and we continue to engage in researching opportunities in the U.S., but we are holding on further U.K. acquisition investment. We expect consolidation to continue in the future in both markets, and we believe we're well positioned with our OEM partners to capitalize on those kind of opportunities. Now I will turn the call over to our CFO, Daniel McHenry, for an operating and financial overview. Daniel McHenry: Thank you, Daryl, and good morning, everyone. In the third quarter of 2025, Group 1 Automotive reported quarterly record revenues of $5.8 billion, gross profit of $920 million, adjusted net income of $135 million and adjusted diluted EPS of $10.45 from continuing operations. Starting with our U.S. operations. Performance was strong across all business lines, both reported and same-store. Revenue growth was broad-based, led by record quarterly records in used vehicle, parts and service and F&I. New vehicle unit sales rose mid-single digits on both a reported and same-store basis, reflecting healthy demand and steady inventory flow. While new vehicle GPUs continue to moderate from the highs of the past few years, we have maintained strong operational discipline through effective cost management and process consistency. Expiring tax credits lead to increased BEV deliveries in the quarter at lower GPUs, negatively affecting U.S. new vehicle GPUs by approximately 6%. Our used vehicle operations performed well with record quarterly revenue and GPUs holding up well with only a slight 3% decline on a same-store and as-reported basis. These results reflect the benefits of our scale and operational flexibility, combined with our team's focus on disciplined sourcing and pricing in a competitive market. Our third quarter F&I GPUs grew over 5% or $135 and $126 on a reported and same-store basis versus the prior year comparable period, respectively. The performance by our F&I professionals has been outstanding to maintain GPU discipline while driving higher product penetration across nearly all product categories. Aftersales once again stood out as a major contributor, achieving record quarterly revenue and gross profit. Gross profit continues to benefit from our efforts to optimize our collision footprint, shifting collision space opportunistically to additional traditional service capacity and closing collision centers where returns do not meet our requirements. Aftersales remains one of our strongest engines of growth and stability. Overall, our U.S. business continues to perform exceptionally well, demonstrating both the strength of the consumer demand and the effectiveness of our disciplined process-driven operating model. Wrapping up the U.S., let's shift to SG&A. While U.S. adjusted SG&A as a percentage of gross profit increased 160 basis points sequentially to 65.8%, we view this as a good performance. We continue to focus on resource management and technology investments to maintain SG&A as a percent of gross profit below pre-COVID levels as vehicle GPUs further normalized. Turning to the U.K. Results reflected a challenging operating environment. However, same-store revenues grew across almost every line of business. New vehicle same-store volumes declined 4% and local currency GPUs moderated by 1% versus the prior year quarter, leading to a 6% decline in local currency same-store new vehicle revenues. Used vehicle same-store revenues were up over 5% on a local currency basis with volumes up 4%. However, same-store GPUs declined by over 24% on a local currency basis, leading to a similar decline in same-store used vehicle GPU, reflecting the challenging used vehicle market in the U.K. Aftersales and F&I year-over-year growth in both revenue and gross profit. The aftersales business remains an important stabilizer within the U.K. operations, along with F&I is a key area of focus as we work to enhance profitability. Same-store F&I PRU reached $1,106 with as reported and same-store PRU both increasing more than 15% year-over-year. On expenses, SG&A increased from the prior period, reflecting cost inflation and integration-related impacts as well as a lack of gross profit for the full quarter from our JLR operations due to the cyberattack. While we have executed target restructuring initiatives to improve efficiency and return the business to more sustainable cost levels, costs continue to increase, some of the government imposed through increased payroll tax-related charges. During the quarter, we also incurred modest nonrecurring restructuring charges tied to our restructuring efforts. In response to current market conditions, we are taking further actions to reduce our corporate headcount by approximately an additional 10%, and we are taking additional expense actions to save an expected $8 million in our stores. We will benefit from these savings in 2026. We will also be executing additional restructuring plans in future periods as we exit select OEM sites. In connection to the notification with JLR, we recognized a franchise rights impairment charge of $18.1 million, which is included in the impairment charge that Daryl mentioned earlier. We are taking decisive actions in the U.K. to control costs, strengthen operational efficiency and position the business for improved returns as market conditions stabilize. Turning to our balance sheet and liquidity. Our strong balance sheet, cash flow generation and leverage position will continue to support flexible capital allocation approach. As of September 30, our liquidity of $1 billion was composed of accessible cash of $434 million and $555 million available to borrow on our acquisition line. Our rent-adjusted leverage ratio as defined by our U.S. syndicated credit facility was 2.9x at the end of September. Cash flow generation through the third quarter of 2025 yielded $500 million of adjusted operating cash flow and $352 million of free cash flow after backing out $148 million of CapEx. This capital was deployed in the quarter through a combination of acquisitions, share repurchases and dividends, including the acquisition of $210 million in revenues, $82 million repurchasing approximately 186,000 shares at an average price of $443.81 and $6.4 million in dividends to our shareholders. Subsequent to the third quarter, we repurchased an additional 140,000 shares under a Rule 10b5-1 trading plan at an average price of $433.48 for a total cost of $60.9 million, resulting in an approximate 5% reduction in share count since January 1. We currently have $165.4 million remaining on our Board-authorized common share repurchase program. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website. I will now turn the call over to the operator to begin the question-and-answer session. Operator: [Operator Instructions] And our first question today comes from Bret Jordan from Jefferies. Bret Jordan: Some of your peers have talked about a U.S. luxury trend softening. Could you sort of give us any color on what you're seeing at the consumer, maybe luxury versus import versus domestic demand trends and GPUs? Daryl Kenningham: Bret, I wouldn't say that what we've seen is material enough yet to call it a trend. You've seen a little bit of shift between some of the big bakes. Audi is certainly a challenge. I'm not sure that's consumer related. But we saw a little bit of inventory build in some of the luxury makes in the third quarter. I think the real tell will be fourth quarter, which typically is the largest quarter of the year for the luxury makes and especially the Germans. And so before I think we would say we see a softening there, I'd want to see how the fourth quarter kind of shakes out and where that heads, to be honest with you. And Peter or Daniel may have another view based on their perspective. Peter Delongchamps: Bret, this is Pete DeLongchamps. I would tell you that our Lexus business remains very, very strong. BMW dealerships did well in the quarter. Like of Daniel's or Daryl's comment on the Audi business is certainly difficult. Bret Jordan: Okay. And then a question on the JLR exit, I guess, within 24 months. It sounded as if you might be reallocating some of those properties to other brands? Or is this -- when you think about business? Daryl Kenningham: Yes, we own the vast majority of those -- that real estate. And we've had some reviews of how it might be used in better ways, primarily automotive, other brands potentially. Some of them will stay JLR and transition to another owner. And then others, just through the consolidation work going on in the U.K. with all the OEMs, it might provide an opportunity for us in some of our cluster markets and other brands. Some of that is still undetermined. But that is an outcome that's a possibility. Yes, absolutely, Bret. Bret Jordan: Okay. And the housekeeping, I guess, of the $124 million impairment, $18 million of that was JLR... Daniel McHenry: So it's Daniel here, Bret. It's a combination there. So in terms of our franchise rights, $18 million was JLR. Now what that did was by terminating the JLR franchise, it triggered us to have to look at the U.K. entity as a whole and take a goodwill impairment. Now that goodwill impairment is not just JLR specific, it's the entity as a whole. So some percentage of the circa $100 million remaining will be relating to JLR. So 18-plus some percentage of the total business unit. Operator: Our next question comes from Rajat Gupta from JPMorgan. Rajat Gupta: Just to follow up on Bret's question on the U.K., just the reallocation-of-capacity question. Would you consider partnering with some of the Chinese brands here? It clearly looks like they're gaining a lot of share, putting some pressure on the legacy brands that you own. Curious if there's any thought process around that of maybe increasing exposure there? And I have a quick follow-up. Daryl Kenningham: Rajat, there, we have met with some of the Chinese OEMs about representing them. And we continue to consider that and review that. And we've also looked at that part of the industry and where we believe it's going in the U.K. We believe for the next several years, it will be primarily mass market focus and not luxury. At some point, we certainly get the luxury business. Our focus in the U.K. is primarily luxury. But we have looked at it. What we want to make sure that we are comfortable with is that the retail model is a good one for our shareholders. The rooftop throughput at retail for the Chinese brands is still quite low and the economics around these rooftop aren't what our other stores can generate at this point. But we realize, obviously, they're growing. We want to make sure that we're positioned well to take advantage of that if there's an opportunity. We are having some active dialogue. Rajat Gupta: Got it. Got it. That's helpful. And then just on the used GPUs in the U.S., it seems like it pulled back quite a bit sequentially, also down year-over-year. I'm wondering if you could elaborate a little bit more on that. Was it just some of the tariff tailwinds from the previous quarter going away, maybe some higher priced inventory that came with the quarter? Or is there -- or is it just a sign of just more competitive landscape on the used car side? Any thoughts there would be helpful. Peter Delongchamps: Rajat, it's Pete DeLongchamps. We've certainly seen stabilization through the used car -- in the used car business. But it does remain very competitive in the acquisition landscape of used cars. I think we've done a really good job of maintaining discipline with our auction purchases. The majority of our cars come from trades and customer outside purchases. But it's a business right now that it is dependent on how well you can acquire and how quickly you can turn. I think we maintained a 30 -- 31-day supply again. So we're comfortable with the performance of the used car operation in the current landscape. Operator: Our next question comes from Jeff Lick from Stephens Inc. Jeffrey Lick: I was wondering, Daniel or Daryl, if you wouldn't mind just giving some detail on the parts and service in the U.S. and the dynamics here, customer pay and warranty up 16%. Just as we go forward, is there anything that would skew the gross margin percentage, which obviously flows into gross profit dollars? Just the dynamics and we're lapping some tough compares now. Just any color would be helpful. Daryl Kenningham: Well, the encouraging thing, Jeff, this is Daryl, and I'm sure Daniel has a comment. The encouraging thing is our customer count grew. In the U.K., it grew almost 6% year-over-year. In the U.S., it grew 3%. So we were really pleased that we're adding customers to our shops, not just dollars. And so we feel like our CP business is still healthy, and we still feel like there's a lot of opportunity there. Warranty is really tough to predict sometimes, obviously. And we don't see any reason for necessarily a mix change. One thing that is happening is the -- I mean, a margin mix change, I should say. As the collision business is -- it's getting weaker and that can affect margin because a lot of the our wholesale parts sales go to the collision industry. And so overall aftersales margin may be helped by that on a percentage basis. So if the wholesale parts continue to climb. So at least the collision sector. But on CP and on warranty, we haven't seen that. I know there's been some discussion on margin percentages by some in the industry, but we haven't necessarily seen that. We don't necessarily really predict that either. So Daniel, I don't know if you have anything to add. Daniel McHenry: Jeff, the only thing that I would add around was customer pay, as Daryl said, continues to be strong. U.S. specific, we've grown by about 8% year-on-year. In terms of warranty, we've grown by just over 16% year-on-year. Now as we talked about in the earnings call, collision is down. We closed a number of our smaller collision centers turning those into customer pay work, and it's down about 11% in the quarter. Now the result of that is that our margin mix as a total company is trading upwards and our margin mix has gone up from about 54% to 55.2% in the quarter. Daryl Kenningham: CP margin was up year-over-year for us and so was warranty margin. Jeffrey Lick: Just a quick follow-up. I think maybe this is one for Pete. On your Slide 14, you guys do a good job of always disclosing the retention by model year, which I don't think your peers necessarily disclose that. Could you talk a little bit about -- I believe you guys are well north of what would be typical and just the dynamics there. Peter Delongchamps: This is on parts and service overview, retention? Jeffrey Lick: Yes. Peter Delongchamps: Yes, I think what we're working on, and it starts with the sale. And then if you take a look, Jeff, at our overall consistency with vehicle service contracts, maintenance, we are completely focused on getting our customers back into our shops, and we do that through constant follow-up. We do that by ensuring that pricing is right, making sure that schedules are wide open for appointments. And I think that when you take a look at the trend we've had over the years, and we've done a remarkable job with it, and this is where we've landed at 68-plus percent. Daryl Kenningham: Jeff, one of the things that we focus on, the way we measure retention is 2 visits in a year. Other people measure it differently. OEMs all measure it differently. we wanted a standard number we could use inside Group 1 across all our stores. The key in the future as the average mileage goes up, the age of the cars is still going up. Our average mileage on our service drives is almost 70,000 miles. And really, the key for us to continue to grow customer pay is in reaching those higher mileage, older vehicles. And one of the keys to doing that is when we vertically integrated our own data management with our customers starting about a year ago so that we now have a much clearer view, much better view of where our customers are going and when they're likely to need service next using propensity modeling and things like that, that help us do that. And so we have to be able to reach deeper into that ownership cycle as time goes, and we're really working hard on that, really working hard. Jeffrey Lick: Well, the results show. Best of luck in the next quarter. Operator: Our next question comes from Daniela Haigian from Morgan Stanley. Daniela Haigian: So one on forward demand. We've kind of passed through the peak tariff fear from April. We're now seeing OEMs revise up their guidances, clearing the bar on these improved gross tariff impacts. Are you seeing any decontenting or changing in pricing on new model year vehicles in excess of the normal price hikes? And how are you thinking about that going into next year? Daryl Kenningham: We haven't seen anything in excess of normal price hikes, Daniela. We've seen a little recontenting not -- I wouldn't -- I would say it's normal. there hasn't been any broad announcements about major pricing. There's been a couple of specific pricing actions with smaller OEMs. As we think about it and in more discussions we have with our OEM partners is they are taking a longer view on it, and they're going to try to recover the tariff impacts over a longer period of time and some of that -- and they will absorb most of it in general. And we're seeing very little pricing that can be attributable to tariff increases. And I think that will continue, to be honest with you, unless something radically changes with the tariffs, we think that's probably what will happen. And Pete may have some more. Peter Delongchamps: No, I think, Daryl, you just covered it. The only thing I would add is you take a look at the financial services companies and the strength of the financial services companies can bring down those -- some of those additional costs through leasing subbing rates, which bodes well for those OEMs that have strong financial services companies. Daniela Haigian: Got it. That's helpful. And then one more, maybe, Pete, for you. Daryl Kenningham: Our captive lenders are really -- a real advantage, we feel like. And we -- they drive loyalty, they drive finance attachment, and that's a real key for Group 1. Daniela Haigian: Absolutely. Absolutely. And then in that vein on auto credit, obviously, there's a lot of headlines out there. And obviously, Group 1 skew is much higher on the credit quality curve. But just as investors continue to focus on risk to the consumer, have you seen any change in consumer behavior in the last few weeks starting the fourth quarter? Daryl Kenningham: We have not seen a change in consumer behavior. And actually, we're seeing increased penetration rates on new and used. And then most of the headlines are centered around the deep subprime, which we don't play in. So a channel checked the majority of our lenders prior to this call and the business continues to be robust, and there's still a lot of appetite with the lenders to make car loans with us and our customers. Operator: And our next question comes from Glenn Chin from Seaport Research. Glenn Chin: I guess just a couple of questions on the U.K. So just broadly on the macro. I mean, this used to be close to 25-million-unit market. Can I just ask where you see it settling out? And what needs to be done to improve it? I mean, is it lower energy costs or government incentives? And does it need to get worse before it gets better? Daryl Kenningham: It doesn't need to get worse before it gets better. What has to happen is the throughput through per rooftop has to grow. The margins were steady year-over-year. The aftersales business is healthy. We've got work to do on costs, as we've mentioned. And the OEMs are all working to try to rationalize their networks to a level that meets today's SAAR of around 2 million rather than the 2.5 million that you referenced, Glenn. So as we take rooftops out, that should improve the throughput of the remaining networks, and they're all working feverishly on that. Some of them are in our opinion, taking a healthier approach than others. Groups like Volkswagen, groups like Mercedes-Benz, groups like BMW are doing a really great job working with their dealer partners to try to affect that. And I think their outcomes are going to be really good, really healthy. But that's a real key is to try to get the throughput per rooftop up to a better level. And then while we continue to take costs out, we'll continue to do that and focus on that. Daniel may have something to add. Daniel McHenry: Glenn, there's a couple of things that I would add. If you look at the forward-looking SAAR curve for the U.K., it's pretty static out over the last -- the next 5 years in terms of approximately 2 million. I think the important thing for us as a company is that the premium sector within that 2 million remains pretty constant with a little uptick over the next 5-year period. In terms of the U.K. government at this moment in time, they continue to be taxing both the consumer and the business fairly heavily. And I can't really see that changing in the short term. But as Daryl rightly said, there's a lot that we can still do around cost. And equally so, we bought a lot of stores over the last 18 months, and we are working on portfolio rationalization, which I think will make the business a much stronger business coming out of that in 18 months' time. Glenn Chin: And can you -- with respect to that rationalization, Daniel, can you give us a feel or some perspective on how much more needs to be done? I mean, you took $124 million in impairment this quarter. How much more needs to go? Daniel McHenry: In terms of impairment, that's -- we've taken impairment for JLR as a franchise, and we took effectively a goodwill impairment on our whole company. If I look at our forward-looking projections for that, I would say I would be fairly confident, all things being equal, that we have taken the impairment that's required for us to take as a company. In terms of other things that we would dispose of, typically, they're going to be smaller stores or underperforming stores that have little or no goodwill attributed to those stores, certainly in terms of franchise rights. So I wouldn't expect there to be any additional impairment. Equally so, we've totally impaired the Jaguar Land Rover franchise, and we will be able to sell those for some element of goodwill or some element of value. So we should see some upside coming out of that. Daryl Kenningham: And Glenn, if you look at how we've managed our portfolio in the U.S. over the last 4 years, we've sold smaller underperforming stores in the U.S. or divested of those or closed some of those. And so it's a similar approach that we're taking in the U.K. Daniel McHenry: Portfolio rationalization -- we're optimizing, I should say. Glenn Chin: Just one last question on JLR. So what is different about the franchise in the U.K. versus in the U.S. or your stores for that matter? Do you have a different view of the JLR franchise in the U.S. Daryl Kenningham: Well, when you look at where some of our U.K. JLR stores are, they're close to London. And London had some of the highest theft issues in the -- which affected insurability on those vehicles. And we saw the order banks dry up very quickly in those brands and then in those ZIP codes right around London. And so that was -- and that didn't recover really, Glenn. And so when you look at that and when you look at how much those stores are contributing or losing, and what we really firmly believe at Group 1 is we've got to put our focus and attention and efforts in the areas that are going to drive the best shareholder return for our constituencies. And so when we looked at it and assessed it, and it wasn't an overnight decision, obviously, it was something we've considered for some time. We just felt like our efforts are better with some of our other partners. And we also hope and believe in my conversations with the OEM on this, that they can go get partners that they feel like they can be successful with. But given the real estate that we have with JLR and given the location of those sites and just the outlook in general of it, we felt like our efforts were going to be much better utilized and the return is much better in our other brands. Operator: And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. We do thank you for joining today's presentation. You may now disconnect your lines.
Operator: Good morning, and welcome to Nucor's Third Quarter 2025 Earnings Call. [Operator Instructions] And today's call is being recorded. [Operator Instructions] At this time, I would like to introduce Chris Jacobi, Director of Investor Relations. You may begin your call. Chris Jacobi: Thank you, and good morning, everyone. I'm excited to join you this morning as the newest member of the Nucor IR team and welcome you to our third quarter earnings review and business update. Leading our call today is Leon Topalian, Chair, President and CEO; along with Steve Laxton, Executive Vice President and CFO. Other members of the Nucor executive team are also here with us today and may participate during the Q&A portion of the call. Yesterday, we posted our third quarter earnings release and investor presentation to Nucor's IR website. We encourage you to access these materials as we will cover portions of them during the call. Today's discussion will include the use of non-GAAP financial measures and forward-looking information within the meaning of securities laws. Actual results may be different than forward-looking statements and involve risks outlined in our safe harbor statement and disclosed in Nucor's SEC filings. The appendix of today's presentation includes supplemental information and disclosures along with a reconciliation of non-GAAP financial measures. With that, let's turn the call over to Leon. Leon Topalian: Thanks, Chris. I want to begin by thanking our 33,000 Nucor teammates for their continued commitment to safety. Our team has been lowering our injury and illness rate every year since 2017, and we are on track to do it again in 2025. This level of performance would be impressive at any point, but to do it through a period of significant growth is an amazing accomplishment. Congratulations to the entire Nucor team and let's make the last two months of 2025 the safest in Nucor's history. Turning to Nucor's third quarter financial performance. We generated EBITDA of approximately $1.3 billion and earned $2.63 of EPS. These results exceeded our third quarter guidance driven by stronger-than-expected shipments from our steel mills and favorable corporate adjustments. Steve will provide more details during his financial update. We remain committed to prudent capital management on behalf of our shareholders, balancing long-term growth with meaningful shareholder returns while maintaining our industry-leading credit profile. During the third quarter, we reinvested $807 million into the company with the majority of this capital related to growth projects that are nearing completion. We've also returned approximately $230 million to Nucor shareholders through dividends and share buybacks, bringing our year-to-date returns to nearly $1 billion or 72% of net earnings. We also saw our long-term credit ratings upgraded to A3 by Moody's. Following the Moody's upgrade, we are now rated A- or A3 by all three ratings agencies, making us the only major North American steel producer to hold that distinction. Creating value for our stakeholders requires a relentless focus on execution, and I'm proud of the work our team has done to advance our long-term mission to grow the core, expand beyond and live our culture. We are in the final phase of our multiyear capital investment campaign and will complete four major projects by the end of this year. Recent milestones include the commissioning of two bar mill projects and the commencement of pole production in galvanizing operations at our Alabama Towers & Structures facility. Our two new sheet coating facilities at Crawfordsville and Berkeley County remain on track, and the team in Crawfordsville recently processed the first coil through their new galvanizing line. And construction of our new sheet mill in West Virginia is 2/3 complete and remains on schedule to begin ramping up by the end of next year. Even as we invest to grow our capabilities, we remain focused on leveraging our existing asset base to generate attractive returns for our shareholders. For example, in steel products, we've taken steps to repurpose to existing steel products facilities to support our faster-growing Nucor data systems businesses. And within the steel mills, we have recently decided to no longer pursue a new Rebar micro mill project in the Pacific Northwest region. With the recent investments we've made in the bar group, we can serve the Western U.S. and Canadian markets from our current footprint with superior cost and supply chain advantages. We will continue to monitor market developments to ensure the best use of our shareholder capital. As I've said in the past, our growth strategy is not about growing our capacity it's about providing more capabilities for our shareholders, customers and team. The investments we are making now to grow our core steelmaking capabilities and expand into downstream steel adjacent businesses will better position Nucor to offer comprehensive integrated solutions unmatched by any of our competitors. And by optimizing our full portfolio to operate as one team we make it easier for our customers to buy, build and succeed. Let me now take a few minutes to highlight a couple of the areas where Nucor is improving its position as the supplier, employer and investment of choice within the steel industry. One of these is Nucor's bar mill group. As many of you know, Nucor entered the steelmaking business in 1969 when we began operating our first bar mill in Darlington, South Carolina. Over the following five decades, we have harnessed the inherent advantages of scrap-based steelmaking and Nucor's performance-driven culture to grow our Bar Mill Group into the nationwide powerhouse that it is. The Bar Mill team has delivered strong results in 2025, fueled by increased demand in the nonres construction markets and infrastructure markets. With our broad geographic coverage and capabilities Nucor is well positioned to optimize both product mix and volume regionally. In fact, the team has set quarterly rebar shipment records twice so far this year, first in Q1 and then again in Q3. We also began ramping production in the third quarter at our new melt shop in Kingman, Arizona and our new rebar micro mill in Lexington, North Carolina. Both facilities are strategically located in high-growth regions with reliable access to local scrap supply, enhancing our existing footprint in the Western and Southeast markets. We will continue ramping up operations over the coming months, with both projects on track to be EBITDA positive by the first quarter of 2026. While we build our leadership in steelmaking, we are also positioning Nucor as a key supplier to high-growth markets, like data center construction. The Dodge Construction Network is forecasting 60 million square feet of data center construction in 2025, a 30% increase over '24. And the state of Virginia alone has seen 54 new data center permit applications in the first nine months of the year, underscoring the sector's momentum and long-term growth potential. With our comprehensive portfolio of products, Nucor is uniquely equipped to partner with leading developers and hyperscalers who increasingly value speed and certainty of execution. We now supply over 95% of all steel products that go into a data center from the building envelope to the interior infrastructure. For example, we're the only provider capable of supplying steel for both conventional structures and preengineered buildings at scale. Inside of data centers, we're accelerating growth in our Nucor data systems businesses, implementing domestic production of server cabinets and increasing capacity for hot aisle containment and data center support structures. This unlocks powerful cross-selling opportunities for our diverse product portfolio, creating better outcomes for customers and driving shareholder value. Turning to trade policy. We've seen meaningful federal action this year supporting the American steel industry. Section 232 measures and ongoing trade enforcement are curbing imports with finished deal imports down nearly 11% year-to-date through August. Since the broader Section 232 tariffs were implemented, we have seen larger month-over-month reductions in imports and expect the trend to continue. While imports have decreased since the comprehensive 50% steel tariffs went into effect, they continue to be a necessary tool to counteract the massive amounts of overcapacity that persist in the global steel sector. We believe that tariffs must stay in place with no exceptions or loopholes until there are fundamental changes in the global steel industry. Ongoing trade cases continue to provide another important defense against unfairly traded imports. In September, the ITC Commission rule that American steel producers were materially injured by imports of corrosion-resistant steel from 10 countries. Nucor is pleased with the decision, which clears the way for the Department of Commerce to issue final antidumping and countervailing duty orders in the coming weeks. We are also following the Commerce Department's investigations into rebar imports from four countries and expect to see the preliminary determination later this quarter. Overall, we are encouraged by the administration's actions to help level the playing field for the American steel industry. And as North America's largest and most capable steel products company, Nucor is well positioned to create value for our customers and shareholders. With that, let me turn it over to Steve, who will share additional details about our third quarter financial performance. Steve? Stephen Laxton: Thank you, Leon, and thank you all for joining us on the call this morning. For the third quarter, Nucor generated net earnings of $607 million or $2.63 per share. Earnings were in line with the second quarter's adjusted earnings per share of $2.60 and above adjusted earnings per share of $1.49 for the third quarter of last year. Year-to-date, Nucor's adjusted net earnings are approximately $1.4 billion or $5.98 a share. Earnings for the third quarter exceeded the midpoint of our guidance range by approximately $0.50. The guidance beat was driven by two main factors: better-than-expected shipments and lower pre-operating and start-up costs. Our steel mills segment realized higher-than-expected shipments in sheet, bar and structural. In September, our Berkeley division set an all-time production record. And as Leon mentioned earlier, the bar group achieved another quarterly record for rebar shipments. The steel mills group also saw stronger-than-expected shipment levels from several mills coming out of the third quarter planned outages. Additionally, the steel products segment exceeded volume expectations, contributing further to overall outperformance. Several of our newer operations progressed through start-up activities more rapidly than anticipated, resulting in lower-than-expected pre-operating and start-up cost. Pre-operating and start-up costs for the third quarter were $103 million. Favorable corporate and administrative impacts also contributed to the outperformance. These included lower inventory eliminations due primarily to lower-than-expected inventories in our downstream steel products segment as well as lower overall corporate and administrative costs. Turning to the segment level results for the third quarter. The steel mills segment generated $793 million of pretax earnings, a decrease of 6% from the prior quarter. We saw improved results across our bar and structural steel groups, but lower profitability in sheet and plate more than offset the gains in longs. We continue to see strong demand for long products and more subdued but stable demand for flats. That said, we are gaining market share and are encouraged by the recent operating performance of our steel mills. Sheet shipments nearly matched our record volumes set in the prior quarter with sheet backlog tons up 13% year-over-year. And our bar products backlog at the end of the third quarter was 35% higher than the same time last year. Turning to Steel Products. We generated pretax earnings of $319 million, down from $392 million in the second quarter. Despite the sequential decline, volumes held up better than expected with external shipments increasing 4% quarter-over-quarter. However, operating profit was impacted by less favorable product mix, higher substrate pricing and planned outage cost. Our steel products backlog has moderated alongside typical seasonal ordering trends, but ended the third quarter 14% higher year-over-year. The backlog extends well into the second quarter of 2026 for some of our more custom engineered product lines. Coating activity remains robust, and we believe this reflects business confidence among our customers servicing the construction and infrastructure markets as well as their confidence in Nucor as a reliable provider of high-quality solutions. Turning to the raw materials segment. We realized pretax earnings of approximately $43 million compared to $57 million for the prior quarter. The primary driver of the sequential decline was lower pricing, partially offset by lower operating cost. Moving to the balance sheet. Nucor continues to have a differentiated position of strength and flexibility in our industry. An example of this was on display in the past quarter as evidenced by our recent ratings upgrade by Moody's. And we remain committed to maintaining a strong investment-grade credit profile. We ended the third quarter with a total debt to capital ratio of approximately 24% and cash of approximately $2.7 billion. We generated $1.3 billion in operating cash flow during the quarter, a testament to Nucor's cash-generating operating model. Capital expenditures totaled $807 million for the quarter, bringing our year-to-date total to $2.6 billion. We now expect full year CapEx to be $3.3 billion for 2025 as some project spending was pulled forward from 2026. We will provide more detail on our CapEx budget for 2026 on our year-end earnings call in January, but we expect overall expenditures to decline by more than $0.5 billion compared with 2025. The cornerstone of Nucor's capital allocation framework is providing meaningful cash returns to shareholders. During the second quarter, we returned $227 million to shareholders in the form of dividends and share repurchases. Through the end of the third quarter, we've returned nearly $1 billion, representing 72% of Nucor's year-to-date net earnings. During the same period, we repurchased approximately 4.8 million shares at a weighted average price of approximately $126 per share. Turning to our near- to medium-term demand outlook. I'd like to take a closer look at the distinct demand drivers shaping our flats, longs and steel products markets. While we're seeing varying levels of demand across these products, we expect each will continue to benefit from further declines in imports as the effects of tariffs and trade cases are realized. Beginning with our flat products, we expect strong demand from energy, data centers and advanced manufacturing. At the same time, we're monitoring softer conditions in areas like residential construction, consumer durables, heavy equipment and agricultural machinery. Additionally, new domestic supply is still being absorbed in the market. Turning to long products. Our bar and structural mills continue to benefit from a number of demand drivers, underpinning a more constructive near-term outlook that we remain mindful of typical seasonal purchasing trends. Infrastructure spending remains elevated. The American Road and Transportation Builders Association reports that bridge and tunnel contract awards are up nearly 20% year-over-year. And 60% of total funds allocated to the IIJA highway projects remain unspent. As Leon mentioned, data centers and energy infrastructure needed to power them will continue to drive pronounced demand for Nucor's long products. We also see good demand from institutional construction, stadiums, warehouses and chip facilities. In addition, we expect to capitalize on the strong regional demand and gain market share as our North Carolina micro mill and new melt shop in Arizona ramp up. Finally, in our steel products segment, many of our business lines are benefiting from pockets of strength in nonresidential construction. As the market leader in custom engineered building products like joist and deck, metal buildings and insulated metal panels, we're seeing strong customer interest in our capabilities, particularly from those prioritizing speed, quality and certainty of execution. We also expect healthy demand for our rebar fabrication business and incremental demand for tubular products. That said, we're closely monitoring the impact of evolving trade policy, higher construction cost and persistent softness among residential construction activity. Turning to our fourth quarter outlook. We expect Nucor's consolidated earnings to be lower than the third quarter. We expect lower total volumes across all operating segments due to a combination of factors, including seasonal effects, Nucor's fiscal quarter continuing five less shipping days and two scheduled outages at our DRI facilities during the fourth quarter. We anticipate a decline in realized pricing within our steel mills segment, primarily driven by sheet. In contrast, pricing in our steel products segment is expected to remain stable. Looking ahead to 2026, we expect stable domestic steel demand. With the broadest range of capabilities in the North American steel market, Nucor is confident in our ability to create value for our customers and shareholders as we capture a healthy share of that demand. And with that, we'd like to hear from you and answer any questions you may have. Operator, please open up the line for questions. Operator: [Operator Instructions] Our first question comes from Alex Hacking from Citi. Alexander Hacking: Congrats on the strong results. It seems like Nucor shipments are growing faster than the industry and you referenced they're gaining share. Could you maybe give more color on the kind of specific products where you're gaining share? Any change in strategy that led to you gaining share? Leon Topalian: Yes. Thanks, Alex. Look, let me begin, Alex, with our most important value, and that is the value of safety. We're on track for a historic eighth year in a row of lowering our I&I rates in creating the safest year in the history of our company. And so I just wanted to take a moment and thank the 33,000 team members that execute that incredible value each and every day across 40 states, 300 locations in multiple countries. So again, we begin there. But specifically to address your question, Alex, yes, we continue to stay very focused in being the market leader means that we've got to do things to stay out in front. And so as we think about how we've restructured and positioned the