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Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 CoStar Group Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Rich Simonelli, Head of Investor Relations. Richard Simonelli: Thank you very much, operator, and hello, and thank you all for joining us to discuss the third quarter 2025 results of CoStar Group. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Chris Lown, our Chief Financial Officer, I'd like to review our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the company's outlook and expectations for the fourth quarter and the rest of 2025 based on current beliefs and assumptions. Forward-looking statements involve many risk, uncertainties, assumptions, estimates and other factors that can cause actual results to differ materially from such statements. Important factors that could cause actual results to differ include, but are not limited to, those stated in CoStar Group's press release issued earlier today and in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q included under the heading Risk Factors in these filings as well as other filings with the SEC available on the SEC's website. All forward-looking statements are based on the information available to CoStar on the date of this call. CoStar assumes no obligation to update these statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Reconciliation to the most directly comparable GAAP measure of any non-GAAP financial measure discussed on this call are shown in detail in our press release issued today, along with the definitions for these terms. Press release is available on our website located at costargroup.com under Press Room. So please refer to today's press release on how to access the replay of this call. And remember one question during the Q&A session, so make it a good one. And with that, I'd like to turn the call over to our Founder and CEO, Andy Florance. Andy? Andrew Florance: Thank you for joining CoStar Group's Third Quarter 2025 Earnings Call. We achieved another excellent quarter for CoStar Group with third quarter 2025 revenue reaching $834 million, a 20% year-over-year increase. This is our 58th consecutive quarter of double-digit revenue growth and we're 1 quarter closer to potentially 100 sequential quarters of revenue, double-digit revenue growth. Stay tuned. Adjusted EBITDA in the third quarter rose to $115 million, up 51% over Q3 '24. Profit margin in our Commercial Information and Marketplace businesses increased to 47% for Q3 2025. Net new bookings totaled $84 million, up 92% year-over-year. CoStar Group's residential real estate portals include Apartments.com, Homes.com, OnTheMarket and Domain. These are all sites that help people find or market a residence. Assuming we own Domain for the full third quarter, the revenue for the residential portals would now be $411 million in the quarter or $1.644 billion annualized. Our residential portals revenues grew 22.7% quarter-over-quarter and 31.3% year-over-year. We expect synergies across these residential portals will continue to drive improvement in our margin profile and believe that long-term margins can operate at more than 40% adjusted EBITDA margins. Apartments.com delivered another strong quarter, surpassing $1.2 billion in annual run rate revenue and generating $303 million in Q3 revenue, an 11% increase year-over-year. Apartments.com remains the preferred source for property managers and owners as reflected by a 99% monthly renewal rate, 99% monthly renewal rate and a 93 NPS score. Our high-quality proprietary content remains central to attracting consumers. Net new bookings rose 37% year-over-year in Q3. We added 4,200 new apartment communities in Q3. Our sales force has now grown to over 500 representatives, achieving our 2025 sales hiring target ahead of schedule. In Q3, the team conducted 200,000 client and prospect interactions, with nearly half of them occurring in-person, a 66% year-over-year increase in Q3. Our total multifamily property count now exceeds 87,000, an increase of 12,000 in 2025. Apartments.com network site visits totaled 223 million for the quarter, leads for specific models and units increased 64%, and our highest converting apply now leads rose 70% year-over-year in Q3. In the single-family rental segment, we had 1.4 million availabilities and 260,000 paid rentals, up 51% year-over-year. Homes.com rental traffic grew 55%, underscoring the synergy between Apartments.com and Homes.com. Advertisers benefit from increased exposure across both platforms at no additional cost. Turning to Homes.com. Homes.com is showing steadily accelerating revenue growth from an increasing number of revenue streams. Annualized net new bookings of Homes.com subscriptions rose to $16 million in the third quarter, up 53% year-over-year from $10 million in the second quarter of '25. That's actually quarter-over-quarter, up 53% quarter-over-quarter from $10 million in the second quarter of 2025, not year-over-year. Much more impressive when it's Q-over-Q. The net new annualized bookings in the third quarter represent 1,225% year-over-year increase. Revenue in Q3 increased 20% year-over-year. The number of net new subscribers added in the third quarter was 7,035, up 12% over the 6,280 net new subscribers added in the second quarter. In Q3, net new subscriber growth was 1,000% year-over-year. We now have over 26,000 subscribing agents. Just one of the many ways in which our business model is superior to competing portals is our ability to provide service to a much larger number of agents than they can. Competing portals in the United States business models of lead diversion limits them to selling to about roughly 5% of agents because they need to take leads from the other 95% of agents who are not clients so that they have something to sell to the 5% that are clients. In contrast, we can sell to well more than 50% of agents because we're not taking away leads from any agent. With LoopNet, CoStar and Apartments, we have shown that in many markets we're selling to well more than half of the players in that market. This is the advantage of creating a bigger TAM, but also creating more goodwill among agents. In competing portal models, 95% of the agents are losing business because of the portal and 5% are gaining business. In our model, almost every agent can gain business because of our portal and that creates goodwill. Alignment with your clients build stronger and more durable brands. Sales of our Homes.com Boost product rose 136% quarter-over-quarter to $617,000 in the third quarter. Homeowners are the primary buyers of Boost, paying on average $386 on a onetime basis to give their home for sale more exposure. At this point -- at this price point, the U.S. TAM for Boost sold to homeowners alone is already approximately $2 billion. When agents do buy a Boost for one of their listings, we see 25% of those agents convert to full Homes.com membership subscriptions. We began selling enhanced exposure on Homes.com to new homebuilders on August 25. In the month of September alone, we sold net new annualized bookings for new homes of 498,000. In total, we've already sold 743,000 annualized buildings since August 25. As Homes.com approaches our seventh quarter since launch, it is now the fastest-growing revenue product we've ever launched. So Apartments.com and CoStar now have more than $1 billion in revenue. They grew revenue at a much slower pace than Homes has in their first 7 quarters. Homes.com has now grown 50% more incremental revenue in its first 7 quarters than did Apartments.com in the same time period. We're continuing to increase the size of our Homes.com sales team. We now have 500 sales reps in production with another 150 in preproduction. We've now added field sales, new home sales specialists and major accounts reps. We believe the highest and best function of a portal is to market real estate and that, that is the future of the industry. I do not believe that future revenue models for successful real estate portals will be based on either iBuying or lead diversion to buyer agents. Currently, as I mentioned, we have 26,000 subscribing agents and Boost clients, promoting 130,000 active listings on Homes.com, representing 6% of the active 2.2 million properties for sale in the U.S. A recent analyst report from Citi say that they believe that a core product for Zillow going forward will be its showcase listing product and estimated in September '25 that Zillow had only 24,500 listings or approximately 1.1% of the active market. So we have 5x the number of listings marketed or boosted on our site. Citi further estimated that Zillow will have $13 million of revenue in the third quarter for showcase listings. So Homes.com is well ahead of Zillow in both revenue and listing count, in what we believe is the primary sustainable revenue driver for successful residential real estate portals around the world. Our strategy is to grow the share of real estate agents and homeowners relying on us to bring more exposure to their homes for sale, and these numbers show that we're on the way to achieving that goal. Our marketing campaign continues to build out audience and brand awareness. In August, unaided awareness was 42% and unaided intent was 28% that unaided awareness is up from about 4% we started. And as we -- and we are showing continued long-term upward trend in both categories. In the third quarter, the Homes.com network achieved 115 million unique monthly visitors. This led to 560 million total visits to the Homes.com network in Q3, up 7% compared to Q2. According to comScore, unique visitor traffic to Homes.com rose 8.3% compared to a 6.5% decline at Zillow and a 0.7% decline at Realtor.com. I'll just call that last part flat. comScore continues to rank the unique monthly visitors to the Homes.com network above either Realtor or Redfin. Our organic traffic in Q3 climbed 87% year-over-year. We continue to improve the quality and engagement of traffic to Homes.com achieving a low 24% bounce rate in Q3, which is a 64% year-over-year reduction in bounce rate. Our average session duration increased to 4 minutes and 29 seconds in Q3, which is a 93% year-over-year increase. I believe that our efforts to put more than 70,000 Matterports on the sites is driving this deeper home, shopper engagement on our site. We are optimizing for quality of traffic from our SEM generating $112 million listing detailed page views from SEM in Q3 for a 374% year-over-year improvement. We achieved this improvement with essentially the same but a more efficient SEM spend. I believe we are about to see our products hyper accelerated by some of the most exciting facilitating AI technologies I could have ever imagined. While we're already using AI throughout our organization, I am excited about the launch of AI Smart Search on Homes.com and the future innovations it foreshadows. Consumers can ask Homes.com precisely what they're looking for in their own words. This allows for reasonably complex queries such as long conversational phrases with multiple geographies such as show me waterfront properties with a pool, with a balcony and a great view in Miami Beach and Fort Lauderdale starting at $1 million. This does away with having to deal with traditional filters and forms that are limiting. If you're a coder, this is like giving people with no coding skills access to the power of full deep [boolean nested] queries against 10x the number of fields with just simple plain English questions. As a result, Smart Search is highly customizable, intuitive, fun and easy and more powerful. This is our own artificial intelligence capability we're engineering in, and we're doing it in partnership with Microsoft. In the third quarter, AI Smart Search has produced improved user engagement. So this new AI Smart Search is producing significant improvement in user engagement. Users of AI Smart Search use 69% more search filters, viewed 37% more listing pages per session, were 5x more likely return to the site within the following week. That's amazing and submitted 51% more leads after viewing a listing page. It's a more effective way to look -- find what you're looking for. We are now investing 50% of our Homes.com software development efforts in the fourth quarter and beyond towards building a range of AI-empowered features into Homes.com. This is our single biggest commitment by far to any software development effort. This is an incredibly exciting time for Homes.com. All of our products have boundless new opportunities opened up by the enormous potential of Generative AI. In the 4 decades that I've led CoStar product vision, a core principle of our success is leaning into new facilitating technologies to unlock their value for real estate. We were among the first to digitize real estate information, put real estate on a digital map, present digital real estate photos. We're the first to incorporate digital twins in a scale. And we were actually the first to leverage the Internet for real estate. In fact, we actually bought CBRE, Cushman & Wakefield, JLL, their first Internet accounts before there was even a Netscape or a Google around. AI offers transformative opportunities to unlock tremendous value in real estate. I believe few products are better positioned to cohesively capitalize on this opportunity than is Homes.com, Apartments.com, LoopNet and CoStar. We have massive and proprietary real estate data resources. We have unmatched expertise in organizing and quality control in that information. We have leading expertise in how to make that information useful and relevant to real estate industry participants. We believe that it will bring tremendous dislocation generally and open up huge new value opportunities, which we plan to exploit. While Homes.com is our initial priority for AI enhancement, we will apply the lessons learned to Apartments.com and all of our other products as quickly as possible. AI will impact top-of-funnel traffic acquisition. Real estate portals built on SEO foundations need to build strategies to acquire traffic from AEO, answer engine optimization and GEO generative engine optimization. SEO remains the foundation of AEO and GEO, though, a portal's brand content context remain the key building blocks for success. Today, GEO is sub-1% of top-of-funnel acquisition. For example, one large U.S. real estate portal in the U.S. only draws 0.45% of its top-of-funnel traffic from ChatGPT. And another large portal in Australia only captures 0.15% of its top of funnel from ChatGPT. So brand traffic -- brand, direct traffic, SEM display, social, e-mail, SEO and AEO remain 99.5% of top-of-funnel source. These traffic sources remain important in Generative AI future for sure and likely the majority, but GEO will become much bigger top of funnel traffic feed, and we will position our portals to capture that traffic. Many believe that traffic from GEO may be monetized the way Google monetized SEO with SEM. There's some huge AI GPU and energy bills to pay out there. I just spent a few days at the online marketplace conference in Madrid with dozens of real estate portal CEOs and digital real estate experts. All felt the competitive urgency to integrate the range of capabilities of Generative AI into their portals. But I did not find one person who thought that Generative AI solutions would effectively meet the specialized needs of the real estate world. To be successful, there's a need to build specialized AI models around buyer personalization and profiles, data capture listing evaluation, computer vision, digital twin, searching, area valuation, lead management, advertising optimization, valuation and many other algorithms. That is exactly the exciting work we are leaning into and embracing. There was a time when AOL, Yahoo! or eBay were ascendant and uniquely dominant and Microsoft and Google are still dominant though, perhaps, passed their zenith of dominance. All of these impressive general-purpose transformative technology innovations enthusiastically built real estate portals and tried to dominate digital real estate, all failed. All failed. They've now exited the space. Only eBay has anything left, and it's not much, which is a very [visible] thing. Specialized solutions often leveraging these companies' capabilities repeatedly ultimately dominate the real estate vertical. I believe the past is prologue here. There are a number of incredible Generative AI companies that are building invaluable tools. Those tools will be leveraged by specialized digital real estate companies to create specialized value. A specialized digital real estate company that does it best among them will unlock huge value for its investors. CoStar Group is the largest digital real estate company in the world by market cap is well positioned to win in an AI future. It's just a brief comment on AI. The Homes.com subscriber Net Promoter Score rose to 36 in the third quarter, rising 84% over Q2 '25. October to date, that NPS score continues to rise and is now at an outstanding 43. We're not done there. We'd like to get it up to Apartments 93, but the progress is amazing. It took less than 2 years for Homes.com to reach an NPS level that took CoStar about a decade or so to reach. As our NPS increases, so does our subscriber retention rate. In Q3 '25, our retention rate of subscribers we sold 6 months prior from Q1 to 2025 rose to 86%. The Q3 retention rate rose 7.5% from 81% retention in Q2 '25 and rose 39% year-over-year from 62% retention in Q3 '24. We are offering Homes.com subscribers the benefits of Matterports for their listings and agents tell us some focused groups that they really value that benefit. Member listings with Matterports captured nearly 40x listing detailed views of nonmember listings without Matterports. That should be the objective of any real estate agent selling a home, get 40x as many people to inspect that home. In the quarter, subscribers who had a Matterport on a listing had a 37% higher renewal rate than those that did not. It's working. We are enhancing our Matterport benefit to subscribers by offering a photorealistic 3D view of the exterior of the house to complement the digital twin of the interior. This exciting new technology is called Gaussian Splatt and we capture it with a short drone flight around the house where legal. I would encourage you to view one live by looking up a home for sale at 5471 Country Club Parkway in San Jose, California, on Homes.com and view that Matterport 3D exterior. Eventually, the house will sell, and it won't be there anymore. In recent focused groups, we are seeing success in raising real estate agent awareness that Homes.com is the only Your Listing, Your Lead portal. 51% of agents surveyed recognize "Your Listing, Your Lead" and overwhelmingly connected to the Homes.com brand. Agents dislike lead diversion expressed a strong preference for portal operating with "Your Listing, Your Lead" principle. As we continue to build that awareness, we believe that Homes.com will become the portal agents trust and most recommend to their clients. Now I need to turn to an uncomfortable but important matter. Zillow is under siege facing an unprecedented wave of lawsuits. I'm not sure that the market grasps the sheer magnitude of the risk bearing down on Zillow from all sides. These lawsuits are not isolated instance. They collectively target the heart of Zillow's operations exposing alleged antitrust violations, widespread copyright theft and blatant consumer deception. With private plaintiffs and government regulators now alert to Zillow's misconduct, I predict even more aggressive legal and regulatory action in the months ahead. There are 5 federal lawsuits filed against Zillow since June of 2025. First, Zillow threatened to permanently banning listing that was publicly marketed but not put on the MLS within 24 hours. So if you put a sign for sale -- for sale sign in front yard and didn't put it on Zillow, within 24 hours, you're banned. You have a Facebook post, and don't put it in the Zillow in 24 hours, you're banned, pretty aggressive. It appeared that Zillow was targeting Compass. Zillow followed through and banned Compass listings that were not put on Zillow in 24 hours. On June 23, 2025, Compass sued Zillow exposing Zillow's so-called 'Zillow ban' for what it truly is a ruthless scheme to strangle competition, trap home sellers inside of Zillow's walled garden. If Compass prevails and home sellers choose to -- where to list -- where and when to list their homes, Zillow could lose massive swaths of its inventory calling into question lead diversion model. I believe that Zillow's actions pushed Compass in a defensively merging with Anywhere. When the Compass-Anywhere merger is completed, the combined company will be, by far, the largest real estate brokerage in the U.S. as I understand, as many as 300,000 plus agents. I'm pretty sure that Zillow just picked a fight it cannot win. Compass will have the most important listing content in real estate, and Zillow will need them a lot more than Compass need Zillow. We filed our lawsuit against Zillow on July 30, 2025 to put an end to Zillow's brazen theft and monetization of CoStar's intellectual property. Zillow undoubtedly has used content stolen from Apartments.com to unfairly build their rental business. The scale of this infringement is staggering. For context, in 2019, Xceligent was caught with 38,489 CoStar copy-righted photographs and the Federal Court awarded $0.5 billion in damages to us. Zillow's conduct is even more egregious and we're determined to hold them fully accountable. Then in September, the Zillow was sued in a class-action suit by a group of plaintiffs who alleged that they were being deceived into overpaying hidden fees through Zillow's notorious Contact Agent button, don't push it. This case tears straight to the heart of Zillow's business model, laying bare a system built on deception. The complaint exposes Zillow's tactics saying, Zillow actually directs the buyer away from listing agent and directs the buyer to an unrelated buyer agent who lacks any specialized knowledge about the subject property. And the fallout isn't just limited to duped buyers, Zillow's lead diversion racket is bleeding home sellers by diverting their potential homebuyers to agents that may compete with their listing. Most recently -- we're not done, hang with me. Most recently, September 30, 2025, the United States Federal Trade Commission filed suit against Zillow Group and Redfin over an illegal agreement to suppress competition. They stated that the illegal deal stuns multifamily rental advertising competition harming American renters and property managers. The FTC went on to say that the Zillow partnership with Redfin was, 'nothing more than an end run around competition that insulates Zillow from head-to-head competition on the merits with Redfin for customers advertising multifamily buildings'. The FTC is seeking injunctive relief, meaning a potential unwinding of the deal. The lawsuit was followed up the next day by another lawsuit on behalf of bipartisan coalition of Attorney Generals from Virginia, Arizona, Connecticut, New York and Washington State. You might assume that CoStar Group sees deals like this when they come up like the Redfin deal. My immediate and clear reaction would have been that, obviously, the FTC would not allow such an illegal deal in any effort to end run the FTC regulatory process would necessarily bring unnecessarily excruciating pain and damage to anyone foolish enough to try it. So we never would have pursued it. If Zillow is ordered by Federal Courts, the FTC or Attorney Generals of states [disgorge] their allegedly illegally gained apartment revenue and content, I believe, will seriously damage Zillow's reputation in the apartment industry. These lawsuits will take years to resolve. The full extent of Zillow's contact as alleged in these complaints and the various remedies from these lawsuits is yet to be seen. Moving to the United Kingdom. It was a strong quarter for our, OnTheMarket, our U.K. residential marketplace, with leads up 21% year-over-year. In Q3 '25, we delivered significant ROI to our 16,000 subscribing customers there. Bringing some Homes.com inspired features to OnTheMarket has resulted in positive changes to the site that are generating more consumer engagement. We are building an audience of serious property seekers with total page views up 24% year-over-year in Q3. Average time on site per active user is up 79% year-over-year and lead to conversion -- lead to visit conversions are up 31% year-over-year. Net new bookings increased for the 17 months in a row and has delivered nearly $11 million of annualized net new bookings since its acquisition. We closed the acquisition of Domain in August. I'm excited to work with the Domain team and their customers to bring Homes.com, CoStar and LoopNet platforms to Australia. Domain's residential marketplace and commercial marketplace -- well, Domain's residential marketplace is very successful and generates more than 50% direct contribution margin. Its commercial marketplace generates a 40% direct margin. Both marketplaces have long-term growth potential under the CoStar umbrella. The Domain brand is very well known in Australia, and there's significant potential to expand market share there, where homeowners invest significantly in digital real estate advertising. Domain has an excellent management team led by Jason Pellegrino, who knows the Australian market well. He used to be the MD for Google there. And his vision for the business aligns with ours. We have made fast progress since taking ownership of the Domain business on August 20, delivering 7.4 million unique users in September on Domain's residential platforms which was the largest number of unique users on Domain's owned platforms in its history. The quality of this increased audience was retained, delivering the highest consumer reviews per listing in Domain's history. We're on track to significantly beat those records in October. We have already delivered a 24% year-over-year increase in audiences on our commercial real estate platforms in Australia. These strong audience results were driven by a mix of greater marketing investments supported by an improved mix of marketing investment across every step of the consumer journey, and rapid product improvement supported by a refocused product team and access to CoStar platforms, relationships and talent. Examples of product improvements already executed and planned within the first 60 days of ownership include improvements in platform speeds and latency, removal of all advertising interrupting the consumer experience and improvements in image quality. A key highlight was the growth achieved in our audience metrics, where we saw Domain apps average 138% increase year-over-year in downloads across iOS and Android, allowing us to successfully overtake our main competitor in App Store rankings. Domain was previously constrained under its former media company owner. It received limited management focus, limited expertise and scarce resources, limited expertise in real estate marketplaces. It was operated with short-term EBITDA strategy, keeping it from competing effectively with a market leader, REA. We believe that with CoStar Group's technology and resources, Domain will compete more effectively and will achieve stronger, long-term profitability. A dozen members of my management team and I recently spent 2 weeks in Sydney for a deep dive into the Domain business and believe there are clear opportunities to make changes that will create value for our shareholders. Most of the significant software resources and products we offer, we believe, are compatible with the Australian market, and we can integrate Domain into them to create competitive advantage and cost efficiencies. We hope to improve Domain's focus and profitability by rationalizing some of its product portfolio. Under prior ownership, Domain allocates significant resources to about 10 noncore initiatives at the expense of the highly profitable residential and commercial portals. I believe that most of the software development resources were allocated to products generating less than 20% of its revenue. We will refocus Domain's resources towards its successful scalable core and competing against its main competitor. We expect to offer LoopNet Homes and CoStar in Australia within 18 months. There's currently, we believe, no equivalent to CoStar in Australia, while Domain and REA Group offers products similar to LoopNet, I do not believe that they're on par with what LoopNet offers. This presents a significant opportunity for us to quickly establish a leading presence. The more I live with Matterport, the more impressed I am with this technology, how well it works and how useful it is to real estate. Matterport creates a strategic advantage in both our residential and commercial product portfolios. Matterport digital twins unlock value by bringing a new and important dimension of digitizing real estate in every product we offer. As part of CoStar Group, we see Matterport set on 2 pillars. On one pillar, Matterport is a stand-alone solution for industries such as insurance, construction, public safety, facilities management and similar, which we believe is by itself a multibillion-dollar revenue opportunity. In the second pillar, Matterport is brought to market as an integrated solution within our marketplaces and information solutions through our existing sales forces of 2,000-some people. We believe that in the second pillar, Matterport can help CoStar compete and achieve more than $1 billion in incremental value. Integration of Matterport and the second pillar is well underway, and you can see deeper than ever integration of Matterport within our products. I believe that prior to merging with CoStar, Matterport was a world-class transformative technology held back by lack of focus on go-to-market strategy with an underscaled sales and marketing effort. Matterport had fewer than 30 sales representatives globally, leaving many huge revenue opportunities untapped. We plan to expand the sales force by 200 by the end of '26 and drive accelerated revenue growth. Matterport's Q3 revenue was 12% higher than our expectations, $44 million versus $40 million and our Q3 '25 net bookings were up 194% over Q3 last year. We emphasize new customer acquisition, which resulted in a 94% increase year-over-year in incremental new customer logos. Our Matterport Max rollout for Apartments.com began at the NAA conference in June of this year. We've already sold over 530 Matterport Max subscriptions, which are adding upwards of $5,000 per year in annual subscription revenue per unit. We just completed a successful developer Summit and Hackathon with the Matterport team. Coming out of that, I'm very confident that we have an outstanding and innovative product road map that will delight our customers and for you all, more importantly, our shareholders. Turning to CoStar, CoStar generated $277 million in Q3 of '25 revenue, reflecting 8% year-over-year growth. Revenue growth has slightly improved in '25 as net new bookings remain strong. Per rep productivity in Q3 was at its highest since Q3 '23. Cancellation rates have declined over the past 2 quarters, and our renewal rate reached 93.3%, the highest since '23. Our subscriber count rose to 284,000 in the third quarter, up 20% year-over-year. Our lender business achieved a record quarter, closing $4.3 million annual net new bookings, with nearly almost just there $100 million in revenue and over 450 clients, including banks, credit unions, private lenders, regulators, insurers, CoStar for lenders has demonstrated strong success and has significant potential. CoStar Lender has already uploaded over $1 trillion of loans into CoStar. Clients' loan portfolios are securely uploaded to our SOC 2 compliant platform, unavailable to any AI scraper and integrated with CoStar's proprietary data analytics and credit modeling informed by our research and marketplace solutions. This comprehensive ecosystem delivers unmatched value for regulatory examines, asset examinations, asset allocation and responsible growth. In '26, we plan to launch our benchmarking product and have begun developing a loan origination system, expanding our total addressable market. One of our core goals for all of our emerging businesses is to cross that also important $100 million revenue milestone. So congratulations to John Vecchione, Xiaojing and the entire Lender team, well done and dinner is on me. LoopNet remains the world's largest and most active real estate marketplace, capturing 8.5x more searches than our nearest competitor. In the third quarter of '25, LoopNet achieved 10% revenue growth. Based on net new bookings from the last 3 quarters of '25, we expect the platform to deliver low double-digit growth next year. I firmly believe that LoopNet should and can return to 20%-plus growth -- annual growth rate soon. Our strategic focus has been on offering LoopNet advertising packages that enable clients to promote their entire property portfolios rather than just select assets. The silver ads, their portfolio comprehensive design are designed to drive higher renewal rates, deliver strong ROI for clients, expand listing coverage and enhance both the consumer and customer experience. We are also continuing to roll out asset-based pricing for renewals aligning our service pricing with the value delivered to clients. International expansion remains a key pillar of LoopNet's growth. Many of the largest multinational companies in the world are heavy users of LoopNet, and we could provide them even more value if we are carried listings in more countries. In August of '25, we integrated all French listings from BureauxLocaux into LoopNet, bringing the total number of European listings to 100,000 across France, Spain and the U.K. We could see major tenants like Amazon and many others, searching LoopNet for commercial real estate, not only in the U.S. but also in Canada, France, the U.K. and Spain. So they -- wherever we're going, they're searching. We will soon add Australia, as I mentioned, through our Domain acquisition, further growing our global reach. We believe that LoopNet can deliver more value to local advertisers if we're delivering a unique and valuable global audience with high buying power. Our data consistently shows that properties listed on LoopNet sell and lease faster. For properties listed in January '24, 30% of those on LoopNet transacted, while only 22% of those not listed on LoopNet transacted. For firms listing 90% to 100% of their listings on LoopNet, their 24-month close rate was 36%, while those not listed on LoopNet only had a 20% close rate. If a few hundred dollars invested in the LoopNet could increase your chance of transacting a commercial property by 80%, I believe that's a no-brainer. Turning to CoStar Real Estate Manager and Visual Lease now support real estate lease management accounting, project management needs for 2,000 corporate clients, including more than half of the Fortune 500. Third quarter '25 revenue climbed 63% year-over-year to $30.6 million. The business is very profitable with growing margins. We are making good progress integrating CoStar Real Estate Manager, Visual Lease and CoStar into one extremely valuable corporate real estate solution. We expect to launch lease benchmarking capabilities in mid-'26 creating a new level of transparency, helping investors, brokers, corporates and lenders gain a more accurate and timely understanding of CRE rents and potential income. We expect to release an integrated product with real estate management CoStar Suite in '26, late '26. Clients will be able to access comprehensive market data and gain visibility into previously unseen opportunities to optimize their real estate portfolios. This will allow them for detailed analysis to make the most informed decisions that we believe will significantly drive significant ROI and cost savings for these clients. We shared our new product road map in our recent customer advisory meeting with major clients, which include real estate finance and accounting leaders, and we received very extremely positive feedback on the new product direction. CoStar Group's European business continues to deliver record net new bookings reaching $5.7 million in Q3 '25 and $16.9 million year-to-date, representing a 51% year-over-year growth. The U.K. business achieved another record quarter with year-to-date net new bookings up 125% and revenue up 17% year-over-year. In France, our research team has curated over 260,000 buildings, 50,000 availabilities, 140,000 tenants and 60,000 sale and lease comps. Business Immo, now fully integrated to CoStar News reaches over 100,000 French CRE professionals monthly, and we're confident that CoStar will soon become the leading source for CRE data in France, connecting global and French investors. In closing, I believe that our results this quarter demonstrate that my colleagues here at CoStar Group are making great progress, continuing to successfully grow our existing businesses, while effectively investing into new real estate segments and new global markets. With $350 trillion of real estate in the world, we believe we are creating value digitizing it with leading marketplaces and information solutions that can result in a $1 trillion addressable market with a deep moat, and we're busy building it one brick at a time. At this point, I'll turn the call over to our CFO, Chris. Christian Lown: Thank you, Andy. Good evening. I'm happy to report that CoStar has now posted its 58th consecutive quarter of double-digit revenue growth coming in at 20%. We achieved an impressive commercial information and marketplaces brand margin of 47% in the third quarter versus 43% in 3Q '24. Net new bookings for the third quarter were $84 million representing a 92% increase year-over-year. Every major product contributed to this record as our growing dedicated sales force of over 2,000 people is delivering for CoStar. Revenue for the third quarter was $834 million, which included a $25 million contribution from the Domain acquisition. Revenue, excluding Domain of $808 million exceeded the high end of our guidance. Third quarter adjusted EBITDA came in at $115 million, also exceeding the high end of our guidance at a 14% margin. The outperformance in adjusted EBITDA was a result of continued expense discipline and better-than-expected revenue. Our CoStar products saw revenue grew 8% in the third quarter, ahead of our guidance. We are excited about this product's renewed growth, especially given continued volatility in the commercial real estate sector. Net new bookings have steadily increased throughout 2025 and are now at the highest level seen since 2022. With this increasing momentum, we expect to see the CoStar product grow between 8% and 9% in the fourth quarter with full year growth firmly in the 7% range from our original guidance of 6% to 7%. Residential revenue was $55 million in the third quarter with $23 million coming from the Domain acquisition. The $32 million in organic revenue was consistent with last quarter's guidance. With the addition of revenue from Domain, we now expect fourth quarter revenue of $100 million to $105 million with Domain contributing around $67 million. For full year 2025, we expect residential revenue to more than double to $210 million to $215 million from $101 million in 2024. Apartments.com's third quarter revenue growth came in at 11% year-over-year. Our Apartments.com sales reps are consistently the most productive of our large brands, and we have increased the size of this team by 20% year-to-date. We now have more than 500 Apartments.com sales reps for the first time in its history. These reps will take time to ramp up their productivity but this investment puts us in a great position for longer-term growth. For 4Q '25, we expect 11% to 12% revenue growth, resulting in full year 2025 revenue growth of 11% to 12%. LoopNet revenue grew 12% in the third quarter with a 2 percentage point lift from the Domain acquisition. LoopNet's organic performance was in line with last quarter's guidance. Our sales team is consistently outperforming prior productivity levels. And in conjunction with the demand contribution, we now expect 4Q revenue growth of between 15% to 17% and full year revenue growth of 10% to 11%. On an organic basis, 4Q revenue growth is expected to be 11%, its highest growth rate since 2023. This acceleration throughout 2025 sets us up nicely for 2026. Revenue from information services was $41 million in the third quarter. We expect fourth quarter revenue to be consistent with the third quarter and full year revenue growth of between 18% to 20%. We are excited about launching our new rent analytics product in the first half of 2026 and our new lease platform in the fourth quarter of 2026. Other revenue was $78 million in the third quarter with Matterport contributing $44 million. For the fourth quarter, we expect other revenue to range between $70 million and $72 million. The fourth quarter is expected to be slightly impacted by revenue recognition timing for 10x and lower camera sales at Matterport as we sunset the Pro 2 camera. As previously stated, adjusted EBITDA for the third quarter was $115 million, meaningfully above the high end of our $75 million to $85 million guidance. The favorable performance came from higher-than-projected revenue, higher-than-anticipated professional service -- I'm sorry, lower than anticipated professional service costs and greater-than-expected headcount savings as we remain laser focused on expenses. Our contract renewal rate was 89% for the third quarter, with a renewal rate for customers who have been subscribers for 5 years or longer holding steady at 94%. Subscription revenue on annual contracts was 75% for the third quarter, the acquisitions of Matterport and Domain are the driving factors for the change in our subscription revenue metric. Our September 30 balance sheet included $2 billion in cash, which earned net interest income of $26 million in the third quarter, a 4% rate of return. We repurchased 576,000 shares in the third quarter for $51 million, bringing our year-to-date total to 1.4 million shares repurchased for $115 million. We expect to purchase approximately $50 million of additional shares in the fourth quarter, bringing our 2025 total to approximately $165 million of the $500 million share repurchase authorization. We closed on the Domain Group acquisition on August 27. The total consideration was USD 1.9 billion. Domain contributed $25 million of revenue for the stub period from August 28 to September 30. For context, around 90% of Domain's revenues is residential, while the remaining 10% is split between commercial marketplaces and information services. With 9 months of 2025 in the books and with the closing of Domain, we now expect full year revenue of between $3.23 billion to $3.24 billion, broadly in line with our guidance, excluding Domain. Fourth quarter revenue is now expected to be between $885 million and $895 million. Full year adjusted EBITDA is now expected to range between $415 million and $425 million, with Domain contributing approximately $15 million. This $25 million increase in our guidance, excluding the impact from Domain is indicative of our strong third quarter performance. Fourth quarter adjusted EBITDA is expected to range between $150 million and $160 million. And with that, I will now turn the call back to our call operator to open the lines for questions. Operator: [Operator Instructions] Our first question comes from Pete Christiansen with Citi. Peter Christiansen: Nice results, guys. Good trends here. Andy, It's interesting. I was looking across the last 8 years and sequential change in bookings excluding COVID, so 2020 was roughly 15%. This quarter sequential change in bookings was 10% down. So clearly, the new sales force capacity is contributing and other things also contributing to some of that growth being above seasonality. But just curious if you could point out any seasonal behaviors that you noticed and maybe a special attention on the residential side. Are agents canceling now, planned to come back later? Are you seeing the same type of seasonality that you normally see in the apartments business? Just any deeper thoughts there would be helpful. Andrew Florance: Sure. And I guess you got the first question because we source Citi during our script. So -- but the Apartments.com does have seasonality. And as you know, the prior quarter, you have usually unusually large sales because of the NAA event where people, major property managers do their annual purchasing for the year to come. And we would expect some limited seasonality from residential agents as they get to year-end holidays and the like. Their peak season is the spring selling season. But what we're seeing right now, if I look at a line of our sales production at Homes.com, it is a very linear line and the only seasonality in that sales line is Saturday and Sunday. So it's a very smooth progression up right now, and we're not yet seeing seasonality. And maybe in the Christmas holidays that you might get something but not yet. Operator: Our next question comes from Stephen Sheldon with William Blair. Stephen Sheldon: Just wanted to follow up on that question. I guess, can you just give more detail on the sequential booking trends in the third quarter as we look at the core businesses. So looking at Suite, Apartments.com and LoopNet. And then just how are things shaping up in the seasonally important fourth quarter around bookings, especially with a bigger sales force and the ramping productivity. So yes, just what are you -- how are you thinking about the bookings trajectory into 4Q? Andrew Florance: Chris? Christian Lown: Yes. So I think as you see... Andrew Florance: Didn't like [indiscernible] Christian Lown: I think what you see is, you see our full year guidance, you see our sequential trends. We're very pleased with the bookings. And I think we're just getting started from the sales force expansion, all those sales force came in at the end of the first quarter, second quarter, et cetera. So productivity takes time to ramp. But seasonality and what we're modeling is pretty much in line with what we're expecting. And therefore, you saw the increase in our full year guidance and our expectations. And so I think we're on track from what we're expecting. Andrew Florance: Yes. And I do want to point out that from -- remind everyone that from the bookings at Homes.com from Q2 to Q3 was up 53%. So as we're going into the third quarter, we're seeing a significant uptick in bookings at Homes.com. And again, because of the number of people, a very smooth upward growth trajectory. Christian Lown: Yes. And just to expand a little further, at CoStar's trends is very positive. We're seeing reacceleration there, which we're very excited about. We talked about LoopNet, Andy talked about LoopNet and what's going on there. And on Apartments, as I said, the trends are as expected as modeled. So I think we feel really good on the underlying trends and resulting in our change in guidance. Operator: Our next question comes from Ryan Tomasello with KBW. Ryan Tomasello: At Apartments.com, in terms of bookings, can you say how those performed sequentially versus, I think, $45 million in the second quarter? And looking at the guidance for the fourth quarter, Chris, I think you're calling for 11% to 12% on multifamily, which would be pretty unchanged growth from the third -- I'm sorry, from the -- yes, from the third quarter. Just curious what's driving that despite the ramp in the sales force and just generally how you're thinking about demand trends at Apartments.com heading into the end of the year? Christian Lown: What's important is what you saw across a number of funds. One, we continue to see rooftop expansion in Apartments.com. We're expanding the sales force. We've talked historically about the seasonality or -- have the contributions on a quarterly basis as we look at back historically, with the second quarter being the largest quarter, the third and fourth quarter as being relatively similar, although there can be an uptick in the fourth quarter. So I think we feel generally good about the trends, which has resulted in our numbers and our forecast. But obviously, solid growth, increased rooftop expansion. And then that's actually across all segments, 1 to 49, obviously had a pretty significant increase year-over-year and then both 50 to 99 and 100-plus also showing growth at or higher than what we've seen over the last 4 or 5 quarters. Andrew Florance: And Ryan, did I mention that the FTC was suing our competitor? Ryan Tomasello: Yes, I think I caught that Andy. Andrew Florance: Okay. Just want to make sure. Operator: Our next question comes from Curtis Nagle with Bank of America. Curtis Nagle: I guess, Andy, I just wanted to go back to the point. So you're investing 50% of your software costs now into AI. I guess where are you redirecting those expenses from? And I guess, any thoughts you could give on how to think about total expenses for '26 for Homes.com? Andrew Florance: I thought you'd never ask. The -- those -- the 50% of our software development going into AI features in Homes.com is an allocation of the existing resources. It does not reflect an increase in total spend. So as we go into any particular quarter or season, we're always looking at what are the headline investment initiatives going to be. We are most excited about the potential of these AI features and functions, which are just remarkable and awesome. And then we look at 2026, we anticipate, I would say, same or lower spend on Homes.com investment in '26. Do you agree with that, Chris? Are you going to go... Christian Lown: You're the CEO. I agree with whatever you say, Andy. Andrew Florance: Okay. Great. Yes. But we don't see any -- other than the increased sales force size that we've already baked in that roll over to '25, the costs are not materially going up in any way I see. Operator: Our next question comes from Brett Huff with Stephens. Brett Huff: Can you detail a little bit, unpack a little bit the bookings number that you gave us for Homes.com which we appreciate. Just in terms of rep productivity, are the newer folks getting more up to speed? Do we still have more of those folks get up to speed, pricing? Sort of any of the numbers that go into that bookings number would be super helpful as we try and tweak our model. Andrew Florance: Sure. So we are in a period of remarkable headcount growth at Homes.com. We've never seen anything like it, where you have classes of 100-and-some coming in at any given point. That is difficult to manage, you would fully expect you'd see a drop off in per person productivity as you bring that many people in. But we are seeing that consistent -- we're seeing consistent growth in those bookings. And what was the second part of the question? Christian Lown: Productivity. Andrew Florance: Yes. So the productivity is still -- we're seeing a very positive ROI at each incremental salesperson added, but you are seeing the effects of so many people coming in. And we are slowing the growth or I believe sort of have capped the growth of salespeople to allow for training and onboarding to catch up. Christian Lown: Right. And you have made adjustments to pricing to improve penetration.... Andrew Florance: Slight increase in pricing in this quarter over prior quarter, but we're focusing on penetration, as you can see. Operator: Our next question comes from Faiza Alwy with Deutsche Bank. Faiza Alwy: Yes. Andy, you mentioned in your opening remarks that you think that you can get to 40% profitability or margins on the residential business. I'm curious how you think about the time frame on that? And sort of what needs to happen for you to get there? Andrew Florance: Yes. So the residential business, obviously, you have Domain in there, you have OnTheMarket, you have Homes in there, you have Apartments.com, and past is prologue. You see us adding components to it through time. But when you look at our business model, it's uniform across all 4 of those platforms. It is around marketing the real estate. If I look around the world at all of the precedent models that use marketing real estate as their core business, it will be a Rightmove, or Idealista or SeLoger or REA Group and the like. They all operate up at margins that are typically around 50%, in some cases, high as 75%. So it's really continued blocking and tackling over the next number of years. I don't have a specific date for that. But when I look at our -- when I look at the margin numbers for the combined residential businesses, I like the progression of EBITDA margin that I see in that group of companies. You can combine all these things together this way or that way. But when you look at them, I think they're making good progress towards our intermediate to long-term margin goals. Operator: I would now like to turn the call back over to Andy Florance for any closing remarks. Andrew Florance: Well, I think I think our participants on the call today have probably modeled good behavior in keeping it brief. I'll try to be brief in my next set of comments. But thank you guys for joining us. We're very excited about what's happening here at CoStar Group. And we look forward to updating you in 2026 for our next earnings call. Thank you. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the GeneDx Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Sabrina Dunbar, Investor Relations. Please go ahead. Sabrina Dunbar: Thank you, operator, and thank you to everyone for joining us today. On the call, we have Katherine Stueland, President and Chief Executive Officer; Bryan Dechairo, Chief Operations Officer; and Kevin Feeley, Chief Financial Officer. Earlier today, GeneDx released financial results for the third quarter ended September 30, 2025. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans, updated 2025 guidance and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, October 28, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our third quarter 2025 earnings release and slides available at ir.genedx.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. And with that, I'll turn the call over to Katherine. Katherine Stueland: Thank you, Sabrina, and good morning, everyone. The third quarter was another exceptional quarter for GeneDx. We continue to drive record growth while maintaining our commitment to profitability. For us, better patient care and profitability go hand-in-hand because our ambition is truly transformative to fundamentally alter how precision health care is delivered, making it more accessible, effective and patient-centric. We envision a world where any genetic disorder is diagnosed quickly to prevent disease progression and ensure everyone has a chance to live a long and healthy life. Achieving that vision requires a fast-growing, disciplined, profitable business that delivers both life-changing answers for patients and long-term value for shareholders. Based on our momentum exiting this quarter, we're raising our 2025 revenue guidance to $425 million to $428 million. Our North Star, the goal that drives each and every one of us at GeneDx is to diagnose disease earlier for as many families as possible. Our strategy to do so is to: one, drive high profitable growth; two, offer the best-in-class diagnostics products and experience for clinicians and patients globally; and three, build the network effect required to usher in the next era of precision medicine. Across all 3 focus areas, we are leveraging the power of GeneDx Infinity, the largest rare disease data set to generate deep genomic insights that enable fast and reliable diagnoses and fuel the precision medicine revolution. Just last week, the FDA granted breakthrough device designation to our ExomeDx and GenomeDx tests, offering powerful validation that our industry-leading technology is the gold standard in transforming lives and shaping the future of health. There are over 10,000 rare diseases impacting 1 in 10 Americans, most of them children, and it still takes an average of 5 years to reach an accurate diagnosis. Receiving an accurate genetic diagnosis is a pivotal milestone in a patient's journey that is often not the end. Today, 95% of rare diseases have no approved treatment. But as the largest provider of rare disease diagnosis in the world, GeneDx will be central in changing that. As we look to our future, GeneDx isn't just the starting point for rare disease. We're the nexus, connecting patients, biopharma, health systems, payers, policymakers and advocacy to unlock the full potential of genomic medicine. We recently announced 2 key executive hires, Lisa Gurry as Chief Business Officer; and Dr. Mimi Lee as Chief Precision Medicine Officer, to unite our data diagnostics and partnerships so that clinical adoption, equitable access and therapeutic advancements reinforce one another, creating a network effect. We are uniquely positioned to move our system from sick care to health care and strengthened by the network effect, we will deliver on the promise of precision medicine for all. What fuels our business is growth in diagnostic testing at scale, and our strategy is twofold. We're deepening our penetration while widening the market, enabling us to serve more patients today while opening access for patients tomorrow. Our existing markets of geneticists and pediatric neurologists continue to deliver impressive growth, and we have ample room to run. And with updated guidance from the American Academy of Pediatrics now in place, we can now shorten that multiyear diagnostic odyssey by meeting parents where they go first, their pediatricians. Our commercial build-out is underway, and we expect to nearly double our sales force over the coming quarters with a dedicated GeneDx team. We're also leading medical education on updated guidance, expanding GeneDx's authority as the leader in genomics to this new cohort of clinicians, many of whom are learning about these changes for the first time from us. We're also investing in customer experience to drive utilization. The opportunity is significant, and we expect it will take 18 to 24 months from the June update before we see real adoption. Turning to the inpatient setting. The NICU remains underpenetrated and continues to be a focus with less than 5% of NICU patients receiving any genetic testing today. We have 8 Epic Aura integrations live and are on track to deliver at least 12 by the end of the year. Our ultra rapid genome continues to prove its value for critically ill infants. And as protocols evolve and whole system engagement increases, we're well positioned to significantly scale testing in Level 3 and Level 4 NICUs over time. Our work to date has shown the value of testing symptomatic patients, but we know the next step forward is to enable proactive personalized care beginning at the earliest moment possible. Our leadership in genomic newborn screening from supporting pioneering research to enabling clinical adoption in Florida, reflects our mission to drive true longevity and highlights our unique ability to expand access to this technology at scale. Our work on the GUARDIAN study generated foundational clinical data to support adoption, demonstrating an over 3% true positive rate for actionable conditions at birth. This quarter, we announced our role in 2 new pivotal initiatives, the NIH with Beacon program and the Sunshine Genetics Network. These programs are relying on GeneDx as a trusted adviser in newborn screening because we have the unique talent and experience to design programs that are clinically impactful, equitable and scalable. Broad adoption of newborn screening will flip the system from reactive to proactive, advancing our mission and accelerating impact as population scale. At the same time, exome and genome testing can have significant utility later in life. Adult conditions represent another large untapped market where GeneDx is uniquely positioned to offer diagnosis for cardiovascular conditions, neurodegenerative diseases and many others. And as we grow our footprint domestically, we're also poised to address growing opportunities internationally. The Fabric genomics platform offers us flexibility to serve global markets at scale, and we're excited to have boots on the ground in key ex-U.S. regions to develop these markets. We're proud to have built a business that delivers both purpose and profit to fuel reinvestment and the strength of our model today is laying the foundation for an exciting future. With that, I'll pass it over to Kevin to share more about our results. Kevin Feeley: Good morning, everyone, and thanks for joining us today. We reported third quarter 2025 revenues of $116.7 million, a 52% increase year-over-year. That total includes $98.9 million in revenue from exome and genome, up 66% from the same quarter last year. In the third quarter, we reported 25,702 exome and genome tests. Growth there, has accelerated from 24% year-over-year in the first quarter to 29% in the second quarter to now 33% in the third quarter. We expect volume growth on these tests to continue to accelerate in Q4 and offer high growth for the foreseeable future. For those new to our story, the business began by serving expert clinical geneticist 25 years ago, and now 8 out of 10 in the U.S. ordered their testing from GeneDx. I mentioned that because it's been just over 2 years since we began calling on pediatric neurologists and already 1/3 of those physicians order from us. Over the next few years, we expect to pull volume from many more call points, the largest of which is the general pediatrician. Near-term growth should continue to be fueled by increased ordering patterns from existing accounts as they continue to convert from panels and activating more untapped pediatric neurologists. We'll also open up and penetrate additional pediatric and adult specialty call points and begin international market development. The NICU remains a compelling market for us, expected to ramp over the next several quarters and years. Of course, all of that is supplemented by the long-term potential to establish a commercial newborn screening market and by our ability to put GeneDx Infinity work for biopharma and other health care partners in a way that contributes meaningfully to our revenue base. The average reimbursement rate for exome and genome was over $3,500 a test in the third quarter. That's up from approximately $3,700 last quarter and $3,100 a year ago. With a talented team in place, our cross-functional revenue cycle efforts are positively influencing Medicaid coverage expansion and fighting for fair adjudication. And there's one big recent development to share in that regard. On November 1, the largest state Medicaid program, Medi-Cal, will begin covering whole genome testing for their members in California. We applaud their decision to become what is now the 36th state to cover exome and genome outpatient. As I mentioned on our last call, when we begin to sell into new call points and for new indications, we inherently expect lower initial payment rates compared to our established channels like Neuro and Geneticists. With this strategy to expand into new markets, some new volume may start out at lower collection rates, which in turn may have a modest impact on our average reimbursement rate in the coming quarters. That said, any impact should be transitory. And to be clear, unit economics matter to us. Lessons from this industry's past are always top of mind when contemplating pricing and go-to-market strategies. Our view that rates will be durable and enable both high growth and attractive gross margins well into the future remains intact. Turning to gross margin. We expanded total company adjusted gross margin of 74%, driven by favorable mix shift, improved reimbursement and lower COGS. Bryan's team continues to innovate, and they have an impressive road map to further reduce COGS by leveraging automation and AI to optimize production. GeneDx has achieved an important economy of scale advantage, and we expect to hold on to that advantage well into the future. Adjusted total operating expenses were $71 million. That is up sequentially in terms of aggregate dollars, representing some variable costs growing with the revenue base, but primarily early investments we expect will drive volume growth mid-2026 and beyond. Total OpEx was 61% of revenue this quarter, and that's a number I'm quite comfortable with at this point. I want to underscore the spend here is deliberate, representing strategic investments into accelerating our long-term growth vectors. Specifically, we've begun to build the first phase of the dedicated Gen Peds sales team. We've added the first few sales heads in new specialty markets and key international markets. We're executing against our first ever brand campaign. We've ramped product and technology talent to design and build our next-gen customer experience for nonexperts and R&D includes innovation to our genomics program and support for clinical and health economic research as just some examples. The expense ramp reflects continued confidence in the ROI. They're all designed to drive volume in the future. That growth, in turn, accelerates a flywheel effect, whereby our Infinity data set expands, our competitive moat strengthens, we attract new customers and economies of scale continue to improve. While these investments impact near-term operating margin, every dollar is meant to build high-quality, durable future revenues. Expect sequential growth in our operating expense for the next several quarters, but all within a framework designed to achieve industry-leading growth rates while maintaining attractive gross margins. We have demonstrated the ability to drive operating leverage and EPS accretion. With strong demand in an ever-expanding serviceable market, we'll be reinvesting back into the business to capture an exponentially larger future and build long-term value creation. The team here has the experience to understand our responsibility to be good stewards of investor capital. On the bottom line, we generated $14.7 million in adjusted net income and $0.51 of adjusted basic EPS in the third quarter of 2025. And we're well capitalized with cash, cash equivalents, marketable securities and restricted cash totaling $156 million as of September 30, 2025. Cash flow for the third quarter included $9 million in free cash flow generated and $12 million in ATM proceeds net of fees from the issuance of 101,367 shares of common stock. Now an update on guidance before turning over to Bryan. We're raising top line total revenue guidance to between $425 million and $428 million for full year 2025. Just as a reminder, in the third quarter, we discontinued our hereditary cancer offerings. That business generated $1.2 million in this third quarter of 2025 and $3.3 million in the same quarter last year. It will be near 0 in the fourth quarter of this year. We're raising exome and genome revenue guidance to deliver between 53% and 55% growth for full year 2025, which is exome and genome revenues of $358 million to $361 million. As a reminder, when looking at the prior year comp, the fourth quarter of 2024 included a discrete benefit of $6.8 million we called out on our fourth quarter 2024 call. $5.8 million of that benefit was exome and genome. Excluding that, the full year growth rate is 57% to 60%. We again reaffirm our expectation to deliver at least 30% exome and genome volume growth for full year 2025. As had always been expected, volume growth has accelerated throughout the year, and the guide implies a fourth quarter exit of at least 34%. We're raising expectation for full year 2025 adjusted gross margin to between 70% and 71%. And we once again reaffirm our expectation to remain profitable. I'll now hand it over to Bryan, our Chief Operating Officer. Bryan Dechairo: Thanks, Kevin. Good morning, everyone. When children need medical care, parents like myself want an accurate diagnosis as soon as possible. That's what we do every single day at GeneDx, and we do it better than any other lab in the world because of GeneDx Infinity, the leading rare disease data set, made up of more than 2.5 million rare genetic tests, including nearly 1 million exomes and genomes and over 7 million phenotypic data points. Infinity contains an unparalleled vast and structured reservoir of potential gene variants that cause rare condition. We reported over 25,000 cases this quarter and nearly 2/3 of those were parent-child trios capturing mom and dad as comparator samples. That means this quarter alone, we actually sequenced more than 55,000 individuals. The scale of the data is fundamental. It takes at least 2 children with the same gene variation to validate a diagnosis for both kids and the greatest chance of finding another child with fewer child variant is within GeneDx Infinity. Every patient enriches Infinity's data density, creating the flywheel effect and rapidly making it more difficult for competitors to catch up to our quality, speed and accuracy across diverse populations. As we're accelerating, this year alone, we are projected to add 30% more rare disease exomes and genomes into Infinity than in the previous 24 years combined. Tapping into Infinity is our brilliant team of more than 100 MDs and PhDs and 150 genetic counselors who transform Infinity into clear trusted answers that clinicians can act on with confidence. We are also applying AI tools like our ML-powered GeneRanker Multiscore on top of GeneDx Infinity to harness the power of our data, scale our platform and increase speed and turnaround time. We already deliver answers in as soon as 48 hours in critical care settings like the NICU. But by expanding AI across our system, there's potential to turn our ultrarapid turnaround time into standard of care in every setting. Infinity, our team and our technology have helped us build a best-in-class genome, and we continue to raise the bar. We are constantly enriching our product with new genomic technologies, including medium and long-read sequencing and adding multimodal analysis beyond DNA. Partners come to GeneDx looking to validate emerging technologies and pioneer modalities that will forever change how we diagnose disease, thus creating a virtuous cycle of innovation that not only future-proofs our product leadership, but enhances our ability to serve more patients with speed, accuracy and scale over time. As showcased in the science we delivered at the ASHG conference, these programs generate data that compounds upon our massive library of more than 1,000 peer-reviewed publications, further exemplifying GeneDx position at the forefront of genomic innovation. In parallel, we are radically simplifying genomics to enable broad adoption in everyday medicine. GeneDx is the #1 genetic testing brand amongst pediatric providers, and we are evolving our customer experience to extend that lead. On average, general pediatricians have only 10 minutes with the patient. So we need to meet them where they are with 1 minute ordering and best-in-class customer experience. Catalyzed by the American Academy of Pediatrics clinical report in June, we are simplifying ordering and result interpretation for clinicians while enriching the patient and family experience. We are already still testing many of these customer experience innovations and are positioned for broader rollout in 2026 and beyond. With that, I'll hand it back to Katherine. Katherine Stueland: Thank you so much, Bryan. We talk about being a fast growth business and volumes because each one of those samples represents a family that is desperate for an accurate diagnosis. So we act with urgency and purpose because those patients and families are counting on us. There are incredible opportunities ahead as we continue the broader paradigm shift already underway across health care, supported by GeneDx Infinity, and strengthened by our network of partners. GeneDx is leading the shift to proactive personalized care that begins at first, unlocking earlier diagnoses, faster breakthroughs and healthier lives for all, and we're very proud of the work we do each and every day. So thank you. With that, I'd love to open up the line for your questions. Operator: [Operator Instructions]. And our first question for today will come from the line of Subbu Nambi of Guggenheim. Subhalaxmi Nambi: With emphasis at AAP for clinicians to take a stepwise approach to ordering beginning with chromosomal microarray, have you seen an uptick in volume there? And if so, how does that change your strategy, if at all, to sunset some of these legacy products? Katherine Stueland: Absolutely. Thanks, Subbu. As I mentioned in the script, most pediatricians are hearing about the guidelines update for the first time from us. So whether it is at AAP or as we're starting to engage with pediatricians on education, they're hearing about it from us. So I think that underscores the massive need for education and why it reaffirms our view that it will take 18 to 24 months beyond education, it's also going to require workflow. So I would say what we saw in the quarter was the vast majority of growth coming from our core, which is great. And no meaningful uptake in terms of orders from pediatricians from CMA and no notable changes on CMA or orders from general peds. But really good engagement. I would say the research that we've done with pediatricians is affirming how important our opportunity is. And it's not if they're going to order an exome or a genome, it's how they're going to order it. And is it going to be through an improved ordering process that we're building that Bryan talked about. So one minute ordering, we think, is an awesome improvement for us as we think about 2026. Doctors are consumers, too. And so they're used to fast efficient ordering. And Epic Aura is also going to be a great way. So I would say that the feedback that we're getting from the engagement that we're having with pediatricians is really positive about the fact that they are going to order testing and want to order it from us. I think the FDA designation only further reinforces why they should order from us. Infinity is another reason why they're going to order from us in terms of accuracy. So it's not -- if they're going to order, it's how, and we feel really confident it will be from GeneDx. Subhalaxmi Nambi: Kevin, this one is for you. The guide implies ASPs to go down sequentially. Is that just conservatism? Or are there any seasonal dynamics to call out? Even the margin guide implies COGS to increase sequentially? Any color you could provide. And then just a cleanup, the true-ups for 3Q '24, in this print, it says $2.2 million, but in the Q, it had said $6.3 million, if I remember it right. So just help us out here, please. Kevin Feeley: Yes. And by the way, in case I misspoke in my prepared remarks, the third quarter average reimbursement rate was over $3,800 and so representative of a lot of strength in the third quarter and continually reducing denials. So really pleased with that third quarter result over $3,800. Yes, the guide would imply that potentially the rate could bounce, bounce around some in the magnitude of about $100 down in the fourth quarter. That's really just part of that inherent expectation as we continue to open up new call points, target indication expansion there may be some experience on the outset where rates are artificially lower to start, and we have to build up some experience and show that demand to payers. And so the guide builds in some conservatism in that regard just to level set. And then in terms of true-ups throughout the year, the third quarter, nothing to call out, very minimal impact in terms of out-of-period adjustments in the third quarter. So that rate of over $3,800 is representative of what we think the third quarter activity will produce. And historically, we've averaged a couple of million dollars of those true-ups each quarter, but nothing that I would call out as extraordinary or onetime. Subhalaxmi Nambi: And Kevin, it was a pretty good margin as well this quarter. So is there any reason for us to believe that it should not be sustainable? Kevin Feeley: No. Look, we raised the guide again in terms of gross margin. And so I just wanted to leave some room there should we see some of those reimbursement rates bounce around some in the fourth quarter. So a little bit of a function of raising the guide, but keeping a bit of a conservative stance. Operator: And our next question will be coming from the line of Dan Brennan of TD Cowen. Daniel Brennan: Maybe the first one, Kevin and Katherine, can you just speak to the NICU? I know you discussed, Katherine, in your prepared remarks, you guys are on track for the number of NICUs that are be enabled with EMR. But just kind of what did you see in Q3? How do we think about implicit in the volume guide for 4Q, what the NICU contribution is? And any color on just kind of what some of the early traction and kind of feedback has been? Katherine Stueland: Yes, I'll start, and then we'll pass it over to Kevin. So the NICU, as I said, remains a really important opportunity. It is shocking to people when you say fewer than 5% of babies in the NICU get a genetic test. We have the clinical data. We've got the health economic data. We have the calculator that can convince the CFO that this is going to be good for their business. Hospitals are running businesses as well. And we have Epic Aura. We're continuing to see growth in that sector. And in fact, that it's a fast-growing part of our business. We're seeing meaningful growth in terms of same-store sales on the NICU side of things. So we definitely see it as an important contributor to our overall goal of getting an earlier possible diagnosis. And what we're also learning is that some clinicians like our portal. And so we're on track to continue to drive Epic Aura. We'll have at least 12 systems activated by the end of this year. We're seeing kind of the full test menu being ordered, which is fantastic. So we think Epic Aura continues to be a meaningful unlock for new clinicians who are working with us. And so we're going to continue to drive utilization of Epic Aura at the health system level in order to impact both outpatient and inpatient. Kevin Feeley: Yes. I mean through the third quarter and to date, volumes from the NICU are growing nicely. It's one of our fastest-growing channels, albeit from a much smaller pace. But percentage-wise, it's growing nicely. Throughout the year, we've been tracking looking to bring in an incremental 2,000 units or so in the second half of the year with most of those coming in the fourth quarter. We're going to run through the tape as much as we can through the fourth quarter. Whether or not we hit that number exact or not, more than confident that outpatient volumes will supplement and more than make up for that. I think most importantly, we're seeing growth. We're engaging with health system administrators and our thesis that the NICU market is very compelling and part of our growth story in the years to come remains very much intact. Daniel Brennan: Maybe just on the quarter itself. I mean the quarter came in better than expected. I know in past quarters, you've given some color about same-store sales growth, maybe some new indications. I know you discussed in the prepared remarks also new doctors. Just any way to frame kind of what's happening with their volumes and how that might inform kind of the implied guide for the fourth quarter with those building blocks? Kevin Feeley: The strength really driven by those core outpatient markets, continued nice step-up from even that innermost core of Expert Geneticist. So we are seeing strong signals of the continued evolution of those docs putting down single-gene tests and multi-gene panels in place of exome and genome, and we'd expect that to continue for several more quarters or years to come. So in terms of same-store sales rates at Expert Geneticist continue to see nice uptake there. And