plate group is a great example of that, where Brandenburg continue to ramp up. And as you heard Steve mention earlier, in his prepared remarks, the pre-operating start-up costs reduction means that Brandenburg is ramping up faster than we had anticipated. They're doing a great job. You'll hear more about that in a few moments, I'm sure as we get into plate later in the call. But plate is another broad example where we're focused on that. Long products is another where Nucor is going to continue to look for the opportunities to grow in bar and beams in that segment. But ultimately, what I think the strategy that you've seen playing out over the last few years has really wrapped around our commercial and construction solutions group that are looking to attach these major developers, major hyperscalers that are looking for speed and a capability set that Nucor now has in bringing that to the market. So we're getting a ton of pull-through effect in our products groups from the upstream mills from sheet plate, bar -- engineered bar all the way through the downstream adjacent segments. So we're seeing, I think, a lot of that play out, which is increasing our market share. And again, the capability set. You heard me say in my prepared remarks as well, Alex. You think about how white hot the data center trend is today with our Southwest data products acquisition, with our racking group, with the insulated metal panels as well as the breadth of the steel products that we make, we are now capable of making 95% of all steel components within the framework building and hot aisle contained within that data center. So again, it offers a very unique solution set for, again, these developers and hyperscalers. Alexander Hacking: I guess just a follow-up on that point on the data centers, are there specific products that Nucor is selling that are particularly exposed to data centers? I mean I know that choice impact shipments are up over 20% like this year versus last year. Are they an obvious beneficiary from this? Leon Topalian: Yes, Alex, it's really the gambit. So insulated metal panels, joist, grading, decking, fasteners, sprinkler, conduit, the foundations, the rebar and the foundations, the civil side, the sheeting on the outside of the building, the overhead doors from C.H.I., Rytec and so really, it's the full purview. But John, anything else would you add to that? John Hollatz: Yes, Alex. On the joist and deck side, we're definitely feeling the benefits of the data center build-out as well as e-commerce. And we're just well positioned with these end-use markets because of our industry-leading capabilities, the breadth of our product offering, our nationwide coverage. Right now, our joist and deck backlogs are about 25% higher than what they were a year ago at this time. They extend well into 2026, and we're optimistic about what the next year is going to bring. Operator: Our next question comes from Bill Peterson from JPMorgan. William Peterson: Congrats on the quarter. Maybe to follow up on this data center opportunity, but maybe to contextualize relative to what I think is a larger market, much larger now, which is warehouses, I guess, based off of your backlog, how should we think about square foot growth beyond 2025, maybe from a market perspective as well as your own opportunity? And is there a way you can, I guess, help quantify or provide any anecdotes on how you're gaining share in the market with like Southwest data products compared to industry growth averages? Just trying to get more context on this opportunity relative to larger ones such as warehouses. Leon Topalian: Yes, Bill, let me start with the -- to your point, the larger segment, which is the warehousing. Look, that is probably flat year-over-year and expect it to be about the same in '26. And so again, that peaked, I don't know, '21, '22, where we saw massive buildouts from Amazon, up others that were building as fast as they could come. So the shift has come in the last 12, 18 months into the data center side. But again, with the energy infrastructure is a big piece of that, that Nucor is, again, tying into Southwest data products enables us to do things in that hot aisle that we weren't able to do prior. But Nucor now has a Nucor warehouse and data systems group that kind of provides an overarching solution set for, again, these major developers. And John, maybe unpack that just a little bit further on how we use that go to market with that? John Hollatz: Yes, Bill, when you think about a data center, and it's on our Slide 7 in our presentation, all of the different products that Nucor supplies into that market. And we're the only company that can supply all of those products. Many of our competitors can supply one of them. We have the ability to supply all and we work directly with a lot of these companies to guarantee the surety of their supply to meet their deliveries to get these facilities operational on time. It's a big advantage that we have with that entire portfolio of products. In addition to that, having redundancy in our portfolio we mentioned, we've converted a couple of facilities over the last several months to help the build-out of these data centers because we see that market being so hot moving into the coming years. Stephen Laxton: Bill, this is Steve. I'd like to just add one thing that's implicit in the questions that you and Alex both ask is a commentary on the flexibility of Nucor's overall portfolio. And so as you see different markets get strong, Nucor has excelled over the years at winning in a variety of different ways. And right now, you're focused in on data centers, and we can capture, as John and Leon described, unprecedented. We're unparalleled with anyone in the space and the ability to gain in that area. But it's not lost on us and shouldn't be on you that Nucor has won at various times when different markets have been strong because of the product diversity and the flexibility that we have in supply in the market. William Peterson: No, I appreciate that color. I guess maybe just to follow-up, maybe I missed -- or I didn't hear it, but you said data center flat for '26. Is there a sense for how we should think about the data center growth next year? And then I have a follow-up question. Leon Topalian: Yes. Sorry, Bill. No, warehouse -- traditional warehouse would be flat. Data centers are up double-digit growth for the next 5 to 6 years is what every major category where we're looking at is tracking. So I think in my prepared comments, that I opened with, that the forecast is for 60 million square feet of capacity in 2026. So it's an incredibly fast-growing segment. So not flat on the data center side. William Peterson: Yes. Well, understood. On my second question, so scrap cost was down, but conversion costs were up. I guess can you speak to what contributed to the latter? Is this related to the new mill ramps? Or is there something else there? And I guess, more importantly, how should we think about this trend into the fourth quarter? David Sumoski: Thanks, Bill. This is Dave Sumoski. So although our cost quarter-over-quarter were up, cost year-over-year are down 5%. But specifically, the items affecting the quarter-over-quarter results are slab costs for CSI. Some of our consumables was up such as refractory and labor was slightly up due to some significant planned outages in the quarter. Operator: [Operator Instructions] Our next question comes from Lawson Winder from Bank of America. Lawson Winder: I appreciate the update today. Could I ask about the guide, which, I mean, in the guidance for Q4, you pointed to lower volumes just because of fewer shipping days. I mean, that all makes sense. But you also suggested there was some lower realized cheap pricing factored in. Yesterday, Nucor's CSP was $10 higher. I mean was that factored in? I mean we also saw a competitor raise their pricing by $50 yesterday. How should we think about the movement we've just seen very recently in that? Leon Topalian: Yes, Lawson. I appreciate the question. And most of Nucor's sheet deliveries are based on contracts. So while you see the moves today, what I would tell you is you're seeing that typical seasonality and a softer Q2 flow through the order book, which is our projection for Q4 to see lower realized pricing. But again, with the current price increases in that group, we anticipate Q1 will be -- we'll certainly realize those higher pricing. So it takes some time, right, to flow through that. But on the positive side, there's two factors I'd point out in terms of how quickly that can move through. One is the service center inventory side of things is pretty very, well, seasonally low in terms of that overall picture, but also internally to Nucor. We are not sitting on high volumes of inventory at our mills. So it's going to enable us a much faster realization of that pricing you just mentioned. So again, those two factors, we'll see that move through the order books into the balance sheet for Q1. Lawson Winder: Fantastic. And can I ask on acquisition opportunities? When you look at the relevant acquisition set for Nucor, how would you characterize that in terms of product and region or segment upstream versus downstream? I appreciate any thoughts. Leon Topalian: Yes, Lawson, broadly, here's how I would tell you, our mission statement is very simple right? Where is it we launched in January 1, 2020. It's to grow the core, expand beyond and live our culture. The core steelmaking capabilities, you're seeing that with the start-ups of electric fins, micro mill in North Carolina, the melt shop in Kingman, Arizona, they're ramping up. And then three start-up at Crawfordsville's galv line, Berkeley next year, the start-up of our first towers and structures facility in Alabama, the next two, that will be next year. And then that will ultimately culminate with the start-up of the largest investment in Nucor's history in Mason County, West Virginia, with the most state-of-the-art sheet mill that's going to offer a capability set unparalleled in our industry. And so we're going to have the breadth of capabilities to provide our customers the steel they need today as well as what they're going to need for tomorrow. So that's the core. As we think about expand beyond, it sits in the C.H.I and Rytec Southwest data products, our Summit, which is the first acquisition in the Towers & Structures we made. The insulated metal panels group that continues to bring a really differentiated product mix to the Nucor offering. So as we look to the future now is -- again, we don't anticipate building any more greenfield facilities, at least in the near term. That capital is now going to get deployed in the adjacent space as well. Again, right more we'll leave you that ambiguous. If we think a little bit more about, well, where is that going to go? It's going to go on the mega trends that we're seeing in the U.S. economy like Towers & Structure. So like energy, energy infrastructure, the data center community. So what are the things that we're not providing or don't provide today that again, hit a few boxes, right? So as we look for targets, it's got to be like-minded culture that fits who we are. It's going to be a converter model that we bring in terms of our competencies to that acquisition. Three, it's going to be low capital intensity. And four, we're going to look for 4 and 5 high margins. And fifth, the sort of countercyclical to the traditional cyclicality of steel. So we want something that isn't is affected by the true steel cycles that we see over, again, the last 60 years that we've been in this business. And again, C.H.I., Rytec, IMP all provide a much more stable earnings platform, growth throughout all the sectors and highs and lows in both the financial crisis COVID and whatnot. They have -- their return profiles are incredibly stable. And so again, ultimately, our goal is to stabilize Nucor's overall earnings to provide higher highs and higher lows. Operator: Our next question comes from Timna Tanners from Wells Fargo. Timna Tanners: I wanted to ask about my home state, that is Washington and what's happening in Seattle. So I saw the announcement of not replacing the existing mill. Can you just elaborate on that decision? Does that -- you said you could supply it from other mills. But with imports to the West Coast down, I'm assuming like is there enough supply on the West Coast? Can you supply it from Kingman? And are you just not replacing the existing mill? Or are you just not shutting it down? Leon Topalian: Yes. Look, you kind of answered the question within that question as well, Timna. So thank you for it. Look, we have a great relationship with the city of Seattle and our team out there does an amazing job connecting with our community, being in that community and welcoming that committee with open arms and how we take care of our safety, the environmental, the sustainability side. So they do a really, really nice job. But it is as we step back and look at our prudent capital allocation, where our dollar's best spent. And where is the best returns on those dollars going to be? With the investment of the melt shop in Kingman, Arizona, our Utah facility and the breadth and exposure of our Seattle mill, we are adequately covered for the Western side of the United States as well as Western Canada. So again, as we step back to really evaluate that, we feel really good about where the mill is and its capability set in Seattle, but couple that with the addition of Kingman's melt shop, and we think we've got a very adequate coverage there. So we're going to use those dollars elsewhere to think about growth. And again, how do we not just meet our cost of capital, but double our cost of capital. How do we make sure that we're generating EVA for our shareholders for the long term? And that's where we're going to put that. And again, if we don't have that home, as you've seen over the course of the years and following us, Timna, this year, we're at 72% return of our net earnings back to our shareholders and dividends or share buybacks, and that will continue. Timna Tanners: Great. That's my next question. But just to clarify, that Seattle mill keeps operating. You're just not replacing it with the micro mill, is that right? Leon Topalian: That's correct. Timna Tanners: Okay, super. So along the lines of the shareholder returns, your third quarter buybacks at $100 million. Is the smallest you've had, I think, since 2020 when you didn't have any buybacks. Is that correct? And if so, is that a statement of anything? Do you have other uses of capital? Anything you can elaborate on there? Leon Topalian: Yes, I'll let Steve answer that. But I would remind you the $13 billion that we've returned back to our shareholders over the last five years, but I think you're accurate. But Steve. Stephen Laxton: Yes. Hey Timna, you're correct. That is the lowest quarterly return we've had, but we remain committed to getting back at least 40% of our earnings every year. We don't necessarily do that every quarter. And so over the course of the year, we're well ahead of that mark. And as Leon alluded to, over the last five years, we've given back around 60%. Just under 60% of the earnings. So we've continued that discipline of balancing investment with our capital and growing the company while we also maintain strong liquidity and a strong balance sheet position. We've actually improved that even getting the upgrade from Moody's this past September and give meaningful returns. So those three elements remain in place, and that's not going to change going forward. So I wouldn't get too focused in on the quarter -- quarterly number. I'd just remind you that we remain very mindful and intentional about the management of those three pillars of our capital allocation framework. Operator: [Operator Instructions] Our next question comes from Phil Gibbs from KeyBanc. Philip Gibbs: Just wondering if you could give us the state of the West Virginia sheet investment in terms of where you are in the spending and your expected start-up time frame? Leon Topalian: Yes, certainly, Phil, I'll ask Noah Hanners, our EVP over Sheet Group, to give you a more detailed update. Noah? Noah Hanners: Yes. Thanks for the question, Phil. It gives me a good opportunity to congratulate, recognize the team on the progress there. I'd tell you, we're at about 75% on the build. And in terms of capital spending, we're about to that same point now. Most of the 25% we have remaining remains in the labor category. So if you go there today, it looks like a steel mill. And so we have the world's best steelmaking team, and you see the foundation of it starting there with that team in West Virginia. We have done an awesome job that West Virginia team has done an awesome job of bringing in some of the most talented people from across our sheet group and from across Nucor to lead that project. We've done a great job of hiring and experience and I get often asked about like how do you feel about this investment and we could not be more excited because we're taking this awesome team, and we're giving them the world's best equipment, like they're going to have assets, capabilities there that are the best in our market. And then we are turning them loose in a region where we've been underserved, but where we have really strong customer demand. When you stack those things up, we're going to be extremely successful with that investment, and we're excited about what the future brings for West Virginia. Philip Gibbs: And then just a question for Steve. On the tax side, is there a distinct difference between your cash tax rate and your book tax rate for '25 and '26, given the recent changes in tax legislation? Stephen Laxton: No. Surprisingly, Phil, not necessarily because of the way that legislation was written, it accelerates things that start after legislation. Most of our spend has already been started. So to give you a sense and a feel for that, the deferred tax benefits -- the cash flow benefits this year in '25 will be around $100 million. And when you look out into '26, that gets -- it will be smaller because of the nature of the bill. So the One Big Beautiful Bill had relatively modest impact for us on that. It does accelerate some of the R&D credits a little bit. That's where some of the gains coming from. But in terms of the capital spending, maybe not as pronounced as you might expect given the dollars we're spending in capital. Operator: Our next question comes from Katja Jancic from BMO Capital. Katja Jancic: Starting on the start-up costs, given that you have a couple of projects now that are ramping up, how should we think about these costs over the next few quarters? Stephen Laxton: Katja, this is Steve. We would expect over the next quarter then to be in line with the third quarter. And give or take, they're going to be in that range into the first quarter as well. So call it $100 million to $110 million a quarter going forward for the next couple of quarters. Katja Jancic: And then I think some of the margin compression in the mill segment was tied to the slabs you purchased for the TSI operations. If I'm not mistaken, that mostly comes from Brazil. Is that correct? And if so, why not use more of the material produced internally? Noah Hanners: Katja, this is Noah. I'll take that. Yes, mostly from Brazil, and we have been mostly slab served there this year, but we have a team that looks at the decision about whether to supply with internal substrates, so coils from our own mills like Allison or Crawfordsville more to buy slabs. Most of this year, it's made the most economic sense to buy slab and roll it there to our hot mill, but there have been months where we supplied a lot more coil. And I would tell you, over the course of this year, we've leaned into more of our own internal substrate. So that team will continue to look at what makes the most economic sense and we'll go that way. Operator: Our next question comes from Andrew Jones from UBS. Andrew Jones: I've got a couple of questions on price hikes. And first of all,the MBQ aborted hike from some of your peers. It sounds from the commentary like you didn't support it. Curious on the reasons there. And then secondly, on plates, curious how you're seeing the market at the moment. Obviously, we've had some relief on the import side or we should have done, and it doesn't seem like the Canada carve-out is coming anytime soon. So I'm curious how you're sort of thinking about pricing and the state of the market in the coming months in plate given that sort of tighter supply side? Leon Topalian: Okay. Andrew, we'll start off with the bar group. I'll ask Randy to just give you an update on your questions there, and then we'll take it to Brad on plate. Randy Spicer: Yes. Andy, thank you for the question. Certainly, we're not going to comment on specific pricing actions. But what I can tell you is that the momentum across our bar products, it remains very strong. We're seeing robust order entry across all regions and key end markets. And as kind of been mentioned, it's driven by infrastructure projects, chip plants, warehouses and data centers. And that strength is being amplified by the continued growth of our downstream businesses, Nucor rebar fab, Vulcraft and so forth. So it's also worth noting we have implemented and realized meaningful price increases in merchant bar throughout 2025, supported by our multiyear high backlogs and extended lead times. So all of that gives us confidence as we move through Q4 and into 2026 that the market is strong and ready for us to continue in that space. Brad Ford: Yes. And I'm happy to comment on the plate side. Plate market overall this year has been pretty good. ADC based on the last data we got is trending up around 15% year-over-year, and we're starting to see the impact to tariffs on imports, right? Imports were pretty -- were up a little bit in the beginning of the year, but have come down pretty significantly over the last couple of months. Similar pockets of strength in plate that you heard from Randy and Leon and Steve around energy, both traditional and renewable, infrastructure. Our bridge business has been very strong this year and then on the nonres construction side. As we sit today, our backlog is 58% higher at the end of Q3 than we ended Q3 of last year. So we're pretty optimistic about where -- about where the plate market is going. Leon Topalian: Brad, why don't you touch on just the military applications and great development at Brandenburg as well? Brad Ford: Yes, quick Brandenburg update. Team continues to make significant progress at the mill. We announced last quarter that we achieved EBITDA positive results. We achieved that again in Q3. I'd mentioned some weekly or monthly records from last quarter, but honestly, the team has already shattered those records so far here into Q4. And then on the product development side, we've had some pretty notable achievements, one being X70 API grade for line pipe. We've achieved qualifications and certifications there and captured a very large order for Q4 and into Q1. And then on the military side, we're really encouraged by the early-stage military armour trials. Nucor's product breadth in place between our three plate mills, really is going to allow us to become the premier plate supplier in the U.S. military. And then finally, Brandenburg's capabilities, I know we've mentioned on prior calls that we're seeing opportunities with existing customers, and we're really seeing that play out. The capabilities of Brandenburg are allowing us to sell deeper with our current customer base, and we're seeing that in our total plate volumes where we've shipped nearly as much plate through the first three quarters this year as we did for all of last year. Leon Topalian: Does that cover all the questions you had, Andrew? Andrew Jones: Yes. Just one follow-up on the military side. Curious whether export markets like, obviously, Europe with sort of potential doubling tripling of defense spending. Is that a market you're focused on, given, I guess, with these higher-quality grades it's more of a global market than the U.S?. What is that -- is that a target for Nucor? Stephen Laxton: Yes. Thanks for the question. Certainly, it's an opportunity. Again, Brandenburg's capability set is unique in the world market. There's only so few folks that can produce the qualities and size ranges engages that Brandenburg can. So defense spending increases not just here in the U.S., but across the world. We're well positioned to take advantage of that. Operator: Our next question comes from Tristan Gresser from BNP Paribas. Tristan Gresser: The first one is just on your prepared remarks, you mentioned stable demand outlook for next year. But in your presentation, it seems you have a lot of structural tailwinds, especially on resi and infra. So I'm just trying to understand what could be the pockets of weakness next year that would offset that growth? And that stable demand outlook. If you could split that between longs and flats that would be helpful as well. Leon Topalian: Yes, Tristan, look, I'll touch on a couple of things that we expect to be, I guess, relatively tepid next year, but it is factored into our comments about next year being stable, and it could be up a couple of percent. But again, it's factored in with some softer markets like heavy equipment and ag, right? We don't see that coming back. We think the tariff impact of that has gotten into those heavy equipment suppliers in agriculture. We think residential construction is, again, probably not going to be great. Interest rates will certainly help that, and we'll see what the fate does over the next 70 or 80 days as we finish out 2025. And then auto is probably another one that's not a huge market for us today, again, about 5% or 6%. But one that we think we can continue to grow in because, again, we're increasing our capability sets. But again, I think those are probably three areas that we see either flat or down into '26. Tristan Gresser: All right. That's clear. And maybe just following up on that. I mean consensus has external shipments for the steel mills, I think, below 21 million tons for next year. Obviously, you have all those growth projects coming online and ramping up at different paces. So could you help us understand a little bit of the moving pieces into volumes for next year? And what sort of utilization rates for the new project do you expect? And do you see consensus is conservative or pretty well calibrated at this point? Leon Topalian: Well, okay. Look, I appreciate the question and we'll be careful on how much detail we get into for obvious reasons, Tristan. But look, I'm an incredibly optimistic guy. We're sitting on the eighth safest year in the history of Nucor. We've returned $1 billion through the first nine months of the year. We're ramping up two of our products today that we expect in Lexington, Carolina and Kingman, Arizona that we expect to be profitable in Q1 of '26. We've been upgraded by Moody's to A3. We started up the first of three Towers & Structures facility in Alabama, the other two next year. Continue to grow our capabilities and now make 95% of the data centers that steel that's in data centers that's required, starting up Crawfordsville galvanizing line and Berkeleys galvanizing line, culminating in West Virginia startup next year. The tsunami of earnings power that's going to be brought to Newport's balance sheet is significant. And so I couldn't be more optimistic about our future and do I think there's upside in our forecast. Absolutely. But look, there's other external factors that we all weighed. But again, the investments Nucor has made are for the long term. Not the quarter-to-quarter, that's the 10-, 12-, 15-, 20-year cycles. And again, I think we are as well positioned today as we have ever been in our history. Tristan Gresser: All right. All right. No, that's fair. And maybe just a last one on steel products. Is it fair to expect higher ASP into 2026, have you've seen rebar prices going up? And joists and deck, you mentioned good momentum. And if you could also, I think, expand beyond we're supposed to do $450 million of EBITDA for this year? Do you think it's achievable? And lastly, if you could just remind us the timing and EBITDA contribution of the two new tower projects that would be also really helpful. Leon Topalian: Yes, I'll start with the last. And if I forget the first, either, Steve can help me remember. But -- or you can, Tristan. If we start with the last question you asked about the other two towers facilities. Indiana is expected to be up and running midyear of next year and then Utah facility should be end of '26. So again, by the end of next year, we will rival some of the largest players in that space where the capability set that is truly differentiated, Tristan. It's -- these facilities that are being built aren't -- they're fully automated. They are using the latest technologies that you can imagine that are making these -- the design window for those from a cost and technology standpoint, incredibly advantageous. The product segment though, is also another area, and I'll let John comment here a little bit, but it's another area for us that we are incredibly optimistic about. If you think about the last 3, 4, 5 years of the products group, they have generated somewhere between 30% and 40% of Nucor's overall net earnings. We have seen in the cyclical market that we're in as a steel company. The products group has reached a new high, and we've seen the low and we're already climbing out. Our backlogs are up 25% to 30% year-over-year. We're seeing pricing stabilized and moving up in most of the segments within that group. And so again, do I think there's a lot of upside as we head into the new year and some tailwinds that could make that better? Yes, I absolutely believe that's to be the case. John Hollatz: Yes. Tristan, this is John. On the pricing side, look, the market is going to dictate what pricing is, but the one that we always get the question around is joist and deck pricing. And as we mentioned last quarter, we're expecting the trend and this is coming to a reality where our order entry is on joist and deck is matching our backlog pricing. That's been the case for about the last nine months. We're seeing a lot of stability there. And just echoing what Leon said, this -- the margins and the profits produced by these businesses are much stronger than what they were pre-pandemic, which is important for our downstream performance. Tristan Gresser: All right. And just on the $450 million EBITDA target for Expand Beyond? Stephen Laxton: Yes. Tristan, thanks for that question. Expand is doing fine. It's hitting its clip, and it's a mixed bag of things as Leon was highlighting some of the progress we're making in towers. Keep in mind that's a bit of a build out, a greenfield build-out. So we still would point people to our long-term run rate of $700 million as a target, and we're not going to back off of that. Operator: Thank you very much. We currently have no further questions. So I just like to hand back to Leon Topalian for any further remarks. Leon Topalian: Well, thank you for joining us for today's call and for your questions. Nucor is continuing to execute on our strategy to grow our core steelmaking capabilities while expanding into downstream steel adjacent businesses. I'd like to thank our team for delivering solid financial performance and for your unwavering commitment to become the world's safest steel company. Thank you to our customers for allowing us to serve you and to our shareholders for investing your valuable capital with us. Have a great day. Operator: As we conclude today's call, we'd like to thank everyone for joining. You may disconnect your lines.
Operator: Good morning and good afternoon, and welcome to the Novartis Q3 2025 Results Release Conference Call and Live Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Ms. Sloan Simpson, Head of Investor Relations. Please go ahead, madam. Sloan Simpson: Thank you, Sharon. Good morning and good afternoon, everyone, and welcome to our Q3 2025 earnings call. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the U.S. Securities and Exchange Commission for a description of some of these factors. The discussion today is not the solicitation of a proxy nor any -- nor an offer of any kind with respect to the securities of Avidity Biosciences or SpinCo. The parties intend to file relevant documents with the U.S. SEC, including a proxy statement for the transactions and a registration statement for the spin-off. We urge you to read these materials that contain important information when they become available. Before we get started, I want to reiterate to our analysts, please limit yourselves to one question at a time, and we'll cycle through the queue as needed. And with that, I will hand over to Vas. Vasant Narasimhan: Great. Thank you, Sloan, and thanks, everybody, for joining today's conference call. If you turn to Slide 5, Novartis delivered solid sales and core operating income growth. And I think importantly for us, important pipeline milestones through quarter 3. Sales were up 7%. Core operating income was up 7% with our core margin at 39.3%. And in the quarter, we were able to deliver some important approvals, including Rhapsido, our FDA approval in CSU for our BTK inhibitor. As well as important Phase III results, which we'll go through in a bit more detail, Ianalumab, Pluvicto, Kisqali's 5-year data as well as positive opinions for Scemblix and then also positive data that came out relatively recently on Cosentyx in PMR and Fabhalta in IgAN. Now moving to Slide 6. Our priority brands drove robust growth in the quarter. So I think really, while we, of course, are contending with our LOEs that particularly Entresto, but also Tasigna and Promacta, what I hope we can get the focus to be on is on our strong underlying growth of our key growth drivers. Here, you can see growing 35%, really excellent performance from Kisqali, Kesimpta, Pluvicto, Scemblix, solid performance from Leqvio and Fabhalta. So I think we're on a solid track to drive growth through the coming years. Now moving to Slide 7. Now taking each brand in turn, Kisqali grew 68% in quarter 3, outpacing the market and our CDK4/6 competition. If I could draw your attention to the center panel, our total to brand NBRx now, as you can see, is in a market-leading position, particularly driven by the early breast cancer launch. Our U.S. growth was up 91% in quarter 3. We are the metastatic breast cancer leader in NBRx and TRx. And in early breast cancer, our share is 63%, and we're leading both in the overlapping populations with our competitor and the exclusive population. In particular, I see -- I'd say we see significant growth potential in that exclusive population where we estimate more than 60% of patients are currently not on a CDK4/6 inhibitor. Outside of the U.S., we saw 37% growth in constant currency. We are the NBC leader in NBRx and TRx share across our key markets. Our early breast cancer indication now is approved in 56 countries. And so we'll start to see the effect of the early breast cancer launch in the next few quarters ex U.S. Now I think it's a good indicator of what we see as possible outside the United States. Our Germany NBRx share is already at 77%. And I think that helps demonstrate the kind of power that we have to drive Kisqali's utilization and enable women to prevent breast cancer recurrence across the globe. I'll close by just reminding you, we have a Category 1 NCCN guideline support as the only preferred CDK4/6 inhibitor with the highest score in early breast cancer and metastatic breast cancer. Now moving to Slide 8. Just wanted to say a word about Kisqali's 5-year data, which we showed at ESMO. There was a 28.4% reduction in the risk of recurrence in the broadest population of early breast cancer patients that have been studied. You can see here the data is very consistent across tumor Stage 2 or Stage 3 in node-negative patients and node-positive patients. I'd also note that our OS data, while still maturing, has reached a hazard ratio of 0.8, and we see a narrowing confidence interval, as you can see here in the third bullet, just a little bit above 1 on the upper bound of the confidence interval. So a clear trend favoring Kisqali. The safety is consistent. We also had some notable important trends in the data continue to demonstrate a reduction in distant recurrence to distant metastases, which is excellent to see. So we'll continue to follow these patients and continue to provide updates on this data as it matures. Now moving to Slide 9. Kesimpta grew 44% in quarter 3, and this was primarily demand-driven growth, particularly in the United States. U.S., we had 45% growth in Q3, robust TRx growth outpacing both the MS and B-cell markets. We have broad first-line access now almost 80% of the patients receiving Kesimpta are first line or first switch. Outside of the U.S., we had 43% growth, and we're the leader in NBRx share in 8 out of the 10 major markets that we participate in. And we see a significant opportunity now looking ahead for Kesimpta outside of the U.S., where approximately 70% of disease-modifying treated patients are not currently being treated with a B-cell therapy. So as we continue to get that B-cell class up with Kesimpta having leading share in many markets, we see the opportunity to drive dynamic growth ex U.S. We did present some additional data at ECTRIMS that show the benefit of Kesimpta. I think I'd highlight that 90% of naive patients receiving Kesimpta showed no evidence of disease activity at 7 years, really demonstrating the durability of the response to this medicine. Now moving to Slide 10. Pluvicto grew 45% in constant currencies in quarter 3. That's really momentum driven off of the pre-taxane castrate-resistant prostate cancer approval, which we recently achieved. The U.S. growth is driven -- so the Q3 sales in the U.S. were up 53%, driven by new patient starts increasing to 60% versus prior year. 60% of our new patients in the pre-taxane setting are -- with market share already surpassing chemotherapy. So really driven now by the pre-taxane launch. The key enablers to sustain our growth now in the U.S. is really to drive community adoption. We have 60% of our TRx in the community. We have 9 out of 10 patients within 30 miles of a treating site, so over 730 sites. We believe that we need to get to around 900 sites to also support the HSPC indication. So we're well on our way. Our rollout of the pre-filled syringe is really positive, around 70% of sites using the pre-filled syringe already. And outside of the U.S., the rollout continues. We see good growth in the post-taxane setting in Europe, Canada, and Brazil. And we also received a Japan approval and expect the China approval in quarter 4. So all on track for Pluvicto to reach its peak sales potential. Now moving to Slide 11. We presented last week the PSMAddition data, where we demonstrated that Pluvicto plus standard of care reduced the risk of progression or death for standard of care alone by 28%. The primary endpoint was met, clinically meaningful 28% reduction in these patients with a compelling p-value, a clear positive trend in OS with a hazard ratio of 0.84, and that's even with crossover. So I think that really demonstrates we're having the attended effect the time to progression to castrate-resistant prostate cancer was delayed, which demonstrates we are achieving disease control. And overall, the Pluvicto tolerability profile was consistent with the Phase III trials in PSMAfore and VISION. So we would see global regulatory submissions in quarter 4 of this year. So moving to Slide 12. Leqvio was up 54% in the quarter, on track for over $1 billion in sales in the year. In the U.S., we're up 45%, outpacing the advanced lipid-lowering market. We had solid TRx gains of 44% versus prior year. And our key focus is particularly in Part B accounts and accounts that have a high interest, of course, in using the buy-and-bill Leqvio model to drive more depth in those accounts, particularly as we've now evolved our field model to better support those accounts. Outside of the U.S., we see a continued strong performance, 63% growth. driven by a number of markets, particularly China out of pocket, but we also see strong uptake in Japan, strong uptake in the Middle East and the Gulf countries. So all of that taken together, I think, really portends well for Leqvio in the medium to long term. We did achieve some important regulatory and clinical trial highlights. Our U.S. monotherapy label expansion, removing the statin prerequisite in the primary prevention population was added to the label. The V-DIFFERENCE data was presented at ESC, which showed Leqvio helps patients get to goal faster. I'd also note that our pediatric submissions are on track, which, of course, supports our longer-term LOE profile. Now moving to Slide 13. Scemblix grew 95% in constant currencies in quarter 3. It's on track to be the most prescribed TKI by NBRx in the U.S. Focusing on the middle panel, you can see that our all line of therapy, NBRx has now reached 39% and is steadily climbing built off of that first-line approval. In first line specifically, we've reached 22% share. So we're now approaching NBRx leadership in first line. We already are the NBRx leader in second line and third line plus with 52% and 53% share, respectively. Outside of the U.S., our focus currently is on the third line plus setting, where we have 68% share. But we do have the early line now approved in 26 countries, including China and Japan and a positive CHMP recommendation from October. So we would expect now to start to see our ability to reach patients in the first-line setting picking up outside of the United States. As an indicator of that, you can see here our strong launch momentum in Japan, first-line share already up to 18%, second line at 25%. So we continue to be very optimistic about the outlook for Assembly. Then moving to Slide 14. Now Cosentyx had a mixed quarter. Our growth was impacted by a onetime effect in quarter 3, which I'll go through in a moment. But most importantly, we remain on track for mid-single-digit growth in full year 2025 and are confident in the peak sales potential of the brand. So you can see that in constant currencies, our growth was down 1%. In U.S. dollars, we're more or less flat. Now when you remove the onetime RD adjustment of $74 million, our global sales growth was around 4% in constant currencies. In the U.S., when we adjust for that onetime RD, our growth goes from plus 1% to plus 9%. Cosentyx continues to be the #1 prescribed IL-17 across indications. In HS, now we see a stabilization of the performance, 52% share in naive and 50% overall. So when the competitor came in, we did see a dip in that share, but that's now stabilized. And we are better able now to manage patients alongside physicians to achieve step-up dosing rather than switching off of Cosentyx. And I think that will be important. And so we can really turn our focus to market expansion in HS with the stable share that we've been able to achieve. Outside of the U.S., we were down 3% in constant currencies, but this again was driven by a onetime price effect in the prior year. Importantly, we saw 4% volume growth, and we're the leading originator biologic in Europe and China. So overall, I think the key message is we're confident in the $8 billion peak sales potential. We expect continued market growth in our core indications and rollout of the recent launches in HS and IV. But I think also importantly, we did achieve a positive Phase III readout in polymyalgia rheumatica. It's the second most common inflammatory disease in adults over 50, an estimated 800,000 patients in the U.S. and 1 million patients in Europe to have the condition. So this is a market that's on par with the HS market when you think about the size of the segment. We have global regulatory submissions planned in the first half of 2026, and we'll be working to accelerate them as well and really hope to drive rapid uptake in PMR. We believe the data is compelling. We demonstrated, as you saw in the press release, a positive clinically meaningful primary endpoint, and we also hit all of the secondary endpoints. So we're looking forward to presenting that data and taking this launch forward. Now moving to Slide 15. Our renal portfolio continues to gain traction in the U.S. We had a positive Fabhalta eGFR data, really the first oral therapy to generate such compelling eGFR data. So looking forward to presenting that. We see steady growth in the U.S. Our IgAN portfolio grew 98% versus market growth of 23%. Our NBRx share is now 18% climbing steadily. We see strong uptake as the first approved therapy in C3G. Outside of the U.S., we're beginning to get the key approvals, particularly in China, where there's a large market for IgAN therapies. And turning to the Phase III APPLAUSE-IgAN study, we saw a statistically significant clinically meaningful improvement in eGFR slope versus placebo. It's the longest renal function data for IgAN to date. So we're excited to present that data at a future meeting. And this data should support a full approval -- traditional approval with FDA. Now moving to Slide 16. Rhapsido was approved by FDA as the only oral targeted BTK inhibitor for CSU. I think many of you know the medicine well. It's something we're quite excited about. It's indicated for the treatment in adult patients who remain symptomatic despite antihistamine treatment. And we estimate that patient population to be around 400,000 patients uncontrolled out of 1.5 million treated patients. We achieved a clean safety profile with this medicine, no box warning, no contraindications, no requirements for routine lab or liver monitoring. oral administration, 25 milligrams twice daily with or without food. So a really good profile for these patients. I would want to highlight as well. We're very excited to have a medicine with rapid onset in a highly symptomatic condition. These patients have to deal with itch, loss of sleep, discomfort. And so if you can have a medicine that has a really rapid efficacy benefit that's really, I think, something that could drive rapid uptake. Our initial patient -- physician feedback is excellent, and we're already seeing a steady increase in start forms. Our goal will be to improve the access environment for the drug as fast as possible, and then we would start -- expect to see rapid uptake over the course of next year. And then lastly, in both EU and China, we've completed our submissions and our Japan submission is slated for also later this year. And moving to the next slide. Ianalumab, we announced our positive Phase III studies earlier in the quarter. Yesterday, we released our top line data. The full data set will be presented soon, I think, tomorrow. And then our Analyst Day to discuss this data as well as the Rhapsido data as well as other immunology data, including our CAR therapy platform for immunology. Immune reset platform will be on Thursday. So I hope you'll be able to join that, and we'll give you a lot more detail on the secondary endpoints, on post half endpoints, on biopsy data, et cetera. But here, just on the top line, the Phase III endpoint was met in both studies, statistically significant improvement in ESSDAI. I do want to highlight here, there's a lot of focus, a lot of report on the aggregate ESSDAI from a patient standpoint and a physician standpoint, what matters is where the individual patients are and how much we're able to improve their relative disease. And also what is the starting point for the ESSDAI score. So the fact that we've achieved two positive Phase III trials, I think, will really enable us to roll this out to patients. And then as patients see the symptom benefit given their profile, they'll hopefully be able to get the benefit and stay on the medicine. We have consistent numerical endpoints, improvements in the secondary endpoint, a favorable safety profile. And as I mentioned, the data will be provided shortly. So regulatory submissions are on track for the first half of '26. And moving to Slide 18. Overall, I think a strong innovation year for the company. You can see all the various milestones that we've reached. Also, we've been, I think, the leading player in the sector in terms of deals bringing in medicines at all stages from preclinical to Phase I to late-stage assets, also continuing to bolster our technology platform. So we'll look forward to giving you a full innovation update and technology update at Meet the Management in November. So with that, let me hand it over to Harry. Harry Kirsch: Thank you very much, Vas. Good morning, good afternoon, everybody. As usual, I will take you through the financial results now for the third quarter, the first 9 months and the full year guidance. And as always, unless otherwise noted, all growth rates are presented in constant currencies. So if we go to our Slide 20, you see a summary of the financial performance. In the third quarter, net sales grew 7% versus prior year. Core operating income was also up 7%. In the U.S., we had some negative gross to net true-ups first time since the year. Prior, we had mostly positive. But they were mainly related to Medicare Part D redesign, which was new for the industry this year based on invoices for prior periods, mainly quarter 2. And excluding these true-ups, the underlying growth would have been 9% on the top line and 11% on the bottom line as the priority brands and launches continue to offset the increasing generic erosions, mainly for Entresto, Tasigna, and Promacta in the U.S. Our core margin was 39.3% in Q3 and core EPS came in at $2.25, reflecting a 10% increase and free cash flow totaled $6.2 billion. For the first 9 months, obviously, as we had less generic erosion, net sales grew 11%, core operating income 18% and the core margin expanded 250 basis points to reach 41.2% and with core EPS at $6.94, up 21%. Free cash flow reached after 9 months already $16 billion, growing 26% in U.S. dollars versus prior year. Moving to next slide. Speaking of free cash flow, up 26% billion, as I mentioned, already close to actually prior year full year $16 billion after 9 months. So it really shows continued strong conversion from profits to cash flow. And of course, cash flow remains a strategic priority as it increased further our ability to convert strong core operating income growth and robust free cash flow and gives us the capacity to reinvest in our business organically, pursue value-creating bolt-ons like the proposed acquisition of Avidity and return attractive shareholder -- attractive capital levels to our shareholders through growing dividends and share repurchases. Speaking of capital allocation, let's go to the next page, right? It's really unchanged. And again, based on very strong free cash flow, we really can optimize both a significant investment in the business to drive top and pipeline and returning capital to our shareholders at attractive levels. In the first 9 months, aside from Avidity, we have executed multiple bolt-on M&As, smaller in size, but still very important and -- which strengthened our key platforms and pipeline for our four therapeutic areas. And of course, we also continue to invest in our internal R&D engine. On the capital return side, we successfully completed our up to $15 billion share buyback program early July and have launched a new up to $10 billion buyback program targeted for completion by the end of 2027. We also have distributed $7.8 billion in dividends during the first half of this year as part of our annual dividend. Turning to the next slide. We reaffirm our full year guidance. We expect high single-digit growth in net sales and low teens growth in core operating income, even after accounting for negative gross to net true-ups in the third quarter. And to complete our outlook, we now anticipate the core net financial expenses is slightly higher at $1.1 billion before we had $1.0 billion, a bit higher hedging costs. But overall, nothing dramatic. And the core tax rate continues to be in this range of 16% to 16.5% so far in the first 3 quarters at 16.2%. Now let's move to the next slide. So usually, we don't provide so much level of quarterly guidance, right? Quarters are a bit more volatile than the full year usually. But given that we have U.S. generics entry in the middle of the year for three of our brands, of course, the biggest being Entresto, but also Promacta and Tasigna were, of course, blockbusters, it results in very different quarterly dynamic this and next year. And so as a reminder, in quarter 4 of last year, we benefited from significant positive gross to net adjustments, which added back then about 3 points of growth. So it makes for a very high prior year base. Adjusting for these one-timers, we expect quarter 4 underlying growth to be low single digit on the top line and mid-single digit on the bottom line, reflecting the increasing generic erosion from a full year impact of Entresto U.S. generics but better, obviously, than what we expect to report, including the prior year gross to net adjustments. We provide full year guidance for 2026, of course, next quarter with the full year results, but you can imagine it will be a year of two halves. The first half of 2026 will be depressed due to the impact of generics with still a high prior year base, but we expect to emerge much stronger in the second half, but much more on that as we go -- as we report our full year results early February. Now let's move to our currency estimate impact of currencies should -- currencies remain where they are basically late October. Then we expect a full year in '25 impact of 0% to 1% on net sales and minus 2% points on core operating. You see also the quarter. And we roll this forward to '26. So in '26, we would expect with these exchange rates, a slight positive 1% point on net sales and basically no material impact on core operating income. And as you know, we publish this on a monthly basis as it is quite difficult to forecast this from the outside in, and we hope you find it helpful. And then lastly, I hope you were able to join our presentation on the proposed acquisition of Avidity yesterday. If not, I would encourage you to listen to the replay. And -- adding Avidity, as we mentioned yesterday, raises our '24 to '29 sales average growth rate from 5% to 6%. But of course, even more importantly, further supports our mid-single-digit growth over the long term with main impacts, of course, in the 2030s and beyond. And it brings, of course, these near-term product launches two with multibillion blockbuster potential with LOEs in the 2040s and no IRA impact. Now we also mentioned yesterday that we do expect some short-term core margin dilution given Phase III trials are basically now starting to run or up and running shortly in the range of 1% to 2% points for the next 3 years. But we are confident that we return to the 40% margin, which we already achieved this year also will return them back to that in 2029. And please make sure that you also model this 1 to 2 points core margin dilution as you finalize your 2026 models for us. This deal, of course, overall is expected to deliver very strong sales and profit contributions post -- starting in '29 and then even more and therefore, driving significant shareholder value with a small price to pay over the next 3 years on the margin dilution as part of the investment. That's all I had for now and handing back to Vas. Vasant Narasimhan: Great. Thank you, Harry. So moving to Slide 28. In summary, solid sales and core operating income growth in the quarter despite generic headwinds. So I think we're navigating that well with strong underlying performance of our priority brands, which is reflecting the strong execution, a strong pipeline progress. We delivered strong pipeline progress in the quarter. And we also reaffirm our 2025 guidance and remain highly confident in our mid- to long-term growth, which is further bolstered by our proposed acquisition of Avidity, not just through the end of the decade, but into the next decade and beyond. I want to just quickly remind you as well, we have our immunology pipeline update on October 30, and our Meet Novartis Management on November 19 and 20, in person in London. So thank you again, and we'll open the line for questions. Operator: [Operator Instructions] We will now take the first question. And the question comes from Matthew Weston, UBS. Matthew Weston: I hope you can hear me. It's a question about policy, Vas. And we've seen now two companies do deals with the White House around Medicaid and tariffs. And I wondered from your perspective, how much you felt we could see the industry do a cookie cutter of those deals or whether there are meaningfully greater challenges for some companies and when we should expect something from Novartis? And if Harry, I can steal, I guess, an extension of the same question. Can you walk us through CapEx over the next 5 years given the investments that you've announced in the U.S. and how we should think about modeling that as part of cash flow? Vasant Narasimhan: Thank you, Matthew. So I think from an industry-wide perspective, I think the pharma industry's view is that the proposed negotiations or proposed actions are not going to address the underlying issues here, which, of course, we believe are PBMs, 340B and importantly, perhaps most importantly, G7 countries and related countries outside the United States properly rewarding innovation and properly assessing the appropriate price for innovation. That said, I think, as you point out, there are I think now three companies that have reached agreements with the administration. I'd say Novartis has -- I can't speak to what other companies are doing. We've been in conversations with the administration since the beginning of the year as we've had the various turns in these discussions. And I'd say we're meeting with the administration weekly to look at what are the best solutions we can come up with. It is important to note that the President was very clear on the four parameters, and I think those are the four parameters that are in discussion. And we'll have to see in the coming weeks and towards the end of the year if we can come to a proposed approach that makes sense for all involved. And in terms of CapEx, Harry? Harry Kirsch: Matthew, I think as we mentioned when we also introduced the $23 billion over the 5 years commitment, we made it clear that the majority is actually not CapEx. Majority is R&D OpEx, where we have the choice to invest in the U.S. or anywhere else in the world. And we choose, of course, to have a strong commitment also for R&D in the U.S. And then there's a portion, yes, it's CapEx, but it's actually part of our overall worldwide financing plan also for -- and we choose basically incremental to invest in U.S. to build up there our manufacturing base to supply the U.S. from the U.S. instead of further expanding, for example, European sites. So from that standpoint, overall, I don't expect a significant or meaningful CapEx increase. We are always in this range of 2.5% to 3% of sales, actually quite a low end of the industry given our very focused and efficient manufacturing setup. And it's always -- there can be annual fluctuations, but nothing meaningful. Also, we have further opportunities in cash flow and inventory. They are usually on the high side. We keep that as a bit of a buffer in certain times. So overall, in short, I would not expect a significant CapEx increase. And I would expect free cash flow to grow roughly in line with core operating income growth. Operator: Your next question comes from the line of Peter Verdult from BNP Paribas. Peter Verdult: Pete Verdult, BNP. Only one, so I'll keep it topical for Vas. Just on the market reaction to that ACR abstract, I think you've alluded to it being disappointment and you perhaps sharing a different view. So just pushing you on -- do you think the market depreciation of the data set will improve once we see the full details tomorrow? And just could you remind us, I'm sorry to get technical, of the 12 domains that make up the ESSDAI index, which ones are seen as the most important to patients and physicians? Vasant Narasimhan: Yes. Thanks, Peter. I mean, I think for us, the most important thing is that we make a compelling proposition to patients and physicians. And then if we deliver a strong launch, then I think, obviously, the markets will do what the markets will do, but presumably will follow. I think -- we will present detailed data on Thursday, and I think that will help at least understand where our conviction comes from. I think very important for us is the individual patient benefit. I think practicing physicians and patients don't measure an ESSDAI. They're actually looking for symptomatic benefits in things like fatigue, in salivary flow, in activities of daily living. And I think looking at that -- the global assessment of physicians and how they see patients benefiting is going to be really important for this launch. It's a highly variable disease. So a lot of this will depend on finding those groups of patients that have a significant benefit. And I think important for these patients as well is to feel like they don't need the same level of steroids that they typically are using, which can be hugely disruptive for their lives. Sleep is another topic as well. So we'll present that information. But I think we feel confident that there is a high willingness even from the physicians that we're talking to now in Chicago, a high interest and a high willingness to make this option available for patients. And assuming we can make patients materially feel better versus the current standard of care, which is frankly just high-dose steroids, we expect to be able to drive significant growth from this medicine. Operator: Your next question comes from the line of Stephen Scala from TD Cowen. Steve Scala: It seems like there may be a subtle change in the messaging on Cosentyx in HS. While Novartis grew overall market share quarter-over-quarter on Slide 12 of the Q2 deck, Novartis noted continued HS market growth. And in the Q3 slide deck, that was not stated explicitly. It's clear Novartis has been playing defense on share. But with that now stabilized, is the point that you need to grow the market and it's not growing at the pace that you expected? So is that the contour of the market? This would seem to be a factor in whether Novartis grows earnings in 2026. And when Harry was talking about 2026, he didn't say that specifically. Vasant Narasimhan: Yes. Thanks, Steve. So what I can say is that we feel confident that our share has stabilized after the competitor entry. I think we have not seen the market growth that we had originally hoped for that we -- there's clearly a lot of patients who can benefit from biologic therapy with HS. We continue to see this as a $3 billion to $5 billion-plus market, but it's clearly going to take longer for that market to develop. And so I think we probably did not do the careful analysis that you did on our slides, and I'll look to our IR team to do that more carefully in the future. But I think your point is absolutely on that we need to see -- we need to grow this market, and that's what really both companies should really be focused on and get more patients on these therapies. Now with respect to earnings, we don't comment on 2026. We're focused on clearing out 2025. And so once we get there in January, we can provide you our outlook. I would say that I think I would focus much more on the dynamic growth you saw in the quarter on Kisqali, Pluvicto, Scemblix, Kesimpta, all of which, to my eyes, were ahead of consensus. And I think that's where I think the focus should be now looking ahead for the company. Next question, operator? Operator: Your next question comes from the line of Shirley Chen from Barclays. Xue Chen: Can I ask about Pluvicto. So congrats on a great quarter. Could you please help frame where you are in the launch curve for pre-taxane new label? And how do you expect the inflection in 4Q and also next year? Can you remind us your peak sales ambition of this drug? And when do you expect Pluvicto to reach at the full potential within the PSMAfore population and also potentially PSMAddition population? And also in addition, you -- I think you previously mentioned a few challenges for commercialization, such as reimbursement, education of staffing and referral networks. And how do you find where you are tackling these challenges? Vasant Narasimhan: Yes. Thanks, Shirley. So for Pluvicto overall, I think we're on the steep part of the curve right now. We see -- as you saw, very strong growth in quarter 3. We would expect very solid growth in quarter 4. It's important to note in quarter 4, we always have a slowdown in the Thanksgiving and Christmas holidays. So in effect, lose 2 to 3 weeks because of those holidays, simply because patients don't want to "have a nuclear medicine, radioactive medicine that prevents them from being around children or family members, so for a period of time." So important to note that. But that said, we do expect continued strong performance in quarter 4. And then going into next year, we would expect solid growth, but I think as always with these launches, good growth, but maybe not the same levels of growth you're seeing in quarter 3 and quarter 4, kind of an S-shaped curve. And then our plan would be to bring on the HSPC indication, which will then propel us, we believe, to the $5 billion peak sales that we've guided to. So we fully are confident on that. We see high levels of now receptivity. And that, I think, brings me to your point on the structural challenges, which I think we've successfully tackled now with the PSMA and VISION launch, we struggled to get into the community in a way that was scaled. Now through years of effort by our U.S. commercial team, we've successfully, as I noted, have over 700 prescribing clinics across the country. 9 out of 10 patients are very close to a center that can provide Pluvicto. We're adding centers just to be on the safe side. We've done careful mapping to know the referral pathways. Physicians are much more comfortable now using the PFS, a pre-filled syringe and dealing with some of the other logistics associated with radioligand therapy. So we're in a very good spot in that sense. And that's what gives us confidence that the pre-taxane launch can propel us into the $3 billion-plus range and then the HSPC launch will propel us into the $5 billion-plus range and will be where we expect. We continue in the as well in the oligometastatic setting as well to go earlier. We also have a number of Phase IV studies, including in the mCRPC setting in combination with ARPIs to give physicians even more options. So we're doing all of the work as well to fully build out the data package to maximize this medicine. I think while I'm on Pluvicto, I think all of that builds the base for our radioligand therapy platform more broadly. We have that full range of 10 -- around 10 different indication medicines that are advancing in the clinic. And now as we bring those forward, we have that infrastructure built in the U.S. and now increasingly Japan, China, and other markets to make those other launches successful. So I think all on the right track. It was a very important element for us to strategically solve. And in my view, we have solved the challenge of rolling out radioligand therapy in the United States. Next question, operator? Operator: Your next question comes from the line of Florent Cespedes from Bernstein. Florent Cespedes: A question on Rhapsido. Could you maybe share with us how you see the ramp-up of the product as you have a clean safety profile, convenient administration? And do you have any feedback from the Street even though it's still early days? And any thoughts for the situation in Europe, the adoption knowing that the product will be compared with much cheaper drugs? Vasant Narasimhan: Yes. Thank you, Florent. So we're in the early stages of the launch. Right now, our focus is on sampling through patient start form, getting through patient start forms and negotiating with payers to ensure broad access in the early part of next year. I think once we get to the early part of next year, we get that base up through sampling in this initial phase, we would then start to expect a more rapid uptake through Q2 forward next year, where I think there will be the opportunity then to really drive uptake. We would expect initial uptake to be in patients who are not responding to biologic. But then our goal very much is to be positioned pre-biologic. That's really where the opportunity is for this medicine, and that's what we're going to be our long-term focus in the U.S. and really around the world. I think in Europe, you raised an important point. I mean, a lot of this will come down to our payer negotiation. And I think in light of the current situation in the U.S., it will be absolutely our goal to hold the line and ensure that Rhapsido is appropriately reimbursed for the innovation it's bringing and not have it be compared to old generic drugs, but really compared to what it is a pureless oral twice-a-day option for patients that really need a rapid onset of action. And we're hopeful that European payers will realize that and then appropriately reward it, and then we'll be willing to be patient to achieve that. But then I think once we get access, all of our indications, there's a lot of enthusiasm in both the allergists and the derm community for a safe oral option, and we should see rapid uptake there as well. So I think overall, very excited about the medicine. As you know, we're progressing as well in CINDU. We would expect that readout next year. We're progressing in food allergy. We're progressing in HS. So we have a number of opportunities now ahead of us as well for this medicine. Next question. Operator: Your next question comes from the line of James Quigley from Goldman Sachs. James Quigley: I've got a follow-up on Ianalumab, please. So one question we've had is that, obviously, the slide suggests in NEPTUNUS-1 that statistical significance was only achieved in the last two blocks of data. Was that just because of when the tests were run? Or is that sort of what you're expecting as well in terms of when you're planning the study? And a second quick one on Ianalumab as well, hopefully not to preempt tomorrow or Thursday. But you talk about the sort of secondary endpoints and fatigue and salivary flow being more important, but the secondary endpoints were not statistically significant. So again, was this a case of hierarchical testing or anything else? How can you show that when you -- when the drug hopefully gets approved and you talk to physicians about the data? Vasant Narasimhan: Yes, absolutely. I mean, I think the endpoint here is at 52 weeks. And so I think we were trying to indicate all of the time points to reach nominal significance. But given that endpoint, the goal here is 52 weeks, and both studies achieved the prespecified primary endpoint at 52 weeks in the independent analysis and in the pooled analysis. So no issues there. And so we feel from a regulatory standpoint, we've -- 48 weeks, excuse me, 48 weeks the standard. So I think you can see here on Slide 17, 48 weeks was hit in both trials. And then -- separate from that, there is hierarchical testing here as often is the case. And so if one of the secondaries are hit, even if they hit from a nominal standpoint and lower the hierarchy, it's no longer valid from a pure statistical hierarchy standpoint. It could be nominally statistically significant, but wouldn't reach the threshold from a regulatory standpoint. That said, I mean, I think as I've tried to articulate, there's the regulatory standpoint here. And in a disease that's never had an approved drug, there's really what our patients and physicians looking for. And we've really tried to understand once we hopefully can get the regulatory approval, then what do we need to educate physicians and patients on. So you'll hear more about that on Thursday, but our team has done a range of analyses to look at secondary outcomes, look at post-hoc outcomes, look at also biopsies and really try to demonstrate that you're seeing the benefits that patients want. I myself have spent time talking to patients with Sjögren's. And I think what really matters to them is quality of life metrics and very specific quality of life metrics that varies patient to patient. So I don't think that for them that the ESSDAI score is going to make the difference. It's going to be whether or not their symptoms are getting better and they can live their daily life day in and day out better. Next question. Operator: [Operator Instructions] Your next question comes from the line of Richard Vosser from JPMorgan. Richard Vosser: One on Kesimpta, please. Just whether you're seeing any impact in the U.S. from the OCREVUS subcutaneous launch. It doesn't seem like it, but just wondering what you're seeing here. And linked to that, there's some discussion from you about your new formulation. Just wondering on details of treatment interval, whether this could be a new BLA and how this could protect from potential biosimilars down the line. Vasant Narasimhan: Yes. Thanks, Richard. So on OCREVUS subcu, we don't see an impact to date, as you can see on our overall performance. We're holding share in a growing market. I think -- the overall market growth for multiple sclerosis drugs has been solid. Within that, the B-cell class continues to steadily increase with a bigger opportunity outside of the U.S., but still we see the opportunity. I think 25% of patients in the U.S., give or take, are still not on B-cell therapies that could be. And so we're really benefiting from the market growth. We are doing a lot of work now to get better at targeting physicians that we think would be more amenable to a patient self-administered administration rather than the various other options available. But I think overall, this is a growing market where the medicine is holding its share, performing really well. It's all volume-driven growth. From a life cycle management standpoint, we are advancing our Q2-month formulation. And so we'll keep you updated as we progress, but that's something that's a trial that's currently on rolling. And then we're exploring other options, no details I can get into at this point to get into longer intervals as well potentially with novel technologies. And I think as those progress and if there is the opportunity to get those launched before biosimilar entry, that's something that we're highly, highly focused on, absolutely. But I think it's premature to comment on that at this point. Next question, operator? Operator: Your next question comes from the line of Thibault Boutherin from Morgan Stanley. Thibault Boutherin: Just a question on abelacimab, the injectable Factor XI acquired with Anthos. I think we're getting the first Phase III data in AFib next year. This is for patients at high risk of bleeding and for whom oral anticoagulants is not adequate. Can you just sort of frame the opportunity in terms of size? And are you looking to potentially go into a broader patient population with this asset? Vasant Narasimhan: Yes. Thanks, Thibault. So this is the -- as you know, the antibody that we acquired back from Anthos is originally a Novartis-originated antibody. So we know it quite well. As you know, the study next year will be in patients who are ineligible for DOACs, NOACs. And so the opportunity here is for these patients, which is a reasonable sizable patient population to provide them a significant option with monthly dosing. I think the opportunity here will really -- the size of the opportunity, we believe is multibillion, but the scale of that multibillion-dollar opportunity will really depend on how the oral Phase III program from one of our competitors performs. I mean, clearly, if that oral medicine, which is an all comers in a very large study, if that is unsuccessful, then we would have a very significant potential with our medicine. I think with an oral and an antibody, we'll be much more than focused on these more refractory patients and the opportunity won't be quite as large. But I think in either case, it will be a multibillion-dollar asset we can bring into our cardiovascular portfolio. And we're -- yes, we're quite excited about it. Next question, operator? Operator: Your next question comes from the line of Michael Leuchten from Jefferies. Michael Leuchten: If I could please go back to Cosentyx. Could you tell us, please, what your pricing assumptions, the net pricing assumptions are for the U.S. into the fourth quarter? Do you expect any drag? And just trying to understand the increase in step-up dosing comment on your slides around HS, the 25% utilization. Could you put that into context? What was that maybe at the half of the year? And how has that developed? Vasant Narasimhan: Yes. Thanks, Michael. So on Cosentyx pricing, we don't expect any shifts going into quarter 4. And I'd say, overall, we expect stable gross to nets as well going into next year. I mean it's relatively mature brand, but also with multiple new indications and a solid payer position. So I think we should be stable on that front. We are also monitoring the impact of the Part D redesign, but most of the impacts we've seen on Part D redesign have actually been on Entresto earlier in the year, and then I think that will fade away now as generics enter. On HS, this really referred to the fact that early on with the competitor launch, what we were seeing is with patients who were on the monthly dosing, if they weren't seeing the effect that they are, physicians weren't seeing the effect that they hoped for, the effect was wearing off, they were switching rather than updosing Cosentyx every 2 weeks. And so now we see about 25% of patients on Cosentyx moving up to that every other week dosing. And that's something we'd like to get even higher over time because I think that really demonstrates patients are persisting on Cosentyx, and that's going to be important for us to retain our greater than 50% NBRx share and then the correlating TRx share as well. So that's very much in focus for us. And then I'd come back again that we also just need to work on growing the market. I think if this ends up being two competitors just trading the same group of patients, that would be disservice to this patient community. I think we have to get better now at reaching patients who have either fallen out of the system or for whatever reason are being identified as biologic appropriate patients and get them on therapy. Next question, operator? Operator: Your next question comes from the line of Simon Baker, Rothschild & Co Redburn. Qize Ding: I hope you can hear me okay. So this is Qize Ding speaking on behalf of Simon Baker. So I have one quick question. So one quick question on the rebate adjustment. Is there anything you can call out other than the Cosentyx? And also, did any drug benefit from the rebate adjustment in the Q3? Vasant Narasimhan: Yes. Thank you for the question. I'll hand that to Harry. Harry Kirsch: Yes. Thank you for the question. So overall, of course, when you see the amount that is prior period is roughly $180 million. You see that this has about this 1.5 almost rounding the 7% to 9%, if you will, effect on the quarter. And Cosentyx is a big piece of it. Another big piece of it is Entresto actually where patients got quicker into the catastrophic as part of the Medicare Part D redesign. And of course, that part really should go away as Entresto kind of goes away. And there has been some smaller elements, including like really going back into '24 with some inflation penalty part. But the two biggest ones are Cosentyx and Entresto. Vasant Narasimhan: Thank you, Harry. So Sharon, next question. Operator: [Operator Instructions] And your next question comes from the line of Rajesh Kumar from HSBC. Rajesh Kumar: Just trying to understand the margin cadence over 2026. I know you're not giving a '26 guidance at the moment. But very helpfully, you said it will be a year of 2 halves. So given what you know about Part D now and how generics are coming and what sort of operational gearing you're getting on your Kesimpta, Pluvicto, and other, drugs which are growing. If you were not cutting the costs, would the cadence be a lot more steeper? And what have your actions done to offset that impact? So what is the mix impact versus self-help? If you could help us quantify as well as the seasonality of Part D cadence? Because this year, you have done a prior period adjustment that might not be the next year because you have some accrual history now. So you will base your quarterly accruals on the evidence you have. So it would really help us model out first half, second half for '26. Harry Kirsch: Yes. Thank you, Rajesh. A very thoughtful question, of course. And so in our business with our mix, we usually do not have Medicare kind of related different gross to net levels quarter-by-quarter other than when we have a gross to net true-up, right? So when channel mix changes, when a product goes quickly into the catastrophic and those -- if there are -- I mean, there are always some deviations, right? We have over 20 billion RDs in U.S. But when these are significant or meaningful, then we let you know, right, how much it is, like in quarter 4 of last year, it was 3 points of growth, which is now impacting as a high base. Quarter 1 was 2 points to the positive and quarter 3 is now 2 points to the negative. So we show you that stuff. But that's basically true-ups. The underlying is not changing quarterly dynamics for us. So for next year, you will have a very high base Q1 right, with the 2 points of growth that we got from the -- and you will have a relatively low base in Q3 from the 2 negative points this year. And other than that, it's all about launch uptake and generic erosion of the three main products. Maybe long-winded, but I hope it was addressing your question. Vasant Narasimhan: And we'll do our best, I think, at the full year earnings as well to provide more guidance on how best to think about the full year 2026. Next question, Sharon. Operator: Your next question comes from the line of Matthew Weston, UBS. Matthew Weston: It's just a quick follow-up actually to one of the prior questions. Harry, Kesimpta looks like a very strong quarter in Q3 that looks somewhat off trend. And I'm just making sure that as we go into Q4, we aren't going to learn that it was lumpy one way versus the other. Can you just confirm that was underlying operational growth? Vasant Narasimhan: Absolutely. Harry? Harry Kirsch: Yes, it was mainly underlying operational growth, a little bit of inventory, but not much. Vasant Narasimhan: Just a strong global volume, I think, in both U.S. and ex U.S. for this matter. Next question. Operator: Your next question comes from Simon Baker, Rothschild & Co. Redburn. Qize Ding: Just one quick question on the Ianalumab in Sjögren’'s disease. So we observed the placebo response in the Sjögren’'s trial tend to be plateau at week 48. So why did it reverse in the first trial of those two Phase III trials, please? The Phase III trial is called NEPTUNUS 1. Vasant Narasimhan: Yes. I think the question is regarding the placebo response. I mean I think -- look, I think these were both adequately controlled, well-designed studies, global studies. This is just a highly variable disease. And so you're going to see some variability in how the placebo responds. When we look at background therapy as well, it's very comparable across the studies and so also versus normal standard of care. You do see as well that the month data looks much better than the Q3-month data, but you do see as well the dose response that we would expect. So I think that's all positive. And so we'll have our experts on the line on Thursday. So if you want to get into more detail, and they'll also be able to go through some of the background on the study design and baseline characteristics. But I think, obviously, I can't comment more until the full data is presented. Next question, Sharon? Operator: Your next question comes from Stephen Scala from TD Cowen. Steve Scala: Novartis raised the long-term revenue guidance yesterday, half of which was attributed to the existing business. Of the half attributed to the existing business, how much is due to currently marketed products? And how much is due to higher sites for the pipeline agents? Vasant Narasimhan: Yes, Steve, I think we can provide better midterm guidance on that and meet the management. But most of that is in-line brands. Obviously, you see the strong performance of Kisqali, Kesimpta, Pluvicto, Scemblix, I think solid performance on Leqvio. And there is probably some in there of what we expect will be a strong launch for remibrutinib, so Rhapsido and the label expansion for Pluvicto. Yes, I think that's roughly the breakdown more or less. I think any other pipeline assets we would expect to have limited ramp in this period, just given how long it takes to ramp up these launches when you think out to '29. And we will provide guidance as well out to 2030, as I said yesterday, and meet the management as well as update our peak sales guidance on our various brands where appropriate. Next question, Sharon? Operator: Your next question comes from the line of James Quigley from Goldman Sachs. James Quigley: Just a quick one for me. I mean you may have already answered it, Harry, but again, it's coming back to the Cosentyx, the rebate adjustment. Which prior periods does that relate to? Is that a Q1, Q2 this year? Or is that a 2024 thing? I'm just trying to think in terms of modeling for next year as we look at Cosentyx. Is there a slight headwind from where there was a higher price that you realized in Q1 and Q2 that then reversed out in Q3? And also what does that mean sort of going forward into 2026? Again, I appreciate there is going to be other dynamics with PMR and HS, but just wanted to clarify that from a modeling perspective. Harry Kirsch: Thank you, James. It's mainly quarter 2 this year, most of it. And -- but the quarter 3 