then ped neuros good account activation. We're now at a point where just over 1/3 of all ped neuros are ordering their exome and genome from us. Not all of those are mature yet in their ramp cycle. And so good growth to come from docs we've already activated. But I think what's more exciting to us in the coming quarters is just the green space to activate more docs there. The messaging we have for how we can serve that cohort, in particular, is really resonating. And so the next couple of quarters, we'll continue to see growth rates pretty similar to what we just produced from ped neuro and geneticist. And of course, what we remain most excited about is activating even more call points in the coming quarters. Daniel Brennan: And then maybe just one final follow-up. I heard you mention on the cost side. I'd love to get a little more color on kind of OpEx. I think you said the third quarter OpEx number is a good number. Maybe you can just elaborate a little bit on the OpEx spending from here. And I think you said it's going to open up growth by mid-'26. So is that when we're expecting to see a bit of like some pediatrician volume show up? So maybe just clarify the OpEx outlook and kind of and the pediatrician call point and the impact there. Kevin Feeley: Yes. We've begun to build out the commercial team that, of course, includes building a dedicated general pediatrician sales team. I think we remain anchored on that initial expectation we set of about 18 to 24 months from the time those AAP guidelines dropped in June to when we would see sort of escape velocity on incoming volume. That said, we're engaging with the pediatrician community as we speak. We attended their conference in September. And all of that has validated our thesis that the market will be real and that there will be demand out there, but we've got to build some of the tools and medical education. And so we'll, of course, be carrying some incremental commercial costs as we go through that education period. And so that's part of the step-up there. And if we look at overall R&D spend, we continue to rev our genomic assays and technology to keep the best-in-class product in the field and build out that customer experience for nonexperts because we continue to see strong ROI opportunities and pulling through volume from even more physician types out there. So the level of step-up from Q2 to Q3, you might expect something similar into the fourth quarter from Q3 to Q4, but all within an eye towards keeping the business profitable. We maintain our commitment to keep the business in the [ black ] there, so that we can continue to reinvest back into achieving industry-leading growth rates. Operator: And our next question will be coming from the line of Mark Massaro of BTIG. Mark Massaro: Congrats on the strong quarter. I wanted to start, you guys indicated, if I heard correctly, that you plan to double the size of your sales force over the coming quarters. Just looking at your website, it looks like there's over 80 job openings and over 35 to 40 in general pediatrics. Can you just give us a sense for how quickly you plan to onboard these folks? I think you indicated that you've added the first few reps. But can you just give us a sense of how large of a team this might look like, say, maybe 2 years from now? Katherine Stueland: Sure. So we have started hiring our regional sales directors. So the leaders who are coming in and who are starting to form their teams. Frankly, there's just really good talent available to us on the market right now, and we wanted to make sure that we're hiring the best of the best. And I'm thrilled to see the talent that's coming in at the RSD level. So we expect that we're going to be -- as the regional sales directors get assembled, we want to make sure that they are discerning and recruiting the best. So I expect over the next several quarters, we'll get them up to in their seats and activated. And then, of course, it requires training and ensuring that they have their merchant orders in the field. So we've said about double the size of the sales force today. And so we'll be opportunistic and continue to hire over the next several quarters. Our goal is to accelerate that adoption framework. We said 18 to 24 months. We still think that, that's accurate. But of course, we're going to push to see if we can pull that in as much as we can and all centers around that North Star of earliest possible diagnosis for as many families as possible. So we're hiring. I think looking at 2 years from now, could we grow beyond that? Possibly, but we first need to see. I'd like to get this team assembled. I'd like to have them activated. We want to get the features up and running in terms of the workflow. We know it's going to require more education, more medical affairs education. So we have a lot of work to do. So I wouldn't want to commit to building the team beyond what we've built or beyond what we're hiring for today because I think that's a really healthy investment in forward leaning growth. So hopefully, that gives you a sense of how we're thinking about it. Mark Massaro: Yes, that's great. And I wanted to ask, congrats on all the progress on the newborn side with the Florida Sunshine Genetics Act, the BEACONS NIH award and the ongoing GUARDIAN study. Recognizing this is a ways away in terms of recognizing, I would say, perhaps clinical revenue. But can you give us a sense for whether or not you think that this could be more of a near-term driver as it relates to driving clinical adoption. So I guess what I'm asking is in -- like first half of '26, would you expect to drive any clinical testing in genetic newborn screening? Or would this all be basically precursor work to create the evidence for this in the out years? Katherine Stueland: Yes. So thank you for recognizing that we have been central to all of these studies. And these have all been competitive processes. And we have put our best foot forward with each of them. I think the reason why we continue to be selected is because we've done more of this than anyone in the United States. And now with Fabric, it certainly extends our opportunity to be able to do it in a standardized way regardless of if a baby is born in Los Angeles or London. Every child deserves results that are coming from the same data set, which is Infinity. So we think that we've got a massive opportunity to be able to really lead this new era of genomic medicine. Just to give you a little bit of color on each of these programs. So obviously, with GUARDIAN, it established, I think, a responsible ethical foundation for why you can do newborn screening in a way that is going to be something that parents have demand for, 70% of parents enrolled and to be able to deliver clinically actionable information, more than 3% of babies had a clinically actionable finding. With BEACONS, which is an NIH grant, that is looking at a federal approach to how do we operationalize it. And so we're going to be gaining more and more information on how to do this in a more standardized way across multiple states. So there's inherent goodness, I think, in that. And then, of course, Sunshine really takes it out of a research setting and into the clinic. So each one of those has an important -- is playing an important role in how we get to a place where we can drive clinical samples and start getting paid for them, which is ultimately what we want to accelerate. I would say the one piece that we have yet to deliver on, but that we are working on with the various groups that are overseeing the steering committees of these programs is the health economics. We think that's going to be a critically important part of how we can actually start getting paid for it. But as we talk to state Medicaid, we're talking about outpatient health economics. We're talking about inpatient health economics, and we're talking about newborn screening and why they need to start paying attention to it. So I think Florida gives us the first opportunity to say that there is a state that has a progressive approach to genomics and child health. And we want to continue to drive kind of the competition across these other states in order to start getting paid for it. We don't anticipate that, that's going to be a '26 driver in terms of revenue. But we'd like to see how we can continue to accelerate some of these policies to get paid as soon as possible. Kevin Feeley: Yes. I think the base plan, Mark, not counting on anything material in '26, and we'll have further updates throughout 2026 and what that means to 2027 and beyond. But certainly, the momentum would say that beginning in '27 and beyond, we may start to see some nice contribution there. Mark Massaro: Okay. Fantastic. And then if I can ask one more. I am curious about the FDA path Nice to see breakthrough device designation come in from the agency. Can you give us a sense for timing here? Are you expecting to have to run any more clinical trial work or samples to prove the evidence to obtain the approval? And I recognize that some clinicians sort of like the stamp of approval from the agency, but there could potentially be pricing or ADLT implications here. So can you just maybe walk us through the rationale to pursue FDA approval? Katherine Stueland: Sure. I'll kick it off and then I'll hand over to Bryan, who's been leading the charge here. So part of the rationale as we think about the future market, I think a couple of things. One, your point about, yes, clinicians do respond to FDA and FDA-approved, FDA authorized and see it as a sign of validation. And pediatricians who are really busy looking at everything under the sun, we know that they also respond to FDA approved FDA authorized. So we think that there's a really important message to be delivered to accelerate that market. I think part of what's interesting, and this is different than in the oncology space. And as we think about the importance of FDA, in rare diseases, we're trying to open up access and open up more diagnoses, not limit them. So we don't see a real restriction coming through this designation. But I'll let Bryan comment some more on what the next steps are and how the path will look moving forward. Bryan Dechairo: Thanks, Katherine. Mark, so the breakthrough designation is really important because what it actually shows us signals is that our test is unique. The power of our Infinity database is also unique. And it shows that what we're doing today is actually helping critical patients to make decisions that there's nothing else out there to help them with today. And that's what breakthrough designation says from the FDA's recognition. It also is letting us know that FDA is working side-by-side with us in an accelerated regulatory framework to get this critical technology through the agency and to as many people around the U.S. and globally because FDA is also recognized by many markets around the U.S. as we expand ex-U.S. as well. But the nice thing I would also say is not only expedited regulatory review. We are also working by the fact that we've been around for 25 years. Our process, our test is not changing. And what we're doing is we're working with FDA to understand our legacy data and all the power of our database and how it informs the accuracy that we've already been bringing to patients. It's not a new test. It's a test that we've done for many years that we lead in that place. And so I wouldn't look at this at all as limiting access or limiting reimbursement or limiting the actual diseases that we're answering today. It will just be a partnership to accelerate the regulatory review and give that stamp of FDA approval that pediatricians look for in their medications, and they look for that in their diagnostic test as well. Operator: Our next question is coming from the line of Tycho Peterson of Jefferies. Tycho Peterson: I want to go back to the OpEx questions. I know you've had a few already. I appreciate the color on the sales hires. I guess, Kevin, maybe help us think about the ROI on some of the buckets that you flagged. And I'd love to hear a little bit more color beyond the sales hires, you talked about the first brand campaign, international product and technology investments. Maybe could you bucket those for us how meaningful they are? Kevin Feeley: Yes. In many ways, it's like choosing between your children. They're all really important to create a bit of the virtuous cycle to make us more attractive and more sticky with more and more physician types out there. And so the commercial expansion should be viewed as our confidence in the long-term market well beyond the existing physician types that we have today. We have about 3 call points today, at least primarily ped neuro, geneticist and then the NICU. You can see that expanding well beyond a dozen towards 20 over time as you slice different physician types. The largest is the general pediatrician, the 60,000 pediatricians in the U.S. There's about 25,000 of those who are ordering diagnostic tests for developmental intellectual delay, which is covered by the umbrella of those AAP guidelines. And so that's a lot of doors to knock on, and we intend to do so, bringing the best available experience to those nonexperts. As Bryan talked about, those are really busy physicians without a lot of face time. And so it's important that we build the experience, both on the front end to honor their time, but also on the back end to make them feel comfort in providing what oftentimes is devastating diagnosis to families. And so GeneDx is one of the largest employers of geneticists and genetic counselors in the country, if not the world. And so part of the long-term road map is to force multiply those resources with technology, so that nonexperts are comfortable in providing care to patients in the back end of a diagnostic result. All of those, we think, important to capture a leading market share. Today, we hold about an 80% market share of all clinical exome and genome run in the United States, whether we hold 80% or give up a few hundred basis points here or there over the next decade, we'll see, but we intend to hold a majority market share in much larger markets to come. And we think now is the time to make some of those investments. Katherine Stueland: The only thing I would add, Tycho, 2 things. One, whatever we're putting a sales rep out there, we first are following the patients, and we're also following reimbursement. So we're not going to put a rep in a territory, whether it's in the U.S. or in a region outside the U.S. unless there's ample patients for us to help and a healthy path to reimbursement. So those have been like our core principles that I think are unique to GeneDx's business model that we're committed to. Second, on the brand campaign, we are continuing to drive awareness of GeneDx because part of the problem is geneticists have known GeneDx, 8 out of 10 geneticists know us. We need to continue to raise awareness amongst general clinicians as well as parents. So parents know to ask for this testing that the technology exists today is paid for today by insurance companies and that we can get them an answer in a short period of time. So we've got a strong effort there that is only being amplified by the addition of Lisa Gurry, who was at Microsoft running marketing across different business units amongst other roles for about 25 years, and she was at Truveta as well. So she's going to help us also really amplify how we communicate the message, both to clinicians and to patients as well. Tycho Peterson: Okay. Okay. Maybe a follow-up along those lines. I guess, CapEx is also up 3x over last year. I guess, Kevin, anything to flag there? Is that the core Maryland facility? Is it fabrics? How should we think about CapEx here? Kevin Feeley: It's primarily all pulling forward some additional sequencers as we scale. Obviously, the business, we think, has achieved great economies of scale such that we're able to exponentially grow volumes without matching adding resources one for one. But as we grow, we're going to have to add more to the sequencer line. And so what you see in the third quarter, by and large, is really just some sequencer technology to keep pace with the volume. The facility itself has plenty of room in it. And yes, we're still operating the core laboratory down in Gaithersburg, Maryland. Very little from the fabric side. Tycho Peterson: Okay. And then maybe just shifting to denial rates. Can you give us a sense of where you ended the quarter? I understand your ASP commentary for the fourth quarter, but how are you thinking about denial rates and how much leverage you will have maybe first half of '26? Kevin Feeley: It's mid- to high 50% collection rate, picked up a nice basis point or 2 on that with the rate in the $3,800, really pleased with the progress of the team. I think what's most exciting is if you look at that Medicaid population in the 36 or 35 states up until next week, the 35 states with coverage outpatient, we're seeing a really high payment rate of about 80% fairly consistently, pretty clear rules to follow. And not some of the nonmedical denials that we see over the commercial insurers. But the aggregate rate have picked up some towards the high 50s in terms of collection rate. Tycho Peterson: Okay. Last point, Katherine, can we get an update on how some of the earlier launches this year have tracked cerebral palsy, IEI, et cetera? Katherine Stueland: Yes. So I think as we have continued to roll out additional new indications, and again, there's 10,000 rare diseases. So we're just going to be routinely cranking out new indications over time. I think that's part of the reason why we're seeing the strong growth. It's contributing. A lot of the symptoms are overlapping. So you might have a rep who is talking about symptoms associated with epilepsy and it turns out it's cerebral palsy. You might have a rep going in talking about cerebral palsy and it turns out that it's epilepsy. Some of these -- there are dual diagnoses. So there are very -- the new indications are certainly contributing to our growth. And I think it just speaks to the vast underutilization of testing for so many of these kids. So we'll continue to have kind of rolling indications launch. This is a core part of the way that we operate the business. Operator: And our next question will be coming from the line of David Westenberg of Piper Sandler. David Westenberg: I apologize if I asked something I've been jumping between calls. Can you give us an incremental -- a sense for the incremental revenue opportunity with the expansion of Medi-Cal and what the strategy is for securing the remaining 14 states? And how should we think about timing there? And I'll just have one more. Kevin Feeley: Yes. Look, with California being the most densely populated state, certainly a nice win. The probably next largest to come would be Massachusetts. So really exciting to see California come online next week in a couple of days. Today, a couple of thousand tests that would have run through as zeros that now we might expect to get paid for. Obviously, we have to build up some history and experience to see that. And of course, with coverage now, a more focused effort to calibrate and pull more volumes through the state. So excited about a larger opportunity ahead beyond the existing volume that we have. And then the second part of your question, Dave. Katherine Stueland: Strategy is for other states to come online from Medicare. So we've got a fantastic market access team that we only continue to bolster. We now have an East and West government affairs leader. And so they're continuing to put good data, great guidelines, health economics data in front of the state-by-state Medicaid officers. And we work with local clinicians, local parent advocates. So it's -- I would say it's a well-oiled machine, but it's within their control, not ours. So we're just getting playbook. We know they respond well, particularly to the health economic data. The reality is we are paying for these children and the absence of accurate diagnosis one way or another using our testing upfront is an opportunity to get to the right diagnosis sooner and save all of these payers. So that message is resonating. So we'll continue to drive that until we have every single state with inpatient, outpatient. And as I said earlier, then we move on a new work. So we've got our work cut out for us, but a very optimistic path ahead. David Westenberg: Sounds great. I just wanted to ask one longer-term question, and that is about pricing in the longer term. Now a lot of times you're billing for codes of exome and genome. Now saying that not all exomes and genomes are the same, and there's a constant need to integrate things like methylation, long reads, skillful informatics. Do you think that payers understand that constant innovation is necessary to enhance diagnostic yields and you're able to retain pricing over the long term? And consequently to that, when you're thinking about new competitors coming in, do you feel like the constant need for improving the test does maintain pricing long term because you will be constantly needing to enhance the assays? Katherine Stueland: Yes. Thank you, Dave. And I ask Bryan and Kevin to tag in this because I think it speaks to, one, what we're doing today beyond short read, but two, also why Infinity and that data set sets us apart from others. Bryan Dechairo: Yes. Thanks, Katherine. So on the technology front, it's really our job to continue to innovate and fund that innovation to bring the best answers to patients every day. We already have seen that with the indication expansions as we move more and more people off of panels and into genome and exome, which is what's driving the growth that we've been seeing and will continue to drive a lot of that growth. And that takes new technologies, technologies around medium and long-read sequencing, multimodal technologies that we discussed. But what's great is that the scale of our operations that we continue to scale, we are actually able to be driving down cost of goods as we bring in more and more innovations. And so you're not seeing an increase in COGS as the innovations roll out into production. You're actually seeing COGS continue to come down with those innovations with higher diagnostic yield. And really only GeneDx with our scale can deliver that quality. I'll hand it over to Kevin to talk about the reimbursement. Kevin Feeley: Yes. Let's assume that's an issue with Dave's technology. To follow up with Bryan's comments, look, it's upon us to prove the value proposition of all of our services to payers. And so we're hard at work doing so. We've always viewed the long-term durability of our rates at that average reimbursement or cash collection rate. Potentially, over time, you might see the billable rate come down, but we're still facing a dynamic today where we just produced $3,800 a test despite having a denial rate in the mid-40s. And we absolutely think that we can improve upon that in a meaningful way. And so continue to believe that, that average collection rate will be at or higher than today's levels for the foreseeable future over time. Operator: The next question will be coming from the line of Bill Bonello of Craig-Hallum. William Bonello: No, I was kind of interested in hearing where David was going to go with that conversation. So virtually everything interesting and noninteresting has already been asked. I just want to clarify one thing on the margin front with the incremental investments that you obviously need to make drive growth, drive these new opportunities. Is the thinking right now that you would at least try and sort of maintain the level of EBITDA margin where you are at? Or should we think about this more as in the interim, we may see EBITDA margin drop down a little bit as you set up for a future where it could be significantly better? Kevin Feeley: Yes. Certainly all within the framework and design of a future where it's significantly better. But we're entering an investment cycle here. Not every quarter will be different, and we'll have more to say about 2026 at our Q4 call. So -- but may see that EBITDA margin come down some, in some of these quarters as we ramp up investments and then wait to see those investments mature in terms of top line contribution. I read through the commitment as keeping it in the black and positive, but not necessarily at these levels. But certainly, we think the business model has proven the ability to accrete EPS upwards, and there will be a time and place when we focus back on doing that. But for now, there's such a large opportunity ahead. We think it's important we make some of these investments to take advantage of that. William Bonello: Okay. That's helpful. And then just the second thing, as I talk to people, there always seems to be some skepticism about the 18 to 24 months and to avoid the possibility that people get sort of overly exuberant here. Can you maybe just talk through in a little bit more detail some of the steps that need to be completed before you can really see a meaningful ramp in the general pediatrician market. You talked about the sales force, obviously, has to be recruited and trained, but you also mentioned some things that you want to do with the ordering platform and the results delivery platform. What -- maybe you can tell us a little bit more about that and just other -- some of the other basic nuts and bolts kind of work that is required to expand into a totally new segment of the market. Katherine Stueland: Yes. Thank you for that, Bill. So education is key. As I said, most of these pediatricians are learning about the guidelines update from us. We need to make it relevant for them. They're seeing a whole host of symptoms and issues coming into their clinic. And we have to do a lot to dispel some of the myths related to genomics. They think that it's going to take a long time. It's going to be confusing to understand. It's going to be hard to order that a geneticist should be the one ordering it. And when we come in and we explain to them that it is covered by insurance, we can turn around their sample within a few weeks, and we're going to provide a simplified report. It changes the way that they're thinking about things. So I would say education is key to kind of setting the record straight about what we can and cannot do. Also educating them, there's still -- there could be 12 to 24 months to begin to see a geneticist. So they may say that they would like to send a patient to a geneticist. But if you say, well, if that delays a diagnosis by 12 to 24 months, then they don't want to see that happen. They want to activate in that moment. So we're getting a lot of good, I would say, market research feedback that affirms the need to continue to educate. So education is one. Coming out of that, too, yes, we talked about workflow. Their time is precious. And so how do we take our ordering platform today and bring it to what Bryan said was a 1-minute ordering approach. So we're building that capability as well as other ways to ensure that we can unburden the pediatrician from some of the administrative work that they may have to do. So workflow is another key investment market access and ensuring that our market access team is delivering a dossier with these updated guidelines is going to be critically important. So they've started doing that. So that's the third piece. And then fourth is the sales rep and the sales rep going in and doing a lot of the kind of hand-to-hand combat in terms of education. But that's part of the reason why we're investing now. We would love to see an acceleration of that 18 to 24 months, but we know that there's a lot of work that we have to deliver on to educate and to smooth things out and make it easier for these clinicians to order. Kevin Feeley: Yes. Look, if the skepticism is that we'll beat the time frame we set out, I guess I'd characterize that as a high-quality problem. Will it be more than 0 in 2026? It will be more than 0 in 2026 in general pediatricians. But -- we want to make sure we're approaching the market in a responsible way that really sets the stage for the company's growth over the next half a decade to decade. And you only get one good first impression, and we intend to make that. William Bonello: Yes. That makes a ton of sense. And one last question just along that line, and you just may not care to answer this at this point. But in some of the areas where we've been seeing companies reach out to primary care physician markets, which obviously a lot larger, but not a ton different than the conceptually than reaching out to the pediatric market. We've seen companies with specialized tests partner with some of the larger lab companies with broad menus to make ordering of testing a little bit easier, even results delivery a little bit easier. Is that something you would consider? Katherine Stueland: Look, we're always thinking about new channels and ways to help more patients. So I wouldn't say no, we would not consider that if there's an opportunity for us to drive our business forward, help more families. Certainly, in our experience, we haven't seen that work because it tends to not be the highest priority on the part of the partner. But certainly, we would be open to it. So for now, our plan is to make sure that we can drive as much of the business forward as we can in service of more patients. So we're placing a bet on what we know works, which is our team. Bryan Dechairo: I'd also add that we've been around for 25 years and pediatricians have seen their patients who they stay with for 18 years, these kids come back to them with our reports. And when we did market research to look at what was the brand that they thought of when it came to genetics, GeneDx was the #1 brand over all other testing companies, even the ones that they use every day for other tests. And so I think with that recognition and with the understanding that our test is #1 in the space, it makes sense for us to continue with the models that we're exploring. William Bonello: Yes, makes a ton of sense. Operator: And the next question will come from the line of Kyle Mikson of Canaccord. Kyle Mikson: Congrats on the quarter. So Kevin, on the Medi-Cal impact, California is obviously large. It's densely populated, as you said. How significant of an ASP and gross margin headwind is that going to be? And then how long will that dynamic take to stabilize and then approach the higher kind of core ASP and gross margin? Kevin Feeley: Yes. Look, we're excited that Medi-Cal news, of course, will further bolster the reimbursement environment here. So it's certainly positive. So consider it a tailwind. Those are tests, at least the existing volume or tests that we're running and taking zeros on today. And starting next week, we'd expect to get paid for that volume. The couple of thousand tests, I think, would understate the long-term opportunity with now Medicaid coverage in hand, it's certainly a nice talking point for our commercial team to get out there, spread that work and begin to pull in even more volumes. We're serving all 50 states, but at various levels. And so in those states where there's good reimbursement coverage, that's where we tend to amplify sales resources to pull in more volume, and we certainly plan on doing so moving forward. Kyle Mikson: Just to clarify, so payment collection rate would go from 0 to like 80% overnight, you're kind of saying in United States? Kevin Feeley: Yes Yes. Still waiting on the ultimate price from the Medicaid administrator, but we expect it to be in line with other states that have gone live with coverage. Kyle Mikson: Okay. Sounds good. And then Katherine, on the longer-term kind of data business, Infinity AI and Multiscore, you're kind of emphasizing that recently. Could you just contextualize the competitive moat that provides and what the future kind of holds there? And then I think a follow-up to Dave's question, how critical is the longer-range sequencing data going to be to advance that asset, specifically the medium-range kind of sequencing from Roche or longer read with PacBio, et cetera? Bryan Dechairo: Yes. Let me take that 2 parts. First is the Infinity database that you just were mentioning. As I mentioned in my earlier comments, the power of that database is the fact that it's a massive reservoir of variants that we have seen in patients that have yet to be validated by a second patient. But every day, with the volume that we're having, we're validating more and more and growing that database over time. And so the AI tools that we put on top our machine learning, multiscore, it really just improves the accuracy, the speed and the efficiency that our clinical experts can go through and find those diagnosis. It gives us the highest accuracy in that space. But as you're also mentioning, those same AI tools become value add to our partners like pharma, employers and others as they go out and look at the Infinity database, look at the data that it sees and really starts to actually open up the ability to have more and more drug targets, more therapies and bring more solutions to these children with these devastating diagnoses over time. And so we really see that those AI approach is expanding into our pharma and our other partnerships around the globe. As far as our technology, the genome needs -- has some gaps in it. There's some difficult to sequence regions that we know about, which is why there are still some panels that people will order, every time that we bring in a medium read or a long read or other type of technologies, it really starts to improve the diagnostic yield for some of these other conditions, which again converts more and more folks off of panels and into the exome and genome as the best answer for all patients. And we are continuing to add more and more of these technologies for the right patients with the right phenotype. Operator: And the next question is coming from the line of Keith Hinton of Freedom Capital Markets. Keith Hinton: Just 2 quick ones. First one on the ExGen volumes. Just based on the volume split for second half of '25 that you talked about on the second quarter call, it seems like volume in the quarter slightly exceeded your internal expectations. So just can you talk a little bit about where you outperformed versus your internal expectations and maybe why you decided to leave the full year guide unchanged despite the beat? Kevin Feeley: Yes, we saw good momentum through the third quarter with accelerating volumes each month of the quarter. And so wrapped up September sort of as expected with the high point of the quarter and momentum has continued nicely. The outperformance mostly coming in the -- or primarily coming in the outpatient side of the business. Really forming that ped neuro call point. So most of the outperformance there coming from that physician type, and we continue to see a lot of space to go activate more ped neuros and bring in more volume. Overall, really pleased with the third quarter performance. Keith Hinton: Okay. Great. And then just one more question about the launch in general pediatricians, just less so about the sales force and more talking about any kind of buildup you need to do on the back end in terms of adding additional billing and revenue cycle folks to make sure the ASP doesn't drop too much, DTC spending, the parents, anything like that? Can you talk through how we should be thinking about the magnitude there? And also, is there any concern that there could be a bottleneck around genetic counseling for those patients that do have variants that come back that they need to better understand? Kevin Feeley: Part of those investments, as you rightly pointed out, are to ensure that there is no bottleneck in terms of genetic counseling resources or other support for nonexperts, both at the front end or back end of the process and translating those results to patients. And so those are core to the experience design changes that we'll be investing in. If you look at the expense ramp from Q2 to Q3, as I called out, from Q3 to Q4, I expect something in the same order of magnitude. And we'll have more to say as we frame out 2026. But again, would expect that there's ample gross margin to cover those reinvestments back in the business such that we'll keep the business profitable on an adjusted basis. Operator: Thank you. This does conclude today's Q&A session. I would now like to turn the call back over to Katherine Stueland for closing remarks. Please go ahead. Katherine Stueland: Wonderful. Well, on behalf of all the families who we serve, our customers and all of the employees at GeneDx, I just want to say thank you to our shareholders for continuing to support our long-term growth and changing health care for the better. So thank you all, and we look forward to seeing you soon over the coming days and weeks. Take care. Operator: Thank you. This does conclude today's program. Thank you all for joining. You may now disconnect.
Operator: Liliana Juárez González: Good morning, and welcome to our third quarter 2025 earnings call. Joining us today are our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our CFO, Jaime Pous. They will be discussing the company's results followed by a Q&A session. This call is for investors and analysts only. Please note that this call may include forward-looking statements under applicable securities laws. These are subject to several factors that could cause the company's results to differ materially, as described in our filings with the U.S. SEC and Mexico CMBB. These statements speak only as of the date they are made, and Volaris undertakes no obligation to update or modify them. All figures are in U.S. dollars compared to the third quarter of 2024, unless otherwise noted. And with that, I'll turn the call over to Enrique. Enrique Javier Beltranena Mejicano: Good morning, everyone. This quarter once again demonstrated that Volaris' agility and discipline continue to set us apart in a complex environment, driving tangible results. We acted nimbly and with focus, fine-tuning our network and capturing sequential improvement in demand across our core markets. Our results this quarter confirm that our commercial and operational strategies are delivering according to our flight plan. In our last earnings call, we noted that demand momentum was starting to build, and this quarter validated that trend. The recovery we anticipated for the second half is unfolding day by day as we projected. We observed stable domestic demand in a rational supply environment. Additionally, travel sentiment improved in the cross-border market, notwithstanding the geopolitical disruptions observed throughout the year. We executed where it mattered most, taking deliberate actions to strengthen profitability. The third quarter's performance in terms of unit revenue was fully in line with our expectations. The year-over-year variation in TRASM has narrowed each month, confirming that demand recovery continues to strengthen across our network. The sequential improvement is the proof statement that our strategy is delivering consistent momentum, and we believe that improved booking curves for the fourth quarter should position Volaris for a stronger 2026. In the domestic market, supply rationalization across all players continues to create a healthier balance between capacity and demand. Our load factor in the Mexican market reached 89.8%, consistent with last year's levels and reflecting a stable demand under a more rational supply environment, which supports healthier yields going forward. In the international market, we are seeing a steady recovery in cross-border demand with traffic improving month-over-month and holiday bookings already trending ahead of last year. Our 77% load factor reflects our tactical focus on optimizing yields to maximize TRASM. We remain focused on what is within our control, maintaining cost efficiency, adapting quickly, and executing with discipline. As a result, TRASM, CASM, ex-fuel, and EBITDAR margin all came slightly better than our guidance, reaffirming our ability to deliver consistent execution. Building confidence from this solid performance, we're maintaining our full-year 2025 capacity growth outlook of approximately 7% with prudent growth, unparalleled cost control, and improving demand trends towards year-end, we are reiterating an EBITDAR margin in the range of 32% to 33% for 2025. Looking ahead to 2026, we are embedding flexibility into our fleet plan and targeting ASM growth in the range of 6% to 8%, while retaining the ability to adjust a few percentage points in response to demand trends or OEM developments. This level of growth would bring us back to year-end 2023 capacity levels, underscoring that our growth remains prudent and aligned with market conditions. Our capacity decisions remain firmly anchored on customer demand and sustained profitability. I want to make it very clear to our investors. Volaris will continue to control growth with discipline fully aligned with market demand. Taking all necessary actions to efficiently reintegrate aircraft returning from engine inspections to ensure we meet this commitment. Having said that, as demand continues to recover, we are also seeing healthy supply dynamics, particularly in Mexico's domestic market. Volaris continues advancing from a position of strength with leadership in core domestic markets and a world-leading cost structure that will further improve as we reduce fleet ownership costs and gradually narrow the gap between our productive and nonproductive fleet. Sustaining differentiation requires constant evolution. We're not standing still. We're constantly adapting our ultra-low-cost carrier model to Mexico's unique dynamics, lowering barriers to traveling, enhancing service and maintaining our unwavering commitments to low costs and low fares. Leveraging Volaris' scale as Mexico's largest airline, we've built meaningful customer loyalty and driven strong repeat flying across our network. A strong example of this evolution is Guadalajara. A decade ago, this market handled a modest passenger base with limited international connectivity. Today, thanks to Volaris' expansion and market development, Volaris Guadalajara boosts nearly 100 daily departures, connecting travelers to 26 domestic and 22 international destinations. Over our 19 years of history, Volaris has proudly transported more than 90 million passengers to and from this market. Similar to what we've seen in Guadalajara, this trend is emerging across other markets that are rapidly evolving and opening new opportunities for growth, a typical emerging market phenomenon that underscores our role as a catalyst for national mobility and economic development. As our network matures, so has our customer base. We began as an airline built predominantly around VFR traffic, and we have since evolved into a more diversified customer mix. Today, roughly 40% of our passengers remain VFR, while the remainder represent a broader range of travel motivations from business to leisure to other niche segments. This evolution positions us to further strengthen our network through better frequencies, attractive schedules, and varied destinations, reinforcing Volaris as the airline of choice for both our VFR base and all passenger segments traveling from our core markets. Building on this momentum, the next phase of our model focuses on capitalizing on repeat travel and driving incremental TRASM growth across all revenue streams. As Holger will discuss, we continue launching new ancillary products and advancing network and commercial initiatives to better serve a broader customer base, all while maintaining the low-cost DNA that defines Volaris. This evolution builds on our core bus switching strategy, which remains foundational to our growth. As a result, we remain committed to serving this segment by consistently offering low fares. Leveraging our ultra-low-cost carrier model, Volaris is strategically positioned to continue improving TRASM by expanding our product suite and optimizing distribution channels. We're enhancing the customer experience across multiple fronts, refining our network strategy, streamlining boarding processes and offering enhanced seat selection options that continue to strengthen revenue diversification while preserving the cost efficiency that underpins our long-term profitability. Sequential PRASM improvement and a resilient cost structure highlight our disciplined execution. We're closing 2025 and entering into 2026 stronger, more efficient and better positioned to continue delivering value to our customers, capturing opportunities and driving sustained profitability. Volaris has proven its resilience time and again and will continue to do so. I'll now turn the call over to Holger to continue to discuss our third quarter commercial and operational performance as well as the evolution of our broader product offering in more detail. Thank you very much. Holger Blankenstein: Thank you, Enrique, and good morning, everyone. Operationally, our team delivered another quarter of strong disciplined execution. Volaris PRASM performance reflects our ability to anticipate market shifts and respond decisively, managing capacity to protect yield and maximize profitability. Volaris maintained network stability and operational flexibility throughout the quarter, effectively managing delays in aircraft deliveries and ongoing engine constraints. As a result, ASM growth reached 4.6%, coming in slightly below our guidance of approximately 6%. Overall, total third quarter load factor stood at 84.4%. The domestic load factor reached 89.8%, supported by steady demand through the summer season in a balanced supply environment. August performed particularly well, benefiting from an extended public school vacation period. Looking forward, current booking curves for the holiday season look solid. International load factor was at 77% as we actively prioritize yields overloads to optimize profitability. For the fourth quarter, as we head into the holiday high season, international traffic is tracking stronger with historical seasonality, setting the stage for improved profitability as we close the year. And as Enrique mentioned, VFR cross-border demand has been recovering sequentially. We believe we have reached an inflection point in the U.S.-Mexico transborder market with booking trends showing sustained improvement compared to last year. While we remain disciplined in our capacity deployment, this strengthening demand backdrop provides greater visibility heading into 2026. Moreover, we continue to drive robust ancillary adoption. Our average ancillary revenue per passenger for the third quarter reached $56, marking the eighth consecutive quarter above the $50 threshold. Ancillaries now consistently account for over half of total revenue, remaining a standout driver of resilience and profitability across all market conditions. This performance highlights the structural strength of our ULCC model in our markets and the sustainability of our revenue mix. The sequential TRASM improvement we anticipated last quarter materialized fully in line with our expectations. with third quarter TRASM reaching $0.0865, just ahead of our guidance and down 7.7% year-over-year, improving from the 17% and 12% declines recorded in the first and second quarters, respectively. These results confirm that the actions we took earlier in the year are delivering tangible progress. We have good momentum heading into the year-end with forward bookings showing sequential improvement and providing visibility into sustained strength and healthy demand through 2026. As these results demonstrate, Volaris has built a business model and network that allow us to flexibly and decisively capture demand where it is strongest across our markets. As our customer base becomes increasingly diversified, we continue to refine our ULCC model, lowering barriers to travel, encouraging repeat flying and broadening our customer mix while continuing to offer low base fare in our core traffic. A key pillar of this evolution is our ancillary and affinity ecosystem, which continues to grow in both scale and contribution. Our affinity portfolio, including v.club membership, v.pass monthly subscription, the annual pass and the IVex co-branded credit card together represent an increasingly relevant share of our business. Today, v.club represents a growing share of total revenues, while 1/3 of all sales through Volaris direct channels are made using our co-branded credit card. The index card is the largest co-branded credit card for any industry in Mexico. In July, we seized the growing affinity for the Volaris brand by launching our in-house loyalty program, Altitude. We are encouraged by a strong early response with membership enrollments tracking above our expectations. We see significant potential for this franchise, particularly as we integrate our co-branded credit card early next year into Altitude, allowing all card transactions to earn Altitude points. The ultimate goal is to position Volaris as the airline of choice, not only for our core VFR base, but for all customer segments traveling from our core cities across our network in Mexico's domestic market. We already serve a broad mix of travelers from small business to leisure to multipurpose passengers, alongside our loyal VFR base. Guadalajara, which Enrique mentioned, has become a strong market for the multi-reason customers, such as those who travel for leisure on some occasions and for business on others. The growing mix of repeat travelers on the flights we operate represents a structural tailwind to our average fare, ancillary sales and ultimately, margin. This evolution of demand is also unlocking new profitable opportunities for our network, capacity allocation exemplified by the addition of our Mexico City to New York route and increased route breadth from Guadalajara. We are enhancing our product and service offering to better capture the full value of these segments. Simultaneously, as the AOG situation with Pratt & Whitney stabilizes and the political and economic environment improves, we have been able to refocus our efforts on strengthening our network and ensuring industry-leading breadth and depth across our core cities, particularly in Tijuana and Guadalajara. We are also optimizing itineraries and schedules to better serve each segment, for instance, shifting certain red eye flights to more convenient time slots for business and leisure travelers. We expect the financial benefits from these adjustments to begin materializing in our TRASM results next year. In addition to our recent launched Altitude loyalty program and code shares, we continue to introduce new products and partnerships in a cost-efficient, low-complexity way that strengthens our revenue diversification. We are proud to announce recent initiatives that include expanding our presence in GDS through Sabre's new distribution capability or NDC standard. Volaris will expand its reach to Sabre's broad network of corporate and leisure travel agencies across North America and beyond. We are also ramping up marketing for Premium Plus, our blocked middle seat product for the first 2 roles. We are implementing these new revenue initiatives with a focus on the latest technology and minimizing costs and complexity. With this, we are broadening our customer base while remaining true to our ULCC DNA. Overall, we continue to prioritize low cost, operational efficiency and superior customer service. To this end, one recent innovation has been the introduction of AI agents that can immediately assist customers across multiple languages and channels, boosting our speed and efficacy and volume of interaction. Today, 79% of Volaris customer service is handled through digital channels, up from zero before the launch of our AI agent. This allows us to manage 3x more call volume while cutting service cost per interaction by nearly 70%, a clear example of how technology supports both our customer focus and cost leadership. At the same time, our NPS remains strong in the 40s, reflecting how our customers continue to recognize the total value we deliver across our flights, products and services. Looking into next year, we will continue to manage capacity with discipline, adding growth selectively across our network and leveraging our flexibility on lease extensions, redeliveries and network development to support our 6% to 8% capacity growth outlook. At the same time, the foundation we've built this year positions Volaris to continue strengthening into 2026. Supply rationalization in the domestic market is expected to support a healthier yield environment while cross-border demand continues to recover. Our initiatives to expand the customer base and grow ancillary revenues should drive higher revenue per passenger, positioning Volaris for continued profitable growth into 2026. Now I will turn the call over to Jaime to cover our third quarter 2025 financial results and full year 2025 guidance. Jaime Esteban Pous Fernandez: Thank you, Holger. Our third quarter financial results reflect our adjustments to prioritize profitability as cross-border traffic conditions gradually improved throughout the summer. Despite external headwinds, we succeeded in controlling what we can control, and we delivered on each line of guidance. Let me first turn to our P&L for the third quarter compared with the same period last year. Total operating revenues were $784 million, a 4% decrease. On the cost side, CASM was $0.079, virtually flat versus the third quarter of 2024 with an average economic fuel cost down 1% to $2.61 per gallon. CASM ex-fuel was $0.0548, aligned with our guidance and up just 2%. This result reinforces the success of our variable cost model and our effective cost management as we achieve our CASM ex-fuel guidance despite flying fewer-than-expected ASMs and encountering a peso that appreciated more than planned versus the second quarter. While a stronger peso is a benefit to Volaris' overall results, it adversely impacts our cost lines. As a reminder, fleet-related expenses such as depreciation and amortization, depreciation of right-of-use assets and maintenance continue to reflect the full fleet included grounded aircraft. In addition, as we approach a higher number of lease returns in 2026, the P&L line for aircraft and engine variable lease expenses captures the effect of the delivery accruals, which means this line item includes related maintenance for aircraft returns scheduled in the future. Current market conditions have created opportunities to acquire aircraft coming up for redelivery on attractive terms, helping reduce future redelivery expenses and extend time on the assets. Leveraging these opportunities, during the quarter, we acquired two of our formerly leased Cos, acting selectively and only where it made strategic sense. During the quarter, this also represented a benefit to the aircraft and engine variable lease expense line as it involved the cancellation of redelivery accrual related to these aircraft. Moreover, on the other operating income line, we booked sale and leaseback gains of $6.6 million related to the Airbus deliveries of three new aircraft. This line also includes our aircraft grounding compensation from Pratt & Whitney. EBITDA reached $264 million with a margin of 33.6%, aligned with the guidance provided for the quarter. EBIT was $68 million, resulting in a margin of 8.6%. The sequential tighter spread between our EBIT and EBITDA margins reflects our efforts to mitigate the impact on our P&L from engine-related AOGs. Finally, we generated a net profit of $6 million, translated into an earnings per ADS of $0.05. Moving briefly to our P&L for the first nine months of 2025. Total operating revenues were $2.2 billion. EBITDAR totaled $659 million with an EBITDA margin of 30.6%. EBIT was $35 million, representing an EBIT margin of 1.6% and net loss was $108 million. Turning now to cash flow and balance sheet data. The cash flow generated by operating activities in the third quarter was $205 million. The cash outflows used in investing and financing activities were $69 million and $130 million, respectively. Third quarter CapEx, excluding fleet predelivery payments, totaled $106 million and year-to-date stood at $195 million in line with the $250 million we guided for the full year. Volaris ended the quarter with a total liquidity position of $794 million, representing 27% of the last 12 months total operating revenues, sustaining our disciplined and conservative approach to cash management. At quarter end, our net debt-to-EBITDA ratio stood at 3.1x. And going forward, our focus remains to deleverage. Importantly, we have no planned near-term need for additional debt and have already financed all predelivery payments for aircraft scheduled for delivery through mid-2028. Our strong flexible balance sheet remains a key pillar of business. Looking ahead, we will continue to explore financing alternatives beyond traditional sale and leasebacks for a means to structurally reduce fleet ownership costs and further strengthen our capital structure, potentially switching operating for finance leases where appropriate. Looking back, the first nine months of 2025 tested our resilience amid volatility in demand. Yet we remain disciplined and focused on our core priorities. Cost control, profitability and conservative cash management, actions that preserve the strength and value of our business. I want to highlight that we originally had an ASM growth plan for around 15% during the year as guided in October 2024. We have since adjusted our plan to nearly half that level due to external circumstances while keeping CASM ex-fuel in line with our original plan. This demonstrates not only how much control we have over our cost base, but also the strength and adaptability of our ULCC model. With approximately 70% of our costs being variable or semi-fixed, we maintain a uniquely flexible structure that allow us to efficiently navigate operational headwinds and protect profitability. Now turning to engine availability and our fleet plan. As of the end of the quarter, our fleet consisted of 152 aircraft with an average age of 6.6 years and 2/3 being new models. On average, during the quarter, we had 36 engine-related aircraft groundings. Regarding our future fleet plan, we are in a favorable position of having an order book of 122 aircraft, 84% of which are A321neos with competitive economics from the group order. As mentioned, capacity growth is anchor on customer demand and sustained profitability. We have multiple levers to control growth and optimize the deployment. First, we have the option to realign our delivery schedule as we did last year through our rescheduling agreement with Airbus, supporting disciplined single-digit annual growth over the next few years. Importantly, this plan already factors in the aircraft returning to operation at the engine shop visits. Second, we have the flexibility to either extend leases on aircraft due for redelivery or when conditions and terms are favorable, acquire aircraft approaching lease expiration, enabling us to make the decision that best balance cost efficiency and strategic value. Finally, more than half of our upcoming deliveries are intended for fleet replacement. Together, our order book and staggered lease returns represent a meaningful competitive advantage, allowing us to plan growth with precision, sustain structural cost leadership and preserve the agility to adapt to market conditions. We will continue to manage our fleet plan effectively, maintaining flexibility to optimize value and support a strong cash position. Our fleet strategy continues to evolve. To this end, last month, we phased out the last A319 from operations, an aircraft type that at the time of the IPO comprised over half of our fleet. Over the past 10 years, we have continuously adapted transition and became more efficient, and we are committed to continue doing so in the decade ahead. Turning now to guidance. As Enrique and Holger explained, we continue to see demand gradually improve as we head into the holiday season. For the fourth quarter of 2025, we expect ASM growth of approximately 8% year-over-year, TRASM of around $0.093, CASM ex-fuel of approximately $0.0575 with the sequential increase reflecting the timing of heavy maintenance events and a seasonally higher proportion of international operations. And finally, an EBITDA margin of around 36%. This outlook assumes an average foreign exchange rate of around MXN 18.6 per U.S. dollar and an average U.S. Gulf Coast jet fuel price of $2.2 per gallon in the quarter. These quarterly figures are aligned with our full year 2025 outlook, which we reaffirm as follows: ASM growth of 7% year-over-year, EBITDA margin in the range of 32% to 33% and CapEx net of predelivery payments of approximately $250 million, unchanged from our prior outlook. The macros in our quarterly guidance led us to a full year average foreign exchange rate of around MXN 19.3 per dollar and average U.S. Gulf Coast jet fuel price of approximately $2.15 per gallon. Now I will turn the call over to Enrique for closing remarks. Enrique Javier Beltranena Mejicano: Thank you, Jaime. I'd like to conclude our remarks with several reminders. First and foremost, Volaris continues to prove the strength and adaptability of our ultra-low-cost carrier model. We have shown once again that we can respond to market dynamics with discipline. Throughout 2025, we have adjusted our capacity growth from around 15% to nearly half that level while keeping our CASM ex-fuel fully in line with our original plan. Currently, travel sentiment, especially in the cross-border market is improving, a clear validation that our strategy is working. These trends position Volaris well for 2026 and beyond. Regardless of external conditions, our cost leadership, flexibility and expanding product suite are enabling us to address customer needs, capture profitable growth and continue creating value. At the same time, Volaris remains focused on offering low-cost, high-value service that makes air travel more accessible to our broader set of customers, including our core bus switching VFR segment. We are also optimizing itineraries, strengthening distribution and expanding our commercial offerings to drive higher TRAS among a diversified passenger set. We believe our markets are evolving. How European low-cost air travel developed 2 decades ago with strong growth potential, expanding passenger segmentation and a clear preference for affordable high-value travel. Volaris is advancing from a position of strength, leading in our core markets with one of the most efficient cost structures in the world, one that will further improve as we reduce fleet ownership costs and close the gap between productive and nonproductive aircraft. Finally, let me be clear, we are not changing our DNA. Our proven low-cost, low complexity model continues to evolve with enhanced ancillary and loyalty offerings that attract a broader customer base, improve fare mix and strengthen long-term profitability. In short, we are disciplined. We're evolving, and we are well positioned to continue delivering sustainable value for our shareholders. Operator: [Operator Instructions] Our first question is going to come from the line of Duane Pfennigwerth with Evercore ISI Institutional Equities. Duane Pfennigwerth: You mentioned a couple of interesting things in the prepared remarks. One, international is tracking stronger than normal seasonality. And then two, that you believe we're at an inflection point in U.S. transborder. Can you just elaborate on both of those? Holger Blankenstein: Duane, this is Holger. So yes, let me talk a little bit more in detail about the U.S.-Mexico market. We're talking about an inflection point because since mid-August, our sales in the U.S.-Mexico transborder market are above last year's level. And that clearly demonstrates our ability to fine-tune our capacity, manage demand and capture the market momentum that we're seeing. If we look into the fourth quarter, the U.S.-Mexico transborder booking trends are also showing a sustained improvement compared to last year. And that's why we are quite optimistic about the fourth quarter traffic evolution, both in the domestic, but also in the transborder market. Duane Pfennigwerth: Okay. And then maybe you probably covered this and maybe I missed it, but can you tell us the number of lease returns that you expect next year, how many aircraft will go back? How does that compare to this year? And I don't know if there's any good way to kind of net that expense relative to the reimbursement that you're getting from Pratt? Like how do we think about the net of lease return expense and reimbursement in '25 and '26? Jaime Esteban Pous Fernandez: Duane, this is Jaime. In terms of redeliveries of plan, next year, we're budgeting 17 redeliveries versus 7 that happened this year. So, it's a high number of deliveries. I would like you to focus there are many pieces related to aircraft deliveries, engine returns and redeliveries. So rather than focusing on just focus on our full year growth it is important that our priority, as Enrique mentioned, is to narrow the gap between productive and nonproductive fleet while ensuring that we deploy capacity to a market that is consistent with customer demand, all while maintaining the flexibility to adjust capacity up or down as well. Operator: [Operator Instructions] Our next question will be from the line of Thomas Fitzgerald with TD Cowen. Thomas Fitzgerald: A lot of good stuff in the deck. I was wondering if you could dig into Slide 8 a little bit more and how we should think about the potential RASM uplift over the coming years as those initiatives ramp Holger Blankenstein: So, Thomas Fitzgerald, this is Holger again. So, we've quantified the potential for each of the products that we saw on Slide 8, and we expect a positive year-over-year impact on TRASM of these products in 2026. We expect that our commercial initiatives that you saw will begin contributing financially in 2026, and we will communicate the specific targets on all of those products as the adoption of those products scale. These initiatives that you saw there are going to be incorporated in our TRASM guidance for the next year for 2026 when we provide guidance in the next earnings call. Thomas Fitzgerald: And then I'm just kind of curious, as your customer mix diversifies and you take on more SME traffic, is there any investment or maybe it's immaterial, but just that you have to do for your cabin crew just on the soft product and maybe people who especially as you take in volume from some of your interline partners? Holger Blankenstein: So Tom, it is very important to mention that we are implementing the broadening of our customer base and target customers while maintaining a low cost, low complexity model. So you should not see any meaningful impact in our costs and in our complexity of the onboard product, for example, as we implement these products. We are broadening our target customer base, for example, through implementing different distribution channels like the GE, for example. We're going to diversify our revenue base, but we will maintain our low-cost, low complexity model. Operator: Our next question will come from the line of Michael Linenberg with Deutsche Bank. Shannon Doherty: This is Shannon Doherty on for Mike. Thanks for taking my question. Enrique, you alluded to some growth trends or the growth trends, I should say, that you saw out of Guadalajara emerging in other markets. Can you provide us with some more examples? Enrique Javier Beltranena Mejicano: Sure. I think when you look at our bus fare customer base, I mean, that's a segment that grows by far much more rapidly and much more different than any other business traffic that we can see, for example, in the U.S., okay? You can also see how our capacity to penetrate the market has improved our number of passengers that are using the airlines, okay? In the last years, we have developed more than 10 million passengers that have become first-time flyers, and that's really important. So that makes a dramatic difference versus a mature market. Shannon Doherty: And maybe more generally, what do you guys think is driving like the improved travel sentiment in the cross-border market? Like and how is demand in other Central American markets to the U.S.? Holger Blankenstein: This is Holger. So we actually did a survey of our customers, both in the U.S. and Mexico, and they target two main factors for not increasing travel more quickly in the first half of the year. We did it entering the summer season. The first was economic uncertainty, which is about 50% of the responses. And that economic uncertainty is improving significantly as macro conditions in both countries are strengthening in the second half of the year. So that's the reason for not traveling has evaporated and is improving significantly. The second concern was related to migration policies. People were worried about traveling and leaving the U.S. or going to the U.S. And in the public discourse, we are noting that, that has evolved from a broad concern about all immigrants to a more focused conversation around individual and legal violations of immigration policies in the U.S. and that really has reduced the perceived apprehensions among our customer base. So we're seeing more willingness to travel in the transborder market in the second half of the year and specifically in the fourth quarter, where we're seeing solid booking curves in the transborder market. And that brings us to the guided TRASM, which is basically at the levels of last year 2024. Just to maybe close this point off, travel in the transporter market was delayed in our opinion at the beginning of the year and is now catching up as people want to visit their friends and family in Mexico or in the U.S. Operator: Our next question comes from the line of Rogério Araújo with Bank of America. Rogério Araújo: Congratulations on the results. I have a couple here on fleet. First, you said 17, one seven aircraft returned. Is that correct? And how many you expect to be delivered by '26? Also on that matter, what is the number of expected grounded aircraft throughout 2026? I understand you have 36 now. And lastly, how to think the net CapEx for '26 compared to this $250 million in '25? Jaime Esteban Pous Fernandez: This is Jaime. And Jose back into our fleet plan. And let me try to be really on a summary. Our goal next year is to reduce significantly the gap between productive and nonproductive fleet. And it has many moving pieces. I want to start with the AOGs. We see an improvement in AOGs. Remember, this year, we expect and year-to-date, we have 36 average planes. We expect that, that will improve to around 32, 33 next year with the highest point of the AOGs initially in January and significantly going down by year-end. The second [indiscernible] is, is deliver strong Airbus, we’re expecting around 12 to 13 deliveries of new aircraft from Airbus still we need to confirm that with Airbus and we will give detailed guidance in the next earnings call. And finally, with delivery, we are budgeting 17 aircraft to be redeliver. All of those details, we are planning, you should think about ASM growth next year, as Enrique mentioned and reiterated in the range of 6% to 8%, which factors all of the above that I mentioned. Compensation [indiscernible] multiyear agreement remains to 2028, but we are seeing an improvement and we are planning with the flexibility to adapt our demand to customer demand and market condition with the capitalization of flexibility in our market. And the last question was with respect to CapEx. This year guidance is still the same $250 million. Expect that next year is going to be higher than this year because we are investing in the maintenance related to engines returns and the delivery of aircraft. Enrique Javier Beltranena Mejicano: I just want to say again, I mean, our numbers of growth for next year are all inclusive. They include the returns of the engines from Pratt, the deliveries from Airbus, replacement of aircraft from the actual fleet. They include the deliveries, they include everything, all of the above. It's included in the number. So please think about that number as a total number of growth and not the conflict with capacity into the market. Operator: Our next question will come from the line of Filipe Nielsen with Citi. Filipe Ferreira Nielsen: Congrats on the results. My question is regarding CASM ex-fuel. You guided $0.0575 [ph]. You mentioned about the timing of having maintenance putting this a little bit higher than expected. I just wanted to understand how this should evolve? Is it a one-off in fourth quarter related to maintenance? Or is it something that will continue throughout 2026? How are you looking at this trend and not only at the quarter? Just trying to understand the cost impact here. Jaime Esteban Pous Fernandez: This is Jaime. I'm going to start with the 4Q. The sequential increase reflects the normal seasonality in specific cost lines that higher in the 4Q happened last year. It represents higher landing and navigation expenses due to the increased mix of international operations in the 4Q. We also have addition related to deliver maintenance events, which temporarily elevated unit cost are not structural impact aligned with our planned maintenance schedule. And as I mentioned, we will provide full guidance for 2026 in the next earnings calls. You are going to see a higher CAS than this year related to the investment in maintenance and delivery to have the fleet aligned with our growth plans. Operator: Our next question comes from the line of Jens Spiess with Morgan Stanley. Jens Spiess: So on the point of groundings and being the peak at the beginning of next year and then gradually improving, by year-end, how many aircraft do you expect to be grounded? And then when do you expect groundings to reach 0? Is it by mid-'27, by the end of '27? Like what's your visibility on that? Enrique Javier Beltranena Mejicano: Sorry, I'm going to repeat it. We expect that by year-end of 2026, the average number of AOGs will be around 25 to 27. And we believe that we are going to be with no material impact on AOGs related to engines by the end of 2027. End of 2020. Jens Spiess: Okay. Perfect. And if I may, just one additional one. Obviously, you already gave a lot of details on ASM growth for next year and all the variables. But clearly, you have a lot of flexibility given the redeliveries, the 17 redeliveries you have next year. So if demand is much better than expected, by how much could you potentially increase ASM growth? And conversely, if demand is weak by how much could you reduce it potentially? Enrique Javier Beltranena Mejicano: By around 2 percentage points, either up or down. Operator: Our next question will come from the line of Guilherme Mendez with JPMorgan. Guilherme Mendes: Just a quick follow-up. Holger, you mentioned about an overall rational supply on the market, so meaning rational competition. Just wanted to hear your thoughts on how should we think about competition in '26. There's additional capacity coming online from you and from some of your peers, if you do expect the current rational and disciplined competitive environment to remain in 2026? Holger Blankenstein: Sure. This is Holger. So we have some visibility on the domestic market. For us, in the Mexican domestic market, we are budgeting low to mid-single-digit growth for 2026. And we will provide more granularity on our growth rate in the domestic market when we provide the full year guidance in our next earnings call. If we look at the competition, we have visibility on the published schedules of our domestic competitors and industry growth is likely to remain rational from what we can see right now. And that obviously supports a higher and healthier fare environment for us. We are seeing now that competitors have been following a meaningful capacity rationalization to bring capacity in line with domestic demand. And we see that trend continuing into 2026, which will lead to a more balanced and healthy domestic supply-demand environment. Operator: Our next question comes from the line of Alberto Valerio with UBS. Alberto Valerio: Just a follow-up about the groundings. So you expect to normalize it in the end of 2027, 2028. Am I right about this? And about cycles, how have been the cycle of engines and also the deliveries of Airbus, when we should see some normalization on this? And if I may, another one is about one line on the results that is the variable leases come a little bit below what we were expecting, what we were estimating. Should we keep that for the future? This is more related to engines. Is that correct? If you can give some color on that? Enrique Javier Beltranena Mejicano: As mentioned, we expect a positive trend on engines from the shops. We rescheduled with Airbus. So this year, the deliveries are quite aligned on what we plan some minor delays or not material delays. We expect that to continue next year. We have not because we schedule year-end. And we are planning accordingly with that with a lot of flexibility with the different levers that we have in our fleet plan between the deliveries of planes coming back from the shop. We are optimistic and planning around that. If you're right, we should be out of the material impact by 2027 with some minor in terms of absolute 2028. And compensation over[Indiscernible] 2028 in contrast. Operator: Our next question comes from the line of Abraham Fuentes Salinas with Banco Santander. Abraham Fuentes Salinas: During this quarter, we see an improvement in the aircraft and engine rent expense. So I wonder if you can give us a little more color what you expect during 2026 in terms of ASM. Enrique Javier Beltranena Mejicano: Can you repeat the question was too low. Abraham Fuentes Salinas: Yes, of course. We saw an improvement during this quarter in aircraft and engine rent expense. So I wonder if you can give us a little more color what to expect for 2026 measure as ASM. Enrique Javier Beltranena Mejicano: I think the benefit in this quarter is related to the conversion of operating leases into finance leases. So that was the viable aircraft and lease line has the benefit in this quarter. As we continue next year and make decisions in the deliveries, we may explore, as we mentioned during the call in order to lower the total ownership cost of the fleet. And next year, we think that, that number should be a little below what we had this year and more aligned to 2024. Operator: This concludes today's question-and-answer session and I would like to invite management to proceed with his closing remarks. Please go ahead, sir. Enrique Javier Beltranena Mejicano: This is Enrique. I would like to finish the call saying that we continue to demonstrate the strength and adaptability of our ultra-low-cost carrier model and our command over our markets and cost structure. I want also to say again that regardless of the external environment, our cost leadership flexibility and the capacity to expand our product suite ensures that we address customer preference. I also want to say again that we'll continue to control growth with discipline, and that includes everything. It includes all the pieces of the question and it's fully aligned with market demand. It is also important that we will continue prioritizing low cost with high-value service to increase access to air travel for a broader set of customers, and it is important to say that we will continue with leadership in core domestic markets and a world-leading cost structure. Having said that, I would like to thank you, everybody, for being in the call, and thank you to our family of ambassadors as well as our Board of Directors, investors, partners, lessors and suppliers for their support. I look forward to speaking to you all again next year. Thank you very much. Operator: This concludes the Volaris conference call today. Thank you very much for your participation, and have a nice day.