underlying, that's why we gave you the quarter 3 underlying is what the underlying is already taking into account if such channel mix would continue to prevail. So from that standpoint, it gives you a good basis for future modeling. Vasant Narasimhan: I think, Harry, if I'm correct, if you net out the prior period upside versus this that really the year-to-date is relatively clean. Harry Kirsch: Across the whole portfolio. Vasant Narasimhan: Across the whole company, the year-to-date is close to red. Harry Kirsch: Quarter 1, we had 2% upside. Now we have almost 2% downside, right? It's a bit different brand by brand. But that's why we've given you on the brand that has most of it and is -- Entresto is deteriorating, of course, but this one, of course, is a brand that will stay long with us. That's why we gave you the underlying, which gives you the real underlying at the moment for quarter 3. Vasant Narasimhan: Sharon, next question. Operator: Your next question comes from the line of Sachin Jain from Bank of America. Sachin Jain: So firstly, just a clarification on margins for Harry. So 3Q margins were a little bit below Street. I guess, partly on gross margin, which is sort of first impact from generics. I wonder if you could just talk about gross margin, EBIT margin as we think about a full year of Entresto impact in '26. My simple question is, can you maintain margins stable next year through the full year of generics before we model the underlying Avidity dilution? And then given, I might just take an additional one on pipeline for Vas. You flagged good uptake in IgAN. You have the Phase III for the APRIL, BAFF next year. So I wonder if you could just talk to your excitement on that and differentiation and what's the competitive landscape? Vasant Narasimhan: Great. Harry? Harry Kirsch: So on the margins, of course, when you have a product like a small molecule, high-priced products like the 3 going off patent, especially Entresto being so big, there's a slight negative mix effect. Now Kisqali is also a super high-margin product, right, and growing significantly. So that's partly offsetting. But we have also a significant productivity efforts, especially in our manufacturing and supply chain. So as I mentioned before, there will be, as we go forward, some pressures on the gross margin. On the other hand, we do also expect that our SG&A becomes even more efficient as we go forward, offsetting that. Now for the next couple of years, this year, we will be around 40%. And quarter 4 is usually a bit lower. Historically, we have been in the first 9 months at 41%. So Q4 bring that in the range of around 40%. And then for the next 2, 3 years, we said because of the Avidity proposed acquisition, 1 to 2 margin points down from the 40% and returning to 40% in 2029. So with that, basically -- but it's driven by development investments. And overall, to close that long answer on a short question, basically, the gross margin headwinds, I do expect to be offset by SG&A productivity. Vasant Narasimhan: And then Sachin, was your second question around the anti-APRIL antibody, I didn't catch it. Sachin Jain: Yes. Sorry, in the introduction, you talked about the strength of the existing IgAN launches, but I wonder if you could touch on the APRIL BAFF with data next year and how that wraps out your portfolio. Vasant Narasimhan: Yes, absolutely. So first to note, ours is an anti-APRIL antibody. Our competitors are anti-APRIL, BAFF. And so I think one question, of course, will be to see the profile of those two drugs and does BAFF add anything and also differences in safety profile. But I would say, overall, we expect to see proteinuria in the range, we hope of what the others have seen. And certainly, our Phase II data -- final Phase II data indicated we have very strong proteinuria reductions. We will be third to market in all likelihood. And so for us, it's really going to come down to a portfolio opportunity that we bring to patients, physicians, payers, firstly physicians' offices and payers because we'll have the opportunity to have an endothelin antagonist with Vanrafia. We have the Factor B inhibitor with iptacopan and then with Fabhalta, and then we have the anti-APRIL antibody and bringing that entire solution set to the clinic and then also the opportunity for us to run combination studies. So we're already now evaluating what would be the right combination studies to run, generate that combination data so that nephrologists know what would be the right combination agents to optimize care for these patients. So these are all the opportunities I think we're looking at. But it's going to be important for us to think through those given that at least in the anti-APRIL space, we'll likely be third to market. Next question, Sharon. I think it's the last question, if I'm not mistaken. Operator: It is. Your final question for today comes from the line of Stephen Scala from TD Cowen. Steve Scala: Given the proof of concept established by the CANTOS trial 8 years ago, what new evidence compelled Novartis to go down the same pathway and acquire Tourmaline at this time? Vasant Narasimhan: Good question, Steve. So I think we clearly understand that IL-1 beta and hitting the inflammasome has a powerful effect on cardiovascular risk reduction. But in that trial, where we did an all-comers study of patients who had a prior event without, I think, focusing down, you saw the challenge of having a significant CVRR. Now IL-6 has the opportunity to be a little bit further downstream of IL-1 beta. And the idea here is to get within the first few months to max 6 months to a year after an event when -- if patients are at that point in time with an elevated hsCRP, the knocking down that CRP can lead to a significant -- we believe the opportunity exists to lead to a significant impact on cardiovascular risk. So I think it's really -- we've learned from the CANTOS study. We understand a lot more about the biology based on that. And we think by targeting now prospectively patients right after an event who are at elevated CRP levels as a marker of elevated inflammation, we can then have a much more compelling cardiovascular risk reduction than the kind of 14%, 15% that we saw in the CANTOS study. Now we do have a competitor ahead of us, but a lot of our focus is designing, we think with our expertise, a study that can really maximize the opportunity for the IL -- the Tourmaline asset, the anti-IL-6. All right. Well, thank you all very much for attending two calls in 2 days, but we have another call coming day after tomorrow. So we hope you will attend that as well to learn more about our immunology portfolio. We will talk about Rhapsido. We'll talk about our Ianalumab data and importantly, also talk about our immune reset portfolio, which I think is quite exciting. So thank you again for your interest in the company, and we look forward to catching up soon. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Corning Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is my pleasure to introduce you, Ann Nicholson, Vice President of Investor Relations. Please go ahead. Ann Nicholson: Thank you, and good morning, everyone. Welcome to Corning's Third Quarter 2025 Conference Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; and Ed Schlesinger, Executive Vice President and Chief Financial Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we will be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the third quarter, differences between GAAP and core EPS include noncash mark-to-market adjustments associated with the company's translated earnings contracts and foreign-denominated debt as well as constant currency adjustments. As a reminder, the mark-to-market accounting has no impact on our cash flow. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast. We encourage you to follow along. They're also available on our website for downloading. And now I'll turn the call over to Wendell. Wendell Weeks: Thank you, Ann. Good morning, everyone. Today, we reported another excellent quarter. Year-over-year, sales grew 14% to $4.27 billion. EPS grew 24% to $0.67, again, outpacing sales growth. Operating margin expanded 130 basis points to 19.6%. ROIC increased 160 basis points to 13.4% and free cash flow of $535 million puts us on track for another year of strong free cash flow growth. These results demonstrate the powerful, profitable growth outlined in our Springboard plan. So I want to put our third quarter results in the context of that plan. In quarter 4 of 2023, we launched Springboard, which outlined our plan to significantly increase our sales as we captured important secular trends. We said we already have the required production capacity and technical capabilities in place to deliver the sales growth and the cost and capital are already reflected in our financials. Therefore, we expect to deliver powerful incremental profit and cash flow, leading to our earnings growing much faster than sales. So as we approach the 2-year anniversary of Springboard, how are we doing? When we compare our third quarter 2025 results to our launch point, we grew sales 31%. We expanded operating margin by 330 basis points. We grew EPS 72%, more than twice the rate of sales growth. We expanded ROIC by 460 basis points, and we generated strong free cash flow. Now let's compare our results to our upgraded Springboard plan. We are tracking well above our high confidence plan, and we're tracking very well on our internal plan. Through the end of the third quarter, we've added $4 billion of incremental annualized sales since the launch of Springboard. Looking ahead, we expect fourth quarter sales of $4.35 billion, which will add another $300 million to our annualized sales run rate. Of course, this plan is about more than sales growth. Our plan was also to dramatically improve our profitability by improving our operating margin from around 16% to 20% by the end of 2026. Let's see how we've done against that target. As we executed Springboard, you can see that our operating margin expanded significantly. As we look to the fourth quarter, we now anticipate achieving the 20% target a full year ahead of plan. So since the beginning of Springboard, we have significantly increased our sales. We have grown operating profit at twice the rate of sales, and we have increased EPS more than double the rate of sales. Going forward, of course, we still expect the effects of seasonality, which you can see on the chart. But this is a powerful enhancement to our profitability that should translate into very attractive returns as we continue to grow sales. Stepping back, as we approach the second anniversary of Springboard, the plan has certainly been a tremendous success. We've added $4 billion to our incremental annualized run rate, and we have significantly improved our profitability. Perhaps even more exciting is that we see much more growth and more springs ahead. Let me give you just a few quick examples of the opportunities we expect to add to our sales run rate. In mobile consumer electronics, I'm sure you all saw the recent announcement from Apple that committed $2.5 billion to produce 100% of iPhone and Apple Watch cover glass in the U.S. for the first time at our Harrodsburg, Kentucky facility. This plant will become home to the world's largest and most advanced smartphone production line. And we will open a new Apple-Corning Innovation Center there to deepen our co-innovation and play a key role in future generations of Apple products. In total, this creates a significantly larger, longer-term spring for us in mobile consumer electronics. In Optical Communications, we are expanding our innovation and technology leadership in Gen AI. First, in our enterprise business, where we report sales for inside the data center, we grew sales 58% year-over-year. Ann will share more detail. But the primary technical driver behind that growth is what the industry calls the scale-out of the network. That basically means that hyperscale customers are scaling out the GPU clusters with more and more connected AI nodes of server racks or simply put larger neural networks. Because each AI node is connected to the others in the cluster by fiber, this creates more volume for Corning. Now you only need to do a brief scan of the news each day to see that the scale-out opportunity is expanding dramatically. We have plenty of growth ahead, and we expect demand for our innovations to continue to accelerate. We are not only the inventor of the world's first low-loss optical fiber and the technology leader in this space, we are also the largest producer by revenue of fiber, cable and multi-fiber connectors in the world. Importantly, we also have low-cost, U.S.-based advanced manufacturing platforms for each of the critical components. This creates a unique Corning opportunity to support our hyperscale AI customers as they seek to build major U.S. data centers using U.S. origin products. There is more to come in this space. We're working to formalize customer agreements so stay tuned. Now let me shift to another significant opportunity we are pursuing in Gen AI, driven by what the industry calls the scale up of the network. Hyperscalers are creating more capable nodes that move from less than 100 GPUs per node today to hundreds of GPUs per node in the future. Historically, an AI node has been within a single server rack. As hyperscalers scale up, AI nodes are shifting to stretch across multiple server racks. This causes the distance to link these GPUs within the node to get longer. This will eventually cause the links to reach about 100 gigabit per second meter, what we call the electrical to optical frontier line, which roughly marks the point where fiber connections become more techno-economical than copper, creating a large potential opportunity for us. To help understand the size of this opportunity, a single Blackwell-like node has more than 70 GPUs with more than 1,200 links using more than 2 miles of copper. As that node scales up, those 2 miles will eventually be replaced by fiber connections. And those miles will grow over time as more and more GPUs are included in the AI node. I'm sure you've seen announcement regarding co-packaged optics or CPO. That is one of the technologies that helps activate this scale-up opportunity for us. If we succeed technically, the scale-up opportunity could be 2 to 3x the size of our existing enterprise business. And we are working with key customers and partners on making that future a reality as well. Another opportunity for growth tied to Gen AI is playing out in our carrier business. In the industry, this is referred to as DCI or data center interconnect. We introduced a high-density Gen AI fiber and cable system that enables customers to fit anywhere from 2 to 4x the amount of fiber into their existing conduit. And we have seen tremendous response to this product set. We expect this business to scale rapidly, reaching a $1 billion opportunity for us by the end of the decade. DCI also offers the opportunity for new, more radical innovations in this space. We recently strengthened our long-standing relationship with Microsoft, announcing a collaboration to accelerate the production of their hollow core fiber. Our fiber and cable manufacturing facilities in North Carolina will produce Microsoft's fiber as they seek to advance the performance and reliability of Azure's cloud and AI workloads. With hollow core technology, we're talking about cases where the difference between the speed of light through glass and the speed of light through air actually matters. Now this illustrates how important DCI could become as our customers look to decrease their latency. This offers Corning the opportunity to innovate on new dimensions. Now let's shift to our solar business, where we are pursuing another powerful secular trend and expect to add to our run rate in quarter 4 and beyond. We've been seeking a low-risk, high-return entry into the solar industry for some time. First, solar power is fundamentally about the efficient use of photons and low-cost materials conversion platforms. Both are key opportunities for innovation that are right in our wheelhouse. Second, we are already a world leader in semiconductor polysilicon, which is simply a much purer form of the fundamental material used in solar. Finally, we anticipated the growing need for a U.S. domestic solar supply chain, which is only accelerating with the advent of Gen AI and global tariff structures. We began this journey in 2020. And since then, we generated over $1 billion in cash in this platform. We funded the expansion of our manufacturing assets with a growing cash flow generated from assets we acquired for less than $0.10 on the dollar, customer funding and government support, all while generating positive cash flow every year. As a result, we now have built a strong foundation for rapidly accelerating growth. We made process advancements to serve a higher-end chip segment in semiconductors, allowing us to drive continued growth in the most advanced segment of semiconductor chips. We activated idle assets to serve the need for domestic solar polysilicon. And we added the capability to transform our polysilicon into higher-value, domestically made solar wafers, all integrated together on our campus in Michigan. We've sold out our polysilicon and wafer capacity in 2025 and now have more than 80% of our capacity committed for the next 5 years. And today, we're building on this progress with some exciting news. Over the last 18 months, we have built the largest solar ingot and wafer facility in the United States, co-located with our polysilicon manufacturing facility in Hemlock, Michigan. It was a significant undertaking. To give you a sense of scale, the factory contains as much steel as the Salesforce Tower, San Francisco's tallest skyscraper. The site is the equivalent of 60 football fields, and the building itself occupies about 1/3 of that. Now we hope we can offer our investors the opportunity to visit this site soon. So you can see this terrific new factory for yourselves. We have grown the Corning family in Michigan. And as we speak, our folks are starting that big factory up. In this quarter, we expect to move from producing thousands of wafers a day to more than 1 million a day. So needless to say, this is an exciting and stimulating time for us. As we've shared, we have committed customers for more than 80% of our capacity for the next 5 years. So our focus will be on our continued ramp to meet their needs. At the same time, we'll be applying our deep material science expertise to bring our more Corning content approach to bear in solar and applying our advanced manufacturing capabilities to establish ourselves as the global low-cost producer even as we're based in the U.S. Overall, we are thrilled with our progress in solar. In quarter 1 of this year, we generated $200 million of sales in this map. We expect to triple that run rate by 2027, adding $1.6 billion of new annualized revenue to Corning's earnings power as we march towards our goal of building a $2.5 billion revenue stream by the end of 2028. So altogether, as we approach the second anniversary of Springboard, the plan has clearly been a tremendous success, and we have plenty of growth yet to come. With that, I'll turn it over to Ed for more detail on our results and outlook. Edward Schlesinger: Thank you, Wendell. Good morning, everyone. We delivered outstanding third quarter results, reflecting strong sales growth and even stronger profit expansion across multiple businesses. Year-over-year in Q3, sales were up 14%, while EPS grew 24%. Operating margin expanded 130 basis points to 19.6% ROIC grew 160 basis points to 13.4%, and we delivered strong free cash flow of $535 million. First, I will provide more color on our Q3 results, then I will cover our Q4 expectations, both in the context of our Springboard plan. With that, let me share some details on our Q3 results at the segment level, where you see some of our key Springboard initiatives for sales growth and profit expansion [indiscernible]. In Optical Communications, our growth was led by strong adoption of our new Gen AI products. Third quarter sales grew 33% year-over-year to $1.65 billion, highlighted by 58% year-over-year growth in our enterprise networks business. Investors continue to ask us to size our Gen AI opportunity for inside the data center. We began to size the opportunity in early 2024 when we provided a 25% CAGR for 2023 to 2027 for our enterprise segment sales. We upgraded the CAGR to 30% in the beginning of 2025. As a reminder, in 2023, we had a $1.3 billion enterprise business and almost half of that business was for hyperscale data centers. In Q3 of 2025, our enterprise business sales were $831 million or $3.3 billion annualized. Compared with 2023, that's a $2 billion increase in sales. And essentially all of that growth is related to the scale-out of Gen AI networks. Clearly, we are growing much faster than the 30% CAGR we provided. This demonstrates the excellent response to our new Gen AI products, and we expect the growth to continue. We also saw another quarter of year-over-year sales growth in our carrier networks business. As a reminder, we categorize sales of our products used to interconnect data centers in our carrier business. We applied our Gen AI innovations to this space with new high-density Gen AI fiber and cable that enables customers to fit anywhere from 2 to 4x the amount of fiber into their existing conduit. We began shipping these products in the first quarter. We doubled sales from first quarter levels in the second quarter, and we saw another significant sequential step-up in sales again in the third quarter. And we're still in the very beginning of this opportunity as we expect it to be a $1 billion business for us by the end of the decade. Optical Communications net income for the third quarter grew twice as fast as sales, up 69% year-over-year to $295 million, driven by the successful implementation of our Springboard plan in both enterprise and carrier. Moving to Display. We shared our expectations for the full year net income of $900 million to $950 million in 2025 and net income margin of 25%, consistent with the last 5 years. We continue to expect to be at the high end of the $900 million to $950 million net income range and for net income margin to be at least 25%. In the third quarter, display sales were $939 million, and net income was $250 million, both up slightly from the prior quarter, driven by stronger-than-expected panel maker utilization. Q3 price was consistent with the prior quarter. And for the full year, our expectations for the retail market remain unchanged. We expect TV unit sales to be consistent with 2024 and TV screen size growth of about an inch. As a reminder, we successfully implemented double-digit price increases in the second half of 2024 to ensure that we can maintain stable U.S. dollar net income in a weaker yen environment. We hedged our exposure for 2025 and 2026, and we have hedges in place beyond 2026. In 2025, we reset our yen core rate to JPY 120 to the dollar, consistent with our hedge rate. We did not recast our 2024 financials because we expect to maintain the same profitability in display at the new core rate. Looking ahead, we expect glass market volume to be down slightly versus Q3, and we expect our Q4 glass pricing to be consistent with Q3. In Display, overall, we are maintaining our market, technology and cost leadership while benefiting from market growth and a glass supply-demand environment that is balanced to tight. Turning to Specialty Materials. The business delivered a terrific quarter. And as you heard earlier, our announcement with Apple creates a larger longer-term growth driver in mobile consumer electronics through Springboard and beyond. In Q3, sales were up 13% year-over-year to $621 million. primarily driven by the successful adoption of our premium glass innovations for our customers' flagship product launches. Net income was up 57% year-over-year to $113 million on the strong incremental volume, serving as a great proof point of the powerful incrementals outlined in our Springboard plan. Turning to Automotive. As a reminder, in Q1, we graduated our auto glass business and together with our Environmental Technologies business, created this segment. Automotive sales were $454 million, up 6% year-over-year, primarily driven by a stronger light-duty vehicle market in China, partially offset by lower heavy-duty diesel sales in North America. Net income was $68 million, up 33% year-over-year, driven by strong manufacturing performance. Overall, we are focused on executing our more Corning growth strategy in Automotive as additional content is required in upcoming vehicle emissions regulations and as technical glass and optics gain further adoption in vehicles. Turning to Life Sciences. Sales were consistent with the prior year. Net income grew 7%. Finally, let's turn to Hemlock and Emerging Growth Businesses. You heard an update on our new solar business from Wendell a few minutes ago. As a reminder, that business currently sits in this segment. We plan to build solar into a $2.5 billion revenue stream by 2028. We are commercializing our new Made in America ingot and wafer products. Our new wafer facility came online in Q3, and we are ramping in Q4. We have committed customers for more than 80% of our capacity for the next 5 years. Segment sales were up 46% year-over-year, primarily driven by additional polysilicon capacity coming online and the ramp of our module operations. As expected, net income reflected the ramp costs of our new solar products as we address significant customer demand. Now I'd like to take a moment to discuss operating expenses. In the quarter, OpEx was $826 million, which was above our normalized run rate. Included in Q3 OpEx was higher variable compensation expense, including stock compensation. The primary driver of the increase was the significant increase in our stock price in the quarter. And as a reminder, we pay for performance, and we are performing well. Now let's turn to the fourth quarter outlook. In the fourth quarter, we expect to deliver sales of approximately $4.35 billion, representing year-over-year growth of 12%, driven by strong adoption of our Gen AI products and by solar sales as we ramp wafer production. We expect EPS to once again grow faster than sales to a range of $0.68 to $0.72. Our expectations include approximately $0.03 for the temporary impact of the continued solar ramp. You can clearly see from both our Q3 results and our Q4 outlook, we are significantly enhancing our return profile as we execute Springboard. As a powerful proof point, we now anticipate achieving our Springboard operating margin of 20% in Q4, a full year ahead of plan. We are very pleased to see that on strong sales growth, we have grown operating profit at twice the rate of sales. That's a 370 basis point improvement in operating margin from our Q4 2023 starting point. With that, I'll shift from segment results to capital allocation. As we previously shared with you, our upgraded Springboard plan includes higher sales and higher profit. We expect to convert that higher profit into more cash flow. And we've told you that as we grow sales, we expect profit to grow even faster, resulting in strong free cash flow generation. The third quarter was another great proof point. We delivered free cash flow of $535 million. We expect full year 2025 free cash flow to be a significant step up from 2024. We expect to spend approximately $1.3 billion in CapEx in 2025. So how do we invest the expected higher cash flow? Companies do capital allocation in different ways. We prioritize investing in organic growth opportunities that drive significant returns, and we grow primarily through innovation. We believe this creates the most value for our shareholders over the long term. Our investors have confirmed they see the value in this approach. As we see high-return opportunities in the future, we will invest in those opportunities. We also seek to maintain a strong and efficient balance sheet. We're in great shape. We have one of the longest debt tenors in the S&P 500. Our current average debt maturity is about 21 years, and we have no significant debt coming due in any given year. Finally, we expect to continue our strong track record of returning excess cash to shareholders. We already have a strong dividend. Therefore, as we go forward, our primary vehicle for returning cash to shareholders will be share buybacks. We have an excellent track record over the last decade. We've repurchased 800 million shares, close to a 50% reduction in our outstanding shares, which at today's share price has created approximately $50 billion in value for our shareholders. Because of our growing confidence in Springboard, we started to buy back shares again in the second quarter of 2024, and we have continued to do so every quarter since then. And we expect to continue buying back shares going forward. Now before we move to Q&A, I'd like to wrap up by reiterating a few things. When we originally launched Springboard in the fourth quarter of 2023, we provided you with a compelling financial plan. And as we approach the second anniversary of the plan, we are delivering compelling results. From our starting point, we have grown sales 31%, expanded operating margin by 330 basis points, grown EPS 72%, more than twice the rate of sales growth, expanded ROIC by 460 basis points and generated strong free cash flow. And in Q4, we expect to achieve our Springboard operating margin target of 20%, a year ahead of plan. So we feel great about our progress. And most importantly, we are positioned to capture strong growth well into the future. With that, I'll turn it over to Ann. Ann Nicholson: Thanks, Ed. Operator, we're ready for the first question. Operator: [Operator Instructions] Our first question comes from Josh Spector with UBS. Joshua Spector: I just wanted to ask on the optical sales. I mean, obviously, a good quarter and good growth year-over-year. I think expectations are maybe a little bit higher based on some other kind of optical sales players into that supply chain. So I'm just curious if you could talk about any timing effects between 3Q, 4Q that may have impacted some sales or if this is kind of the right run rate we should be growing off of? Edward Schlesinger: Josh, thanks for the question. So maybe what I would do is just start with something I shared when I was reading my remarks. As a reminder, our data center business, the business that's primarily growing through the new Gen AI products we've introduced was about $1.3 billion in 2023, and our current run rate is about $3.3 billion. So we've added $2 billion of sales in that space over about 7 quarters. So a significant amount of growth. We expect that growth to continue. We also have a reasonable amount of growth that's accelerating in the data center interconnect space, and that's in our carrier business, and we also grew carrier about 14% in the third quarter year-over-year. So significant growth there as well. So I think we think of that as significantly outperforming hyperscale CapEx. We would size that if you use Dell'Oro or some of the other firms that publish at about a 40% year-over-year level. So that's not sort of how we think about that business. The timing in any given quarter certainly can depend on specific customer plans. Wendell Weeks: Let me do a little more strategic and then address the specifics. I think we do timing from quarter-to-quarter, Josh, best served there. I think to maybe follow up after the call with Ann and let's make sure that sort of how you're thinking about models and what's happening in a quarter -- any given quarter is one place for us to start, so we make sure we don't talk past each other. What I'd add to Ed is sort of every time we're in a conversation with our customers, they want more from us. And things are quite tight right now. That being said, the reaction to our products is such that they want us to grow even more dramatically as they look ahead to the needs of their supply chain. And so really, in the dialogues between ourselves and our customers, they're -- where they've really turned to is if we need to grow our capacity faster than we currently are, how can they step forward to derisk any capital that we have to invest because the way we look at this is the growth rates are just so high. And as we seek to serve and delight our customers is that we look to them to be able to help us with any sort of capacity investment and/or derisk that capital investment going forward for our shareholders. So it's hard for me to comment, Josh, like any specific deltas quarter-to-quarter. I think those are best handled sort of with IR. But if your question is that do we see just a ton of growth here? The answer is yes, sir. Operator: And the next question comes from Asiya Merchant with Citi. Asiya Merchant: Really powerful operating margin expansion growth here guided as well for 4Q. How should we think about -- given the growth that you guys are talking about, whether it's in optical, auto, solar ramp, how should we think about incremental operating margins going beyond this fourth quarter here? And if there are any updates now to the Springboard operating margin target, given you're already achieving that a quarter ahead -- sorry, almost a year ahead in 4Q? Edward Schlesinger: Asiya, thanks for the question. So first of all, we're really pleased with the performance we've had over the last 7 quarters. I think improving both our gross margin and our operating margin was a really key component of our Springboard plan. And so we feel great about where we are. And as I mentioned, in our guide for both Q3 and Q4, we had some ramp costs associated with bringing our solar facility online. So at some point, those costs will go away. We'll be producing at full capacity and selling and that will help with our gross margin and our operating margin as well. And the way I think for now that we'd like you to think about our operating margin is it creates a really strong return profile for our business. So we expect sales to continue to grow nicely as we go forward. We've got a 20% operating margin, certainly could go higher than that. We'll come back and address that at some point later in the future. But if we're able to continue to grow our sales at that level, we'll continue to improve our return on invested capital, and we'll continue to improve our free cash flow. So that's how I think investors and others should think about the financial profile of Corning going forward. Does that help? Asiya Merchant: No, that's great. And then just maybe on auto, how you guys are thinking about the upcoming emissions, whether it's a 2026 driver and kind of the growth rates we should expect in that segment? Edward Schlesinger: Yes. So I would say in auto, right now, one thing I would point out is that our sales are impacted by a weaker heavy market in North America. At some point, that will bottom out and start to come back, and we'll start to see the growth we would expect like in our auto glass segment and in maybe other parts of the business, we'll see that lift through just because heavy-duty will sort of stabilize and start to come back through the cycle. And then yes, we do expect a couple of drivers of growth in this business. First, auto glass. We expect that business to continue to grow and drive growth through this year into next year and so on. And then I think the emissions regulations in the United States could start to impact us at the end of '26 for model years that start in 2027 and beyond. Operator: And the next question is from John Roberts with Mizuho. John Ezekiel Roberts: In solar, I think there was a large amount of downstream cell and panel inventory brought into the U.S. in advance of the new duties. Does that impact your ramp at all? Or do you accelerate as those downstream inventories are worked off? Wendell Weeks: John, I love your insights in this space. You are correct. That was indeed true. And as those inventories deplete, we're seeing really 2 impacts: a, demand front and as well sort of module pricing continuing to improve. So yes, we're seeing the dynamics that you're talking about. The core of our particular play is the need for U.S. origin product. And as a result, most of our customers are signing up to us just for that. And so really, on the margin, the particular overall industry dynamics that you're explaining don't hit us that dramatically because we're a preferred supplier as a U.S. player. But your insights are right on, John. Operator: And our next question comes from Samik Chatterjee with JPMorgan. Joseph Cardoso: This is Joe Cardoso on for Samik. Maybe just for my first question here. Optical is clearly demonstrating strong revenue performance in the backdrop of these AI tailwinds, but margins have also been impressive, tracking close to 18% in the quarter. How should we think about the headroom for margins to continue to improve from here? And as you consider kind of the demand pipeline that you're seeing from your customers, how should we think about factors such as product mix as well as eventually capacity additions that could influence the trajectory here? Wendell Weeks: So I'll start, Joe, and then I'll let Ed add. I think you are on all of the right questions. You really are. So everything really comes down to the reaction to our innovations and the value they create. As our innovations create more and more value, it offers us the opportunity to continue to improve our profitability as well that we see the opportunity for continued growth here to be quite robust tied to those new product sets. And we'll provide a little more insight as we get a little bit further along in our customer dialogues with how we're going to approach capacity risk reduction and strong commitments from our customers that will allow our customers that will allow us to provide high confidence guidance for our investors. Edward Schlesinger: Yes, Joe, the only other thing I might add is, as we've shared the last several quarters, we have been adding capacity. We will continue to do that to meet demand. So there was or have been some ramp costs in our optical business as we are able to make more and sell more that improves our margins. You saw that nicely here in the third quarter. And I think there's definitely some room above where we are to continue to grow from there. Joseph Cardoso: Helpful color, guys. And then maybe for my second one and in a similar vein, the Hemlock ramp here, I'm just particularly interested in how we should think about margins for this business as well. Obviously, they're running a bit below last year's level as you kind of get through the early stages of the ramp. But any way we should be thinking about the timing of margins here tracking back to those levels and then potentially surpassing it, especially when we're considering the impact of tax credits and some of the other subsidies, which maybe at least from an investor standpoint is a bit opaque in terms of how those should influence the margin trajectory as we kind of think about the business ramping going forward? Edward Schlesinger: Yes. So maybe just stepping back, our goal here is to build a $2.5 billion business. So you can sort of take our current run rate and get to that -- how much incremental sales we'll add from there. We expect that business to be at or above the Corning operating margin level. So you can think of it as being a very nice margin business when we're fully up and running. I think you'll see sort of incremental improvements as we add capacity and as we sell more. So I don't know that I would particularly call out timing in any given quarter, but we should just continue to improve kind of quarter-over-quarter as we go. Wendell Weeks: Yes. So let us sort of get through this quarter and the sort of crucial start-up time with wafers and maybe a little bit into Q1. And then we ought to be able to provide a little more help to you on how the factory is coming up and how we think of it for the coming year. Right now, we're kind of making that jump between making thousands of wafers a day to trying to make 1 million a day, and that tends to focus our mind on the near term. Operator: Next question comes from George Notter with Wolfe Research. George Notter: I wanted to kind of talk a bit or ask a bit about the optical business in terms of just supply constraints. Talking with some folks around the industry, it sounds like you guys are no longer selling glass on an OEM basis to others. I assume it's because you've got more demand in your own internal glass needs than maybe you previously expected. But is that actually the case? And then can you talk about what you're doing to expand capacity? I saw the expansion news in the Hickory facility this past week. I'm just wondering kind of where lead times are and what the capacity expansions look like. Wendell Weeks: I won't comment on our specific on dialogues with our customers and what form they take our product on at this stage. I would say, George, that you are correct in that the demand for our products relative to our supply puts us in a situation where we are quite tight. And we have pre-existing sort of ramps that we have been doing. But now as we look to the accelerating demand from our customers, we're in dialogues with them about how to best set our manufacturing platform profile to serve them better for the future. And how do we handle sort of the risk of that and how do we make sure that we derisk any investments that we make through commitments and/or funding from our customer set. So that's where we are right now, George. More to come as those things start to come together. George Notter: Got it. And any comments on lead times? Yes, I was going to ask about lead times. Any comments there? Wendell Weeks: It really depends on the SKUs. There's no question though that everybody wants more from us faster, right? So in that way, we are seeking to improve our lead times because things are pretty tight. That being said, we're able to -- we've been able to meet really unplanned for growth from our customers in terms of demand. And we brought a number of new customers have come on board for us because of the power of our innovations. Operator: Next question comes from Wamsi Mohan with Bank of America. Wamsi Mohan: Maybe to start in enterprise, if we look at the pace of quarter-on-quarter changes in revenues, it's a little bit below the same time frame last year, and that happened in Q2 and in Q3. And I'm wondering if we can just kind of dissect what the reason behind that might be given that the opportunity that you've highlighted here and the investments that you pointed to across multiple hyperscalers and data centers is just seeming to be very strong. So maybe you could just put that in some context and how we should think about that flowing into the fourth quarter as well? And I have a follow-up. Wendell Weeks: So Wamsi, just to make sure that we understand you, you made a comment about Q2 to Q3, both this year? And then I thought you said last year. Could you just make your question? I just want to make sure we hear you correctly, Wamsi. Wamsi Mohan: Right. Yes. No, Wendell, happy to clarify. I'm just saying that the incremental sequential dollar changes that you experienced from Q2 of '24 to Q3 of '24 was about $100 million in enterprise. This year, it's about $82 million. And last year, in the same time frames in Q1 to Q2 also, it was a little bit higher last year versus this year. And I'm just wondering why the dollar increases are not accelerating as adoption of AI takes over more. Wendell Weeks: I totally get it, Wamsi, in a way, maybe ties to some of the stuff George was talking about. So as we take a look at the year over year -- sequential quarter growth last year versus this year? And why isn't the dollars sort of the same? And is that a demand question? Or is it a supply question? If that's where you're going, yes, it's how much incremental supply was available one quarter to the next is the primary driver of that. And we had a hunk more incremental supply in a particular SKU that enabled that jump last year and this year. So in that way, I guess it's all timing is a way to think about it, but it's not a demand piece. It's purely relative delta in supply between the years. Did that answer make sense, Wamsi? Wamsi Mohan: Yes. Maybe, Wendell, just to follow up on that. Does that mean that like you are undershipping demand fairly significantly now in Q3? And does that lead to a catch-up in Q4? Wendell Weeks: So I don't know how to think about undershipping demand. It's -- right now, if I could put more on my loading dock, our customers would take more. I mean that is just true, right? And so we expect that situation to continue for the foreseeable future. And so really, it's coming to a supply piece for us, what particular products undo a bottleneck at what particular time is driving more of what we put in a guide for our total revenue as a company than it is, can we sell more. Any particular model. We'll try to help after the call a little more with modeling and sort of how we think about it and what those range of outcomes can be, Wamsi. All right? Wamsi Mohan: Okay. And if I could, just quickly, obviously, very exciting news around Apple's investment in Harrodsburg. Now that we're talking about Apple on the call, can we actually just -- can you help us think through the -- if the economics in specialty change meaningfully for Corning, either on pricing or margins of these cover glass products given sort of the, I guess, co-investment that is happening here? Wendell Weeks: So the key thing that will drive our relative profitability in mobile consumer electronics will be the adoption of innovations and the rate of adoption of innovations. So for us, one of the most exciting things about the Apple announcement is the very long-term commitment and the co-innovation center that is going to be there. And what you can look through to that is saying, you can expect a lot of amazing new products to come out of that collaboration. Usually, the more amazing the products are that we make, the more return benefit accrues to our investors. And we would expect that historical approach, which we call -- more Corning to continue. Ann Nicholson: Operator, we've got time for one more question. Operator: Okay. And the last question will come from Mehdi Hosseini with Susquehanna Financial Group. Mehdi Hosseini: Most of the good questions have been asked. I'm just wondering, Wendell, as we look into the longer-term opportunity, especially given the success of the Springboard plan, should we expect that by '26, '27, the incremental revenue opportunities would be in the high single billion on a quarterly or $30 billion plus on an annualized basis? And I'm just looking at the charts that you provide on a quarterly basis, and I'm just taking the same run rate and then extending it into '27 and '28. And I have a follow-up. Wendell Weeks: So we'll update -- we'll owe you guys an update on Springboard given our strong performance. It seems like we upgrade our Springboard plans. And then within just a couple of quarters, we performed so well that we get asked to update our Springboard plan again. So as we look to -- we're in the middle of that process that runs through the remainder of this year and into early next. And then we'll give you a good solid update on what it is we see. To your specific questions on run rates, why don't we sort of follow up on that after the call so we can make sure we understand your math and everything that we've provided historically. Mehdi Hosseini: Got it. Okay. And just a quick follow-up, and this has to do with your strategy with solar and also the acquisition of the JA Solar module manufacturing capacity from the last quarter. Should we assume that you would be able to make the entire solar module, including poly and the module itself at an affordable way so that everything is made in U.S. and used by U.S. customers? And I'm focusing more on affordability, especially given the fact that the subsidies are fast going away. Wendell Weeks: So the short answer is yes. In the value chain, what has -- our area of focus has been on ingots and wafers. And then yes, we also wanted to have a go-to-market position in modules, primarily because we have some new innovations to bring to that, that could increase the conversion efficiency and provide some of the best products or maybe the best product in the world for solar is our hope. But the core of what we're doing, you've nailed it in one, which is we would like to see the U.S. supply chain that is able to make products that are competitive versus the landed basis of solar products made overseas by the time we are done with our efforts here. Our focus is going to be on those areas that we can be really strong. We would rather source, I would say, the cell portion from other U.S. makers through time. But one way or the other, we want to bring our innovation to bear so that the U.S. has domestically manufactured solar power because it's just going to be super important, especially we've been talking so much about AI. AI needs power, needs U.S. source power. This is yet super -- another super economical way for us to provide power, especially in speed. Ann Nicholson: Thank you, Wendell. Thank you, Mehdi. And thank you, everybody, for joining us today. Before we close, I wanted to let everyone know that we're going to attend the UBS Global Technology and AI Conference on December 2. Additionally, we'll be scheduling management visits to investor offices in select cities. Finally, a web replay of today's call will be available on our site starting later this morning. Once again, thank you all for joining us. Operator, that concludes our call. Please disconnect all lines. Operator: This does conclude today's conference call. You may now disconnect.
Operator: Welcome to the Crane Company Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Allison Poliniak, Vice President of Investor Relations. Allison Ann Poliniak-Cusic: Thank you, operator, and good day, everyone. Welcome to our third quarter 2025 earnings release conference call. I'm Allison Poliniak, Vice President of Investor Relations. On our call this morning, we have Max Mitchell, our Chairman, President and Chief Executive Officer; Alex Alcala, Executive Vice President and Chief Operating Officer; and Rich Maue, our Executive Vice President and Chief Financial Officer; along with Jason Feldman, Senior Vice President, Treasury, Tax and Investor Relations, who is on for Q&A. We will start off our call with a few prepared remarks from Max, Alex and Rich, after which, we will respond to your questions. Just a reminder, the comments we make on this call will include some forward-looking statements. We refer you towards the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com in the Investor Relations section. Now let me turn the call over to Max. Max Mitchell: Thank you, Allison, and thanks, everyone, for joining the call today. We are proud to report another strong quarter with results coming in ahead of our expectations. Adjusted EPS was $1.64, driven by an impressive 5.6% core sales growth, primarily reflecting broad-based strength at Aerospace & Electronics and continued strong execution at Process Flow Technologies. This quarter's results yet again underscore our differentiated technologies and operational discipline. In addition to our continued long-term investments in new technology and solutions, the Crane Business System, the machine that we described in great detail at our March Investor Day, combined with our unique culture, enables our teams to adapt to the many unforeseen events that we're all facing every day and deliver on the results. Our pending acquisition of Precision Sensors & Instrumentation from Baker Hughes remains on track to close at year-end, and our strategic outlook for these businesses has only improved over the last 3 months. Many work streams are already well underway to ensure a seamless integration and create shareholder value starting day 1. Our balance sheet remains very strong. Our pipeline of acquisitions remains robust, and we remain very active on the M&A front. And there's a tremendous amount of momentum and continued innovation happening at Crane that Alex will cover off. As we exit 2025, we are once again raising, but also narrowing our full year adjusted earnings outlook to a range of $5.75 to $5.95 from our prior view of $5.50 to $5.80, given our backlog, consistent execution and year-to-date performance. That reflects 20% adjusted EPS growth at the midpoint compared to 2024. Another outstanding year for Crane and our shareholders. And as we look to 2026, our consistent investment thesis remains firm. The strength of our underlying business, our strategy and our capabilities, in both operational execution and commercial excellence, support our 4% to 6% organic growth assumptions, leveraging on average of 35% into next year. We will provide greater detail on 2026 expectations as well as PSI in early January, once we officially close on the acquisition. Now let me pass it over to our Chief Operating Officer, Mr. Alex Alcala to provide some color on the current environment and segment performance. Alejandro Alcala: Thanks, Max. First, let me comment on the pending acquisition of PSI. As Max said, the acquisition remains on track to close January 1, and the integration planning is well underway and progressing smoothly with the existing Baker Hughes and Crane teams. As you would expect, my team and I, as well as the PSI leadership have been intimate with all closing details and integration planning to accelerate strategic execution in 2026. As we discussed last quarter, each brand will contribute a robust and complementary technology, further strengthening the Crane portfolio. Combined with the power of the Crane Business System, PSI will be accretive to our financial profile, both margins and growth, within the next few years, and our confidence in what we'll deliver has only increased as we work closely with the PSI team on a daily basis planning for day 1. In terms of further M&A, our funnel of opportunities remains full. The deals we are working on today include opportunities in both Aerospace & Electronics as well as Process Flow Technologies. And most range in deal-size purchase price from $100 million to $500 million. Now some thoughts on the segments in the quarter. Starting with Aerospace & Electronics. Aerospace and defense markets remain very strong. The backlog we built and new programs and opportunities our teams have won provide a strong visibility into 2026 and beyond. On the commercial side of the business, activity remains healthy with Boeing and Airbus continuing to ramp up production and aftermarket activity continued at elevated levels. On the defense side, we continue to see solid procurement spending and a continued focus on reinforcing the broader defense industrial base, given heightened global uncertainty today. Looking ahead to the balance of 2025, we now anticipate core sales growth for the year to be up low double digits compared to our prior view for core growth to be up single digits to low double digits. And that growth will be leveraged at 35% to 40% for the full year. Our guidance assumes growing year-over-year OE sales, partially offset by decelerating year-over-year growth rates in commercial aftermarket in Q4 that we previously highlighted. Overall, a really outstanding year. We also continue to win new business and pursue new opportunities across the segment. That gives us confidence that we will continue to see above-market growth for the remainder of this decade. Let me highlight a few examples. First, Crane continues to win funded next-generation military demonstrator programs for our brake control systems for both fixed and rotary wing platforms. Second, we continue to advance our vehicle electrification solutions. Heightened by the launch of our new 200-kilowatt traction motor inverter generator controller product at the Association of the United States Army or AUSA trade show in October. We remain actively engaged with defense vehicle OEMs regarding collaboration on the Common Tactical Truck and new combat vehicle programs. Related to this, I would comment that over the past 2 years, customer vehicle development efforts were fragmented with numerous concepts in play and uncertainty around government funding. This year at AUSA, however, the landscape was noticeably different. The focus was clear, industry attention is now centered on competing for the XM30 and the CTT. This shift aligns precisely with the strategic direction we've defined for our defense power business. With government funding priorities now well established, vehicle primes are concentrating their efforts almost exclusively on winning these programs. Very exciting for us. And last, activity around air defense systems remains very robust. Golden Dome is still being defined by the DoD. However, we strongly believe we will benefit directly through existing positions held today on systems like LTAMDS radar system and Patriot missile programs, among others that will certainly be part of Golden Dome solution, let alone pure increased demand drivers. We also anticipate additional growth from new emerging opportunities that our technology is well suited for. Specifically in the scaling and upgrades of radar, counter unmanned aerial systems, high-power energy and space-based assets for Golden Dome. With a record backlog and pipeline of opportunities, Aerospace & Electronics remains poised to well outperform its markets over the next decade. Very proud of our team. Our Process Flow Technologies, similar to Q2, end markets are stable, and we remain well positioned to outgrow across the cycle. We continue to see strength in segments such as wastewater, pharmaceuticals, cryogenics and also power, while chemical markets remained soft, yet stable. As a reminder, we have systematically repositioned our portfolio over the past decade around our core end markets where we have the strongest competitive position and the most differentiation, enabling sustainable market outgrowth. Tactically, we have proven our ability to react to any changes in demand quickly, and we will remain nimble, taking any necessary and appropriate price and productivity measures required. Our focus and discipline enabled us to continue to win in this segment despite the slower growth environment, and that was reflected in Q3. For example, our municipal wastewater pump business is on track for double-digit growth driven by strong momentum in new product adoption. At WEFTEC this year, we introduced the high efficiency SyFlo wastewater pump, featuring advanced non-clog and [ pellet ] technology with leading efficiency metrics. Shipments began in Q3. And as we head into 2026, a robust sales funnel gives us confidence in delivering another year of strong growth for this business. Also, our cryogenic business continues to execute commercially with a number of orders across aerospace and defense, space launch, satellite production and semiconductor investments. Overall, we secured double-digit growth in new orders in the quarter within cryogenics, reflective of our front-end engineering support and manufacturing capability as a differentiator in the market. Additionally, we won a [ 6 million ] large pharmaceutical orders supporting capacity expansion to manufacture GLP-1 drugs. Our ability to deliver high-performance solutions for critical pharmaceutical application continues to differentiate us in a competitive market and positions us well for future growth in this space. And lastly, despite the headwinds facing the chemical industry, our teams continue to secure targeted opportunities largely tied to preventative maintenance and technology upgrades. Looking ahead to the balance of 2025, given our line of sight today, we maintain our view for core growth to fall at the lower end of our low to mid-single-digit growth range that we guided to last quarter, but with greater margin expansion as core volumes will leverage at the higher end of our targeted range for the full year despite tariff headwinds. Overall, both our businesses remain well positioned to continue to deliver outstanding results into 2026. Now let me turn the call over to our CFO, Mr. Rich Maue for more specifics on the quarter. Richard Maue: Thank you, Alex, and good morning, everyone. As we were getting ready for our Q3 earnings release this past month, and as I reflected on the consistency of our execution and overall results, generally, a movie quote came top of mind that one of our investors mentioned at a recent sell-side conference in describing our consistency. One of my favorite actors, Ryan Reynolds, had this moving quote while portraying AAA-rated executive protection agent, Michael Bryce, in a romantic and touching comedy, the Hitman's Bodyguard, when describing his job. Boring is always best. I have heard from many of you and appreciate all the movie quote suggestions that you have all sent over the last year. So feel free to send me your best thoughts on lines in the future that tie to Crane in your view. And anyone suggesting a quote that we actually use on our call will receive a free Crane coffee mug autographed by me. In all seriousness, while the environment is certainly not boring, our story remains unchanged and our teams continue to execute to win, driving results above expectations in the most consistent and boring manner possible despite the well-documented headwinds we are all facing every day. And with that, let me start off with total company results. We drove 5.6% core sales growth in the quarter, driven primarily by the ongoing strength within Aerospace & Electronics. Adjusted operating profit increased 19%, driven by continued strong net price of -- net price and solid productivity. In the quarter, core FX-neutral backlog was up 16% compared to last year, reflecting continued strength at Aerospace & Electronics and core FX-neutral orders were up 2%. From a balance sheet perspective, while we are in a net positive cash position, at the end of the quarter, we completed financing with our bank partners for our pending acquisition of PSI. We entered into a credit agreement that included a $900 million delayed draw term loan and a $900 million revolving credit facility, both maturing on September 30, 2030. We expect to finance PSI primarily with the proceeds of the term loan and cash on hand, leaving the $900 million revolving credit facility available for further M&A and normal working capital management. And consistent with our prior commentary, after the PSI transaction, our net leverage will be just over 1x, still well below our 2x to 3x targeted range, leaving us well positioned for further M&A. With respect to tariffs, we continue to expect the gross cost increase to be roughly $30 million for the year, inclusive of the impact of the Section 232 tariffs, so no change there. And as we said last quarter, we expect to offset tariff impacts through price and productivity and our teams are prepared to react appropriately to any further changes that may occur in this dynamic area. A few more details on the segments in the quarter. Starting with Aerospace & Electronics, sales of $270 million increased 13% in the quarter, nearly all of that organic growth. And even with the continued high level of core sales growth, our record backlog of just over $1 billion, up 27% year-over-year, was up slightly sequentially. Core orders were up 5%, in line with our expectations as some orders that we anticipated later in the year were received in the first half. Again, no surprises and continued strong demand broadly. Total aftermarket sales increased 20% with commercial aftermarket up 23% and military aftermarket up 12%. And OEM sales increased 10% in the quarter with both commercial and military up 10%. Adjusted segment margin of 25.1% expanded 160 basis points from 23.5% last year, primarily reflecting strong net price, solid productivity and the impact from the higher volumes. We expect operating margin to be modestly lower in Q4 due to typical seasonality and less favorable mix between commercial OE and aftermarket. At Process Flow Technologies. In Q3, we delivered sales of $319 million, up 3% with flat core performance in the quarter, along with a 1.6% benefit from the Technifab acquisition and 1.5 points of favorable foreign exchange. Compared to the prior year, core FX-neutral backlog decreased 5% and core FX-neutral orders were down slightly as expected. Adjusted operating margin of 22.4% expanded again and in the quarter was 60 basis points higher than last year, driven by strong productivity, mix and net price inclusive of tariff headwinds in the quarter. Moving to guidance. There were a couple of nonoperational changes below the segments. We now expect corporate expense of $85 million, modestly above our prior view of $80 million during -- due primarily to M&A activity. We also now anticipate net nonoperating income to be closer to $7 million, up from $4 million due to higher investment income on our cash balances. And a quick reminder that this nonoperating income also includes about $9 million of business interruption insurance recovery recorded in other income expense related to Hurricane Helene, around $6.7 million of which has been recognized year-to-date and with $2.7 million in the quarter. And last, our tax rate for the full year will be slightly lower with us now estimating a 23% tax rate for the full year versus our prior estimate of 23.5%. Those three nonoperational items net to a very slight benefit of about $0.01 with the other $0.19 of the guidance increase at the midpoint coming from the segments. Operationally, we didn't change the full year core growth guidance range of 4% to 6%, but we now expect to be in the upper half of that range given the strength at Aerospace & Electronics, and that growth should leverage at our normal rates on a full year basis. So given our excellent results to date and our current view on Q4, we are raising adjusted EPS guidance by $0.20 at the midpoint and narrowing the range to be within $5.75 to $5.95, again, reflecting 20% growth year-over-year at the midpoint. Overall, another outstanding quarter, another outstanding year against a very dynamic macro backdrop. And with that, operator, we are now ready to take our first question. Operator: [Operator Instructions] Our first question is coming from Matt Summerville with D.A. Davidson. Matt Summerville: A couple of questions. First on PFT. Can you talk about -- if the expectation is that the business is up organically low single digits for the year, if you look at the nonchemical portion of PFT, how does that look relative to that low single-digit number? And then on the chemical side, what specifically you expect out of that end market this year? And maybe how you're thinking about that exposure, which is fairly large for the segment through, say, an 80-20 type of overlay? And then I have a follow-up. Alejandro Alcala: Yes, Matt, thank you. This is Alex. So just to frame up the markets and what we're seeing in responding to your question, I think regionally is different then by market is different. As a reminder, we're in PFT, primarily almost half or a little bit over half on Americas-based business, which is a positive in this environment. So first, speaking to the nonchemical markets, wastewater, for example, North America based, we're seeing double-digit growth in that business, driven by just investment in the aging infrastructure and environmental. So that's been strong. We expect that to continue to be strong going into next year. Cryogenics through our new acquisitions in various applications, semiconductors, electronics and space launch I mentioned last quarter, just driven by that commercial aerospace market of launch, and we participate in the platforms and the build-out of platforms, that's been growing also double digits, and we're gaining significant share as well. Just recently visited with the team there, and they were highlighting their commercial excellence in the front end where they have a tablet now on their own site, they're able to sketch the project, convert it into a drawing with this application, send it into the front end and really reduce the lead time, which is important to our customers. So doing very well. Also highlight pharma, in particular, in North America, strong growth there this year. We are seeing this reshoring activity happening in North America. We expect that to continue in the U.S. A big project that we won with a key customer related to the deal GLP-1 drug as they're expanding and producing in the U.S. We expect more of those investments to happen. And also in power, very North American-based, driven just by the demand in power that everybody knows about, AI, data centers. So those are all the nonchemical markets that I will highlight, that are positive, and we continue to see positive going into next year. When we think about chemical, also varying by region. So North America, we've seen some good projects this year, good activity on expansions, productivity. As a reminder, in -- Americas has the advantage of this feedstock and cost advantage. So even though there's capacity globally, customers have advantage to investing in the U.S. and expanding and getting more output. So that's moving in a positive way. And also Middle East, those are the two markets that I would highlight in chemical that have been positive and then softer Europe and China as well have been down. As far as our exposure in chemical, how we think about it, to answer your question -- your second part of your question. Look, the chemical market, there's a lot of things that we like in the applications that we play, very critical, corrosive, toxic, abrasive applications that give us an opportunity to differentiate, add value for our customers. And so we like that. Obviously, the cyclicality of the market sometimes is a challenge. So as you know, over the last decade, we've worked to reshape the portfolio, investing in cryogenics, organically, inorganically, wastewater and we'll continue to do so. Highlighting our recent PSI acquisition as well in the markets where they play, in nuclear, in aerospace, differentiated technology, also wastewater. So we'll continue to invest in these higher-growth markets, but maintain our current presence in chemical and keep building on that. And overall, we'll continue to shape that [ underlying ] growth in our PFT segment. Matt Summerville: And then just another one on PFT, the margin upside you saw in the quarter, can you maybe help parse out what the key drivers of that upside may have been, whether it be price, cost, mix or just cost out and then how we should be thinking about those various levers at a high level as we think about next year? Alejandro Alcala: Yes. So as we think about PFT, the journey we've been on, right, for the last decade, growing and delivering more than 100 basis points, or close to 100 basis points on average, really is driven by several factors. One is our continued innovation, new product launches that we've highlighted in the past, our new product sales keeps growing as a percent of our portfolio. The new products are in these target markets more differentiated and we're able to have higher margin because of that. And then we're driving commercial excellence, value pricing, standing up for the technology and the problems we're solving for our customers. And third, this traditional relentless focus on operational excellence and waste elimination, which is core. So I think I would highlight those three elements. I think what's different in this environment is this tariff dynamic, which I've been very, very pleased with how the teams have been able to manage that through both price and supply chain, which I think is a real differentiator for us to be able to do that and not only maintain, but expand our margins even in this environment, just speaks to the quality of our portfolio and the quality of execution from our teams. Operator: Our next question comes from Justin Ages with CJS Securities. Justin Ages: I was hoping -- you mentioned in PFT some softness in chemicals. But just wondering if you could comment, maybe you're seeing signs of ongoing stabilization or maybe return to growth? Just trying to get a sense of when that might rebound? Alejandro Alcala: Yes. So we're definitely seeing it stable, right, throughout the year. In the first half, we hit some big projects, projects continue to move more so in Middle East and North America. MRO globally has been stable throughout the year. So that's been a big part of our success. So definitely no signs of deterioration, stability. And it's just a matter of when this will start recovering at some point, we expect next year for chemical. But no clear inflection yet, but stable and expected to improve next year. Max Mitchell: Justin, as I think about what's taking place globally, and we've and everyone else has had to react to changes in the tariff structure and other news that happens on a daily basis. But again, I'm pleased with how we continue to stay very agile to react as appropriate. I'm one that -- I mean, within our control -- I'm incredibly proud of what we continue to drive within our control. If I look at the broader market, I'm more on the bullish end just generally because I believe that while there's a lot of noise right now that we're all having to deal with, I believe that this will be settling out here towards the end of the year into next. Just my own reading of the tea leaves and the administration's approach, and I'm more optimistic and planning around it for our teams in terms of what that means. It's still early days. We have our plan meetings coming up here in the month of November to really kind of lock in what it means for 2026. But I'm more optimistic of where all this shakes out and then what that means for the broader global economy. For what that's worth, my opinion is not worth anything more than anyone else's. Justin Ages: Yes. It's worth a lot. I appreciate the answers. And then switching to the PSI, just back of the envelope, the margins a little bit under Crane. So can you just talk about applying the Crane Business System or the machine to PSI and what you're expecting to see in margin improvements once you've integrated them? Alejandro Alcala: Yes, Justin, this is Alex. So we haven't closed the business yet -- we haven't closed the deal. We expect that on January 1. So we'll provide more details after. But generally speaking, these businesses have incredible technology, very stable aftermarket. We expect these businesses to become one of our best businesses within Crane from a margin and growth standpoint in our portfolio. And the improvements that we'll drive are not different than what we've been able to do, particularly on the PFT side through driving overall CBS. So these will become accretive to our profile over the years. They have all the fundamentals, and I'll speak into more detail of how the different elements will play out or how we see them play out with the coming year. But I can tell you, I'm very, very confident that we will deliver with this acquisition. Very pleased with everything I'm seeing and our preparation to execute. Operator: We will move next with Damian Karas with UBS. Damian Karas: Congrats on the progress. So I wanted to ask you a follow-up question related to margins and in particular, your guidance for the year, it seems like it's -- baking in a step down in fourth quarter margins, definitely a notable break from the strength you've been exhibiting so far the first 3 quarters of the year. And I think even on a year-over-year basis, the incremental margin is definitely well below kind of the 35% to 40% plus you guys aspire to. So could you just maybe provide a little bit more color around that margin expectation for the fourth quarter? Any moving pieces there? Richard Maue: Yes, sure. Damian, this is Rich. The primary area would be similar to what we talked about the last couple of quarters with respect to the year-over-year headwinds that we're going to see in commercial aftermarket. Now I would admittedly say that we actually had a little bit of a better quarter here in Q3, and so we didn't see as much of that headwind. We do expect that in the fourth quarter. A couple of items that I would point to is that we did see a few initial provisioning orders that we benefited from in Q3. We saw a decent claim recovery. So we did see a few things that did benefit us here in the quarter. And then what I would also say is two other things. One, we're continuing to see the OE build rates continue. And so that's a natural mix, unfavorable mix element, although we are excited about it. And then the second item would be when you look at the fourth quarter, we tend to have lower production hours. So there's a little bit of seasonality in what we would typically exhibit in the fourth quarter at A&E. Now all that said, I would tell you that on a full year basis, we're going to probably be at the higher end of our targeted leverage range for A&E and will exceed at PFT. So yes, we had a great 9 months. We still expect a great fourth quarter, but it will be a little bit more muted for those reasons. Damian Karas: Understood. That's really helpful. And sorry if I missed any comments related to this earlier, kind of hopping around a bunch of calls today, but would you guys give us your thoughts on the U.S. government shutdown? Are you seeing or expecting any impact from that? And just kind of thinking about that, should this continue into the extended future? Richard Maue: Yes. I mean, right now, we don't -- it's not impacting us today. So the things that we would look to are paying bills and things like that, and we've got no signals of that at all. So far, so good in terms of any impacts to Crane. And at this point, there's nothing on the horizon that would suggest any impact to us here even as we get into the first quarter. Operator: Our next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Alex, you mentioned power and data center demand as being a supportive market for PFT in response to Matt's question, I think. I guess, can you share a bit more detail there on what you're seeing in that market and how it's benefiting Crane? Alejandro Alcala: Yes. For sure. So power, primarily U.S.-based for us, less than 10% really our portfolio in PFT. We've been in this business for a very long, long time with our valve portfolio primarily. And what we're seeing is these power demand that is well documented and the investment in combined cycle -- natural gas combined cycle plant around the country. I think just this year, there's more than close to 30 power plants that are moving forward. So we see content there. Natural combined cycle plants are still a very economic ways to produce electricity, very reliable. And as you know, abundance of natural gas in the United States. So that is our participation there with our valve portfolio, and we expect that to continue into next year. Max Mitchell: Funnel has been increasing, projects are up. Alejandro Alcala: Funnel has been increasing. I think they can't build them fast enough basically on the natural gas side. Scott Deuschle: And do you have any content on smaller reciprocating engines like those that Caterpillar makes? Alejandro Alcala: No. No, we don't have content in that. Scott Deuschle: Okay. And then, Max, are you investing organically at PFT to increase your shipset content on AP1000? Obviously, some big news out this morning. So I was curious if that can maybe be a bigger driver for you all than your historical content suggested? Max Mitchell: Yes. Thanks, Scott. Well, you could argue that Reuter-Stokes long term is absolutely aimed at gaining content on the AP1000. We -- the team is already underway with technology investments to penetrate the pressurized water reactor in addition to boiling water. So long term, absolutely, as we continue -- the current team is doing a phenomenal job and has done as we have when we first won AP1000 content many, many years ago to the tune of about $10 million per shipset. We're identifying another 30% increase in content right now that we're bidding on capturing additional share gain also. So both organically as well as inorganically as we move forward for sure. And there was an exciting announcement today -- exciting announcement that I think in addition to just the announcement today related to the $80 billion investment that the government announced in support, I think you're just seeing this change over time that will continue this trend of nuclear as part of a broader global solution to clean and efficient power that will continue to bode well for us and our position also. Operator: Our next question comes from Nathan Jones with Stifel. Nathan Jones: I'm finding it a bit hard to concentrate with the promise of a signed Rich Maue Crane coffee mug, I guess. I guess, just another question on the PSI businesses. Max, you -- one of the comments you made was that you, from a strategic perspective, are more bullish on that business than you were 3 months ago. Maybe you could just talk a little bit more about what you've learned in the last 3 months that makes you strategically more positive on the outlook for that business? Max Mitchell: Well, I'll let Alex chime in as well. But it starts with the team itself. And I think we just continue to be impressed with the caliber of the talent that's going to be joining Crane. I just love the openness and transparency that we've been met with to date. So that feels really good in terms of integration, integration planning, working well together. It's what I know is taking place already. This is not a team that has stood still. They've been investing for growth, and we're going to get -- quickly get aligned strategically as we're moving forward. It just all feels very, very positive from that standpoint. Sharing of data, kind of getting clarity strategically on what we're going to be working on together from day 1. It's been a fantastic relationship. What else would you highlight, Alex? Alejandro Alcala: Yes. I think over these months, Nathan, just getting more clarity on the specifics of how we're going to collaborate and work together, the detailed plans and the opportunities, just having a very clear line of sight to the gains, starting with the aerospace in Druck, in the nuclear, also with Panametrics, and just a level of detail that we've been able to get and the plans of what we're going to prioritize, and we're going to -- where we're going to be able to have quick gains gives us these higher confidence where we were 3 months ago. So it just keeps increasing as those plans get more defined and more details get clarified. Nathan Jones: And I guess I'll just ask a broader question about 2026. You guys have always been pretty willing to share your outlook. So I mean, are -- you're obviously going to get towards the top end of the growth, 4% to 6% growth target this year. We have seen organic growth slow down a bit as we've gone through the year. Maybe you could just talk about, do you think we're in the 4% to 6% range next year? Maybe it will be a little more towards the middle of next year? Or just any thoughts you have on how the growth outlook might shake out for next year? Max Mitchell: Well, it's still early days. We've got our plan meetings coming up. There's a lot to monitor here in the fourth quarter. Having said all that, based on what I know today, based on what we feel today based on thinking through the end markets and how that will continue to play out, it still feels like our investment thesis holds into next year, Nathan, from that standpoint. Nathan Jones: Okay. I guess we'll wait for the 4Q update. Operator: Our next question comes from Jordan Lyonnais with Bank of America. Jordan Lyonnais: On defense and aero, how should we think about the opportunity for you guys if we start to see announcements for F/A-XX CCA downselection and some of the larger Group 4, 5 drones have been kind of previewed? Alejandro Alcala: Yes, Jordan, this is Alex. On the F-XX or the -- just the NGAD platforms, we are very well positioned on all the demonstrators really. So we've been successful in having multiple horses in the race. So we're going to see strong benefit from that. On the CCA activity, I think we've mentioned we've already secured a position with one of the leading emerging players in that space with CCA, which is going to start ramping up here in the years to come. And then in general, in drones, right, we're actively involved overall. I think, as you know, there's a wide range of drones that exist from the small battery-powered [ hand-launched ], those that are called like Switchblade or Phoenix, and we do not participate in that small. Where we do play is on the medium or larger drones that are part of that CCA, like those that you see called out like Fury, Global Hawk, Predator. So we're well positioned there with various solutions, and we expect to benefit that as that market continues to grow. Jordan Lyonnais: Got it. And then two on -- so how strong demand has been book-to-bill in Aerospace & Electronics, how are you guys thinking about the current capacity you have in place to meet that demand? Alejandro Alcala: As far as capacity, we're -- we've been -- we're well prepared to meet the demand and the ramp-up rates of the OEMs, both Airbus and Boeing. I think teams have done a really nice job preparing for that, even taking advantage of preparing inventory buffers to execute at a very high level to support those ramp rates. So quite confident in our ability to support. Operator: Our next question comes from Tony Bancroft with Gabelli Funds. George Bancroft: Congratulations on the great quarter and all your great work. I recently toured a new facility and was pretty overwhelmed by the amount of automation that was going into it. And I just want to get your view on sort of automation and you've talked a lot about -- it looks like you have a lot of backlog growing and I mean, on the commercial side, it sounds like you're ready to go with capacity, but it sounds like there's a lot of growth on both sides of the businesses and in other areas, obviously, things like Golden Dome and all that. Maybe you could just talk about how you view automation in the long term? And what could that get you maybe on a margin basis? And then just maybe overall ability to grow faster? Max Mitchell: I'll take a stab and then if Alex has anything else. Look, we've always looked at enhancing productivity, easing the work by trying to error-proof and take out cycle time. What's manual, how can we automate? We have a lot of success with cobots across the organization on a localized level. I would be completely honest, Tony, I'm not sure what the technology is that you saw, what type of facility. There are certain technologies that just warrant themselves to complete automation from start to finish and that level of investment. There is no one Crane site that I can think of that would have that type of vision. It will continue to be -- while automation is clearly a direction that we will go down, it tends to be very spot-based and specific to very specific tasks that continue to take out variation, overburden on our associates. At some point in the future, do you link work centers to begin to get flow, cells that flow. The human element for us will always be important in the near future with the type of work that we do across the organization. So I see it as part of the broader strategy for us holistically as we drive productivity on a number of fronts. But that is not one that you would say Crane is going to go down a path of completely automated facilities. Alejandro Alcala: Yes. Just to add to Max, like he said, very specific areas where work is difficult, to make it more reliable. So we have a lot of projects in that, not factory-wide automation. Then the second area where we're investing in automation is just where skilled labor is difficult to get, like welding. So we're trying to get more and more automated in various welding applications. So again, to summarize, more focused on specific tasks that are difficult to maintain and then trying to address skilled workforce gaps more so than fully automating a particular factory. Operator: [Operator Instructions] We have a follow-up from Scott Deuschle with Deutsche Bank. Scott Deuschle: I'm going to be beat up on Rich with a few follow-ups. First is the F-16 brake retrofit program still on track to hit that $30 million revenue target for 2026? Richard Maue: Yes, it is. Scott Deuschle: Okay. And then for 2025, there's essentially nothing in the base, right? Richard Maue: Correct. Scott Deuschle: Okay. And then Rich, is it fair to think that A&E organic growth accelerates next year, given what seems to be a story of acceleration across commercial OE, military OE and military aftermarket? Richard Maue: I would say that when you think about how our external guidance over the long term has been 7% to 9%, I think it's safe to say we'll be at the high end of that range at this point, Scott. Max Mitchell: Commercial OE continues to be a positive. I think what we're continuing to -- we're going to be meeting with our teams on -- from a plan standpoint is on the aftermarket discussion, right, which is -- it's been much stronger than we even anticipated coming into this year. Does that pace year-over-year on a comp basis continue? Or what does that mix look like? I think that is the unknown for us right now. Is that fair? Richard Maue: Yes, I do think that's fair. I think our algorithm there still holds. But what elements would be OE versus aftermarket is going to be something that we'll be teasing out over the next couple of months. But as you're thinking about it, Scott, I would look at that long-term algorithm in the way I positioned it where we think we're going to fall. Scott Deuschle: Okay. And then just one last one to corporate costs. Is this level -- this $85 million number, is this a level you think you can hold for next year? Or is that going to want to grow next year with PSI coming in and things like that? Richard Maue: Yes. No, we don't see it growing next year, to be frank with you. You look at what our rate is today, it's like, I don't know, 3.8%. I would expect that to go down and we're going to leverage the growth, and you'll see it closer to 3% next year, all up, all in. Operator: And this concludes the Q&A portion of today's call. I would now like to turn the call over to Max Mitchell for closing remarks. Max Mitchell: Thank you all for joining us today. We often talk about the Crane Business System that is our foundational and holistic operating system. Many companies claim to have some form of an operating system, and I often get the question from investors as to what makes ours unique. We believe it is the intensity of the culture, people and processes and how we apply the principles to our processes down to the smallest details, which makes the Crane Business System unique. Results are celebrated, but never good enough. And every detail is important to us moving forward. As the late great Giorgio Armani said, to create something exceptional, your mindset must be relentlessly focused on the smallest detail. At Crane, our teams are relentless with the details, building a stronger and more exceptional Crane. Thank you all for your interest in Crane and your time and attention this morning. Have a great day. Operator: Thank you. This concludes today's Crane Company Third Quarter 2025 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.