Operator: Good afternoon, and welcome to the Edison International Third Quarter 2025 Financial Teleconference. My name is Denise, and I will be your operator today. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference. Sam Ramraj: Thank you, Denise, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also on the call are other members of the management team. Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, prepared remarks from Pedro and Maria and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation. During this call, we'll make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to 1 question and 1 follow-up. I will now turn the call over to Pedro. Pedro Pizarro: Thanks a lot, Sam. Good afternoon, everybody. Today, Edison International reported third quarter core earnings per share of $2.34 compared to $1.51 a year ago. This comparison is not meaningful because during the quarter, SCE recorded a true-up for the 2025 General Rate Case final decision, which is retroactive to January 1. Reflecting the year-to-date performance and our outlook for the remainder of the year, including the costs for potential early refinancing activities later this year, we are narrowing our 2025 core EPS guidance range to $5.95 to $6.20. We have also refreshed our projections through 2028 and are reaffirming our 5% to 7% core EPS growth target. Maria will discuss our guidance and financial performance in more detail. California's legislative session concluded with the passage of SB 254, a constructive and important step to support IOU customers, address wildfire risk and boost the financial stability of the state's investor-owned utilities. The bill passed with near unanimous support, and that's a clear signal that policymakers understand the urgency of the issue and the need for durable solutions. SB 254 creates an up to $18 billion continuation account jointly funded by IOUs and customers to provide a backstop for wildfires ignited after September 19, 2025. Importantly, it enhances the existing framework by basing the liability cap on the year of ignition rather than the year of disallowance, providing certainty for stakeholders. It also allows for the securitization of wildfire claims payments for 2025 wildfires ignited between January 1 and September 19, if the initial wildfire fund is exhausted, which would apply to the Eaton Fire if needed. These provisions are constructive for potential cost recovery and help utilities like SCE continue to invest in safety and reliability while maintaining affordability for customers. We have provided a summary of SB 254 on Page 3. SB 254 calls for an important second phase, a comprehensive report due in April 2026 that will evaluate long-term reforms to equitably socialize the risks and costs of climate-driven natural disasters. The law recognizes that customers and shareholders continuing to bear the burden of these events is unsustainable. This second phase is important to evaluate the broad scope of potential reforms that are necessary for a sustainable model. As you will see on Page 4, the 10 points outlined in SB 254 can be grouped into 3 categories: first, reducing the risk of ignitions and harm from wildfires; second, affording fair compensation for people affected by wildfires, including avoiding disparate treatment of communities. Third, allocating the risk and costs of natural catastrophes across stakeholders equitably. We are encouraged by this direction and by the executive order that Governor Newsom signed on September 30 to expedite the state's all-in response. We look forward to continuing to work with legislators and stakeholders to shape a more sustainable and equitable framework. We are confident that we will see meaningful legislative action next year. Turning to the Eaton Fire. The investigations remain ongoing. As we have said before, SCE is not aware of evidence pointing to another possible source of ignition. Absent additional evidence, SCE believes that it is likely that its equipment could be found to have been associated with the ignition. During the third quarter, SCE entered into a settlement with an insurance claimant agreeing to pay $0.52 for each dollar paid to its policyholders. Note that this is a single data point and does not provide sufficient information to develop an estimate of the total potential losses associated with the Eaton Fire. The Wildfire Fund administrator has confirmed that Eaton is a covered wildfire for the purposes of accessing the fund. Based on the information we have reviewed thus far, we remain confident that SCE would make a good faith showing that its conduct with respect to its transmission facilities in the Eaton Canyon area was consistent with actions of a reasonable utility. That said, we continue to take proactive steps to support community members. Shortly, SCE will launch the wildfire recovery compensation program for the Eaton Fire. This voluntary program is designed to provide eligible individuals and businesses impacted by the fire, direct payments to resolve claims quickly. This allows communities to focus on recovery earlier while minimizing the overall cost and outflows from the Wildfire Fund by reducing escalation, interest expense and legal fees. Moving to the regulatory front. The key message is that we've made significant progress across multiple proceedings this year, further derisking our financial outlook and bolstering our ability to deliver for customers and investors. Earlier this year, the CPUC approved the TKM Settlement, authorizing recovery of approximately $1.6 billion in wildfire-related costs. More recently, SCE reached a settlement agreement with intervenors in the Woolsey fire proceeding as highlighted on Page 5. This marks a significant milestone and puts the company one step closer toward fully resolving the 2017 and 2018 legacy events. The agreement with authorized recovery of approximately $2 billion of the $5.6 billion requested subject to CPUC approval. This structure supports long-term affordability for customers by reducing excess financing costs and improving credit metrics, specifically up to a 90 basis point benefit to FFO to debt and an annualized interest expense benefit of approximately $0.18 per share. Combined with the TKM Settlement, this will result in recovery of 43% or about $3.6 billion of the total cost above insurance and FERC recovery. We anticipate a final decision from the CPUC toward the end of this year or early next year. And assuming CPUC approval, we expect to receive proceeds from securitization mid-2026. Details of both proceedings can be found on Page 6. SCE also received a final decision on its 2025 General Rate Case in September, as highlighted on Page 7. The decision authorizes 2025 base revenue of $9.7 billion and support significant investments in wildfire mitigation, safety and reliability and upgrades for increased load growth while incorporating affordability considerations for customers. It also authorizes average revenue increases of about $500 million per year for 2026 to 2028, subject to adjustment based on inflation. On capital expenditures, the final decision authorizes 91% of SCE's request. Importantly, the commissioners highlighted that these investments in the grid provide long-lasting value to customers, especially given the need to protect against wildfires, advance electrification and ensure a ready, reliable grid for the clean energy future. On wildfire mitigation, SCE has now deployed more than 6,800 miles of covered conductor. I'm pleased to share that by the end of the year, SCE will have hardened nearly 90% or more than 14,000 miles of its total distribution lines in high fire risk areas. The GRC authorizes installing another 1,650 miles of covered conductor for wildfire mitigation as well as 212 miles of targeted undergrounding. Similar to covered conductor, which continues to be an important risk mitigation tool, SCE believes that its targeted undergrounding program will also provide substantial benefits to further safeguard its customers and communities. Public safety power shutoffs remain a critical tool in wildfire prevention. This year's updates include revised criteria and wind speed thresholds, expanded circuit coverage and broader boundaries around high fire risk areas. Additionally, SCE has now enabled fast curve settings on approximately 93% of its 1,100 distribution circuits in high fire risk areas, further reducing ignition risk and improving system safety. As we've shared before, SCE's system average rate continues to be the lowest among the major IOUs in the state. Importantly, the utility expects this will grow at an inflation-like level on average through 2028. Incorporating the GRC approval, TKM Settlement and pending Woolsey settlement, we continue to expect that CAGR to be in the range of 2% to 3%. In closing, I want to thank our team members for their continued dedication and resilience. And I also want to thank our investors for your support and our customers for the opportunity to serve them. This has been a year of meaningful progress on the legislative front, in the regulatory arena and in our operational execution. We've taken important steps to resolve legacy wildfire liabilities, strengthen our financial position and advance the utility's mission to safely deliver reliable, affordable and clean energy. But we also recognize that this has been a challenging time for so many of the communities we serve, particularly those impacted by wildfires. We remain deeply committed to learning from our experiences and supporting recovery and resilience to rebuild stronger. We are grateful for the opportunity to partner with customers, local leaders and other stakeholders to build a safer and more sustainable energy future. Well, we look forward to continuing our dialogue with many of you at the EEI Financial Conference in November. We'll see you there. And with that, Maria, let me turn it over to you for your financial report. Maria Rigatti: Good afternoon, and thanks, Pedro. I will echo your comments that we have made significant progress across multiple proceedings this year, further derisking our financial outlook and bolstering our ability to deliver for customers and investors. With the GRC final decision in hand, we now have increased certainty and visibility into the work SCE will do to meet customers' needs and have refreshed our projections through 2028. Consequently, we are reaffirming our 5% to 7% core EPS growth target, which I will discuss in detail. Starting with third quarter 2025 results, EIX delivered core EPS of $2.34, up from $1.51 a year ago. The year-over-year variance analysis is on Page 8. As Pedro noted, this comparison is not meaningful because SCE recorded a true-up of approximately $0.55 for the 2025 GRC final decision, which is retroactive to January 1. Based on strong year-to-date performance and our outlook for the rest of the year, we are narrowing our 2025 core EPS guidance to $5.95 to $6.20, as you will see on Page 9. This range now includes the potential for $0.10 per share of costs associated with refinancings tied to the TKM and Woolsey cost recoveries. As previously mentioned, our 2025 guidance does not include the potential earnings associated with the Woolsey settlement. SCE is awaiting a proposed decision on the settlement and a final decision could be issued later this year or early next. We want to be clear that for measuring our core EPS growth through 2028, the 2025 baseline of $5.84 is unchanged from prior disclosure. Now I would like to discuss our refreshed projections, which we have summarized on Page 10. Additionally, on Pages 14 through 17, we put together a comprehensive list of frequently asked questions on guidance-related topics for background and easy reference, which we hope you will find helpful. Please turn to Page 11, which lays out our 4-year capital plan of $28 billion to $29 billion. This compares to our previous forecast for the same period of $27 billion to $32 billion. The plan incorporates substantial investments in infrastructure replacement, electrification and system resiliency approved in SCE's GRC. Additionally, the plan now incorporates the utility's next-gen ERP project and other updates across the business, including Wildfire Mitigation capital that SCE will securitize under SB 254. We also continue to see the need for substantial grid investments beyond our forecast period. We've highlighted on the right side of the page 2 examples of this, with much of that spending occurring beyond 2028. Driven by the capital plan, we project rate base growth of 7% to 8%, as shown on Page 12. This growth is after incorporating the expected Wildfire Mitigation capital expenditures that will not earn an equity return under SB 254. Moving on to our long-term core EPS growth target, as shown on Page 13, we continue to expect 2028 core EPS of $6.74 to $7.14. You will find additional information on this topic on Pages 14 and 15. Our confidence in delivering on our commitments is underpinned by the clarity we have from the GRC and our ability to manage our operations for the benefit of all stakeholders. Let me now turn to our financing strategy and balance sheet strength. Over the last several years, we have executed efficient financing to support our target 15% to 17% FFO to debt framework. We have used hybrid securities to generate equity content when needed, avoiding substantial common equity issuance to prefund our capital plans. By year-end, SCE expects to receive approximately $1.6 billion in securitization proceeds from the TKM settlement. Following Woolsey settlement approval, the utility plans to request a financing order to securitize an additional $2 billion. These actions further strengthen our credit metrics and financing flexibility for funding future rate base and dividend growth. Altogether, this leaves us very well placed among our peers on 2 key credit metrics. EIX has one of the strongest consolidated FFO to debt ratios projected by S&P. Also, we have one of the lowest levels of parent company debt as a percentage of total debt. Page 13 details our 2025 through 2028 financing plan. Let me highlight that this plan does not require any equity issuance. This expectation is supported by the TKM and Woolsey recoveries. Further, as you know, the Wildfire Fund provides reimbursement for claims paid above an IOU's $1 billion of insurance. Additionally, for buyers between January 1 and September 19, 2025, the recently passed SB 254 allows the utility to issue securitized bonds prior to a reasonableness review to fund claims payments should the initial fund be exhausted. While we currently cannot estimate the probable losses associated with the Eaton Fire, the constructive California liquidity and prudency framework means neither equity nor debt would need to be issued in connection with that event. Following the passage of SB 254, the rating agencies issued updates on the company. Moody's affirmed its ratings for both EIX and SCE with a stable outlook. Fitch removed its rating watch negative from both companies, citing SB 254 as a meaningful policy shift. While S&P downgraded EIX and SCE by 1 notch, we believe this view does not fully recognize the legislative intent or commentary from the Governor's office. Importantly, S&P still expects our credit metrics to remain within our target with upside potential from a constructive Woolsey outcome. At the parent company, we are working on how to best address the preferred equity issuances that have upcoming rate resets. We are looking at cost-efficient options for early refinancing, which will bring forward both the costs and the benefits of the transaction. The core benefit is the optimization and clarity of financing costs before the rate reset, which further derisks our financial outlook. We have considered the potential cost of this optimization in our narrowed 2025 core EPS guidance and see the long-term benefits outweighing the near-term costs. I would like to update you on another positive trend we are seeing, load growth. As we have laid out on Page 18, SCE remains well positioned to meet the diverse and accelerating demand across its service area. Our team continues to anticipate significant investments in infrastructure upgrades to meet this growing demand, many of which were included in SCE's recent GRC approval. Importantly, our demand forecast is not reliant on a single sector. For one, SCE is at the heart of California's EV adoption, helping the state maintain its national leadership in transportation electrification. In fact, the state recently announced a record 29% of new cars purchased in Q3 2025 for zero-emission vehicles. We're also expecting growth in new housing developments and increases in commercial and industrial consumption. To sum up, we are expecting a near-term load growth CAGR of up to 3%. In the long-term, we project electricity sales will nearly double over the next 2 decades. I will conclude by saying that the company has made significant progress achieving certainty across numerous regulatory proceedings this year, allowing us to confidently reaffirm our long-term guidance. It underscores our ability to execute on our commitments and deliver for the customers and communities SCE serves and for our investors. That concludes my remarks, and I'll turn it back to Sam. Sam Ramraj: Denise, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow-up. So everyone in line has the opportunity to ask questions. Operator: [Operator Instructions] The first question is coming from Nicholas Campanella with Barclays. Nicholas Campanella: I just wanted to ask, you brought up the $0.10 for the equity preferred as it relates to the '25 guide. So can you just kind of confirm, is this -- is the $0.10 just a charge for both the '26 and '27 maturities? Or is that still kind of up for debate? And then maybe just expand on what some of your options are for addressing that? Obviously, there's no equity coming to replace this, if I'm reading it correctly. Maria Rigatti: Sure. Right. So just to recap what you said, we have 2 preferred equity series with a rate reset in March of '26 and then again in March of '27. We issued those back in 2021, and that was to address sort of the claims that we were paying related to TKM and Woolsey. And now that we have the TKM settlement approved and the securitization coming later this year as well as the Woolsey settlement pending approval, which will also be securitized, we're taking a look at all of our options at the holding company. So we are still evaluating the options, but we think that maybe taking some steps earlier rather than waiting for those March '26, March '27 reset dates would be beneficial overall for the company. Any time we do a refinancing, there will be a write-off of deferred transaction costs, et cetera. And so that's what the $0.10 represents. That would happen regardless of whether we do it early or whether we did it at the actual reset date. But the options that we're looking at are pretty broad, and we'll have more to come on that. Nicholas Campanella: Okay. Okay. I appreciate that. And then I guess as it relates to Eaton, you've launched this kind of recovery compensation program. maybe you can kind of just discuss what the participation level has been in that? And does that allow you to have kind of a view on claims in more of an expedited manner? Is that something that we can maybe expect with the 10-K? And I understand that there's very clear new protections in place from SB 254, which are helpful. But just when do you think that we'll have a low-range estimate for what the liability against the fund would be? Pedro Pizarro: Yes. Nick, let me jump in here. So we're not quite where you -- I think we are yet. We haven't launched the program yet. We've announced that it's coming. We went through a process of releasing a draft protocol in September and then opening it up to feedback from the community. And so as I said in my remarks, we expect to be able to finalize the program and launch it shortly. And so regarding though, when that might lead or if it might lead to an estimate on losses, first, as you point out, we'll need to see what the participation rate is. I think that there's -- we're doing everything we can, and we have engaged really the world's best outside experts on this, Ken Feinberg and Camille Biros who were, among other things, the architects of the 9/11 fund. So they've been providing great advice on this. We've gotten good input from the community. We're considering a number of potential changes beyond what we had released in draft form. But I do want to make sure I temper expectations. This is -- this will be a long process. And it's only one of the components of potential losses in a complex event like Eaton. So you saw that, I mentioned in my remarks already that we did the 1 SoBro settlement. It was meaningful, but it's only one. And so we're not able to estimate even SoBro losses just from that one data point. And so similarly, we'll have to see what kind of participation rate we get. And at some point, does it become material enough that it maybe allows to start getting our hands around that portion of losses. But of course, there are other kinds of losses in this. So a very long way of saying that we're still kind of where we were last quarter. We don't yet have an estimate of when we'll have an estimate, Nick. Maria Rigatti: And Nick, maybe just picking up on a couple of the other things you raised. The direct claims program is, of course, a good way to be good stewards of the fund. But you pointed directly to SB 254 protections that were introduced. So building on the protections of AB 1054, there are a couple of things that we think can apply to Eaton and do that in a constructive manner. First, the date at which the liability cap is calculated is the point of ignition. So we know with clarity what the cap is for Eaton, which is approximately $4 billion based on our current rate base. The second piece relates to the securitization that I mentioned earlier for fires that occur between January 1 and the effective date of the legislation to the extent there is a need to go above the fund. And again, we don't know what the estimate is for Eaton. The company can securitize those claims before going in for a reasonableness review with the CPUC. That outcome is good for customers because it minimizes costs and interest expense. It's also good for the utility because it wouldn't need to issue any debt at that point or equity to fund the claims payments. Operator: The next question comes from Gregg Orrill with UBS. Gregg Orrill: Thank you for the update on guidance. Just a clarification. Is it -- is there a part within the growth rate range that you feel you're trending toward now, the upper half or the lower half or whatever or maybe things that -- I know you provided some disclosure on what would take you within that range, but any other thoughts on that would be helpful. Maria Rigatti: So Greg, we are very comfortable and confident in the 5% to 7% EPS growth. Obviously, we run a lot of scenarios when we take a look at that, and there are many variables that can change either because it's a 4-year period or because this is a complex business. I would just say that we did incorporate a lot of new information into our outlook. We have the GRC in hand. We had multiple regulatory proceedings over the past year around recovery of memo accounts that also contribute to capital. We had the TKM settlement. We have the securitization that's coming up. The Woolsey settlement that's pending approval. With all of that, we put that together in the mix. And I think the 3 key takeaways for me are not just reaffirming the 5% to 7% EPS CAGR, but also that we have significantly more clarity around that forecast and we have a stronger balance sheet. So we're still 5% to 7% is where we are, but I think there's a lot more behind that, that is very positive. Operator: The next question comes from Shahriar Pourreza with Wells Fargo. Shahriar Pourreza: Pedro, I know there's -- obviously, there's clearly some improvement in the wildfire constructs from Phase 1, even though they kind of kicked the can down the road and some of the key items there. I guess in terms of Phase 2 process, what do you see as viable for limiting EIX's liability? And what will be the data points that you anticipate going into the legislative session? Like is this going to be a public process? Is this going to be a private process? How do we track it? Pedro Pizarro: Yes. Thanks, Shahriar. Good set of questions. And as I mentioned in my remarks, we are very encouraged by the legislature not only having taken the steps that Maria recapped just now on Phase 1, but setting up this Phase 2 process. It's still being shaped, but the California Earthquake Authority as the lead entity here has been pretty articulated already in some key parts of the process. They've given the time line, right, for submission of abstracts across the various topics, that's November 3, is the deadline for those abstracts. And then they have a deadline of December 12 for the full papers that parties can submit. They have said already that they plan to make all of those submissions, both the abstracts and the papers public as they come in. So I think that's really helpful because it will give really nice transparency to everybody in terms of what various stakeholders are submitting and how they're thinking about things. For our part, we continue to work very closely with our colleagues at the other investor-owned utilities, and we'll also be looking to engage with a broader set of stakeholders as we develop our ideas or compare notes with their ideas. We also understand that CEA will have perhaps still being defined a little bit, but some process for open discussions, meetings, et cetera, between the submission of papers and the April 1 deadline for the final report. It was also encouraging, I touched on this very briefly in my remarks, but it's very encouraging to see Governor Newsom turn to the various agencies with this executive order and essentially give out homework assignments for the expectations on how each agency would be contributing to specific items within the 10 areas that were outlined by SB 254 that I covered in my remarks as well. So it's really nice to see not only the CEA putting out their process, but the Governor then turning to the agencies. And for some of the agencies that he can direct, actually gave them direction for the agencies that are more constitutional where he can only provide advice or suggestions, he suggested focus areas for each of those. We'll see what comes out in the report, although we're encouraged, frankly, by this responsibility, the leadership of it, having placed by SB 254 in the hands of the California Earthquake Authority, very professional entity. They have a solid understanding of broad natural catastrophes and risks, starting with their original mission around earthquake. But as you know, they've been the Wildfire Fund administrator since the inception of the fund through AB 1054 in 2019. So they also have deep experience now in terms of the wildfire topic that gives us a lot of comfort that there's good professional management, and they have the ability and we understand that they're in the process of engaging outside help as well. And then I go a little long-winded here. Hopefully, I won't quite go into 18 innings like the Dodgers. Go Dodgers. But maybe I'll give you one more point on this. As Maria is laughing right now. I wish we had video so you could see her. As we turn to the legislation and the outcome of the report itself, we expect that there's a potential here for taking action across the economy. This is not just about utility connections to wildfire, right? And so everything from reducing the exposure that the state has by -- we would hope to see -- seeing strengthening building codes and standards and frankly, strengthening of the implementation of building codes and standards because today's codes and standards are actually rather strong. But reviewing those and then making sure those are being implemented effectively statewide, reduction in the overall exposure to losses, right, by looking at what are potentially some fair caps and specific kinds of claims or fees involved in the process. And then, of course, looking at how does California equitably allocate the ultimate cost of natural catastrophes like wildfires. It was very encouraging to see the legislature acknowledge right upfront in the preamble of SB 254 that the current process of essentially making utility customers and utility shareholders, the insurers of a catastrophe is simply not sustainable. When you take a horrible heartbreaking fire like Eaton, and we still haven't concluded what happened here, but you heard me say it's likely that the equipment could be found and have been associated. But even if the spark did come indeed from our SCE equipment, the catastrophe was about so much more. The extreme weather, the 100-mile an hour winds, the grounding of firefighting aircraft, the homes that unfortunately were beautiful, great neighborhoods, but we're not ready for this high fire risk, the lack of evacuation notices in areas that covered all but one of the fatalities. So you add all of that up, and we simply can't have utility customer shareholders continue to be the insurers of this catastrophic risk, and we're encouraged that the legislature seems to recognize it and setting up 254. Sorry for the PhD dissertation there, but you hit on such an important topic, Shahriar. Shahriar Pourreza: No, no, it's helpful. And then just, Pedro, really lastly for me quickly. I mean, obviously, '26 seems to be a pretty big inflection year for the California utilities. And I know one of your peers in the state is talking a little bit more on capital allocation depending on what could be the outcome of Phase 2, i.e., buybacks, dividends, returning more to shareholders, looking at how they're deploying capital in the state. I guess, how do you -- where do you stand around that, given how binary '26 could be? Pedro Pizarro: Yes. I'll turn to Maria in a second here, but let me just start by saying, above all, and this is really an important part of the messaging for Edison and I think for our peers as well. This is ultimately much more about customer cost than anything else, right? The weakening of financial health, which you mentioned some options here, one of our peers has mentioned here. But ultimately, this is really about how do we maintain healthy balance sheets and importantly, healthy credit ratings because the cost of debt is borne by customers. And so as we engage with legislators, we are laser-focused on that customer impact as being the reason or one of the key reasons in addition, obviously, to public safety to reforming how the state addresses its catastrophic risk. Maria, do you want to talk? Maria Rigatti: Sure. So I think, first, I would say, Shahriar, we've always taken a very measured and efficient approach to how we capitalize the business. You've seen that over the course of the last 5 or 6 years where we went down the path of using hybrid securities as opposed to issuing common equity at times when it would have been more value destructive perhaps to do the latter. I think the other thing to say is we find ourselves in a somewhat different position. We have no equity issuances in our forecast at this point. We are looking at cost-efficient opportunities to take care of the holding company hybrids. So we'll be going down that path. And also, frankly, we have been returning capital to shareholders for the past several decades with an increasing dividend. We're still targeting our 45% to 55% payout ratio. We have a lot of confidence in our forecast, and so we have a lot of confidence in that. So I think you'd find our company in a slightly different position. Operator: The next question comes from Anthony Crowdell with Mizuho. Anthony Crowdell: I just wanted to follow up on Nick's question earlier on the $0.10 related to the preferred equity. It seems that it's -- I don't know if you're calling it earlier or expected earlier financing. Was it not contemplated in like the '26 and '27, '28 forecast when you previously issued that a financing on their maturity, meaning that if they -- if you waited until when they actually matured, it was getting absorbed into the 2026 and '27 guidance, whereas now by pulling it forward, it's hurting '25, but yet '26 and '27 are not going up. Maria Rigatti: Frankly, Anthony, we were taking a look at a lot of options before as well. The fact is that with the TKM settlement earlier this year and the securitization and the Woolsey settlement pending and a subsequent securitization there as well, we find ourselves maybe with more options. Some of those options introduced potentially having to write-off the deferred financing costs. Yes, if we were going to go down the path of refinancing in any event, you would get them in the year in which the event occurred. But if we were just going to continue them on, then there wouldn't have been anything there to write-off. So it does very much tie to the success we've had around some of the regulatory proceedings this year, the certainty that we've gotten from them and the ability to introduce these additional options when we consider the preferred as a holding company. Operator: The next question comes from Paul Zimbardo with Jefferies. Paul Zimbardo: The first one I was going to ask, I know you had one of the comments, and I appreciate the frequently asked questions. How would you describe the linearity beyond 2025 of the EPS trajectory? I know it's been a little bit lumpy in the past, but thinking without rate cases in between, it would be a little bit more linear. So if you could give some color on that, it would be appreciated. Maria Rigatti: Sure. So we will be giving our 2026 guidance on the Q4 call. That's our typical practice. But I can share a little bit more with you about the process that we have and really what's underscoring our very strong confidence in the 5% to 7% growth rate. So I think about the GRC as the frame for the entire 4-year process. And now that we have that final decision in hand, we know the total amount of work that we have to accomplish over that 4-year period. But frankly, annually, we always go through a very detailed planning process to develop the work plan and how we will execute on each piece of the process. And we have to consider a lot of different things. We have to consider resources. We have to consider operational priorities, timing of the work. All of those can introduce some amount of input and structure around our guidance on a go-forward basis. So we are looking at that right now. We have the GRC in hand, but our detailed planning process has not started or it's just recently started underway in -- now that we have the GRC decision in hand. And so we will be providing more of that detail in response to your question on the Q4 call, but it certainly underscores our confidence in the overall 5% to 7% EPS CAGR. Paul Zimbardo: Great. And the other one I had was just on the credit profile. I think the commentary was solidly within that FFO to debt range. But just with the benefit of the enhanced recovery you're getting on the legacy fires, is it fair to think you're trending towards the upper half of that range over time? Maria Rigatti: So we're certainly comfortable in our range, and we're looking at our various financing options, and we'll come back to you once we decide on those. And we can -- we will still, though, always be comfortably in our 15% to 17% range. Operator: The next question comes from Carly Davenport with Goldman Sachs. Carly Davenport: Pedro, maybe going back to some of your comments earlier on customer costs. Just wanted to ask on the cost of capital filing in that context of customer affordability and the rhetoric in California. Just curious your latest temperature on the outcome there relative to what you have baked into the financial plan that you've laid out here. Pedro Pizarro: Yes. I'll start, Maria, you have more there. We're still in that process. You've seen our filings, the range that we provided, which is higher than the current 10.33% -- 10.75% to 11.75%. That's based on our outside experts testimony of looking at the overall risks that SCE is encountered with right now and trying to have fair compensation on that. We will let the process finish its way through. And hopefully, we'll have a decision by the end of the year as has been typical with cost of capital proceedings. Maria, anything you would add there, though? Maria Rigatti: Yes. So Carly, I completely agree with Pedro. We made a very strong showing. The proposed decision based on the schedule is due in November. So we are watching for it. All of the procedural aspects of the proceeding are completed. In terms of your question about -- so how does it roll into our forecast, like many other variables, we run a range of scenarios around the current ROE. So we have a number of things baked in, and we test a wide range of outcomes. So I think that's how it really fits into the range of 5% to 7% EPS CAGR through 2028. Carly Davenport: Got it. Okay. Very clear. And then maybe just one on the updated capital plan here. It looks like the FERC piece come down a little bit on the margin. Just curious what's driving that? And then your current views on the upside opportunities for FERC investment as you manage some of the moving pieces at the state level? Maria Rigatti: Sure. So the FERC piece came down very slightly over the 4-year period. A lot of that just has to do with timing of when the work will be done. So nothing really to read into that. And then on your second question, could you just please repeat that one more time? Carly Davenport: Yes. Just kind of as you think about managing the broader capital plan in the context of maybe the supportiveness of California, some of these investments at a CPUC level, to what degree FERC could sort of be a lever to lean into a little bit more there on the upside? Pedro Pizarro: Carly, one way to think about it is, it's a pretty good delineation between which investments are CPUC jurisdictional and which ones are FERC jurisdictional. And so the CPUC jurisdictional are the ones that we just got approval for in the SCE GRC. In addition, we have other proceedings underway like the next-gen proceeding or the next-gen ERP or the smart meter proceeding, AMI 2.0. But maybe I'll help Steve Powell, the CEO of SCE, just touch us a bit on just a broad transmission plan at CAISO and how that feeds the potential for FERC level investment over the next few years. Steven Powell: Yes. So the Independent System Operator, CAISO has put out -- or puts out 20-year plans to show the long-term opportunities for transmission investment in the state. The most recent one pointed to $45 billion to upwards of $55 billion of potential investment in projects over a 20-year period. They then translate that down to 10-year plans that get rolled out each year. And so you've seen over the last number of years, us get quite a number of incumbent projects as well as bid and win a competitive project. And so as I look forward, kind of the load growth that we're seeing, especially in the 10- to 20-year period is going to continue to drive the CAISO process to create more transmission opportunities. And so we want to continue to position ourselves to be the right incumbent provider to build on the existing network, which is oftentimes the most effective way to get the reliability projects as well as the policy projects built, but also continue to position ourselves for those competitive projects where there's new lines that are needed to be established. And we've shown our ability to go in and win projects, and we expect to continue to participate in competitive opportunities in the CAISO portfolio going forward. Operator: The next question comes from David Paz with Wolfe. David Paz: This is somewhat related regarding the SB 254 CapEx that's ineligible for an equity return, do you anticipate backfilling that roughly? I think it's $2 billion -- $2.3 billion of CapEx that's not in your '25 to '28 plan with other programs. Is that with the next-gen and with the other things? Or should we anticipate there being something else? Maria Rigatti: So maybe let's clarify a little bit what's in the CapEx plan that's in the investor materials today as well as what's in the rate base. So if you recall, under SB 254, the CapEx that we're talking about is Wildfire Mitigation that is approved post 1/1/26, so this next upcoming year. In our capital plan, we have included some of the -- we have included all the CapEx that we expect to spend through 2028 that is going to be subject to that. And we have about $500 million to $700 million of CapEx on the CapEx slide that are related to the SB 254 capital. When you move over to our rate base slides, we are not including that when we convert CapEx into rate base. So you can use the rate base slides as sort of the foundation for your modeling in terms of the amounts on which we can earn equity return. The balance of what is under SB 254. So the rest of that CapEx would be spent then after this rate case cycle. So as we go into the 2029 rate case cycle, we'll be taking a look at how that all factors in. But the numbers that we provided in the materials today should be pretty clean in terms of how you would use them to look at our growth rate. David Paz: Okay. That makes sense. But just to understand for modeling purposes, that remainder, so not what's in your slides today, but the rest should we anticipate that being spread out over the '29 to '32 GRC or upfront just based on the language or your interpretation of SB 254. Maria Rigatti: So we would expect that CapEx to be spent after 2029. We don't have those -- that GRC filed yet. So we'll be working on that as we go through it. And whenever we do have that available in terms of that piece of the forecast, certainly, we would make it clear as to what pieces are in rate base and what pieces are not. Operator: The next question comes from Aidan Kelly with JPMorgan. Aidan Kelly: Yes. Just one question on my end. Could you just touch a little bit more on the near-term annual 1% to 3% sales growth a bit more? Just curious to hear any detail around the breakdown between the electrification, residential growth and C&I customers? Pedro Pizarro: I'll turn it over to Steve again from an SCE perspective. Steven Powell: Yes. So in the near-term, in terms of the customer demand growth that we're seeing, it really is a mix across those ones that you mentioned. So we certainly point to electrification and primarily around vehicles and the continued kind of strong growth in vehicle -- new vehicle purchases that are 0 emissions is really bolstering that transportation electrification load growth. It's probably about 1/3 of it is the driver in there. We continue to see residential new home starts and new residential development happening across our territory. And so that's another key piece. And then the commercial industrial load growth, and that's a breadth of different types of industries, whether it's defense, manufacturing, down to logistics are all ones that we're seeing -- getting a lot of requests. I know there's a lot of conversations around data centers and that load growth. For us, it's not a big driver like many other places, but we see a moderate amount of requests coming through there as well that kind of just blends in with the rest of our commercial industrial growth. So it's a pretty balanced set of load that we would see over the next 5 years where kind of we project that 1% to 3%. Pedro Pizarro: And we really like the durability of having that kind of diverse profile as opposed to relying just on data centers. Operator: Thank you. That was our last question. I will now turn the call back over to Mr. Sam Ramraj. Sam Ramraj: Thank you for joining us. This concludes the conference call, and have a good rest of the day. You may now disconnect.
Operator: Good morning, welcome to Tenet Healthcare's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin. William McDowell: Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's third quarter 2025 results as well as a discussion of our financial outlook. Tenet senior management participating in today's call will be Dr. Saum Sutaria, Chairman and Chief Executive Officer; and Sun Park, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. And with that, I'll turn the call over to Saum. Saumya Sutaria: All right. Thank you, Will, and good morning, everyone. We had another quarter of strong performance where we exceeded our expectations for revenue, adjusted EBITDA and margins. Third quarter 2025 net operating revenues were $5.3 billion, and consolidated adjusted EBITDA grew 12% over the third quarter 2024 to $1.1 billion. This represents an adjusted EBITDA margin of 20.8%, which is 170 basis points improvement over the prior year, driven by our strong same-store growth and continued operating efficiency. USPI continues to excel, and we generated $492 million in adjusted EBITDA, which represents 12% growth year-over-year. Same-facility revenues grew by 8.3% in the third quarter, highlighted by 11% growth in total joint replacements in the ASCs over the prior year. Our M&A and de novo activity remains robust as we acquired 11 centers and opened 2 de novo centers in the quarter, including facilities specializing in high acuity procedures such as spine and orthopedics. We have already spent nearly $300 million on M&A in this space year-to-date and expect to continue adding additional centers in the fourth quarter. The M&A and de novo pipelines remain strong. Turning to our hospital segment. Adjusted EBITDA grew 13% to $607 million in the third quarter of 2025. Same-store hospital admissions, adjusted admissions were up 1.4% in the quarter. And third quarter 2025 revenue per adjusted admission was up 5.9% over the prior year as payer mix and acuity remains strong. In September, we opened our newest hospital facility in Port St. Lucie, Florida. This facility expands capacity in one of the fastest-growing areas in the country. The hospital will provide comprehensive emergency in specialty care and is focused on leveraging state-of-the-art technology, including robotics and advanced cardiac catheterization techniques. Turning to our full year guidance. At this point in the year, we are once again raising our full year 2025 adjusted EBITDA guidance to a range of $4.47 billion to $4.57 billion. Building upon our substantial post second quarter guidance increase, indicating the confidence we have in our business this year, we have now increased our adjusted EBITDA guidance by $445 million or 11% at the midpoint of the range from our initial guidance. Additionally, we are increasing our investments in capital expenditures in 2025 and now expect to invest $875 million to $975 million to fuel organic growth in the future, a $150 million increase at the midpoint over our prior expectations. In addition to this increased investment, we are also raising our expectations for full year 2025 free cash flow minus NCI to a range of $1.495 billion to $1.695 billion, an increase of $250 million at the midpoint from our previous guidance range. This increase is driven not only by the fundamental growth in adjusted EBITDA, but also by the strong cash collection performance of Conifer. Let me turn to 2026 with a few points. Uncertainty about the enhanced premium tax subsidies and the impact on reimbursement and enrollment in the exchanges still exists. Approvals for various increases in state directed payment programs for 2026 are still pending. Currently, in our hospital segment planning process, we see healthy patient demand that would support same-store volume growth and a stable operating environment supported by disciplined cost controls in 2026. Our strategy, which is more focused on higher acuity services, has delivered a track record of improved margins and strong earnings growth over the past few years. The return on invested capital for this improved portfolio of hospital assets is such that we have confidently increased our CapEx per bed from prior levels to higher levels in both 2024 and 2025, and we should continue to see the benefits of that into 2026. At USPI, we expect same-store revenue growth in line with our long-term expectations, a continued focus on high acuity cases, operational efficiencies and disciplined cost controls. Additionally, we expect further contributions from M&A and de novo development. I would note that USPI is less exposed to Medicaid and the exchanges and our ASCs are on freestanding rates. We will continue to operate and invest in this attractive segment. In summary, we continue to deliver our commitments for sustained growth, expanding margins, a delevered balance sheet, and improved free cash flow generation. Our strong execution is driving attractive EBITDA growth that we are converting into significant free cash flow and our transformed portfolio of businesses are well positioned to drive sustained performance in the future. And with that, Sun will provide us a more detailed review of our financial results. Sun, over to you. Sun Park: Thank you, Saum, and good morning, everyone. We delivered strong results in third quarter 2025 with adjusted EBITDA above the high end of our guidance range, once again driven by strong same-store revenue growth, continued high patient acuity, favorable payer mix and effective cost controls. We generated total net operating revenues of $5.3 billion and consolidated adjusted EBITDA of $1.1 billion, a 12.4% increase year-over-year. Our adjusted EBITDA margin in the quarter was 20.8%, a continuation of our improved margin performance over multiple quarters. I would now like to highlight some key items for both of our segments, beginning with USPI, which again delivered strong operating results. In the third quarter, USPI's adjusted EBITDA grew 12% over last year, with adjusted EBITDA margins at 38.6%. USPI delivered an 8.3% increase in same-facility system-wide revenues with net revenue per case up 6.1% and same-facility case volumes up 2.1% -- turning to our hospital segment. Third quarter 2025 adjusted EBITDA was $607 million, with margins up 160 basis points over last year at 15.1%. Same-hospital inpatient adjusted admissions increased 1.4% and revenue per adjusted admissions grew 5.9%. Our consolidated salary, wages and benefits was 41.7% of net revenues, a 160 basis point improvement from the prior year, and our contract labor expense was 1.9% of consolidated SWB expenses. These improvements continue to be driven by our data-driven approach to capacity and labor management and disciplined operating expense controls. Finally, we recognized a $38 million pretax impact for Medicaid supplemental revenues related to prior years in the third quarter of 2025. As a reminder, in total, year-to-date, we have recorded $148 million of favorable pretax impacts associated with Medicaid supplemental revenues related to prior years. Next, we will discuss our cash flow, balance sheet and capital structure. We generated $778 million of free cash flow in the third quarter, amounting to $2.16 billion of free cash flow year-to-date, which is up 22% over the same 9-month period in the prior year. As of September 30, 2025, we had $2.98 billion of cash on hand with no borrowings outstanding under our line of credit facility. Additionally, we have no significant debt maturities until 2027. And finally, during the third quarter, we repurchased 598,000 shares of our stock for $93 million. Year-to-date through September 30, we have repurchased 7.8 million shares for $1.2 billion. Our leverage ratio as of September 30 was 2.3x EBITDA or 2.93x EBITDA less NCI, driven by our outstanding operational performance and continued focus on financial discipline. We believe we have significant financial flexibility to support our capital allocation priorities and drive shareholder value and are very pleased with our ongoing cash flow generation capabilities. We remain committed to a deleveraged balance sheet. Let me now turn to our outlook for 2025. For '25, we now expect consolidated net operating revenues in the range of $21.15 billion to $21.35 billion, an increase of $150 million over prior expectations. As Saum mentioned, we are raising our 2025 adjusted EBITDA outlook range by $50 million at the midpoint to $4.47 billion to $4.57 billion, reflecting our outperformance in the hospital business. This is in addition to the substantial $395 million guidance raise that we announced in the second quarter. At the midpoint of our range, we now expect our full year 2025 adjusted EBITDA to grow 13% over 2024. Turning to our cash flows for 2025. We now expect free cash flows in the range of $2.275 billion to $2.525 billion, distributions to noncontrolling interest in the range of $780 million to $830 million, resulting in free cash flow after NCI in the range of $1.495 billion to $1.695 billion, an increase of $250 million at the midpoint from our previous guidance range. This reflects our focus on strong free cash flow conversion from our EBITDA growth, the continued outstanding cash collection performance of Conifer and continued investment into high-priority areas of our business. Now turning to our capital deployment priorities. We are well positioned to create value for shareholders through the effective deployment of free cash flow, and our priorities have not changed. First, we will continue to prioritize capital investments to grow USPI through M&A. Second, we expect to continue investing in key hospital growth opportunities to fuel organic growth, including our focus on higher acuity service offerings. Third, we will evaluate opportunities to retire and/or refinance debt. And finally, we'll continue to have a balanced approach to share repurchases depending on market conditions and other investment opportunities. We continue to deliver consistent growth and have disciplined operations, which has translated into outstanding financial results. We are confident in our ability to deliver on our increased outlook for 2025 as we continue to provide high-quality care for our patients. And with that, we're ready to begin the Q&A. Operator? Operator: [Operator Instructions] Our first question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: I wanted to ask you about the Q4 guidance and kind of the expectations for utilization. Are you guys building anything in there for higher utilization before these subsidies expire? And how do you think about the capacity, I guess, particularly within USPI to accommodate utilization there? And then I guess, secondly, you mentioned that USPI is insulated from the headwinds for next year, but just trying to understand a little bit where you do see that pressure. I guess can you talk a little bit about exchange exposure within USPI? Saumya Sutaria: All right. There's a lot of questions in there, Kevin. So let me just tackle one by one and Sun, we can kind of complement here. First of all, we haven't built in anything nor are we seeing any kind of rush to the office, if you will, with respect to the exchange subsidies. We're not planning nor are we saying that we expect them to expire at this stage. I think much of what we're hearing is that it may take time, but a compromise will be achieved from our intelligence coming from Washington. So we're just sort of patiently waiting to see what happens there. From a capacity utilization standpoint, at USPI, we typically have, as you know, a busier late November and certainly December. And have planned for staffing and capacity stretch that happens in that time period every year. So the simplest way to look at it is we're not worried about our capacity to take on the demand that we would see in the typical end of the fourth quarter at USPI. We begin planning for that every year, months in advance with a very well-established protocol of how we do things. And there should be no reason that's different this year, including if there happened to be more demand that came because of the -- any kind of change in the exchanges or whatever that may be ahead of us from that perspective. What we have said about exchange business at USPI is a couple of things. One is there's a lot less exposure there on a per case or revenue basis than in the hospital segment. And the reason for that, we have said is that we typically see the exchange business, especially newer exchange members behaving with consumption patterns that are more similar to, for example, Medicaid, and that explains some of the difference. Sun, I don't know if there's anything you want to add here. Sun Park: Yes. Just a couple of metrics, Saum. Thank you. Kevin, I would also just note for USPI, our implied Q4 guidance is about an increase of $80 million roughly from Q3 into Q4, which is fairly standard if you look at our historical pacing and change into Q4. So I think we remain confident in our -- both our capacity as well as our ability to take care of those patients. And then exchange, I would just note for Q3, exchange was 8.4% of our total admissions and 7% of our total consolidated revenues. So a slight increase in total as a percent of admissions from Q2 and relatively flat in terms of total percent of consolidated revenue. So we do see continued strong exchange performance, but at this point, no significant increase in Q3. So we'll see in Q4. Operator: Our next question comes from Scott Fidel with Goldman Sachs. Scott Fidel: I wanted to hopefully just drill a little bit more to the CapEx inputs for the year, including the increase in the CapEx guidance. Maybe if you can talk about specific allocation of capital related to the increase and then maybe bucket some of the key larger investments that you're making within the CapEx for the full year. Saumya Sutaria: Yes. Scott, I appreciate the question. So I would just characterize the increased capital expenditure as more investment in both program or clinical program infrastructure, service line support and various other growth strategies in the hospitals. I mean, obviously, our CapEx plan for the year included the residual capital that was required to open up the Port St. Lucie Hospital. So this is capital expenditure that has extended above and beyond that where we see opportunities for growth. Look, as I indicated, the demand environment continues to be very healthy, and we see opportunities and the efficiency with which we operate, our focus on service levels to the physician community, we see the opportunity for them to choose our sites as a location of care for their patients. more and more. Obviously, the way in which we tend to deploy this capital is focused more on our high acuity strategy, so things that are relevant to the cardiac care unit, intensive care unit, cath labs, high-end imaging, et cetera, surgical programs. But that's really how we're making the investments around the country. And as we reviewed them through this business planning cycle, we felt it was a good time given the demand that we continue to see through the third quarter to go ahead and make those investments and raise our guidance. Operator: Our next question comes from Craig Hettenbach with Morgan Stanley. Craig Hettenbach: Yes. I want to just extend that just focus on free cash flow here, the increase to guidance. You mentioned kind of improved cash collections at Conifer, you also have margins coming up. So any other context around kind of free cash flow and importantly, just the sustainability of those trends as you see it? Saumya Sutaria: Sun, go ahead. Sun Park: Craig, thanks. Yes, as mentioned, this has been a long-term focus of ours, making sure not only EBITDA growth and EBITDA margins come through strong operational performance, but also then making sure that converts through free cash flow. And we listed some of the key drivers there. Obviously, the continued improving and fantastic performance by Conifer on cash collections. Obviously, growth in EBITDA comes through. And then probably a couple of other things that I'll point out. More broadly in terms of working capital management, we have spent a lot of time and focus on making sure we're optimizing all components of there. And then obviously, one of the additional benefits of our continued deleveraging is improvement in interest expenses, which also helps our free cash flow generation. We believe these operational efficiencies that we've implemented similar to our margin performance, whether it's Conifer or working capital management or continued EBITDA generation, we obviously will work hard to make these sustainable over a long period of time. Operator: Our next question comes from Jason Cassorla with Guggenheim Securities. Jason Cassorla: Great. I just wanted to go back to your commentary around the implied 4Q guidance on USPI. At the midpoint, it would imply year-over-year growth a little over 8%, which is still strong, marks a little bit of a deceleration from like the low to mid-teens you've done this year. Just any thoughts around that? Is it conservatism? Anything from a timing perspective, like the pace of development coming online that's impacting that? Just any further detail around the implied fourth quarter guidance for USPI would be helpful. Saumya Sutaria: Well, Sun, we can -- let me start. I don't think anything we're saying about the business demand organic performance really changes. I mean, obviously, we have certain assets at a larger scale and various other pricing elements that begin to lap year-over-year from that perspective. And so if anything, it's just math basically. But there's really no -- I mean, we don't -- there's no implication. We're not looking at this fourth quarter at USPI really any differently than in prior fourth quarter. As I said, we're intensely just focused on the ramp-up of business that we typically would see. Sun? Sun Park: Yes, I don't think I have anything further to add, Saum, thanks. Operator: Our next question comes from Ann Hynes with Mizuho. Ann Hynes: Just looking at the -- obviously, margins and cash flows have been very strong and costs have been very good. Going into 2026, especially the labor environment, I think that's better than expectations in 2025. Do you expect that to continue into 2026 on the labor side? And then any other inflationary pressure you would call out as we do our models, that would be great. Saumya Sutaria: Go ahead Sun. Sun Park: Sure. Ann, while we're not commenting specifically on '26 yet, we'll note a couple of things. You're right, our labor environment has generally been very strong and conducive to our operations, whether it's full-time labor expenses, whether it's our management of contract labor and other premium labor, whether it's pro fees. I think they've all been to our expectations. And in the current environment, as we sit here today, don't see any meaningful changes coming. In terms of other inflationary pressures, again, not commenting specifically on '26. But obviously, the other topic that we've talked about is tariffs. we've said that for 2025, we've been able to manage that fairly well due to both our sourcing optimization exercises, whether it's contracting, whether it's working with our vendors, whether it's picking the right products as well as through efforts through our GPO. So we remain confident based on our contract structure that we have a couple more cycles where we'll be able to manage this. But obviously, as we get into the future years, we'll have to remain nimble on the tariff dynamic. Operator: Our next question comes from Benjamin Rossi with JPMorgan Chase. Benjamin Rossi: I guess just checking in on Conifer. How did Conifer's contribution within the hospital operations segment shake out during 3Q? And then you've previously mentioned Conifer's ability to assist with patient eligibility and enrollment services during things like Medicaid redeterminations. I guess should the ACA exchange subsidies expire, do you think Conifer could have a similar utility for you in helping identify patients who have lost coverage and could be eligible for coverage elsewhere? Saumya Sutaria: Well, I mean, that's a very good insight about some of the capabilities that we have in Conifer. And by the way, I would flip it the other direction as well. Given the time frame we're at, but the likelihood -- the positive likelihood of a compromise that we keep hearing, it will also be important that we have invested in the right capacity and capabilities to utilize Conifer's ability to help with enrollment and enrollment in our markets in our clients' markets on the exchanges if the exchange enrollment time line gets delayed or extended. So yes, obviously, the capabilities to help enroll in other products is there, but we're also ramping up our investments and approach to support what might be a little bit of a dislocated enrollment time line on the exchanges given the potential for a later compromise. So it will work well on both dimensions, and we have been investing up in both our staffing and field deployment in preparation for that already. Conifer is performing well according to our expectations within the segment. Not a lot else to comment on there. I mean, Obviously, we are really happy with the way it's performing in the market for us and our base of clients from a cash collection standpoint that I noted before. Operator: Our next question comes from Ryan Langston with TD Cowen. Ryan Langston: Nice to see the ASC volumes positive. Any particular service lines or maybe even geographies driving this? And maybe same thing for the acute side, any hospital service lines stronger, weaker than you expected in the third quarter? Saumya Sutaria: Yes. No, I appreciate the question. A couple of things. I mean we said this at the start of the year when we gave guidance that we kind of saw the environment USPI picking up later in the year, just given -- we look very carefully, obviously, at how busy our physicians are. And as we looked at that, we saw it ramping up in the latter part of the year. I would say probably the biggest driver of that growth in addition to the core of the higher acuity services that we're investing in ortho, spine, some of the things we're doing in robotics and other things. Those things continue to go strong. We saw just based upon the numbers, healthier GI recovery into the third quarter, which is kind of what we were expecting given what the volumes and business of our physicians looked like in the first half. So that was probably an outsized driver of the USPI volume contribution. On the hospital side, and you can tell from the acuity net revenue per case, et cetera, I mean, that environment continues to be strong. Obviously, things like trauma and high acuity emergency visits and stuff, there's less elasticity there, right, with market conditions given the nature of that. The only thing I would note on the hospital side is that especially outpatient visits, which contribute to adjusted admissions, the respiratory and infectious disease volumes were a little bit lower than perhaps expectations. And that just may signal some sort of a slower start to the respiratory season. The numbers certainly seem to indicate that. But again, we're talking about the third quarter, right? So it's less of a harbinger than one would say. But factually speaking, the infectious disease respiratory areas are the only areas I would call out on a proportional basis. Operator: Our next question comes from Justin Lake with Wolfe Research. Justin Lake: I might have missed it, but I was hoping to get an update on total contribution from DPP in provider taxes in the third quarter and your updated estimate on that benefit for the year. And then I appreciate you pointing out the $148 million of prior year DPP that we should think about as being kind of onetime, I assume. Any other items we should consider for 2026 in terms of that bridge year-over-year versus kind of typical growth? Sun Park: Yes. Justin, on the DPP, in Q3, we had about -- we recorded almost $350 million, $346 million of supplemental Medicaid programs, of which we noted $38 million of that was prior year. So that brings us to about a little over $1 billion, $1.02 billion for year-to-date in fiscal '25. Then of that $148 million was out of period. So I think we're on track. It's right in the middle of kind of our expectations once you normalize for the out-of-period prior year payments. And then in terms of normalizations, I would say from a technical math basis, the $148 million of Medicaid supplemental payments that we pointed out are the largest normalization factor for '25 into '26. Obviously, there are a lot of other dynamics that we -- that Saum touched on in his opening comments around reimbursement and other dynamics that we'll have to take into consideration as we get deeper into guidance in our next earnings call. Operator: Our next question comes from Brian Tanquilut with Jefferies. Brian Tanquilut: Just a question on capital allocation. Obviously, you've set goals for USPI's acquisition spend and you've already exceeded that. And then how should we be thinking about that and then the buyback in terms of how you're thinking about throwing capital at the buyback since you've hit your M&A targets already? Saumya Sutaria: Yes. I mean the M&A targets every year are obviously guidance that we go into the year with respect to expectations of what we're going to do. We're responsive to a marketplace, as you can imagine. And we're very careful about our diligence in maintaining our high bar for acquisitions. This year, we have found more opportunities, a broader pipeline, certain processes that may have been competitive in addition that we won and just continued momentum on our de novo strategy. So I mean, the kind of cash flow that USPI generates, we can fund those increases. Now obviously, if you go back historically, with the platform deals that we have done, we've also outspent our typical guidance. So look, we try to update that as we go quarter-to-quarter based upon what we're seeing in the environment and what we're bringing on board. Obviously, having these additional assets on board is positive for the organization going into the following year. And as I noted, we also continue to see some more opportunity in the fourth quarter. So we'll see how that all plays out. I mean we just remain focused on executing the M&A and de novo strategy. And if we do it with the appropriate diligence and onboarding, we're just updating what the spend looks like in the given year. Look, on the second point, we've been very active repurchasers of our shares this year. I would continue to reiterate that our trading multiples, we're long-term active repurchasers of our shares. This quarter, obviously, was lower than the prior quarter. There's also a lot more uncertainty in the market. And we feel fine about what we've achieved this year in that regard. Operator: Our next question comes from A.J. Rice with UBS. Albert Rice: As you start to think about 2026, pulling budgeting together, et cetera, are there any particular areas on the expense management side? I know you've talked a little bit about some of the things you're seeing this year in labor, but whether it's labor supplies, other that are opportunities for incremental savings or programs to initiatives to move forward. And then obviously, there's a lot of discussion about AI, whether there's anything on AI that's worth calling out that you're focused on being able to deploy that? Saumya Sutaria: AJ, so short, medium, long term, kind of all embedded in there, we have undertaken over the last few months and ongoing, a business transformation initiative that is designed to look for those opportunities and also do contingency planning given the uncertainty in the marketplace. Those opportunities would include how we think about all aspects of what I would call labor costs within the organization. Obviously, this year, as we have noted before, we have done some work to rightsize our corporate structure given some of the asset divestitures that we've had in the past. It has very much been our philosophy to -- I think you know this, to use advanced analytics and where we have the ability to more automation and leveraging our Global Business Center, which is continuing to perform well and scale up. This will -- this year proportionately will be one of the larger scale-up years in the last few years within the Global Business Center, which we feel very good about. So there are a lot of opportunities there. Sun already talked about supplies, so I won't say a lot more there. And we continue to invest actively in improvement opportunities and our ability to drive more efficient and better collections in Conifer, some of which we've noted in earlier parts of this call. So very much comprehensively looking at these opportunities. But with a mindset of finding both shorter-term and longer-term opportunities that will impact the business. Operator: Our next question comes from Josh Raskin with Nephron Research. Joshua Raskin: Just first was a quick clarification, I think, on Kevin's question. Did you see the contribution from exchanges, the revenue contribution was less than the percentage of adjusted admissions. And then my real question, just sort of getting back to the M&A environment for the ASCs. There's been a couple more reports, media reports in terms of maybe a competitive landscape. And I'm just curious if that's been changing or if you're seeing anything on valuations yet. And as you speak to your conversations with physicians, maybe how they're evaluating opportunities in ASCs as well. Saumya Sutaria: I think the commentary going back to the first question from Kevin was simply that the exposure to exchanges either on volumes or revenue is less than in the hospital business at USPI, the exposure, whether you're looking at volumes of exchange patients or revenue from exchange patients proportionally in their business is less than the hospital business. That was what the comment was. I hope that helps clarify. The ASC opportunity, first of all, I would say it has so many different dimensions in terms of the growth platform that we have built at USPI, right? We're active in de novos. Those are more focused on higher-end specialties and partnerships with our more proactive health system partners. So there's really 2 threads there. We've worked hard to work with MSO organizations that are deploying capital and scaling their businesses to be the partner of choice on the ASC side. I think that has played out very nicely. And really there, the strategies are across multiple different service lines, GI, orthopedics, stuff that we do with MSOs in ophthalmology, obviously, our urology platform, et cetera. So there are multiple avenues of growth that develop there. Of course, we talk about the acquisition market a fair amount. And in that acquisition market, we have been, for a long period of time, the partner of choice. It's the reason we've scaled so effectively. But physicians, to get to your question of what are they looking for, I mean, they're looking for somebody who's delivered a consistent track record, who has demonstrated the ability to grow, who has demonstrated the ability to take on new assets and find that other doctors tell them that it went well when onboarded. And they're looking -- many times, single specialty physicians are looking for somebody who has a proven track record to help them diversify their business to grow the center and make it multi-specialty, which is, as you know, something that USPI has historically been very, very good at in terms of running larger multi-specialty type of centers that help these physicians get to the next level of maturity in their investment. So when I look across the board on the way the market works, we continue to be the advantaged party in what it takes to build and grow this segment. And so that's what gives us the confidence to continue ahead to spend more than we had originally thought we would spend and look forward to a healthy pipeline in 2026. Sun Park: And this is Sun. Josh, just to give you the numbers again, what we said was for HICS, it represents 8.4% of our admissions in Q3 of '25 and 7% of our total consolidated revenues. So the admission stat is a little slightly higher than the revenue stat, and that's been consistent for us historically. Hopefully, that helps. Operator: Our next question comes from Whit Mayo with Leerink Partners. Benjamin Mayo: Saum, CMS is this new Wiser model in fee-for-service Medicare that starts next year. Do you see any impact on prior auth or administrative work for USPI? I know it's only 6 states, but Texas is one of them and knee arthroscopy and certain implants, I think are an area they're focused on. So just any thoughts or insight into how you're preparing for this? Saumya Sutaria: Yes. Well, there is some movement in the pre-authorization space in fee-for-service Medicare, as you correctly note, the Wiser program still has some uncertainty about how -- and what scope of services it will be implemented for. But yes, we have taken into consideration what will be required there. There are really 3 threats to it. One is preparing documentation, understanding of documentation requirements for appropriate care. Two is actually consistently complying with those. And three is the operational element of managing our scheduling to be complemented by preauthorization having been achieved. So we're sort of prepared to do all of that. I mean we don't talk about it much, but we have a very capable revenue cycle function within USPI that deals with all of the end-to-end type of services that are required there. And so we feel pretty good about that. Look, the other thing is that in any marketplace, when these types of things are introduced, there's an adjustment period, but also physicians have the opportunity to adjust different mix into the centers as they fill their -- especially the ones that have block time. And so I think part of the move here will also be to increase commercial mix and work with the physicians to increase their commercial mix in that process. Operator: Our last question comes from Andrew Mok with Barclays Bank. Thomas Walsh: This is Thomas Walsh on for Andrew. As we await the finalization of the hospital outpatient rule, could you comment on whether the removal of the inpatient-only list is a net positive or net negative for the enterprise? Saumya Sutaria: Okay. So that came through really garbled. I think the question was, is the inpatient-only rule list going away? And is that a benefit to us? I don't know that it's going away. I think there's been discussion about the inpatient-only rule list and what that impact would be. I mean, obviously, for us, the benefit would be in the USPI segment and potentially a push for more in certain types of volumes that have been in the hospital setting into the outpatient setting. In our acute care hospital segment, because of our greater focus on high acuity work, proportionally, and it's not to say that we don't have the business, but proportionally, those cases wouldn't be affected as much as maybe a typical general acute care facility. But we haven't done any quantification of that, that we've shared anywhere. I think this policy is still very much up in the air being discussed and not even at the point where I would say that we're engaging in rule-making discussions about it. Operator: We have reached the end of the question-and-answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation. Saumya Sutaria: Thank you.
Nate Melihercik: Good afternoon, and good evening. Welcome to Logitech's video call to discuss our financial results for the second quarter of our fiscal year 2026. Joining us today are Hanneke Faber, our CEO; and Matteo Anversa, our CFO. During this call, we will make forward-looking statements, including discussions of our outlook, strategy and guidance. We're making these statements based on our views only as of today. Our actual results could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the Investor Relations section of our website. We undertake no obligation to update or revise any of these forward-looking statements, except as required by law. We will also discuss non-GAAP financial results. You can find a reconciliation between GAAP and non-GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC. These materials as well as the shareholder letter and a webcast of this call are all available at the Investor Relations page of our website. We encourage you to review these materials carefully. And unless noted otherwise, references to net sales growth are in constant currency and comparisons between periods are year-over-year. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Hanneke. Johanna Faber: Thank you, Nate, and welcome, everyone. We delivered a strong second quarter to close out the first half of fiscal year 2026. Our teams executed with excellence, delivering good top line growth and outstanding profitability. They executed well across all regions and delivered strong growth across both B2B and consumer channels. To achieve these results in the current environment underscores Logitech's discipline and resilience. In Q2, we remain focused on our long-term strategic priorities, and they drove our results. First, of course, superior products and innovation, which are so integral to our DNA. This quarter, we announced 16 new products. Some of the highlights included the much anticipated MX Master 4, a new generation of our flagship premium mouse. This new product is the first in the MX line to provide advanced users with tactile haptic feedback, and it is off to a record-breaking start. We also unveiled a wide array of exciting new gaming products, including the new PRO X2 SuperStrike mouse, which blends inductive analog sensing and real-time haptic feedback for the most competitive gamers. We also launched the McLaren Racing collection, a premium lineup of SIM racing gear inspired by McLaren's iconic racing brand and technology. And for those of us in the business world on calls like this one, we introduced the new Zone Wireless 2ES and Zone Wired 2 headsets with AI-powered dual noise canceling microphones and adaptive hybrid active noise cancellation. Many of these new products were announced at our Logitech-ownned flagship events, Logi WORK and Logi PLAY in September. These coveted live events took place in more than 30 cities around the world, attracting thousands of media, influencers, content creators, partners and thought leaders. The Logi PLAY global live stream on the day drove more than 12 million views. And within a month, the Logi PLAY social media and creator activations reached approximately 200 million people. This underscores the growing strength of our global brand. We also continue to double down on B2B with good momentum behind our investments in new products and capabilities. Logitech for business demand was strong across video collaboration, personal workspace solutions and the education vertical. Time Magazine recognized our new office environmental sensor, the Logitech Spot, as one of the best inventions of 2025. This is the second year in a row we have received this prestigious recognition for a new product. Logitech's global scale remains a key advantage. And in Q2, we executed very well across geographies. EMEA posted solid growth. Once again, Asia Pacific had an excellent quarter, supported by our China for China investments. Their strength helped offset a modest sales decline in the Americas as we proactively manage tariffs. Importantly, demand trends in the U.S. improved as the quarter progressed. Finally, our Q2 performance underscores Logitech's capabilities as an operational powerhouse. Our cost discipline and manufacturing diversification were important factors in driving excellent gross margins and double-digit growth in non-GAAP operating income. We are on track to reduce our share of U.S. products originating from China to 10% by the end of this calendar year. We're able to do this, thanks to our long established diversified manufacturing capabilities in 5 other countries, while our Chinese manufacturing site continue to serve China and the rest of the world. Now looking ahead to Q3, we believe we will see continued strong momentum in our business, but we also see some market uncertainty. The North American consumer market, especially in gaming, was softer in Q2. We're cautiously optimistic that this will improve for the holiday season, but that is, of course, yet to be confirmed. The macros also remain uncertain with tariffs, export restrictions, persistent inflation, just some of the dynamics. In this context, we believe our Q3 outlook reflects a pragmatic balance between the strong momentum of our business and the litany of uncertainties within the global economy. Our approach to deliver the holiday quarter and beyond remains unchanged. We'll focus on our long-term strategic priorities while being guided by the 3 in-year principles of playing offense, cost discipline and agility. In terms of playing offense, we will continue to invest in R&D and demand generation to gain share, both in the short and the long term. As for rigorous cost discipline, we'll continue to focus on product cost optimization, tariff mitigation and disciplined G&A spend. And of course, we will continue to be agile and move fast. In closing, we entered a holiday quarter in a dynamic global environment with a strong first half under our belts and with a unique set of assets that underpin our resilience, our extraordinary capacity for superior products and innovation, our global reach with 2/3 of sales generated outside the U.S., our diversified manufacturing footprint or China plus 5, our strong and growing brand, our pristine balance sheet and our experienced high-performing team. I believe these assets, combined with our clear strategic priorities, position us well to continue to deliver strong results. And before I hand over to Matteo, let me say a big thank you to our teams around the world. Our people are driving this strong performance and a unique culture. And I was super proud that, that was recognized by Forbes this quarter when they ranked Logitech out of 900 global companies as #25 on their list of the world's best employers. Matteo, over to you. Matteo Anversa: Thank you, Hanneke, and thank you all for joining us on the call today. I would like to start by thanking our teams around the globe for the continuous strong execution in the second quarter. While the external environment remains challenging, our execution centered on playing offense, disciplined cost control and agility. And this focus drove a non-GAAP operating income of $230 million, up 19% year-over-year. This strong profitability was achieved in a quarter where we delivered mid-single-digit net sales growth year-over-year. So let me discuss some of the key aspects of our second quarter financials. Net sales were up 4% year-over-year in constant currency, supported by continued robust demand across both consumer and B2B. And actually, B2B demand outpaced consumer in the quarter. Some key highlights to mention across our product categories. Personal Workspace grew year-over-year, fueled by double-digit growth in Pointing Devices and Keyboards & Combos. Gaming delivered 5% year-over-year growth in constant currency, driven by double-digit growth in PC gaming. Video Collaboration grew 3% in constant currency, driven by high growth in EMEA, while Americas was relatively flat due in part to the pull forward of sales that we highlighted in the first quarter. We executed well across our regions and more specifically, Asia Pacific grew 19% year-over-year in constant currency, led by sustained double-digit growth in China. EMEA grew 3% in constant currency, driven by strong growth in Video Collaboration and Personal Workspace. And conversely, Americas was down 4%, primarily due to the gaming market decline. And as Hanneke just noted, we also experienced lower demand early in the quarter as a result of the pricing actions that we took to offset tariffs, which improved in the latter half. Moving to gross margin. Our non-GAAP gross margin rate for the quarter was 43.8%, similar to the prior year, and it is important to note that the negative impact of tariffs was entirely offset by our price and manufacturing diversification actions. Additionally, product cost reductions offset investment in strategic promotions. We continue to be very disciplined in managing our costs. And as a result, operating expenses declined 3% year-over-year and were 24.4% of net sales, down 240 basis points from the 26.9% in the second quarter of last year. And similarly to last quarter, this decrease was primarily driven by a reduction in G&A as a result of the measures that we implemented to mitigate the impact of tariffs. As I mentioned earlier, this focus drove a non-GAAP operating income of $230 million, up 19% year-over-year and a non-GAAP operating income margin expansion of more than 200 basis points. Moving to cash. Cash flow continues to be strong. We generated approximately $230 million in cash from operations, 100% of operating income and ended the quarter with a cash balance of $1.4 billion. We returned $340 million to shareholders in the quarter through dividends and share repurchases, consistent with our capital allocation priorities. Now looking ahead, as Hanneke pointed out, we are monitoring 2 pockets of uncertainty. The U.S. consumer market, particularly in gaming, and the overall macro environment, particularly around tariffs, export restrictions, global trade dynamics and inflation. Now nonetheless, we are expecting the overall top line trend to continue to be positive and roughly in line with the performance year-to-date. Net sales in the third quarter are expected to grow 1% to 4% year-over-year in constant currency, with gross margin rate between 42% and 43% and non-GAAP operating income is expected to be between $270 million and $290 million. This outlook contemplates tariff levels for the third quarter to be unchanged from the current structure. And we anticipate, again, that our pricing actions and continued diversification efforts will offset the negative impacts of these tariffs. So while there is a level of uncertainty in the U.S. market, we will continue to manage the business with diligence, generating strong levels of operating income and cash from operations. So I want to thank once again our teams across the globe for their dedication and flexibility. And now, David, I think we can open the call for questions. Operator: [Operator Instructions] And now our first question is form Asiya Merchant from Citi. Asiya Merchant: Great. I hope you can hear me. Matteo Anversa: Yes, Asiya. Asiya Merchant: Okay, okay. All right. Wonderful. [Technical Difficulty] double down a little bit on the U.S. consumer uncertainity that you talked about specifically [indiscernible] gaming. What have you seen? Has that been a function of the price increases that you put through? And when you talk about Americas improving as the quarter progressed, was that a -- is gaming part of that? If you can just double-click on that. And then just given the fact that sell-through was so much better than sell-in, why should we have like more seasonal or maybe more like mid-teens, mid- to high teens kind of guide that you guys are talking about? Johanna Faber: Yes. Thanks, Asiya. So there's a couple of pieces in that question. I appreciate it. Maybe first on the markets overall, we saw continued strong markets around the world on the work side of our business. So Video Conferencing and Personal Workspace, really markets were strong and growing everywhere. In Europe and in APAC, the gaming market also continued to grow. But in the Americas, it was a little bit more mixed. Again, VC and PWS were really solid market-wise, but the Gaming market in Q2 declined mid-single digits. And the reasons for that decline can be debated, but I think what's more important is that we're cautiously optimistic that the gaming market will recover and be back to growth in the holiday quarter for a number of reasons. First of all, we saw the trends improve as the quarter progressed, Q2. There have been some game releases early in Q3, notably Battlefield 6, which is the type of game that really plays to our strength and is off to a really good start. And then we have an excellent innovation bundle and some targeted promotions where needed to continue to grow the business. So I think, again, globally, market is actually quite strong. North America gaming, a little softer. And by the way, in the global context, our competitive share performance in Q2 was also very strong. So all in all, good momentum and cautiously optimistic that, that spot of North American gaming will be better during the holidays... Asiya Merchant: No, no, go ahead. Matteo Anversa: Unpacking a bit of the second portion of your question on the outlook. So the way I think I would describe it as we think it's a reasonably fair balance between the underlying strong performance that the business continues to have, as you have seen in the results that we posted earlier today with some of the litany of uncertainties that Hanneke talked about in her prepared remarks. So when you look at it by region, basically, we are expecting Asia Pacific to continue to perform extremely well with double-digit growth. China keeps doing extremely well. We have 11/11 coming up here in November. So we are expecting strong performance on gaming. So Asia Pacific will continue to perform in line with the last couple of quarters. Similar thing for EMEA, we are expecting a low to mid-single-digit growth in constant currency in Europe as well. So the bookends of our outlook is really around the -- what's going to happen in North America with the U.S. consumer to Hanneke's point earlier. And here, if you look at the low end of the outlook assumes a North America that continues to be slightly negative year-over-year in terms of net sales, like we have seen in the first 6 months of the year, while the high end of the outlook assumes a strong holiday season, strong consumer and North America actually turning flat to slightly positive. So that's are the bookends of the outlook that we provided today. Asiya Merchant: And was any of that an impact of prices that you put through, price increases that you put through? Johanna Faber: Yes. I think mostly our brand and our products, both of which are, we believe, quite superior, protected us to a large extent from impacts of the pricing. I would say, in general, higher priced and premium products as well as our B2B portfolio, we saw very little to no impact of the price increases. Where we did see some impact was on entry-priced products and even there, probably a little bit more so on entry pricing gaming than in PWS. And we're actively managing that with targeted promotions. Operator: Our next question comes from Erik with Morgan Stanley. Erik Woodring: Maybe just following up on Asiya's question there. Just if you could maybe touch a little bit more on the consumer response to higher prices. And really, what I'm trying to get at is, you talked a little bit about B2B pull forward in the June quarter. What type of behavior did you see kind of prior and then after pricing increases in the U.S. that maybe informs you about the consumer? And how are you -- or what are the assumptions that you're making into the December quarter as it relates to pricing and kind of the elasticity of pricing? And then a quick follow-up, please. Johanna Faber: Yes. So again, on the B2B side, very little impact with the exception maybe of some timing impact where, again, we saw a little bit of pull forward in our Q1. But demand-wise, very little impact. Same thing on the premium end of the portfolio, very little impact. I think the U.S. consumer at the high end is in good shape. A little bit more impact on the lower end. That's not unexpected. And again, that got better during the quarter. So overall, we're really pleased by the fact that we took pricing early and you see what that does to our gross margins where we were able to offset the entire impact of tariffs by pricing and cost reductions. Erik Woodring: Okay. And then quickly as my follow-up, Hanneke or maybe it's better for Matteo as well or maybe both of you is just can you talk about how Logitech is thinking about M&A today? And if there's any difference from what you outlined at your Analyst Day back in March, I only ask, we haven't seen I don't think anything has necessarily materialized over the last, let's call it, 6 or 7 months. And so is that just a function of better uses of cash? Is it a function of valuations? Is it a function of the opportunity set? Would just love your feedback there. And that's it for me. Johanna Faber: Yes. Thanks, Erik. No change. I'm afraid versus AID. So our top priority for capital allocation is investing organically in the business, and that's definitely what we're doing. Second priority is making sure we grow the dividend every year. Third priority is M&A, and we are actively out in the market looking for the right targets, but they have to be strategic and they have to make the boat go faster. And we're looking at lots of things, but I'm going to be very careful. I want things that make the boat go faster, and those are not so easy to come by. And then our last priority when it comes to capital allocation is share buybacks because we also don't want a lazy balance sheet, and you saw us returning a lot of cash to shareholders in the quarter, mostly through the dividend in Q2, but also through some buybacks. Operator: Our next question comes from Alek Valero with Loop Capital. Alek Valero: This is Alex on for Ananda. So just back to Gaming in the Americas, can you speak to how and when do you think the Americas, I believe you said entry-level gaming can normalize the higher ASPs? Johanna Faber: Yes. Again, we saw trends improving throughout the quarter. And in America, we haven't taken price increases in a long time. So we don't have a lot of history, but we have taken price increases in other markets around the world over the last -- in recent times. And you tend to see a bit of an impact in the first quarter after. So that is no surprise. And again, we were pleased to see in the impacted parts of the portfolio trends improving throughout the quarter. And as Matteo outlined, exactly when that will normalize is a little hard to tell, which is why we have a range for Q3 and the bookends of those assume either it normalizes faster or it takes a little bit longer. But overall, we're confident that it will normalize. Alek Valero: Awesome. Just a quick follow-up. I believe I recall you mentioned that the B2B is going to layer in over time. Can you speak to what the mix is today in terms of business to consumer? And where does it go from here? Johanna Faber: Yes. So Logitech for Business, which includes VC headsets and Personal Workspace sold into the enterprise channel is about 40% of the business, and that's creeping up but very slowly over time as we double down on that. And we're pleased in Q2. It was again a strong quarter for Logitech for Business. You saw the VC sales were up with double-digit demand growth. And we like -- there's a lot of things we like about Q2 in Logitech for Business. But I would say what I like particularly, we saw disproportionate growth in higher ASP, more premium solutions, including the exciting new Rally Board 65 video conferencing mobile solution, which is proving to be very popular. We continue to strengthen our go-to-market capabilities. We launched CPQ, configure price quote in the quarter, which is really helping us quote faster and deliver better service to our customers. And the education vertical continued to be -- continue to do very well in the quarter. So lots to like there, and we'll continue our focus on Logitech for Business. Operator: Okay. Our next question comes from Samik Chatterjee with JPMorgan. Samik Chatterjee: Let me check first , can you hear me? Matteo Anversa: We can hear you. Samik Chatterjee: Okay. Great. Maybe Hanneke and Matteo, what are you hearing from your distribution partners in terms of promotional activity that they want to really sort of ramp into the December quarter? I know you mentioned 11/11 as well in China. Just in relation to previous years, what are you seeing in terms of intentions from retailers for promotional activity? And maybe how does that influence the gross margin guide, Matteo, that you outlined for the next quarter, particularly when we compare to the slight moderation we had seen last quarter going from Q2 to Q3 -- last year, I mean, sorry. And I have a follow-up. Johanna Faber: Yes. I'll let Matteo comment on the gross margin guide for the next quarter. In terms of what we're hearing, I've been out in the market quite a bit here in the U.S. and in Canada in the last few weeks, talking to customers, to consumers, to some of our partners. I would say they're also optimistic on the holidays. They want to be sure that our premium offerings look really great. And if you go into a Best Buy or in Europe into a MediaMarkt, you'll see fabulous execution, I think, of the McLaren collection and the MX Master 4, which is at beast. They also want to be sure that we together offer great value on the low end of the portfolio. So both in Europe and the U.S., you've seen us in the past quarter do a little bit more promotion there. And I would say that, that kind of mix of great visibility of the high end and targeted promo on the low end will continue into Q4. And that's important -- Q3, sorry, that's continuing. That's important, not just in the U.S., but also in Europe, where we need to do a lot of blocking and tackling versus low-end Chinese competition, which for obvious reasons, is more active in Europe now than last year. Matteo Anversa: So Samik, let me unpack to you the gross margin a bit. I think the best way to think about the third quarter is almost looking back at the second as the story is actually pretty similar. We've been now for quite some time, pretty surgical on promotion and really, to Hanneke's point, really spend the money very carefully where we think is needed. And that's exactly what happened in the second quarter, and that's what you can expect us to do also in the third. So if you look at the gross margin rate in the second, we're basically flattish year-over-year. As we said in our prepared remarks, our pricing actions completely offset the impact of tariffs. Then we had -- the team -- the operating team did a marvelous job and continue to work on product cost reduction, while they were also concurrently working on the manufacturing diversification. And this gave us about 100 basis points of margin expansion year-over-year, which was offset by slightly higher promotion to Hanneke's point that she just described. And then last quarter, if you recall, last year, we had a release of inventory reserves, which was -- did not occur this year that put about 100 basis points pressure year-over-year on the gross margin side, but this was offset by the positive effects due to the current exchange rate, primarily euro to USD. So that's the breakdown of the second quarter. So if you look at the third quarter, actually, the story is going to be -- we are expecting this to be very, very similar. So we will continue to work on product cost reduction. So that should help us offset a little bit more of the promotional spend that you normally have in the third quarter being the holiday quarter. And then price will continue to offset the impact of tariffs. So that's how we layered out the outlook of 42% to 43% that we described today. Samik Chatterjee: Okay. Okay. Got it. Maybe just for my follow-up, for the OpEx run rate that you're managing the business to fairly -- looks fairly disciplined and you're managing it with a lower OpEx envelope year-over-year. I mean, obviously, the business is still growing. So what are the areas you're sort of making those trade-offs on? And where are you finding those efficiencies to keep the OpEx envelope this tight at this point? Matteo Anversa: Sure. So starting at a high level with the numbers, right? We outlined even at the Investor Day that our objective is to have OpEx in the range of 24% to 26% of net revenue, right? Last year, you saw us maybe more on the higher end of this range. And this year, so far, we have been a bit on the lower end. And that's fundamentally driven by the -- some of the measures that we took in light of tariffs to control some of the cost. And here, we need to be very clear that as we did also in the first quarter, most of these cost control actions were centered around G&A. So the typical semi blocking and tackling that you would expect a company to do on G&A, control the contractor cost, pausing hires of people that are not related to R&D or sales and marketing and travel control, this kind of stuff. And so that's really where the focus has been. So really trying to curtail the cost on G&A, but at the same time, take these savings on the G&A side and then refunnel it back into the growth of the business, which for us means R&D and then sales and marketing. And that's what should expect -- you should expect us to continue to do in the next couple of quarters. Operator: [Operator Instructions] And with that, our next question goes to Didier with Bank of America. Didier Scemama: I've got a couple. Maybe first, maybe for Matteo, Hanneke, whoever. I'm just wondering, I think you touched on it a little bit, but how should we think about the marketing spend in the holiday season? Because I can think like some -- you've got some sort of tailwinds from FX. You've got also a sort of difficult consumer environment or slightly more difficult consumer environment in the U.S. So you would want to use that FX tailwind maybe to invest in the U.S. At the same time, you also have a channel that is very lean. So I just wonder how you should we think about that? Johanna Faber: Yes. So we feel good about inventories ahead of the holidays, both in the channel and our own inventory levels. So they're healthy. We have enough. We don't have too much. It's all good. The way -- if I look at overall OpEx, again, Matteo said it just now, we had a great quarter in terms of OpEx, 24.4%. That's, I think, 240 basis points down versus last year. So that's a really great discipline. That was focused on G&A, where we're super purposeful and just tight. R&D was virtually unchanged in Q2, and we're going to continue to invest there. That's our bread and butter. And then to your point, marketing was also in Q2 close to last year. I think what's important to note there is that the effectiveness of our marketing spend globally continues to improve. We're shifting money from nonworking producing stuff to working, which is, in general, much better. And we're also strengthening our marketing capabilities. I've mentioned China before, but in China, we are really rocking it in marketing. And in fact, just last week, at China's big marketing ROI Festival, there were 2,400 entries for best marketing ROI, and we were one of only 11 Gold Award winners. So it just shows the strength of our marketing team and how we've modernized marketing. We're getting more bang for the buck in marketing. And I expect that to continue in Q3, and we won't hesitate to lean into either R&D or sales and marketing spend if we think it can accelerate the top line. Matteo Anversa: For modeling purposes, the -- remember, the third quarter, OpEx as a percentage of net sales tends to be a little lower just because it's the biggest quarter of the year. So that would imply a sequential increase to Hanneke's point, both overall in OpEx and the increase will be primarily in R&D and sales and marketing. So that's what you can expect. Didier Scemama: Perfect. And the quick follow-up is on the China for China strategy. I think Hanneke last quarter, you sort of mentioned that there was a pivot in the competitive positioning of Logitech. You were starting to gain share after several quarters of difficult, let's say, competitive environment for the company. So maybe can you elaborate a little bit more on the products you've introduced, the price points you're hitting and where you've encountered the greatest success? Johanna Faber: Yes. No, happy to do that. So again, China had -- we don't break it out, but you've seen the APAC numbers and China was ahead of those APAC numbers. We continue to hold the #1 shares. Actually, in Q2, PWS share now grew for the entire quarter, which I haven't seen since I've been at Logitech. So that was great to see. And gaming share for the quarter was still slightly down, but the trends are improving. So that's good to see. That's driven by the marketing I just mentioned, where the team is doing a great job versus even a year ago and by innovation. So our global innovations are working well in China, but we've also invested in China for China innovation. So the most exciting thing we launched in Q2 was a new gaming keyboard, the G316 just for China, really cool and unique RGB lighting, retro vintage display and of course, all the cool performance stuff, 8 kilohertz, et cetera. That is doing very well. That's actually on the medium, I would say, the lower medium end of the price range, which is an important part in China to really go big on. Still great margins. The team has done a great job designing and building that in China. And you'll see that type of innovation more and more of it going forward, but super excited about the momentum we now have in China in a fast-growing market as well. Operator: Okay. Our final question will come from Michael with Vontobel. Michael Foeth: You actually answered just all my questions on China just now. But I have 2 small follow-ups. One is on the channel inventories. You said channel inventories are quite lean. You're happy with inventories. Is that the same dynamic across all regions? Or are there any differences across the regions? And can you tie that also maybe with the numbers you showed on sell-in and sell-through? And the second question would be just on gaming. Could you give a bit more color on the different subsegments in gaming, simulation, console and PC gaming? I mean you mentioned PC gaming being very strong, but what about the other categories? Johanna Faber: Why don't I take the gaming and then you can comment on the inventory. So yes, we talked a lot about gaming in the U.S., but maybe if we zoom out gaming globally, again, continue to be really strong with net sales up 5% and demand up double digits, driven by very strong, again, double-digit sales growth in our #1 market, which is China. When we look at the different parts of the business, Michael, we're seeing continued strong demand at the top end. So Pro was up more than 25%. SIM was up more than 10%. So that's really great. And again, we continue to block and tackle in the lower end of the portfolio, which is also important, which also saw solid growth, but the kind of disproportionate growth is coming from the top end of the gaming business. Again, excited for the short term on gaming with things like the SuperStrike and the McLaren Collection. I'm very excited about the mid- and long-term perspectives in gaming. Matteo Anversa: And Michael, on the -- on your question on the channel inventory, we feel the channel overall across all our regions is in a good spot. When we look at the weeks on hand, it's in the range that where we wanted this to be. It's important not to confuse. We had a little bit of a channel inventory dynamic in B2B in VC actually last quarter. That's why you saw in the first quarter, the sell-in of VC outpaced the sell-through and now the reverse happened in the second quarter. But that's a dynamic that has been fixed here in the last 6 months. So overall, we are pleased where the inventory is. And overall, if you look at AMR, that's where you have the biggest discrepancy, the sell-out outpaced the sell-in a bit, which is a positive sign as we enter into the third quarter and the earlier season. Operator: Sorry, we do have one more question from Martin with BMP. Martin? Martin Jungfleisch: Two quick follow-ups. The first one is really on the strength in keyboard and mice. Would you say that is Windows 10 Refresh driven? Or is it more COVID refresh? Or none of those 2? That's the first question. Johanna Faber: Yes. Sorry go ahead, go ahead for your second one. Martin Jungfleisch: Yes. The second one is more for Matteo, I would say, just on the tariff headwind. I think was it the 200 to 300 basis points that you were expecting that you saw in the third quarter? And then also going forward, as you exit the -- or slowly exit the China to U.S. business, should we actually see that headwind ease over the next couple of quarters? Johanna Faber: Yes. Maybe I'll take the PWS one first. And thanks for noticing that really great results in Keyboards & Combos and Mice. Some people think those things can't grow. But as you can see, they can grow. What were the drivers? I'd say the first driver was, again, the premium end of our portfolio. So MX and Ergo are doing extremely well, both with double-digit growth in the quarter. And again, that MX Master 4, a lot of pent-up demand for it, entire subredits dedicated to it before launch, just a lot of excitement on that launch. Then we're seeing continued excellent execution in-store and online on our core keyword and mice business. And to your question, is this linked to the Windows 11 Refresh? We've always said I don't think our growth -- we know our growth is not directly tied to any PC sales trends. And historically, peripherals have always grown a couple of hundred basis points ahead of PC sales, but it can't hurt. And we're always very focused on attach programs in-store and online. When you buy a new PC, we also hope you will attach one of our peripherals. And of course, with some of the excitement about the Windows 11 Refresh and the AI PCs, that gives us more attach opportunities. So I would say that's a mild tailwind, but the real growth comes from our premium portfolio. Matteo Anversa: So Michael, let me -- Martin, sorry, let me talk about the other question. So the -- if I rewind the tape a little bit, right? So in the last earnings call, we said that we were expecting the tariff impact to be about 200 to 300 basis points, offset by 200 basis points of price. So we were expecting the net impact all in, including the diversification action and price to be between 0 and 100 basis points negative for the gross margin for the quarter. What in reality happened is, as we mentioned in the prepared remarks, we were able through -- we were able to offset the entire impact of tariffs. It's about 150 basis points each. So the impact of tariff net of diversification was 150 basis points pressure to the gross margin and price was a lift of 150 basis points. So net-net, we were able to offset entirely. And really, that's driven by 3 key things. Number one, the continued work that our supply chain team is doing on manufacturing diversification, which is trending in line with plan. The price actions that we took in April and then supply chain management. Really, they're doing a fantastic job in managing inventory, and they were able, as we said in prior calls, to pull in some of the inventory, some of the purchases ahead of new tariffs being placed. So we were able to mitigate some of the impact of the tariffs. So this 150 basis points dynamic, that's what I would expect also to happen in the third quarter. So 150 basis points impact on tariffs, offset by price, assuming, obviously, the tariff structure stays as it is currently. Operator: And now we have no further questions. Johanna Faber: Great. Well, thank you always great to see you all. Looking forward to seeing you in the follow-ups, and thanks for being with us today. Have a good week.