Angélica Garnica: [Audio Gap] consolidated sales of Grupo Carso totaled MXN 45.5 billion, decreasing 5.8% in the quarter. Grupo Sanborns and Grupo Condumex increased its revenues by 1.9% and 1.2%, respectively, related to summer promotional activities and higher volumes of industrial products. Zamajal hydrocarbons operation, which started consolidating in the second quarter of last year and is in developing process contributed with additional MXN 546 million, growing 27%. On the other hand, Elementia/Fortaleza, Carso Energy and Carso Infraestructura y Construcción decreased its sales 1.1%, 3.2% and 34.2%, respectively. This last division due to the conclusion of major infrastructure projects. Consolidated operating income totaled MXN 3.1 billion versus MXN 5.3 billion in the third quarter 2024. This 39.7% fall reflected lower exchange rate, higher salaries, wages and inflation in general. Grupo Sanborns additionally is implementing a new IT platform and Zamajal started depreciating major investments. Consolidated EBITDA for Grupo Carso from July to September 2025 decreased 20.4%, reaching MXN 5.6 billion compared to MXN 7 billion a year ago. The EBITDA margin decreased from 14.6% to 12.3%. Consolidated controlling net income decreased 78.4%, totaling MXN 651 million, lower than MXN 3 billion last year, reflecting lower operating results and a foreign exchange loss compared to a foreign exchange gain last year. Regarding the performance by division, Grupo Sanborns recorded higher sales with a 1.9% increase related to promotions carried out in the month of August and September. Operating income totaled MXN 443 million compared to MXN 535 million a year ago. This reduction in profitability was explained by an increase of 8.3% in expenses related to higher wages and salaries and the investment in different IT platforms to improve customer experience. EBITDA went down 6.8% with an EBITDA margin of 6.2%, while net income dropped 9.3%. In the Industrial Division, Grupo Condumex sales increased 2.2%, reaching MXN 13.2 billion versus MXN 13 billion in the same quarter of last year. This improvement was obtained by higher volumes of fiber optic cables for the CFE and automotive cables. Regarding operating income and EBITDA, these items reached MXN 967 million and MXN 1.2 billion, respectively, recording lower profitability compared to MXN 1.4 billion and MXN 1.6 billion a year ago. Carso Infraestructura y Construcción's sales totaled MXN 7 billion with the best performance coming from pipelines, where the construction of the Centauro del Norte gas pipeline started in the north of the country. Manufacturing and services for the oil and chemical industry had lower drilling activity and infrastructure concluded large projects. It is important to mention that currently new replacement projects are being recorded in the backlog due to recent bids, one such as the contract for the construction of the passenger train in Saltillo and new finance drilling services for oil wells. The operating income and EBITDA in Carso Infraestructura went down 95.5% and 78.9%, respectively. The controlling net result was a loss of MXN 629 million compared to a net income of MXN 649 million a year ago. The projects currently in place are the construction of shopping centers such as Pavilion Polanco, Star Medica Hospital, Plaza Carso 3-apartment building, telecom installation services and the construction of the Centauro del Norte gas pipeline. The backlog totaled MXN 70.4 billion compared to MXN 21.6 billion a year ago growing 267.9% since new projects were allocated such as the construction and design of 111 kilometers of the Saltillo-Nuevo Laredo passenger train segments for 13 and 14, Saltillo to Santa Catarina and the onshore and offshore drilling services of up to 32 wells for Pemex. The sales of Elementia/Fortaleza decreased 1.1% from MXN 7.7 billion in the third quarter 2024 to MXN 7.6 billion in the third quarter 2025. This was related to the exchange rate with a relevant part of revenues generated outside of Mexico, either from exports or from companies abroad. On the other hand, cement was affected by adverse weather conditions with heavy rains and hurricanes in some regions, which affected construction and cement demand. Therefore, operating income decreased from MXN 1.3 billion to MXN 1 billion and EBITDA decreased 14.9% due to the same reasons. Carso Energy's performance in the third quarter reduced 3.4% with total sales of MXN 867 million. This was attributable mainly to the exchange rate. The operating income and EBITDA of Carso Energy were MXN 659 million and MXN 773 million, decreasing 5.5% and 3.3%, respectively. The net result totaled MXN 371 million with a 10.8% reduction. Lastly, beginning in the second quarter, the oil operations to explore and exploit the Ichalkil and Pokoch fields on the Campeche Coast are being recorded and consolidated within the Carso numbers, where additional MXN 546 million were recorded in revenues at the Zamajal division. The operating result was a loss of MXN 439 million, while EBITDA totaled MXN 59 million. Zamajal continues its activities in the Ichalkil and Pokoch shallow water fields, increasing production and reducing operating costs and expenses. However, there were impacts of around MXN 250 million recorded in depreciation this quarter coming from significant capitalizations. With this, I finish my general comments to proceed to the Q&A session. We will make [Foreign Language] in Espaneol. But I want to remind you that the financial media can stay, but cannot make questions. The questions for the media will be addressed by Renato Flores Cartas from AMX, which help us with the media inquiries. Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Executive: [Foreign Language] Unknown Analyst: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Analyst: [Foreign Language] Angélica Garnica: [Foreign Language] Unknown Executive: [Foreign Language] Angélica Garnica: [Foreign Language]
Operator: Greetings. Welcome to Grupo Traxion Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Aby Lijtszain, Executive President. Thank you. You may begin. Aby Lijtszain Chernizky: Thank you. Good morning, everyone. Thanks for joining us again for this quarterly earnings call. Let me start with the good news. As you know, we executed the integration of Solistica early in the quarter, and it has concluded successfully. It is the most relevant merger in the logistics industry in Mexico and a very strategic move on our side as it is transformational for Traxion. There are many synergies that we have captured so far. Among the most relevant are the transfer of the shared services center together with all their logistics back office to the Traxion platform and have executed several procurement efficiencies that have improved the bottom line. Traxion invested around MXN 1.6 billion in the acquisition and prepared the company to properly cope with the integration, which is expected to bring at least MXN 8 billion of additional revenue. Because of that, management decided to slow down organic growth to focus more on the successful merger of both operations. Most notably, Traxion significantly reduced its organic CapEx for 2025 to accommodate the acquisition of Solistica, which basically implies the same investment levels as in previous years, but with Solistica up and running in our platform. After the acquisition, the company remains with virtually the same level of leverage and interest expense, which is tremendously accretive. In summary, Traxion will post revenue growth with Solistica but will not change its leverage profile or interest expense at the end of the year which is very similar to having grown organically. Moving on, we experienced a downturn in both cargo and logistics operations. Even though export levels were in line with the same period of last year, there were some sectors affected by the tariff uncertainty in which many of our clients face challenges regarding their production and export operations, mainly the automotive and the online steel industries and some in the consumer and e-commerce sectors as well. There is a clear area of opportunity for us there as we have been shifting our capacity to other sectors of the economy with less volatility. Having said that, we are confident that our year-end top line figure will grow in the mid-teens and will be within the range of the guidance we released in our previous call. Thanks for your attention. I will now hand over the others for a deeper dive into details. Rodolfo Mercado Franco: Thank you, Aby. Welcome, everyone. This quarter continued to be marked by a high level of complexity, driven by uncertainty surrounding tariff-related developments between the United States and Mexico and other countries as well. I will now walk you through the most relevant operating highlights. First, I'm very pleased to share with you that the Solistica integration was implemented successfully and that our 100-day plan concluded favorably according to our expectations, thus ensuring operating and financial progression and the retention of both talent and key clients. We designed an integrated structure aimed at collaboration, efficiency and value creation which in the case of Solistica has an even more enhanced effect as this company came from a very institutional enterprise. Moving on, synergies are coming in as planned. And we have seen some effects in margin that will become more tangible in the next quarters. Among the most relevant synergies achieved so far are corporate reductions and adjustments, the shutdown of Solistica's shared services center and 3PL back office with the procurement side reporting the most relevant efficiency so far. In terms of mobility of cargo, severe disruptions continued during the third quarter, mainly in cross-border circuits on both northbound and southbound that have resulted in prices dropping as demand became more intermittent, especially with clients of the automotive industry and those related to the steel and iron sector. Furthermore, the Mexican peso continue to strengthen, which, as you know, affects the U.S. dollar-denominated portion of the cross-border revenue. However, we are seeing signals of recovery in the retail sector in Mexico and enhancement in general terms in the American side. There are no signals of structural changes in the fundamentals of our industry. So we think that this adversity is temporary. We have also achieved some cost efficiencies related mainly to fuel that have helped to improve cost per kilometer, among other smaller enhancements. Now in the logistics business, we continue to face challenges across the board that are explained basically by a downturn in cargo and some disruptions with our e-commerce clients, which typically import merchandise from the United States to Mexico. However, we expect the situation to normalize towards the end of the year. Finally, in mobility of people, we reported a slight increase in revenue, but a better performance moving to the bottom line. We were able to successfully close our commercial pipeline of the quarter, mainly combining capital expenditure with churning out fleet from older non-efficient clients and allocating those units to new clients at more competitive prices, such effects will become more visible in the coming quarters as those new accounts start contributing revenue and fleet productivity. As you can see, it was a very busy quarter with several highlights in many fronts. Thanks for your attention. With this, I end my remarks. Please, Wolf, go ahead. Wolf Silverstein: Thank you. Welcome, everyone. There are many financial highlights. First of all, there was margin stability in our three business divisions, including Solistica, cargo improved 430 basis points compared to the second quarter of this year. However, with the Solistica integration, Traxion has a much larger component of asset-light business lines which was 45% in terms of revenues this quarter and thus consolidated margin is lower compared to the same period of last year. As this business division continues to gain more relevance, the estimate consolidated margin for the company should be around 16%. Moving on, it is very important to note that the net debt to EBITDA ratio was 2.35x compared to 2.22x reported in the second quarter, just before the Solistica acquisition was finalized. This is very noteworthy as the ratio did not increase substantially and that we expect to end the year at similar levels. That translates into an increased profitability for the company. In this line, there's even another important aspect to highlight, which is that the interest expense remained virtually the same but with the acquisition of Solistica already in place. This basically means that we grew 14.5% our revenue base with virtually the same financial cost. This is indeed very good news and prove that this acquisition was exceptionally accretive and will continue to bring value over time as the integration is fully reflected in our P&L moving forward. Also, as Aby mentioned, we reduced significantly our CapEx for this year to accommodate the Solistica acquisition and still be within similar investment levels as in the past few years. In terms of financial results, aside from the interest expense that I just discussed, this quarter, the company did not have the foreign exchange benefit that contributed to net income in the third quarter of last year. Having said all that, Net income grew over 17%, more than revenues and EBITDA, which is a great highlight to mention this quarter. With this, I conclude my remarks and hand over to Tonio, Thanks. Antonio Obregón: Thank you, Wolf. I will now walk you through some relevant ESG milestones and other tech-related developments. Perhaps the most important sustainability milestone is that this period we incorporated data regarding renewable electricity generation from solar panels installed in our facilities. This is indeed very good news and a tremendous step in terms of emissions reduction and energy efficiency as we continue to expand our logistics footprint and presence. Moreover, we released our 2024 integrated report in line with the most important ESG standards, mainly TCFD and GRI, which are the reflection of our strong commitment to governance, transparency, people and planet. During this period, Traxion obtained the ISO certifications regarding anticorruption and compliance management matters, thus reinforcing the company's integrity standards and corporate observance. Moving on. As you very well know, digitalization has transformed many of our business lines. For some years now, we have paid special attention to tech-driven ecosystems and have conducted many upgrades that are now deeply embedded in our business model that have enabled Traxion to be one step ahead of clients' needs and beyond competition. So in terms of tech advancements and digital strategy, Traxion successfully implemented an in-house developed artificial intelligence program to help our commercial force predict and optimize opportunities, enhancing the decision-making process and boosting talent across the company. This milestone consolidates even more of the company's digital transformation that has been its leadership trademark while strengthening the Intelligent Mobility Solutions platform. Thanks again for your attention. With this, I end management's remarks, and we'll open the floor to Q&A. Operator: [Operator Instructions] And your first question comes from Anton Mortenkotter with GBM. Unknown Analyst: I have two quick ones. One is, we've seen that the cargo truck utilization has been dropping in the last quarters. I was wondering when do you expect this to normalize? Or what kind of levels do you expect to see or should be sustainable in the long term? And also thinking about the industrial trends for the next year, the USMCA renegotiation, how are you positioning for that? And then what are your expectations [ ago ]? Antonio Obregón: Anton, this is Tonio, thanks for your question. I'm going to answer the second question first. As many of you know, one of the biggest plans for Traxion is to expand into the United States because we think that is the natural geographic expansion for us, for the company. The cross-border market between Mexico and the U.S. is the fastest-growing market in transportation and logistics in the world currently. And we want to position ourselves in that market and into the United States. So I think that would be the best way to approach positive USMCA renegotiation, and all the benefits that it's going to bring to the table. Aby Lijtszain Chernizky: Anton, regarding to -- this is Aby, regarding to the first question. So what we're doing is getting clients from different industries. We are now giving a lot of services to the car industry. So we are diversifying the industries from Traxion. So with that, we expect to be as good as it was before, maybe in the middle of the next year, first or second quarter of the next year. Operator: And your next question comes from Edson Murguia with Seneca. Edson Murguia: I have two of them, the first one is related to the personal mobility segment, you have a growth of 4.2%. And you mentioned in the earnings release that we execute some efficiencies. So I was relieved if you can give us or you could elaborate more about your type of efficiencies? Did you perform during the quarter? And my second question is about the fleet reduction. Looking ahead, can we expect the same trend of reduction of the fleet? Antonio Obregón: Edson, this is Tonio. Regarding your second question in terms of fleet reduction, yes, you're right. If you see, we had fleet reductions -- slight fleet reductions in both segments. One has to do in mobility of people, the fleet reduction has to do with the profitability program, which is basically churning out buses from older, not that efficient clients into new clients that are willing to pay more market prices. So when you do that, you need to take out the operation, the bus and prepare it for the next one. So that bus is not operating for some time, perhaps two or three weeks and that reduces the average fleet on the quarter. It's not that we are reducing the fleet by design. It's just some metric that got caught up in the middle of the quarter. And regarding the reduction in the fleet -- in the cargo fleet, it's a normal thing. We are conducting a regular renovation program, which is not linear if we're going to renovate 400 trucks in a year. For example, it's not linear, that is perhaps not 100 trucks every quarter is different. So that's basically the reason. We are not reducing the fleet, quite the contrary. We want to keep it as it is. And regarding your first question, Edson, could you please repeat it? Edson Murguia: Yes, what type of efficiency did you perform in the personal segment to achieve 4.2% growth? Antonio Obregón: Sorry Edson, can you please repeat it again? We are not hearing it clearly. Edson Murguia: Perhaps -- Yes, sorry, probably it's my phone. But what type of efficiency did you perform in the personal segment to grow 4.2% during the quarter? Wolf Silverstein: This is Wolf. So let me try to be as clear I think it was the question. So in the mobility of people, as we mentioned, particularly for this 2025, we run this program that is a profitability program client that we are basically, as Tonio mentioned at the beginning, shuffling the clients that pay less for clients that can pay more, considering the opportunity that we saw in the market to raise some of the prices. So this, combined with the renewal program and obviously, let's say, the overhaul of the units that we need to put in place so we can allocate the buses to the new clients. This is basically what we're doing, in particular this year instead of just growing as it was similar in the past. So it's basically the most different problem that will run this particular year. So this is what you are seeing that the margins in that business are growing even though maybe the -- let's say, the revenues are similar than the inflation. Operator: Your next question comes from Felix Garcia with [indiscernible] Research. Unknown Analyst: Felix Garcia from [indiscernible] Research. First, congratulations on the successful integration of Solistica. Could you share which operational or client synergies have already started to materialize? And whether the 100-day plan help identify additional efficiency opportunities? Secondly, we understand the freight division faced a temporary slowdown in cross-border operations. Have you started to see any signs of recovery in demand or contract reactivation, particularly within the automotive sector? Antonio Obregón: Felix, I'm Tonio, I'm going to answer your first question. There are many synergies, but perhaps the most relevant one is that we basically unplugged the shared services center of Solistica and all the 3PL back-office operation and plugged it into the Traxion platform, which brought many costs and expenses savings in overhead, in corporate, in facilities and other tech-related things. But perhaps the most significant synergies we have identified so far and the most that have materialized in the first quarter, the faster ones, perhaps are in procurement, which as you know, we have a huge procurement platform. We do strategic negotiation and other things. And those are the main efficiencies. Effectively in the first 100 days of operation, we identified -- obviously, as you can imagine, we had identified some synergies that were more visible than evident. But once you have the company in your platform, there are others that are not that visible that are also achievable. So we have been with the company for three months. We think that there are going to be other synergies as time goes by. And I think for -- I think that the next year, you're going to be able to see some other efficiencies and synergies more tangible and more evidently in margin mostly. Rodolfo Mercado Franco: Felix, this is Rodolfo. So regarding your second question about the cross-border business or industry and the automotive, as you're saying, we -- the automotive has been hit in this growth business services. And we haven't seen very much of recuperation in this month. That's why Aby just said it in the before question is we're looking for other industries to switch our equipment and our trucks, so we can avoid the uncertainty that we have the automotive industry right now. Operator: Your next question comes from Martin Lara with Miranda Global Research. Martín Lara: Thank you for the call. Your leverage remains at very low levels. How do you see it going forward? Do you think it would reach 2x by the end of 2026? Wolf Silverstein: This is Wolf. So as we mentioned before, let's say, in the previous calls, even though after the Solistica acquisition, we are remaining at similar levels that we were before the acquisition. So that's very good news for the company and for the leverage of the company. Let's say that, as you know, the CapEx plan in an organic way for 2025, it was lower than the previous years. So we are expecting to deleverage the company in a couple of, let's say, quarters. And I think that's also good news regarding all the synergies that we're planning with Solistica on the Traxion platform plus the reducing CapEx and the generation of the cash flow. Martín Lara: Okay. And how do you see the margin -- the EBITDA margins in logistics and technology? Wolf Silverstein: You saw this quarter, it was something around, let's say, even though 9%. As we mentioned before, Solistica basically comes at the beginning with a similar levels of around 5% margin. Inside of Traxion, we think that this particular acquisition could boost 100 and 200 basis points more inside of Traxion. So at the end, let's say, this particular division at the end could be something between 8% to 9.5% margin in the division. Operator: And your next question comes from Fernanda Recchia with BTG. Fernanda Recchia: Two from our side as well. So the first on the top line growth that you provided for the year in last quarter, you mentioned an expectation of reaching between 14% to 16% of top line growth. But when we look at the nine months, you are -- was 6%, just wondering if you expect, still, to reach the guidance or maybe it could be a little bit lower because of the softer demand that we are seeing? And second, maybe if you could comment on the cash flow generation for next year. Antonio Obregón: Fernanda, this is Tonio. Thanks for your question. Yes, regarding the first question is we are very confident that our year-end figures are going to be within the range of guidance that we provided in the previous call. So we are -- we're confident that we're going to achieve it. Wolf Silverstein: Thank you, Fernanda. This is Wolf again. So regarding your second question regarding the cash flow generation for 2026. As you know, and we mentioned since 2024, the company was able basically to, let's say, to stabilize the operating cash flow neutral the previous year. So after, obviously, the Solistica acquisition, we're planning to have a positive cash flow generation for 2026. Operator: And your next question comes from Jorge [indiscernible]. Unknown Analyst: You mentioned you see expansion into the U.S. as one of the best ways to capture next years trends. If you could delve further into that, how would you prefer getting involved? Would it be via M&A on an existing competitor? Or would it be through fleet expansion? Antonio Obregón: Jorge, this is Tonio. Thanks for your question. Yes, we think that the best approach to tackle the opportunities in the cross-border market for us, would be via an M&A transaction. We think it's faster and more efficient than establishing an organic growth operation. It's going to take more time. And I mean if you take a look at the multiples and the valuations of the cargo companies in the U.S., it's a very attractive entry point. And we also think that the USMCA negotiations are going to be carried out positively. And when this [indiscernible] comes due next year. So yes, the answer to your question is M&A. Operator: [Operator Instructions] Now we'll pause for a couple of moments to see if there are any final questions. Thank you. This now concludes our question-and-answer session. I would like to turn the floor back to Aby Lijtszain, Executive President, for closing comments. Aby Lijtszain Chernizky: Our long-term view has not changed. We are confident that this downturn is temporary and that things are going to get back to normal as talks regarding USMCA evolves and the tariff uncertainty dissipates. We are confident that the North American trade will continue. It is the fastest-growing trade market in the world despite the noise and short-term disruptions. Traxion will continue to seize the opportunities, grow and improve it logistic solutions umbrella as we have always done in the past. Thanks for your attention, and have an excellent day. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Good morning. My name is Matthew, and I'll be your facilitator today. I'd like to welcome everyone to the UPS Third Quarter 2025 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours. PJ Guido: Good morning, and welcome to the UPS Third Quarter 2025 Earnings Call. Joining me today are Carol Tome, our CEO; Brian Dykes, our CFO; and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2024 Form 10-K and other reports we file with or furnish to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results. For the third quarter of 2025, GAAP results include a net charge of $164 million or $0.19 per diluted share, comprised of after-tax transformation strategy costs of $250 million, which were partially offset by an $86 million benefit from the reversal of an income tax valuation allowance. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. And now I'll turn the call over to Carol. Carol Tomé: Thank you, PJ, and good morning. To start, I want to extend my sincere gratitude to all UPSers for their dedication and hard work. The third quarter brought a wave of tariff changes, some expected, others unforeseen, and our team navigated these complexities with exceptional skills and resilience. At the same time, we continued advancing our network reconfiguration, a critical step in shaping the future of our U.S. business. Amid this significant transformation, I remain deeply impressed by the determination of UPS and their steadfast commitment to serving our customers and building a stronger, more agile UPS. Turning to our results. In the third quarter, consolidated revenue was $21.4 billion. Consolidated operating profit was $2.1 billion and consolidated operating margin was 10%. The cash flow pressures we saw in the second quarter eased during the third quarter. As a result, our year-to-date free cash flow reached $2.7 billion. In the third quarter, our focus on revenue quality continued. And as expected, our U.S. average daily volume, or ADV, declined from last year. The largest drivers of the U.S. volume decline were the planned glide down of Amazon volume and a targeted reduction in lower-yielding e-commerce volume. Our focus on revenue quality yielded solid results as U.S. revenue per piece grew by 9.8% in the third quarter. By coupling solid revenue per piece growth with outstanding expense control, we were able to grow our U.S. operating margin by 10 basis points to what we reported last year on an ADV decline of $2.3 million or 12.3% -- in our international business, total ADV grew 4.8%. Our priority is to our customers. And during the quarter, we ran our international network with agility, rerouting capacity to where our customers needed it. Looking at export ADV, it increased 5.9%, marking the fifth quarter in a row of growth. But due to the changes in trade policy, export volume fell in our higher-margin lanes and grew in our lower-margin lanes. This volume mix change pressured our international operating margin and also pressured our forwarding business. On a positive note, we continue to see strength in health care with strong revenue growth in the third quarter year-over-year, driven by our portfolio of health care logistics solutions. As Brian will provide more details on our financial performance, let me provide some operational updates. In recent years, the spotlight on international commerce and the intricacies of supply chains has intensified. And in 2025, we're witnessing the most profound shift in trade policy in a century. At UPS, this is our domain. Every day, we connect businesses and customers across more than 200 countries and territories, ensuring goods move seamlessly across borders. That includes navigating the complexities of customs brokerage, where we're one of the world's largest customs brokers, managing millions of customs entries annually. Our success is powered by deep expertise, exceptional talent and cutting-edge technology. With our next-gen brokerage capabilities, we harness AI to digitally process over 90% of our cross-border transactions, delivering speed, accuracy and reliability at a global scale. Following the elimination of the de minimis exemption for U.S. imports, UPS experienced a tenfold surge in daily customs entries. We responded swiftly, upgrading our shipping systems to capture the expanded data requirements mandated by U.S. customs and border protection. To manage the increased volume and complexity, we enhanced our customs brokerage capabilities by integrating Agentic AI. This advanced technology streamlined formal entry processes. At UPS, we don't just move goods, we remove friction. By absorbing regulatory complexity, we help our customers minimize disruptions and keep global commerce flowing. And due to the investments we've made in our brokerage business, we can absorb this complexity without adding cost that isn't offset by revenue. As you know, we have a goal to become the #1 complex health care logistics provider in the world. To that end, we are making great progress towards our acquisition of Canadian-based Andlauer Healthcare Group. The addition of Andlauer's capabilities will further strengthen our solutions in global health care logistics, particularly in North America. We expect to close this transaction in early November. Now touching on DAP, our digital access program. We have more than 8 million SMBs on DAP. And in the first 9 months of the year, we generated over $2.8 billion in global DAP revenue, an increase of 20% year-over-year. DAP continues to be an important SMB growth engine. And for the full year, we expect to deliver over $3.5 billion in global DAP revenue. Before we move on, let me provide updates on our Amazon glide down effort and our Ground Saver product. Our Amazon glide down efforts are proceeding as planned. As expected, in the third quarter, we experienced a stepped-up volume decline with Amazon. Versus last year, Amazon's total volume decline in the third quarter was 21.2% compared to 13% for the first half of the year. In tandem with this change, we are continuing to reconfigure our U.S. network. We closed an additional 19 buildings, bringing our total so far this year to 93 buildings. Further during the quarter, we completed a successful voluntary retirement program for many long-term drivers who welcome the opportunity to retire from UPS after decades of dedicated service. In total, our network reconfiguration and cost-out efforts are on schedule and the profit improvement we expect to see from the Amazon glide down initiatives is on plan. In a few minutes, Brian will provide more details about our progress here. Moving to Ground Saver. In the third quarter, our Ground Saver average daily volume declined 32.7% year-over-year due primarily to the actions we've taken with Amazon and to trim lower-yielding e-commerce volume. We recently reached a preliminary understanding on revenue and rates with the United States Postal Service to support last-mile delivery for our Ground Saver product. There's still more work to do, but we are confident we will come to an agreement that ensures our service levels will remain best-in-class, which brings me to peak. As we've discussed, our top 100 customers drive about 80% of our peak surge each year, and we expect that to be the case again this year. Early forecasts from these customers suggest they are planning for a good peak that will result in a considerable surge in volume from our current volume levels. But remember that given the Amazon glide down plan, we expect total peak average daily volume in the U.S. to be down year-over-year. Operationally, we're poised to deliver a strong peak season driven by several key factors. First, thanks to strategic enhancements made to our Network of the Future initiative, we're operating more efficiently than ever. These changes will allow us to reduce reliance on seasonal hires and significantly cut back on lease trailers, vehicles and aircraft compared to previous years. Much of this efficiency is powered by automation. Over the past year, we've deployed new automated systems in 35 facilities. In the fourth quarter, we anticipate 66% of our volume will move through automated processes, up from 63% during the same period last year. Second, as we approach the peak shipping window, we'll continue to leverage our proven technologies and scale the network where needed, all while maintaining a sharp focus on service quality. These advancements position us to run the most efficient peak in our history. We've set the standard for holiday shipping, 7 consecutive years of industry-leading service, and we're confident that our operational strategy and commitment to excellence will make it. With the uncertainty around tariffs now somewhat resolved and clear peak forecast from our largest customers, we're in a stronger position to offer guidance than we were at the end of the second quarter. As I wrap up, let me share our financial expectations for the fourth quarter. We anticipate consolidated revenue of approximately $24 billion and consolidated operating margin of approximately 11% to 11.5%. Brian will walk you through the details of our fourth quarter outlook shortly. Amid a rapidly evolving global landscape, UPS is executing the most significant strategic shift in our company's history. We're focused on winning where it matters most, capturing high-value parts of the market and onboarding customers with increasingly complex logistics needs. Our company is rock solid strong with more than sufficient liquidity to deliver upon our transformation and return capital to shareowners. The changes we're implementing are designed to deliver long-term value for all stakeholders. So with that, thank you for listening. And now I'll turn the call over to Brian. Brian Dykes: Thank you, Carol, and good morning, everyone. This morning, I'll cover 3 areas, starting with our third quarter results. Next, I'll discuss progress with the Amazon volume glide down and our network reconfiguration and cost-out efforts. Then I'll close with our expectations for the fourth quarter and capital allocation for the full year. Moving to our results. Starting with our consolidated performance. In the third quarter, revenue was $21.4 billion and operating profit was $2.1 billion. Consolidated operating margin was 10%. Diluted earnings per share were $1.74. $0.30 of EPS came from a sale-leaseback transaction involving 5 properties completed in the third quarter, which resulted in a $330 million pretax gain on sale. This transaction was part of a broader strategy aimed at freeing up capital for reinvestment as we reconfigure our network. The leases are structured to maintain operational continuity for our business. And as a result, we have not adjusted this gain on sale in our non-GAAP presentation. Now moving to our segment performance, starting with U.S. Domestic. In the third quarter, we continued to improve the mix of volume in our network and our disciplined approach to revenue quality meaningfully offset the impact lower volume had on revenue. Additionally, the team did an excellent job managing expense throughout the quarter, resulting in an improvement in U.S. domestic operating margin. For the quarter, total U.S. average daily volume was down 12.3%, primarily due to the glide down of Amazon volume and our focus on improving revenue quality. Total air average daily volume was down 13.9%, mainly due to Amazon. Health care and high-tech customers both showed growth in air average daily volume in the third quarter, which was the third consecutive quarter of positive momentum from these key industries. Ground average daily volume was down 12% year-over-year. Within Ground, Ground Saver ADV declined 32.7% due primarily to the actions we've taken with Amazon and to trim lower-yielding e-commerce volume. As a result, our more premium ground commercial and residential services made up over 84% of our total ground average daily volume in the third quarter. That's the highest percentage we've seen in more than 5 years. Now moving to customer mix. SMB average daily volume was down 2.2% versus last year. However, we continue to see bright spots in SMB health care and automotive as well as growth from DAP, our digital access program. In the third quarter, SMBs made up 32.8% of total U.S. volume, which is about a 340 basis point improvement compared to last year. In the third quarter, B2B average daily volume finished down 4.8% compared to last year due to softness in retail and in manufacturing activity. B2B represented 45.2% of our U.S. volume, which was a 350 basis point improvement versus last year. B2C average daily volume was down 17.6% year-over-year. Moving to revenue. For the third quarter, U.S. domestic generated revenue of $14.2 billion, which was down just 2.6% year-over-year against an ADV decline of 12.3%. Our revenue performance reflects strong growth in revenue per piece and air cargo. In the third quarter, revenue per piece increased 9.8% year-over-year, which was the strongest revenue per piece growth rate we've seen in 3 years. Breaking down the components of the 9.8% revenue per piece improvement, base rates and package characteristics increased the revenue per piece growth rate by 350 basis points. Customer and product mix improvements increased the revenue per piece growth rate by 400 basis points. The remaining 230 basis point increase was from fuel. Turning to costs. In the third quarter, total expense in U.S. domestic was down 2.7%. The decline in total expense was primarily driven by our actions to reduce hours and operational positions with volume. Looking at cost per piece, we were up against a tough comparison from last year. This comparison, together with the costs associated with delivering Ground Saver volume and the contractual union wage increase that went into effect on August 1, resulted in a cost per piece increase of 10.4%. The U.S. Domestic segment delivered $905 million in operating profit and operating margin was 6.4%. Moving to our International segment. Through ongoing shifts in trade patterns spurred by changes in U.S. trade policy, we are continuing to operate our global network with agility to serve our customers. As a result, in the third quarter, International delivered its fourth consecutive quarter of growth in average daily volume and revenue. In the third quarter, total international ADV increased 4.8%, led by Europe and the Americas regions. International domestic average daily volume increased 3.6% compared to last year, led by Canada. On the export side, average daily volume increased 5.9% year-over-year, driven by the agility of our network to adjust to changing trade lanes and led by strength between European countries. As the third quarter played out, we saw a decline in U.S. imports, led by an ADV decline on the China to U.S. lane of 27.1%. Turning to revenue. In the third quarter, international revenue was $4.7 billion, up 5.9% from last year. Operating profit in the International segment was $691 million, down $101 million year-over-year, reflecting pressures from trade lane shifts, product trade down and lower demand-related surcharges. International operating margin in the third quarter was 14.8%. Moving to Supply Chain Solutions. In the third quarter, revenue was $2.5 billion, lower than last year by $715 million, of which $465 million was due to our divestiture of Coyote in the third quarter of 2024. Within Supply Chain Solutions, demand softness in Air and Ocean Forwarding resulted in lower market rates, which drove a decline in revenue year-over-year. Logistics revenue was down year-over-year, driven by a decline in Mail Innovation. This was partially offset by revenue growth in Healthcare Logistics. And UPS Digital, which includes Roadie and Happy Returns, grew revenue by 9.5% year-over-year. In the third quarter, Supply Chain Solutions generated operating profit of $536 million. Operating margin was 21.3%. Our results in Supply Chain Solutions this quarter include the impact of the sale-leaseback transaction, which generated the $330 million one-time gain that I mentioned earlier. Turning to cash and shareowner returns. Year-to-date, we generated $5.1 billion in cash from operations and free cash flow of $2.7 billion. We finished the quarter with strong liquidity and no outstanding commercial paper. And so far this year, UPS has paid $4 billion in dividends. Now let me provide an update on our cost out and network reconfiguration efforts. In conjunction with our actions to significantly reduce the amount of Amazon volume in our network, we are executing the largest network reconfiguration in our history and will remove approximately $3.5 billion in related costs this year. We've made a lot of progress since our last earnings call. Let me walk you through the details. Total Amazon volume was down 21.2% compared to the third quarter of last year. We achieved our reduction target in the portions of the Amazon volume we are exiting, and we grew the portions of Amazon volume that we are continuing to serve. Now let's look at the savings we've generated so far this year. As a reminder, we are tracking our savings within 3 cost buckets. They are variable costs, which primarily captures operational hours, semi-variable costs, which reflects operational positions and fixed costs, which includes closing buildings and reducing expense from support functions through our efficiency reimagined initiative. Looking at variable costs. Total operational hours continue to move down with volume. So far this year, we are down more than 16 million hours, and we are on track to reach our reduction target of approximately 25 million hours for the year. Moving to semi-variable costs. Attrition and operational positions accelerated each month during the quarter, and we finished down nearly 34,000 positions year-over-year, which includes a reduction from our driver voluntary separation program. Nearly 1/3 of the reductions occurred in September. In our fixed cost bucket, year-to-date, we have completed the closure of 195 operations, including closing 93 buildings. As we are closing buildings, we are also investing through our Network of the Future efforts. And as Carol mentioned, we've deployed additional automation in 35 facilities. And while we expect to be busy processing volume during peak, we also plan to deploy automation projects in 7 additional buildings in December. Lastly, savings from our efficiency reimagined initiatives continued to accelerate in the third quarter. Pulling it all together, we are making meaningful progress executing our strategy. So far this year, we've reduced expense by $2.2 billion, and we're on track to achieve our 2025 expense reduction target of approximately $3.5 billion. Now moving to our outlook. At the consolidated level, we expect fourth quarter revenue of approximately $24 billion and an operating margin of approximately 11% to 11.5%. Looking at the segments in the fourth quarter. Starting with U.S. Domestic, we expect revenue to be around $16.2 billion in the fourth quarter, driven by the continued volume reduction with Amazon and strong revenue per piece growth. And we expect an operating margin of approximately 9.5% to 10%. In terms of peak, in the U.S., we expect heavier volume earlier in the peak period, and we have 1 additional delivery day compared to last year, which gives us more flexibility. The network reconfiguration and additional automation we deployed through Network of the Future set us up to deliver a more efficient peak and another year of industry-leading service for our customers. In short, we're ready for peak. Turning to International. We expect the dynamic environment we've experienced throughout the year will continue. With this in mind, we expect fourth quarter revenue to be approximately $5 billion, and we expect an operating margin of between 17% and 18%. In Supply Chain Solutions, we expect revenue in the fourth quarter of around $2.7 billion and an operating margin of approximately 9%. Looking at capital allocation for the full year, we expect capital expenditures to be approximately $3.5 billion. We are planning to pay out around $5.5 billion in dividends, subject to Board approval, and we have completed the targeted share repurchase of about $1 billion of our shares. Lastly, we expect the tax rate to be approximately 23.75% for the full year 2025. Before I close, let me comment on our financial condition. UPS is rock solid strong, and we have plenty of liquidity to continue executing our strategy and return value to our shareowners. And following the completion of our acquisition of Andlauer, we expect to end the year with around $5 billion in cash. So with that, operator, please open the lines for questions. Operator: [Operator Instructions] Your first question is coming from Chris Wetherbee from Wells Fargo. Christian Wetherbee: Maybe we can start on domestic margins. So obviously, some improvement, but we had a lot of RPP growth in the quarter. So I guess as we think forward, I know there's a mix of cost as well as yield management that we're going to see. And I know you've given us some ranges for the fourth quarter. But generally speaking, where you think you are in the glide down, can you give us a little sense of maybe what we can start to think about for 2026 from a domestic margin perspective? Brian Dykes: Thanks, Chris. I appreciate it. And look, I think we're very pleased with both the revenue quality we saw in the third quarter as well as the progress that we're making with the Amazon glide down, and we laid out the activity metrics around that. On 2026, look, we'll update 2026 on the January call when we report fourth quarter. But there are a few things that I think are worth kind of keeping in mind. Remember, we're 3 quarters into a 6-quarter drawdown. So as we lap the year, we kind of come through the first 3 quarters of this year, we will see a sequential increase in Amazon volume as we go into peak because everybody peaks. And then we'll continue to draw down as we go through the first half of next year and the cost takeout will continue as we go through that. The second is, as Carol mentioned, we're taking strategic actions around Ground Saver that will start to take hold next year, and we'll see economic benefit in the back half of next year for that as well. We do anticipate closing Andlauer in November of this year, and we'll update you on the financials as we wrap that into next year, but that's an exciting acquisition to accelerate our health care strategy. And look, we're continuing to focus on growing in the parts of the market that will help us continue to drive revenue per piece growth as well as higher margins as we go into the back half of '26 and complete the Amazon glide down. Operator: Our next question comes from the line of David Vernon from Bernstein. David Vernon: So Brian, can you talk a little bit about the exit rate on cost per piece coming out of the third quarter? It seems like this was kind of an inflection quarter where with the buyout and everything else, you probably came out a little bit better than you started and whether we should expect that to accelerate into 4Q? And then it sounds like you guys are saying you found a way to work with the USPS on Final Mile for some of the residential lower rate e-commerce type of stuff. Can you kind of be more specific in terms of what that looks like and how that changes cost per piece? Brian Dykes: Sure. Well, first, let me talk about exit rate on Q3 cost per piece, and I'll let Carol comment on the USPS. And there's a couple of things on cost per piece. Look, the cost per piece is on a tough comp year-over-year because this is probably the largest year-over-year comp related to the e-commerce volume that we're exiting. So it has a big mix impact both on rev per piece and cost per piece. As we've gone through the quarter, though, we are seeing some of the best production metrics that we've seen certainly on our inside, I think it's in 12 years, on a preload in 20 years. The investments that we're making in automation that we're deploying through Network of the Future are certainly showing benefits, and we're seeing that come through the cost per piece. The other thing that I'll point out, and I'm sure you saw it in the non-GAAP reconciliation is that we executed on our driver voluntary severance program in the quarter. About 90% of those drivers exited on August 31. And so those savings will start to materialize in the fourth quarter as well. Carol, do you want to comment on Ground Saver? Carol Tomé: I'm happy to. And David, nice to hear from you. Just maybe going back on the driver piece. The total cost of the buyout is $175 million. the payback -- annual payback is $179 million. So the payback is less than 1 year. So that's a good thing for our cost per piece, isn't it? Yes. Now let's talk about the USPS. As you know, David, the Postal Service has a new Postmaster General. And when Mr. Steiner joined, immediately started having a conversation with him about how could we create a win-win-win relationship, a win for the postal system, a win for UPS and a win for our customers. And the way to do that is to leverage what they're best at, which is final mile and what we're best at is middle mile. And so I'm happy to tell you that we've reached preliminary agreement on what that looks like from a volume and rates perspective. We're working through the details and look at those details all ironed out over the next weeks and months. And by the end of the fourth quarter, we'll be able to give you more details. But I'm very, very pleased with where we are today and this new -- renewed relationship with USPS. David Vernon: Is there any way to kind of talk a little bit more about timing and how that kind of affects the domestic margin for 2026? Or is it still too early? Carol Tomé: It's too early. We don't expect any benefit in the fourth quarter. It will start, we hope, knock on wood, we can knock it all down by the beginning of the year. And it's not just for our Ground Saver product, which is in our U.S. small package business, but also for Mail Innovations. And we're excited about what that's going to mean to our Mail Innovations margin looking forward. So at the end of the year, we'll give you more color. Operator: Our next question comes from the line of Todd Wadewitz from UBS. Thomas Wadewitz: So I wanted to ask, let's see, I mean, I think on your comments in 2Q, you talked about concern on SMB stepping down. I think this was the impact of the elimination of the de minimis exemption that, that would have a meaningful impact and then it became a global elimination, not just China and Hong Kong. So can you give us a bit more perspective on how SMB played out versus what seemed to be a lot of concern in 2Q? And then also, when we look at September, how is the impact different in the international business when it became a global elimination versus China, Hong Kong? So yes, on those 2 things. Carol Tomé: Sure. If you look at our SMB results for the quarter, we were down slightly year-on-year. But as we look at our performance relative to the market, we took share both in volume and value. So we were pleased with our performance relative to the market and the decline year-on-year wasn't as dramatic as we thought it could be. We are watching the SMBs very closely, though, Todd. Some are doing just fine and managing through the changes in trade policy and some of them candidly are challenged. So we've got a close attention to these to these customers. And let me just give you some data, which is amazing how many shippers are looking for help. In the third quarter, we had 12 trade webinars with more than 8,300 participants. And we've reached out and had conversations with 61,000 customers trying to help them navigate through these changes in trade policy. It's complicated. It's super complicated. And to your point about the elimination of the de minimis exemption. Well, it certainly played some havoc on some of these shippers, and I'll just make that real for you, too, just some data. Back in March, we had 13,000 packages that came into the United States every day that required some sort of a dutiable clearance. And we handled that about 21% was handled with technology, so cleared without any manual intervention. If you fast forward to September, when now it's a global elimination, 112,000 packages a day required some sort of dutiable clearance. And thank goodness, we invested in technology. So we were able to clear 90% of those packages without any manual intervention, which is great, but 10% needed some help. And where they needed some help, they really needed some help because when the global exemption went into place, you might have seen that some mail systems like Royal Mail or Deutsche Post really stopped shipping into the United States, which meant shippers, predominantly consumers who used to use those mail carriers as a way to get packages in the United States came into carriers like UPS or FedEx or others. And many of those shippers, consumer to consumer were naive, and you wouldn't expect them to understand the intricacies of trade policies and they shipped in packages that didn't have the information necessary to clear. And so Kate, you might want to talk about how we worked with those shippers because it was a lot of hard work and effort to work with those shippers. Yes, sure was. And so to help especially these C2C consumer-to-consumer shippers, multiple calls with them, helping -- trying to get them to understand the missing information that they are required to provide. And a good portion was on food. And if you think about a family shipping food to family members, and that tended to be the pinch in that 3-week, I'll call it, initial surge from the international post. The post then got the exception and that food and low -- very low-end value of goods consumer to consumer moved back to the post. And so since that point, we have been clearing now up to 97% within the last 1.5 weeks same-day clearance on our goods. So helping our very valued shippers ensure that they meet the requirements of the U.S. government. Brian Dykes: And Todd, if I could just maybe dimensionalize the impact of that. In the third quarter, that had about a $60 million impact for us. And we estimate in the fourth quarter, the direct impact will be $75 million to $100 million. A lot of this is demand related, right, because the technology allows us to scale our brokerage operations, but there is a demand impact. Carol Tomé: And let's be clear on what that cost is. It's really not the cost of clearing. It's the change in trade lanes because as you know, our most profitable trade lane is that between China and the United States. And we saw an over 20% decline in that in the third quarter and expect that will continue into the fourth quarter. Now there's a big meeting coming up this week. So maybe we'll have a little bit more certainty about trade between our 2 countries, but we're right now forecasting a decline in those trade lanes in the fourth quarter. Thomas Wadewitz: And -- just quick circling back on SMB. Do you think you're at stability now, like now we shouldn't have as much concern about a drop-off going forward as maybe you had in 2Q? Carol Tomé: So as we look at the peak forecast, that's the best way to tell you where we are. As we look at our -- as you know, 100 of our customers, most of them are enterprise customers make up 80% of our peak surge. And what those large customers have told us that they expect a good peak that the surge should be about 60% from where their volume is today. That's the same surge that we've seen over the past 3 years. So they've got the inventory, they're ready for peak. On the SMB side, they're a little short of where they were a year ago. So if you think about effectiveness being 100% effective, our enterprise customers are at the 100% mark. The SMB customers that give us forecast are at the 99% mark. So has it stabilized a bit, but it's still something, I think, to watch out for, particularly as we head into next year because next year is when you're going to feel the full brunt of some of these tariffs hitting some of these SMBs. Now -- we're working with them to try to help them think about how do they change where they source their goods, how do they think about the mode of transportation that you saw and so forth. So we're working with them, but I think it's prudent to be a bit cautious on the outlook here because it's still early days. Operator: Our next question comes from the line of Ari Rosa from Citigroup. Ariel Rosa: So it was really nice to see the step-up in free cash flow. Carol or Brian, I was hoping you could talk about how you think about kind of the sustainable level of free cash flow after some of these cost-cutting initiatives occur and kind of as you work through some of these shifts in revenue mix? Brian Dykes: Yes. Great. Thanks, Ari. It's great to hear from you. Yes, look, we saw the Q3 free cash flow bounce back. There were some timing issues in our Q2 versus Q3 that have kind of worked themselves out, and we expect Q4 to look similar to Q3. Now on your question, though, I think you're exactly right. This is why we're leaning into the parts of the market that we're leaning into is because you'll see that our penetration in B2B was up 350 basis points. Our penetration in SMB was up 340 basis points. We're seeing growth in the areas of the markets where we want to grow. That allows us to drive better returns and better margins. And with the cost takeout and the network efficiency that we're creating through our automation investments, we do expect the business to generate significantly more free cash flow over time. Clearly, we've got a dividend of around $5.4 billion to $5.5 billion, and we expect it to be above that in the very near future. Operator: Our next question comes from the line of Jonathan Chaplin from Evercore ISI. Jonathan Chappell: Just kind of a 2-parter. I'm sorry to do 2pers here. But Amazon glide down, I said you're kind of running on track here. You said down 21%. I thought we're supposed to be around 30% at this point. So maybe just help us understand where you are as we think about exit rate in 4Q? And then secondly, it really looks like you're on track with the cost takeout associated with that volume glide down. Can you speak to the cost alignment with the rest of the business ex Amazon? Just given all these changes that you've spoken about already with Rest of World de minimis, maybe some of the SMBs being a little bit lighter in the peak, do you feel like you're on track there as well? Or is there a little bit more catch-up to do on ex-Amazon cost alignment? Carol Tomé: Well, on the Amazon glide down, we're winding down the volume that we don't want, and we're right on our plan. But we're growing the volume that we do want. And so that's why the year-over-year decline wasn't as much as we had anticipated at the end of the second quarter. So we're really pleased with that, growing the volume that we want, like returns is good for our business. On the question about cost out, I would say excellent job managing through the Amazon glide down, but we're also driving a heck of a good business. And Abbott, you might want to talk about your production numbers, the best that we've seen in 20 years, 10 years, talk a little bit about that. Unknown Executive: Yes, sure. And I think it's really exciting as we look at our network. We're not looking at everything exclusively or uniquely, but as one big network. And of course, we keep finding opportunities for us to bring costs down. So if you think about the buildings we've closed, the operations we've closed, also the 34,000 positions that we've eliminated, that's part and parcel, of course, driven by some Amazon, but also our productivity. So if you think about production across the network, Brian mentioned that our inside operations are demonstrating the best process rates in 12 years. Our hub process rates in 20 years, and then we can go down the list with safety in the decade and other items related to cost. I guess what should give everybody comfort is what we've displayed in the first 9 months, we've also started the stage next year in 2026. So this continues, and we will hit our Amazon targets and our drawdown in terms of cost and productivity just gets enhanced as we first, introduce more NOF projects, but also all the peripheral buildings that we had supporting those upgrades will start to fall off as well as we start to implement NOF. A great example of that is Mesquite, 48,000 hub per hour for us, just opened up 2 weeks ago and prior to that, a similar hub in Texas in SweetWater. So really excited about those additions to the network and of course, more to come. Brian Dykes: And Jonathan, just to put a number to that because I think the third quarter really shows a testament. We started the year saying that we were going to focus on getting the right volume in the network and drive efficiency and volume was down 12.3%, and we expanded operating margin, and we'll look to continue that trend... Operator: Our next question comes from the line of Scott Group from Wolfe Research. Scott Group: So just a follow-up on the Amazon piece. So I think when you first talked about this, it was -- it would be down -- be cut in about half by the middle of next year. Is that number changing at all, bigger or smaller? And as we think about like the next wave of Amazon volume to come out, is it any different in terms of mix, any harder or easier to manage from like a decremental standpoint? And then it's all part of like the same question. Like I know there's $3.5 billion of cost reduction this year. What's the right number to think about for next year in terms of cost reduction? Brian Dykes: Sure, Scott. Thank you, and good to speak to you. So on the Amazon, look, think about it as there's a portion of the Amazon volume that we're exiting that they're going to in-source that that's the outbound. That's a pretty consistent glide. It's all scheduled, right? So this is where e-commerce gets very physical, right? We have to hand over a building, they catch a building. There has to be tax cars and drivers and sorters that all transition in kind of the same week. Lane by lane. Lane by lane, building by building, city by city. So that's all scheduled out. It's on track. We're working very collaboratively with them. And I think it shows in our service numbers, both for ourselves and for them that this has been a great relationship. Separate to that, right, we -- Amazon is still going to be a large customer, right? And there's a lot of places where we can add value to their supply chain like returns, their inbound, the small business sellers that sell on the platform. That part of the business is growing. But when you think about the decrementals going into next year, it's the same type of volume. It's just over a period of time. On the cost takeout, we'll reset that in January as we roll forward. But Nando's team has been doing a great job that as these buildings transition, we move to work, we consolidate, we're investing in NOF, and we'll drive a similar level of efficiency next year. Carol Tomé: And the same cost buckets, right? It will still be the variable, the semi-variable and the fixed cost. You should expect that to continue into next year. And we'll dimensionalize that at the end of the quarter -- end of the fourth quarter. Operator: Our next question comes from the line of Jordan Alliger from Goldman Sachs. Jordan Alliger: Just wanted to come back to international. Maybe some additional thoughts around your international trade flow analysis. Now that the rest of de minimis has gone, when we sort of lap Liberation Day next year, could we get back to more normal sort of trajectories or patterns? Or is it permanent shifts? And then just along with that, what does it take to keep international margin more sustainably in that high-teen level you guys had been used to? And that's with an eye towards 2026 as well. Brian Dykes: Sure. Thanks, Jordan, and good to hear from you. On international trade flows, look, as Carol mentioned, as we went through the third quarter and particularly into September with de minimis, we did see things slow down. Now look, there's still a lot of flux going on in the world where things are moving around. What we are seeing is a lot of growth outside the U.S., right? So trade is continuing to flow, but it's not touching the U.S. as much as it was before. As we look into next year and we think about the margin, look, there will be some permanent change until things -- until the system settles and the new equilibrium on trade flows settles. I do think that this mid- to high teens margin for international is absolutely the target, but we need kind of trade flows to settle in order to get there. Carol Tomé: Well, what Kate and her team have done is really operationalize the change in trade flows. In the third quarter alone, you did 100 different operational changes to make sure that we could meet the needs of our customers as trade trade flows are changing. And we're investing ahead of some of this. You might talk, Kate, about what you're doing in Asia. We've mentioned this before, but just remind everyone what we're doing in Hong Kong and in the Philippines. Kathleen Gutmann: Yes, absolutely. And so to unlock that growth, we're a global network with a global portfolio, and we're seeing the return on the investments we made in Asia, expanding our service, fastening our time in transit. So if you look at, say, the top 20 export lanes, non-U.S., 16 of them are growing and growing very nicely. A lot of them are Asia to either Asia, Asia or Asia to Europe and reverse. So that's really the expansion. Customers have needs. They are shifting trade. And within there, I will tell you, we see the small and medium-sized businesses in international growing 9% in many regions of the world. So that also will help us with momentum for next year. Operator: Your next question is coming from the line of Bruce Chan from Stifel. J. Bruce Chan: Nice to see the results in the guidance here. And maybe just on that last point, I'm guessing that since the books closed and since you built your guidance in fourth quarter budget, we've got yet another variable with the government shutdown. Wondering if that is contemplated in the guidance? And if not, is there any downside to the range in terms of demand or service or operations, especially with regard to ATC and payrolls and consumption? Carol Tomé: Yes. So we don't have a real crystal ball here. We're watching this closely, obviously, particularly as it relates to the airlines. So far, we've seen no disruption of service, but we're watching this very closely because we all are reading the stories about what's happening with people not showing up to work. From a volume perspective in the United States, here we are at the end of October, and we're right on where we thought we would be, if not a little bit better. So we haven't factored in any significant impact to the peak season because we rely on what our customers are telling us and our customers are telling us those from peak that they're going to have a good peak. So we haven't factored any of that in. But of course, it's smart to always think about what could happen. Hopefully, there will be a resolution soon as we should hope for. Operator: Our next question is coming from Ken Hoexter from Bank of America. Ken Hoexter: So it seems like your 300 basis points in improvement in domestic is maybe a bit more -- sorry, sequential improvement is a bit more than normal in terms of your target of getting to 9.5% to 10%. Just trying to understand your view on maybe the potential for accelerating that cost-cutting benefits above normal trend as we not only enter fourth quarter, but your thoughts on as we go into '26. And then next -- I guess, next week, we're going to start the Supreme Court hearings on tariffs. Thoughts on -- initial thoughts on the potential impact to de minimis. Could that get reversed and we start seeing that for the rest of the world, if not China, Hong Kong Lane? Maybe any thoughts on the Supreme Court process? Brian Dykes: Sure. Well, let me talk about the sequential impact first. So Ken, if you go from Q3 to Q4, remember, as Carol said, we have been working closely with our customers, and we expect peak to be in similar shape as it has in the last 4 years, right? So we'll see about a 20% step-up in sequential ADV in the U.S., about 10% in international. Now also, there will be holiday demand surcharges that have been announced. Our take rate on those has been good. Even though there's one incremental day in the peak season, we're still balancing demand and expect to see good take on the holiday demand surcharges. On the cost side, remember, we've been investing in deploying automation throughout the year, the Network of the Future. There's been -- there will be 42 new automation projects live by the time we start peak. And part of the function of bringing down the water level in the total U.S. network is it allows us to run more efficiently. So you need less variable capacity, fewer leased aircraft, fewer rented vehicles, fewer seasonal workers that allows you to run a much more efficient network. And we're excited. We think it's going to be one of our best service and production peaks that we've had in a long time. Carol... Carol Tomé: On the Supreme Court question, obviously, we'll be watching it very closely. But Ken, we don't -- we're not in a position to speculate on what the outcome will be. Operator: Your next question is coming from Brian Ossenbeck from JPMorgan. Brian Ossenbeck: Just one quick follow-up on -- first on the USPS. In the last quarter, Carol, you called out some density headwinds. It sounds like those were probably still present here in 3Q, and I would expect in 4Q. So if you could clarify that. And then, Brian, can you give us a little bit more color on how you think rev per piece will track into the fourth quarter and sort of exit the year? There's a lot going on with the mix dynamics, some of the product service changes, but clearly, it looks like there's still some base rate momentum and also a bit of a help from fuel. So if you can give us a little bit more thoughts on those 3 parts of that trend would be helpful. Carol Tomé: On the Ground Saver product, density is -- continues to be a challenge. We just can't seem to get more packages per stop on these residential deliveries. And this is one reason why we're so very excited about our renewed relationship with USPS. We estimate that the cost drag in the third quarter was about $100 million... Brian Dykes: Which is another cost that we overcame as we came down to drive margin expansion. And Brian, on your point on rev per piece, look, we continue to see strong base rate improvement in rev per piece. We expect the fourth quarter to be a little bit above 6%. And if you look at that with where we set out originally at the full year to be 6%, we're coming in higher than that. And so we expect that to come through both in base rate, slightly less mix improvement in the third quarter as we start to lap some of the Chinese e-commerce shipper actions that we took last year and then holiday demand -- strong holiday demand surcharge. Operator: Our next question is coming from Ravi Shanker from Morgan Stanley. Ravi Shanker: So you obviously had a lot of traction with headcount reduction in both the building side and the driver side. The union is saying that kind of you guys have committed to net job increases through the course of the contract. So how do you see that playing out in the remaining 2.5 years of the contract? And would you have to start hiring again to make up for that difference? Carol Tomé: We are in compliance with the terms of our contract. And Brian, you might want to give a little bit more color there. Brian Dykes: Sure. And Ravi, part of the terms of the contract allow us to offer full-time positions to part-time employees in order to give them the ability to go part time to full time, which look is, quite frankly, that's the best outcome from us, right? We want to create lifetime jobs and good careers with people who can earn a solid income with benefits at UPS. So the way the contract works is we offer full-time positions to part-time employees. From a net headcount standpoint, it doesn't really change things, but it's a way for us to create career pathing. It's good for the union. It's good for our people. It's good for us. It helps us have more trained workers that are committed to UPS. Carol Tomé: And sometimes there's messaging that's confusing on this point. So if you read something that's confusing, just call us, and we'll clarify it. Operator: Your next question is coming from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: I wanted to touch on the add-backs, specifically in the U.S. domestic segment for the quarter. If you could just break down maybe the delta between the add-backs going from $66 million to the $302 million in the quarter, really what the components of those -- the major components of the add-backs were for the quarter? Brian Dykes: And Stephanie, just to clarify, you're talking about the non-GAAP adjustments. Stephanie Benjamin Moore: That is correct. Brian Dykes: Right. Yes. So as Carol mentioned, so we executed on our driver voluntary separation plan in the quarter. About 90% of the drivers exited on August 31. 80% of that charge is associated with the severance included in that. It be -- in the second quarter, we laid out a range of kind of $400 million to $650 million associated with the total network reconfiguration and efficiency reimagine program. We're still within that range. Carol Tomé: And I think just to make it real, real, we had $166 million of cost in the third quarter for the driver buyout against a total cost of $175 million. So we won't see that same amount in Q4. Brian Dykes: That's right. PJ Guido: And Matthew, we have time for one more question. Operator: Our final question comes from the line of Conor Cunningham from Melius Research. Conor Cunningham: So I think you said you had 195 operations that have been reduced and then 93 buildings that have been closed. I was hoping you could talk about how that may trend into 2026. Like are we expecting that to continue to ramp up? Or it seems like there's further opportunities. So if you could just talk about the opportunity just in terms of getting more efficient on the network. Carol Tomé: Sure. Well, the Amazon glide down continues. We're 3 quarters in a 6-quarter glide down. So the Amazon glide down continues, which means there will be further consolidation of buildings. At the end of the fourth quarter, we'll provide guidance for 2026 or our outlook for 2026, where we can be more specific on what that looks like. Operator: Thank you. I will now turn the floor back over to your host, Mr. PJ Guido. PJ Guido: Thank you, Matthew. This concludes our call. Thank you for joining, and have a good day.