Operator: Good afternoon, and welcome to the Mondelez International 2025 Third Quarter Earnings question-and-answer session. [Operator Instructions] On today's call are Dirk Van de Put, Chairman and CEO; Luca Zaramella, CFO; and Shep Dunlap, SVP of Investor Relations. Earlier this afternoon, the company posted a press release and prepared remarks, both of which are available on its website. During this call, the company will make forward-looking statements about performance. These statements are based on how the company sees things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in the company's 10-K, 10-Q and 8-K filings for more details on forward-looking statements. As the company discusses results today, unless noted as reported, it will be referencing non-GAAP financial measures, which adjust for certain items included in the company's GAAP results. In addition, the company provides year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within the company's earnings release and at the back of the slide presentation. Operator: We will now move to our first question. Our first question comes from the line of Andrew Lazar with Barclays. Andrew Lazar: Dirk, maybe to start off, I was hoping you could talk a bit more in depth about Europe, how you're seeing things as you sort of close the year and into next, particularly when it comes to pricing that's been landed and movements sort of that you deem that you need to make, as you mentioned, price gap management in certain European markets. Dirk Van de Put: Yes, Andrew. So I would say, if I start with the consumer in Europe, I would say the consumer confidence remains, in general, stable, unchanged versus the last quarter. If I look at our biscuits, cakes and pastries and meals business, they're all performing well, where we have share growth and volume/mix growth. And if I look at it from an overall euro perspective, I would say the category is performing generally in line -- the chocolate categories in general, in line with expectations. We've seen the cocoa situation. As you know, we had to do quite substantial price increases in the order of about 30%. And so broadly speaking, I would say, the chocolate business is fine, but we are clearly seeing a couple of pockets of pressure that we need to address. These are caused sometimes by competitive situations where our competitors did not increase their pricing as much as we did, largely because they are private companies. And the other thing I would say is that in certain markets, the retailers also suddenly took more margin than they have historically done. So we're fixing these problems. I wouldn't say it's a structural issue, but we need to be -- deal with, and that has caused a difference in what we were expecting for this quarter in Europe. I would also mention that as you look at the European situation, there was a heatwave in July, which has affected our volumes, plus we have done some significant downsizing also, which affects our volumes. The two markets where we have these situations are the U.K. and Germany. We are starting to see a reaction to the repositioning of the price points in certain areas of the portfolio that we have done. And so we are seeing the volume and the share improve as a consequence of that. We've also seen that competition has started to price recently. So that also will help the situation going forward. Overall, I would say, as I see how the pricing is landing in Europe, elasticity is around 0.7, 0.8, it's higher than we would have expected where -- our thinking was more like 0.4, 0.5. And so we are taking on top of what I already explained to a number of other actions in the sense that we are innovating with new flavors and new formats. We are investing more in A&C. We're driving the seasonals very hard. We're working on promo effectiveness because that's also not playing out sometimes the way we would have expected. And largely our main focus is on hitting the right price points where in certain cases, like on our 300-gram range in chocolate, we passed 2 key price points, and that was probably a little bit more than the consumer can accept at the moment. We are, of course, accompanying that with a lot of productivity and cost savings. But overall, I would say, seen the fact that this was the heaviest cocoa cost that we would have in the year, from here going forward, we expect a significant improvement. We expect to see a significant improvement in Europe. I hope that helps, Andrew. Andrew Lazar: Yes, really thorough. Really appreciate that. And I guess, lastly, with respect to guidance, maybe you could talk briefly about the implied Q4 guidance change, just as I would assume, cocoa is largely been locked in at this point. And then what's the key reason behind, I guess, the cut? And then as it relates really to '26, you make reference to being an algorithm and EPS. I was hoping you could add a bit more color on your confidence around this. And I guess, more importantly, the sort of the key puts and takes that we should think about when thinking about organic sales growth next year in light of the planned investments that you're making and some of the elasticity concerns? Luca Zaramella: Thank you, Andrew. I will start by saying that on the '25 guidance, we had a series of impacts that clearly we weren't anticipating at the time of us giving guidance for 2025. The three main ones are the tariffs and related uncertainty affecting the overall consumer confidence. The second one is the material destocking that happened in the U.S. due to retailers lowering their working capital. And the third one clearly was the unprecedented heatwave in Europe. Those elements lowered already, when we talked to you for Q2, our flexibility for the year. With incremental softening of the U.S. biscuit market at the end of Q3, and we saw the market declining in volume terms a little bit more than the previous quarters, and the higher chocolate elasticities in Europe. Clearly, that caused a volume/mix impact that at this point in time, we don't want to offset by cutting costs and potential growth into next year. I think importantly, in the prepared remarks, we give you a sense of all the actions we are taking to improve the volume trend that we see specifically in the U.S. and in Europe. And importantly, we have taken additional pricing in the U.S. We have confidence in all the plants that we are putting in place around seasonals. I think we call out clear elements of growth in the U.S. like Tate's, the Ventures and Give & Go. And I think when you really look at what the new guidance means in terms of implied Q4, you see a step-up in the top line. 4% is year-to-date organic net revenue growth, we are guiding you at more than 4%. And importantly, last year, below the line, we had an $0.08 impact in the tax line that is nonrecurring this year. And so the implied EPS growth will translate in an over delivery compared to last year of the EBIT that will be quite good in terms of growth. Obviously, as far as '26 goes, it is a little bit premature to put all the pieces together for you at this point in time. We are literally going through the plans. And you might imagine that the big question we are asking ourselves is, what cocoa level are we going to have into next year? As I mentioned a few times, we are well protected and covered. But reality is we have put in place a series of coverage strategies that would allow us to participate to cocoa further potential declines. And so we need to understand a little bit better, and we will have a better sense of what the real cocoa impact is going to be for next year. It's certainly going to be positive even if cocoa is trading at a level that is quite higher compared to historical norms. We feel quite good about the plans we have been reviewing with all the business units in terms of chocolate. We are clearly optimizing GP dollars into next year, in line with our guidelines and how we want to manage the business. The commercial approach to chocolate is quite good. We are doubling down on things that are working really well for us. And obviously, we want to build share, drive consumer value and protecting penetration. And I don't have to tell you again that we have big opportunities in all emerging markets. I mean, adjacencies like cakes and pastries, snack bar and premium. So cocoa will be deflationary in '26, and we wanted you to hear that our goal is clear in terms of EPS growth for next year. And so we are really targeting a high single-digit EPS growth for 2026, even after the material investments that we're going to put into the business to really protect the long-term growth of our categories. Operator: We'll move next to Peter Galbo with Bank of America. Peter Galbo: Dirk, I was hoping maybe you could give us a similar walk around the U.S. in terms of the path forward maybe to getting back to growth. I know you gave kind of a very detailed answer around Europe, but would appreciate kind of a similar level of detail on the U.S., please. Dirk Van de Put: Yes, yes. Well, so as Luca already said, we saw the category slowing down more in the last quarter versus what we saw in the first half, which is obviously not good. If you look at it, the volume was down 4% versus 2.8% average year-to-date. That is driven obviously by a consumer that is very concerned in general about the economy, frustrated with the pricing they're seeing. And we're seeing the same behavior that we've been seeing before in the sense that they are really seeking for value, that means different things for the lower-income consumers, that means going to smaller packs at the right price points. For the higher income consumer that usually goes for bigger packs and buying when they're on promotion. We see that the basket size of the consumer is really not increasing over the last 3 years. And as you can imagine, as prices have gone up, they're being more squeezed on what they can buy within that basket. And they are tending to focus on what are the essentials. And as a consequence, snacking categories are not that essential for them, and we're seeing that in our volumes. And on top of that, promos are not necessarily delivering the expected ROI. What else are they doing? They're shifting channels and format. So we see a big shift from food and mass to value, club and online. We see more multipacks being sold. There's also some good news in the sense that some of the premium segments are doing well, like cakes for us is doing well and some of the better-for-you offerings, particularly protein related, that is for us a Builder's Bar under the Clif range, or a Perfect bar. They're doing well. We have Hu, which is our vegan chocolate is doing well. So we can see that there are areas that are connecting with the consumer for instance, also a Give & Go is doing quite well. The main concern is the U.S. biscuits category. And of course, the government shop shutdown going forward will not help with the confidence of the consumer. If I look at the OI, the reason why the OI is negative in North America is largely driven also by cocoa. It might not immediately be clear, but Oreo or chips or Tate's also have quite a bit of chocolate in them. And so they are affected by them. At the moment, it's not easy to price in the U.S. So what are we doing about all this is the big question, of course. I would say in the first place, the one thing that's important to realize is that our presence in those channels that are benefiting, Club, Value and E-commerce is good, but we don't have the same market share as we have in food and mass. So we've been working very hard to increase our presence there over the past more than one year. And every quarter, our market share in those channels is increasing, and we will continue to do so. That means we have to adapt our PPA. We have to increase the number of displays we have in these channels, and we need to do some route-to-market investments. The other channel that we are pushing very hard is on the go. And on the go, you can reach the consumer on the go with multipacks. If you think about a big multipack, and mom has to put a snack in the lunch basket, if you buy a multipack, that can cover several days or more than a week. And so we see a big opportunity in multipacks. Of course, we are working very hard on C stores because that's the other big area where on the go is happening. Overall, price points are critical, so we're doing a lot of RGM work on hitting the right price points. And that means really PPA at both ends of the spectrum. On one hand, the lower price. And so we've been talking about in previous calls that we need to get really to that $3 price point with some of our packs and then also the big pack as I was talking about before. The other thing, as I said, better for you, particularly protein is doing well. So we're driving our protein range quite hard. We're seeing 20%-plus growth there in Perfect bar and in Builders. So that is something that we will continue to double down on. And then as it relates to premium, particularly brands like Tate's, belVita and Hu are the other ones that we are going to double down on. As it relates to health and wellness, we also see a little bit of movement in overall health and wellness. We are working on expanding the Zero Oreo range and also the gluten-free Oreo and Tate's range. So maybe the last thing I would mention there on how we are trying to get back to growth is that we are studying very carefully how our promotions are working, and we've seen that we have to shift the way we do certain promotions. We need a lot more activation, not just a price decrease, but activation featuring special events, things like that. So those -- all those activities combined at this stage, make us believe that we can get to positive growth next year in U.S. Peter Galbo: Great. And Luca, maybe just on the prior question, maybe a bit more directly, you seem to have the visibility on, on-algorithm EPS growth for next year. I mean, should we be expecting that on top line, you'd have some visibility to algorithm top line, even if it's at the low end, just I know it's a bit more of a direct question, but would be helpful just from a modeling standpoint. Luca Zaramella: As I said, Peter, we need to put together our thinking at this point in time on what type of cocoa levels we are going to have into 2026. As I mentioned, we are well protected, but should cocoa go even lower, we will take advantage of that. I think the way you have to think about the top line is in three key components. One, it is Europe, where clearly, chocolate pricing might be deflationary. But as a consequence, the elasticity that we saw on the way up, should happen on the way down as well. And importantly, I think we will be seeing volume growth in the chocolate business for 2026 in Europe. The other component is developing markets where I think you're going to see continuous growth, volume and price-driven at this point in time. And the third component is really the U.S. where we are not projecting an improvement of the market situation, but where we will have material benefits coming out of channel expansion, us investing more in our brands and importantly, going after things that are really working well for us and doubling down on those. I think in the prepared remarks, for instance, we mentioned Oreo with Reese's. So it's really impossible for us at this point in time to give you exactly the range of top line growth of 2026. But rest assured that we are driving for volume growth in chocolate in Europe, we are going to restore top line and bottom line in the U.S. And third, emerging markets will continue growing for us. Operator: We'll move next to David Palmer with Evercore ISI. David Palmer: I just want to circle back to Europe. You mentioned the price elasticity up to 0.7 or so. And you also talked about there's some price gap issues and some competitors that have lagged on pricing. I'm curious how you're thinking about the outlook for price elasticity going forward, maybe some of the gives and takes since we don't deal with that market quite as much. One scenario would be that you're making adjustments right now. And that price elasticity could come back down. And then you mentioned the historically high prices, and we've seen categories where there's a little bit of fatigue after a series of prices and that price elasticity can continue to be stubborn and rising. So I wanted to get your sense on that. And I have a quick follow-up. Dirk Van de Put: Yes. Well, the type of price increases we had to implement our kind of unprecedented if you think about it. We are players that are largely in the tablet market. We are also in the other segments of chocolate, which is gifting or count lines. But largely tablet players, which has the biggest content of cocoa. So as a consequence, we had to do, as I said before, about a 30% price increase. And historically, the elasticity has been around 0.4, 0.5. It is higher, as I said, 0.7, 0.8, but that's not yet dramatic in the scheme of things, I would say, that's pretty good as long as you're below 1, I don't think there's many categories that would have such a limited price elasticity. But the main thing is, if you think about a 30% price increase on a 300-gram chocolate bar, for instance, you start to really get into quite high euros per bar. And I think as an example, that one, that's the one where we believe that we need to do something going forward. That doesn't necessarily mean elasticity needs to improve. What we need to do is get that bar to a price point, which is much more acceptable for the consumer. Short term, we can do that by reducing the price. Long term, we have to see if we reduce it to for instance, a 250-gram bar or something like that. So it is really adapting to very specific circumstances where we knew that we were taking a risk by passing certain price points, and in some cases, that worked quite well. In other cases, it didn't turn out so well. So that's one movement we are doing right now. That movement is helped a little bit by some of the more benign cocoa environment. I wouldn't say cocoa is getting extremely cheap, but it's still much higher than it used to be, but at least it's come down from the high that we saw during this year. The other one is probably that we need to adapt certain formats and look at where our competition is placed and make sure that we are in a much more competitive level. That would be the second big movement that we need to make. So these two movements, we believe, will solve some of the issues that we're seeing. And again, I want to emphasize that, yes, things are different than we expected, but it's not that they're often a major way of what we would have expected to happen in Europe, but we do need to make a number of adjustments of which I just gave you two. David Palmer: And when you look at your emerging markets, do you -- I don't want to make a big deal of the type of price elasticities that it looked like in the third quarter, they were still not bad. Your volume was down, the price elasticity would be sub-0.5, even if you take that quarter in isolation. But are you seeing certain markets where you're seeing a little bit of fatigue or maybe price gap issues? Or is that playing out just as you would think there, and I'll pass it on. Dirk Van de Put: Yes. I would say -- in the emerging markets, I would say, it's playing out largely the way that we would expect. The first thing I would say is there is more downsizing that has an effect on our volume. So if you think about it, our emerging markets, volume was down 4.7%. And first of all, Argentina, where everything has been going on. I probably assume that you're aware of that. So there, we saw hyperinflation, very negative macros and so our volumes were significantly affected in the quarter in Argentina. I guess with the recent elections that will start to improve going forward. And then the other big market for us is India, where we decided not to increase our prices that much, but to downsize quite a bit. So if you take out those two, the 4.7% becomes a 3% volume decline. So there's a number of effects in there that are driven by downsizing or the economy in two markets. If I then go a little bit around, I would say, the one market that we are experiencing more pressure is China, where we had low single-digit growth, a negative low single-digit growth in Q3, which is a new thing for us. Year-to-date, we are positive in our growth. We do see some short-term pressure. But overall, we believe that things will be okay going forward. And as you know, we still have a big distribution runway. It's clear that the consumer there is still not in the same confidence and probably still at a low for the last 20 years, and we're starting to see some signs of that. But we do believe gradually the consumer confidence will come back. India, I mentioned, India in fact is doing quite well in the movement that we had to make. So performing better than we expected, mid-single-digit growth in Q3, low single digit year-to-date. And then if I go to Brazil, double-digit growth in Q3, excellent execution in biscuits, chocolate and gum and candy. And then Mexico, also improving. I wouldn't say that the consumer in Mexico is in a good place. Clearly, very concerned about the economy and overall job opportunities, but our business is recuperating from some of the issues that we had before. We're seeing good mid-single-digit growth in Q3. So I would say, overall, we feel pretty good. Maybe looking at the volume, you might say that there is -- or it might look like there's a big elasticity effect, but that's really not the case from our perspective. And on our four big markets, we feel quite good at the moment. Operator: We'll take our next question from Megan Clapp with Morgan Stanley. Megan Christine Alexander: Luca, maybe just a quick follow-up. I think in one of your answers you said the guide does imply a step-up in the fourth quarter from an organic sales perspective. It sounds like that's mostly driven by Europe. I guess, is that fair? And then just the second part of the question. I think you had anticipated some rebound in North America just as the pricing flowed through. So can you just help us understand a little bit more about what you're expecting for North America in the fourth quarter, just given scanner data has been a little bit softer recently. Luca Zaramella: Thank you, Megan. Yes, we expect a bit of a rebound in Europe. Definitely, there is going to be a big activation around Christmas, and so the team is full steam ahead in terms of delivering the season and -- so you will see a little bit of a volume step-up in Europe, and that's one of the drivers. I think you see emerging markets despite the numbers that on the face of it are in terms of volume/mix, maybe a little bit lower than you would have expected. As Dirk mentioned, there is a big impact of Argentina, but the chocolate elasticity in emerging markets is just 0.3x as of Q3. And we expect that not to improve, but not worsen either in Q4. And importantly, in places like Mexico, China, India, Brazil, et cetera, I think the top line will continue to be good. So yes, there will be a better top line going into Q4. In the U.S., we are projecting a market that is in line with the minus 4% volume wise that we have been talking. But as we said, we are fine-tuning our pricing strategies and our promos, and so you will see a little bit of more pricing kicking in, and that will have a positive impact on both the top and the bottom line. And so that's where we are at this point in time. Megan Christine Alexander: Okay. Great. And then maybe just as a follow-up. You talked about in the prepared remarks the new multiyear North America supply chain program. Maybe you can just spend a little bit of time helping us understand what's different about this from prior productivity programs and any early targets you can share today? Luca Zaramella: Yes, it is a plan that we have been reviewing with the team for the last, I would say, 6 to 9 months. It is leveraging the competitive advantages that we have in terms of supply chain already. I think if you look at our profitability in the U.S. in biscuits and compare it to other players, it is obvious that we have quite a few good things to -- that help us delivering good profitability of the business. The new program will be intended to address mostly cost in some of the U.S. bakeries. I think we still have opportunities in terms of putting down lines that are more automated and address, a, some capacity constraints that we have, but importantly, our overall cost structure, and I think it will be a meaningful impact, again, that you will start seeing most likely as of 2027. And the second big element that we are addressing at this point in time is our DSD system. We stand by it, it is a competitive advantage. And so we're not talking about the front-face delivery of our great brands to retailers, but we are rather talking about the logistics system that is in the back of all of that. And having potentially fewer distribution centers and branches and automating those will result, a, in much better cost from a logistics standpoint, but second, in a much better service level and inventory for retailers. And so let's stay tuned. We'll talk a little bit more about it in the next few months. And all of this will be done within the envelope of the cash flow goals that we have. Operator: We'll move next to Tom Palmer with JPMorgan. Thomas Palmer: You noted the planned reinvestment for 2026 just when kind of talking about earnings. SG&A has been running down quite a bit this year. I guess any framing of how much of the reduction we've seen this year is more persistent cost reductions versus items that kind of come back next year? Luca Zaramella: So in terms of SG&A, I would say there are three key components of it. The #1 is clearly the working media, and working media is a little bit in decline compared to last year, but we didn't touch structurally the amount of spending investments we have been making in that P&L line in 2025. Going forward, you will see a big step-up of that line into 2026, and we firmly believe that the virtuous cycle that has delivered great results for us will have to be put back in place in 2026, particularly as there is cocoa coming down and there is a cost favorability due to that. The second element is non-working media that has been managed in a declining mode for 2025 and that will continue into 2026. Obviously, we'll have to make some specific investments, but we expect the non-working media line to be kept in control. And the third element is the overhead. This year, specifically, there is a positive impact due to our incentive plan that is not as high as we had it last year. But importantly, as we go forward, I think the team is working on initiatives that will deliver further SG&A savings. And so we expect that line to be in level to 2025 in 2026, with the exception, obviously, of the incentive that will be planned at 100% for 2026. Thomas Palmer: Okay. And I apologize for asking again on Europe. But I do just want to clarify on elasticity because I think there's kind of two pieces you discussed. This 0.7 to 0.8, that's effectively like non-seasonal products where you're seeing that elasticity and the belief is that will not change for the quarter. But as you shift more to seasonal, you'll effectively see better volume trends because those items will have less elasticity? Dirk Van de Put: Yes. That's basically the correct assumption in the sense that the 0.7, 0.8, unless we start to do major movements, and what I said is we are adapting in certain areas, that means it's not an across the board sort of adjustment of our pricing. It's only in those specific cases where we think we need to bring it back to the right price point. And so the 0.7, 0.8 roughly will be maintained on the normal range. And just historically, we noticed that the seasonal range, the consumer is not that clear on what the right price point is and also is inclined to pay a little bit more. So the seasonal range will have less elasticity. Operator: We will take our next question from Chris Carey with Wells Fargo Securities. Christopher Carey: So I wanted to ask about North America strategy. Some of your competitors in North America or peers maybe better said, have taken the approach of investing into value, into pricing, so as to establish a foundation from which to grow volume longer term and have effectively accepted the consequences over a 12-month time horizon. I think you certainly dabbled with this strategy in the front half of the year, and it impacted your profitability and there's been some shift towards, I suppose, protecting the profit pool. Can you just talk about your -- I suppose, level of confidence is the right way to put this, that a strategy that's a bit more focused on value and protecting the profit pool is the right strategy as we exit this cycle over the next 6 to 12 months. And maybe just if you could highlight a bit more whether you don't see these as mutually exclusive items, you can both protect the profit pool with pricing, but also offer value with some of the innovations and pack changes. So a little bit of detail on the strategy evolution in North America regarding pricing and volume. Dirk Van de Put: Yes. Well, I would start with saying it's a particular year for us in the sense that you have on one hand, the whole chocolate, cocoa movement that we have to deal with. And on top of that, you've got North America, particularly U.S. market that is slower than we've seen in quite a while. And so at a certain stage, we need to, yes, protect our overall profit pool, and we cannot try to solve for all problems at the same time. And so that would be one reflection that we had. The other one, I would say, as we started off the year, and we had a certain promotional strategy, what we noticed in North America is that, that promotional strategy was not giving us the volume effect that we were hoping for. And as a consequence, that started to affect our margins more than what we have thought or our profit pool, if you want. And so the shift that you've seen with now some price increases and some changes in the way we promote are really not driven necessarily by protecting the profit pool but are really driven by seeing how can we optimize our situation. And so going forward, as you look into next year, on one hand, as we explained, we think that the chocolate situation will significantly improve and that will allow us also to invest more into North America. If we would use that extra investment for a value play at the moment, I'm not convinced that, that is the best solution. As I said before, consumers don't seem to necessarily just react to value. They seem to be much more in a situation where they say, "Well, I can buy in my basket today what I can afford. I'm not planning to increase my spending. Within that, I need to cover my essentials. And yes, sometimes I will buy my biscuits, sometimes I won't." But even if the biscuits are a very cheap price, it doesn't necessarily mean that they will buy them. So our experience with the value strategy hasn't been that great. What we do, do is in our PPA strategy, we have launched a range of products that are at lower price points, you get less product for it, but at least it's available at the $3 or the $4 price point where about 1.5 years ago, 70% of our range or so was above the $4 price point. And we've significantly moved that in a way, that is a value strategy, but those products come still at very good margins. So that's the way I see the movements that we are going to do. And I hope this clarifies it a little bit. Christopher Carey: Yes. Helpful. One quick follow-up on the investment a little bit around this SG&A buckets. Is there any pull forward of investment that you had planned for 2026 coming into Q4 as you see some opportunities to lean in to achieve some of those outcomes that you're looking for? And then just as it pertains to this 2026 earnings outlook, does that embed a full spending, a replenishment of spending that you would expect to be sufficient so as not to need to do that again going into 2027? Luca Zaramella: Look, I think the -- at this point in time, the Q4 plans for A&C investments are locked in. So there is -- the guidance we gave you is in line with the level of spending. And clearly, we allocated money in the places where we saw opportunities. And as I said, we pulled back, particularly on nonworking media. But in general, pricing a lot, and they are contemplated in guidance. The virtuous model of this company is continuous investments in our brands, in our franchises and execution at point of sales and activation at point of sales. For instance, if you take some of the plans we have for next year, particularly around our chocolate with Biscoff or the fact that we are launching Biscoff in India. I think that will be meaningful spending and incremental cost due to activation at point of sales. I don't think it's possible to assume in a growth company like the one we want to be that we have done in 2026 with the investment. If you look at the amount of working media we have put into the system in the last few years, it is quite meaningful. But I think that is one of the reasons why we see our categories doing well. We have seen the company delivering good top line, volume-driven and price driven in a balanced way, and we want to continue that algorithm. I think importantly, you will see us in the years to come to go more deliberately after key incremental spaces like snack bars and cakes and pastries. We have just launched 7 Days in Brazil, we want to make sure there is efficiency of spending behind all these incremental initiatives. And so we don't want to play necessarily on a model that is launched, see how it does and then invest A&C, we want to go all in, both in terms of execution at point of sales and support to our brands. Operator: And this does conclude our question-and-answer session. I would now like to hand it back to Dirk Van de Put for any additional or closing remarks. Dirk Van de Put: Well, thank you for attending our Q3 earnings call. Obviously, if you have any further questions, our IR team, Shep and Ron, are available to answer anything else that you would like to discuss. Thank you. Luca Zaramella: Thank you, everybody. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.
Operator: Good afternoon, and welcome to the Red Rock Resorts Third Quarter 2025 Conference Call. [Operator Instructions] Please note this conference call is being recorded. I would now like to turn the conference over to Mr. Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead. Stephen Cootey: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts Third Quarter 2025 Earnings Conference Call. Joining me on the call today are Frank and Lorenzo Fertitta, Scott Kreeger and our executive management team. I'd like to remind everyone that our call today will include forward-looking statements under the safe harbor provisions of the United States federal securities laws. Developments and results may differ from those projected. During the call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings release, Form 8-K and investor deck, which were filed this afternoon prior to the call. Also, please note this call is being recorded. The third quarter was another strong one for the company by every measure. Our Las Vegas operations once again set new records, delivering its highest third quarter net revenue and adjusted EBITDA in our history while maintaining a near record adjusted EBITDA margin. This marks the ninth consecutive quarter of record net revenue and the fifth consecutive quarter of record adjusted EBITDA, underscoring the strength, consistency and long-term earnings power of our operating model. In addition to delivering strong financial results, we remain very pleased with the continued performance of our Durango Casino Resort and the revenue backfill at our core properties. Durango continues to expand the Las Vegas locals market, drive incremental play from our existing customer base and attract new guests to the Station Casinos brand. Despite the disruption caused by the construction of our new high limit slot room and covered parking garage, the property continued to demonstrate strong momentum within the quarter with increased visitation and elevated net theoretical win from our carted customers in the surrounding Durango area as well as adding new customers to the brand. As discussed on prior earnings calls, construction continues on the current phase of our Durango master plan. This expansion will add more than 25,000 square feet of additional casino space, including a new high limit slot area and bar. In total, the project will introduce approximately 230 new slot machines with 120 allocated to the high limit room. As part of this phase, we are also building a new covered parking garage with nearly 2,000 spaces, which will enhance customer access and provide infrastructure flexibility to support future growth of the company. The total project cost is approximately $120 million remains on budget and is expected to be completed in late December. With this phase nearing completion, we are now turning our attention to the next phase of Durango's master plan as we continue to build on the property's early success and strong customer demand. Supported by robust market fundamentals and the rapid development of the surrounding area, this next phase will expand the podium along the north side of the existing facility by more than 275,000 square feet. The expansion will add nearly 400 additional slot machines and [ancillary] gaming to the casino floor as well as introduce a range of new amenities designed to enhance the guest experience and deliver on what our customers are asking for, including a state-of-the-art 36-lane bowling facility, luxury movie theaters, a mix of new restaurant concepts and food hall tenants and multiple entertainment venues designed to drive repeat visitation and broaden our customer appeal. Construction is expected to begin in January and will take approximately 18 months to complete. The total project cost is estimated at approximately $385 million and will be executed under a guaranteed maximum price contract. We are excited to embark on this next phase of growth at Durango. And upon completion, we believe the property will be even better positioned to capture additional market share and drive sustained growth in the local market, which is expected to add more than 6,000 new households within 3-mile radius of the property over the next few years, complemented by the continued build-out of Downtown Summerlin and Summerlin West, which together are projected to add approximately 34,000 new households. Now let's take a look at our third quarter. With respect to our Las Vegas operations, our third quarter net revenue was $468.6 million, up almost 1% from the prior year's third quarter. Our adjusted EBITDA was $209.4 million, up 3.4% from the prior year's third quarter. Our adjusted EBITDA margin was 44.7%, an increase of 110 basis points from the prior year. On a consolidated basis, our third quarter net revenue, which includes $3.9 million from our North Fork project, was $475.6 million, up 1.6% from the prior year's third quarter. Our adjusted EBITDA, which also includes $3.9 million from our North Fork project, was $190.9 million, up 4.5% from the prior year's third quarter. Our adjusted EBITDA margin was 40.1% for the quarter, an increase of 110 basis points from the prior year. In the quarter, we converted 67.3% of our adjusted EBITDA into operating free cash flow, generating $128.5 million or $1.21 per share. This brings our year-to-date cumulative free cash flow to $335.3 million or $3.17 per share. This strong level of free cash flow was strategically deployed to support our long-term growth initiatives, including our most recent projects at Durango, Sunset Station and Green Valley Ranch or returned to our stakeholders through debt reduction, dividends and share repurchases. As we begin the fourth quarter, we remained focused on our core local guests while continue to grow our regional and national customer segments across the portfolio. Compared to the third quarter of last year, we saw continued strength in carded slot play across our database, including our regional and national segments. Robust visitation and net theoretical win helped drive the highest third quarter revenue and profitability in our gaming segment in the company's history. Turning to our non-gaming operations. Both hotel and food and beverage delivered another strong quarter, achieving near record revenue and profitability in the quarter. The hotel segment performed exceptionally well, generating near-record results despite the West Tower at Green Valley Ranch being offline for renovation, driven by our team's success in increasing occupancy across the portfolio. The Food and Beverage segment achieved record revenue and near-record profitability for the quarter, supported by higher cover counts across our outlets. In group sales and catering, our teams delivered near record third quarter revenue, and we continue to see positive momentum in both business lines through the balance of 2025 and into early 2026. As we look ahead to the fourth quarter, we are seeing continued stability in our core slot and table games business within the locals market and across our Carta database. We've also seen a return to a more normal hold in our sports business as we start the fourth quarter. While we do expect near-term disruption impact from our ongoing construction projects at Durango, Sunset Station and Green Valley Ranch, we remain as confident as ever in the strength of our business and long-term growth prospects. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the third quarter were $129.8 million, and the total principal amount of debt outstanding was $3.4 billion, resulting in net debt of $3.3 billion. At the end of the third quarter, the company's net debt-to-EBITDA ratio was 3.89x. During the third quarter, we made total distributions of approximately $27.8 million to the LLC unitholders of Station Holdco, including a distribution of approximately $16.3 million to Red Rock Resorts. The company used a portion of the distribution to pay its previously declared quarterly dividend of $0.25 per Class A common share and repurchase approximately 92,000 Class A common shares under its previously announced $600 million share repurchase program. Prior to the earnings call, our Board authorized an extension of our existing share repurchase program to December 31, 2027, as well as authorized an additional $300 million to our existing share repurchase program, giving us $573 million of availability for future share repurchases. As a reminder, since we began purchasing shares either through our share repurchase program or the 2021 tender, we have purchased approximately 15.2 million Class A shares at an average price of $45.53 per share, reducing our share count to approximately 105.9 million shares. As mentioned on our previous earnings call, there was no estimated cash tax payment for Red Rock Resorts in the third quarter, and we do not anticipate one occurring in the fourth quarter due to the passage of the One Big Beautiful Bill Act earlier this year. Capital spend in the third quarter was $93.7 million, which includes approximately $70.5 million in investment capital as well as $23.2 million in maintenance capital. This brings our year-to-date capital spend to $240.1 million, which includes approximately $163.1 million in investment capital as well as $77 million in maintenance capital. For the full year 2025, we now expect to spend between $325 million and $350 million, down $25 million from our previous earnings call, mainly due to the timing of capital expenditures. The full year capital spend includes $235 million to $250 million in investment capital as well as $90 million to $100 million in maintenance capital. In addition to our continued investment in our Durango property, we are making significant investments in our Sunset Station and Green Valley Ranch properties. At Sunset Station, we continue to advance our podium refresh to better position the property for continued growth in Henderson, particularly for the master planned communities of the Sky and Cadence, which are expected to deliver over 12,500 new households at full build-out. The $53 million renovation includes an all-new Country Western bar and Nightclub, a new Mexican restaurant, a new center bar and a fully renovated casino floor. We are pleased to report that customer feedback and initial financial performance on the completed portions of the renovation has been overwhelmingly positive, reinforcing our confidence in the project's direction. The project remains on budget with the new amenities expected to come online throughout the remainder of 2025 and into the first half of 2026. At Green Valley Ranch, we've commenced a comprehensive refresh of our guestroom suites and convention spaces, aligning the hotel experience with the recently renovated and well-received high limit table and slot rooms at the property. Work on the rooms in the West Tower is currently underway and is expected to be completed by mid-November, at which point the East Tower will come offline. While we are still reviewing the East Tower and convention schedules, we now expect the timing for this portion of the project to extend into the summer of 2026. As with our recently -- other recently introduced amenities, we believe these upgrades will generate strong returns. However, we do anticipate some continued disruption at the property through the first half of 2026 as we bring these new offerings online for our guests. Turning now to North Fork. Construction is progressing well. We expect to have the facility enclosed by the end of the month and permanent power in place by December, keeping us on pace for an early fourth quarter 2026 opening. The total all-in project cost remains approximately $750 million is fully financed and is being executed under a guaranteed maximum price contract. When complete, this best-in-class resort will feature approximately 100,000 square feet of casino space with over 2,400 slot machines, including 2,000 Class III games, 40 table games, 2 food and beverage outlets and a food court with many exciting options. At the end of the quarter, Red Rock's outstanding note balance due from the tribe stands at approximately $75.2 million. We're excited about this project, very happy with the progress of construction and look forward to providing further updates on future earnings calls. Lastly, the company's Board of Directors has approved an increase in our regular quarterly cash dividend of $0.26 per Class A common share payable on December 31 to shareholders of record as of December 15. The decision to raise our regular quarter dividend reflects the continued strength we are seeing in our business and the confidence we have in our long-term earnings power of our operating model. Including the dividend and the share repurchases completed during the quarter, we will have returned approximately $221 million to our shareholders year-to-date, demonstrating our ongoing commitment to disciplined capital allocation and delivering sustainable long-term value to our shareholders. With a third record quarter behind us, strong momentum from the start of the year has continued, and we remain confident in the strength and resilience of our business. Durango continues to validate our long-term growth strategy and highlight the value of our own development pipeline and real estate bank, which includes more than 450 acres of developable land in highly desirable locations across the Las Vegas Valley. Combined with our portfolio of best-in-class assets in premier locations, this pipeline positions us for significant long-term growth and allows us to fully capitalize on the favorable demographic trends and high barriers to entry that define the Las Vegas locals market. Looking ahead, we remain focused on executing our development pipeline, maintaining operating discipline and enhancing shareholder returns through a balanced and consistent capital allocation strategy. Finally, we want to take a moment to sincerely thank all of our team members for their continued hard work and dedication. Our success begins with them. They are the driving force behind the exceptional guest experience that keep our guests coming back time and again. Thanks to their efforts, we are proud to have been recognized with multiple accolades, including being voted top casino employer in the Las Vegas Valley for 5 consecutive years, certified as a Great Place to Work for 4 years running and named one of America's best in-state employers by Forbes for the second year in a row. We were also honored as a top place to work by USA TODAY and recently recognized by Newsweek as one of America's Greatest Workplaces in Nevada. Lastly, we extend our heartfelt gratitude to our loyal guests for their unwavering support over the past 6 decades. With that, operator, we're happy to open the line for questions. Operator: [Operator Instructions] and at this time, our first question will come from Dan Politzer with JPMorgan. Daniel Politzer: First, Durango, I guess, we can call it Phase 3, if you will. Can you maybe talk about the rationale there for adding on as you kind of finish up this initial phase, the disruption impact and maybe how to frame returns just given there is a big component of this project that's going to be clearly non-gaming? Lorenzo Fertitta: Sure. This is Lorenzo. Obviously, as you know, Durango opened very strong 2 years ago. Guests really have taken to the property, and we've been very happy with the results so far. Going back to the overall premise of the Durango investment, looking at the fact where the location exists, there's no competition within 3 miles in a growing market, submarket in Las Vegas. And then when we look at demand there, particularly for entertainment assets at that property, we felt like that there was the ability to drive additional traffic and additional guests by adding some additional capacity as well as additional entertainment assets there. And look, and the reality is that from a return standpoint, we expect to get similar returns on the expansion that we have gotten so far on the initial build, which is right in line with what we had communicated to everybody when we announced the project. Stephen Cootey: And of all the customer surveys that we've done since we opened, the one thing that our customer base expects is all these other entertainment amenities like movie theaters and bowling and things of this nature. So we're basically giving our customers what they're asking for. And that's really what we build as regional entertainment destinations in the best locations with the best amenities at the facilities. That's what's allowed our company to grow the way that it has. Daniel Politzer: Got it. That makes sense. And then just in terms of the quarter, Steve, I think you alluded to something along the lines of sports betting hold. I don't know if you can quantify what that might have been in the quarter? And then along those lines, any way to kind of get a sense of what that disruption impact, where we stand year-to-date versus I think that $23 million, although given it sounds like they're [indiscernible]. Stephen Cootey: It's really last year was like a not normal sports hold last year given the way the NFL had most of the favorites winning every game. Lorenzo Fertitta: Yes. If you recall, last October, we announced that last third quarter call, we announced we had about $4 million of unfavorable hold. So I just wanted to remind everyone that we're back to a normal hold as Q4 is progressing. In terms of, I think, disruption, I think this quarter was a really outstanding quarter by every measure, even despite the disruption we had in both our Green Valley Ranch, where the hotel remains offline through mid-November. It probably impacted our results by $2.5 million to $3 million for the quarter, after which the East Tower will then go right down. We also did experience some disruption, especially during peak parking times at Durango and at Sunset Station as we're during peak construction times. As mentioned, with the Green Valley Ranch project extended, we expect that disruption to extend beyond 2025 and into 2026. For Q4, we're estimating Green Valley disruption probably around $8 million. Operator: The next question will come from Brandt Montour with Barclays. Brandt Montour: So Steve, you called out in the hotel business, exceptional success. Obviously, one of your peers has an asset that's a little bit closer to the strip that was feeling it right from the sort of Las Vegas softness. And I know you guys are sort of running a different model, perhaps a different customer, different regional location. But maybe you could just comment on what you did see in terms of the strip weakness over the summer in your business. You guys have been taking share from the strip on VIPs. Did that kind of hold its own even with what's going on over there? Scott Kreeger: Brandt, this is Scott. Maybe I'll take this one. For the quarter, we were very happy with the hotel performance. We look at the choppy market in the city, and we felt like we were very resilient in regard to the performance. One thing to caveat, if you look at hotel revenue being down, it's largely a function of the Green Valley rooms being offline. So if you take that out, we actually performed quite well. Occupancy was up about 244 basis points. And when you look at RevPAR, we were only off by about 1.3%. And if you added back in the GVR rooms that RevPAR, we probably would have been positive in RevPAR for the quarter. Probably the one thing that you're most interested in is ADR. And we kind of mirrored the rest of the city where you saw luxury properties performing a little bit better in ADR year-over-year comparison to, say, something that's more 2- or 3-star level. We saw the same thing. But if you look at overall ADR for our company against the Strip, we outperformed them by about 25% on an ADR basis. Brandt Montour: Okay. Great. And then just to circle back on one of Dan's questions. I don't know if I caught it. But Phase 3 Durango disruption potential, assuming not that big of a deal. I mean it's on the north side, and so maybe it's not a big deal and you guys didn't -- but you didn't talk about it making sure we didn't miss anything there. Stephen Cootey: No Brandt, you didn't miss anything. I think we're still working through the details as we're getting for the construction launch in January. But we do feel that disrupting the north side of the resort is going to cause some significant disruption. Operator: The next question will come from Stephen Grambling with Morgan Stanley. Stephen Grambling: Just a follow-up on Brandt's question about the strip. Just maybe more broadly, how do you think about the health of the Strip and its impact on your business? And should we be thinking that maybe historical correlations are not potentially useful at this point? Stephen Cootey: Yes, Stephen, I know there's been a lot of discussion, particularly since G2E about the recent softening trends from the strip and really whether these things are going to spill over in the locals market. And I think the first thing to do is really differentiate the business model. So the past 50 years, we viewed the Las Vegas locals market. It's just a fundamentally different business. One unlike the strip, it doesn't rely on heavy tourism, doesn't rely on conventions nor is it hotel driven. Instead, our locals market is anchored in a gaming-centric business model that offers value propositions to both local guests as well as out-of-town guests and at its core, is supported by incredibly loyal guests who, in our case, over 50% of our card revenue sees guests come over 8 times a month. And then further, the market continues to display resilience and stability within this market. We believe we're best positioned to capture our fair share of that market in the Las Vegas Valley. And this is demonstrated by our financial results. We had 9 record quarters of revenue and 5 record quarters of EBITDA. Stephen Grambling: Makes sense. And then you've got a lot on your plate, I recognize with the different projects. But as we look further out to some of the new development opportunities out there, just given the confidence that it sounds like you have in some of these projects, does it change how you think about either the magnitude or what projects or even the ROIC that you could have on some of the land that you could still develop going forward? Scott Kreeger: Well, this is Scott. That's a great question. I don't think that anything has really changed in our view and what we've said in the past. The announcement of Durango North is really just about the fact that Durango North is shovel-ready. So it's the quickest project we can get in the ground. That does not slow us down in any way in our master planning, entitlement or cost analysis of the other projects that we've talked about, namely Cactus and Inspirada. Stephen Cootey: And perhaps the Durango hotel rooms. Lorenzo Fertitta: This is Lorenzo, we're continuing to plan and design and move forward with entitlements, and we're as bullish as we've ever been relative to the future development of the company and our ability to generate returns. Operator: The next question will come from David Katz with Jefferies. David Katz: So just to follow on to that a bit. I know Steve and everyone, we've had the discussion about potentially having 2 projects kind of in the ground and spending at once. And that was possible, but it didn't seem all that likely. Can you sort of give us your updated perspective on that? Scott Kreeger: Look, we definitely could have 2 projects in the ground at the same time, but I don't think that would be more than a minor overlap in my opinion. One project may be winding down with another project starting out. Stephen Cootey: And that said, David, when you talk about major developments, like we just announced Durango North, which we view as almost an extension of a new build. At the same time, we're doing an extensive remodel at Green Valley. We're doing extension remodel at Sunset Station. Scott Kreeger: And we're working on our greenfield projects. David Katz: Okay. Lots of balls in the air. And Steve, I just want to make sure I heard correctly, fully loaded leverage is 3.89x. Just looking through the next 12 months, is that a neighborhood that we should expect you to kind of stay in? Or does that start to ramp up in your model? Stephen Cootey: Right now, I can tell you we're very comfortable with the leverage. This quarter marked the sixth quarter in a row of deleveraging. And as I mentioned earlier, we converted 67% of our EBITDA to free cash flow. So we do plan on funding these resorts out of free cash. Leverage, if it does spike up because of the development of these projects would be temporary in nature as we get these projects up and running, particularly our Green Valley project and Sunset Station projects online and generating cash. David Katz: And you don't expect to be a cash taxpayer in the near term? Stephen Cootey: No. I think as Frank alluded to, the tax bill has been -- is going to be incredibly favorable for these development projects. When we took an initial look, and there's still some wood to chop in this analysis, but we would expect 100% of the Sunset Station project that's currently scoped to be allowed to accelerate depreciation, about 40% of the GDR project to be accelerated, 40% of the Durango North project to be accelerated and about 10% of the current Durango South garage to be accelerated. When you kind of put all that together, that's a little bit over $300 million of capital we're going to put to work that we'll be able to accelerate depreciation and take advantage of the tax bill. Operator: The next question will come from Ben Chaiken with Mizuho. Benjamin Chaiken: Just a follow-up on the tax benefit that you were just running through. I guess now that you have a better view of what the capital outlays will look like in '26, could you help us with the free cash flow conversion next year, EBITDA to free cash flow? Stephen Cootey: Well, I mean, we're still in the throes of actually doing our operating budget and our capital plan for 2026. What we was able to focus on is our capital on our existing projects. I mean that's really where the extent of it. I do -- as you've seen over the last several quarters, we've reduced capital outlays by $25 million, mainly due to the timing of those projects. So these 3 same projects, the Sunset is currently scoped, Green Valley, the hotel and convention as well as the Durango South the Garage, which is going to be opening in mid-December, about $175 million of capital related to those projects will spill over into 2026, just as a matter of timing. And hopefully, that helps, Ben. Benjamin Chaiken: Yes, that's very helpful. I appreciate it. And then just kind of like more modeling related. In the past, you've -- last couple of quarters, you've given us some seasonality color. Is there anything notable we should consider as we close out the year? I think you mentioned $8 million of construction disruption. Just anything else you'd flag? Stephen Cootey: I mean, typically, Q4 to -- Q3 to Q4 seasonality is usually up about 10% to 11%. Right now, at least we haven't seen anything that would argue differently. But then as you mentioned, that's going to be offset by there's some Green Valley disruption, about $8 million and probably Sunset Station to the tune of $1 million to $1.5 million. Operator: The next question will come from John DeCree with CBRE. John DeCree: Maybe a question operationally. You talked a little bit about on the hotel side, the performance on luxury versus more value-oriented options. I wonder if you could speak to the gaming business, perhaps the database. And Steve, you may have touched a little bit on this in the prepared remarks. But what are you seeing across the database kind of upper tiers versus lower tiers? And any trends in kind of unrated play? It's not a huge piece of your business, but from a consumer perspective. Scott Kreeger: John, this is Scott. I'll take that one. For the quarter, we saw meaningful increases in carded and uncarded slot win. It's really been consistent and stable performance. And it's really a function of us prioritizing investments around our higher valued customers. So whether that's having some of the best-in-class high [indiscernible] rooms in town, new relevant amenities, best-in-class assets, keeping them clean and fresh and really location. That's what I was just going to say is the fact that we're positioned in these high net worth, high-growth areas on arterial freeways is really shining through in the database. So when you look at our local, our regional and our national customers, all of those groups or those categories are up meaningfully with particular growth in VIP, regional and national, while the lower worth segments remained stable. And then I also mentioned and you got that uncarded is also up for the quarter. John DeCree: That's all really helpful. And then maybe an easy one on the promotional environment. Las Vegas is kind of a separate market, but we're kind of seeing and hearing outside of Las Vegas regionally a little bit of uptick in promotional activity. Have you guys noted or seen anything, of course, throughout the summer or currently in terms of changes in competitive behavior in the market? Scott Kreeger: No, it's been business as usual for us. So it remains very constant and rational. Operator: The next question will come from Chad Beynon with Macquarie. Chad Beynon: Flow-through in the quarter was slightly better than, I think, what most expected given the disruption that you called out and OpEx per day was down for the first time in several years. Can you just talk about if this is sustainable from a cost standpoint? And anything else that we should be thinking about from a labor, utility, et cetera, standpoint for expenses in the next couple of quarters? Scott Kreeger: I can take the OpEx part, maybe you take the free cash flow part. Really, you said it. Overall, operating expenses were flat to down for the quarter. When you look at COGS as a percentage of revenue, we were flat. When you look at utilities and repairs and maintenance, we were down slightly. So payroll, we were up a bit, but that was a function of us giving a 3% raise in the middle of the year to salary and hourly employees, which is really kind of a CPI pacing pay raise. But fundamentally, as long as marketing remains rational, which it has for the last several years, these are completely sustainable efforts and kind of a shout out to our operating teams in the field. They're incredibly focused on margin control and expense management and the GMs and their teams out in the field do a great job. Stephen Cootey: Yes. And just to add to piggyback what Scott said, and I was going to give a similar shot on the revenue side. I mean this is really -- it's about operating leverage and a flow-through operating leverage. So as Scott mentioned, the database is healthy. The business is healthy despite some disruption at 3 of our properties. So if we keep that up, flow-through should be sustainable. The consolidated flow-through, Chad, is probably a little bit lumpy just given the fact that there's the North Fork development fee embedded in that. But other than that, it's business as usual. Chad Beynon: And then actually a good segue to my next question. Just in terms of the fee, you said opening for North Fork, you said Q4 '26. When will you start to receive kind of those top and bottom line economics? Do those flow through as the property ramps? Or are there any deferred payments in terms of how that's structured? Stephen Cootey: Well, I think the first thing I think you'll see is that we've been accruing, we accrued $10 million of the development fee last quarter, $3.9 million this quarter. We expect to accrue $3.4 million pretty much through the opening. That obviously is noncash. Once the resort opens in Q4 per the development agreement, I would think about -- there's going to be an influx of cash from that development fee upon the resort successful opening. And the -- there's probably going to be a true-up of that development fee, probably, I would say, a quarter behind that as we true up construction costs. And as Frank is mentioning, the $75 million note payable goes cash interest immediately upon cash open, and then we will look to recoup that note as soon as the property starts cash flowing at which point our 7-year management agreement kicks in the day we opened. And we expect -- if we're going to give guidance to that resort, we expect to generate $40 million to $50 million in management fees upon stabilization over that term. Operator: The next question will come from Joe Stauff with Susquehanna. Joseph Stauff: Just 2 quick ones. I was wondering if you can maybe just give us an update on the backfill process at Red Rock. I know there are a couple of things moving around in the quarter with GBR out, the hotel offline. But I was wondering if you could comment on that. And just to clarify, Scott, I think you had mentioned in the previous answer that both regional and national demand were up in the quarter. Is that right? Scott Kreeger: That's correct. Stephen Cootey: On the backfill, we're on track. As you know, when we kind of kicked off the Durango process in December of '23, we said that we would experience cannibalization. We did. We expected within 3 years to backfill Red Rock. And so we're kind of in the year 2 in the throes of year 2, and we're on track to do that just that. Operator: The next question will come from Steve Paella with Deutsche Bank. Steven Pizzella: Just a couple of quick ones. Within locals, can you talk about if there was anything to call out from a cadence perspective intra-quarter? Stephen Cootey: Cadence for the quarter No, I think it was pretty normal quarter, yes. Steven Pizzella: Okay. And then I might have missed it. Did you give a sportsbook hold impact for the quarter if there was one? Stephen Cootey: No, we didn't. What we did, I think prior question, we referenced it during the script because if you recall last year, during the third quarter call, we held unusually poorly, and we called a $4 million number out last October. We just wanted to remind folks that the hold is normal through today. Operator: The next question will come from Jordan Bender with Citizens. Jordan Bender: Maybe to drill down on margins one more time. If I look at casino margins, they continue to improve to levels we haven't seen in over 2 years. Is this a function of mix? Is it Durango continuing to ramp? Or anything else you would kind of point us to, to say this is kind of the right level for your casino margins looking forward? Stephen Cootey: I think it's a function of the mix, but also I think the team has done a great job managing expenses. Scott Kreeger: And I think it's been a shift in our approach to the market post-COVID, where we shifted towards high-limit slot rooms, high-limit table games. And I think we're doing a much better job post-COVID on attracting the high-end value customer. Jordan Bender: Understood. And just on the follow-up, the dividend increase went up $0.01 a quarter. I mean is there any kind of calculation behind why that went up $0.01? Or was it just arbitrary that's kind of what you guys landed on? Stephen Cootey: Well, it's a whole number to start. So it took some condensing, but it's $0.01 a quarter, so $0.04 a year. I think the Board recognized and the management team recognize the continued strength of the business and the long-term earnings power of the platform. The Board continues to evaluate its dividend policy every quarter. And so I think they set something up so that in the future, they could reevaluate quarterly earnings dividend increases. Operator: The next question will come from Barry Jonas with Truist Securities. Patrick Keough: It's Patrick Keough on for Barry tonight. First, zooming out on the construction impact, you had previously pointed to around $25 million for the year. Where would you say you are cumulatively? And any reason to think you'd be tracking above or below that number for the full year? Stephen Cootey: I think we're tracking below that number, and I kind of walked you through it. sunset, we have seen marginal disruption in the past quarters. I expected $1 million to $1.5 million this quarter. Durango, Dave and the team down there have done an amazing job managing the disruption. So there's minor disruption there. It's tough to quantify because it's mainly peak parking time. And then Green Valley, I kind of walked you through what I think this quarter was about $2.5 million, $3 million. Next quarter, I anticipate $8 million sorry, this quarter. Patrick Keough: Sounds good. As a follow-up, we'd be interested to hear any early thoughts on the taverns business. How many do you have open at this point? How have they performed relative to expectations? And what does your pipeline look like? Scott Kreeger: Patrick, this is Scott. So we've got 8 under contract, 2 are operational. We've got 5 coming online starting in the early part of next year and all the way through to the summer. Early indicators are we're ramping to our investment thesis. So we're happy with the performance of the 2 taverns. And if we go back to the thesis a little bit of why we like the taverns, tends to skew a younger audience. As we grow our database, we're seeing that come to fruition that it's a younger customer base and the customer base we're trying to attract. Also, because of the locations of the 2 open taverns, we're finding a pretty strong penetration into unknown customers in those zones. So we're kind of reaching out and finding new customers that we didn't have in our bloodstream. And we are seeing those customers now migrate to our large box properties as well. So all of those original reasons why we got into the business, we're starting to see green shoots on. It's early days as we open up more of the taverns, we'll kind of solidify the performance and the kind of attributes of what we like about the taverns. But so far, we're pretty excited about it. Operator: And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Stephen Cootey for any closing remarks. Please go ahead, sir. Stephen Cootey: Well, thank you very much for joining the call, and we look forward to talking again in about 90 days. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby and I'll be your conference operator today. At this time, I'd like to welcome you to the Bloom Energy Third Quarter 2025 Earnings Results. [Operator Instructions] Thank you. I'd like to turn the call over to your host today to Michael Tierney, Vice President, Investor Relations. Sir, you may begin. Michael Tierney: Thank you, and good afternoon, everybody. Thank you for joining us for Bloom Energy's Third Quarter 2025 Earnings Call. To supplement this conference call, we furnished our third quarter 2025 earnings press release with the SEC on Form 8-K and have posted it along with supplemental financial information that we will reference throughout this call to our Investor Relations website. During this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding future events and our future financial performance. These include statements about the company's business results, products, new markets, strategy, financial position, liquidity and full year outlook for 2025 or 2026. These statements are predictions based upon our expectations, estimates and assumptions. However, as these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties as discussed in detail in our documents filed with the SEC, including our most recently filed Forms 10-K and 10-Q. We assume no obligation to revise any forward-looking statements made on today's call. During this call and in our third quarter 2025 earnings press release, we refer to GAAP and non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with U.S. generally accepted accounting principles and are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between the GAAP and non-GAAP financial measures is included in our third quarter 2025 earnings press release available on our Investor Relations website. Joining me on the call today are K.R. Sridhar, Founder, Chairman and Chief Executive Officer; and Maciej Kurzymski, our Acting Principal Financial Officer. K.R. will begin with an overview of our progress, and then Maciej will review financial highlights for the quarter. After our prepared remarks, we will have time to take your questions. I will now turn the call over to K.R. K. Sridhar: Good afternoon, and thank you for joining us today. I'm delighted that Bloom had its fourth consecutive quarter of record revenue. This seminal year for Bloom positions us for an even stronger 2026 and beyond with higher growth and more profitability. Three major tailwinds benefiting Bloom today have created a once-in-a-generation opportunity for us to become the global standard for on-site power generation. First, the AI buildouts and their power demands are making on-site power generated by natural gas a necessity. Second, winning the AI race is a nation-state priority, driving government policy and removing barriers that had previously been headwinds for on-site power generation. Third, our product innovation is advancing at a pace more akin to semiconductor evolution than to that of traditional industrial products. Every year, for over a decade, our fuel cells have seen double-digit year-over-year cost reductions. While our costs are coming down, our performance is going up. Our fuel cells last longer, are more reliable and are more efficient and today produce 10x more power in the same footprint than they did 10 years ago. These improvements have opened up large market opportunities. For example, we historically sold exclusively in high-cost electricity markets such as California and the Northeast. We are now competitive in large power-hungry markets of the Midwest, Mid-Atlantic, Mountain West and Texas, and many European and Asian cities. Bloom is now positioned to become the standard in on-site power, which many of us believe will be a trillion-dollar market. Becoming the standard means we will be the benchmark by which all others are measured. The reference point for speed, reliability and performance in on-site power. When customers, partners, regulators and governments think about dependable, dispatchable electricity, they should think about Bloom first. While we built Bloom with the conviction that this moment would arrive, we had no illusions of the difficulties we would face to gain acceptance as we embarked on this journey. To be even considered, we had to be better in every dimension. We persevered and delivered step by step. Now after 24 years, we have robust supply chains, manufacturing processes, installation capabilities and field performance data to show our customers we offer an unparalleled on-site power solution at speed and scale. We obsess about meeting our customers' needs and do not expect them to compromise. We do not offer them false choices, clean, reliable or fast. Instead we offer them an and solution. We ship on time and aim to ship faster than anyone else. We are more reliable and resilient and offer our customers superior price-to-performance value. Our mass-produced modular power systems allow us to power sites as small as your neighborhood retail store and as large as a giga AI factory that mass manufactures intelligence. Bloom Energy servers are safe, operate without consuming water, do not pollute the local air and have curb appeal, all features that make them welcomed in the communities where they are installed. The precursor to becoming the standard is to first earn our place in the evaluation process alongside the well-entrenched and very capable competitors that have defined the market for decades. We are now executing on this phase, working to replicate in new markets, the success we have achieved in sectors like semiconductor manufacturing and telecommunications, industries that demand the highest reliability. Today, we are the standard for on-site power in telecom and semiconductor manufacturing as evidenced by the rapid adoption of our technology by the top-tier players and the strong sales pipeline in those segments. Our strategy is deliberate and simple. In each vertical, we establish our credibility with a lighthouse account and then build on that success with other Tier 1 customers. For example, in telecommunications, we first secured AT&T as a lighthouse customer in 2011. After they became convinced of our operational excellence, they deployed us in multiple sites in many states. Soon, we added Verizon and T-Mobile as customers and have sold over 100 megawatts of on-site power to telecoms. Today, we are a go-to on-site power choice for U.S. telecom companies. Now we are following the same playbook to become the standard on-site power solution for AI. We are embedded in 7 distinct AI ecosystem channels. In each channel, we have secured a lighthouse customer in our robust pipelines. First, the hyperscalers. Back in August, we announced our first deal to power an AI factory with Oracle. We have fulfilled our delivery ahead of schedule. We promised to deliver in 90 days, and we delivered in 55 days. Second, electricity providers. Last year, we signed a gigawatt agreement with AEP, which purchased our fuel cell systems to power another big hyperscaler, AWS. Third, gas providers. We signed our first deal with a major gas provider who will convert its gas to electricity with Bloom fuel cells and sell that on-site power to a third hyperscaler. The hyperscaler will announce details of this installation when it is ready. Fourth are co-location providers. We work with many, including Equinix, which has deployed over 100 megawatts across data centers in multiple states. Fifth, neoclouds. Our systems are generating on-site power for a top neocloud provider, CoreWeave, at a high-performance data center in Illinois. Sixth, data center developers. When an understanding has been reached on key terms, developers begin to file permits and permissions. You may have seen some of these public filings recently. Seventh, infrastructure owners. Large infrastructure funds are increasingly developing their own AI factories. Brookfield, the world's largest AI infrastructure investor has invested $50 billion in AI opportunities and is tripling the size of its AI strategy over the next 3 years. It announced an AI infrastructure partnership with Bloom Energy and made an initial investment of $5 billion. Bloom will be the preferred on-site provider for Brookfield's trillion-dollar infrastructure portfolio of AI factories, data center operators, corporate facilities and factories. Brookfield will also finance Bloom-sourced AI opportunities. We have already completed projects and Brookfield plans to announce a Bloom-powered European AI inference data center project by the end of the year. To recap, we have strong traction across all channels of the AI ecosystem. Each channel is anchored by a lighthouse customer and accompanied by robust commercial activity. As we continue to penetrate new geographies and verticals, success builds upon itself and should make each new market entry easier than the first. The opportunity is vast, and we are still in the early innings. So what are we doing to make sure we are ready to handle growth as well as further advance our leadership position? As we have previously announced, we are doubling our capacity to 2 gigawatts by December 2026, which will support about 4x our 2025 revenue. That expansion is all systems go. Bloom's capacity will not be a bottleneck for our customers. We are also investing in operational talent and capabilities needed for the expansion of our production capacity beyond the 2 gigawatts. We are building a commercial team that can capture opportunities across diverse market segments and geographies. And we are continuing to invest in R&D to increase our lead in on-site power. We are doing all of this while maintaining our focus on operational excellence and financial discipline to achieve margin expansion over time. Based on what we see today, we expect 2025 to be better than our previously stated annual guidance on our financial metrics. In addition, we expect double-digit product cost reductions to continue and keep us on a path of margin accretion. We look forward to a strong 2026 as we march forward and build a future where Bloom powers the digital age and is the recognized standard for on-site power globally. I'll turn over to Maciej now, and I look forward to answering your questions. Maciej Kurzymski: Thank you, K.R., and good afternoon, everyone. As K.R. mentioned, Bloom is now positioned to become a standard in on-site power. Our announced customer base and financial results are a testament to this. On today's call, I will discuss our Q3 financial performance and make a few comments about fiscal 2025. The last 4 quarters have been a record operational and financial performance and Q3 was no exception. While our commercial success have been most visible, the work our engineering, manufacturing and support teams have done behind the scenes to drive product cost reduction is evident in our financial results. Highlights include record third quarter revenue, positive cash flows from operating activities and our seventh consecutive quarter of profitability in our service business. As a reminder, I will focus my discussion on non-GAAP adjusted financial metrics. For a reconciliation of GAAP to non-GAAP, please see our press release and the supplemental deck on our website. Revenue for the quarter was $519 million, up 57% year-over-year. Time-to-power needs are creating demand for on-site power. This, together with the advantages of our fuel cell technology for AI factories is driving our revenue growth. Gross margin was 30.4%, 510 basis points higher than the 25.2% gross margin in Q3 of 2024, driven by continued focus on product costs and manufacturing efficiencies. Our operating income was $46.2 million versus $8.1 million in Q3 last year. Adjusted EBITDA was $59 million versus $21 million in Q3 of 2024 while EPS was a positive $0.15 versus $0.01 loss a year ago. Again, these are all non-GAAP results. Our product margins were 35.9%, while our service margins were 14.4%. This is the second straight quarter of double-digit margins in the service business, and we expect this trend to continue. As we have talked about on each call this year, we took advantage of our balance sheet and our visibility into customer demand to level load our factory. We expect to work down inventory in Q4 as our shipments of product accelerate. Cash flow from operating activities was an inflow of $20 million, primarily due to working capital improvements. We ended the quarter with $627 million in total cash on the balance sheet. Turning to the full year. As K.R. mentioned, based on what we see today, we expect fiscal 2025 to be better than our previously stated annual guidance on our financial metrics. To conclude, Bloom is focused on not just on scale, but on showing sustainable profitability as we grow. We are uniquely positioned to benefit from this unprecedented market dynamic, and I could not be more excited about the opportunity in progress. Operator, we are now happy to take questions. Operator: [Operator Instructions] Your first question comes from the line of David Arcaro from Morgan Stanley. David Arcaro: I was wondering if -- very helpful commentary, too. I was wondering if you could talk about the pace of commercial activity that you're seeing. You've had success now with multiple agreements in a short period of time. How do you see this playing out as we look forward to the next agreements in the pipeline just in the context of the market demand that you're seeing? K. Sridhar: David, thanks for that call. Look, I think we've been saying in the last 3 earnings calls that the commercial momentum is robust. And all that I can tell you, if I looked at it this week and last week, and if I walk over to the commercial section of our offices is that momentum is clearly accelerating and it's palpable, okay? So forget questions of, is it static or is it slowing down? It's accelerating. That's all we see. And we see that across the board. And by the way, it's accelerating not just in AI, our traditional, commercial, industrial segments are doing the same. So it's across the board. And the larger the deals get, the more the actors that get involved, as I explained in the entire AI value chain. These are complex deals. And each one goes to a different phase, different momentum. Some close extremely fast because of the need. Some take a little bit longer. But make no mistake, the commercial momentum is absolutely accelerating. David Arcaro: Okay. Excellent. And I was wondering, we've seen other technologies emerging in recent data center deals, small-scale gas turbines, gas engines. I'm wondering if you could describe what you're seeing with the competitive environment, how your product compares to some of the other solutions? And just is the competition heating up? Or how do you see it playing out? K. Sridhar: Look, I think the supply-demand mismatch is so large that everybody who has a solution that's viable today has a market out there for them to address. So you're going to see data center developers, hyperscalers wanting any and every solution that they can find. But there are very clearly, you're asking for distinction between us and other technologies. These were purpose-built for the data centers. The additional benefit and value we bring to them is enormous compared to band-aided solution of something that was created for the mechanical age, trying to solve this very sophisticated digital AI problem. We stand to benefit every single time that we stand to benefit our end customer using our technology. And so you asked me to compare, let me compare other technologies that generate on-site create air pollution, we don't. Other technologies that now using mechanical combustion moving parts, cannot load follow and require lots of batteries to be able to maintain a on-site power because these are not connected to the grid, whereas our solid-state power does not require batteries and we are able to provide that power. Today, we are able to provide our power faster than most of the others who have supply chain constraints. We can expand our capacities a lot faster than anybody else. We are future-proofing our customers for future technology advances, whether it is in the field of DC power, whether it is in the field of carbon capture and zero carbon or a green molecule, we offer all those optionalities that others don't have. You put all those together from -- and then if you take the same amount of gas that is available, we can produce a lot more power and allow the hyperscaler to put out a lot more tokens. At the end of the day, it is converting those watts to tokens is where the game is. With the same amount of gas that's available, same amount of space that's available, we can produce a lot more tokens for the hyperscaler than any other technology can today, end-to-end. And so the value for a hyperscaler is not about the cost of power. It's about that cost of the entire value chain across the board. So price-performance ratio, we can compete with anybody. So that's the answer, David. Thank you. Operator: Your next question comes from the line of Chris Dendrinos from RBC Capital Markets. Christopher Dendrinos: Congratulations on the strong quarter. I wanted to follow up on the Brookfield partnership here. And I'm hoping you could just expand a little bit on the relationship and provide some more details around the potential development time line? And then just how should we think about this partnership financially and how that benefits you? K. Sridhar: Chris, thank you so much. Brookfield, look, they're an incredible partner to Bloom, right? I mean they are at the heart of the AI value chain. And I think I mentioned this in the script, they've already invested over $50 billion in AI and want to triple that very quickly in the next 2 to 3 years. But put that in a broader context. They're one of the world's largest infrastructure owners with over $1 trillion in assets that comprise of 140 data centers operating and using approximately 1 gigawatt of critical load capacity and wanting to accelerate and grow that enormously in AI. On top of that, they have a portfolio of factories. They have a portfolio of commercial offices and real estate that are all going to be beneficiaries of AI. And as they automate, as they bring robots in, those factories are going to need more power. So Brookfield is using their balance sheet and using their relationship with us as the power provider and making us the preferred choice that they would recommend to all their portfolio companies, including their data centers. On top of that, Brookfield believes that they themselves are going to be a large AI infrastructure developer. And there, they're going to use us. On top of that, if there are Bloom-sourced deals that require financing, so we can offer a customer a PPA, they are willing to step in and be the financier for that. This is all not -- and they have made it very clear that this $5 billion investment is an inaugural investment. Now what Brookfield -- with Brookfield, we have already done some deals together. And they have said that they will announce a European AI inference data center before the end of the year using Bloom as the power source, so stay tuned for that. So it's a very big relationship. I cannot understate how important it is to us. Christopher Dendrinos: Got it. And I guess maybe just as a follow-up, sticking with the European opportunity here, can you maybe just expand on the global opportunity? And are you seeing the same kind of power limitations globally as you are in the U.S.? And does that present a strong opportunity for more international growth? K. Sridhar: Yes. Chris, that's a great question. Look, I have been to these capitals, whether it is Frankfurt, whether it's Munich, whether it's Dublin, whether it's Taipei, okay? They all have a power shortage problem. And they all clearly recognize that their central power plants along with transmission and distribution cannot keep up with AI speed. That's across the board. This is true in Delhi. This is true in Mumbai, okay? So now what is happening in Europe, Asia, if you take as an example, I was just recently in Tokyo. And what I heard there is finally the sentiment of natural gas not just being a short-term bridge, but a long-term solution. And the agreements the U.S. is reaching with our friendly countries, our friendly allies to say, we will supply you long-term LNG, is now making them take a very different look at natural gas. And once that policy unlock happens of saying natural gas projects can move forward, we think there will be a tremendous acceleration in those places, and we are extremely well positioned to be able to play and the interest in Europe for our carbon capture solutions where you can go to almost net zero using natural gas as a fuel, tremendous interest there. No other technology, the turbines and the engines cannot do that. We can. So tremendous interest there. Operator: Your next question comes from the line of Manav Gupta from UBS. Manav Gupta: Generally, when you tell a customer, I can deliver the order in 90 days, the customer is happy to get the order in 360 days. So incredible feat delivering it in 55 days. My first question, sir, here is last week, Energy Secretary sent a draft proposal to FERC that would limit the regulatory review period for data center connections to power grid to just 60 days, expediting a process that can currently extend up to years. Help us understand how this could help Bloom Energy. K. Sridhar: Manav, thank you for those kind remarks. A shout out to our team for doing that. So look, the first thing I want to say about that or people who are not familiar with that is, again, the Energy Secretary asked FERC to start a hearing process and a rule-making change to allow large loads like data centers and AI factories and other factories to get rapid interconnection with the grid, which has been an issue. And first and foremost, we applaud the policymakers and regulators for doing that. I think it's the right thing for us as a country to do. The second thing I want to say is, if you read that announcement, it's very obvious, even when you get that interconnection, they state very clearly, you're entering the age of BYOP, bring your own power, okay? You get curtailed even if you have an interconnection, if you don't bring your own power. And large AI data centers are not going to operate in a place where the utility is going to curtail them and not curtail them depending on what their load and peaks are, right? So that becomes extremely important. So obviously, time to power is the reason this is being done. We are able to provide our servers very quickly to a utility who wants to interconnect and offer the power to either a data center or a factory. And it's not unlike what AEP is trying to do. We think it's just going to accelerate other utilities wanting to do the same thing. So that's how we think it's going to help our business. And for people from the utility listening to that, right, it's very simple. You don't make your nuclear power plants, you don't make your gas turbines, you don't make your fuel cell. You can now buy our fuel cells very quickly and install it in front of the meter and offer it to your customer. But when you do that, here are the additional benefits you get. Ancillary support for the grid. Let me explain this. It's not a easy concept to understand. Engines and turbines can offer reactive power. It is something that you can provide as a byproduct in addition to supplying power to your load almost for free into the grid, and the grid benefits from that in stabilizing the local grid. Now engines and turbines can -- or any other kind of combustion device that has rotation or movement can only do that in a very narrow range. Bloom has an amazing range in terms of that power factor, and that benefit will be enormous in places like PJM, where you have grid congestion and grid instability or places like California, where the amount of renewables you have completely destabilize the grid. We are a stabilizing factor. In addition, we can easily provide a lot more power into the grid in short notice to make up peaks and non-peaks if they want to net meter it as a utility because we are constantly standing in hot standby and when the grid -- when the data center is not using it, you can export that power. However, if you're going to use a bunch of turbines to be able to do it, you don't keep the turbines on hot standby, it' not economically possible. So you have to start it up and bring it up, which means you need 5, 6 minutes, and that may be the time you need to peak. So we are a tremendous asset to benefit, first, the data centers being built fast. Second, for the utilities to be able to provide that and win with that. Third, for the utilities to use our ancillary services and benefit from that. And fourth, because we don't pollute the air, we are a benefit to the communities where they are installed. So this is a win-win-win. We love this proposition. Manav Gupta: My second question, and I apologize in advance, I am an electronics engineer, but it's been two decades since I graduated. So in case it's an invalid question, please just ignore it. Sir, I recently read somewhere that some chip makers are looking to move from 400-volt AC to 800-volt DC by 2027. I think it was NVIDIA. I'm just trying to understand, if that does happen, would it make your fuel cell even more efficient? Would DC/DC power be even more efficient than a DC/AC power because of transmission losses? If you could just talk about that. K. Sridhar: Don't undersell your technical knowledge, it is spot on. So I think given how you phrased it, let me -- this is such an important question, and we didn't address it. It is probably a miss on my part to have not addressed it in the script. So let me take a few minutes to explain this so everybody understands. It's so important. Here's the important part, and I want you to understand this. This moving from converting that 400-volt AC to 48-volt DC, which is how server racks, which are the size of a refrigerator roughly sitting in a data center. These are the machines that manufacture the intelligence, okay? They -- today, the standard has been ever since we had data centers, low voltage, like 48-volt DC. So it gets converted. So think of this, the power going -- so I'm thinking of an analog as you ask me this question. It may not be perfect, but I think it will answer the question. So think of power coming in into the rack as a hungry human being drinking water, okay? They can only drink through a straw. And that straw was sufficient. That is the 48-volt DC because the small wire through which a small amount of water comes into the straw, that water was sufficient to satiate the thirst. That was when CPU racks were 13 kilowatts. We have put a lot of Band-Aids on it to make sure Blackwell chips that come somewhere near the 130 kilowatts can handle it through the straw. Guess what? Rubin chips and going forward are going to be 5x that to 10x that. There is no way you can pump that much of fluid for the body to keep up if that's the amount of water you need, that's the amount of power you need through that little straw. But in the rack, there is no more space than the straw. What does that mean? You have to increase the pressure of the water that you're shoving to that straw. That's the only way you're going to get more water through. And that pressure equivalent in the water is voltage in power. So it is -- the laws of physics dictate that you have to go to an 800-volt DC architecture if you want AI chips that have more power density, which is the only way you can improve upon AI in the next generation. This is not an if, this is not a nice-to-have. This is a must-have. Now go to the other side. All our wonderful legacy power generation systems that helped us propel into the mechanical age was built for the mechanical age. They are like Niagara Falls dropping water and you cannot make it to the voltage that you need. You need to make it very, very high voltage. Otherwise, you can't bring all that water in a pipe of reasonable size to where you want to bring it. Even an on-site 50-megawatt turbine cannot produce directly at 800 volts or the amount of copper you need becomes too bulky, too big. It's not just physically viable. Guess what we did at Bloom? We saw this coming one day. We didn't know what day in 2000 when we initially created architecture. We built an architecture where we can feed these straws appropriately right at that 800 volts, and we decided every unit we have shipped for the last 15 years has that. But after that, we have one other box that takes that DC and makes it into AC and provides it because we were making color TV images, the world was only consuming black and white. So we are converting our color TV images to black and white. But the other guys create black and white, and now you have to colorize them all and provide low definition when we already have high-definition color image. That's the analog. So we are super excited about this. As I see it, it's self-evident to me that this has to become the standard and Bloom will set the standard for the digital age, digital power. Operator: Your next question comes from the line of Nick Amicucci from Evercore ISI. Nicholas Amicucci: I just wanted to build upon on kind of the doubling of capacity by the end of 2026 and kind of the commentary that would support 4x the fiscal '25 revenue. How should we think about kind of the utilization on that capacity as we kind of enter into -- again, as we enter into 2027 and we have that -- the 2 gigawatts kind of up and running. I mean because if we're exploring opportunities to go beyond that 2 gigawatts, it seems like 4x full year '25 revenue, that seems like a big number that we could get there relatively quickly. So I just wanted to parse that out a little bit. K. Sridhar: Yes. So here is a simple way to think about it, right? We didn't get to where we are today to deliver what I just explained, this purpose-built factory based on just meeting a market demand as we see it right now, we just prepared ourselves. What is the beauty of Bloom being able to expand its capacity and offer what we do? Is the return on investment like invested capital? So we are fiscally very disciplined, and we only make decisions based on that added cost and its absorption, will it have a great rate of return. So we have a very disciplined process on this. And on top of that, we have a very clear understanding right now given time to power shortages and the importance of this as a nation-state issue for AI. We are committing to strive and work as hard as we need to and stay ahead such that we will never be the constraint to our customer on growing their data center. That's what we are positioned for. And we will increase capacity. We will increase it in whatever steps necessary as we see fit. But as you saw, this 2-gigawatt capacity, all systems go based on that. Would we use it for peak capacity? When we use it, will we use it for steady capacity? All that, you'll hear from us as we talk about our backlog and other things next year. But we are now using our OpEx wisely to invest in capability and talent to think about how do we expand beyond 2 gigawatts. That's all I can say right now. Thanks for that question. Nicholas Amicucci: Got it. That makes sense. And so as we see kind of the here and now, obviously, the power demand is here and obviously, you guys are ready, willing and able to address it. But as we kind of think out and I bring this up because you had mentioned an inference data center in Europe. I guess just the -- can you just kind of convey the additive value when we think of kind of the inference and when latency becomes an issue when we get to inference and reasoning within the AI complex, how kind of Bloom's partaken that? K. Sridhar: So thanks for asking that question. It's very important, right? Here is the beauty. Our exact same architecture with fewer LEGO blocks, okay? Think of each of our Bloom power systems as a LEGO block. With fewer LEGO blocks is an inference data center, multiply that many times over, it can power a training data center. No difference. No other technology can do that. That's how we built it. That's the power of our modular, fault-tolerant architecture, number one. Number two, inference data centers are going to be close to your bedroom window and your office window. You don't want that to be polluting, you don't want that to be noisy. We are -- we should be for those inference data centers, the power producer of choice. Operator: Your next question comes from the line of Ben Kallo from Baird. Ben Kallo: K.R., maybe could you just talk about, I think, the biggest project you guys have announced is 80 megawatts with SK. Could you just talk about how you view -- because there's been permits out there, huge numbers on them on doing bigger projects, how your customers have gotten comfortable with your technology over time? And maybe the time to power, how you think about the size of projects you can do and where we think you guys fit in, if it's 100 megawatts or 900 megawatts. K. Sridhar: Ben, that's a very good question. And look, again, our architecture was purpose-built. Our factories do copy exact modules. And the boxes don't know whether they are sitting along with 5 other boxes or 5,000 other boxes. Nothing in our scaling has scaling risk, right? So yes, we are talking to customers with lot bigger stamps right now and working with them on ideas and projects and various stages of negotiations of much larger sizes. We can do that, and we can do your neighborhood retail store, and we are talking to customers about that, too. So that is the flexibility of our architecture. You're adding no additional risk. In fact, think about it because these are hot swappable LEGO blocks, the more LEGO blocks you have, the more reliable our system gets. So large block power becomes a lot more reliable than small block power. Thank you. Ben Kallo: Maybe a follow-up. Just as we think about capacity, I think other people asked about this, but we see these big numbers out there. What's go/no-go decision from going 2 gigawatts more? And how fast can you do that? K. Sridhar: Look, we get accused of you're building capacity too fast. We get accused of we don't think you can build too fast. Let me be very clear. We are going to strive to make sure we are able to provide power for our customers before they are ready for it. We will not be the bottleneck. And we designed our factories, we built it with that in mind. Thank you. Operator: [Operator Instructions] Your next question comes from the line of Mark Strouse from JPMorgan. Mark W. Strouse: So K.R., things obviously are changing very rapidly here. It's been a bit there since you've provided kind of long-term margin targets. So kind of to the earlier point about your capacity expanding, but also as the utilization of that capacity increases, how we should think about kind of gross or operating margins under that scenario? K. Sridhar: Thank you. So look, here's how I'd answer it. Wait till 90 days from now to hear our annual guidance for next year. But in the meantime, if you want to think about it, here's how you can think about it. For over a decade, every single year, we have a cost down in double digits, number one. Number two, when we transact on electricity as we grow our volume, the pricing pressure on electricity is going to be based on the macros and there's a shortage of electricity. So you go figure out what that pricing pressure would be. And we have tremendous operating discipline within the company that you have seen us exercise these last 3, 4 quarters, and that's how we'll continue going forward. Our factories are not capital intensive. We have made that statement very clear. You know what those numbers are. Where is it that we will spend? Investment. We'll invest in our people. We'll continue to invest in our technology. We will invest in the talent necessary for scaling our operations. We'll invest in the skills needed, in our commercial team to go capture opportunity. And we will continue to invest in technology to further enhance our leadership position on on-site power. So those are the things to take away. Thank you. Operator: Your next question comes from the line of Michael Blum from Wells Fargo. Michael Blum: You've given us some good information on how to think about the Brookfield partnership and the scope of that. But can you give something similar with Oracle? Can you give us a sense of the size of that opportunity set? And how exactly Bloom will play a role in that partnership because they also obviously have pretty big ambitions as well? K. Sridhar: Michael, I can't speak to any one customer. You should be asking them about that question. But I think what I can refer you to there would be their statement when we had the press release saying that what we did for them earlier was the first of many, right? So we think they are going to play an extremely big role in this space, and they are going to be growing in many, many geographies. And they are not only looking at how we have executed on the first year, but they're intimately familiar with what's in our technology road map and all the value we can bring to them. So we just obsess on pleasing the customer, then the customer will do the right thing. So that's what we do. Thank you. Operator: Your next question comes from the line of Ameet Thakkar from BMO Capital Markets. Ameet Thakkar: I've just got a quick kind of housekeeping question. Your 10-Q kind of refers to $288 million of related power -- related party revenues during the quarter. I was just wondering, is that related to Brookfield? Or is that related to SK? Maciej Kurzymski: Yes. This is Maciej. As part of the contracts with Brookfield, we've made equity investments into this vehicle. And because of those equity investments, those JVs became a related party to Bloom, and that's what created the disclosure around the related party revenue. And again, it's important to note that the equity investments are fairly small. The way the contract is being set up is that we put a little bit of ceiling on those investments to be very significant. That said, there's a criteria to go through. And if you meet the criteria of equity investment, you get into the related party disclosure. Operator: Your next question comes from the line of Colin Rusch from Piper Sandler (sic) [ Oppenheimer ]. Colin Rusch: No, it's Colin Rusch, but I am from Oppenheimer. So just in terms of the balance of 2025 and looking into '26, can you talk a little bit about the mix shifts from direct product sales into some of these financing options with partners or related parties? And then also if we could get a quick update on the CFO search and that coming to conclusion? K. Sridhar: Yes. I'll take the CFO search. Look, it's a very important position for us. We take it very seriously. And so we have a process in place, and that search is going on. We have a sense of urgency, but no sense of rush. So we will let you know when we hire one. Thank you. Maciej Kurzymski: Yes. As far as the financing goes, if you go back and we talk about this in pretty good detail in our 10-Ks, where there are 3 ways of going to market. There is a direct sale, which we refer to as CapEx, which is effectively a customer showing up and writes a big check, which effectively is like prepaying for electricity for a number of years. There's a PPA financing structure in place and the managed services, which is the sale-leaseback transaction. We haven't done managed service transactions in quite some time. We don't expect to do those going forward. And I would say, majority of the transactions we get into are actually through the PPA structures, although there are some CapEx deals every quarter from time to time where the customer is wanting to finance the deal themselves. Operator: Your next question comes from the line of Maheep Mandloi from Mizuho. Maheep Mandloi: Most of the high-levels are answered, but just like housekeeping on the guidance for Q4. Could you just talk about like the reason to not disclose that? Is it just timing of these lumpy installations you have in December or January or something else over there? K. Sridhar: Yes. I think you just answered your question, Maheep. We have said that at the beginning of the year, why do we give a range? Because project-based installations, many of them being greenfield for changes in variations. Lots of things could happen on the customer end. We have no difficulty supplying our boxes on time, ahead of time, as you saw. But the customer has to be ready to take the power, which is when we ship. So a project can fall a few days in front of or on the other side of December 31, which is just a deadline, and it has no impact on that project or that revenue other than a pure timing issue. And yes, with 365 days in the year, we would give you one guidance. Now 300 of those are gone, and we have 65 days left. So we're giving you a slightly better guidance, but we can't pinpoint it. That's exactly right. Thank you. Operator: Your next question comes from the line of Sherif Elmaghrabi from BTIG. Sherif Elmaghrabi: For the Brookfield partnership, you mentioned they're bringing a substantial balance sheet to the equation. But any capital commitments for Bloom under those joint ventures or other costs related to that, obviously, besides the Fremont CapEx that you're already investing? Maciej Kurzymski: Yes. Other than the equity investments that were -- that we agreed to make for the respective projects, very small equity investment, there is none. K. Sridhar: Okay. With that, I just want to bring this to a close as we are getting to the top of the hour. Thank you all. We are delighted with our results in Q3. Our commercial activity is robust and the momentum is accelerating across the board. This year has been a big transition year for Bloom. I want to thank our team inside for stepping up and contributing to our success in such a great way. We appreciate the trust of our long-term shareholders, and we welcome our newest shareholders. And thanks to all of you for placing trust in us. And I think we have an exciting journey ahead of us together as we go forward to become the standard for on-site power. Thank you, and have a great day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good afternoon, and welcome to the OrthoPediatrics Corporation Third Quarter 2025 Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Trip Taylor from the Gilmartin Group for a few introductory comments. Philip Taylor: Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer; and Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the Company's remarks include forward-looking statements within the meaning of federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the Company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the Company's most recent annual report on Form 10-K, which was filed with the SEC on March 5, 2025, and its subsequent quarterly reports on Form 10-Q. During the call today, management will also discuss certain non-GAAP financial measures, which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the Company has included a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure in the third quarter earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, October 28, 2025. Except as required by law, the Company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer. David Bailey: Thanks, Trip. Good afternoon, everyone, and thank you for joining us today. We are proud to start this call with our typical and most meaningful performance metric. In the third quarter, we supported the treatment of more than 37,100 children, increasing our total impact to approximately 1.3 million kids health. With too few solutions designed specifically for children and the clinicians who care for them, pediatric health care has long faced critical gaps. At OP, we are committed to addressing these unmet needs, and our mission to close those gaps and reshape the future of pediatric care remains clearer than ever. We have made tremendous progress in this market, but there is still a substantial market opportunity ahead. In the third quarter, we saw strength in all areas of our business, excluding 7D capital sales and LatAm international stocking and set sales. In fact, we saw total third quarter global revenue growth, excluding 7D capital sales of 17% and domestic revenue growth, excluding 7D capital sales of 19%. Both T&D and scoliosis implant sales were strong as we saw a very normal summer selling season and OPSB growth continues to be extremely robust with growth in excess of 20%. As a reminder, OPSB sales are approximately 80% T&D and 20% scoliosis, and we saw strong growth in both areas. As we highlighted in our preliminary announcement, our revenue results fell short of our expectations, driven by 2 isolated factors: 7D capital sales that were expected in the quarter did not close prior to the quarter end; and headwinds from stocking and set sales in Latin and South America have continued longer than expected. Although these 2 areas did not produce the results we wanted, these are 2 of our lower-margin segments. And because the rest of the business remains strong, we still delivered high gross margins and profitability in line with our expectations. Looking beyond the top-line for the third quarter, we are pleased to see a significant 56% improvement in adjusted EBITDA, growing to $6.2 million. In addition, we also saw huge progress with our free cash flow usage, which was dramatically lower in the third quarter, decreasing $8.2 million. Both of these metrics have been a focal point of our strategy, and we are succeeding in delivering our goals. Touching briefly on our outlook. As announced previously, for the full year, we now expect revenue to range from $233.5 million to $234.5 million. Adjusted EBITDA is still expected to be $15 million to $17 million, and we are on track to deploy $15 million in sets and generate positive free cash flow in Q4. Even though our top-line expectations have been adjusted, we are maintaining our profitability and free cash flow outlook. As we drive toward our profitability goals, our core business, consisting of trauma and deformity and scoliosis implants, specialty bracing and our international agencies generate higher margins and better free cash flow than the capital sales and LatAm stocking and set sales. Our core businesses are positioned to remain the key engines of revenue growth, adjusted EBITDA and free cash flow, and we are confident in our forecast of generating positive free cash flow in Q4 and breakeven in 2026. Turning to our segments. In the third quarter of 2025, the T&D business grew by 17% in the quarter, driven by continued strong market share gains across several product lines. More specifically, growth was led by strong performances in trauma implants and a return to normal scheduling in the elective limb deformity business. Extremely strong exfix growth and the continued high growth of OPSB were the highlights in the quarter. Taking a closer look at Trauma, we saw particularly strong revenue gains driven by continued rapid adoption of PNP Femur, PNP Tibia, ORTHEX and the Bioretec ActivaScrew. Looking closer at the 3P platform, following the FDA approval of the 3P Pediatric Plating Platform Hip system and its first surgical cases, we are seeing consistent case growth, which we expect to continue through the remainder of the year and to ramp aggressively as we begin the full launch of this product in 2026. Additionally, we are pleased to have recently accomplished another milestone for this platform as we have just announced the next 3P system in the series, 3P Small and Mini has been approved by the FDA. This approval comes ahead of schedule, and we now expect to complete the first cases in the beginning of next year. With the 3P platform, we expect to launch new systems each year for the next several years, bolstering both Trauma and Limb Deformity revenue. T&D remains a core growth engine for our business, powered by our expanding scale, ongoing market share gains and a steady cadence of innovation focused on unmet clinical needs. We have established ourselves as a market leader in T&D, and we are executing with confidence, especially as we see more competitors exiting the space by removing pediatric-specific product lines. Our OPSB specialty bracing strategy continues to build momentum. And with continued execution of our operational goals, our confidence in this long-term opportunity only strengthens. This segment represents a high potential capital-efficient growth avenue and is an integral part of our company strategy. We will continue our efforts to drive targeted territory expansion, accelerate R&D efforts and continue scaling our sales force. As a reminder, when we acquired Boston O&P in January of 2024, there were 26 operational clinics. As previously reported, since then, we have expanded to more than 40 clinics, entered into 8 new territories and launched several new products. Our preliminary expectations for new clinic return on investments of 25% for new clinic acquisitions and 40% for new greenfield clinics are being realized. During the quarter, we expanded our footprint into 2 very large markets, New York City and California. We expanded Denver and Ohio. And for the first time, we expanded internationally with a clinic in Ireland. These latest additions continue to reinforce the importance and need for OPSB clinics, and we anticipate that the strong wave of clinic expansion opportunities driven by high customer demand and a robust pipeline will continue. In addition to expansion opportunities, same-store sales growth has been increasing and generating positive momentum. Our OPSB strategy is delivering strong results and has proven to be a highly efficient expansion path for OrthoPediatrics. Our presence outside the operating room allows us to create deeper partnerships with our customers. This powerful strategy is extending our leadership position in pediatric orthopedics. We remain focused on executing our strategy with precision as we work towards securing a leading share in this growing market. Moving to the Scoliosis business. Our growth of 4% seen in Scoliosis this quarter was led by strong U.S. Scoliosis implant and Scoliosis OPSB growth, offset by $2.3 million lower 7D capital sales. U.S. Scoliosis growth continues to be led by new users adopting OrthoPediatrics technology, including RESPONSE as well as pull-through from past 7D placements. As mentioned, the underlying OUS business grew nicely, but was negatively affected by reduced stocking and set sales in LatAm, primarily Brazil. We expect this will continue for the next several quarters, but are working on an improvement plan to implement in the near future. 7D sales in the quarter were impacted by increased variability in the timing of unit placements that caused delayed capital sales and the corresponding revenue from those placements had a significant impact on quarterly sales and overall growth. Typically, there are a few 7D unit sales within the quarter. But for the third quarter 2025, there were 0 unit sales. This compares to our strongest 7D unit sales results in the third quarter of 2024. We still expect 7D to be a revenue driver for us, but we cannot predict how much and which quarter sales will fall in. To minimize the impact of lumpy 7D unit sales, we have adjusted our outlook, so there is minimal impact on our expectations, which does result in negative growth assumptions from this segment. Looking at our EOS product portfolio. We are pleased to see that our portfolio expansion strategy continues to be effective. In particular, we are seeing positive trends with our recently launched VerteGlide Spinal Growth Guidance System skeletally immature patients. Following the first completed cases in August, we are seeing solid adoption of VerteGlide through the limited release, and we remain on target for the full market release in the coming months. We are excited about the progress made within this portfolio and look forward to progressing the remainder of our EOS products. Moving to international. International underlying sales were solid in the quarter due to extremely strong demand in surgical volume in EMEA and APAC, offset by unfavorable growth from LatAm. The underlying revenue largely comes through our sales agencies and represents a good reflection of high surgeon usage and higher-margin replenishment revenue. We are particularly excited to see our EMEA Scoliosis launch going so well and are eagerly awaiting the EU MDR approval of our 4.5 Scoliosis System, along with multiple other approvals expected before the end of the year. On the other hand, the headwinds in LatAm have persisted longer than we anticipated. In an effort to focus on improved cash metrics, we have made the conscious decision to limit new stocking and set sales to South America. This dynamic continues to play out and negatively impacts our growth, particularly in Brazil. We believe that at this point, our LatAm business would be in a more stable position and that we would see the benefit of growth in Latin and South America again. However, we experienced continued disruption in sales, largely related to timing of large stocking and set orders. We're working towards solutions but expect there to be some variability here moving forward, which we have reflected in our outlook. In summary, we are proud of the way the business performed, excluding 7D and LatAm. OrthoPediatrics continues to lead the pediatric orthopedic market and provide comprehensive solutions to support the care of children. We remain focused on execution across the business, including scaling of OPSB, leveraging previous set deployments and launching innovative new products. This strategy will support revenue growth, increase adjusted EBITDA while meaningfully reducing cash burn as we work towards achieving free cash flow break-even in 2026. Lastly, we believe our strategy positions OrthoPediatrics to help more children than ever before. With that, I'd like to turn the call over to Fred to provide more details on our financial results. Fred? Fred Hite: Thanks, Dave. Taking a closer look at the P&L. Our third quarter of 2025 worldwide revenue of $61.2 million increased 12% compared to the third quarter of 2024. Growth in the quarter was driven primarily by strong performance across Trauma and Deformity, Scoliosis and OPSB, offset by a decline in 7D unit sales and LatAm stocking and set sales. U.S. revenue was $48.7 million, a 14% increase from the third quarter of 2024, representing 80% of total revenue. Growth in the quarter was primarily driven by Trauma and Deformity, Scoliosis and OPSB, offset by a decline in 7D unit sales. We generated total international revenue of $12.5 million, representing growth of 6% compared to the third quarter of 2024 and representing 20% of our total revenue. Growth in the quarter was primarily led by increased procedure volumes, partially offset by lower stocking and set sales to LatAm. In the third quarter of 2025, Trauma and Deformity global revenue of $44.1 million increased 17% compared to the prior year period. Growth was primarily driven by strong growth across multiple product lines, specifically our cannulated screws, PNP Femur, PNP Tibia, DF2 and OPSB. In the third quarter of 2025, Scoliosis global revenue of $16.3 million increased 4% compared to the prior year period. Growth was primarily driven by increased sales of RESPONSE 5560 and revenue generated from FIREFLY, offset by a decline in 7D unit sales. Finally, Sports Medicine/Other revenue in the third quarter of 2025 was $0.9 million (sic) [$0.8 million ] compared to $1.3 million in the prior year period. Touching briefly on a few key metrics. For the third quarter of 2025, gross profit margin was 74% compared to 73% for the third quarter of 2024. The increase in gross margin was primarily driven by favorable product sales mix as a result of lower 7D unit sales and lower stocking and set sales to LatAm, which generate lower gross margin profit. Total operating expenses increased $9.0 million or 19% compared to the prior year period to $54.7 million in the third quarter of 2025. The increase was mainly driven by $2.3 million of restructuring charges, $2.3 million of impairment charges, increased noncash stock compensation as well as the ongoing growth of the OPSB clinics. Sales and marketing expenses increased $1.9 million or 11% compared to the prior year period to $18.7 million in the third quarter of 2025. The increase was mainly driven by increased sales commission expense and an overall increase in volume of units sold. General and administrative expenses increased $2.9 million or 11% year-over-year to $29.2 million in the third quarter of 2025. The third quarter increase was driven primarily by increased noncash stock compensation as well as the ongoing growth of the OPSB clinics. Intangible asset impairment recorded during the third quarter of 2025 was $2.3 million related to our annual impairment test, where we determined the fair value of ApiFix, Telos and Medtech trademark assets and Telos customer relationship assets were below the carrying value. We recorded an impairment charge to reduce the carrying amount of the intangible assets to their estimated fair value. Restructuring charges recorded during the third quarter of 2025 was $2.3 million related to the company's global restructuring plan started in the fourth quarter of 2024, aimed at improving operational efficiency, reducing operating costs as well as reducing staffing. For the third quarter, we recorded additional restructuring expense as we continue to review structural changes required to drive down costs. We saw savings in the third quarter, but anticipate greater impact in the fourth quarter and in 2026. Research and development expense decreased $0.2 million in the third quarter of 2025 due to timing of product development third-party invoices. Total other expense was $2.5 million for the third quarter of 2025 compared to $3.6 million of other expense for the same period last year. GAAP net loss per share for the period was $0.50 per basic and diluted share compared to $0.34 per basic and diluted share for the same period last year. Non-GAAP net loss per share for the period was $0.24 per basic and diluted share compared to $0.18 per basic and diluted share for the same period last year. Adjusted EBITDA was $6.2 million in the third quarter of 2025, a 56% improvement when compared to $4.0 million in the third quarter of 2024. We ended the third quarter with $59.8 million in cash, short-term investments and restricted cash. In the third quarter, we saw a significant improvement in free cash flow performance. For the third quarter, free cash flow usage was $3.4 million compared to $11.7 million of free cash flow usage for the third quarter of 2024. Set deployment was $4.1 million in the third quarter of 2025 compared to $5.3 million in the third quarter of 2024. Turning to guidance. As Dave mentioned, we adjusted our expectation for full year 2025 revenue to be in the range of $233.5 million to $234.5 million, representing year-over-year growth of 14% to 15%. We are reiterating the guidance that our full year gross margin will be within the range of 72% to 73%. We also continue to expect to generate between $15 million to $17 million of adjusted EBITDA in 2025. Additionally, we continue to expect approximately $15 million of new set deployed in 2025. This represents our continued focus on driving the business to free cash flow break-even by 2026, and we anticipate delivering our first quarter of free cash flow positivity in the fourth quarter of 2025. Operator, let's open the call for Q&A. Operator: [Operator Instructions] Our first question comes from David Turkaly with Citizens Bank. David Turkaly: Dave, you made a comment, I thought I heard you make it, so I just wanted to clarify it, something about competitors exiting the space. I was wondering like specifically, what were you referring to there? David Bailey: Yes. Good question, Dave. Listen, we see some of the big OEMs that are -- have notified customers that they're pulling products that historically have been used in pediatric patient population. So we've seen that from J&J. We've seen that from Smith & Nephew in the last 6 months, more recently, J&J with a Hip product that would be a competitor to 3P. And so we have really nice timing that we're coming out with a new Hip system. And just, I think, seeing a continued defocus of these pediatrics in some of the large OEMs, which I think is not necessarily great overall for patients, but certainly good for us from a competitive standpoint. David Turkaly: And I know that you talked about sort of 12% being, I think, the new LRP limit or down, I guess, lower limit of growth. And it seems like you're doing a pretty good job with these clinics. But as we look ahead to the next couple of years, do you think there's an ability to possibly accelerate either the expansions or openings on the OPSB side, maybe to accelerate that number? David Bailey: Yes. I think there is no question that there is extremely high demand for clinics. And this year, I would say we've gotten a lot of experience in terms of the timing of accelerating those clinics and the timing of getting those clinics started. We're pleased with what we've seen so far. And you can bet that if we have the opportunity to do more and do more faster, we would certainly want to do that. Certainly, trying to balance also that against the P&L requirements of trying to drive to increase profitability. But I think the demand is there. And yes, you could assume that if we have the opportunity to open more clinics, we would certainly want to do that. Operator: Our next question comes from Ben Haynor with Lake Street Capital Markets. Benjamin Haynor: First off for me, on OPSB and the 25% and 40% realized returns that you're seeing, is that something that includes any sort of halo effects that you see for other products on either the -- or I guess, on the QD and Scoliosis side? Fred Hite: No, it does not. We -- yes, it would be difficult, I think, to try to quantify that. So that's not included. Benjamin Haynor: Okay. Got it. And then just thinking about the revenue range, the $1 million difference between the top end and the bottom end there with the $2 million difference between the top end and the bottom end of the EBITDA range. Is there anything that folks should read into there? Any additional color on what might drive that EBITDA range to the top or bottom end? Fred Hite: No, it's really product mix is probably the single biggest item that drives the change on the bottom line. That's where it was to start with, and we didn't feel like narrowing that gap on the last update. Benjamin Haynor: Okay. That's fair enough. And then lastly for me, just on the competitors that notified customers that are exiting the market. Do you have a sense of where their shares stand at -- market share stands at for the likes of them? David Bailey: Yes. I certainly don't know their market shares in each one of those individual product lines. No question that our largest competitors historically have been legacy products from those 2 large OEMs. And more of their product sales probably are in the commoditized small plate, small screws types of things like that. But certainly, when there are less options available in the market and we have the best products there, it certainly bodes well for us taking all the share we would credibly want to take in areas like hip deformity correction, for example. Operator: Our next question comes from Ryan Zimmerman with BTIG. Unknown Analyst: This is Izzy on for Ryan. So I heard the comments about accelerating off of 12% for the long-term plan with new clinics opening. But I was just curious if you guys could talk a little bit about what's giving you the confidence in 12% as being the correct base to grow from. David Bailey: Yes. I mean, I guess when we look at implant sales across the board and what we see adoption rates of all our products, the way the Scoliosis business has grown and then we strip out some of the uncertainty that we've seen from Latin America, and strip out the majority of the 7D, which inevitably is going to happen. But as we've said, it's very difficult for us to determine quarter-to-quarter. When you strip some of those things out and look at the momentum we have in all of those other areas of our business, it gives us a lot of confidence that a 12% kind of baseline is a good one for us. And you're right, I mean, I think there's the opportunity for acceleration when you look at the speed with which we're -- the rate with which we're growing the OPSB franchise. I mean there's just a lot of demand for clinics. We're seeing same-store sales within our existing clinics go up. And I don't even think that we have seen the impact yet from the R&D initiatives that we've got going. We launched a number of products on the OPSB side. I think DF2 is the primary one that we talk about because it's growing so rapidly. But I think in the next few quarters, we'll be talking a lot more about a number of new R&D projects that are coming out of the OPSB franchise. And I think when you add all that up, we feel very confident in kind of a baseline growth rate of 12% going forward. Unknown Analyst: Got it. And I heard you call out strength in other international regions outside of Brazil and LatAm. I was curious if you guys are taking any steps to kind of derisk international revenue volatility as we move into 2026. Are any of the other regions where you're seeing strength growing fast enough or strong enough to offset any of the headwinds that you've seen this year? David Bailey: Yes. It certainly, as the international business grows, the dependence on revenue from Latin America, South America, particularly Brazil, becomes less impactful. And we are seeing really nice growth, particularly in Asia Pac as well as EMEA and particularly -- well, really across all of our implant businesses. I'd like to particularly call out the Scoliosis growth that we're seeing in both of those areas, which is new. We haven't really had a Scoliosis business, particularly in EMEA over the last few years. And here in the last 12 months, have really grown it from 0 to -- it's still small, but something nice and it's growing rapidly. And so all of that certainly offsets the volatility that we have from stocking distributors in Latin and South America. And I think Fred and I are going to work hard to determine if there are better structures that we could put in place with our stocking distributors in Latin America as well that could potentially mitigate some of the choppiness or lumpiness that we see in revenue. And so a number of things that we can do. But yes, I think you're on a good track here thinking that as we grow these businesses in our agencies, as our agencies become a larger percentage of our revenue, particularly in EMEA, that will mitigate some of this. Last thing I would comment on is the progress we're making on the EU MDR. So we have a number of files right now before our notified body, and we do expect by year-end, as we talked about earlier in the year to have a number of MDR approvals. I'd say the majority or the main one that we are excited about is the approvals for our small stature scoliosis system, the 45-50 system. Right now, we're growing the EMEA Scoliosis business rapidly, but really feel like we're doing it with one arm tied behind our back. We don't have half of the product portfolio there. And so to see customers so readily adopting RESPONSE when they really only have access to one embodiment of RESPONSE, is really encouraging, particularly knowing that we're on the dawn of getting approval for our small stature system. Operator: Our next question comes from Matthew O'Brien with Piper Sandler. Unknown Analyst: This is Anna on for Matt. I guess I just wanted to ask a bit on the T&D franchise. You've got a bunch of good and new products there, but I guess we were maybe expecting a bit stronger growth. So how much room is left in the market? And maybe how much of that is low-hanging fruit versus penetrating the next layer of docs? David Bailey: So we're really pleased right now with the kind of growth we see, I think, 17% for T&D global. And you could assume that we also see some T&D disruption in LatAm. So I think the underlying growth rate of T&D, our largest business is -- we feel really good about. There's a lot of growth remaining opportunities on the 7D -- a lot of growth remaining on the T&D side. Outside of the United States, as we've talked about, there's a number of EU MDR approvals that are going to help us continue to grow outside of the U.S. And then as you've heard, 3P Small-Mini, 3P Hip, these are product lines that are just now coming out. And again, we see the exiting of some of our competitors, I suppose, of the incumbent providers of products in that market. So I think one of the things that we need to consider or we're considering on the T&D side is just the pace with which we want to grow that business given the volume of sets deployed. You see our set deployment number this year come down from nearly 25 last year to 15 this year. A big portion of those sets are on the T&D side. And so without a direct competitor there, we don't have anybody trying to steal our lunch money, so to speak, in that business. And we can flex our growth rate a little bit. And when we won't want to put as much capital out and driving hard to generate free cash here, we'll deploy fewer sets, and that can impact the growth rate negatively if we deploy fewer sets maybe by a few points or positively if we, in the future, decide to ramp up set deployment and grow the T&D business a little faster. So a lot of low-hanging fruit, I think, still available to us. It's a question more of how we want to either throttle up the growth or throttle back the growth based on the cash usage we want to use in the future. Unknown Analyst: Got it. That's super helpful. And then on 7D placements, there tends to be a strong implant pull-through effect in the next few years following placement. So I was just wondering how the lowered outlook on 7D, how that has any impact on the growth of the core spine business going forward? David Bailey: Yes. That's a great question. I think this is less about our outlook and more about timing. We -- obviously, the unit placements that we anticipated happening in Q3 certainly haven't gone away. you could assume that they're likely to close at some point in time in the future, whether that's a number of them in Q4 or a bunch in Q1 or vice versa, it's hard for us to determine. But I don't think that the delays in the placements of those types of units are something that is significant enough for us to impact the long-term growth rate of the implant business on the Scoliosis side. And so not particularly concerned about that. I think we have more in the top of our funnel on the 7D side than we've ever had. And so I think there's a bright future in terms of set deployments for placements of 7D units. It's just -- again, it's hard to determine which quarter it will happen and pretty unlikely to affect implant sales. Unknown Analyst: Okay. Great. That's great to hear. And then if I can just squeeze in one last one on the profitability improvements we saw in OpEx, what was cut and how durable because you guys did a good job this quarter. Fred Hite: Yes. We're very pleased with the results we saw in the third quarter. Nice improvement both this third quarter compared to the same time last year as well as improvement over the second quarter. As mentioned, the restructuring actions we started in the fourth quarter of last year, took some more smaller actions earlier this year and then some bigger actions here in the third quarter. A little bit of those savings showed up in the third quarter, but more of those savings will show up here in the fourth quarter as well as all of 2026. So despite the softness in revenue, gross margins are strong. Profits are right where we expected them to be even with higher revenue. And that all means improved free cash flow for the business, which is obviously a key goal as well. So definitely taking steps in the right direction here. Operator: Our next question comes from Mike Matson with Needham & Company. Unknown Analyst: This is Joseph on for Mike. So I guess maybe just to start off the EU MDR, the approvals or expected approvals you guys called out. Does that get you to half or above half of the Scoliosis portfolio available over there in Europe? And then just the reduced staffing that you guys called out, I was just wondering, maybe you did mention it where that's coming from. Is that like demand driven? Is it location dependent? Is this just kind of bloat, I guess, just kind of trimming the fat for staff that necessarily wasn't needed? David Bailey: Yes. So from an EU MDR approval standpoint, yes, on our Fusion platform, having the 45-50 would really give us a full complement on the Fusion side. Certainly, the newer products on the EOS, the early onset scoliosis products are not approved in Europe. That said, there are a number of hospitals and physicians in Europe that operate in locations where they can get those types of products through a critical access type of device or emergency use type of device. So we do expect some sales on the EOS side. But yes, we'd have a pretty -- we would have a full complement of product on the RESPONSE side once we get the RESPONSE 45-50 approved. I think on the staffing side, a lot of staffing as we announced last year, we shut down the majority of the facility in Israel, and so we're starting to see some savings there. We have historically used our Telos business, both internally for R&D efforts related to clinical and regulatory efforts related to EU MDR as well as have the Telos business working with a few outside companies. I think as we have gotten to a point where EU MDR or at least the technical files have been submitted on the EU MDR side, we can start to throttle back some of those expenses we had with Telos. And so there was head count associated with that. And I would just say, generally, we're just tightening things up here and recognizing that the business is going to be solidly profitable, and we're going to generate some cash here in the near future and making some changes around the edges that ultimately will help us drive profitability. Unknown Analyst: Okay. Great. Yes, that makes a lot of sense. And then I guess maybe just the, the next-gen or the new spinal fusion system. I guess, is that still expected this year? Or is that more of a 2026 launch? I don't know if that has to do anything with how much momentum you guys are getting with RESPONSE, if that's changing your thinking around the launch there. But yes, any color there would be helpful. David Bailey: Yes. Certainly, Nextgen will be a 2026 initiative, probably not a full-blown launch in 2026, but our hope is to start doing some cases probably in the back part of 2026. you're fairly accurate in saying that while from an R&D perspective, we're heads down on making sure we got the best system. It's not critically imperative that, that product gets launched right away when we see RESPONSE growth as high as it is. So we're certainly not throttling anything back, but it's good to see that when Nextgen comes, we think we'll have an absolutely elite system there, and it will be building on the strength of RESPONSE and an already growing product line in RESPONSE. And so probably 2026, to answer your question, back part of 2026, probably a big launch in 2027, 2028 but not factored into our revenue here this year or really much revenue in 2026. Operator: Our next question comes from Richard Newitter with Truist Securities. Ravi Misra: This is Ravi in for Rich. I have 2 questions. So just the first one on 3P, a number of kind of, I don't know, line extensions or kind of new innovation and how to characterize that new innovation in the space. But just around that, can you help us understand how that gets you into -- I believe you talked about a $450 million or LatAm in that opportunity? Like how does that allow you to penetrate that? And then presumably, should we be thinking of this longer-term as kind of a leverage driver, both SG&A as well as gross margins, given that you have kind of a unified platform of products for production and kind of sale? And I have a follow-up. David Bailey: Yes. So there are -- as we mentioned, the 3P, there is a number of different implant systems in the 3P that will be more targeted to anatomic areas or specific deformity correction opportunities. I would say that the -- I would say that we are opening a lot of new opportunities with 3P because of our existing plating system doesn't have all of the indications covered. And I would say is a little bit antiquated. And so I think 3P being kind of the flagship for our trauma and limb deformity product portfolio on a go-forward basis has a big impact on our capacity to grow the T&D business. I think that it probably gets us deeper, Ravi, into existing accounts. As you know, we're present in every major children's hospital. But I think what we struggle sometimes with is that when there's shelf space and shelf presence for things that are more commoditized and small plates and screws that have been there for a long time. It's going to take some more disruptive technology to get those systems off the shelf and get newer, more modern systems in. And so I do think that as we do the full launch of 3P over the next few years, you're going to see the opportunity for substantial displacement of more of the commoditized product and replace that with some pretty high-technology products that also have very specific plates and screws, shapes and sizes, instruments that ultimately allow surgeons to do the procedures easier. And so it's a big deal for us, and I do think it allows us to get deeper and deeper in the children's hospitals where we're already present. Fred Hite: Yes. And to the leverage question, that's a great call out. I mean it's called a platform for a reason. That's the design from the very beginning is to try to leverage this stuff and to really drive what we've been working on for the last really 3 to 5 years with all of our new product introductions, which is improved return on all of our assets that we're deploying. And by combining this into a platform, we can then leverage similar drivers, similar screws, a lot of the similar items across multiple platforms, which gives us tremendous improved return on investment on these new sets coming out. So more leverage there, leverage with the suppliers than really on the SG&A side. So you'll probably see it show up more in improved gross margin. But absolutely, improved gross margin and better return on investment from a cash perspective is absolutely multiple benefits from that type of a system launch. David Bailey: Yes. And just sorry to amplify Fred's point on the asset utilization metrics here. I mean we've talked to the investment community for a long time about how our legacy products probably where some of those products that are in the market still growing, but they've been out there for 10 and 15 years. And when we developed those products 15 -- nearly 20 years ago, asset utilization metrics were not top of our list when we were a tiny company 20 years ago or 18 years ago. And since the IPO and really over the last 5 years, I mean, new product development is not only focused on meeting major unmet clinical needs in pediatric healthcare, but also being able to do that where we're getting better asset utilization metrics, so either high ASP against -- or less inventory. And I can say with confidence after seeing what we're getting on 3P Hip and what we're getting both from an ASP standpoint as well as just the inventory required to do those elective procedures that the 3P -- first iteration of the 3P platform is doing exactly as we want. It's allowing surgeons to do procedures on kids they would really struggle otherwise and really high demand types of patients, but it's also doing it at a really nice price point for us, a really nice margin for us. And I'm pretty excited to see the return on assets meeting our needs, meaning a substantial improvement over some of our legacy products. Unknown Analyst: Great. And then just maybe one last one. No, no I mean, it's an important product driver, right? So -- and then just on the last -- just kind of a question on the Q&A kind of just struck me around how you're thinking about Latin American growth right now and kind of Brazil as you kind of work your way through the dynamics there. And when you're looking at kind of the long-term 12% outlook that you're putting out there for '26, '27 and beyond, how should we kind of think about -- if you're looking to restart growth, obviously, in that area of the world with a new business model potentially coming in, should we think about maybe trading some profitability for revenue there? Or any kind of comments that you can kind of give us as you work through your new strategy there, given the changes you've seen in the last couple of months would be very helpful into '26. Fred Hite: Yes. What I would say is I think you should expect more of the same in that revenue is important, but improving profitability and improving free cash flow is as important. And so it's not revenue at all cost. It's revenue that's profitable and it's revenue that generates free cash flow for us. And any change that we do, I think, in the business, you could assume is going to follow those same principles. So it's not necessarily going to maximize revenue growth, but more importantly, improve the profitability of sales down there as well as improve the -- dramatically improve the cash flow of that operation. Operator: I'm not showing any further questions at this time. I'd like to turn the call back over to Dave for any further remarks. David Bailey: Well, thank you for everybody for your good questions. Thank you for your time. And I'd just like to thank all of my associates and partners in pediatric health care and our investors for continuing to share in the mission to help 1 million kids a year. Have a great day, and we look forward to talking to you soon. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.