Operator: Greetings, and welcome to Alkermes' Third Quarter 2025 Financial Results Conference Call. My name is Rob, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Sandra Coombs, Senior Vice President of Investor Relations and Corporate Affairs. Sandy, you may now begin. Sandra Coombs: Thanks, Rob. Welcome to the Alkermes plc conference call to discuss our financial results and business update for the quarter ended September 30, 2025. With me today are Richard Pops, our CEO; Blair Jackson, our Chief Operating Officer; Todd Nichols, our Chief Commercial Officer; and Joshua Reed, our Chief Financial Officer. A slide presentation, along with our press release, related financial tables and reconciliations of the GAAP to non-GAAP financial measures that we'll discuss today are available on the Investors section of alkermes.com. We believe the non-GAAP financial results in conjunction with the GAAP results are useful in understanding the ongoing economics of our business. Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see Slide 2 of the accompanying presentation, our press release issued this morning and our most recent annual and quarterly reports filed with the SEC for important risk factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call or in the accompanying presentation as a result of new information or future results or developments. After our prepared remarks, we will open the call for Q&A. And now I'll turn the call over to Richard for some opening remarks. Richard F. Pops: That's great, Sandy. Thank you. Good morning, everyone. So Alkermes delivered a strong third quarter. It was marked by solid commercial execution, significant progress in our development pipeline, robust financial performance and continued execution across our strategic priorities. Today, we're raising our financial expectations for 2025, reflecting our confidence in the momentum of the business. Before we dive into the results for the quarter and our increased expectations for the remainder of 2025, I'd like to take a moment on the announcement we made last week regarding our proposed acquisition of Avadel Pharmaceuticals. This transaction is an important step forward in Alkermes' strategic evolution for 3 compelling reasons. First, we gain an FDA-approved medicine with significant growth potential. LUMRYZ is the first and only FDA-approved, once-at-bedtime oxybate for the treatment of cataplexy or excessive daytime sleepiness in patients 7 years or older with narcolepsy. It has already shown strong market uptake since launch. In 2025, it is expected to generate [between] $265– to $275 million in net revenue. Once the transaction is complete, it will immediately diversify our commercial portfolio and strengthen our profitability. Second, this acquisition will accelerate our commercial entry into the sleep medicine market. It will provide a well-established foundation for the potential launch of 3 alixorexton, our promising orexin 2 receptor agonist in development for narcolepsy and idiopathic hypersomnia. Avadel is a recognized leader in sleep medicine and has successfully built and scaled a high-performing commercial organization. With positive Phase II data for alixorexton in narcolepsy type 1 now in hand, data from Vibrance-2 in NT2 that we expect to report in November, and plans to initiate a global Phase III program early next year, we have reached a new level of conviction in the potential of our orexin platform. And third, the financial strength of the combined company will enhance our ability to support a diversified development strategy in sleep disorders. This will include alixorexton, as well as our additional orexin 2 receptor agonist candidates, ALKS 4510 and ALKS 7290, which recently entered the clinic. Avadel’'s development pipeline also has the potential to broaden our offerings for the sleep community, with an ongoing Phase III study of LUMRYZ in idiopathic hypersomnia and valiloxybate, a no-salt oxybate candidate in early-stage development. The proposed acquisition reinforces our commitment to neuroscience. It gives us additional scale and builds on our legacy of innovation in complex psychiatric and neurological disorders. The transaction is a compelling opportunity to accelerate our growth trajectory and is squarely aligned with our financial and strategic priorities. Upon closing, which we currently expect in Q1, we'll be able to provide more color on our expectations for the combined business. So with that as an intro, I'll turn it over to Joshua, who will walk through our third quarter financial results. Joshua Reed: Thank you, Richard. I'm pleased to join you today for my first earnings call as Chief Financial Officer of Alkermes. I'm excited to be part of a company with a strong financial foundation, a clear strategic vision and a deep commitment to delivering value for shareholders while advancing innovative medicines that have the potential to make a meaningful difference for patients. Since joining, I spent time getting to know our teams, our operations and our financial priorities. I've been impressed by the discipline and focus that drive our performance, and I look forward to building on that momentum. Now turning to our financial results. Our third quarter results were strong, reflecting continued commercial and operational execution. Financially, the year is tracking ahead of our expectations. And based on our performance through the first 9 months, we are raising our full-year 2025 guidance today. For the third quarter, we generated total revenues of $394.2 million, driven primarily by our portfolio of proprietary products, which generated net sales of $317.4 million, reflecting 16% year-over-year growth. These results were driven by strong underlying demand, which Todd will address in his remarks, and gross-to-net favorability, primarily related to Medicaid utilization rates, which drove a onetime gross-to-net benefit of approximately $8 million for VIVITROL and approximately $5 million for ARISTADA. As we move into the fourth quarter, we expect Q4 net sales from this portfolio in the range of $300 million to $320 million. Manufacturing and royalty revenues were $76.8 million for the third quarter, including revenues of $35.6 million from VUMERITY and $30.2 million from the long-acting INVEGA products. Turning to expenses. Cost of goods sold were $51.6 million, which compared favorably to $63.1 million for Q3 last year, primarily reflecting efficiencies following the sale of our Athlone-based manufacturing business last year. R&D expenses were $81.7 million compared to $59.9 million for Q3 last year, reflecting investments in the Vibrance Phase II studies of alixorexton across narcolepsy and idiopathic hypersomnia and first-in-human studies and development efforts for our next orexin 2 receptor agonist candidates, ALKS 4510 and ALKS 7290. SG&A expenses were $171.8 million compared to $150.4 million for Q3 last year, reflecting the expansion of our psychiatry field organization earlier this year and promotional activities related to LYBALVI. In Q4, we expect a modest increase in SG&A, primarily reflecting activities related to the Avadel transaction. This performance generated strong profitability of GAAP net income of $82.8 million, EBITDA of $96.9 million and adjusted EBITDA of $121.5 million in the third quarter. As we look ahead, based on our strong commercial performance and momentum through the first 9 months of the year, we are on track to deliver record revenues from our portfolio of proprietary products in 2025. As a result, we are raising our 2025 full-year guidance to reflect our current expectations of total revenues of $1.43 billion to $1.49 billion, GAAP net income of $230 million to $250 million, EBITDA of $270 million to $290 million and adjusted EBITDA of $365 million to $385 million. Our full expectations are outlined in the press release issued this morning. Turning to our balance sheet. We ended the quarter in a strong position with $1.14 billion in cash and total investments. For the acquisition of Avadel, we will use cash from our balance sheet in conjunction with bank debt to finance the transaction. As we close the transaction and finalize the financing, we will be in a position to provide more details. Taking a step back, Alkermes is one of the few biopharmaceutical companies that has successfully transitioned into a fully integrated profitable commercial organization with an exciting development pipeline. I stepped into this role at a time when the company is operating from a position of financial strength with a clear growth trajectory and near-term opportunities with the potential to drive meaningful value for shareholders. I'm energized by the opportunity to help shape that next phase of our growth, working closely with the rest of the leadership team to support our strategic priorities and drive long-term value creation. I look forward to engaging with many of you in the weeks ahead and to contributing to the continued success of Alkermes. With that, I will turn the call to Todd for a review of the proprietary portfolio. C. Nichols: Thank you, Joshua, and good morning, everyone. In the first 3 quarters of the year, we executed with discipline against our targeted growth initiatives. The focus drove strong consistent performance across our 3 proprietary brands, underscoring the strength of our commercial strategy and our capabilities. We're encouraged by the momentum we've built and remain confident in our ability to carry it forward. In the third quarter, we recorded net sales from our proprietary product portfolio of $317.4 million, reflecting 16% year-over-year growth. We drove strong end market demand across VIVITROL, ARISTADA and LYBALVI. Starting with VIVITROL. Net sales in the third quarter were $121.1 million. VIVITROL performance continued to be driven by growth in the alcohol dependence indication market and our ability to capitalize on highly localized market dynamics in certain states and payer systems. For the full-year 2025, we now expect VIVITROL net sales in the range of $460 million to $470 million compared to our prior expectation of $440 million to $460 million. Turning to our psychiatry franchise. The expansion of our psychiatry sales force earlier this year was a key strategic initiative designed to enhance our competitive share of voice. With our expanded footprint, we have been able to significantly increase the frequency of our call volume for high-priority prescriber targets across LYBALVI and ARISTADA. This increased share of voice, along with strong execution has driven increased breadth of prescribers for both brands. For the ARISTADA product family, in the third quarter, net sales were $98.1 million. Leading indicators related to underlying demand were encouraging with increased prescriber breadth and strong new-to-brand prescriptions during the quarter. For the full-year 2025, we now expect ARISTADA net sales in the range of $360 million to $370 million compared to our prior expectation of $335 million to $355 million. Turning to LYBALVI. Net sales grew 32% year-over-year to $98.2 million. Underlying TRx growth was 25% year-over-year, driven by new patient starts and prescriber breadth. Gross to net adjustments were approximately 28% in the third quarter. For the full year, we now expect LYBALVI net sales in the range of $340 million to $350 million compared to our prior expectation of $320 million to $340 million. Across the portfolio, we are pleased with our performance through the first 3 quarters of the year and entered the final stretch of the year with strong momentum and a clear focus on delivering against our full year objectives. With that, I will pass the call back to Rich. Richard F. Pops: Thank you, Todd. Well done. I think you can see from the results that the company is performing well across each of the key aspects of our business. During the quarter, our commercial teams delivered strong operational financial performance, our R&D teams made major strides in advancing our expanding development pipeline. So I want to make comments about both aspects of the business. First, commercial. We entered the final quarter of the year ahead of plan and with good momentum into year-end. Over many years, we've developed capabilities necessary to operate in challenging payer and policy environments. By design, we manufacture our proprietary products in the United States, and we do not commercialize these products outside the U.S. We are growing our business by growing demand based on the clear clinical attributes of our medicines and maintaining a disciplined contracting strategy consistent with our view of their significant value. Now R&D. Our portfolio of orexin 2 receptor agonist is advancing rapidly, led by alixorexton. The first Phase II data set of alixorexton was presented at World Sleep in September. In the Vibrance-1 study, alixorexton demonstrated compelling therapeutic benefits in patients with narcolepsy type 1 with a profound effect on excessive daytime sleepiness and cataplexy, along with a generally well-tolerated safety profile. Taken together with the clinically meaningful improvements in fatigue and cognitive function demonstrated in the study, we believe alixorexton has the potential to transform the treatment of NT1. At World Sleep, the competitive positioning for alixorexton in NT1 also came clearly into focus. In this large randomized, double-blind, multi-week study, alixorexton administered once daily across a range of doses demonstrated new potential best-in-class features. With data from this rigorous Phase II study now in hand, we're confident in the profile of alixorexton in NT1, and we're moving rapidly to initiate the Phase III registrational program in the first quarter of next year. We expect to be first to market in narcolepsy type 2 and idiopathic hypersomnia. We completed enrollment in Vibrance-2 in patients with narcolepsy type 2 toward the end of the summer, and we expect to report top line data in November. In idiopathic hypersomnia, Vibrance-3 is enrolling well, and we expect data from that study in mid-2026. Like Vibrance-1, these are both large, well-powered Phase II studies designed to provide substantial data sets informing potential Phase III development. We are building a significant body of clinical data that deepens our understanding of orexin biology and its therapeutic potential in central orders of hypersomnolence and beyond. Equally important, the Phase II studies are yielding key learnings related to study design and implementation that we believe will be invaluable for Phase III and help support alixorexton's competitive position in narcolepsy. Beyond alixorexton and sleep disorders, additional candidates from our portfolio of orexin 2 receptor agonists are advancing well. ALKS 4510 is in the clinic and progressing quickly through single and multiple ascending dose studies in healthy volunteers. We expect to complete this Phase I work early next year and move quickly into proof-of-concept studies in the disease areas that we plan to pursue. For ALKS 7290, we have filed the IND and recently initiated our first-in-human study. Across our orexin development programs, we have demonstrated in clinical or preclinical models that orexin 2 receptor agonist may have powerful effects, not only on wakefulness, but also across domains related to fatigue, cognition, attention and mood. We look forward to sharing more on both of these candidates next year as they complete their Phase I healthy volunteer studies. So to wrap up, the third quarter was a clear demonstration of Alkermes' strong execution, commercial momentum and scientific leadership. We continue to operate from a position of financial strength as we advance our pipeline and generate a growing body of data and insights that inform our strategy and reinforce our conviction in the opportunities ahead. With disciplined focus and a commitment to innovation in the patients we serve, we're well positioned to deliver long-term value for our shareholders. So we look forward to sharing our progress. With that, I'll turn the call back to Sandy to manage the Q&A. Sandra Coombs: Thanks, Rich. Rob, we'll open the call now for Q&A. Operator: [Operator Instructions] And our first question is from the line of Marc Goodman with Leerink Partners. Marc Goodman: Yes. Can you talk about LYBALVI just a little bit, seem to be a lot stronger than expected and the gross to net seem to be a little lower than expected. We were expecting that to kind of creep up some. Just give us a sense of what's happening with the product and just how you're thinking about gross to nets into the next year? C. Nichols: Yes, absolutely, Marc. This is Todd. Yes, we're really pleased with performance for Q3. As I said in my prepared remarks, expansion of our psychiatry footprint really drove a strong share of voice in the quarter. We were able to significantly increase our call volume, which was our strategic plan. We did that in Q3. We believe that, that momentum will carry into Q4. And so the result of that is we saw year-over-year TRx growth of about 25%. But what's even more encouraging is we saw new patient start year-over-year NBRx has increased almost 16%. So the underlying demand is really encouraging, and we believe that's a really direct reflection of the expansion of our sales force. So for context, breadth of prescribing over the quarter increased 7%. So that's 2 consecutive quarters, Q2 and Q3, we saw a strong breadth of prescribing. To your question on gross-to-net, gross-to-net was a little bit lower in the quarter than from Q2. That's the result of just as deductible resets throughout the year, lower co-pay utilization, some small little dynamics like that actually had a lower gross-to-net for the quarter. Richard F. Pops: And Marc, it's Rich. I'll just add and Todd can expand on it. But the story about LYBALVI over time in the marketplace other than just our strong commercial execution is its efficacy. And that efficacy message is resonating, and I think it's supported now by multiyear data in the real world. Marc Goodman: How do we think about gross-to-net into next year? C. Nichols: So we're not going to provide any guidance today, Marc, for next year. We do expect that going into Q4 that the typical seasonal patterns would show up. So we do expect a little bit of expansion of gross-to-net in Q4, but we'll give you a full-year guide in February. Operator: Our next question is from the line of David Hoang with Deutsche Bank. David Hoang: So I just wanted to ask about, I guess, expectations once the NT2 alixorexton data are in hand. How does that inform the next steps with the FDA? And when will we know more about the Phase III program and design? And then maybe just a follow-up on VIVITROL, just kind of the expectations heading into Q4 for that product. Richard F. Pops: David, it's Rich. I'll take the first, and then Todd can answer on VIVITROL. So we expect that we're on track for data from the NT2 study in November. And as we've said along, when we get those data in hand, that coupled with the Vibrance-1 in NT1 data will comprise the package for our end of Phase II meeting with FDA. So we'll request that meeting as soon as we get the NT2 data. We'll have that meeting and then we'll launch the Phase III program as our expectation early next year. Go ahead, Todd. C. Nichols: Yes. In terms of VIVITROL for the fourth quarter, I think the basis of that is what we saw in Q3. We saw strong AD demand. AD sales continue to drive the substantial majority of the brand. We hear very encouraging feedback from the market from HCPs and patients. So our expectation is that we would continue to see AD growth going to the fourth quarter. I think it's also just important to keep in mind that this is a mature product. So we think it will perform like a mature product, but our focus is really driving AD sales in Q4. Operator: Our next question comes from the line of Umer Raffat with Evercore ISI. Umer Raffat: I just wanted to dial in on the NT2 study a little bit. Could you perhaps lay out for us your expectation of how much of an MWT benefit is reasonable to expect, knowing there's a bit of tachyphylaxis off of single-dose work in Phase I. But on the flip side, patients are starting off at 10 to 12 minutes at baseline. So how much MWT improvements are you expecting? And then also any broad parameters around what do you know as of right now on blinded safety for NT2? Richard F. Pops: Umer, it's Rich, I won't comment on any of the blinded data. We'll get the full data set here just in a matter of weeks. So we'll look at the data in the aggregate in a large multi-week randomized, placebo-controlled study, the blinded information is only -- is not particularly useful to us. So we'll look forward to seeing the whole data set right away. Our expectation is that based on the Phase Ib study is that we know that orexin 2 receptor agonist from that study can drive wakefulness in patients with NT2 and NIH. But we really don't have a numerical threshold at the outset because we also expect a lot more variability in the patient population. So from a Phase II perspective, what we're looking for is we've identified a range of doses like we did in the NT1 study. What we'd like to see is the safety tolerability profile across that range of doses and clear evidence of efficacy across the various efficacy parameters, all to inform our dose selection for Phase III. So that's the goal. If we can come out of the NT2 study with clear evidence of safety, tolerability and efficacy and a design for Phase III, we think we're going to be the first to market in NT2. And the same thing applies for IH. And this is the virtue, by the way, of running these large Phase II studies. When you're talking about cohorts of 90 patients or so over multiple weeks. And remember, it's not just the 6-week or 5-week double-blind period or 8-week double-blind period. It's also the extension period where we have dose variability and selection for patients. So between these 2 phases, we just learned a tremendous amount about patient preference as well as dose response, and that all goes into the calculus for Phase III. Operator: Our next question comes from the line of Paul Matteis with Stifel. Paul Matteis: Just to piggyback off that, can you confirm what details you'll give us in the top line release? Will we know the actual effect size? Or are you going to be saving some of this for a medical meeting? And then on the safety point, how are you thinking now looking ahead as to whether you might employ some sort of titration to try to attenuate certain side effects given that in the OLE and the NT1 study, we weren't really seeing much in the way of new onset visual AEs or things like that? Richard F. Pops: So yes, we have a good sense of how we're going to provide the top line data. You'll see that in the next few weeks. What you learned from the Vibrance-1? Probably, there's a lot of data that comes out of these studies. So what we'll do is as soon as we get the data, we'll start submitting the abstracts for the various medical meetings as they roll into 2026. But you can expect a fair amount of data coming out, but the top line, we have a good sense of the structure of it, and you'll see that in relatively short order. We have made a lot of decisions following Vibrance-1 about the structure of the dosing in Phase III. We're going to keep most of that proprietary right now because we feel like there are some real learnings. Some of them probably you can think through and derives from the comment that you made is that we really saw a very, very low incidence of new-onset adverse events for patients who had already been exposed to alixorexton in the double-blind period. So all that information from Vibrance-1 has been put into our modeling. And I think we've settled on our Phase III design, and you'll see that when the study gets underway. Operator: The next question is from the line of Akash Tewari with Jefferies. Manoj Eradath: This is Manoj for Akash. Just 2 questions. When you release the top line Vibrance-2 data, will you be releasing data points over time like 4 weeks and 8 weeks because both TRK-994 and 861NT2 data showed some deterioration of efficacy, primarily in MWT going from 4 weeks to 8 weeks. Do you see any biological rationale for this? Or is this just like a noise related to a small number there? And also, do you expect a dose response in Vibrance-2 in terms of ESS? And also lastly, what kind of PK profile do you look for the next-gen orexin agonist? Richard F. Pops: So on the point about the tachyphylaxis that you referred to or Umer referred to as well, we don't see based on previous data, a significant evidence of tachyphylaxis or degradation in efficacy signal between 4 and 8 weeks or even 8 and 12 weeks in other data sets. So at the top line, I wouldn't expect all the detailed data of time course. But I just want to let you know at the outset, that's not our pretest hypothesis that we expect to see a degradation. Now, to the extent that one did, one way that you could overcome it is with a range of doses. And we've always thought that having a range of doses could be a real competitive advantage in this category. We are hopeful to see dose response across the various efficacy measures, but we won't know until we see the data. The 3 doses that we modeled for NT2 were designed to give us a spectrum of dose response, but we won't know until we see the final data set. And the PK profile of -- I think you asked about the next orexin agonist. We're really not going to disclose any of those particular attributes of the next wave of molecules coming in. I wouldn't necessarily describe them as next generation because I don't feel like they're improving necessarily on deficiencies the alixorexton has. They're just different. And so they're designed for different patient populations in different clinical settings. And as such, they share common features of potency and selectivity, and we think that's essential for interrogating the circuitry in the brain, but they will be different. Operator: Our next question is from the line of Joseph Thome with TD Cowen. Joseph Thome: Maybe for the NT2 data set, can you talk a little bit about the importance of also showing the benefit on the ESS? Is this important for both the FDA? Or is this more of a European measure? If you can kind of put that into context a little bit? And then for the Phase III programs, can you talk a little bit about your expectation for ocular monitoring on one side of it, I could see that it would be helpful if you do see some early visual disturbances to kind of say that this was not impactful. But obviously, on the flip side, it would probably make the Phase III a little bit more complicated. So kind of your latest thoughts on that would be helpful. Richard F. Pops: Yes, we think in the NT2 study, both MWT and ESS or Epworth Sleepiness Scale are primary endpoints. And they capture different things. The virtue of the MWT is it's sort of a numeric quantitative assessment of the sleep latency. And ESS captures the patient experience, their self-described degree of sleepiness. And they both -- I think they both are quite important. And in Phase II, we're interested in looking at where the sensitivity is, where -- what scales move the most reliably across the doses. And that includes, [I'll throw] cognition, fatigue, narcolepsy severity scale, global impressions, and all the endpoints that we're looking in Phase II because that informs your Phase III structure and design. So we're hoping to see signs of efficacy across all those various parameters. Phase III, it's too early to say. Just for counting, I think that in Vibrance-1, what we saw was really generally very mild, one moderate and one severe ocular in the form of blurred vision. And so it was generally very well tolerated. And that along with the rigorous ophthalmic exams that were conducted in all the patients, I think really answered the question about are there any structural issues that derive from using an orexin-2 receptor agonist. And so I don't know the answer yet whether we'll have to do any monitoring in the Phase III study. We hope that we don't. And to the extent that we do, it's quite mild. But I think in some ways, that will be more of a discussion with the regulators. Operator: Our next questions come from the line of David Amsellem with Piper Sandler. David Amsellem: Just a couple of quick ones on the additional orexins that are going into the clinic. I know, Richard, you talked about properties in mood and attention. So is it safe to say that the -- at least one additional disease setting is going to be in a psychiatric setting once you move into proof-of-concept studies next year? Maybe elaborate a little more on how you're thinking about that? And then secondly, I don't know if this has been asked, but any thoughts on alixorexton outside of the United States? And what kind of discussions, if any, have you had with European regulators there? Richard F. Pops: Yes, I think we've said about the next candidates that we're interested in 3 broad domains: psychiatry, neurology and interestingly, certain rare neurodevelopmental or neurodegenerative settings where we think a significant part of the clinical presentation is excessive daytime sleepiness, anhedonia, fatigue, depressed mood, things like that. So we won't be more specific than that right now. But as I mentioned in the earlier remarks, our goal is as we get through the SAD/MAD to move right into those types of patient-focused studies to get signal early on. And you'll -- what I'm hopeful is that by the end of 2026, people see how this program has expanded well beyond narcolepsy. And the essential prerequisite of that is getting these 2 candidates through their SAD/MAD credentialing them as bona fide development candidates for these indications. That's well underway. So we're quite excited about how that's going to mature in 2026. The second question was alixorexton in ex U.S. We're developing in ex U.S. We're running clinical trials in Europe and in Asia. And there's a strong demand, I think, for this type of product for patients around the world. So given the state of pharmaceutical pricing discussions across the world, I think it's -- we can say comfortably, we wouldn't expect to bring alixorexton to patients outside the U.S. at significantly lower prices than in the U.S. But our goal is to bring this patient -- to patients in the U.S., in Europe as well as in Asia. Operator: Our next question is from the line of Ash Verma with UBS. Unknown Analyst: This is [indiscernible] on for Ash. For NT2, how are you thinking about these patients' hypersensitivity to exogenous orexin? What's the most concrete evidence that you see why this hypersensitivity could be lower in NT2 patients versus the NT1? Richard F. Pops: Yes, I wouldn't describe it as hypersensitivity. I think it's the other direction. I think NT2 patients based on the data are less sensitive to orexin agonist administered exogenously. So NT1, recall, is the disease, is a deficiency of orexin. So in NT1 patients, small doses are driving significant efficacy benefits as low as 1 milligram in our hands with alixorexton, we've shown meaningful changes in wakefulness. Whereas in the NT2 patients, and we know this from our Phase Ib study, you can drive higher doses in order to elicit more wakefulness as well as they tolerate higher doses before you see adverse events. So the basic hypothesis going into the NT2 and IH studies is that there's a frame shift, there's a dose response curve shift to the right so that you need more alixorexton in order to drive wakefulness and patients will tolerate more alixorexton before seeing adverse events. Operator: The next question is from the line of Leonid Timashev with RBC Capital Markets. Leonid Timashev: I just want to ask how you're thinking about the NT2 versus IH populations and sort of the differences in your ability to actually accurately capture them in separate trials, sort of what you're hearing from physicians on how those are diagnosed and bucketed. And then ultimately, whether these are differences that are meaningful in the real world and how that may impact how you're thinking about the relative opportunities of NT2 versus IH? Richard F. Pops: I think it's an important question. I think we won't really know the answer until we complete the 2 studies. And I think there's differences based on our learnings in multiple discussions with clinicians and patient groups in the U.S. and Europe, there could be regional differences too, in the way that the differential diagnosis is made. What's interesting though, Leonid, is the hypothesis -- there's no pretest hypothesis that suggests there might be a difference in the response between the IH/NT2 diagnosis or the subcategorization within those 2 diagnoses. As you know, within IH, there are long sleep IH patients, there are shorter sleep IH patients. They have different phenotypes that present. What we know from our Phase Ib study, albeit small, was just taking all comers with NT2 and IH, we were able to show changes in wakefulness and well-tolerated profile. So I think this is de novo clinical research. No one's ever tested orexin 2 receptor agonist at these doses in these patient populations. So I think the whole community is going to be fascinating to see what the distribution looks like, what the variability looks like and what the overall effect of various doses in these patients. And then I think with that information, we can better design Phase III, too, are there ways of tuning up or focusing that response in the Phase III studies. But a priority, we're enrolling patients without any discrimination between the differential diagnosis. Interestingly, in NT2s, you tend to use MWT as an endpoint, whereas that's not used in IH, they use idiopathic hypersomnia severity scale and Epworth. So it's -- it will be interesting to see how the 2 patient populations look when we're finished with the studies. Operator: Our next question comes from the line of Luke Herrmann with Baird. Luke Herrmann: Congrats on the quarter. Just a couple of time line questions on the earlier pipeline. For the next-gen orexins, are you expecting to share Phase I data from 4510 next year? And do you think there's a possibility of 7290 first-in-human data reading out next year as well? And then similarly, I know it's sensitive right now before deal close. But in general, do you see a possibility of some new data on the low-salt oxybate next year? Richard F. Pops: Yes. The 4510 and 7290, I think -- I can't say right now whether we'll show you data "per se from the SAD/MAD." I think it's more of the gating -- the go decision to say if we're through SAD/MAD at doses we think are target engaging and therapeutically relevant, then we're going to -- you'll know that we're moving into the patient-focused studies. The timing of the readout of those translational studies remains to be disclosed. I think we're getting a sense of it right now, but it just depends on how fast we move into those translational studies and how quick the readout is. So give us some time to give a little bit more refinement about that as we move into 2026. But our goal is to finish SAD/MAD for 4510 first and move right into some translational studies. Same thing with 7290, get through the SAD/MAD and then go right into a different set of translational studies. We're obviously quite interested in the no salt once-daily development program within Avadel. And as we complete the merger, we will -- or the acquisition, what we'll do is we'll give you more sense of -- in our hands, what we'll be doing with that program. But we think it's a very logical extension to the business that LUMRYZ has built. Operator: The next question is from the line of Ami Fadia with Needham & Company. Ami Fadia: With regards to impact on nighttime sleep, can you talk about the 2 mechanisms, orexin versus oxybate and how you're thinking about the 2 mechanisms being complementary and how you intend to study that further going forward? And just separately, with regards to ARISTADA, can you talk about where you expect the gross-to-net to land for the full year? Richard F. Pops: It's Rich. Yes, I think your question about nighttime sleep is going to be a very fertile one for additional clinical research. What we've heard from clinicians, you've probably heard the same thing, is notwithstanding the powerful daytime wakefulness that orexin agonists are driving, there is still some interest in understanding how that coexists with consolidation of sleep at night for certain patients. Recognizing that most patients don't take oxybate, but the ones who do see real benefit from it, I think there's a real opportunity for some clinical research now to understand how the 2 can coexist, particularly in once-nightly and once daily forms that we would control both. So that's an exciting area for further research for patients and I think for the full field because I think that the full effect of an orexin agonist on nighttime sleep architecture is still yet to be learned. We're developing those data in our Phase II program with extensive polysomnography. So we'll be analyzing that data as we complete the Vibrance program. But in the meantime, I think that there's a -- we see that there's a place for the oxybates on a going-forward basis for the patients who really benefit from them, and we want to further elaborate that. Todd, do you want to talk about the GTN? C. Nichols: Yes, absolutely. For ARISTADA, for the full year, we expect it to follow the consistent historical patterns, which should be approximately 53%. Operator: Our next question is from the line of Uy Ear with Mizuho. Uy Ear: Congrats on the quarter. So maybe just a quick question on the gross-to-net favorability. You benefit from the last quarter and this quarter for both -- for ARISTADA and VIVITROL. Just wondering, could you maybe just help us understand whether there's more benefit going forward? Like what is being -- like -- yes, help us understand why these adjustments? And secondly, in the quarter, could you also sort of speak about inventory, whether it's -- is there any stocking or is that normal level? C. Nichols: Yes, absolutely. Yes, as we said in our prepared remarks, we did see a benefit for VIVITROL and ARISTADA in relation to Medicaid utilization. Going forward, we're not assuming or planning for any additional gross-to-net favorability within Medicaid. I think it's important just to note that the Medicaid volume, the absolute volume for Medicaid patients is stable. This is just related to the percentage of Medicaid across our overall channel mix. That was -- that's the favorability. In terms of inventory, there's always seasonal patterns during the fourth quarter, and it can be a little bit difficult to predict, but we are expecting a little bit smoother of a pattern from Q4 of this year into Q1 of next year. Operator: The next question is from the line of Ben Burnett with Wells Fargo. Benjamin Burnett: I wanted to see if you could just maybe talk about some of the Phase III scenarios for alixorexton. I think we're assuming sort of 2 Phase IIIs would be needed. I guess, number one, I guess, do you agree with that? And then if so, like would a Phase III NT2 study maybe be sufficient along with an NT1 Phase III to get approval in both of those indications? Richard F. Pops: Ben, it's Richard. That's our assumption right now, but we'll confirm that, obviously, with FDA. Our expectation is that we'll seek labeling for alixorexton for the treatment of narcolepsy. And the Phase III program will be a well-controlled Phase III study for NT1 on a stand-alone basis and a similar study in NT2. Operator: The next question is from the line of Douglas Tsao with H.C. Wainwright. Douglas Tsao: Congrats on the progress. I guess -- I know it's early, Richard, and a lot of uncertainty. But just given the fact that you're always thoughtful on public policy issues, I'm just curious if you thought much about the potential impact of sort of lapse on ACA subsidies and what it could have for your commercial business in the near-term. And I have a follow-up. Richard F. Pops: Yes, it's a good question, Doug. And I think everybody is watching that. I think my sense is that there's a strong political virtue to continuing the ACA subsidies at some level. And recall that in reconciliation and the One Big Beautiful Bill, what we were able to make sure is that patients in our population, i.e., patients with serious mental illness and addiction are treated differently. They're the ones who are the explicit target of programs like Medicaid because if these patients are not treated, they end up in the emergency rooms and in the criminal justice system in the community. So the price points of our medicines treating these patients are lower and the gross-to-nets are high. So they're not breaking the bank. So our view from a policy perspective is that there's a reason -- there's a political reason to keep ACA subsidies in place, a; and b, to the extent that we have changes that are focused on Medicaid population, in particular, serious mental illness and addiction patients, we're going to continue to fight to have them carved out. Douglas Tsao: And I guess just a follow-up on LYBALVI. I'm just curious, just given the success you had with the sort of additional promotion and detailing the product, do you have the sense was it physicians just weren't writing and they just needed that consistent reminder? Or was there just sort of some extent lack of awareness of the product and its attributes? C. Nichols: Yes. In terms of LYBALVI, I think the first thing is over the last several years, we've had a really strong focus strategically on building awareness around the efficacy profile. And that's really resonating. It resonates every single quarter. So that's a big driver is just the underlying value of the product. It's also important to remember that LYBALVI has a broad label, right? So we have a broad addressable population. So we're seeing strong growth with schizophrenia and bipolar. The mix is still roughly about 50-50, but new patient starts are definitely growing more towards the bipolar population. And so I think with the strong efficacy, along with our commercial execution and then also the resourcing that we've put behind the brand, we actually really saw a very positive quarter, and our expectation is that -- and our focus is really growing that demand going into the fourth quarter as well. Douglas Tsao: I guess just sort of what was driving it? Do you think some clinicians just weren't familiar that you had the breadth of label for bipolar and the efficacy? Or was it just those are competitive markets and you just constantly need to stay in front of reps? C. Nichols: Yes, it's a good point. The competitive landscape is fierce as we know. And so we're very practical with this to make sure that we're putting resources in our highest growth driver. So we felt and the data showed us that we needed a stronger share of voice. But number 2 is physician research tells us that HCPs need experience. So once they get experience with one patient type, schizophrenia or bipolar, in general, patients are having a good experience. They're more open to expanding their breadth of prescribing. And so we're very pleased. As I said earlier, breadth of prescribing has expanded by approximately 7% for 2 consecutive quarters, and we're seeing encouraging trends with depth. So it's really those 2 things. It's our commercial investment, but it's also the experience of the HCP and the positive experience they're hearing from patients. Operator: Our last question is from the line of Jason Gerberry with Bank of America. Chi Meng Fong: This is Chi on for Jason. I want to follow up on the visual AE commentary earlier for Vibrance-1. The commentary that I heard was that most visual AEs were mild, and there was one moderate and one severe case. Can you contextual like one constitute a severe vision blur and how long did that AE last? And secondarily, is there a dose response relationship with that -- with the visual AE in Vibrance-1? When I look back at the Vibrance-1 AE table, there was a severe case of AE of any cost in the 4-milligram dose and 2 severe cases of AE of any cost in 8-milligram dose. Can you clarify which dose level did that one moderate case of visual AE and which dose level did the one severe visual AE case occurred in? Richard F. Pops: Yes. The vast preponderance of the visual AE, they were actually reported as blurred vision were mild cases. There was one moderate that became a mild after 4 days, I believe. And there was one that was categorized as severe, but that was part of a constellation of symptoms that led to an early termination of that patient after the third day, I believe, in the study. So -- there was dose response. We saw more at the 8-milligram dose than at the 4 and the 6. But interestingly, in the extension period, after patients have been in the double-blind period and could choose their dose, if patients had been on a previous dose of alixorexton then moved to the 8 milligram, we saw no new incidence of visual AEs of burn vision. So we think that there is dose response. We think the phenomenon is largely mild, meaning it's noted by the patient, but doesn't affect them and largely occurred in the first week and are largely transient as well. But we'll see now in the NT2 data set, what that looks like in the IHs as well. But as we build a bigger and bigger data set, the overall conclusion, I think you have to draw from this class so far is that they're largely generally well tolerated and the side effects are generally mild-to-moderate and transient. And the top of the list of the AEs that are on target, you're going to see with these drugs are insomnia and pollakiuria which is urinary frequency. Operator: That will conclude our question-and-answer session. I'll turn the floor back to management for closing comments. Sandra Coombs: All right. Thanks, everyone, for joining us on the call today. Please don't hesitate to reach out to us at the company if there are any follow-up questions. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.