Operator: Good afternoon, and welcome to Landstar Inc.'s Third Quarter Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Frank Lonegro, President and CEO; Jim Applegate, Vice President and Chief Corporate Sales, Strategy and Specialized Freight Officer; Jim Todd, the Vice President and CFO; Matt Dannegger, Vice President and Chief Field Sales Officer; and Matt Miller, Vice President and Chief Safety and Operations Officer. Now I'd like to turn the call over to Mr. Jim Todd. Sir, you may begin. James Todd: Thank you, Elmer. Good afternoon, and welcome to Landstar's 2025 Third Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is a safe harbor statement of the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relate to Landstar's business objectives, plans, strategies and expectations. Such information is, by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2024 fiscal year described in the section Risk Factors, Landstar's Form 10-Q for the 2025 first quarter and our other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information. I'll now pass it to Landstar's CEO, Frank Lonegro, for his opening remarks. Frank Lonegro: Thanks, JT, and good afternoon, everyone. I'd like to thank our BCOs and agents and all of the Landstar employees who support them every day. It was great to spend time with our BCO independent contractors at our annual appreciation days in Bossier City, Louisiana recently and to celebrate their incredible achievements. We were extremely pleased with the turnout. And it was my honor to preside over Landstar's 52nd Truck Giveaway, awarding Christian Sanchez Cantù from Laredo, Texas with a new 2026 Freightliner Cascadian. The capability, resiliency and level of commitment exhibited day in and day out by our network of independent business owners is unique in the freight transportation industry. Their adaptability and dedication to safety, security and service for our customers is truly impressive. They are exceptional business leaders and key to driving the continued success of Landstar's business model. The challenging conditions experienced in the truckload freight environment over the past 10 quarters continued during the 2025 third quarter. Volatile federal trade policy and lingering inflation concerns continue to generate supply chain uncertainty. However, even as overall company revenue decreased approximately 1% year-over-year, the 2025 third quarter included important positive signs for Landstar, which I'll cover shortly. As JT and I will discuss in greater depth later in our prepared remarks and as disclosed in our earnings release, the 2025 third quarter financial results were impacted by three discrete noncash, nonrecurring items. As we disclosed via the 8-K we filed with the SEC on August 13, the largest of these items related to the decision to actively market for sale Landstar Metro, our wholly owned Mexican logistics subsidiary that is principally engaged in intra-Mexico truck transportation services. We are working towards a late 2025 or early 2026 sale of Landstar Metro and have thus far experienced a good deal of interest in that company. Excluding the revenue contribution from Landstar Metro from both the 2025 and 2024 third quarters, as well as approximately $15 million in reported revenue during the 2024 third quarter that was associated with the previously disclosed agent fraud matter, the total revenue increased approximately 1% year-over-year in the 2025 third quarter. This is a positive marker for our business. Encouraging signs in our overall performance were highlighted by strength in the unsided/platform equipment business. This service type posted another strong quarter with a 4% year-over-year revenue increase driven by the performance of Landstar's heavy haul service offering. We generated approximately $147 million of heavy haul revenue during the 2025 third quarter, or a 17% increase over the 2024 third quarter. This achievement reflected a 9% increase in heavy haul revenue per load and an 8% increase in heavy haul volume. And as noted in our earnings release and representing the collective efforts of many people at Landstar, Matt Miller and I are very pleased to report that the number of trucks provided by BCO independent contractors increased during the 2025 third quarter, representing the first sequential growth quarter since the 2022 first quarter. Our focus continues to be on accelerating our business model and executing on our strategic growth initiatives. We are continuing to invest in the foundational work that will put Landstar in a great position to leverage the freight environment when it eventually turns our way. We are also focused on our commitment to continuous improvement in the level of service and support we provide to our customers, agents, BCOs and carriers each and every day. As I previously noted, in addition to the decision to sell Landstar Metro, our third quarter financial results reflected two other noncash, nonrecurring charges disclosed in our recent 8-K. These three discrete items, in the aggregate, resulted in impairment charges in the quarter of approximately $30.1 million or $0.66 per share. As a result, GAAP earnings per share were $0.56. Excluding the impact of these three items, adjusted earnings per share was $1.22. JT will cover these three impairment charges in greater detail during his prepared remarks. Turning to Slide 5. The freight environment in the 2025 third quarter was characterized by relatively soft demand from a seasonal perspective. The impact of accumulated inflation remains a drag on the amount of truckload freight generated in relation to consumer spending. Truck capacity continued to be readily available with small pockets of supply/demand equilibrium, and market conditions continue to favor the shipper amidst choppy conditions in the industrial economy, as evidenced by an ISM index below 50 for the entire 2025 third quarter. Considering that backdrop, Landstar's revenue performance was admirable in the 2025 third quarter, with both truck revenue per load and the number of loads hauled via truck essentially equal to the 2024 third quarter. Our balance sheet continues to be very strong, and our capital allocation priorities are unchanged. We will continue to patiently and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck, during the first 9 months of 2025, we deployed approximately $143 million of capital toward buybacks and repurchased approximately 995,000 shares of common stock. And yesterday afternoon, our Board declared a $0.40 dividend payable on December 9 to shareholders of record as of the close of business on November 18. We continue to invest through the cycle in leading technology solutions for the benefit of our network of independent business owners and have allocated a significant amount of capital this year towards refreshing our fleet of trailing equipment, with a particular focus on investment in unsided/platform equipment. Turning to Slide 6 and looking at our network. The scale, systems and support inherent in the Landstar model helped to drive the operating results generated during the 2025 third quarter. JT will get into the details on revenue, loadings and rate per load in a few moments. As noted during previous earnings calls, Landstar's safety first culture is a crucial component of our continued success. Our safety performance is a direct result of the professionalism of the thousands of Landstar BCOs operating safely every day and the agents and employees who work to reinforce the critical importance of safety at Landstar. I'm proud to report an accident frequency rate of 0.60 DOT reportable accidents per million miles during the first 9 months of 2025, well below the last available national average DOT reportable frequency released from the FMCSA for 2021 and slightly better than the company's trailing 5-year average of 0.61. This long run average is an impressive operating metric that speaks to the strength, skill, talent and dedication of our BCOs and provides a point of differentiation our agents are able to highlight in discussions with our freight customers. I'd also like to take a moment to recognize Landstar's nearly 500 million-dollar agents based on our 2024 fiscal year results. Importantly, retention within the million-dollar agent network continues to be extremely high. Turning to Slide 7 on the capacity side. On a year-over-year basis, BCO truck count decreased approximately 5% compared to the end of the 2024 third quarter. Importantly, as noted earlier in my remarks, BCO count increased by 7 trucks on a sequential basis, representing the first increase in sequential quarterly truck count since the 2022 first quarter. BCO turnover continues to be influenced by a persistent relatively low rate per load environment, combined with the significant increase in the cost to maintain and operate a truck today compared to before the pandemic. Directionally, we are pleased to see our trailing 12-month truck turnover rate drop from 34.5% as of the fiscal year-end 2024 to 31.5% at the end of the 2025 third quarter. Through the first 4 weeks of the 2025 fourth fiscal quarter, the number of trucks provided by BCO independent contractors is down fractionally versus the ending truck count of Q3. We were encouraged, however, by a recent visit we had with U.S. Secretary of Transportation Sean Duffy. During our meeting, Matt Miller and I discussed several federal regulatory initiatives and administrative -- administration priorities with the Secretary, with a real focus on issues facing truck drivers and the truck capacity marketplace. We were proud to confirm to Secretary Duffy that Landstar BCOs have had 0 violations of the English language proficiency regulation and no reported issues with nondomiciled CDLs. We do not believe we have thus far experienced significant impact to our business from the federal regulatory agenda, but believe there is a potential longer-term positive impact for our BCO business, in particular. I will now pass the call back to JT to walk you through the 2025 third quarter financials in more detail. James Todd: Thanks, Frank. Turning to Slide 9. As Frank mentioned earlier, overall truck revenue per load was essentially flat in the 2025 third quarter compared to the 2024 third quarter, primarily attributable to a 0.1% increase in revenue per load on both loads hauled by van equipment and unsided/platform equipment, offset by a 5% decrease in LTL revenue per load and a 2.2% decrease in revenue per load on other truck transportation loadings. On a sequential basis, truck revenue per load increased 0.5% in the 2025 third quarter versus the 2025 second quarter, slightly softer than the typical pre-pandemic normal seasonality increase of approximately 1.5%. In comparison to overall truck revenue per load, we consider revenue per mile on loads hauled by BCO trucks a pure reflection of market pricing as it excludes fuel surcharges billed to customers that are paid 100% to the BCO. In the 2025 third quarter, revenue per mile on unsided/platform equipment hauled by BCOs was 6% above the 2024 third quarter, and revenue per mile on van equipment hauled by BCOs was 2% above 2024 third quarter. Delving deeper into seasonal trends, revenue per mile on loads hauled by BCOs on unsided/platform equipment declined 3% from June to July, declined 2% from July to August and increased 3% from August to September. The June to July decline and the July to August decline both underperformed pre-pandemic seasonal trends, while the August to September increase outperformed pre-pandemic historical trends. With respect to loads hauled by BCOs on van equipment, revenue per mile was more stable. Revenue per mile on van equipment hauled by BCOs increased 1% from June to July, underperforming these trends; decreased 1% from July to August, outperforming these trends; and was flat from August to September, underperforming pre-pandemic August to September historical trends. It should be noted that month-to-month seasonal trends on unsided/platform equipment are generally more volatile compared to that of van equipment. This relative volatility is often due to the mix between heavy specialized loads and standard flatbed volume. As Frank alluded to, we've been pleased with the recent performance in our heavy haul service offering. Heavy haul revenue was up an impressive 17% year-over-year in the third quarter, significantly outperforming core truckload revenue. Heavy haul loadings were up approximately 8% year-over-year, and revenue per heavy haul load increased 9% year-over-year. This represented a mixed tailwind to our unsided/platform revenue per load as heavy haul revenue as a percentage of the category increased from approximately 34% during the 2024 third quarter to approximately 38% in the 2025 third quarter. Non-truck transportation service revenue in the 2025 third quarter was 1% or $1 million below the 2024 third quarter. Excluding approximately $15 million in revenue reported during the 2024 third quarter that was associated with the previously disclosed agent fraud matter, non-truck transportation service revenue in the 2025 third quarter increased by approximately $13 million or 16% compared to the 2024 third quarter. Turning to Slide 10. We've provided revenue share by commodity and year-over-year change in revenue by commodity. Transportation Logistics segment revenue was down 0.6% year-over-year on a slight decrease in both loadings and revenue per load compared to the 2024 third quarter. Within our largest commodity category, consumer durables revenue decreased approximately 4% year-over-year on a 3% decrease in volume and a 1% decrease in revenue per load. Aggregate revenue across our top 5 commodity categories, which collectively make up about 69% of our transportation revenue, increased approximately 1% compared to the 2024 third quarter. While Slide 10 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top 5 commodity categories. From the 2024 third quarter to the 2025 third quarter, total loadings of machinery increased 4%, automotive equipment and parts decreased 4%, building products decreased 10% and electrical increased 23%. Additionally, Substitute Line Haul loadings, one of the strongest performers for us during the pandemic and one which varies significantly based on consumer demand, increased 12% from the 2024 third quarter. We experienced strong demand related to AI infrastructure projects, which is reflected in part in both our electrical and machinery commodity categories, while strong demand for our services and support of wind energy projects drove the strength in our energy commodity grouping. As we've mentioned many times before, Landstar is a truck capacity provider to other trucking companies, 3PLs and truck brokers. During periods of tight truck capacity, those other freight transportation providers reach out to Landstar to provide truck capacity more often than during times of more readily available truck capacity. The amount of freight hauled by Landstar on behalf of other truck transportation companies is reflected in almost all of our commodity groupings, including our Substitute Line Haul service offering. Overall, revenue hauled on behalf of other truck transportation companies in the 2025 third quarter was 17% below the 2024 third quarter, a clear indicator that capacity is readily accessible in the marketplace. Revenue hauled on behalf of other truck transportation companies was 10% and 12% of transportation revenue in the 2025 and 2024 third quarters, respectively. Even with the ups and downs in various customer categories, our business remains highly diversified with over 23,000 customers, none of which contributed over 8% of our revenue in the first 9 months of 2025. Turning to Slide 11. In the 2025 third quarter, gross profit was $111.1 million compared to gross profit of $112.7 million in the 2024 third quarter. Gross profit margin was 9.2% of revenue in the 2025 third quarter as compared to gross profit margin of 9.3% in the corresponding period of 2024. In the 2025 third quarter, variable contribution was $170.2 million compared to $171.4 million in the 2024 third quarter. Variable contribution margin was 14.1% of revenue in both the 2025 and 2024 third quarters. Turning to Slide 12. Operating income declined as a percentage of both gross profit and variable contribution, primarily due to the impact of the noncash, nonrecurring impairment charges included in the 2025 third quarter and the impact of the company's fixed cost infrastructure, principally certain components of selling, general and administrative costs in comparison to slightly smaller gross profit and variable contribution basis. The decline in adjusted operating income as a percentage of both gross profit and variable contribution was significantly less pronounced given the size of the noncash impairment charges and was attributable to the impact of increased costs negatively impacting operating income, while both gross profit and variable contribution were approximately 1% below the 2024 period. Other operating costs were $15.6 million in the 2025 third quarter compared to $15.1 million in 2024. This increase was primarily due to increased trailing equipment maintenance costs, partially offset by the favorable resolution of a value-added sales tax matter and a decreased provision for contractor bad debt. Insurance and claims costs were $33 million in the 2025 third quarter compared to $30.4 million in 2024. Total insurance and claims costs were 7.2% of BCO revenue in the 2025 third quarter as compared to 6.7% in the 2024 third quarter. The increase in insurance and claims cost as compared to 2024 was primarily attributable to net unfavorable development of prior year claim estimates and increased severity of both current period auto and cargo claims, partially offset by a decreased frequency of both auto and cargo claims during the 2025 period. During the 2025 and 2024 third quarters, insurance and claims costs included $9.2 million and $4.6 million of net unfavorable adjustment to prior year claim estimates, respectively. Selling, general and administrative costs were $57 million in the 2025 third quarter compared to $51.3 million in the 2024 third quarter. The increase in selling, general and administrative costs were primarily attributable to increased stock-based compensation expense, increased information technology costs and increased employee benefit costs. Stock-based compensation expense was approximately $1.6 million during the 2025 third quarter as compared to a $43,000 reversal of previously recorded stock-based compensation costs during the 2024 third quarter. We continue to manage SG&A in part by closely managing headcount at Landstar. Our total number of employees based in the U.S. and Canada is down approximately 40 since the beginning of 2025 and down approximately 80 since peak headcount. We also continue to focus on driving efficiencies and productivity gains throughout our network. Landstar is actively engaged in rolling out an AI-enabled customer service solution throughout the corporate organization. We also continue to invest in and develop multiple in-flight AI-enabled products within our portfolio of digital tools in support of our network of agents, capacity providers and employees. Depreciation and amortization was $11.5 million in the 2025 third quarter compared to $15.4 million in 2024. This decrease was primarily due to decreased depreciation on software applications. As Frank referenced earlier during this call and as previously disclosed in the current report on Form 8-K filed with the U.S. Securities and Exchange Commission on August 13, 2025, the company conducted a strategic review of our operations during the 2025 third quarter focused on efforts to streamline our core operations and position the company for future growth. In connection with that strategic review, the company recorded noncash, nonrecurring charges in the aggregate for 3 discrete items of approximately $30.1 million or $0.66 per basic and diluted share. First, in connection with the decision to actively market Landstar Metro for sale, the company recorded noncash impairment charges of approximately $16.1 million or $0.35 per basic and diluted share on the company's 2025 third quarter balance sheet based on the estimated fair value less cost to sell this business. The second charge noted in the earnings release related to the decision to select the Landstar TMS as the company's primary system for truckload brokerage services. And in conjunction with that decision, wind down the Blue TMS, an alternative transportation management system in use by one of the company's operating subsidiaries focused on the truckload brokerage contract services business. The resulting impairment charge representing the remaining net book value of the Blue TMS was $9 million or $0.20 per basic and diluted share. Third and finally, the company recorded a $5 million impairment charge relating to a noncontrolling equity investment in a privately held technology startup company. This charge represented the total carrying value of this investment on the company's second quarter 2025 balance sheet date. The effective income tax rate was 25.8% in the 2025 third quarter compared to an effective income tax rate of 22.2% in the 2024 third quarter. The increase in the effective income tax rate was primarily due to: one, the favorable impact of certain federal tax credits during the 2024 period; and two, the deleveraging effect of lower pretax profits, mostly due to the just discussed 3 noncash impairment items during the 2025 period with a similar population of permanent items in both the 2025 and 2024 periods. Turning to Slide 13 and looking at our balance sheet. We ended the quarter with cash and short-term investments of $434 million. Cash flow from operations for the first 9 months of 2025 was $152 million, and cash capital expenditures were $8 million. The company continues to return significant amounts of capital back to stockholders, with $111 million of dividends paid and approximately $143 million of share repurchases during the first 9 months of 2025. The strength of our balance sheet is a testament to the cash-generating capabilities of the Landstar model. Back to you, Frank. Frank Lonegro: Thanks, JT. Given the highly fluid freight transportation backdrop and an uncertain political and macroeconomic environment, as well as challenging industry trends with respect to insurance and claims costs, the company will be providing fourth quarter revenue commentary rather than formal guidance. Turning to Slide 15. The number of loads hauled via truck in October was approximately 3% below October 2024 on a dispatch basis, and revenue per load in October was approximately equal to 2024 on a process basis. As a result, we view October's truck volumes as modestly below normal seasonality and truck revenue per load as lagging slightly behind normal seasonality. Looking at historical seasonality from Q3 to Q4, pre-pandemic patterns would normally yield both a 1% increase in the number of loads hauled via truck and truck revenue per load yielding a slightly higher top line sequentially. As noted above, both fiscal October truck volumes and revenue per truck trended slightly below normal seasonality. With respect to variable contribution margin, the company typically experiences a 20 to 30 basis point compression in variable contribution margin from the third quarter to the fourth quarter, typically driven by a combination of decreased BCO utilization and compressing net revenue spreads on our truck brokerage business associated with peak season. As noted in our 10-Q, which we'll file a little later this afternoon, a BCO independent contractor with a subsidiary of the company was involved in a tragic vehicular accident earlier this month during the 2025 fourth quarter. Importantly, Landstar was not involved in the initial collision of this multistage incident. This incident is still in the process of being investigated, but could have a material adverse impact on insurance and claims cost in the 2025 fourth quarter. With that, operator, we'd like to open the line for questions. Operator: [Operator Instructions] Our first question is from Reed Seay from Stephens Incorporated. Reed Seay: I want to start off with what you're seeing in the broader truckload market. There's been a lot of noise on some of the temporary tightening we've seen and maybe some subsequent softening. So any commentary you have on the broader market would be greatly appreciated on the capacity exits in particular, if you have any insights there? Frank Lonegro: Yes. I mean, I think we're pleased with what we're seeing on the BCO side. Again, given the first sequential increase in our BCO count since the beginning of 2022, that feels pretty good. We've been trending relatively flat there, pretty close to even keel, but actually seeing a positive sign there was really, really helpful for us, if for nothing else other than just morale, I mean just getting 7 additional trucks. I know Matt and his team are fighting every day to keep the folks that we have and to continue to look for ways to onboard high-quality drivers. I think there is a fair amount of conversation that's happening about the regulatory landscape. And obviously, you're seeing headlines of upwards of 200,000 nondomiciled CDL holders out there. We're seeing ELP getting enforced from time to time in various states. So I would tell you that the impact on the capacity has got to be more than 0, but I also think it's going to come out over a little bit longer period of time than just a matter of weeks or months. Reed Seay: Got it. Makes a lot of sense. And touching on kind of the BCO count decline slowing here in 3Q. It is encouraging to see kind of the truck count increase a little bit, but do you have any visibility to when you can return to BCO count growth here maybe in the fourth quarter or in 2026? Frank Lonegro: Yes. So again, on the third quarter relative to the end of the second quarter, we actually did increase the count ever so slightly at 7 BCOs positive, so we were happy to see that. We're down just a little bit here in the October to date in the fourth quarter. I'll let Matt give you some commentary around what we normally experience this time of the year. But what I can tell you is that the things that Matt and his team are working on are 100% geared toward making structural changes within what we're doing every day to both maintain the existing BCOs that we have and to onboard new folks. Matt? Matt Dannegger: Thanks, Frank, and thanks for the question. So given the rate backdrop, we're pleased with having the best gross truck adds [ over ] in 8 quarters. During the third quarter, we saw gross truck adds up more than 15% compared to the third quarter of 2024. And one of those things -- we can't control rate, but the team is focused on what we can control, which is how we recruit, how we qualify, how we onboard, driving efficiencies and improving that conversion rate of those expressing interest in coming on to Landstar. Likewise, there's two sides of the coin on the retention side. We saw the seventh consecutive quarter of turnover improvement. High watermark was 41%, that was the fourth quarter of 2023. And we just got down to 31.5% as of the end of the third quarter, really approaching our long-term average of 29%. All that being said, this really hinges on rate, right? If we saw an inflection in rate and rate ticking higher, I could see us finishing the fourth quarter higher than where we finished the third quarter, but that's going to be rate dependent. Reed Seay: Got it. And then if I could squeeze in just a real quick one here. The approved and active carriers that declined from 2Q to 3Q, is that -- could that impact your ability to affect -- to more favorably buy freight, just as you have a smaller pool to choose from? Matt Dannegger: No. We don't really see that impacting our ability to source and satisfy demand. We're really being selective here. And we talked about that a little bit in the second quarter comments. We're choosing to be a little bit more selective on who we choose to partner with, a pretty big backdrop as it relates to fraud out there in the space. And so throughout the course of the year, those numbers have been coming down. Frank Lonegro: And it was a -- Reed, if we're all skeptical around the capacity provider or there's something in the background that we can't verify, we're erring on the side of caution given the fraud backdrop. James Todd: And Reed, I would just only add on to that, some of the pruning that took place in the third quarter around that carrier base during that -- during the third quarter, we saw our net revenue margin on brokerage business actually widen out 78 basis points. So nothing from a capacity procurement side that gives us any concern where we sit today. Operator: Thank you. Next one is from Jonathan Chappell from Evercore. Jonathan Chappell: Thank you. Good afternoon, everyone. So Jim or Frank, you guys can handle this. So I want to go back to the first question. Jim said in his prepared remarks, revenue hauled for other transportation companies down 17%, a clear indicator of spare capacity. Then your revenue per load, October flat year-over-year, slightly below typical seasonal trends. Can you help us align both of those comments with some of the sources out there that have been talking about truckload spot rates spiking basically throughout the month of October? And are you just not seeing that in your particular routes? Or is maybe that a narrative that's kind of more broadly off base? James Todd: Jon, so I'll tell you the observations in the third quarter, and all three kind of move the same way. So we talked about how our revenue per load increased 50 basis points and typically goes up 150 basis points. So we saw sub-seasonal pricing. We saw our net revenue margin on brokerage business widen out sequentially, and we saw tender rejections actually dropped down a little bit in the third quarter when we saw an uptick, 1Q to 2Q. As we sit here today, it's day 2 of October close, I anticipate our October pricing is going to be about flat to September. And if you go back 15 years, historically, we get about a 60 basis point uptick, September to October. So it's not that it's significantly lagging, but we are not seeing -- if you're seeing public board data flash that spot rates are ticking up in October, we are not seeing that in our data thus far. Perhaps a bit of a Landstar lag that we've talked about in the past with agent behavior, not wanting to be the first one into their customers with the rate increase, but nothing we see in the numbers so far. Jonathan Chappell: Okay. And then also just -- anything you'd call out? I know you're not giving guidance, but just anything for the fourth quarter that would be important to note on the expense side? And also, how do we think about the bridge to incentive comp in '26 versus '25? James Todd: Yes, Jon. So on the expense side, insurance is always noisy and a difficult line to predict in a 90-day period. You heard Frank's prepared remarks about an early accident in October. We just went through an actuary review on the third quarter balance sheet date and had to true-up some prior year reserve estimates. So that one is a little noisy. On the other operating cost line, we held a BCO appreciation event. It's a little over $1 million. That will be a tailwind, 3Q to 4Q. And then finally, on the incentive comp and stock comp, we're accruing to about a $10 million charge, full fiscal year 2025. And if that kind of resets in a onetime number, Jon, in '26, that'd be about $11 million headwind. Operator: Next one is from Scott Group with Wolfe Research. Scott Group: So I want to understand maybe some of the October volume trends. Do you have any way of isolating sort of what -- how government-related volumes are doing? I guess, what I'm trying to figure out is, I think everyone is talking about sort of sub-seasonal volume in October. Is this a government shutdown phenomenon that you can see it pronounced in this one part of your business? Or is it broader? Frank Lonegro: It's a little bit of both, Scott. So I'll start and let Jim Applegate chime in. I mean, it's a combination of the government shutdown, which, as you know, we're a fairly significant hauler for various federal agencies. So we're certain that there's some there. The automotive business continues to be in a tough spot. Interest rates aren't helping the housing business either. You heard Matt Dannegger on the prior call talk about our peak expectations, and he can certainly chime in as well. So I mean, I think we're seeing what we have been seeing in the past couple of quarters. Perhaps adding to that is the government shutdown. James Applegate: Yes. And just around the government shutdown, we're not seeing it in our actual numbers yet just because billings are kind of catching up, but we are noticing in the dispatch loads, we are down over 30% so far within October from a dispatch standpoint as it relates to government loads, and we expect that to continue to trend down. However, it's temporary. You'll see it trend down. When the government does pop back up, you'll see a bump back up, and we'll gain a lot of that back. And actually, from a disruption standpoint, we probably stand long term to make out a little bit better than some of the other traditional asset-based providers just based on the flexibility of our network. So we're watching it closely. We do see it as something that's going to be a temporary blip, but we do see opportunity on the back end to catch up. Frank Lonegro: Matt, do you want to comment at all on the peak season? Matthew Miller: Sure. Thanks, Frank. JT talked a little bit ago about our Substitute Line Haul numbers being down this quarter. When we talk at peak at Landstar, we're really talking about a handful of customers in that Sub Line Haul sector. And then going back the last couple of years, we've just not seen that, coming off of those post-pandemic highs. So the last couple of years has been a little bit muted. A lot of the transition and people going back to the stores has made a change. Retailers and these e-commerce finding different ways to manage their transportation. You got the tariffs this year, which -- maybe there's a little pull forward there, maybe some disruption on the back end here. So just not seeing the amount of volume that we saw from our traditional partners in the past, just because they're not getting the same amount of volumes that they've had in the past. So again, I expect a muted peak season this year, probably similar to what we saw last year and maybe even down a little bit from that. Frank Lonegro: Yes, Scott, you saw UPS' print. So that will give you some indication of where they are on their peak business anyway to the quarter. And then I look at our numbers in October relative to the backdrop, and I'd say we've performed pretty well in the grand scheme of things. Scott Group: Yes. Okay. And then on the driver side with all these regulations -- so I get what you're saying, you don't have any BCO exposure here. But how about on the brokerage side of your business? Do you have a sense of what percentage of the broker carriers you're working with have exposure here? Frank Lonegro: It's hard to get a precise type of exposure. I do know -- and Matt can chime in here in a second. I do know that our vetting criteria are pretty significant. So we also have agents that are always directly conversing with those carriers. So they have to be able to do business with us. So we have a, I'd say, kind of a high probability that there's not going to be significant impact there. What's interesting is the BCO population should stay relatively stable and increase in that type of an environment and could actually see some improved utilization there as loads present themselves that maybe in the past, were handled by third-party broker carriers who might get impacted by either ELP or nondomiciled CDL. Matt Dannegger: Yes. And I appreciate the question. The FMCSA on the nondomiciled, they're probably the best place to go for data at this point because it's so recent. That emergency action just happened in September. So we're a little bit more than a month beyond, but they put out 200,000 as the potential estimated number of those impacted on the nondomiciled. And then since June 25, when ELP enforcement started to ramp, it started slow. We've seen more states adopt, even 2 in the past 2 weeks have begun training law enforcement on it. So far since June, 5,900 unique out-of-service violations. So a ramp is still taking place there, but I don't expect a pop. Frank Lonegro: And Scott, I have not heard -- and I think I would. I have not heard any agents say I had to either give a load back or I got a load that was stopped because I had a third-party broker carrier that was taken out of service. So it's an anecdotal sample size, but we haven't heard anything certainly around this table of that. Scott Group: And then ultimately, what I'm trying to get at is like, you guys tend to be pretty straight shooters and not like overly promotional. Like, do you think this is a big deal or not? Like, is this going to be -- is this like the big sort of catalyst for the cycle we've been waiting for? Or ultimately, do we just need demand, and that's going to be the key? Like, what are you -- how are you thinking about just the catalyst to get us going? Frank Lonegro: So the point that I would make here is, if -- and I'll put a big if on it -- if DOT is correct, and we're talking about 194,000 owner operators over the next year or 2, that would be a pretty big deal relative to that population. And I'd like to think that our BCO population is going to be stable and grow in the backdrop of a tighter supply side environment there. So I can certainly paint you a nice picture there, but a lot of that's just going to depend on the enforcement. And the enforcement doesn't really happen at the federal level. It happens at the state level, and you can see the politics around there and some of the banter back and forth between, for example, DOT in the State of California. So like a lot of that's got to happen on the ground in the states. It's not federal law enforcement that's involved in it. It's all the states. Operator: Next one is with Ravi Shanker from Morgan Stanley. Unknown Analyst: This is Madison on for Ravi. Just one quick one on the back of Scott's question. I know you mentioned some impact on the dispatch loads for the government shutdown. I was just wondering if you could talk a bit about how quickly that business can ramp back up once the government reopens? And if -- I know you talked about a catch-up coming there if that comes probably within fourth quarter or if it gets pushed out more into 2026? James Applegate: Yes. No, good question. Really, it's about timing and how long this goes on for. And it's just a matter of the government is getting the money to go ahead and ship. And it's going to be very quickly after the government reopens where you see that pipeline open back up again as well, too. So again, we're not looking at it as something that's kind of detrimental to what we're going to see from a volume standpoint. Long term, we're seeing it as something that's kind of a short-term blip that we're going to get through, and I think there will be some opportunity on the back end. Frank Lonegro: I think it's going to be measured in days and weeks, not months or quarters. Unknown Analyst: Got it. Okay. That's helpful. And then a little bit more of a bigger picture one. I know there's been a lot of talk in the market about AI usage and brokerage. I was just wondering if you guys can give a little bit of color about what Landstar is doing there and how you kind of think you differentiate versus peers? Frank Lonegro: Yes. So the model is obviously a differentiator in and of itself. We've got three different areas that we're focused on. We're focused on AI to assist our agents. So in the agency office, suggested pricing would be an example of that. We're also working on BCO retention. So how do we make sure that we know when a BCO might be sort of sending us the quiet signals that they're maybe not long for the company. So it could be reduced number of loads. It could be a change in the type of freight. It should be the agents that they're dealing with, et cetera. So we're looking at things in that space. And then we're obviously looking at it inside the building. We are a service provider in many respects, where our corporate support people are designed to serve the BCOs in the agent community. And if they're able to do that more effectively and more efficiently in how they are able to acquire knowledge in a particular question set. So we're working on a whole call center technology and suite of AI tools there that are going to help us be more efficient and effective when we deal with both BCOs and agents. Operator: Thank you. Next question is from Bruce Chan with Stifel. J. Bruce Chan: Yes. Thanks, operator, and good afternoon, gents. Maybe just a follow-up question on the technology side. You mentioned synthesizing the TMS onto 1 platform. Wondering if there are any identifiable cost savings that come out of that project or program? And then similarly, on the AI side, any margin impact that you expect or that you're targeting internally from the rollout of these tools? Frank Lonegro: Yes. I think on the first one -- and I'll let sort of JT chime in on the exact. But obviously, we're not going to have 2 TMSs that we're continuing to develop either under capital or operating expense, and he can walk you through the depreciation impacts on that one. But really just getting onto 1 platform was the important thing there. It will also give our folks within -- which is a very small area, but within our Blue organization to be working off of the exact same TMS that our agents are working off of, which I think is going to be helpful on both sides of that equation. On AI, we have not discussed any or disclosed any specific targets. But the increase in service levels is going to be our first area of focus, and then we'll look for opportunities on the efficiency side. JT? James Todd: Yes. Thanks, Frank. Bruce, on the Blue TMS, it was about a $750,000 depreciation tailwind already captured in the third quarter. So 3Q to 4Q, I expect no impact. Operator: Next question is from Brandon Oglenski with Barclays. Brandon Oglenski: I'll keep this a little bit longer term. And I know you don't really want to provide guidance here, but net income margins here -- sorry, net operating margins pretty much near the low, and I think that's very understandable, just given where the market is. But how do you think about the ability to get back to maybe the pre-pandemic range, where you were pretty consistently, 40% to 50% on net operating margin? Frank Lonegro: Yes, Brandon, good to hear your voice. Haven't spoken to you in a while. But look, I think the combination of increased revenue, which allows us to spread our fixed cost, the more that we can get in rate, obviously, that's going to be our friend on OM. We've certainly got to turn the corner on insurance and claims and things of that nature. And then we've got to get the efficiencies out of the technology. Whether those happen inside our building or they happen in the agency offices and therefore translate into higher sales productivity within the agent community, that's the right outcome. And then from a BCO perspective, the more loads that are hauled via BCOs is better from a BC perspective for us as well. So we're looking forward to touching all of those things through the tools and the AI that we're putting out there. James Todd: Yes. Thanks, Frank. And Brandon, I would certainly piggyback to Frank's comment on insurance. I would point you in 2019, we had about 10,500 BCOs leased on with this, and we had an $80 million insurance line that fiscal year. You take a look at where we were in the first 9 months of 2025 and run rate, and we've got about 8,600 BCOs in the fleet. We are safer today or as safe today as we were in 2019. It's this persistent claim cost inflation that's not only impacting Landstar, it's impacting all the truckers. I think you're starting to see some chunkier exits in the trucking space. And eventually, the folks are going to have to recapture that in the top line in the form of higher rates. We are clearly doing what we can, as I referenced in the prepared remarks around our headcount is down 80 from the peak. It's down 40 since the beginning of the year. We were talking about a company that's got less than 1,300 heads supporting 8,600 owner operators and 1,000 agents and taking care of 23,000-plus customers. So we'll continue to work on the controllables. Operator: Next one is from Jason Seidl from TD Cowen. Elliot Alper: This is Elliot Alper on for Jason Seidl. How are you guys thinking about capacity planning over the next, call it, a year as these nondomiciled CDLs continue to roll off? Or is it just too early to plan for? And then on the same note, are there conversations with your insurers or underwriting partners taking place on any changes to risk or risk premiums associated with any of these nondomiciled regulations? Frank Lonegro: Yes. Good question. In terms of the nondomiciled, as I mentioned to you a moment ago, we don't have it. Our business model where we -- or has not certified across our entire BCO fleet. Or Jim Applegate talked about the government business that we have. I mean, there certainly are lots of gates or rigor that we put people through to make sure that we're able to support the customers that we have in the way that they need to be supported. So our insurers are going to ask us those questions, as they should. And our answer is going to be we don't have any exposure there. In terms of capacity planning, I mean, our job is to qualify and onboard as many BCOs as possible and to try to retain all of the BCOs that are currently leased on to us. So you're going to see us continue to focus really, really hard on growing the BCO fleet. In terms of capacity itself, we have a lot of different ways that we go about recruiting and retaining appropriate third-party capacity providers. Again, as I mentioned earlier, it's really important that they can support our customers with the appropriate level of safety, security and service that our BCOs do. And so we're going to err on the side of caution when it comes to those three things. And so if we have any thought that they're not going to be able to converse in English or they're holding a nondomiciled CDL, then we're going to -- honestly, we're going to vet those out. The quality is what we is what we sell here. We don't transact in price. You can see that just based on our rate relative to where the DAT board rates are. We're at a different premium level, and we want to maintain that quality. Elliot Alper: Okay. Great. And then just following up. So I understand October is trending below seasonality, and helpful commentary around peak expectations. But can you discuss how the load and revenue per load comparisons stack up as we move through the quarter? Just trying to gauge if comps get tougher off October. James Todd: Yes. From my recollection, I don't have 4Qs last year. Bear with me 1 second. So it looks like last year, fourth quarter volumes dropped off 190 basis points sequentially, and it looks like rate was up 100 basis points sequential. So rate was basically right in line with normal seasonality. It looks like we're starting out of the gate here in October flattish, and October rates typically gap up about 60 basis points. So I would tell you, we're -- achieving that 100 will take a strong lift here in fiscal November and fiscal December. From an October standpoint, you heard Applegate talk about government and Frank talked about some of the parcel carriers and some of the automotive. We're running, I think, down 4.5% loads per workday in October, and we typically drop off about 2% loads per workday, October versus September. So we'll need a little catch-up baseball there as well. Operator: Our last question is from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: Maybe circling back to the part of Scott's question on the supply and demand environment, but focusing on the demand environment. Clearly, it's been very weak for some time, and we can all look at the data, including PMIs and the likes. What -- but I guess overall, still a relatively healthy macro depending on what you look at it. So what do you believe we need to see in terms of the demand environment ultimately improving? Are you hearing any early optimism about this in 2026? And then maybe also, anything you can call out from an end market exposure where you're seeing maybe some underlying strength or maybe weaknesses too? Frank Lonegro: Stephanie, so let me try to take a stab at it. What would we need to see in order for the demand environment to improve? I think first and foremost, you need to have stable trade policy and have some of the relations between U.S., China, U.S., Canada, U.S., Mexico. The more normalization we can see there, I think the better for people deploying capital, which is ultimately what it comes down to. I also think the consumer, if they were to shift a little bit more back to goods rather than services, that would certainly be helpful. I think the Big Beautiful Bill and the unlocked potential there, which is certainly going to create the possibility of additional cash flow in companies so they're certainly going to have the capital to deploy. But again, I think you need normalization of trade relations to get to a better spot to allow people to do that. In terms of interest rates and Fed policy, we'll all be ears open tomorrow to see what the Fed is going to do. And ultimately, what's the impact on medium- and longer-term rates because that would help out on the automotive side and on the housing side. In terms of bright spots, we clearly have seen a significant uptick in our unsided business and in our heavy haul business. And so continuing to see that play out over time would certainly be helpful from a Landstar perspective. The AI data center, commercial AC associated with that, the power gen, like all of the things that are in that AI ecosystem, we have seen the benefit of. And then I think we've seen a little bit of an uptick in the quarter relative to prior quarters in the U.S./Mexico cross-border business, which has been down for us for several quarters, and we're actually seeing it improve. So that feels pretty good. So I can paint you a good picture for next year, but we just haven't seen it. Right now, it's on paper. I haven't been able to see anything that would tell you that those are actually what's going to transpire when we flip the calendar to January 1. Operator: Thank you. At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks. Frank Lonegro: Thank you, Elmer. In closing, while the freight environment remains challenging, we believe we have seen some positive signals. We were encouraged by the modest sequential pricing improvement we experienced during the third quarter. And with a choppy industrial economic backdrop, we were extremely pleased with the 17% year-over-year revenue increase in our heavy haul service offering. We also believe the potential impact of various federal regulatory developments could provide some positive lift for our BCO business, in particular. And regardless of the economic environment, the resiliency of the Landstar variable cost business model continues to generate significant free cash flow. Landstar has always been a cyclical growth company, and we are well positioned to navigate the coming months as we continue to look forward to higher highs when the freight market turns our way. Thank you for joining us this afternoon. We look forward to speaking with you again on our 2025 fourth quarter earnings conference call in late January. Thank you. Operator: Thank you for joining the conference call today. Have a good evening. Please disconnect your lines at this time. Thank you very much.
Nate Melihercik: Good afternoon, and good evening. Welcome to Logitech's video call to discuss our financial results for the second quarter of our fiscal year 2026. Joining us today are Hanneke Faber, our CEO; and Matteo Anversa, our CFO. During this call, we will make forward-looking statements, including discussions of our outlook, strategy and guidance. We're making these statements based on our views only as of today. Our actual results could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the Investor Relations section of our website. We undertake no obligation to update or revise any of these forward-looking statements, except as required by law. We will also discuss non-GAAP financial results. You can find a reconciliation between GAAP and non-GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results and forward-looking statements in our press release and in our filings with the SEC. These materials as well as the shareholder letter and a webcast of this call are all available at the Investor Relations page of our website. We encourage you to review these materials carefully. And unless noted otherwise, references to net sales growth are in constant currency and comparisons between periods are year-over-year. This call is being recorded and will be available for a replay on our website. I will now turn the call over to Hanneke. Johanna Faber: Thank you, Nate, and welcome, everyone. We delivered a strong second quarter to close out the first half of fiscal year 2026. Our teams executed with excellence, delivering good top line growth and outstanding profitability. They executed well across all regions and delivered strong growth across both B2B and consumer channels. To achieve these results in the current environment underscores Logitech's discipline and resilience. In Q2, we remain focused on our long-term strategic priorities, and they drove our results. First, of course, superior products and innovation, which are so integral to our DNA. This quarter, we announced 16 new products. Some of the highlights included the much anticipated MX Master 4, a new generation of our flagship premium mouse. This new product is the first in the MX line to provide advanced users with tactile haptic feedback, and it is off to a record-breaking start. We also unveiled a wide array of exciting new gaming products, including the new PRO X2 SuperStrike mouse, which blends inductive analog sensing and real-time haptic feedback for the most competitive gamers. We also launched the McLaren Racing collection, a premium lineup of SIM racing gear inspired by McLaren's iconic racing brand and technology. And for those of us in the business world on calls like this one, we introduced the new Zone Wireless 2ES and Zone Wired 2 headsets with AI-powered dual noise canceling microphones and adaptive hybrid active noise cancellation. Many of these new products were announced at our Logitech-ownned flagship events, Logi WORK and Logi PLAY in September. These coveted live events took place in more than 30 cities around the world, attracting thousands of media, influencers, content creators, partners and thought leaders. The Logi PLAY global live stream on the day drove more than 12 million views. And within a month, the Logi PLAY social media and creator activations reached approximately 200 million people. This underscores the growing strength of our global brand. We also continue to double down on B2B with good momentum behind our investments in new products and capabilities. Logitech for business demand was strong across video collaboration, personal workspace solutions and the education vertical. Time Magazine recognized our new office environmental sensor, the Logitech Spot, as one of the best inventions of 2025. This is the second year in a row we have received this prestigious recognition for a new product. Logitech's global scale remains a key advantage. And in Q2, we executed very well across geographies. EMEA posted solid growth. Once again, Asia Pacific had an excellent quarter, supported by our China for China investments. Their strength helped offset a modest sales decline in the Americas as we proactively manage tariffs. Importantly, demand trends in the U.S. improved as the quarter progressed. Finally, our Q2 performance underscores Logitech's capabilities as an operational powerhouse. Our cost discipline and manufacturing diversification were important factors in driving excellent gross margins and double-digit growth in non-GAAP operating income. We are on track to reduce our share of U.S. products originating from China to 10% by the end of this calendar year. We're able to do this, thanks to our long established diversified manufacturing capabilities in 5 other countries, while our Chinese manufacturing site continue to serve China and the rest of the world. Now looking ahead to Q3, we believe we will see continued strong momentum in our business, but we also see some market uncertainty. The North American consumer market, especially in gaming, was softer in Q2. We're cautiously optimistic that this will improve for the holiday season, but that is, of course, yet to be confirmed. The macros also remain uncertain with tariffs, export restrictions, persistent inflation, just some of the dynamics. In this context, we believe our Q3 outlook reflects a pragmatic balance between the strong momentum of our business and the litany of uncertainties within the global economy. Our approach to deliver the holiday quarter and beyond remains unchanged. We'll focus on our long-term strategic priorities while being guided by the 3 in-year principles of playing offense, cost discipline and agility. In terms of playing offense, we will continue to invest in R&D and demand generation to gain share, both in the short and the long term. As for rigorous cost discipline, we'll continue to focus on product cost optimization, tariff mitigation and disciplined G&A spend. And of course, we will continue to be agile and move fast. In closing, we entered a holiday quarter in a dynamic global environment with a strong first half under our belts and with a unique set of assets that underpin our resilience, our extraordinary capacity for superior products and innovation, our global reach with 2/3 of sales generated outside the U.S., our diversified manufacturing footprint or China plus 5, our strong and growing brand, our pristine balance sheet and our experienced high-performing team. I believe these assets, combined with our clear strategic priorities, position us well to continue to deliver strong results. And before I hand over to Matteo, let me say a big thank you to our teams around the world. Our people are driving this strong performance and a unique culture. And I was super proud that, that was recognized by Forbes this quarter when they ranked Logitech out of 900 global companies as #25 on their list of the world's best employers. Matteo, over to you. Matteo Anversa: Thank you, Hanneke, and thank you all for joining us on the call today. I would like to start by thanking our teams around the globe for the continuous strong execution in the second quarter. While the external environment remains challenging, our execution centered on playing offense, disciplined cost control and agility. And this focus drove a non-GAAP operating income of $230 million, up 19% year-over-year. This strong profitability was achieved in a quarter where we delivered mid-single-digit net sales growth year-over-year. So let me discuss some of the key aspects of our second quarter financials. Net sales were up 4% year-over-year in constant currency, supported by continued robust demand across both consumer and B2B. And actually, B2B demand outpaced consumer in the quarter. Some key highlights to mention across our product categories. Personal Workspace grew year-over-year, fueled by double-digit growth in Pointing Devices and Keyboards & Combos. Gaming delivered 5% year-over-year growth in constant currency, driven by double-digit growth in PC gaming. Video Collaboration grew 3% in constant currency, driven by high growth in EMEA, while Americas was relatively flat due in part to the pull forward of sales that we highlighted in the first quarter. We executed well across our regions and more specifically, Asia Pacific grew 19% year-over-year in constant currency, led by sustained double-digit growth in China. EMEA grew 3% in constant currency, driven by strong growth in Video Collaboration and Personal Workspace. And conversely, Americas was down 4%, primarily due to the gaming market decline. And as Hanneke just noted, we also experienced lower demand early in the quarter as a result of the pricing actions that we took to offset tariffs, which improved in the latter half. Moving to gross margin. Our non-GAAP gross margin rate for the quarter was 43.8%, similar to the prior year, and it is important to note that the negative impact of tariffs was entirely offset by our price and manufacturing diversification actions. Additionally, product cost reductions offset investment in strategic promotions. We continue to be very disciplined in managing our costs. And as a result, operating expenses declined 3% year-over-year and were 24.4% of net sales, down 240 basis points from the 26.9% in the second quarter of last year. And similarly to last quarter, this decrease was primarily driven by a reduction in G&A as a result of the measures that we implemented to mitigate the impact of tariffs. As I mentioned earlier, this focus drove a non-GAAP operating income of $230 million, up 19% year-over-year and a non-GAAP operating income margin expansion of more than 200 basis points. Moving to cash. Cash flow continues to be strong. We generated approximately $230 million in cash from operations, 100% of operating income and ended the quarter with a cash balance of $1.4 billion. We returned $340 million to shareholders in the quarter through dividends and share repurchases, consistent with our capital allocation priorities. Now looking ahead, as Hanneke pointed out, we are monitoring 2 pockets of uncertainty. The U.S. consumer market, particularly in gaming, and the overall macro environment, particularly around tariffs, export restrictions, global trade dynamics and inflation. Now nonetheless, we are expecting the overall top line trend to continue to be positive and roughly in line with the performance year-to-date. Net sales in the third quarter are expected to grow 1% to 4% year-over-year in constant currency, with gross margin rate between 42% and 43% and non-GAAP operating income is expected to be between $270 million and $290 million. This outlook contemplates tariff levels for the third quarter to be unchanged from the current structure. And we anticipate, again, that our pricing actions and continued diversification efforts will offset the negative impacts of these tariffs. So while there is a level of uncertainty in the U.S. market, we will continue to manage the business with diligence, generating strong levels of operating income and cash from operations. So I want to thank once again our teams across the globe for their dedication and flexibility. And now, David, I think we can open the call for questions. Operator: [Operator Instructions] And now our first question is form Asiya Merchant from Citi. Asiya Merchant: Great. I hope you can hear me. Matteo Anversa: Yes, Asiya. Asiya Merchant: Okay, okay. All right. Wonderful. [Technical Difficulty] double down a little bit on the U.S. consumer uncertainity that you talked about specifically [indiscernible] gaming. What have you seen? Has that been a function of the price increases that you put through? And when you talk about Americas improving as the quarter progressed, was that a -- is gaming part of that? If you can just double-click on that. And then just given the fact that sell-through was so much better than sell-in, why should we have like more seasonal or maybe more like mid-teens, mid- to high teens kind of guide that you guys are talking about? Johanna Faber: Yes. Thanks, Asiya. So there's a couple of pieces in that question. I appreciate it. Maybe first on the markets overall, we saw continued strong markets around the world on the work side of our business. So Video Conferencing and Personal Workspace, really markets were strong and growing everywhere. In Europe and in APAC, the gaming market also continued to grow. But in the Americas, it was a little bit more mixed. Again, VC and PWS were really solid market-wise, but the Gaming market in Q2 declined mid-single digits. And the reasons for that decline can be debated, but I think what's more important is that we're cautiously optimistic that the gaming market will recover and be back to growth in the holiday quarter for a number of reasons. First of all, we saw the trends improve as the quarter progressed, Q2. There have been some game releases early in Q3, notably Battlefield 6, which is the type of game that really plays to our strength and is off to a really good start. And then we have an excellent innovation bundle and some targeted promotions where needed to continue to grow the business. So I think, again, globally, market is actually quite strong. North America gaming, a little softer. And by the way, in the global context, our competitive share performance in Q2 was also very strong. So all in all, good momentum and cautiously optimistic that, that spot of North American gaming will be better during the holidays... Asiya Merchant: No, no, go ahead. Matteo Anversa: Unpacking a bit of the second portion of your question on the outlook. So the way I think I would describe it as we think it's a reasonably fair balance between the underlying strong performance that the business continues to have, as you have seen in the results that we posted earlier today with some of the litany of uncertainties that Hanneke talked about in her prepared remarks. So when you look at it by region, basically, we are expecting Asia Pacific to continue to perform extremely well with double-digit growth. China keeps doing extremely well. We have 11/11 coming up here in November. So we are expecting strong performance on gaming. So Asia Pacific will continue to perform in line with the last couple of quarters. Similar thing for EMEA, we are expecting a low to mid-single-digit growth in constant currency in Europe as well. So the bookends of our outlook is really around the -- what's going to happen in North America with the U.S. consumer to Hanneke's point earlier. And here, if you look at the low end of the outlook assumes a North America that continues to be slightly negative year-over-year in terms of net sales, like we have seen in the first 6 months of the year, while the high end of the outlook assumes a strong holiday season, strong consumer and North America actually turning flat to slightly positive. So that's are the bookends of the outlook that we provided today. Asiya Merchant: And was any of that an impact of prices that you put through, price increases that you put through? Johanna Faber: Yes. I think mostly our brand and our products, both of which are, we believe, quite superior, protected us to a large extent from impacts of the pricing. I would say, in general, higher priced and premium products as well as our B2B portfolio, we saw very little to no impact of the price increases. Where we did see some impact was on entry-priced products and even there, probably a little bit more so on entry pricing gaming than in PWS. And we're actively managing that with targeted promotions. Operator: Our next question comes from Erik with Morgan Stanley. Erik Woodring: Maybe just following up on Asiya's question there. Just if you could maybe touch a little bit more on the consumer response to higher prices. And really, what I'm trying to get at is, you talked a little bit about B2B pull forward in the June quarter. What type of behavior did you see kind of prior and then after pricing increases in the U.S. that maybe informs you about the consumer? And how are you -- or what are the assumptions that you're making into the December quarter as it relates to pricing and kind of the elasticity of pricing? And then a quick follow-up, please. Johanna Faber: Yes. So again, on the B2B side, very little impact with the exception maybe of some timing impact where, again, we saw a little bit of pull forward in our Q1. But demand-wise, very little impact. Same thing on the premium end of the portfolio, very little impact. I think the U.S. consumer at the high end is in good shape. A little bit more impact on the lower end. That's not unexpected. And again, that got better during the quarter. So overall, we're really pleased by the fact that we took pricing early and you see what that does to our gross margins where we were able to offset the entire impact of tariffs by pricing and cost reductions. Erik Woodring: Okay. And then quickly as my follow-up, Hanneke or maybe it's better for Matteo as well or maybe both of you is just can you talk about how Logitech is thinking about M&A today? And if there's any difference from what you outlined at your Analyst Day back in March, I only ask, we haven't seen I don't think anything has necessarily materialized over the last, let's call it, 6 or 7 months. And so is that just a function of better uses of cash? Is it a function of valuations? Is it a function of the opportunity set? Would just love your feedback there. And that's it for me. Johanna Faber: Yes. Thanks, Erik. No change. I'm afraid versus AID. So our top priority for capital allocation is investing organically in the business, and that's definitely what we're doing. Second priority is making sure we grow the dividend every year. Third priority is M&A, and we are actively out in the market looking for the right targets, but they have to be strategic and they have to make the boat go faster. And we're looking at lots of things, but I'm going to be very careful. I want things that make the boat go faster, and those are not so easy to come by. And then our last priority when it comes to capital allocation is share buybacks because we also don't want a lazy balance sheet, and you saw us returning a lot of cash to shareholders in the quarter, mostly through the dividend in Q2, but also through some buybacks. Operator: Our next question comes from Alek Valero with Loop Capital. Alek Valero: This is Alex on for Ananda. So just back to Gaming in the Americas, can you speak to how and when do you think the Americas, I believe you said entry-level gaming can normalize the higher ASPs? Johanna Faber: Yes. Again, we saw trends improving throughout the quarter. And in America, we haven't taken price increases in a long time. So we don't have a lot of history, but we have taken price increases in other markets around the world over the last -- in recent times. And you tend to see a bit of an impact in the first quarter after. So that is no surprise. And again, we were pleased to see in the impacted parts of the portfolio trends improving throughout the quarter. And as Matteo outlined, exactly when that will normalize is a little hard to tell, which is why we have a range for Q3 and the bookends of those assume either it normalizes faster or it takes a little bit longer. But overall, we're confident that it will normalize. Alek Valero: Awesome. Just a quick follow-up. I believe I recall you mentioned that the B2B is going to layer in over time. Can you speak to what the mix is today in terms of business to consumer? And where does it go from here? Johanna Faber: Yes. So Logitech for Business, which includes VC headsets and Personal Workspace sold into the enterprise channel is about 40% of the business, and that's creeping up but very slowly over time as we double down on that. And we're pleased in Q2. It was again a strong quarter for Logitech for Business. You saw the VC sales were up with double-digit demand growth. And we like -- there's a lot of things we like about Q2 in Logitech for Business. But I would say what I like particularly, we saw disproportionate growth in higher ASP, more premium solutions, including the exciting new Rally Board 65 video conferencing mobile solution, which is proving to be very popular. We continue to strengthen our go-to-market capabilities. We launched CPQ, configure price quote in the quarter, which is really helping us quote faster and deliver better service to our customers. And the education vertical continued to be -- continue to do very well in the quarter. So lots to like there, and we'll continue our focus on Logitech for Business. Operator: Okay. Our next question comes from Samik Chatterjee with JPMorgan. Samik Chatterjee: Let me check first , can you hear me? Matteo Anversa: We can hear you. Samik Chatterjee: Okay. Great. Maybe Hanneke and Matteo, what are you hearing from your distribution partners in terms of promotional activity that they want to really sort of ramp into the December quarter? I know you mentioned 11/11 as well in China. Just in relation to previous years, what are you seeing in terms of intentions from retailers for promotional activity? And maybe how does that influence the gross margin guide, Matteo, that you outlined for the next quarter, particularly when we compare to the slight moderation we had seen last quarter going from Q2 to Q3 -- last year, I mean, sorry. And I have a follow-up. Johanna Faber: Yes. I'll let Matteo comment on the gross margin guide for the next quarter. In terms of what we're hearing, I've been out in the market quite a bit here in the U.S. and in Canada in the last few weeks, talking to customers, to consumers, to some of our partners. I would say they're also optimistic on the holidays. They want to be sure that our premium offerings look really great. And if you go into a Best Buy or in Europe into a MediaMarkt, you'll see fabulous execution, I think, of the McLaren collection and the MX Master 4, which is at beast. They also want to be sure that we together offer great value on the low end of the portfolio. So both in Europe and the U.S., you've seen us in the past quarter do a little bit more promotion there. And I would say that, that kind of mix of great visibility of the high end and targeted promo on the low end will continue into Q4. And that's important -- Q3, sorry, that's continuing. That's important, not just in the U.S., but also in Europe, where we need to do a lot of blocking and tackling versus low-end Chinese competition, which for obvious reasons, is more active in Europe now than last year. Matteo Anversa: So Samik, let me unpack to you the gross margin a bit. I think the best way to think about the third quarter is almost looking back at the second as the story is actually pretty similar. We've been now for quite some time, pretty surgical on promotion and really, to Hanneke's point, really spend the money very carefully where we think is needed. And that's exactly what happened in the second quarter, and that's what you can expect us to do also in the third. So if you look at the gross margin rate in the second, we're basically flattish year-over-year. As we said in our prepared remarks, our pricing actions completely offset the impact of tariffs. Then we had -- the team -- the operating team did a marvelous job and continue to work on product cost reduction, while they were also concurrently working on the manufacturing diversification. And this gave us about 100 basis points of margin expansion year-over-year, which was offset by slightly higher promotion to Hanneke's point that she just described. And then last quarter, if you recall, last year, we had a release of inventory reserves, which was -- did not occur this year that put about 100 basis points pressure year-over-year on the gross margin side, but this was offset by the positive effects due to the current exchange rate, primarily euro to USD. So that's the breakdown of the second quarter. So if you look at the third quarter, actually, the story is going to be -- we are expecting this to be very, very similar. So we will continue to work on product cost reduction. So that should help us offset a little bit more of the promotional spend that you normally have in the third quarter being the holiday quarter. And then price will continue to offset the impact of tariffs. So that's how we layered out the outlook of 42% to 43% that we described today. Samik Chatterjee: Okay. Okay. Got it. Maybe just for my follow-up, for the OpEx run rate that you're managing the business to fairly -- looks fairly disciplined and you're managing it with a lower OpEx envelope year-over-year. I mean, obviously, the business is still growing. So what are the areas you're sort of making those trade-offs on? And where are you finding those efficiencies to keep the OpEx envelope this tight at this point? Matteo Anversa: Sure. So starting at a high level with the numbers, right? We outlined even at the Investor Day that our objective is to have OpEx in the range of 24% to 26% of net revenue, right? Last year, you saw us maybe more on the higher end of this range. And this year, so far, we have been a bit on the lower end. And that's fundamentally driven by the -- some of the measures that we took in light of tariffs to control some of the cost. And here, we need to be very clear that as we did also in the first quarter, most of these cost control actions were centered around G&A. So the typical semi blocking and tackling that you would expect a company to do on G&A, control the contractor cost, pausing hires of people that are not related to R&D or sales and marketing and travel control, this kind of stuff. And so that's really where the focus has been. So really trying to curtail the cost on G&A, but at the same time, take these savings on the G&A side and then refunnel it back into the growth of the business, which for us means R&D and then sales and marketing. And that's what should expect -- you should expect us to continue to do in the next couple of quarters. Operator: [Operator Instructions] And with that, our next question goes to Didier with Bank of America. Didier Scemama: I've got a couple. Maybe first, maybe for Matteo, Hanneke, whoever. I'm just wondering, I think you touched on it a little bit, but how should we think about the marketing spend in the holiday season? Because I can think like some -- you've got some sort of tailwinds from FX. You've got also a sort of difficult consumer environment or slightly more difficult consumer environment in the U.S. So you would want to use that FX tailwind maybe to invest in the U.S. At the same time, you also have a channel that is very lean. So I just wonder how you should we think about that? Johanna Faber: Yes. So we feel good about inventories ahead of the holidays, both in the channel and our own inventory levels. So they're healthy. We have enough. We don't have too much. It's all good. The way -- if I look at overall OpEx, again, Matteo said it just now, we had a great quarter in terms of OpEx, 24.4%. That's, I think, 240 basis points down versus last year. So that's a really great discipline. That was focused on G&A, where we're super purposeful and just tight. R&D was virtually unchanged in Q2, and we're going to continue to invest there. That's our bread and butter. And then to your point, marketing was also in Q2 close to last year. I think what's important to note there is that the effectiveness of our marketing spend globally continues to improve. We're shifting money from nonworking producing stuff to working, which is, in general, much better. And we're also strengthening our marketing capabilities. I've mentioned China before, but in China, we are really rocking it in marketing. And in fact, just last week, at China's big marketing ROI Festival, there were 2,400 entries for best marketing ROI, and we were one of only 11 Gold Award winners. So it just shows the strength of our marketing team and how we've modernized marketing. We're getting more bang for the buck in marketing. And I expect that to continue in Q3, and we won't hesitate to lean into either R&D or sales and marketing spend if we think it can accelerate the top line. Matteo Anversa: For modeling purposes, the -- remember, the third quarter, OpEx as a percentage of net sales tends to be a little lower just because it's the biggest quarter of the year. So that would imply a sequential increase to Hanneke's point, both overall in OpEx and the increase will be primarily in R&D and sales and marketing. So that's what you can expect. Didier Scemama: Perfect. And the quick follow-up is on the China for China strategy. I think Hanneke last quarter, you sort of mentioned that there was a pivot in the competitive positioning of Logitech. You were starting to gain share after several quarters of difficult, let's say, competitive environment for the company. So maybe can you elaborate a little bit more on the products you've introduced, the price points you're hitting and where you've encountered the greatest success? Johanna Faber: Yes. No, happy to do that. So again, China had -- we don't break it out, but you've seen the APAC numbers and China was ahead of those APAC numbers. We continue to hold the #1 shares. Actually, in Q2, PWS share now grew for the entire quarter, which I haven't seen since I've been at Logitech. So that was great to see. And gaming share for the quarter was still slightly down, but the trends are improving. So that's good to see. That's driven by the marketing I just mentioned, where the team is doing a great job versus even a year ago and by innovation. So our global innovations are working well in China, but we've also invested in China for China innovation. So the most exciting thing we launched in Q2 was a new gaming keyboard, the G316 just for China, really cool and unique RGB lighting, retro vintage display and of course, all the cool performance stuff, 8 kilohertz, et cetera. That is doing very well. That's actually on the medium, I would say, the lower medium end of the price range, which is an important part in China to really go big on. Still great margins. The team has done a great job designing and building that in China. And you'll see that type of innovation more and more of it going forward, but super excited about the momentum we now have in China in a fast-growing market as well. Operator: Okay. Our final question will come from Michael with Vontobel. Michael Foeth: You actually answered just all my questions on China just now. But I have 2 small follow-ups. One is on the channel inventories. You said channel inventories are quite lean. You're happy with inventories. Is that the same dynamic across all regions? Or are there any differences across the regions? And can you tie that also maybe with the numbers you showed on sell-in and sell-through? And the second question would be just on gaming. Could you give a bit more color on the different subsegments in gaming, simulation, console and PC gaming? I mean you mentioned PC gaming being very strong, but what about the other categories? Johanna Faber: Why don't I take the gaming and then you can comment on the inventory. So yes, we talked a lot about gaming in the U.S., but maybe if we zoom out gaming globally, again, continue to be really strong with net sales up 5% and demand up double digits, driven by very strong, again, double-digit sales growth in our #1 market, which is China. When we look at the different parts of the business, Michael, we're seeing continued strong demand at the top end. So Pro was up more than 25%. SIM was up more than 10%. So that's really great. And again, we continue to block and tackle in the lower end of the portfolio, which is also important, which also saw solid growth, but the kind of disproportionate growth is coming from the top end of the gaming business. Again, excited for the short term on gaming with things like the SuperStrike and the McLaren Collection. I'm very excited about the mid- and long-term perspectives in gaming. Matteo Anversa: And Michael, on the -- on your question on the channel inventory, we feel the channel overall across all our regions is in a good spot. When we look at the weeks on hand, it's in the range that where we wanted this to be. It's important not to confuse. We had a little bit of a channel inventory dynamic in B2B in VC actually last quarter. That's why you saw in the first quarter, the sell-in of VC outpaced the sell-through and now the reverse happened in the second quarter. But that's a dynamic that has been fixed here in the last 6 months. So overall, we are pleased where the inventory is. And overall, if you look at AMR, that's where you have the biggest discrepancy, the sell-out outpaced the sell-in a bit, which is a positive sign as we enter into the third quarter and the earlier season. Operator: Sorry, we do have one more question from Martin with BMP. Martin? Martin Jungfleisch: Two quick follow-ups. The first one is really on the strength in keyboard and mice. Would you say that is Windows 10 Refresh driven? Or is it more COVID refresh? Or none of those 2? That's the first question. Johanna Faber: Yes. Sorry go ahead, go ahead for your second one. Martin Jungfleisch: Yes. The second one is more for Matteo, I would say, just on the tariff headwind. I think was it the 200 to 300 basis points that you were expecting that you saw in the third quarter? And then also going forward, as you exit the -- or slowly exit the China to U.S. business, should we actually see that headwind ease over the next couple of quarters? Johanna Faber: Yes. Maybe I'll take the PWS one first. And thanks for noticing that really great results in Keyboards & Combos and Mice. Some people think those things can't grow. But as you can see, they can grow. What were the drivers? I'd say the first driver was, again, the premium end of our portfolio. So MX and Ergo are doing extremely well, both with double-digit growth in the quarter. And again, that MX Master 4, a lot of pent-up demand for it, entire subredits dedicated to it before launch, just a lot of excitement on that launch. Then we're seeing continued excellent execution in-store and online on our core keyword and mice business. And to your question, is this linked to the Windows 11 Refresh? We've always said I don't think our growth -- we know our growth is not directly tied to any PC sales trends. And historically, peripherals have always grown a couple of hundred basis points ahead of PC sales, but it can't hurt. And we're always very focused on attach programs in-store and online. When you buy a new PC, we also hope you will attach one of our peripherals. And of course, with some of the excitement about the Windows 11 Refresh and the AI PCs, that gives us more attach opportunities. So I would say that's a mild tailwind, but the real growth comes from our premium portfolio. Matteo Anversa: So Michael, let me -- Martin, sorry, let me talk about the other question. So the -- if I rewind the tape a little bit, right? So in the last earnings call, we said that we were expecting the tariff impact to be about 200 to 300 basis points, offset by 200 basis points of price. So we were expecting the net impact all in, including the diversification action and price to be between 0 and 100 basis points negative for the gross margin for the quarter. What in reality happened is, as we mentioned in the prepared remarks, we were able through -- we were able to offset the entire impact of tariffs. It's about 150 basis points each. So the impact of tariff net of diversification was 150 basis points pressure to the gross margin and price was a lift of 150 basis points. So net-net, we were able to offset entirely. And really, that's driven by 3 key things. Number one, the continued work that our supply chain team is doing on manufacturing diversification, which is trending in line with plan. The price actions that we took in April and then supply chain management. Really, they're doing a fantastic job in managing inventory, and they were able, as we said in prior calls, to pull in some of the inventory, some of the purchases ahead of new tariffs being placed. So we were able to mitigate some of the impact of the tariffs. So this 150 basis points dynamic, that's what I would expect also to happen in the third quarter. So 150 basis points impact on tariffs, offset by price, assuming, obviously, the tariff structure stays as it is currently. Operator: And now we have no further questions. Johanna Faber: Great. Well, thank you always great to see you all. Looking forward to seeing you in the follow-ups, and thanks for being with us today. Have a good week.
Mike Bishop: Hello, everyone, and welcome to Atomera's Third Quarter 2025 Update Call. I'd like to remind everyone that this call and webinar are being recorded, and a replay will be available on Atomera's IR website for 1 year. I'm Mike Bishop with the company's Investor Relations. As in prior quarters, we are using Zoom, and we will follow a similar presentation format with participants in a listen-only mode. We will open with prepared remarks from Scott Bibaud, Atomera's President and CEO; and Frank Laurencio, Atomera's CFO. Then we will open the call to questions. If you are joining by telephone, you may follow a slide presentation to accompany our remarks on the Events and Presentations section of our Investor Relations page on our website. Before we begin, I would like to remind everyone that during today's call, we will make forward-looking statements. These forward-looking statements, whether in prepared remarks or during the Q&A session, are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of our filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 10-K filed with the SEC on March 4, 2025. Except as otherwise required by federal securities laws, Atomera disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regards to those events, conditions and circumstances. Also, please note that during this call, we will be discussing non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release, which is posted on our website. Now I'd like to turn the call over to our President and CEO, Scott Bibaud. Go ahead, Scott. Scott Bibaud: Thanks a lot, Mike, and good afternoon, all. This has been a quarter of both challenge and validation, one that underscores the reality of bringing a new material technology to market and the opportunities that come when you solve fundamental problems for the semiconductor industry. I'll start by addressing our update with STMicroelectronics and depart from our regular format to review the broader picture, the momentum we're building with new customers and the different market opportunities that Atomera's technology is being used to address. As many of you have seen in our announcement, our work with STMicroelectronics on their smart power platform reached an inflection point this quarter. During this program, we were tackling a very difficult performance trade-off for their 200-millimeter platform. We achieved what we set out to do, significant performance improvements in key device metrics. However, that higher performance came with a corresponding reduction in device lifetime, often referred to as reliability, which failed to meet all of ST's specifications. Over many months, our 2 teams worked closely to resolve this trade-off. Then ST, as part of a reshaping of its manufacturing footprint, announced they would discontinue development on 200-millimeter wafers to focus exclusively on 300-millimeter for the next-generation BCD110 platform. At about the same time, Atomera discovered a new MST implementation validated through our TCAD simulations that doubled our performance improvement without the associated reduction in device lifetime. In other words, we found a way around the trade-off, and improvement only made possible by using MST. Over the last few months, ST validated our findings for the new implementation. However, because this new version required a device architecture change that would take multiple learning cycles to validate, they determined that they could not incorporate it and still meet their aggressive BCD110 launch schedule. Therefore, ST informed us that they will take BCD110 to market without MST, and currently, they have no plan for a future variant that includes it. That means we no longer have a line of sight to royalty revenue at ST for this particular program. While that outcome is certainly disappointing, there are several important positives I want to emphasize. First, at STMicro, we demonstrated significant performance gains and proved MST's integration capability inside a Tier 1 production fab. Second, we've now developed a very high-performance solution that eliminates the performance reliability trade-off, which is a significant new differentiator for us going forward, one that we are already actively discussing with other players in this market. And third, ST has reiterated their intent to continue working with us in other technology areas where MST could add value. Under their license with us, they continue to run experiments across several different businesses. This chapter with ST underscores that moving a new material into mass production is rarely linear. But the learning from this effort makes us a stronger -- gives us a stronger foundation as we engage with others in the same power market segment, including with a very large existing customer and even a new engagement that began this past quarter. Customers are now evaluating MST for power devices between 5 volts and 48 volts. It's important to keep in perspective that ST is only one of many large customers we are working with today to take MST into production in the power area. We also have 3 other very active technology focus areas. In the Gate-All-Around space, there are 3 large competitors and one that's still emerging. We're working with or in discussions with all 3 of them. I mean, all 4 of them. In the DRAM space, there are 3 large manufacturers, and we are engaged with 2 of them right now and have good relationship with the third. In the RF-SOI area, we're doing integration work with 4 different fabs and a fabless player right now with many of them running wafers. So you can see that we have no lack of opportunities across several different segments. Indeed, during the last 3 months, we processed a record number of wafers for our customers. When we look at all these opportunities, it's helpful to understand how we prioritize our business in terms of revenue potential. The first being the fastest time to market, second being the highest return on investment and the third being breakthrough long-term growth. One of the fastest ways to get Atomera's technology to market is through applications which use MST deposited on top of the starting wafer rather than inserted into the middle of the manufacturing line. There are many reasons why this can accelerate revenue. First, customers can simply acquire an MST starting wafer and run it through their standard production flow with very few process modifications for an easy experiment. They don't have to install MST, deal with the complications of wafers being transferred in and out of their fab, make major changes to their process to integrate it or complete a license agreement. The price of MST can be built into the cost of the starting wafer, which gives Atomera the same revenue, but the customer will not view the cost as a royalty. And it's certainly faster to get MST starting wafers qualified than something integrated into the middle of the process. Today, we use MST starting wafers in our work in RF-SOI, in GaN and possibly soon in next-generation DRAM. We actively seek out these implementations because of the relatively easier integration and shorter path to revenue. The second set of applications have enormous revenue potential, but the development process can be more demanding because MST is inserted into the middle of a complex set of production steps. It is worth it, though, because the upside represents a massive return on investment, including in the areas of Gate-All-Around logic, DRAM, power devices and other memory products. One design win here will ensure the future success of the company. And as I mentioned earlier, we have at least 6 or 7 of those efforts underway today. In Gate-All-Around and advanced memory, our partnership with a leading capital equipment company announced earlier this year is showcasing our competence at advanced nodes. Using their test infrastructure, we've been able to validate MST's ability to reduce contact resistance, improve channel reliability and be deposited in the tiny structures of nanosheet transistors. We are very excited by the deep cooperation and customer interest generated through this partnership. This quarter, we'll be hitting the road on joint visits with our customers to persuade them that issues in their manufacturing process can be solved using MST. The weight of our partners' endorsement cannot be overstated. Finally, we have an abundance of new breakthrough materials enabled by MST under development in the background through commercial partnerships and university collaborations. For many of them, we've already filed fundamental patents, and we're now in the process of making prototypes and understanding their capabilities. This is the type of program, for instance, which launched our GaN work. We have a dozen similar initiatives in early investigation, several of which might become near-term disruptive technology announcements in areas like quantum computing, AI server power, high-bandwidth memory architectures, piezoelectric devices, optical networking and a variety of other areas, which have the potential to enable entirely new applications. Farming out the early R&D whenever possible, allows Atomera's core team to keep a laser focus on the nearer-term revenue opportunities and apply more resources only when we see the potential of these innovations coming to fruition. Our gallium nitride initiative continues to deliver exciting progress. In collaboration with Sandia National Labs, we're in the process of completing device fabrication to highlight our improved electrical performance. Prior results have confirmed MST's ability to enhance GaN growth on silicon substrates, a major barrier for high-volume production and have garnered interest from our first commercial customers. We hope to release a complete data set publicly later this year, which will be the precursor to a full-scale rollout. As we continue our GaN work with Sandia, they are now seeking to expand the areas of R&D engagement on a range of Atomera technologies corresponding to their highest priority development areas. The semiconductor industry is clearly entering a new materials innovation cycle. Across logic, memory, power and RF, engineers are hitting the limits of conventional scaling. They're searching for material solutions that can boost performance, improve reliability and reduce variability, exactly where MST delivers value. This is particularly true in AI infrastructure and data centers, where the demand for power efficiency and thermal management is driving renewed focus on device-level innovation, which MST can deliver. One of our principal challenges is to ensure that potential customers know about MST -- and that is why I'm so excited to welcome Wei Na as our new VP of Sales. Wei has had experience growing a semiconductor technology licensing business very much like Atomera from scratch, selling to the exact same customers we are addressing, and we believe his leadership will help us both grow sales and convert existing opportunities into licenses. Our priorities remain clear: emphasize MSD starting wafer products like RF-SOI and existing engagements to get to production and revenue as quickly as possible; 2, leverage our strategic OEM partnership to advance active engagements in Gate-All-Around logic, memory and power through our comprehensive silicon test results and early licenses; 3, bring MST for GaN technology to a customer-ready stage with shareable electrical data; and 4, maintain fiscal discipline as we transition from R&D validation and integration to revenue-generating licenses. Our mission hasn't changed. It's to enable better, faster and more efficient semiconductors through advanced materials engineering. That mission remains as relevant as ever. I want to thank our employees, our customers and our shareholders for their continued confidence and support. Every quarter, we move closer to the point where MST's impact will be felt across multiple product lines and foundries worldwide. With that, I'll turn the call over to our CFO, Frank Laurencio, to review our financials. Francis Laurencio: Thanks, Scott. At the close of the market today, we issued a press release announcing our results for the third quarter of 2025. Our summary financials are shown on this slide. Our GAAP net loss for the third quarter of 2025 was $5.6 million or $0.17 per share compared to a net loss of $4.6 million, which was also $0.17 per share in Q3 of last year. GAAP operating expenses in the third quarter of this year were $5.7 million, an increase of $857,000 from $4.8 million in Q3 of 2024. This was due to a $544,000 increase in R&D expenses, reflecting both higher outsourced device fabrication work and increased compensation expenses and the $353,000 increase in G&A expenses, primarily consisting of higher stock compensation expense. Sales and marketing expenses were basically flat. Non-GAAP net loss in Q3 2025 was $4.4 million compared to a loss of $3.9 million in Q3 of last year due to a $423,000 increase in non-GAAP operating expense, primarily reflecting the higher R&D expenses I just discussed. Stock compensation expense, which is the main difference between GAAP and non-GAAP operating expenses was $1.3 million in Q3 of 2025 and $907,000 in Q3 2024. The increase in stock compensation expense, which is noncash, reflects the adoption of performance-based RSUs or PSUs for executive equity-based compensation in March of last year. PSUs vest over 3 years rather than 4 years as is the case for time-based RSUs. However, PSUs will only vest if we deliver shareholder returns that meet minimum targets relative to the Russell 2000 Index. Sequentially, Q3 2025 non-GAAP net loss of $4.4 million compares to a $4 million net loss in Q2, primarily due to higher R&D expenses. Our balance of cash and cash equivalents as of September 30, 2025, was $20.3 million compared to $22 million as of June 30, 2025. We used $3.4 million of cash in operating activities during Q3 compared to $3.5 million in the second quarter of this year. During Q2 -- sorry, during Q3, we raised approximately $2 million under our ATM facility, net of commissions and expenses by selling approximately 393,000 shares at an average price of $5.23. Since the end of the quarter, we've raised an additional $836,000 from sales of approximately 171,000 shares at an average price of $5.03. As of today's date, we have 31.7 million shares outstanding. In Q4, we expect to recognize between $75,000 and $125,000 of NRE revenue from wafer shipments to customers running the demos that Scott mentioned in his remarks. Those shipments and the associated revenue recognition will happen in Q4 as well as into next year. Gross margin was negative this quarter because a portion of the cost for MST deposition on those wafers was incurred during this quarter, but the revenue will be recognized as we ship the wafers going forward. Moving to expenses. I expect our non-GAAP operating expense for the full year 2025 to be in the range of $17.25 million to $17.50 million. Sales and marketing expenses ticked up last quarter in connection with recruiting for both sales and marketing leadership roles. The compensation expenses associated with those roles are built into our plan. Our recruiting efforts have started to pay off with the hiring of Wei Na as our VP of Sales. With that, I'll turn the call back over to Scott for a few summary remarks before we open the call up to questions. Scott? Scott Bibaud: Sorry, a little trouble with the Zoom controls here. Thanks, Frank. Across all of our technology focus areas, we have strong developments underway with the leaders of the industry. I hope today, we've given you a sense of our wide and deep potential to deliver important material solutions that will ultimately make Atomera a financially successful technology provider across many different semiconductor segments. I appreciate you taking the journey with us. Mike, we will now take questions. Mike Bishop: All right. Thank you, Scott. [Operator Instructions] Right now, our first question comes from Richard Shannon of Craig-Hallum. Richard Shannon: All right. Great. Hopefully, I'm unmuted here, Mike. Mike Bishop: You got it. Richard Shannon: All right. Excellent. Thanks Scott and Frank, let me ask a few questions here. Scott, maybe let's do a redux on STMicro. So I guess my first question here is, so it sounds like you did a new design on 300 millimeters that you validated in your simulations, but there would have been multiple cycles of learning to validate for ST. So is that trying to match your simulation to the real world to their simulations to make sure that it worked, and that cycle time was just too much to fit within their time frame getting to 300-millimeter. Is that the kind of the dynamic here that led them to their decision? Scott Bibaud: Yes. So first of all, the work -- the new implementation we came up with would have worked on 200-millimeter or 300-millimeter. And actually, if you let me digress one second here, Richard, because we've gotten a number of questions that have come in where people were asking, when did you know about this trade-off between the reliability and performance. Every time you do a development, it's about trade-offs. You're doing a trade-off on one thing -- I mean, you get -- that's why we always talk about cycles of learning. You get some big improvement in one area, it breaks something else. And then you have to go in and you have to work to fix the other thing and try to get to a point where it's all balanced out. So this trade-off work that we were doing is not at all unusual. It's what we do with every customer all the time. What is unusual is that because they made the transition from 200 to 300, (sic) [ 200-millimeter to 300-millimeter ] we lost the ability to bring in that ultimate solution and get it done for them in time because the 300-millimeter delayed their development efforts and then they needed to get into production fast, and so they just didn't have time to run the validation runs to get our new thing proven out. I'm not sure that answered your whole question. Let me know. Richard Shannon: I guess the point here is that it sounded like they were confident that this solves not only the performance, but the reliability issue that you discovered in 200-millimeter, and it was just the time frame that was too tight for them to want to continue right now? Scott Bibaud: Yes, that's right. Originally, you asked about the simulation work. So we do simulation based on what we believe a customer's process -- manufacturing process is, but that's usually very secretive. They don't give anybody that information exactly. We can make our best approximation. And so we made a TCAD simulation that showed, yes, we really got this great improvement. And we gave it to them in this summer. And then they spent the next 2 months running their own simulations. Their simulations are very exact to their own manufacturing process. And so what they did was they put in all the improvements we saw -- we proposed. And they came back and they said, "You know what, when we run our simulation, it also brings that level of improvement." So ultimately, I mean, the good news here is that they confirmed it. It makes us feel very confident to bring it out into the market as a new product. And it also makes us confident that at some point in time, we're hopeful we can reengage with ST on that particular product and have them take it forward and make it -- put it into their process. Richard Shannon: Okay. All right. Fair enough. Let me follow up on one other comments you made related to STMicro and then we'll move on to some other topics here. So what seems obvious and you just commented on is the ability to take some of the learnings from the process with ST and take it to other customers in the power space here. What have you been able to do so far? Can you use similar kind of structures that you've built with ST and use those with other power customers? Maybe just kind of give us a sense of the benefits you can see from the situation. Scott Bibaud: Yes. Exactly. So what we did with ST, there's a technique and architecture that the industry has known about for some time, but it hasn't been implementable. When someone builds it, it causes too many things to break and nobody has ever been able to get it to work. But because of the way MST works, because of the way it prevents dopants from diffusing uncontrollably, we believed that we could get that process to work. So this is not like something no one's ever heard of. It's something that -- one of those theoretical things that no one has been able to get working well and now we can get it to work well. And so yes, it's -- we're not taking anything from -- any proprietary ST information. This is like a standard design technique that we can suddenly make work because of MST. And so yes, we can take that out to other customers, and they kind of understand the concept immediately. Richard Shannon: Okay. All right. Fair enough. Let's move on here. In the last number of quarters, you've talked about transformative customers here. And unless I missed something, you didn't necessarily use that phrase here today in your prepared remarks. But I think you did mention a large demo run, which I think refers to one of them. And I think is also contributing to some of the revenues this year. I will ask a question to Frank on the revenue side here in a second here. But maybe just kind of detail where we're sitting with the transformative customers. And I do want to hit on one specific point that I had a question on. I actually asked Mike Bishop offline earlier today, and he said to ask this question of you, which is you've talked about 2 or maybe 3 of these customers. I want to make sure how many we're talking about and which ones are still ongoing versus any ones that may be stalled. So if you can enumerate that first and then discuss what's going on with this large demonstration you talked about last quarter, and I think you briefly mentioned today, that would be great. Scott Bibaud: Okay. Yes. I know everybody is frustrated with the code words, and I am too. But we -- so in January or February, we unfortunately had to announce that one customer that we had called transformative had discontinued our -- we were negotiating a deal and they had backed out of the deal. And that customer, we continue to have good relations with them. We talk with them regularly, but we are not on an active engagement with that customer right now. In that same call, which I think was early -- was in February. We mentioned 2 new transformative customers that were getting underway. And yes, we are working very actively with them. When we talked about a record number of wafers that we're processing, it includes those 2 customers that we call transformative back then. And so now today, I mentioned these 4 different segments and how we're working with a lot of customers. And then I broke it down by revenue potential and the folks in the middle, folks that are doing Gate-All-Around, folks that are doing DRAM, there are really big players who are doing power and other memory architectures. They are all massive and they're all customers that I would call transformative and so we are -- we're working with more than just those 2 that I mentioned on the call. Richard Shannon: More than just the 2 that you would refer to as transformative. Is that what you're saying, Scott? Scott Bibaud: Yes, yes. Richard Shannon: Okay. Scott Bibaud: I mean I -- just discontinue the term transformative. [ We're good. ] These 2 customers I spoke about as transformative in February are just very, very large revenue potential customers with very big processes that we hope to get going on. But we're also working with other customers who are also very large and have the potential to be transformative. Richard Shannon: Okay. Well, let's talk about the specific transformative customer you talked about last quarter that you're doing a large demo run here. What's the update on what's going there? And is that leading to at least some contribution to the revenues you're guiding to this quarter? Scott Bibaud: Yes. Maybe I'll let Frank answer that. But -- so one of the -- there's some trickiness about when we book revenues. And so we have a lot of customers. The revenue that we're putting out this quarter is based on several customers. I can't answer whether that specific one is in Q3 or it will be in the guidance that Frank gave for Q4, but it's -- yes, we're getting revenue from wafer runs with that customer. Francis Laurencio: Yes, that's right. I mean, the revenue guidance actually covers multiple customers, 3 different customers. And it's spaced out over time. And while I don't like to show negative gross margin, the timing issue gives a little bit more visibility in the sense that we do a bunch of the deposition work, which is when we incur the cost of our tools, the metrology and the labor associated with it. And oftentimes, these are -- these can get matched up pretty quickly with the revenue because it's a small number of wafer runs, and that's been true in the past. But we've been talking now for a couple of calls that we've been working with a very large customer on one of the largest wafer -- on the largest wafer run that we've ever done. And we also have other customers. So now what you're seeing is, we do a lot of that work we don't ship all of those wafers out, but we don't necessarily do all the deposition because the nature of these engagements is it can be iterative. You may do some wafers for setup, you run a series of tests, the customer validates those, you get some feedback. You then do another run with slightly different conditions, either on the MST or how the customer processes it with implants and things of that nature. So you can get a lot of activity in 1 quarter and then the wafers will ship out over time. And one of the challenges in sort of giving guidance is, it isn't set in a schedule of we're going to ship 25 wafers this month and 25 wafers 2 months after that. Sometimes it really depends on what the customer learns in the process of evaluating that, setting up a new set of experiments and then we ship out more. So yes, there's multiple customers here, and these are important engagements in different application areas. Richard Shannon: Okay. All right. That's helpful, Frank. I'll probably follow up with you a little later on that one. Maybe 2 more questions. I will jump out of line here. First of all, Scott, in your prepared remarks here, and I'm sure we'll review these in detail when the transcript comes out here, but you talked about kind of segmenting your opportunity based on where in the stack your MST is applied here and you talked about on top of the wafer versus somewhere in the middle. Certainly, layers in the middle or -- I think it's fairly understood, especially for me who is not a device guy per se that that's very complicated. But vice versa, if you can apply just on the top, that seems to be a much simpler process, which also implies it might be an area where by which you might expect to see or hope to see your first license here just from a time-to-market perspective. So 2 questions for you is, I think I missed the applications areas that, that specifically applied for. And b, would you agree that, that's a very -- a somewhat likely or very likely situation by which you first reach first manufacturing license and commercial production? Scott Bibaud: Yes. So first of all, yes, you're right about being deposited on top of the wafer makes it much easier. The applications that we specifically spoke about that do that is RF-SOI and gallium nitride; and also in the future, we have some ideas on next-generation DRAM that could use it. So one thing to understand very briefly is when we deposit MST in the bottom layer, it has to be on a process that doesn't use incredibly high heat for long periods of time. So if we deposited -- if it was on an MST starting wafer and then someone put the wafer into an annealing step that was 1,100 degrees for an hour, then that would really damage the MST itself and it wouldn't work. So the only time we use MST on the starting -- on the start of a wafer is on -- manufacturing processes are going to be lower temperature. And there's a lot of those. Like RF-SOI is running at very low temperatures. The new Gate-All-Around processes, they're trying to run them at very low temperatures. So in theory, MST could be on the base -- on the starting wafer for those. Gallium nitride, we put MST on bottom before it grows the gallium -- yes, the gallium nitride on top of it. That one isn't quite as low temperature, but it doesn't matter. The MST still works as a starting wafer. So I think a layman might say, well, why don't you just do every process as a starting wafer if it's much easier and faster time to revenue. Well, it has to fit a certain dynamic, which has to do with this temperature range. You had a second half to your question, and I've talked those [ I might have ] forgotten it. Richard Shannon: You hit the applications. I think you've answered most of it. So I think that's very helpful. Last question for me, I'll jump out of line. You talked about this large capital equipment partner. And I think today, you mentioned about going on a roadshow here. Maybe just kind of give us a sense of how broad the engagements are with this company. I think in the past, you mentioned 2. I don't know if that was the limit or there were more you just didn't mention, but -- well, how do we understand the scope and breadth of your interaction with customers through or with them? Scott Bibaud: Okay. So the stated aim of our partnership is in the Gate-All-Around market. And that was what we announced in our press release. However, I have to say that -- there's great value in this partner working with us in everything. And there's value in us working with them in everything. So we have talked to them a lot and done some work on DRAM as well. So basically, yes, I would say our primary focus right now is Gate-All-Around and DRAM. And when we go out on the road, that's who we'll be really targeting most closely. Mike Bishop: Okay. Thank you, Richard. A number of questions have come in on the Q&A line, and I will aggregate them and ask some of the more common ones. So first one is about the Gate-All-Around projects and when the -- there's a number of current projects underway that are expected to launch soon. And how many years do you expect the target process you are currently collaborating on to enter production? Scott Bibaud: Yes. So first of all, working with a few different customers, so there might be a different answer for each customer. In general, the guys working on Gate-All-Around, the great news is it's amazing working with them because they have armies of people working on this stuff, lots and lots of resources to test out your material. And the bad news on that is that they come back with a ton of requests for more information and more testing. But they're almost always working towards some kind of a launch that you would be built into. Some of them, I would say the majority are looking at a launch that's still a few years out. There is some of them that are actually looking at using MST to improve yield on processes that are in production today. I can't exactly say, well, if or how long it would take to get into production on those processes. But my guess is if they integrated MST, they would have to do some qualification work on it. But if it did indeed improve their yield, which I think is what the majority of them are looking at for the current timing processes, they would try to move it into production very quickly. As long as it didn't break anything in the specifications of their production wafers, they would have every incentive to get it into production as soon as possible to improve yield. Mike Bishop: All right. In the past, you've talked about JDA1 and the fabless RF licensee. Have you been doing wafer runs for those? And what do those results look like? Scott Bibaud: Yes. So the answer is yes, we are doing wafer runs with them. Unfortunately, we don't have the results yet. I can't really commit that I'll be able to give you results from each customer. But generally, what happens is when the results come out, that's the timing when we'll be able to start driving towards licenses and transitions to production. Generally speaking, we have a number of different customers with wafers underway right now. None of them are coming out in the next few months. I would say we might have some coming out at the end of the year, but more likely into the first quarter before we start seeing a lot of results from those runs. Mike Bishop: Okay. And one for Frank. So the Incize partnership for GaN testing, can you talk about the economics there of who's paying for the runs and -- or for the testing, if you could shed a little light on that? Francis Laurencio: Yes. I mean at this stage, this is a -- an arrangement with [ RF ] Incize, where we're each bearing our own costs and we'll hopefully achieve a result that would lead us to some further activity. But right now, it's -- we're not paying them to run testing nor are they paying us for wafers. So it's early stage. And I think our hope right now would be to generate good RF data because that's something notoriously difficult. RF testing is complex. It's not something that we can typically do ourselves. So a lot of the work on RF-SOI that we can do is kind of physical characteristics of our film. But when you get into some of the testing of actual devices on kind of different figures of merit, then those are more specialized tests. And so getting more insight into that is very helpful from a marketing standpoint. And our view is there was some question on work with Soitec and wafer-based products. The more information that we have to market to the ultimate customers of RF-SOI devices, the better it is in terms of building a relationship with Soitec, who's a wafer manufacturer. So the more end demand that they see, the closer the collaboration is with us. So I kind of see it as a means to an end there. Mike Bishop: Okay. And then Scott, going back to a topic we've touched on in the past, but is there an update on JDA2? Scott Bibaud: JDA2 is running wafers with us. And they're one of the ones that I talked about that we'd hope to get some results at the beginning of the year; and hopefully, see if we can turn that into a license and then plan to go to production. Mike Bishop: Okay. And then with regard to the STM news, we had a number of questions on disclosure channel. And can you talk about why you chose to put the news out on a blog post? Scott Bibaud: Yes. Yes. And we went back and forth on that. So I just want to be clear, we were in discussions with ST all through August, September and into October about implementing this new version -- a new architecture we had and moving forward on 300-millimeter, and we were waiting to find out from them what the plan was, when that work would start, when they had planned that it would be trying to take it to production. And it was really just 1.5 weeks ago that we had a call with them, and that's when they told us that they did not have a plan in place to use MST to do that new architecture. So immediately after that call, we got off the phone and we started talking about, okay, we have an earnings call in 1.5 weeks. but it seems too long to wait for 1.5 weeks before we notify investors. And so on the following Monday, we actually started speaking with ST to make sure that when we disclose this, we would be following their internal guidelines on what we could say and couldn't say. And then on Tuesday, we put out the blog post. We could have put out a press release, but press releases tend to be, at least in our opinion, much more black and white about news that you're giving. In this case, we see it as a much more nuanced message. ST was telling us we're not -- we don't have a plan to use you guys on this next run. Yes, very bad news because I know all the investors want to know when the royalties will start flowing, and so do we. But they didn't say they'll never use us. And they also reassured us again and again that they are continuing work using our technology on other process areas. So we felt that using a blog would allow us to give a little more nuance than a press release. And we know that the channels of communication that we have with the blog, we push it immediately out to all of our investors, so -- that are at least registered with us. And so we felt it was a good channel of communication in this particular case. And the most important thing to us was to get it out there as soon as we can within the restrictions of making sure we were working everything out with ST and so forth. Mike Bishop: All right. And one more question here. Is there any chance of government funding now that Atomera has been working with Sandia for a while? Scott Bibaud: I talked a little bit on this call, which I've never done much about in the past about all of the different R&D efforts that we have underway. And many of them are, as I mentioned, through Academia, through outside commercial partners so that we don't have to burden our internal team with too much of it. But Sandia is very interested in many of those technologies, and they have government programs that are interested in implementing things that would use those. So yes, there's a lot of interest through Sandia. And we also continue to work with the government and with the CHIPS Act infrastructure such as it is to see what we can do to kind of deliver some of our technology in through that channel and get some near-term revenue that way as well. Mike Bishop: Okay. Thank you, Scott. At this time, we'll turn the call to Scott for closing comments. Scott Bibaud: Okay. Thanks, Mike. Okay. Yes, thanks for joining us and listening to our progress that we've been making here at Atomera. Next month, we'll be attending the Craig-Hallum Alpha Select Conference in New York, and we look forward to seeing some of you there, if you'll also be attending. Please continue to look for our news articles and blog posts, which are available along with investor alerts on our website, atomera.com. Should you have additional questions, please contact Mike Bishop, who will be happy to follow up. Thanks again for your support, and we look forward to our next update call. Mike Bishop: Thank you. This concludes the conference call.
Operator: Good day, and welcome to the Alexandria Real Estate Equities' Third Quarter 2025 Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Paula Schwartz from Investor Relations. Please go ahead. Paula Schwartz: Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now I would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel. Joel Marcus: Thank you, Paula, and welcome, everybody, to Alexandria's third quarter earnings call. With me today are Hallie Kuhn, Peter Moglia and Marc Binda. Let me start off as I usually do with a quote. My friend and mentor, Jim Collins, who wrote his well-known book, Built to Last, noted that, the secret to an enduring great company is its ability to manage continuity and change simultaneously, a discipline that must be consciously practiced, keeping clearly focused on which should never change and what should be open to change. And clearly, our development pipeline is front and center in that. Jim's visionary wisdom and advice is a great frame for Alexandria at this moment in time as the gold standard and leader of our niche. We invented and pioneered life science real estate, a whole new asset class and category 31 years ago during the early years of the biotechnology revolution. Our North Star was and remains our focus on innovation clusters and ecosystems unique to the life science industry different than almost every other property type. We're blessed with best assets, best tenants, best Megacampus and best team. Our relentless mission is driven by building the future of life-changing innovation and enabling the world's leading innovators to advance and better human health. The biotechnology revolution started almost 50 years ago. And in those 50 years, we've only been able to therapeutically address less than 10% of the more than 10,000 diseases known to human kind. No one lives in a family, community, which has not been struck by the wrath of disease and illness devastating in so many ways. We now find ourselves on the precipice of an entirely new age of discovery and innovation at the intersection of biology and technology 50 years later. Biology, it's important to remember, is inherently slow and complex. The life science industry, and particularly the innovation engine of the biotech sector, is mission-critical for a strong, safe, healthier country and planet as well as for America's global leadership, future economic growth and security. As opposed to most property types, office, industrial and resi, we operate in a highly regulated industry that takes extraordinary time and cost to bring life-changing medicines to patients. To get a life-saving product on the market, you only can sell that product for a handful of years in a regime of pricing oversight sometimes control different than other property types. I wonder what Microsoft would say if they were told you could only license window for a decade and then you lose the right to retain revenue or develop revenue from that innovation. If it matters fundamentally if the government is shut down or not operating effectively or efficiently. The four pillars of the life science industry are critical and a critical bedrock to what I've just said about this country's health. We must preserve, protect and grow the strong and basic translational research. It is a critical bedrock of new discoveries, and we must deal, hopefully quickly, with the current limitation on indirect overhead cost, which is timing demand out of the institutional sector. We must preserve, protect and grow the robust entrepreneurial ecosystem with access to affordable capital. Cost of capital today is high for discovery research engines, from the venture capital to the IPO to the M&A, we are in a continuing difficult environment, getting better, but difficult nonetheless. That's the second bedrock. The third one is providing a reliable and efficient and time-sensitive regulatory science framework and pathways. Once again, the FDA must compress timeframes and cost of R&D development. We met with Commissioner McGarry at the end of September, and he is super focused on this issue. Important to note that total development time frame for molecules in the Western world, U.S. and the EU ranges in the neighborhood of about 10 to 12 years versus China, which is about 1/3 of that time frame in their early stage of development in this industry. Approximate cost to bring products to market in the Western world is somewhere in the range of about $1.5 billion. And in China, it's about 50% to 90% below that. So we're faced with a very different circumstance today that the industry must face. And the fourth pillar is providing reasonable reimbursement for innovative medicines, which are costly and time consuming to bring to market. We at Alexandria successfully navigated the dot-com bust in circa 2000, the great financial crisis circa 2008, 2009, both when we were unrated, non-investment grade. And during the GFC, we had 30% of our gross assets in non-income producing land at Mission Bay and Cambridge. But this time, the navigation is once again different than before. We've seen the unprecedented bull market -- the unprecedented bold biotech market post GFC 2014 to '21 capped off by the rocket ship of COVID rate funding and demand, a very low interest rate environment went along with that, which incentivized really foolish speculation by financially motivated real estate companies and they're even more foolish capital partners. This brought an unwanted and unnecessary oversupply to many of the innovation submarkets. This has never happened in this niche before. But they're learning painful lessons that this real estate niche is unique and different from all others. This was followed by a biotech bear market, we're now in the fifth year, which is starting to turn the corner, and we're now witnessing the bottom and early signs of a recovery and strengthening as we predicted at NAREIT in June. The industry is now enduring a government shutdown and the impact to the FDA is pretty serious. This brings us to the third quarter, a critical juncture and time for this industry. On the one hand, the greatest prospect ever for innovation in our time, and coupled with the relentless change in government shutdown. Quite a juxtaposition. Huge congrats to our first-in-class team who are navigating this difficult environment with relentless grit and determination and unparalleled experience and expertise. While declines in FFO per share, occupancy and guidance are tough at any point in time, Alexandria remains strong, tough, resilient and continuing beacon of life for our life science industry. One of our North Stars has been our balance sheet, working out of the GFC when we are unrated to today. We're now one of the top 15 of all REITs. It's strong, flexible and we have the longest weighted average remaining debt of all S&P 500 REITs at 11.6 years, over $4 billion of liquidity, strong fixed coverage ratio 96% -- almost 97% of our fixed rate debt is at [ 3.7% ] blended interest rate and one area of laser focus for us will be to continue to reduce our current non-income-producing assets on the balance sheet from the current 20% as we diagram for you in the supplement and press release, to about 10% to 15%. As opposed to the great financial crisis where we had 30% non-income producing assets as a percentage of gross assets with an unrated balance sheet there was pent-up demand and no supply coming out of the GFC year. So we kept our land at Mission Bay and Cambridge for future development, which provided a decade of unprecedented growth. Alexandria has and will continue in this environment to accelerate its transition from substantial development to a build-to-suit on Megacampus only development model. We intend to continue to decreased construction spend, preserve capital and not create further supply. And then finally, let me make a couple of comments before I turn it over to Marc for an in-depth review of the quarter and kind of factors impacting 2026. Let me make a couple of comments about leasing. The lifeblood of Alexandria's sector, a leading platform with the largest number of clients and strongest tenant base is our leasing. And our tenant base, of course, 53% of our leases are to investment grade or big cap, tenants with an average almost 9.5 years weighted average lease term for our top 20 tenants, and 18 of the top 20 pharmas are our tenants, a best example of our brand being the most trusted in the industry. And congrats to our team for the historic lease executed in this third quarter for 16 years with a credit -- existing credit tenant for almost 500,000 square feet at our Campus Point Megacampus in San Diego. We're proud to say that our ARR from Megacampus is 77% and is continuing to approach 80%. We continue to benefit from stellar operating margins and a very disciplined G&A run rate. 3Q was a solid quarter of leasing. However, institutional demand is still stuck due to the NIH issues and particularly the reimbursement of indirect costs. Coupled with we need to see more green shoots from early-stage, venture-backed companies as well as the larger cadre of public biotech companies which have yet to recover in a meaningful way. We're starting to see green shoots on that, but that will be a critical litmus test going forward. And finally, before I turn it over to Marc for comments, let me just say we intend to continue to meet the market for our tenants and continue to successfully lease and dominate our space. And with that, Marc? Marc Binda: Thanks, Joel. This is Marc Binda, Chief Financial Officer. Good afternoon. I plan to cover the performance for the third quarter as well as some key emerging trends expected to impact 2026. Our team continues to navigate a challenging environment given macro industry and policy factors beyond our control. Please refer to our earnings release for our EPS results. FFO per share diluted as adjusted was $2.22 for 3Q '25 and included the following three key impacts compared with the prior quarter. First, occupancy was effectively down 1.1% for the quarter after considering the benefit from the exclusion of assets with vacancy, which were sold or designated for held-for-sale during the quarter, and was driven by a challenging life science supply and demand dynamic. Second, there was a $0.03 reduction in rental income associated with one tenant in our Seattle market to adjust rental income to cash basis. Importantly, that tenant remains in occupancy and is current on rent pending future critical milestones in the first half of 2026. And third, other income was down $8.7 million or about $0.05 compared to the prior quarter. Current quarter other income of $16 million remains consistent with the prior 8 quarter average. And as we discussed in our prior call, 2Q '25 did have some lumpy fees in there. Leasing volume for the quarter remained solid at 1.2 million square feet, in line with the 5 quarter average. This includes the previously announced 467,000 square foot build-to-suit lease with a multinational pharma tenant that was executed in July. We continue to benefit from our scale, high-quality tenant roster and brand loyalty with 82% of our leasing activity in the quarter coming from our existing deep well of approximately 700 tenant relationships. Rental rate growth for lease renewals and re-leasing the space for the quarter was solid at 15.2% and 6.1% on a cash basis, which is at the high end of our guidance range for the year. We've reduced our guidance for 2025 rental rate increases on renewals and re-leasing the space by 2%, primarily due to one short-term renewal in Canada that was executed in October as well as some higher free rent. Lease terms on leasing continue to be long at 14.6 years for the quarter, which is well above our historical average, and tenant improvement leasing costs on renewals and re-leasing the space for the quarter are relatively consistent with the prior year and down from the first half of the year. Occupancy at the end of the quarter was 90.6%, which was down 20 basis points from the prior quarter. As of September 30, certain assets with vacancy were designated for held-for-sale and were removed from our operating occupancy metric, which benefited occupancy at September 30 by 90 basis points. As a result, the decline in occupancy for our operating properties on an apples-to-apples basis declined by 110 basis points during the quarter. While occupancy declined due to oversupply in certain of our submarkets, it's important to highlight that our Megacampus platform, which represents 77% of our annual rental revenue as of 3Q '25 outperformed overall market occupancy in our three largest markets by 18%. Our outlook for year-end occupancy was reduced by 90 basis points to a range of 90% to 91.6%. Our outlook assumes up to a 1% benefit from assets with vacancy, which could potentially be sold or designated as held-for-sale by December 31, which implies an 80 basis point decline in occupancy by the end of 2025, based upon the midpoint of our guidance. Our team continues to execute with 617,458 square feet of leasing completed to date for spaces that are vacant today and expected to deliver upon the completion of construction in May of next year on average. Looking ahead to next year, we have 1.2 million square feet of lease expirations through the end of 2026, and which are in great assets in AAA locations but are expected to go vacant, and we expect downtime on those assets. Same-property NOI was down 6% and 3.1% on a cash basis for the quarter. The decline in same-property was primarily driven by lower occupancy. In addition, we provided an alternative same-property presentation, which recasts the first and second quarter results based upon the third quarter same-property pool to provide a consistent quarterly trend view given several assets that were removed from the third quarter same-property pool as they were either sold or designated as held-for-sale. It's important to note that this alternative presentation shows higher same-property performance in the first half of 2025, which means there will be a tougher benchmark in the first half of 2026. We reduced our outlook for same-property performance for 2025 by 1%, primarily due to slower-than-anticipated leasing caused by a slower realization of demand. Despite this change, we continue to benefit from a very high-quality tenant base with 53% of our ARR coming from investment-grade or publicly-traded large cap tenants, long remaining average lease terms of 7.5 years, average rent steps approaching 3% on 97% of our leases, solid rental rate increases of renewed and re-leasing space during the quarter, and our adjusted EBITDA margins remained strong at 71% for the most recent quarter, consistent with our 5-year average. On G&A, we continue to make great progress towards our goal of annual savings for 2025 of approximately $49 million compared to 2024 through a number of prudent and strategic cost savings initiatives. Our trailing 12 months G&A cost as a percentage of NOI was 5.7%, which represents approximately half the average of other S&P 500 REITs. We expect that around half of the 2025 savings will continue into 2026, given the temporary nature of some of the 2025 savings. With projects under construction and expected to generate significant NOI over the next few years, and other earlier-stage projects undergoing important entitlement design and site work necessary to be ready for future ground-up development, we are required to capitalize a portion of our gross interest cost. We have and will continue to curtail our large development pipeline coming off a decade bull run for the industry fueled by the rocket ship demand of COVID. Given the lack of clarity on near-term demand as well as significant availability in some of our submarkets, we are carefully evaluating on a project-by-project basis the $4.2 billion of land subject to capitalization during the first 9 months of the year. With preconstruction milestones in April 2026, on average, we continue to evaluate whether to progress preconstruction or construction efforts beyond the current milestones and in various cases will likely pause or curtail activity. If we decide to pause on a project as it reaches the next milestone, capitalization of interest, payroll and other required costs would cease on that project. While these ultimate decisions have not yet been made, we would like our funding program for next year to include a significant component of land dispositions which help us achieve one of our strategic objectives over the near to intermediate term to significantly reduce the size of our land bank. Sales of land could result in a significant reduction in capitalized interest and potential impairment charges. We expect steady to slightly lower capitalized interest in 4Q '25 and lower capitalized interest beginning in the first quarter of 2026. Despite positive recent activity for the biotech XBI Index, private and public biotech companies continue to remain challenged given the 5-year bear market for the sector. Given these and other factors unique to our venture investments, we did revise our guidance down to a range of $100 million to $120 million. It's important to point out that for the first 9 months of 2025, we realized $95 million of gains from our venture investments, which were included in FFO per share as adjusted or about $32 million per quarter. Based upon the midpoint of our revised guidance for realized investment gains of $110 million, this implies $15 million for the fourth quarter, or a $17 million decline over the average quarterly run rate for the last 3 quarters. We continue to stand out as our corporate credit ratings rank in the top 15% of all publicly traded U.S. REITs. We have the longest average remaining debt maturity among all S&P 500 REITs at 11.6 years and tremendous liquidity of $4.2 billion. We updated our guidance for year-end leverage to 5.5 to 6.0x for 4Q '25 net debt to annualized adjusted EBITDA. The increase from our prior target of 5.2x was primarily due to two factors: first, a reduction in our disposition guidance to a midpoint of $1.5 billion related to $450 million of potential dispositions expected to be delayed into 2026; and second, a projected reduction in annualized EBITDA in the fourth quarter from lower same-property net operating income and lower realized investment gains. We've completed $508 million of dispositions to date, which leaves $1 billion to complete in the fourth quarter, all of which are subject to non-fundable deposits signed NOIs or purchase and sale negotiations. In connection with our disposition program, we recognized impairments of real estate of $323.9 million during the quarter, with approximately 2/3 of that coming from an investment in our Long Island City redevelopment property. Three items to highlight here. First, we acquired the site in 2018. That submarket suffered a substantial setback when Amazon abandoned its plan for new HQ in that location in 2019 and it never recovered. Second, despite the lower rental rate price point and our dominance in that submarket, it has been challenging to get a critical mass of life science tenants to go to this location. And ultimately, we don't view it as a life science destination that can scale. And third, this location has become more of an industrial flex and cinema submarket rather than life science. Ultimately, at the end of September, we decided future capital needs and the sale proceeds related to this project would be better recycled into our Megacampuses where we have greater conviction long term. Looking forward, we have a number of assets under consideration for sale either by the end of this year or sometime in 2026 that have estimated values below our carrying values ranging from $0 to $685 million. Although these potential impairments have not been triggered and final decisions to proceed have not been made, we updated our guidance range for 2025 to reflect these potential additional impairments in the fourth quarter. We anticipate an end to the large-scale non-core asset program by the end of 2026 or early 2027. We also expect dispositions to provide the vast majority of our capital needs for next year. Turning to capital allocation, two points here. First, we are continuing to evaluate some of our development and redevelopment projects expected to stabilize in 2027 and 2028 for opportunities to pivot. Second, we estimate our 2026 construction spending to be similar to slightly higher than the midpoint of construction spending for 2025 of $1.75 billion, which includes the recently announced build-to-suit in San Diego and higher CapEx and repositioning costs necessary to lease vacant space related to our operating properties. But the goal is to continue to reduce non-income-producing assets and other development pipeline -- and our development pipeline over time. Next, on dividend policy. The Board's approach has been to share cash flows from operating activities with investors as well as to retain a meaningful amount for reinvestment which has allowed us to retain $475 million at the midpoint of our guidance range for 2025. In addition, the cumulative growth in dividends and FFO has been highly correlated since 2013. Given the factors that we described in our press release that are expected to impact 2026 earnings and cash flows, we anticipate that our Board of Directors will carefully evaluate future dividend levels accordingly. We provided updated guidance for FFO per share diluted as adjusted for 2025, which was reduced by $0.25, or about 2.7% to a midpoint of $9.01 per share. This change was primarily due to lower investment gains and lower same-property performance driven by lower occupancy. Looking ahead to 2026, as is our long-standing practice, we will provide detailed guidance at our Investor Day on December 3. And in advance of that, we've shared five important trends that will impact earnings for 2026, including core operations and occupancy, capitalized interest, realized gains on non-real estate investments, G&A and our disposition program. Please refer to Page 6 of our supplemental package for more information. Given the various factors impacting 2026 earnings, it's important to recognize the tremendous intrinsic value of our highly differentiated Megacampus assets included in consensus NAV, which is significantly above our current trading price today with that consensus NAV coming in at around $117 per share. To be clear, we continue to be the dominant leader for life science real estate with the best assets in the best locations and the best tenants. Our focus in irreplaceable world-class Megacampuses will continue to set us apart and give us an opportunity to capture premium economics for the long term as the demand and supply picture improves over time. Now I'll turn it back to Joel. Joel Marcus: Operator, please start questions. Operator: [Operator Instructions] Today's first question comes from Farrell Granath with BofA. Farrell Granath: I first just want to touch on, I know last quarter, you had some commentary about potential benefits to occupancy, about $600,000 or 1.7%. I was curious on the update and your expectations or line of sight that you're seeing now? Joel Marcus: Yes. That's a really good question. Marc, do you want to comment on those assets? Marc Binda: Sure. Yes. So we did provide an update, it's in Page 2 of the press release, that number is about 617,000 feet as of September 30. It's primarily at properties located in Greater Boston, San Francisco, San Diego and Seattle. And it's about $46 million of -- potential annual rental revenue of $46 million. And we expect it to deliver on average. There's a lot of spaces in there, as you can imagine, but on average, around May 1 of next year. Farrell Granath: Okay. And also, I guess, a broader question. In previous calls, we've heard that there was early positivity around leading indicators in the biotech market. And you made a few comments around that. But it generally still feels like you're very much seeing the impacts of supply and demand. And I'm curious, what would turn your perspective or optimism a little bit higher, either if that's greater IPOs or different capital market movements? Joel Marcus: Yes. That's also a really important question. I think the two -- well, there are three missing links, as I mentioned in my opening comments to demand today and Hallie, can give you chapter and verse on the green shoots that we're seeing, which are substantial from the capital market side to M&A, et cetera. But one is the FDA, the government shutdown has to stop and the FDA has to open. Number two, venture, earlier-stage venture-backed companies have to start making commitments for space as opposed to kind of holding, waiting for cost of capital issues with the Fed and broadly in the industry. And I think, three, the public biotech sector, which has been, to a large extent, the mainstay of this industry as far as space and demand has to be reignited. And even though the XBI is up substantially, that has not yet translated into action. So I think those are the key things we're looking for. And institutional demand, if the NIH can get its act together on the issues we talked about, one, making sure they're fully funded and disbursing funds and that there's an unlocking of the current bar to the 15% indirect cost limitation. Operator: Thank you. And our next question today comes from Seth Bergey with Citi. Nicholas Joseph: It's Nick here with Seth. Just as we think about the sources of capital, you mentioned equity-like capital. Could you elaborate on that and kind of either the pricing or what exactly you mean by that? Joel Marcus: Yes. I mean we've used that for the last, I don't know, 15-or-so years. That really is just capital that comes into the company through one form or another, it could be savings on dividend like we've done. It could be other sources, joint sales of joint ventures. But primarily, I think Marc stated it pretty clearly, and let me just repeat for everybody, the vast majority of capital for next year's plan, which will unveil on December 3 at Investor Day will be asset sales. And we gave you a pie chart in the press release regarding, at least, this year's proportion of those, so a big chunk from land, a very big chunk from other than fully stabilized assets and then a chunk from stabilized assets. So I don't think that's going to vary much from this year. Nicholas Joseph: That's helpful. And then in your opening comments, you said the bear market is starting to turn the corner. Are you seen that in the transaction market as well for -- on the stabilized asset side? Is there a change in buyer demand given the underlying fundamentals and what you're seeing? Joel Marcus: Yes, Peter? Peter M. Moglia: Yes. I would say that there is strong demand for our assets, especially ones that investors consider to be opportunistic, that's really the sweet spot right now. But yes, we have no shortage of interest in everything that we're bringing to the table, that's life science and things that are alternative uses where we're finding a lot of interest from residential developer. Operator: And our next question today comes from Rich Anderson at Cantor Fitzgerald. Richard Anderson: So can you talk a little bit about -- a little bit more detail on the development sort of process going forward? I think it's a matter of -- maybe it comes down in order of magnitude over the coming years just in dollars in terms of development spend, but also type of development. Joel, did I hear you right that the focus going forward will be more on build-to-suits than anything else, not that you haven't been focused on that. But I mean, I wonder what the development picture is going to look like kind of post-2026, when you top off what's left and then you consider the $4.2 billion that's sort of kind of still early stage in terms of the process. Just if you could sort of give us a line of sight into what this will all look like eventually? Joel Marcus: Yes. And I mean you can look at, we've been at this now for a multiyear period. It obviously is a lot of pick and shovel work. This year is a good example. And again, the chart or the pie chart I referred to just a moment ago, this year's land sales as estimated, both what we've accomplished and what we have left to do, will be an important part of reducing that land bank. And if you look at Page 46 of the press release and supp, you can see the pie chart. Marc has tried to enhance this in as clear a fashion as possible. And you can look just your eyes kind of go to 2 particular places right away. One is the 15% bucket critical milestones coming up, non-Megacampus projects. We clearly want to bring -- to try to, through entitlement, design and sometimes design, but entitlement in particular, trying to create as much value for alternative uses. We mentioned resi and we've been very successful there. So this is a bucket that will clearly not be there over the coming years. The one at its immediate left, 26%, where we have both -- well, stable near-term projects that are not yet fully stabilized, of course, '27 and beyond, we have a smaller amount of leasing. Those are projects that we are going to look at very carefully and make some pretty big determinations as soon as we can get to points in time where we think we've tried to maximize the current value. And my guess is a bunch of those projects will be sold, which will further reduce the land bank. And we'll see on the Megacampus projects, what happens to those. We're clearly unable to do all Megacampuses. And so it's certainly possible we bring one or more. There's a chart of, I think, or pictures of 4 big Megacampuses, one in Seattle, one in near South San Francisco, in San Bruno, another one in San Carlos and then the final one at Campus Point. It's pretty clear that, for example, the San Bruno is one that we're thinking about very carefully. We're working through a very complex project with both entitlements and existing tenants. And we'll see what happens there. But that's the kind of project that we could see potentially exiting at some point as well. So we're trying to be as both as aggressive as we can time-wise, cost-wise, but also very thoughtful. Richard Anderson: Okay. And so do you think that there will be like at Investor Day some sort of run rate development exposure that Alexandria will sort of commit to at the other side of all this? Is that sort of the messaging that you expect to provide, if not right now, but... Joel Marcus: When you say development run rate specifically as to what time? Richard Anderson: Well, as a percentage of assets or however you want to look at. Joel Marcus: Well, I think I actually said it on the call in my opening, we're at 20% today. We were at 30% break GFC, but for different reasons, we decided to hold those, Mission Bay and Cambridge, and those turned out to be the lifeblood of our decade bull run with the biotech industry. I think it's different this time because there's a lot of stupid space that was built by others. And so we don't want to build into that kind of a market. So 20% should come down to 10% to 15% over the coming years, and we're certainly looking at trying to accelerate that as fast as possible because the less we have on balance sheet and the less dollars going into that or the less construction dollars and funding dollars we have to require. So the 2 go hand-in-hand. But 10% to 15% is the number. Richard Anderson: Yes. Okay, you did say that, my apologies. And then lastly for me, on the dividend, you're running at a $5.28 annual dividend and talking about the Board taking a look at it next year. What's your comfort level from a payout ratio sort of when you kind of think about resetting the dividend? I'm just curious where -- what the sort of the policy is -- the dividend policy... Joel Marcus: Yes. Well, the Board will look at that in the fourth quarter and declare a fourth quarter dividend. I think what we want to do is try to be able to frame 2026, I think, very, very clearly, and we'll try to do that to the Street as quickly as we can. But I think that frame then impacts how the Board will think about the metrics of dividend. But remember, that's our cheapest form of capital, so we are focused on that. But Marc, you could give any broad parameters you want. Marc Binda: Well, I would -- the only thing I would add to that is we do have room in our taxable income. So the Board will obviously make the final decision, but there's room potentially up to 40 -- 30%, 40%, but they'll be looking at a variety of factors, including the amount of retained cash flows or capital needs for next year, AFFO coverage as well as a few other stats there. Operator: And our next question today comes from Anthony Paolone with JPMorgan. Anthony Paolone: Just on that last point on the dividend, Marc, do you all have taxable net? Like do you need to pay a dividend? Or do you have the ability to just keep cash? Marc Binda: No, we do need to pay a dividend. That's right. I mean... Joel Marcus: And we intend to. Anthony Paolone: Okay. Just wondering, because also it seems like even after a day like today with the stock down the way it is, and you had brought up kind of where some of the Street numbers are for NAV, like does this bring back the prospect of using capital just for your stock here? Or are the development needs just going to be great enough that you got to keep going down that path? Marc Binda: Yes. Look, I think we believe the price is attractive to buy back, but we're certainly focused on making sure that we have enough capital to finish out the construction commitments that we have, and that's kind of our first priority. Anthony Paolone: Okay. And then just another question. Just in the -- you called out the 1.2 million square feet that are sort of the key leases or move-outs we should be thinking about. But the remaining like 1.3 million square feet expiring next year, are those likely to stay and so you kind of have kept them in a separate bucket? Or should we assume there's still some normal retention to move out in that grouping as well? Marc Binda: Yes. Look, those -- what's left over is -- are things in the normal course of leasing. So what we've called out are items that we are -- we know are going to go vacant. The rest of it are things that are just too early to tell. Anthony Paolone: Okay. If I could just sneak one more in. Just, Marc, you mentioned the $15 million in venture gains for the fourth quarter. I know you'll give details on other income in December, but should we think of $15 million as the new $32 million or any guidepost there at this point? Marc Binda: Look, the $15 million as the number for the fourth quarter is really a reflection of where we think the market is and the unique factors specific to our portfolio of investments. We'll be able to give a clear picture on what we think next year looks like at our Investor Day come December. Operator: And our next question comes from Wes Golladay of Baird. Wesley Golladay: I was just looking at the future pipeline, the $3 billion and the $1.2 billion, how much of the potential residential land plays will come out of that bucket? And then when you also look at the potential for $685 million of impairments, would that mostly fall in that bucket as well? Marc Binda: Yes. It's Marc. I can definitely take the second question on the $685 million. Just to be clear, the $685 million is -- relates to a variety of assets that are under consideration. So there's a variety of ways that, that could go. It just depends on what happens with the buyer, if we can get a price that we like, et cetera, some of these assets we could end up holding if we decide to pivot. But the $685 million, I would say the bigger chunk there has to do with land-type assets. Wesley Golladay: Okay. And then for the -- go ahead. sorry. Joel Marcus: No, please. Wesley Golladay: No, go ahead, go ahead. Yes. Joel Marcus: Well, I was going to say, if you just look at the 4 Megacampuses that are pictured in the press release and supp, each one of those are intended to have a component and some substantial component of resi. So you can make that judgment based on that commentary. Wesley Golladay: Okay. Got that. And then for the leases that are going to commence in, I guess, the first half of next year, was there any -- it looks like there might have been a small delay on that. Was that anything like permitting-wise or just the tenant looking to move in a little bit later? Marc Binda: Yes. No, I don't know that there was necessarily a delay. It's just a -- that bucket continues to evolve, right, as some of it gets delivered and then we're obviously adding new stuff there, right? We're leasing space that then extends that. So that will be an evolution just because that bucket changes from quarter-to-quarter. Operator: And our next question comes from Michael Carroll at RBC Capital Markets. Michael Carroll: Can you provide some color on the type of tenant activity that the company is tracking right now? I mean it sounds like in the prepared remarks that you're seeing activity being kind of flat despite the XBI uptick. But are there certain tenants looking for different types of spaces? I mean, how many tenants are looking for like the Class A space versus the Class B space? I mean is there different price points that tenants are looking at just given them trying to extend their cash burn rates given the current uncertainty? Joel Marcus: Well, yes, that's almost an impossible question to answer because if you look at the press release and supp, we put a pie chart of our -- the tenant sectors in there, and there is certainly demand from almost all of those. There's no government demand. And at the moment, there's muted institutional demand, although we're working on one big deal as we speak. But aside from that, I think what we said is, and it varies submarket by submarket, each submarket has its own particular dynamics. Some are pretty well in balance with supply and demand. Others are imbalanced. And so that is a little bit different. But I think across the board, there is demand. I think what the commentary really is, is that given the recovery in the XBI, we're a little surprised that demand hasn't followed as much. It's not as obvious than maybe in past times, but the reason for that is clear, cost of capital and federal interest rates are being stubbornly high. The government has shut down. The FDA is closed by and large, and there's a lot of log jams out there that are preventing a -- and the IPO market is shut by and large. There's a little bit of activity, but it really isn't an opening. I think those are the factors. But there's demand from a variety of sectors. But again, it's very case specific. And it also depends on, when you say Class A, you tend to have revenue-producing companies looking for Class A space or companies that are extremely well capitalized. Others are looking for either moved out space or second -- true second-generation space after a 5-, 7-, 10-year lease, so it varies all over the marketplace. Michael Carroll: All right. That's helpful. And then just following up on Anthony's question related to the 1.3 million square feet of 2026 lease expirations that are still outstanding that you guys need to address. Is that mostly lab tenants that are looking at that space? Or I guess, what's the mix between lab tenants or maybe covered land plays that those assets were holding? I mean, can you provide any details on what type of tenants are included in that bucket? Marc Binda: Yes. Yes. I mean we try to give some framework for kind of the key drivers there. I think it was on Page 23, footnote 4. If you go kind of line by line through the call out of those properties, most of those are going to be lab related, with the exception of the first one that we called out, which is about in 137,000 in Greater Stanford, that one is probably more likely to be targeted to an advanced technology use, but the other ones that we called out there in San Diego and then also in Cambridge are all lab. Michael Carroll: Okay. Is this the 1.3 million remaining square feet? Or is that footnote talking about the 1.1 million square feet that is expected to move out? Marc Binda: That's related to the -- sorry, I was referring to the 1.2 million square feet of lease expirations that are known vacates. Michael Carroll: And then the 1.3 million that is remaining that is yet to be addressed. Is that mostly lab? Marc Binda: It's a mix. I would say, mostly lab, but it's a mix. Peter M. Moglia: Yes, Marc, it's Peter. I can confirm it's mostly lab. There is also a little bit more tech space in there, just like in the 1.2 million, but it's mostly lab. Operator: And our next question today comes from John Kim with BMO Capital Markets. John Kim: I was wondering if you could provide a little bit more color on the quantum of capitalized interest that may be lowered in 2026. I know you mentioned a lot of this will be driven by land sales, but I'm trying to match that with the $1.75 billion of expected construction spend you'll have next year, which would suggest that the majority of capitalized interest will continue? Marc Binda: Yes, I can take that. So 2 things driving next year in terms of construction numbers, one is the development costs and redevelopment costs to finish what's in the active pipeline, right? We still have a decent amount that's going to deliver next year that is 80% leased. And then we've also got higher, I would say, CapEx or repositioning type costs next year than we had in 2025, and that has a lot to do with the fact that there are some known vacates and it's going to cost -- we're going to have higher maintenance costs just given how much vacancy we have to lease in this market. So those are really the 2 biggest drivers. I think in terms of your fundamental question of how much cap interest rolls off, I would just refer you to the commentary that Joel had earlier about really thinking through that pie chart on Page 46 of the supplemental, the way we're thinking about the various buckets. The Megacampuses, obviously, we'd love to do. They're very valuable, but we can't do them all. You've got the non-Megacampus future land assets, which would be ripe if there are opportunities to sell. And then the 2027 and beyond projects, which we may look at opportunities to pivot there in some fashion. John Kim: Okay. And then going back to the known move-outs for next year, the 1.2 million square feet, can you provide some commentary on why those tenants are not renewing? Whether they're going to new product or they're shrinking footprint or there was some kind of event within the company? Marc Binda: Yes, sure. I can rattle through those. So maybe I'll just go through the 4 that we mentioned there. The first basket was really, I would say, a non-lab tenant. They were a software company that was in there when we acquired those assets in Greater Stanford. That's 138,000 feet. That was a known vacate. The original business plan there was to redevelop it when we bought that a number of years ago. But things are obviously different, and we may choose to do something different there in terms of targeting more advanced type technology users. So that... Joel Marcus: Yes. And there's a lot of tech activity on that location. Actually, it's a very, very unique campus, mini campus. Marc Binda: Yes. And then in San Diego, I would just point to the one asset in Torrey Pines, the 118,000, that was a project that had been occupied by a subsidiary of a big pharma. That big pharma ended up consolidating on our campus at Campus Point and they ended up coming out of that space, but they did expand with us. And I think that project delivers next year. So that was kind of lead behind space. The 84,000 or 83,000 square foot space in Sorrento Mesa, a similar story. That was a subsidiary of a big pharma that also expanded with us on our SD Tech campus, and that was the lead behind space, very good quality spaces in both of those instances, but they're bigger spaces, so it may take some time if we end up either targeting a larger user or smaller-type users since they were big kind of single tenant spaces. And then the last bucket in Cambridge, some of that was -- it's just a variety of different spaces. Those spaces, as we mentioned there were older product that we really hadn't -- at least most of it hadn't really touched since we bought that campus in 2016. So it's a variety of factors. Joel Marcus: Yes. And then you should note that of the 3 noted vacancies on Page 23, footnote 4, we have an LOI signed for 83,000 square feet of that known vacate, and we have an LOI signed of about 40% of the 118,000 feet at the moment. So stay tuned. Operator: And our next question today comes from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess, Joel, bigger picture, you're now in a macro, you sort of called the bottom, but things are uncertain. Obviously, you don't have control over that. It seems like the sales process is also -- it really depends on buyer timing, so perhaps less control and you're trying to solve for leverage and capital needs. So I'm wondering like as you get through this in the next year or 2, to be in a better position to maybe take advantage of distress, why not consider just outright equity to fix the balance sheet, fix your capital needs, rather than having to rely on the asset sale process, which I know is important, but I'm just trying to... Joel Marcus: Well, yes, that's a really good question. But I think, number one, the balance sheet is actually in great shape. Leverage ticked up a little bit, but I think we're pretty comfortable given the sales we have in line. I think what we really want to do is to bring our balance sheet down to a much healthier non-income-producing asset weighting, if you will, now at 20%, down to 10% to 15%, and I think we'll make pretty huge strides on that through the end of next year and early '27. We've got a couple of big sales where we are close to pretty big entitlements and that will help us on valuations. But we feel like we can manage the balance sheet and provide the capital we need through the assets that we would like to shed. And also, we have been selling a lot of non-core assets, some stabilized and some non-stabilized and that's part of our goal to move our Megacampus ARR up to about the 80% level. So I think we feel pretty good about that without the need to go through a common equity raise. Vikram Malhotra: Okay. And then just on this -- the Investor Day, like, there's a bit of a departure, you're giving a lot of tea leaves on '26. I'm just wondering sort of why not so-called rip the Band-Aid just give a high-level number of where you think next year is going to shake out. Just -- it seems like a 2-step process, which I don't know... Joel Marcus: Yes, we get that. Unfortunately -- well, let me just say this, we wouldn't have preferred to plan third quarter earnings so close in time to Investor Day. But I think Marc and his team may very well give a range for FFO kind of a framework for that here shortly to the Street. So keep your eye out for that. We're likely to probably try to do that, so that we don't keep people in a mystery box for 3 or 4 weeks, which we never intended to do. But frankly, the industry is -- as I said, it's a regulated industry. And it is in a tough time because the government shutdown essentially puts almost everything you can't file for, you can't submit to the FDA for new INDs. There are some things coming out the back end, but the wheels are substantially stopped. And then on the other hand, the President has chosen, I think, better than the former administration, who is trying to get much broader price controls. This administration is really negotiating with each big pharma in a sense to get his version of MFN. So far, it's been limited to Medicaid, which I think has been great, but going through 20 big pharmas is tough. So there's a lot of -- kind of a lot of slow-moving wheels out there that we really need to see kind of the wheel put back on the cart so that the industry moves forward. And as I said, the industry has tremendous prospects. Any of us who have seen or in their disease know that there's a lot of wood to chop. We know of a whole number of people who've just been diagnosed with Parkinson's. We still don't have any addressable therapy. We got to get moving on these. So we will try to give the Street guidance here pretty shortly. So there's not a 3-, 4-, 5-week delay in trying to at least frame it. Marc did a -- I thought tried to do a good job giving factors, but we realized with cap interest rolling the way it's going to roll as we reduce the development pipeline, that leaves an unknown numbers out there that we'll try to fill in, broadly speaking. Vikram Malhotra: Great. We look forward to the update and definitely ARE on the other side. Joel Marcus: Yes. And thank you for the thought on that. Operator: And our next question today comes from Dylan Burzinski with Green Street. Dylan Burzinski: I guess just -- maybe going back to some of your comments, Joel, it seems like the only thing that's necessarily changed this quarter versus last quarter is really related to the government shutdown, right? Because if you think about the supply pipeline that sort of continues to dwindle, albeit it's still at high levels. There's obviously been a huge challenging capital markets environment for a lot of tenants. So I guess you mentioned that the government shutdown is having a huge impact in terms of kind of demand, it seems like. So is it the idea that we should think that once the government comes back, that demand start to pick up off of this level or... Joel Marcus: I don't think that's necessarily the issue, but that's a prerequisite for the industry kind of getting on its feet because, again, it's a regulated industry, both from submissions, clinical trials and then approvals. And if the government doesn't open, you can't get any of those really effectively done. Some of -- I think there was one approval to AstraZeneca that kind of came out recently. But I mean the wheels are stopped. That isn't going to -- that isn't directly tied to demand, but it's hugely tied to the health of the industry, which then in turn is tied to demand. I think if you go back to the second quarter, I think people still -- I remember, second quarter call, and then at Nareit, it wasn't clear when the industry would kind of hit this bottom, but it kind of has been bottoming but at a time when the government is shut. I think what we really need to see is lower cost of capital and a clear and condensed regulatory path. I mean I think if you think about a couple of things, what's needed for this industry, there are 3 things I could tell you. One is we must reduce the drug development costs. And that's really in the hands of the FDA and our meeting with Makary confirmed he's hyper-focused on that. We've got to increase the probability of success of drug development. I think AI and other tools will help that. But the FDA, again, is front and center there. And then we've got to lower the regulatory barriers to help streamline a lot of these programs. And I think that's what's needed to bring health back to this industry in a really robust fashion. We need venture to kind of open their pocket book and cost of capital is a big issue there, and we need the IPO market to open and the secondary market to become even more fulsome, not just doing offerings on data per se. If those things happen, then you've got a very healthy industry. Dylan Burzinski: I guess as a sort of follow-up to that, I mean -- and maybe it was asked, sorry if I missed it, I joined late. But I mean I get the sense that reading some -- or listening to the call today, reading some of the tea leaves and the 2026 consideration settlement that demand may have worsened since the second quarter, but it felt like looking back at my note and stuff and your commentary on that, that things are set to improve, and we're hearing out of peers of yours that the demand -- the overall touring pipeline is improving. So just trying to see if maybe I'm misreading into some of the comments made today as well as the 2026 considerations. Joel Marcus: Well, I don't -- again, I don't think you can look at -- this isn't like office where you can look at certain data and be fairly certain that office is going to rebound or data for mini storage or data for resi or something. This industry is far more complex. It's highly regulated, both at the front end and the back end. So I know everybody struggles. They want indicators and factors that point to demand and quarter-to-quarter, it doesn't really work that way. And I think we've had 2 reasonable quarters of leasing, but that doesn't reflect the health -- the underlying health of the industry, which I've tried to articulate, is still in need of a number of pieces to be put in place for that to happen. And then I think you've got a fulsome rebound. So that's the best I can articulate it. Hallie Kuhn: Maybe -- this is Hallie here. Maybe just to add to Joel's comments, when you think about tour activity where we're certainly seeing really great companies looking for new space, thinking about expansion. But as we've mentioned before, decisions are taking longer. We're very conservative in how they think about when to pull the trigger. And given all of the factors Joel mentioned, there's still a lot of uncertainty. And so we do feel confident that there are some fantastic companies, really high quality in this market that are going to need space. The question is, when are they going to get comfort around making those decisions. And to date, there's just still a lot up in the air, especially on the regulatory front. Joel Marcus: Yes... Dylan Burzinski: Yes. Really appreciate that. And maybe just one more, if I can. I know you guys kind of alluded to equity-type capital, and Joel, you mentioned partial interest sales dividends, stuff like that. But I know most of your guys is focused on the dispositions of sort of the non-core assets. I guess is there any desire to sell a partial interest in any of the Megacampuses given it still seems like there'd be a strong bid or depth of demand for that type of product today? Joel Marcus: Well, I don't think that is our game plan because I think over time, our goal is actually to own more of the Megacampus rather than less. But I think there are a variety of campuses. Some are at the absolute upper end, some are in the medium to high end. So it's a matter of selection there and some we already have partners on. But I don't think that's necessarily the key game plan. Our key game plan is to rid the balance sheet of a whole lot of non-income-producing property and reduce our exposure to non-core assets to as minimal as we can. I think that's the core strategy here. Operator: And our next question today comes from Jim Kammert with Evercore. James Kammert: You've given a lot of great color regarding the '26 expirations and potential move-outs. Is it -- given the environment, is it like too early to even start thinking about 2027 type expirations? And how those tenants are looking in terms of their burn rates and their intentions? I'm just curious, as you go into the Investor Day, et cetera, perhaps as much clarity on that would be helpful. Joel Marcus: Yes. Well, we -- it's a good question, Jim, and we're pretty laser focused, not only on next year's roles, but the year after's roles. And in fact, we just had one I think renewal extension we just did, which was a company that I think had a role in 2031. We just extended for a decade. So we're all over every single tenant that we want to keep in our markets about what we can do to preserve them, protect our core and to create future growth, so that clearly is also front and center for us, yes. James Kammert: Okay, great. And quickly second one, there was some press discussion that in Mission Bay, you had been potentially looking to reallocate, I think, is the term they use, some of the lab space there, your 4 assets in Mission Bay to office use, particularly targeting AI? I mean, one, is that a valid report? And if there is validity to it, how would that sort of work? What would you do with your existing tenants? Joel Marcus: Yes. I'll have Peter comment, but we did go in for Prop M allocation for, I think, most of our buildings there. We have them in a partnership, but we're the managing partner, and we got 100% approval on that. And the reason is because, one, we want to be able to offer office to the extent that it makes sense for our existing tenants as they need it. UCSF is a big tenant on campus and sometimes their needs flex between lab and office. Clearly, OpenAI has made that the center of the universe for their needs and campuses buildings around a campus, and that's a very valuable use of space. So it makes good sense to be able to have that flexibility. But Peter, do you want to comment? Peter M. Moglia: Yes. So we already had a couple of properties in Mission Bay, the Illinois properties already had 100% allocation for Prop M. When we developed the Owens properties, 1450, 1500, 1700 Owens and then 455 Mission Bay Boulevard, they only had a partial allocation for about 1/3 of the building area. That would be for pure office users only. Office that houses the researchers is not included in that. We don't have to have Prop M for that. But as Joel alluded to, we're seeing more and more users from our tenant base, both traditional tenant base and otherwise in that area that would like to have all office type of space. And it just makes a lot of sense to have that flexibility. In addition to just the pure office users, though, our lab users are more and more looking for additional office area for computational workflows as they integrate AI and other technologies into their research. So all of the -- we've been thinking about this for a while. We finally had an ability to act on it, and so we did. But I wouldn't read into anything as far as like are we not going to be doing lab there. Of course, that's the primary use. But to the extent that our lab tenants need more office area or there's other alternative tech in the area that is complementary to the innovation economy there, we want to be able to serve it and the counselors agreed with us and allocated the Prop M. Operator: And our final question today comes from Jamie Feldman at Wells Fargo. James Feldman: Joel, I was hoping you can just look into your crystal ball a little bit. You guys are clearly thinking about the balance sheet, making some changes to get capital in line, shrinking construction pipeline. You're probably the league leader in this space. How should we think about what's to come from the competitive set or just the industry overall in terms of finding a bottom and working through other pain in this industry? And I'm thinking specifically about your comment about meeting the market, I assume you meant on rents. Like you think there's a lot more downside on rents across the sectors, across the markets as this all plays out? Just how should we think about what's to come across the industry? Joel Marcus: Yes. So maybe I'll make a couple of comments and ask Peter to come in, in depth. Yes, we don't feel like there is any real competitor out there, probably the next biggest company, which is maybe, I don't know, 1/4 of our size or something like that, 1/3 of our size is, Blackstone, and they're private, obviously, and they have a very different mindset about how they run their business in the sense of they don't -- I mean we view clusters in ecosystems in a different way than, say, a purely financial investor would view it, and that's a pretty important thing. And to a large extent, that's why we ended up with this big lease that we signed in San Diego that was not generated by an RFP. So another company would not have had a chance to really kind of come and bid on that. So we view ourselves very differently. There's nobody who is a public pure play. The one other company that's out there has got a big presence in South San Francisco and heavily weighted medical office. So I don't think that really counts as a comparable, and then there's a whole lot of private guys out there. But I think the point of what I said was, I think that 0 -- very low interest rates coupled with almost a decade-long bull market and this COVID run up. Remember, our demand went up 4x due to COVID. I mean we'd never see anything like that. And you try to meet the demand of your clients, but real estate takes time, and that's unfortunate that you can't meet it instantly. And so I think many, many of those folks that decided to hop into in the circa '20, '21, '22 era built foolishly. There's a lot of building standing empty. Peter and others call them zombie buildings. I just think they're just of a different ilk than buildings in the heart of clusters and wrapped into ecosystems just different. But if we're one-on-one with any other developer and we have space that fits the clients' needs, we're going to win. We almost never lose. And the reason is because we have the best team. We have the best space generally. You can rely on us. We have the highest level of trust and we do what we say and we say what we do. And we've got street cred in the industry that nobody else has anything like that. Peter? Peter M. Moglia: Yes. Look, economics are very important, especially in an uncertain time when you don't know when the next dollar or where the next dollar is coming from, but you need space, you need to renew what have you. There's other choices out there, as Joel alluded to, some dumb space decisions made by others. And what that has caused is a deterioration in fundamentals. We've talked a lot about the TI allowances that are in the market, the free rent that's in the market. By and large, the market has held the rents fairly high. I mean I think we're still above pre-COVID rents in the big markets and especially in the tertiary markets where there's been less competition. But even our tenants, who are used to our great service, they know what's out there, they want to stay with us and they increasingly come to us and say, "Guys, we want to renew. We want to stay with you. We want to make a long-term commitment, but the reality of the market are this." And we just want to assure people that we understand that, and we're going to meet the market. Now are we going to have to go to the bottom in order to make the play? No. Like what Joel said as far as why people come to us, our platform, our service, our Megacampuses, I mean they still value that. But at the same time, they need a deal. And we're out there understanding where we need to be, and we are going to get a premium, but it's not going to be where it was in the old -- in the previous cycle. So we just want to assure everybody that the tenants that are the best tenants in the market that we want to retain, we're going to retain. And if that means more TIs than traditionally we had to get or a roll down in rent, then we'll do it. We're going to get through this time. It's going to take a while, but a lot of these zombie buildings will go and become different uses. The market will get tight, and we'll be in a better position the next time around. But we're going to continue to prioritize occupancy. And that's why Joel mentioned meeting the market. James Feldman: Super helpful. So as you think about -- I mean, your Slide 19, you still have a positive mark-to-market. I mean is it -- could you sense when markets are bottoming or leases are bottoming? Or it's just too early to tell? Can you maintain positive spread? Joel Marcus: I think it varies by submarket, Jamie, because some are very oversupplied and others are within some reasonable balance. But Peter, you can kind of... Peter M. Moglia: Yes. It's a guess, right? But as I see that the majority of supply left to be delivered, which I think right now that we consider competitive is somewhere in the neighborhood of 3.3 million in our 3 big submarkets. Out of that 3.3 million, the majority of it is already pre-leased. So I'd say roughly about maybe 30% of that 3.3 million is going to be delivered vacant and increased availability. But then after that, we don't see anything in -- and that's inclusive of things delivering in '26 by the way. We don't see anything coming in '27. So the availability numbers are going to peak. And maybe it's a little bit into '26 when they peak. And so you're only going to go up from there. So I don't see fundamentals deteriorating further, given that there's just -- we're going to start recovering soon but you never know. Hallie Kuhn: Just to add here, Hallie here, and to summarize that, given all the work myself and the team on the ground are seeing, as we continue to out lease competitors, which we are doing across all of our markets, we do see the early stages and acceleration of conversion of what were targeted as life science spaces going to other uses. And so back to your original question on competition, the more that we continue to out lease and dominate, the more we'll see that balance of supply coming into picture. Peter M. Moglia: Yes. In other words, people are going to be capitulating and pivoting. James Feldman: Yes, that makes sense. And if I could just throw in one more. I mean it seems like a big strategic moment for the company. I mean we've seen some of your office peers talk about asset-light models. Is that something -- I think your answer to one of the prior questions is no, you just want to continue to own your best Megacampuses, but have you thought about that at all? I mean you have such a good operating platform, is there a way to monetize the platform without tying up so much capital? Joel Marcus: Peter, you can speculate on that. Peter M. Moglia: Yes. I mean it's an interesting concept, Jamie, that we actually have discussed a number of times. At this point in time, though, it really doesn't make sense to have so many different players. It's going to consolidate down to where it was before, meaning experienced developers that have their own platforms and a lot of these projects that have deteriorated the fundamentals are just going to -- they're going to be something else and those operators are going to go away. So I don't know if it's really an opportunity to where you're managing other people's projects because those projects aren't going to be lab. That would be my take. Joel Marcus: Yes. And I think, remember, Jamie, that I kind of emphasized a number of times, this is just very different than almost any other property type due to the intense regulation of all aspects of this industry -- the underlying industry. And demand is just different as well. It isn't just about what's the cheapest space or what's just simply available. It's -- I've got mission-critical both assets and processes in that space, and I don't want somebody to screw it up and lose me a whole lot of money. So that matters. Whereas if you're just going in for Wells Fargo office, whether you're in this building or that building, generally isn't going to make a huge difference. But for lab, it actually makes a giant difference. So it's just different. Operator: And this concludes our question-and-answer session. I'd like to turn the conference back over to Joel Marcus for closing remarks. Joel Marcus: Just simply say thank you, everybody, be safe, be well. Thank you. Operator: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Cody McAlester of ICR. Cody McAlester: Thank you, and thanks to everyone joining us today. Before we begin, please note that today's session, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to today's press release and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2024. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason Brooks: Thank you, Cody. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we'll take your questions. Overall, we are pleased with our third quarter results in light of what remains a difficult and dynamic operating environment. Sales for the quarter increased 7%. Gross margins were up 210 basis points, and we delivered adjusted diluted EPS of $1.03, a 34% increases versus our Q3 last year. Our teams have done a great job at navigating higher tariffs imposed by the U.S. on most trade partners, especially countries that account for the majority of global footwear production. We've moved quickly to diversify our sourcing base, including adding new Asian-based manufacturing partners outside of China and Vietnam as well as leveraging our own facilities in the Dominican Republic and Puerto Rico. These actions, along with price increases and strong demand for our brands should help mitigate the impact of the higher tariffs as they start to hit our P&L more meaningfully in the fourth quarter and next year. We are still ramping up production with our new partners, which has resulted in some delayed shipments. However, we are confident that we'll start 2026 with our supply chain in a position of full capture demand. Tom will share more about our sourcing structure later in the call, but at first, I'll review the drivers of our third quarter performance by brand. Starting with XTRATUF. The brand continued its exceptional momentum, delivering strong growth that significantly outpaced last year. U.S. wholesale stood out in the quarter, increasing double digits, while xtratuf.com also posted double-digit growth compared with Q3 last year. From a product standpoint, our legacy 6-inch ankle deck boot, particularly the duck camo version was once again the top performer and within the category, ADB Sports was the best-performing collection. Camo continues to be in high demand across our men's, women's and kids offerings, demonstrating strong consumer performance for these designs. We were encouraged that the strong sell-through was broad-based with notable gains coming from big box sporting goods stores, traditional coastal retailers, pure-play e-commerce retailers and online marketplace. We are excited about the XTRATUF prospects for the fourth quarter and with the launch of our cold weather collection, a Sesame Street collaboration for holiday at retail and online, plus several exciting xtratuf.com exclusives. Turning to Muck. Coming off one of the strongest Q2 in years, the brand continued its positive trajectory in Q3 despite less favorable weather compared with the year ago period. Improved inventory positions, particularly in best-selling chore styles, combined with initial deliveries of our successful Bone Collector collaboration in the hunting channel fueled double-digit growth in our U.S. wholesale business and meaningfully higher in our marketplace volumes. Also adding Mucks performance and brand awareness was a highly successful feature on Good Morning America's Deals & Steals event over Labor Day weekend. Our women's business continues to be strong performance, led by the Muckster II Chicken Print series, while men's also had notable success in several regions. In terms of the channels, new product expansion fueled growth in the hardware stores, while our Farm and Ranch segment saw solid growth with multiple key retailers. As we anticipated, Durango sales were down year-over-year in Q3 as some key accounts pulled forward orders into Q2 ahead of the planned price increase we took to help offset higher tariffs. This was particularly offset by the consistent and steady growth Durango has experienced throughout this year in our Farm and Ranch accounts. Product highlights include Durango Shyloh series, which continues to gain traction with consumers, thanks to the great styling, great quality and attractive price points. Our Legacy [indiscernible] series continue to sell through well at retail and our on-trend women fashion collection have proven extremely popular leading into increased placement for these series. Georgia Boot delivered solid growth in the quarter, led by double-digit gains with major accounts and strong results in our field account business. This strength was driven by our largest Farm and Ranch accounts and e-commerce-only partners, supporting by successful new product launches and legacy bestsellers. New product launches were led by our Carbon Flex Wedge, a technology wedge with improved flexibility that books so successfully, we are launching a version in November featuring the BOA lace and closure system. Field business followed similar patterns with new products, driving increases across most regions, compensation for mixed retail conditions in some areas. Rocky Work, Outdoor and Western in total was up versus last year, led by gains in the work and outdoor categories. Work was driven by new or expanding distribution across the country, including a new work program with a large Farm and Ranch retailer across the mountain and Northwest region, led by several styles with the BOA lacing and closure system. Rocky Work also continued to sell well in key national safety footwear distributors plus multiple digital platforms. In Outdoor, it was improved distribution nationwide with new and larger programs at key Farm and Ranch retailers and sporting good partners that fueled the year-over-year improvement. Within these channels, our new Wildcat series of hunting outdoor boots delivered great value at core price points, while premium BearClaw outdoor boots reinforced Rocky's leadership in performance footwear. While Rocky Western sales declined year-over-year, our heightened focus on Work Western products, particularly our Iron Skull Safety Toe Western pull-on is driving gains with several regional and national brick-and-mortars and online. Rocky commercial military and duty posted its second consecutive quarter of improved results. Commercial military sales were up versus last year and exceeded plan as our strategic inventory management enabled us to maintain higher fill rates throughout the quarter. Duty also outperformed expectations, driven by strong gains with our largest U.S. Postal Service customer and continued double-digit growth in our Fire Boot program. In retail, our BI B2B business grew high single digits versus Q3 last year. We continue making operational improvements to our custom fit website and launched our new partnership with [indiscernible] Eyewear for prescription safety eyewear through our managed PPE program. Customer spending remained consistent with good subsidy utilization and new customer acquisition remains strong, more than offsetting impacts from supply chain and tariff uncertainty. Looking ahead, our view in the remainder of the year is based on the momentum we are currently experiencing with our brands, especially XTRATUF, balanced with the operate level of cautious about the broader consumer environment and the anticipated impact on the fourth quarter gross margins from the higher tariffs. While there is still uncertainty with respect to the outcome of certain trade negotiations, we feel good about the changes we've made to our supply chain, in particular, the increased flexibility we have to shift sourcing and production if needed. And therefore, we are anticipating that the headwinds from higher tariffs implemented this year will abate midway through 2026. With that, I will turn the call over to Tom. Tom? Thomas Robertson: Thank you, Jason. We are pleased with the improvement in results we delivered year-over-year, especially given the changes in our sourcing structure we've undertaken recently to help mitigate the impact of higher tariffs combined with what continues to be a choppy consumer environment. For the third quarter, reported net sales increased 7% to $122.5 million. By segment, wholesale net sales increased 6.1% to $89.1 million. Retail net sales increased 10.3% to $29.5 million and contract manufacturing net sales increased 4.1% to $3.9 million. Turning to gross profit. For the third quarter, gross profit was $49.3 million or 40.2% of net sales compared to $43.6 million or 38.1% of net sales in the same period last year. The 210 basis point improvement in gross margin was driven by higher wholesale and retail margins, which were fueled by brand mix and select price increases and higher percentage of retail sales, which carry higher gross margins than the wholesale and contract manufacturing segments. These gains were partially offset by 160 basis points of pressure from higher tariffs as product brought into the U.S. post Liberation Day in April has begun flowing through the P&L. Reported gross margins by segment were as follows: wholesale, up 200 basis points to 39.5%. Retail, up 320 basis points to 46.8% and contract manufacturing margins were 6.9%. Operating expenses were $37.6 million or 30.6% of net sales compared to $33.6 million or 29.3% of net sales last year. Excluding $700,000 of acquisition-related amortization in both periods, adjusted operating expenses were $36.8 million and $32.9 million for the third quarter of 2025 and 2024, respectively. As a percentage of net sales, adjusted operating expenses were 30.1% in the third quarter of 2025 compared with 28.7% in the year ago period. The increase in operating expenses was driven primarily by higher outbound logistics costs and selling costs associated with the increase in our direct-to-consumer business as well as an increase in our marketing investments compared with the year ago period. Income from operations increased 16.5% to $11.7 million or 9.6% of net sales compared to 10.1% [Technical Difficulty] of sales last year. On an adjusted basis, income from operations was $12.4 million or 10.1% of net sales compared to $10.8 million or 9.4% of net sales a year ago. For the third quarter of this year, interest expense was $2.6 million compared with $3.3 million last year. The decrease in interest expense was driven by lower debt levels as well as lower interest rates. On a GAAP basis, net income was $7.2 million or $0.96 per diluted share compared to net income of $5.3 million or $0.70 per diluted share in the third quarter of 2024. Adjusted net income was $7.8 million or $1.03 per diluted share compared with $5.8 million or $0.77 per diluted share a year ago. Turning to our balance sheet. At the end of the third quarter, cash and cash equivalents were $3.3 million and our total debt net of unamortized debt issuance costs totaled $139 million, a decrease of 7.5% since September 30 of last year. Inventories at the end of the third quarter were $193.6 million, up $21.8 million or 12.7% compared to $171.8 million a year ago. Of the approximate $22 million increase in inventories year-over-year, about $17 million or nearly 80% is attributable to higher tariffs, a small increase in pairs on hand and the remainder in raw materials as we are now producing more footwear in-house. Of the approximate $17 million from incremental tariffs on our balance sheet, roughly $10 million will flow through our P&L in the fourth quarter with the rest hitting in the first half of 2026. As we've touched on, we have taken actions this year to mitigate the impact of higher tariffs that started to pressure margins in Q3 and will intensify for the next few quarters, offset by price increases. We are also -- we also made significant changes to our sourcing model. These include shifting more production to our own facilities in the Dominican Republic and Puerto Rico and diversifying the geographic footprint of our third-party manufacturing to reduce our exposure in China. For 2026, we project that we'll manufacture approximately 50% of our inventory needs in-house, up from approximately 30% in 2025. Approximately 20% will be produced in China. However, only half of that or 10% of the total will be imported into the United States. The other 30% will be split between partners in Vietnam, Cambodia, Dominican Republic and India. We anticipate our actions will allow us to return gross margins to the recent run rate in the high-30s, low-40s percent range in the second half of next year as we move through the incremental tariffs currently on the balance sheet. With respect to our outlook, based on the third quarter performance and current view of the remainder of this year, we are reiterating our prior guidance for 2025. We still expect revenue to increase between 4% to 5% compared to 2024 levels with full year gross margins down approximately 70 basis points to between 38% and 39%, consistent with our previous outlook. SG&A is still expected to be up in dollars from an increase in our marketing spend to support growth, especially during the key holiday season and higher logistics costs from the projected increase in retail sales with modest expense leverage versus last year on higher sales. Finally, we still expect 2025 EPS to increase approximately 10% over last year's $2.54. That concludes the prepared remarks. Operator, we are now ready for questions. Operator: [Operator Instructions] Our first question is from Janine Stichter with BTIG. Janine Hoffman Stichter: I just want to start out with the consumer. You continue to mention a challenging environment and a dynamic environment. I'm just wondering if you could just offer your thoughts on how you're thinking about the consumer now maybe versus 3 months ago and what that -- how that's embedded into your forecast? Jason Brooks: Yes. Thanks, Janine. Great question. This has been probably one of the most dynamic years in my career with trying to understand the consumer. We get reports back from many of our retail partners and our products are still selling well. But I think there is still some cautious -- people being cautious about when and where they're going to spend those dollars and what they're going to spend those dollars on. So I think we are just trying to navigate it the best we can, try to provide the best inventory positions we can without being too crazy to support our retail partners and our own websites. But I think there's just -- it's just a little unsettling out there. And if we could have a consistent consumer report, I think it would be better, but it just -- it kind of goes up and down right now. So we're just being a little bit cautious. Janine Hoffman Stichter: Totally fair. All right. And then a couple more for me. Just you mentioned some delayed sales due to supply chain. Is there any way to quantify how much that was? And then as you think about tariffs and offsetting, it sounds like all of it from a gross margin rate perspective in the back half of next year. Maybe just walk us through what that embeds. Is there any additional pricing that you feel like you need to take to get there? Or is that all just diversification of sourcing? Thomas Robertson: Yes. I'll take this one, Janine. I think, look, at the end of every quarter, we always have a little bit of missing inventory and a little bit we left on the table, as we're chasing certain styles. This quarter, with all the sourcing changes, particularly with moving products to India, Cambodia and Vietnam, we saw anywhere from a 3-week to 30-day delay getting those products. And so that number was a little bit larger than usual, probably a few million dollars being transparent. And then I think as we look to next year, I think the second part of the question from a margin perspective, diversifying is certainly going to help. But I think the biggest driver in helping margins next year is going to be us bringing more and more product in-house. And so that will help leverage our margins as we go into 2026. Operator: Our next question is from Jonathan Komp with Baird. Jonathan Komp: Can I just ask when you look at the third quarter results, how things played out generally versus what you expected since I know you don't guide quarterly, necessarily. And when you look at the indicators you watch for your business, could you maybe remind us what visibility you have on sell-throughs in the marketplace, either your or your partners' business? And just what you've observed more recently in terms of some of the trends you've seen? Thomas Robertson: Yes, I can start here, and then Jason can certainly weigh in. I mean we have visibility into some of our larger national accounts. And there's been nothing that's been real concerning from a sell-through and retail perspective. I think Jason was touching on a little bit of just retailer behavior maybe earlier. But to that point, our marketplace business continues to be very strong compared to last year, up strong double digits. Our e-commerce business, which I kind of use as our closest pulse, was a little sluggish in the end of July and early August when we were transitioning over to our new platform. But we saw that recover nicely at the end of August and then September was the strongest month for the quarter from an e-commerce perspective. So we're not seeing anything too troubling out there from a consumer standpoint. Jason Brooks: Jon, I would just add, I think at the beginning of the question, you asked about our expectations about how Q3 came in. And I think we are pretty pleased with where we're at. I obviously would have loved to hit that top line number, but I think because of the transitions of the factories and what we had to do there, it made things a little bit more complicated for us. But I think we're really pleased with what Q3 was, and we're looking forward to Q4 and think it can be a good quarter as well. But just want to be cautious about it. Like I said, it seems to be an ever-ending story. One week, it's really positive in the consumers' mind and then the next week, it seems to change. So we're just trying to take it kind of one week at a time and navigate that. Jonathan Komp: Understood. And maybe as a follow-up, are there any pockets of weakness that you're seeing that you're paying close attention to across your business? And when we think about the fourth quarter, you're reiterating the guidance for the year. It implies a wider range for the fourth quarter by nature. So any color on what might cause you to be closer to the high end or the low end as you think about the implied fourth quarter? Jason Brooks: Yes. So from a branding standpoint, the only brand that is kind of funky right now is Durango. But as I said in the script, we had quite a few key accounts pull some business ahead there before the price increase. So our fill-in business wasn't quite as good in Q3. So I would say Western Durango is maybe the only brand that we're just maybe watching a little bit closer. Muck and XTRATUF, like I said, are doing really well. I was really pleased to see Rocky in a better place in Q3 and then also Georgia really had a nice quarter. So I think that's kind of where we're at. And then obviously, Lehigh is still doing very well for us. Thomas Robertson: Yes. Just to touch on the Durango piece a little bit. I think in the middle of the summer and dragging into a little bit of fall here, we've seen a little bit of softness in kind of our independent Hispanic retail accounts. And so we've been keeping an eye on that. That appears to have recovered a little bit here in September. So we'll continue to monitor that. And then to the sourcing comment and the missing inventory from a minute ago, Durango was detrimented the most here as the vast majority of that product historically was made in China. And so that's where you've seen a lot of the sourcing changes, particularly in Cambodia and India. And so there was a couple of million dollars there that just didn't get here as we had originally hoped. Jonathan Komp: Great. One follow-up then, if I could, Tom, on the implied profit guidance in the fourth quarter. I know you still are expecting earnings growth around 10% for the year after a good third quarter, that implies a pretty steep decline in the fourth quarter and some pretty steep falloff in gross margins. So I guess, are you assuming that pricing doesn't offset the tariff impact as it looks like it has started to? Or just any further color on what you're embedding there? Thomas Robertson: Yes. So the pricing certainly will be an effect. And every month that's gone by since the price increase, we've realized more and more of that. And so we'll continue to recognize that. The reason the margins will be more depressed in the fourth quarter is, one, because of the $10 million that I noted before. But if you think about how the timing of all this played out, when the tariffs came out, they were initially really higher, particularly out of China. And so as inventory was still flowing to us, we're paying kind of larger than -- higher reciprocal tariffs than we're currently paying today. And we weren't able to make all those sourcing changes that we've been able to execute on. Those will continue -- those sourcing changes are getting better every day, but that will -- the results of those changes will lag into the P&L. And so Q4, in my opinion, Q4 of '25 will be the worst quarter from a tariff perspective and will only start improving from there. It certainly will be a headwind in Q1 and in Q2 of 2026. Jonathan Komp: Okay. Great. And then last one for me, just bigger picture as we look forward into 2026. Any thoughts that you have just knowing your business and your brands whether or not stimulus could be something you can take advantage of or that might benefit? Any thoughts there? And then when you think of the momentum for XTRATUF, could you maybe just frame up what you're planning for that business? And any updated thoughts on what the potential might be as we look forward? Jason Brooks: Jon, can you elaborate more on the stimulus? I'm not sure what the question is. Jonathan Komp: Yes. I just -- I wonder if early 2026 stimulus to the consumer from the tax bill is something you're looking forward to as a potential driver or not for the consumer or for businesses on the tax side, if that's something that you've considered for your business? Jason Brooks: Got you. Yes, I'm sorry. Yes, I think any time the consumer is going to get any kind of stimulus, I think we all saw this during COVID. And then obviously, this is a very different tax bill and stuff. But I think any time our consumer gets a little kick, they are willing to spend some more. So I think we will be prepared if it happens, we'll have the inventory, and we'll be able to take advantage of it. But it's not something that is a huge focus of ours, but we'll be prepared if it does come for sure. Thomas Robertson: Yes. And then as we look to 2026, Jon, we can look at our order book and our bookings are up year-over-year, which is positive. It's up in dollars and in pairs, which shows you it's not just the price increase. And if you look at our spring 2026 product, it is -- it looks exceptionally well and very -- kudos to our product development team for everything they've done there. As it relates to the XTRATUF comment, it feels like XTRATUF is starting to accelerate a little bit. It's been running up low mid-double digits throughout the year, and it's accelerated a little bit in the third quarter here. We're very, very interested to see how this new cold weather line that we've really invested in, how that plays out as inventory is starting to arrive every day now here at the warehouse. And so we'll see how that plays out in 2026 as well. Jason Brooks: And we're continuing to see that product come more inland, Jon. So obviously, the coastlines, the fishing, the boating was really where that product was killing it, and we're starting to see that come a little bit more inland rather -- not real fast, but we're definitely seeing it happen. So we're pretty excited about that. I would tell you that 2026 is going to be a fun ride with XTRATUF. Operator: There are no further questions at this time. I'd like to hand the floor back over to Jason Brooks for any closing comments. Jason Brooks: Great. Thank you. I'd like to thank the entire Rocky team for all their efforts this year. It has been a real challenge, particularly in our sourcing department, and that team has just done an amazing job to try to navigate what we've had to do. So thank you, Rocky team, and thank you to our investors, and thank you to the Board. We look forward to finishing 2025 and kicking some b*** in 2026. Thank you. Operator: This concludes today's conference. We thank you again for your participation. You may disconnect your lines at this time.
Operator: Good day, and thank you for standing by. Welcome to the CECO Environmental Third Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Marcio Pinto, Vice President of Financial Planning and Investor Relations. Please go ahead. Marcio Pinto: Thank you, Tanya, and thank you for joining us on the CECO Environmental Third Quarter 2025 Earnings Call. On the call with me today is Todd Gleason, Chief Executive Officer; and Peter Johansson, Chief Financial Officer. Before we begin, I'd like to note that we have provided a slide presentation, which is on our website at cecoenviro.com. The presentation materials can be accessed through the Investor Relations section of the website. I'd also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may differ materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings, including on the Form 10-K for the year ended December 31, 2024. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. Today's presentation will also include references to certain non-GAAP financial measures. We've provided comparable GAAP and non-GAAP numbers in today's press release and provide non-GAAP reconciliations in the supplemental tables in the back of the slide deck. All right. With that, I'll turn the call over to CECO's CEO, Todd Gleason. Todd? Todd Gleason: Thanks, Marcio, and good day, everyone. Thanks for your time and for your continued interest in CECO. I'm very pleased to discuss another strong quarter as well as our reaffirmed outlook for 2025, and our initial view of full year 2026. With that said, please turn to Slide #2. This executive summary slide captures the main points we hope you take away from today's earnings call and our release this morning. We will provide much more detail in later slides, so I will be brief. We delivered another high-performance quarter with outstanding top line and bottom-line growth. We exit Q3 with a new record backlog even after generating our highest ever quarterly revenue. In the quarter, we expanded EBITDA margin nicely while we continue to invest in long-term growth resources and operating capabilities. Given the tremendous visibility we have in our backlog and sales pipeline, we reaffirm our full year 2025 outlook and introduce our full year 2026 outlook, which points to another year with very strong growth in both sales and adjusted EBITDA. As you will hear from this call, we remain very bullish as we are encouraged by strong market dynamics in our most impactful sectors and pleased that our proven operating model continues to deliver for our customers and for our shareholders. Now let's dive into more details. Please turn to Slide #3. Demand for CECO solutions and services continues at a record-setting pace. Our backlog grew to $720 million, a new record; year-over-year, our backlog is up approximately $280 million or 64%. Sequentially, our backlog increased by approximately $30 million. This new record backlog was made possible by another quarter of robust order intake of $233 million in new bookings, which is up 44% versus Q3 of 2024. We continue to book a nice mix of midsized and large-sized orders, particularly in the power generation and energy transition sectors. While we didn't book any mega jobs this quarter because of timing of those particular jobs, we are very pleased with how those power opportunities continue to develop. We remain well positioned for these larger projects, which we define as greater than $50 million and even greater than $100 million. When combined with orders from the first half, our year-to-date 2025 book-to-bill is nearly 1.3, with $735 million in year-to-date orders. If you expand the bookings across the past 4 quarters, we have now booked approximately $950 million in new orders, with each quarter comfortably above $200 million. With the investments we have made to position our businesses to capture and capitalize on robust demand in our core markets, we expand into new geographies and offer more new solutions and services. Our sales pipeline is now over $5.8 billion, which adds to our confidence for sustainable growth. Quarterly revenues came very close to eclipsing $200 million for the first time and produced an all-time record of $198 million in the quarter; this was up 46% year-over-year. Through 3 quarters of 2025, we have already generated more sales than all of last year, which had been a previous record. When we entered 2025, we forecasted strong growth. And I would submit that our year-to-date bookings and revenues are meeting or exceeding the bullish outlook we originally provided. Adjusted EBITDA was up 62% in the quarter as our sales growth and improving G&A cost profile continues to allow nice EBITDA margin expansion. And Q4 free cash flow of approximately $19 million was in line with the nice cash flow performance we expected and a strong rebound from our first half of 2025. We expect to continue to improve our working capital position as we navigate the balance of the year. A final metric on this summary slide shows adjusted EPS was $0.26, up approximately 86% year-over-year. So overall, record results and solid performance, and we enter Q4 with an incredible backlog and sustainable momentum in all of our growth programs. Now please turn to Slide #4. As today's press release highlighted, we are reaffirming our full year 2025 annual outlook across the board. This represents full year revenue of between $725 million to $775 million, which is up approximately 35% at the midpoint year-over-year. For adjusted EBITDA, we are maintaining $90 million to $100 million, which is up approximately 50% at the midpoint and free cash flow at around 60% of adjusted EBITDA for the year is also reaffirmed. You can see the comments on the right side of the slide. One of the items we highlight is our expectation that Q4 bookings will be above $250 million. And depending on the timing of just a few orders, we might actually deliver our first $300 million-plus quarter. Now before I hand it over to Peter, let's move to Slide #5 for a quick overview on CECO's prime position to benefit from current market dynamics and also navigate potential challenges. For the remainder of '25 and our initial 2026 outlook, we have a strong market backdrop in power, electrical equipment, industrial reshoring, industrial water and natural gas infrastructure sectors. Each of the past 4 quarters, we have booked orders in the critical infrastructure projects to support domestic power generation and energy delivery investments. And our pipeline would indicate we have the opportunity to maintain that pace throughout 2026. We see these projects continue to grow in both size and volume as we not only head through that year, but into 2027. We remain bullish on the industrial water and wastewater treatment sector and in particular, the international water infrastructure projects, where we now have our most active and largest pipeline of opportunities associated with water reuse and recycling applications. We expect substantial orders to be placed over the next 4 to 6 quarters with a sales pipeline that extends also well into 2027. Industrial reshoring in the global semiconductor and electronic component sectors also remain robust, and CECO's breadth of capabilities in industrial air and energy applications ensure that we are very well positioned to continue to win in these areas. We remain extremely focused on optimizing our project pricing and margin levels based on constant communication with our extended supply chain, including our fabricators, component suppliers and raw material suppliers. We have seen moderate inflation in select commodities and components that we include in our costing models and work to mitigate our designs and sourcing plans. Certainly, last but not least, M&A. We have not announced the transaction since we closed the sale of our global pump business in late Q1 as well as the acquisition of Profire Energy in early January of this year. But that doesn't mean we haven't been actively building our M&A pipeline and advancing certain deal-related discussions. We remain focused on the sustainability of CECO's portfolio, building a world-class industrial company with leadership positions in several and meaningful industrial niches. We expect to have more to discuss in the coming quarters. As far as challenges or uncertainties, at CECO, we believe that proper planning for scenarios is one of the hallmarks of a high-performance company. We remain laser-focused on the things we can control, and we prepare for additional actions if certain headlines turn into headwinds. As such, we continue to monitor tariffs and the impact on inflation. We are also monitoring the U.S. Government shutdown and what impact that might have on various operational items. So far, nothing that we can point to as far as moving the needle up or down as it pertains to CECO. We will maintain our focus on these potential factors and act accordingly. Best to be proactive when possible, and that's our plan. I will now hand it over to Peter, who will go into more detail on our financial results. Peter? Peter Johansson: Thank you, Todd. Good day, everyone. Thank you for joining Todd and myself for CECO's Third Quarter 2025 Earnings Call. I would like you to turn to Slide #7 for more details on our recent financial results in the quarter. CECO finished the third quarter with a record backlog of $720 million, up 64% versus prior year and 5% on a sequential basis. This result delivers the 11th of the last 12 quarters with an increase in backlog. The increase was driven by good order rates across a wide range of end markets. Of the total, approximately $60 million is related to the recent acquisitions, with the balance of the increase being generated from organic order growth. Third quarter orders were $233 million, an increase of 44% over the prior year period, representing a book-to-bill of approximately 1.2x; and as Todd mentioned earlier, the fourth consecutive quarter with orders greater than $200 million for a trailing 12-month level of $954 million, 65% greater than the prior 12-month period. This $954 million level represented a book-to-bill of 1.33x revenue, a record for any 12-month period in CECO company history by a large margin and a 4-quarter average of approximately $238 million. The results were largely due to strong demand in power, natural gas infrastructure, semiconductor, and industrial water applications. I would like to point out that CECO is just shy of reaching $1 billion in orders on a 12-month basis for the first time in company history, a level that we expect to achieve in the coming 12 months. Revenue in the quarter of $198 million was the highest for any quarter in company history and an increase of 46% or $62 million over prior year. Approximately 30% of the year-over-year increase was generated by the company's most recent 3 acquisitions and the balance was from organic growth. Sequential revenue was up 7%, with a big assist by revenues recognized on large power generation projects booked in prior quarters, as well as strong backlog conversion from industrial air, industrial water projects. Adjusted EBITDA of $23.2 million was an increase of 62% versus prior year, with margins improving approximately 120 basis points over the year ago quarter. On a trailing 12-month basis, adjusted EBITDA grew 26% to approximately $80 million, with margins down slightly, driven by our Q1 2025 results, which were lower than anticipated. On a sequential basis, adjusted EBITDA was flat on a dollar basis with 80 basis points of margin contraction due to lower gross profit margins in the quarter, partially offset by lower G&A spending. Gross profit margins of approximately 33% in the quarter was down 70 basis points year-over-year, mainly due to an adverse project mix as well as driven by a medium-sized project closeout with dilutive gross margins. Sequentially, gross profit margins are slightly down, driven by mix and the typical summer seasonal headwind dynamics. Sales, engineering and G&A expense continued its favorable downward trend with spending in the quarter down 4% sequentially, benefiting from cost-saving initiatives initiated in the first quarter and strong expense management. Adjusted EPS in the quarter was up $0.12 or 86% on higher volumes, operational excellence efforts and G&A expense management, partially offset by higher interest expense. Now please turn to Page 8 to review our backlog position in more detail. With our strong orders performance in the third quarter, our backlog is continuing its steady upwards climb as we convert on the growing sales opportunity pipeline. At $720 million, CECO's backlog has more than tripled since the end of 2021. We expect the majority of this backlog to convert to revenue within the next 24 months, with a large portion scheduled to convert over the next 18 months. Our 2025 year-to-date book-to-bill is approximately 1.3x, further underpinning future revenue. Now please turn to Page 9, for a look at gross profit and gross margin performance. This slide, like in previous earnings decks, presents CECO's gross profit and gross margin performance by quarter since the fourth quarter of 2022. We are presenting it on a trailing 12-month basis to normalize for quarter-to-quarter fluctuations and to provide a look back to the start of CECO's operating excellence agenda deployment, which began in the fourth quarter of 2022. Since that point, CECO has expanded trailing 12-month gross profit margins by approximately 500 basis points with gross profit dollar growth of slightly greater than 95%. In the third quarter of 2025, our business delivered the second highest gross profit dollar performance for the company in a quarter of $64.6 million and a gross profit margin of 32.7%. The decrease of 300 -- with a decrease of 350 basis points sequentially and 70 basis points year-over-year. Project mix and seasonal dynamics drove the quarter-on-quarter decline. I would like to remind the audience that a sequential step down from second quarter to third quarter is normal for CECO. This has occurred annually since 2020, most recently in 2024, where we experienced a 220-basis point sequential reduction before a similarly sized step-up in the fourth quarter. The seasonal dynamic is mostly due to fewer working days with summer holidays in Europe and the United States, resulting in a general slowdown in business operations. In addition, we chose to accelerate the closeout of an industrial air project with dilutive margins into the third quarter to put that behind us for the balance of the year. Similar to past years, we fully expect gross profit margins to bounce back into the fourth quarter and continue the upward momentum as we maintain long-term profit margins at the gross margin level at greater than 35%. On a trailing 12-month basis, our gross profit margin was 35% at the end of the third quarter. This improvement over the past 2-plus years is attributable to the progress our teams have made capturing annualized sourcing savings in the range of $10 million, improving project execution, and the impact of our commercial and portfolio transformation initiatives to improve the business mix while making acquisitions with accretive gross profit margins. For the remainder of 2025 and into 2026, we will continue to implement and expand on our operating excellence agenda, focusing on project execution and sourcing and increasing our focus on G&A expense optimization and process simplification to further benefit adjusted EBITDA delivery. These efforts will be bolstered by the addition of 80/20 to our operating model, a process which we have introduced late in the third quarter and will continue to drive deeper into the organization in coming periods. Now please move to Slide 10, where I'll review cash flow and indebtedness. Starting on the left side of the page with free cash flow generation. The schedule shows a walk from GAAP net income to free cash flow on a year-to-date basis. Cash flow in the quarter was a net positive of $19 million, a strong improvement of $22 million sequentially versus the second quarter due to strong cash generation from operations due to higher volumes, improved working capital management, and adjustments related to taxes paid on the gain on sale of the GPS business in the first quarter of this year. On a year-to-date basis, cumulative free cash flow is approximately $1 million. Year-to-date capital expenditures of approximately $8.7 million are largely driven by investments in our ongoing ERP system migration program, operating improvements in select production facilities and office updates and consolidations in Dubai, Shanghai, and Singapore as we integrated our legacy and acquired teams in those respective regions. On the right side of the slide is a summary of CECO's gross indebtedness with the primary drivers of change shown in the schedule provided. We ended the third quarter with gross debt of approximately $217 million, flat to year-end 2024 and a reduction of approximately $20 million from the end of the second quarter. Cash generated from operations and working capital initiatives was used to reduce our gross debt balance in the quarter to a level that now predates the Profire acquisition concluded in early January 2025. The reduction in gross debt, combined with the growth of our TTM EBITDA will result in a 25-basis point step down in the fourth quarter for the interest rate we will pay on our outstanding revolver balance, providing CECO with approximately $550,000 of annual savings in interest payments on the current balance. This benefit is exclusive of the benefit we will experience from further Fed rate reductions, of which 2 are expected by the end of 2025. Net debt at quarter end was approximately $186 million, a decrease of $13 million from the end of the second quarter and a slight decrease -- increase, excuse me, from the year-end net debt balance of $180 million. At $186 million, our net debt-to-EBITDA leverage ratio has been further improved to approximately 2.3x our third quarter TTM Bank EBITDA of $80.4 million. At the end of the quarter, our investment capacity is $109 million, an increase of $40 million from the year-end 2024 level and providing sufficient liquidity for our near-term needs. While we remain active in cultivating various M&A opportunities and expanding our deal pipeline, our short-term focus for capital deployment remains to further strengthen our balance sheet, accelerate our ERP migration efforts, and fund our double-digit organic growth. However, with our current capacity, we are well positioned to close on one of the tuck-in transactions working its way through our M&A pipeline. That concludes my remarks on CECO's third quarter 2025 financial performance, a solid result to follow up on an equally strong second quarter performance. And now back to Todd for his final remarks and a wrap-up. Todd Gleason: Thanks, Peter. Let's transition to looking ahead, including our initial 2026 outlook. On Slide 12, we summarize positive market and operational items as well as certain challenges that are incorporated in our 2026 outlook. We continue to believe energy transition investments such as more power generation, more natural gas infrastructure and LNG investments, and a business-first friendly policy agenda, which allows investments to flow quickly to create economic benefit. These are all meaningful positives to energy transition, positives to our customers, and positives to CECO. We also see other positive market dynamics for industrial air and industrial water, each with a set of bullet point items listed in their sections. Each of those has a very large pipeline of opportunities as we navigate -- excuse me, Q4 2025 and throughout our 2026 sales outlook. I can't stress enough how well positioned CECO is for general industrial investment and expansion globally. Now that we have firmly established a global water platform, we are also very well positioned for large wastewater and produced water projects. It remains a very exciting market dynamic, and we continue to invest to advance our leadership and support our global operations. As for potential challenges or uncertainties, several of these same themes -- several of these are the same themes from earlier in our earnings deck. We continue to monitor tariffs and inflation, regulation changes and resource availability. These aren't new themes and these aren't new potential challenges. So we believe we have a lot of programs and processes in place to navigate these various items. Now please move to Slide #13, and let me provide our initial full year 2026 outlook. I'm very pleased to share this outlook, as it demonstrates the ongoing strength of our operating model and our leadership position in growing markets. Starting with orders, we are targeting orders to exceed $1 billion and the slide highlights a greater than 1.1 book-to-bill. We have the sales pipeline to overdrive this book-to-bill level, and we are very excited to work with our customers to eclipse $1 billion in bookings. As you know, this bookings level is a preview of revenue levels in outer periods, and we certainly are ready to be a $1 billion revenue company on our way to much more. Full year 2026 revenue outlook is projected to be between $850 million and $950 million, which is up between 15% to 25% year-over-year when compared to 2025's midpoint. Our estimated 2025 year-end backlog of approximately $750 million, or greater, gives us significant visibility as we start 2026. And depending on how bookings occur in both Q4 '25 and Q1 of '26, we'll know a lot more about this revenue range for next year. Moving to adjusted EBITDA. Our outlook is between $110 million and $130 million, up between 20% and 40% year-over-year when compared to full year '25. We expect with the revenue execution of major power jobs that gross profit will be slightly down year-over-year, but that will be more than offset by savings in our SG&A. As a result, we expect adjusted EBITDA margins to be up between 110 to 150 basis points year-over-year. Adjusted free cash flow is expected to convert between 50% to 60% of adjusted EBITDA based on achieving major project billing milestones and continued working capital management improvements. So as we sit here in October and provide outlook for 2026, we have a lot of visibility and a lot of momentum. This gives us the confidence that providing initial guidance with strong double-digit top and bottom-line growth, which comes immediately after what will be a banner year in 2025 is something we are very comfortable doing. Please turn to Slide #14. This might be my favorite slide. There's a lot to like here. Certainly, a lot of graphics going up and to the right. A lot of great double-digit growth and steady margin expansion. What I like most about the slide is how we have demonstrated and continue to maintain high-performance, sustainable results. The numbers jump out at you. Our 4-year backlog CAGR of 34% growth; our 5-year order and 5-year revenue CAGR each with 23% growth; our 5-year adjusted EBITDA CAGR of 35% growth -- it's just steady, solid performance, and it's not an accident. We continue to invest in people. We continue to invest in growth programs and global expansion. We continue to invest in operating excellence to drive safety, quality, on-time delivery and cash and working capital management. We continue to deploy capital smartly to generate the best economic returns for our shareholders. In fact, perhaps the best number that's not even on this slide is our shareholder returns that we've generated over the last 4 to 5 years. We look forward to delivering more for our customers and shareholders as we deliver great results for many years to come. Let's please move to our last slide, which is #15. As we begin to wrap up 2025, we believe CECO remains well positioned to benefit from our diverse end market exposure and key mega themes that remain very strong. Our $5.8 billion and above pipeline -- sales pipeline provides tremendous visibility into many exciting opportunities. I'm very pleased with our Q3 and year-to-date 2025 performance. Year-over-year, backlog up 64%, orders up 44% and revenue up 46% in the quarter. This level of growth just continues to be sustained, and our 124-basis point margin expansion is something we're pleased with as well. I'd like to thank team CECO for relentlessly delivering for our customers. And we continue to be bullish with respect to our full year outlook and of course, the 2026 outlook that we just provided, another strong year of double-digit top line and bottom-line forecast. With that, we'll pause and open up the line for questions. Operator? Operator: [Operator Instructions] Our first question will be coming from Rob Brown of Lake Street Capital Markets. Robert Brown: Congratulations on all the progress. Just first on the kind of the project pipeline. I think you talked about some large kind of projects in the works in terms of the industrial water side, in particular, and I guess, the power gen side. Could you give us a sense of where those are at and sort of what those projects entail? Todd Gleason: Yes. I'll start and Peter can add certainly some color to this as well. We'll start with industrial water. The larger projects, and we're really well positioned, we feel globally, and we're excited about a lot of the U.S. domestic applications and growth that we see. But the larger projects are mostly based in either the Middle East or even in various regions around Asia. They relate to produced water or water reuse applications in very large installations. We believe that our growing reference sites and our relationships with large organizations and EPC firms sort of puts us in a win-win position. If they secure the projects, we're their technology of choice. So we're working through those -- the timing of those items. We're excited. We've had a constant dialogue with them throughout the year. And so really, right now, at this point, it's really all about timing in terms of that. And those larger jobs would be predominantly based in the Middle East. Robert Brown: Then the 2026 outlook, I think you have pretty good visibility there with the current backlog. But are there projects that can come in that can move that up? I guess, what's sort of the ability for that to move up, I guess, in terms of project activity? What would have to happen to kind of hit the high end of that number? Todd Gleason: Yes. No. I mean, look, I can -- by the way, I appreciate that we're sitting here a few days before Halloween, and we're already talking about raising guidance next year, Rob, well done. But joking aside, let's be clear, right? Like, look, we have a $5.8 billion sales pipeline. That means these are jobs that over the next 18 months, we have high confidence will move forward, and we will either win or lose our participation on those programs. That is multiple billions higher than it was just a few years ago, and we're growing, obviously, at a strong, sustainable double-digit pace. As we look at what's in the more nearer term, Q4 of this year, first half of next year -- I might even say Q1 of 2026, certainly, there are a handful of larger projects that we see the revenue profile associated with those projects being something that we can model in '26 and in '27. So it really depends on if those projects -- those specific projects move forward and how many of those do we win in Q4 and in the first half of next year, let's go with Q1. If, let's say, instead of winning 1 of 2, we win 2 of 2 large industrial water jobs; or instead of $75 million to $125 million power job, we win multiple which we can serve in our capacity, then that skews our view because we certainly haven't baked in every one of those jobs in our outlook. So to be fair, we have the visibility in our backlog and in our expected win rate to drive performance relative to the outlook that we just provided. And it's very early, obviously, versus when most companies give a 2026 outlook. So I'd say we have a high degree of confidence that what we were modeling in based on our expectations is something we're proud of. However, yes, there are always levers that can occur throughout the next few quarters that gives us even more visibility to what looks -- what could be a higher 2026. Where we sit right now, we would say we don't think we're being conservative. We also don't think we're emptying the cupboards on 2026. We think we're in the right place, and we believe this guidance reflects that. Operator: One moment for our next question, which will be coming from Aaron Spychalla of Craig-Hallum Capital Group. Aaron Spychalla: Maybe first for me, just on the pipeline in power generation. Can you maybe give us an update there? It seems like in the market, there's a focus on improving connections at the data center level and just getting to market faster. Are you seeing any acceleration in the pipeline there on the order front? And just maybe give a little more color on the activity levels there. Todd Gleason: Yes. I don't know that we're seeing acceleration. I think we're seeing a very robust space with a lot of headlines and a lot of activity. No doubt it's easy and important to read what some of the more larger organizations, like GE Vernova and Siemens and others are talking about, as they clearly are leaders in providing so much of the important power generation equipment, and we love partnering with them. And those conversations continue to be positive. Yes, there are times when things accelerate and ebb and flow, but they don't seem to be decelerating, I'll say that much. But I would say where we were a few quarters ago, I would say we feel very confident to that pace being pretty sustainable. The pipeline is well over $1 billion for us of just those projects over the next 12 months or so. And so it's a very active set of discussions. Peter? Peter Johansson: It's easy to become overwhelmed by all the reporting on data centers. I think we all have to be a little, say, more balanced in our view of how much of that becomes a reality. And if you dig into the large OEM, gas turbine OEM backlog information, you'll see that they are also suggesting that the international demand is every bit as exciting as North America. And that's because there is tremendous needs for power, both for industry as well as for the transition off of coal in those regions as well. So I think we have to be careful that we -- and we are careful and that we look at our pipeline in a way that ensures that we balance the best of the opportunities with where they are occurring globally. And what Todd was referring to in his remarks earlier was that there's a lot of near term in the U.S. to serve the data center demand, but this is a multiyear cycle that's going to run for at least we view out through 2030, 2032. And so -- and this is somewhat to Rob's point as well, we could get it all today. And if we got it all today, still deliver over the next 3 to 5 years. So it's a multiyear story, and I just caution everyone on getting overly excited about these headlines because it takes years to build a plant, it takes years to deliver the equipment, it takes years to turn it on. Todd Gleason: By the way, Aaron -- and only saying this because we've talked about this with you and others and also have been asked this question and maybe coming up on this Q&A. We, CECO, and our solutions with respect to power are, call it, later in the cycle of the power builds, meaning we're providing the thermal acoustic noise abatement, emissions management. Yes, there are some areas where we're in the gas infrastructure side with separation filtration. But our larger solutions on these power jobs come in the second to later half of a project, not the beginning. We may be in early conversation and bidding and participating in budget assessments and planning, but we don't win the jobs until later in the cycle. So as the cycle continues to mature, we're starting to hit our stride, if you want to call it that. Aaron Spychalla: Then maybe just switching to margins. You talked about 100 bps to 150 bps of kind of targeted EBITDA margin expansion. Can you just maybe talk about the confidence there? It sounds like there might be some mix just from some of these larger projects on the gross margin line, but you also talked about some of the early efforts on 80/20 and other lean initiatives and SG&A reductions. Just maybe help provide some color there, please. Todd Gleason: It's really at least a 3-pronged steady approach for us, and we're -- and we have confidence in this approach. In no particular order, think of #1, the volume that we continue to generate is -- allows us to have a lot of visibility, not just through our backlog and margins in our backlog and in the projects. And we're talking about gross margins, which might be a little lower than the current company average of 34%, 35%, but the EBITDA margin from those jobs is higher than the company average. So we like the dynamics, number one, of what the volume represents just in terms of continued steady margin expansion. #2, we have invested throughout the last few years in a lot of areas to support and to drive growth. And those investments will continue. But as we get larger and we approach $1 billion, they sort of modulate, right? They're able to be absorbed with more sales. And so that's prong #2, if you will, is that we're going to just get more G&A leverage and even some S&E leverage as we get growth from resources that are already in place. Then last but not least, and in fact, this is driving a lot of our nice gross margin expansion over the last few years, and we'll continue to bolster and improve that area. It's that our operating excellence teams and investments in other areas of cost management like 80/20, which we're just now deploying in the fourth quarter in our first set of businesses are really targeted at maximum efficiencies, right? They're targeted at finding ways and then executing on ways to get more logistics savings, to get more cost management savings in our operations. A lot of our businesses have grown rapidly over the last few years. And 80/20, for example, is one process that really goes back and looks at now that you're twice the size you were 4 years ago, how would you -- how should you design -- redesign your organization for maximal efficiency given your new normal levels of operations. So we believe and know that operating excellence in 80/20 are that third most important prong to really get our gross margins sustained and higher and to get our EBITDA margins to eventually those mid-teen results. We just like the steady approach of getting it up 100 to 150 basis points next year, maybe higher. Certainly, would depend a little bit on volume and some of the mix. But look, we're on our way to the mid-teens, if not higher margins over time, and we're just having that balanced diet of areas and processes that we think are important. Operator: Our next question comes from Gerry Sweeney of ROTH. Gerard Sweeney: Congrats on a nice quarter. AI topic du jour, so let's stick with it. But just curious on the project side. So some of these data centers, they are switching different power, going a little bit more towards disaggregated power opportunities. Are there any opportunities in those locations for you guys versus the large turbine builds, et cetera? Peter Johansson: It depends on how they choose to power the microgrid. If it's reciprocating equipment, the answer is little opportunity. If it's small format industrial gas turbines or aeroderivative gas turbines, there are certainly opportunities, but it depends on how the solution is defined and how many will be -- how many are present. The challenge in answering that question definitively is there's no single standard concept for any of these solutions. Gerard Sweeney: Then just sticking with the AI stuff or the power generation and build-out. At some point, does that expansion for a lack of a better word, stall just because there's just enough -- not enough capacity at some point in some of these build-outs? So instead of it being a higher hump, it's more of an elongated process. And do you have a sense of what that is if that's true? Peter Johansson: The answer as we see it is, yes, it will be elongated because there isn't enough supply to deliver what is presently being called for demanded. When you hear numbers being thrown around like $1 trillion of investment in data centers is going to $3 trillion per year, it's eye-watering and it's kind of hard to kind of make sense of it all. But Jensen Huang will be telling us it's going to be $3 billion a year -- $3 trillion a year for the next decade in order to satisfy global demand. That suggests that the amount of megawatts that have to be delivered to power that is well in excess of what industry can supply today, and we'll be providing it for many years to come. We also can't forget there's 3 other demands being placed on our power grids. We have a demand for new businesses, new manufacturing returning to the U.S. and other developed countries. So that reshoring dynamic is raising the demand on energy. We have the electrification of everything from transport to manufacturing process to heating and cooling to moving goods within warehouses. That's another source of demand. Finally, you've got -- AI is what people are focused on, but good old-fashioned computing. Cloud computing and more people operating computers for gaming and for crypto mining and for trading all requires electricity, and they're all going to be put on the grid in waves. And there's plenty of analytics that suggests this is going to run to 2040 at some level, going to run to 2030 at an elevated level. We're just at the beginning. Gerard Sweeney: On that front, historically, I think a lot of your M&A has been maybe in the water and industrial side. Do you look at the opportunity on the power side? Are there acquisitions or opportunities for you to expand adjacent to what you're doing or add additional solutions to expand your wallet share? Todd Gleason: Sure. Our pipeline is balanced. We like it to be that we push all of our businesses to think of ways organically and inorganically to advance their leadership. That's true in our energy businesses. Look, we -- to your point, our transactions have been more skewed to building and advancing a leadership position in industrial water, certainly doing the same in industrial air. But we've made some smart investments. The Transcend acquisition, separation filtration business, which has a large aftermarket and installed base was -- it was a great investment, high-margin investment for us that we made a few years ago, continues to grow. We've doubled the business as we start to really stretch our legs on that acquisition. There's others that we would look at doing in the space as well. Operator: Our next question will be coming from Bobby Brooks of Northland Capital Markets. Robert Brooks: I was just curious to double-click on the 2026 guide. I was just curious what -- and I know you've touched on it a little bit, but just to go a little bit deeper, what sort of macroeconomic backdrop are you assuming in the ranges of your '26 guide? Todd Gleason: Yes. Look, I think we're stable, I think, is what I'd start with that word. We're not -- we don't feel we need a significant positive change in the macroeconomics. I think we're reading the same headlines, and we're sensitive to certain things that could influence the economy, whether it's interest rates and tariffs, certainly, we've all become much more accustomed to the dynamics that exist with the direction changes at times around the tariff topics. And I think supply chains have been stable in their management of that. I think that there's certainly things that could change our view of the macro economy because we certainly aren't on an island if things go completely different. But we certainly don't see a major positive or negative swing over the next 12 months. We think that there are reasons that things could change. But where we sit right now with our pipeline and our backlog, look, for us, Bobby, frankly, it's about the visibility of pretty steady markets, right? Like it's hard for us to sit here today and say that over the next 6 months, these important power jobs are going to care about some of these headline topics, right? I mean, certainly, things can change that, but tariffs and interest rates aren't going to really change these important investments. Same thing with reshoring. These water projects are somewhat unrelated to the general economy. So we're not -- as you well know and have done a great job of analyzing, we're not super sensitive to short or intermediate changes in, let's say, consumer sentiment or certain geographic-specific shifts. We're probably -- given that 100% of our sales is in industrial with industrial customers that are really in expansion and investment mode in a multiyear theme, it's hard for us to see a major economic shift in that. Robert Brooks: Then I wanted to circle back on the cross-selling opportunities with Profire. So you've had Profire under your umbrella for 9, 10 months now. And I know one of the most exciting pieces to that acquisition was the cross-selling opportunities with their applications that historically had only went into U.S. oilfield service -- U.S. oilfield service customers to then cross-sell that into your wide range of industrial customers as well as bringing it to your international OFS customers. So just curious to kind of hear an update on that and how that's progressed so far. Todd Gleason: Yes. Look, it's still a huge, we think, opportunity for Profire as a business. And we spent a lot of time with the team, including recently, including, by the way, them being one of the early businesses where we're going to be deploying and utilizing 80/20 to really get a firm grasp of how we can implement it at CECO. So a lot of dialogue with Profire, both in terms of opportunities to cross-sell and to break into new geographic and industrial markets. I think that there's a lot of good progress. Look, it's still only been 9, 10 months. We always say -- we give it a year. We let our businesses get sort of settled in. We look for ways to invest operationally and commercially. Those programs are being put in place now. The team, I know, is very excited to be part of CECO. Certainly, they're looking at market dynamics within their core markets in the oilfields and energy applications. So they're constantly looking at ways to innovate and to make investments. So we've had some good discussions about organic and inorganic investments in Profire. I continue to believe it's a business that is a $100 million business in a few years down the road. And some of those are certainly the result of our ability to bring their product into more industrial and international applications. Robert Brooks: Then just last one for me. Todd, you quote in the press release saying depending on timing, fourth quarter of this year could be the largest booking quarter ever, which is some really strong commentary and not something you've specifically noted in prior press releases. So I was just curious, aside from the multitude of shots on goal you have, especially with the large power gen and water projects, what else has given you confidence to speak to that? And maybe have you already had strong orders quarter-to-date through October? Todd Gleason: So yes, look, it's a good catch. And obviously, we put it in there for sort of a reason. And that reason is quite simple. Bring these two things together, Bobby. One is we just delivered our fourth consecutive quarter of orders over -- well over $200 million. And we're very pleased with orders of north of $230 million. And that this past quarter, the third quarter, while it gave us very nice year-over-year growth and a new record backlog, and it really didn't include any of the large, call them, mega jobs. It certainly had several very important and decently sized jobs. And historically, certainly would have been jobs that we might have called out because they were between $20 million and, let's say, $40 million. But for where we're at now in both power and international industrial water, they're not going to represent some of our larger jobs. And so the fact that, let's say, in our largest quarter year-to-date, we had one mega job. And in the third quarter, we still produced over 230. We didn't have one. And yet we believe we're very close in terms of timing on a purchase order, which is how we book a job. Even if we have a verbal, we don't book anything until we have all of the Ts and Cs and purchase orders and everything completed. So I think it's a confidence in not just the visibility in our pipeline, but where we're at in several, not just one, but maybe several relationships and dialogues and verbals that we were getting from customers. So look, if the timing in Q4 is it more than one, but several of those occur. Now you're looking at our first quarter with more than 1 mega job, and that will give us -- certainly, that's the confidence that we have, and that's why we're sharing it. Look, if it doesn't happen, we're still -- we have a lot of visibility to another great quarter of well over $200 million. But if they do happen, then as I said in our prepared remarks in the call, we will see -- what we believe we could see a quarter over $300 million. Operator: Our next question will be coming from Jim Ricchiuti of Needham & Company. James Ricchiuti: One I'd like to just follow up though. Peter Johansson: Jim, we're having a hard time hearing you. The line is choppy. James Ricchiuti: Okay. Any better, Peter? This any better? Todd Gleason: It's a lot better. A lot better. Thank you. James Ricchiuti: Good. So yes, just a follow-up question just on gross margin. I appreciate the commentary and citing the sequential -- the seasonal issue in gross margin in Q3 of last year. But on the other hand, you had, I think, a sequential decline in revenues in Q3. So I'm just trying to get comfortable with what's happening with gross margin. Peter, you alluded to something I may have missed it. You talked about some issue, a closeout issue that impacted the Q3 gross margin. Wondering if you could size that for me. Peter Johansson: It was about -- it contributed 30 to 50 basis points of the reduction. It was a project that we decided we would negotiate with our client to get it closed, get all outstanding change orders recognized, put it behind us, free those teams up and move on. It was a project that started out with a lot of positive vibes. And at the end, it was just one of those where we decided we probably needed to terminate and move on from each other. James Ricchiuti: And just, again... Todd Gleason: I'm sorry, I just want to add to, look, our seasonally -- our softest quarter from a gross margin perspective is historically Q3. So we sort of model in a decline just naturally. There's just certain cost of goods sales costs that get sort of trapped in the quarter, while volumes were solid, just the dynamic of the quarter is typically a lower quarter for us from a gross margin perspective. You'll see it if you look back at most of our Q3s. It's not a guarantee that it's always going to be the softest of our quarters, but I would be willing to bet that 80% of the time, Q3 for us is the most impacted from a gross margin. If it dips, it's going to dip in Q3. So again, I'm not trying to just say, well, it's a seasonal thing, but we already had modeled in that we were going to have a bit of a decline. There's always some smaller pieces, like Peter mentioned, that could be 30 to 50 basis points of additional contraction. Some inflation did occur in the third quarter, which the timing of which is something we're going to work through, just like we have in other quarters. So look, we're not -- we were very happy with where our gross margins were year-to-date prior to Q3. Q3 was not different than we had sort of imagined it could be. We believe that we're going to get back to higher gross margins. But certainly, we've seen some impacts in inflation. It's modest. James Ricchiuti: Again, looking out to 2026, it sounds like you're assuming somewhat lower gross margin or maybe I misinterpreted your comment. And that's really -- if that's the case, that's a function mainly of mix, both industrial air and industrial water, a larger percentage of some of these bigger deals? Todd Gleason: Yes. I think it's -- we are just providing a view that if our gross margins in '26 are lower on average than '25, it's mostly because of mix, large power jobs, large water jobs that would just have lower gross margin, but would maintain very good EBITDA margins because the amount of G&A associated with those jobs is minimal. And so -- and they're large jobs. So just the scale, the mix scale size of these large jobs would be hard for us to overcome mathematically in gross margin, but not hard for us to overcome in terms -- in fact, would be beneficial to the EBITDA line. So it's more an indication that if gross margins are a little lower next year, we don't believe it's a dynamic that's changing in price or inflation. Those are things that we feel comfortable with. In fact, look, there are potential opportunities in nuclear, in defense, and in a few other areas of aftermarket in short cycle that if they occur throughout the year at the volumes that they could, those gross margins are materially higher than the average CECO gross margin and can certainly work to offset any natural gravitational pull down on margins from large power jobs and large water infrastructure jobs. So look, right now, we're balancing it out. We don't give gross margin outlook for the year. We're just signaling that if it is lower, we're not sure that it's a real headwind as much as it is just the mathematical dynamics of the size of the jobs that are pulling it down. Operator: One moment for our next question, which will be coming from Joseph Giordano of TD Cowen. Unknown Analyst: This is Chris on for Joe. Have you observed any change in customer sentiment or project timing for water, wastewater infrastructure investments contingent in part or whole on some form of government funding as a result of any changes in pace of disbursements from Infrastructure and Jobs Act? Todd Gleason: Yes. We don't. And I think I don't want to sound like we're unique in the fact that we're saying we don't. I would say it's mostly a quick and confident answer that we don't see an impact because in the large infrastructure jobs that we're participating in, they're not U.S.-based programs or even necessarily European-based. They're located in regions where either that dynamic isn't occurring, where there's governmental pauses or large program timing associated with monies. Instead, it's -- there are other investments that criteria altogether. Unknown Analyst: Can you provide an update on how your short-cycle business trended during the quarter? And it's expected to be a larger share of the mix in the 2026 and what you see contributing to that? Todd Gleason: Yes. So the mix of our short cycle is steady. But the short-cycle businesses are growing nicely and continue to add, I think, great results to our performance. Mix is tricky because if we have large power jobs and certainly, those are longer cycle. If we have large water jobs, those can be longer cycle. So the mix, all of a sudden, looks like it's staying steady when, in fact, short cycle could be growing rapidly inside our organization. Just hard to overcome the mix shift. But look, we -- 4 years ago, we had at best 20% as a percentage of sales in short cycle. We continue to be up above 30%. Now again, the mix of that can change depending on the jobs. But our goal over time is through organic and inorganic balance to find 50-50. That continues to be our goal. It might not be a 2026 dynamic because of how our jobs are going to flow through our P&L. But again, we like the fact that we continue to add applications and businesses with a lot more aftermarket content, more filtration, more aftermarket parts and services. So it is a continued investment for us, but the short cycle has been pretty steady throughout the year. Operator: I am showing no further questions. I would now like to turn the call back to Todd Gleason for closing remarks. Todd Gleason: Thank you very much, and thanks, everyone, for the questions and of course, the interest in our information today. Importantly, to our global teams that are delivering incredible value for our customers, thank you very much for all that you do. It's important for our customers that we have the most talented organization to protect people, to protect the environment and to protect our customers' investment in their industrial equipment. We're passionate about that. We are going to be presenting at several conferences in November and December. The information of those can be found at our Investor Relations website. We look forward to meeting with many of you when we're out on the road as well. So with that, we're going to end the call today. We appreciate it, and have a great day. Operator: This concludes today's conference call. We appreciate your patience. You may disconnect.
Anja Siehler: Thank you, Maria, and also a very warm welcome from the Nordex team in Hamburg. Good morning. Thank you for joining the management call on the upgraded full year 2025 EBITDA margin. As always, we ask you to take notice of our safe harbor statements. With me are our CEO, José Luis Blanco; and our CFO, Ilya Hartmann, who will lead you through the presentation. Afterwards, we will open the floor for your questions. And now I would like to hand over to Jose Luis. Jose Luis Blanco: Thank you very much for the introduction, Anja. Good morning, everyone. Thank you for joining us on such short notice. As you saw in ad hoc released last night, we managed to deliver a strong performance in the third quarter and, hence, we are now raising our full year 2025 EBITDA margin outlook after careful review of the full year forecast. Today, I'm pleased to walk you through our preliminary Q3 results and the rationale behind our upgraded guidance. So let's start with our preliminary third quarter results. We delivered revenues of EUR 1.7 billion in the third quarter, broadly in line with the same period last year. This was partially driven by project scheduling mix and temporary supplier-related delays in Turkiye. On the profitability side, we exceeded expectations. Q3 EBITDA margin reached 8%, up from 4.3% in Q3 last year, driven by stronger execution and ongoing improvements in service margins. This brings our year-to-date EBITDA to EUR 324 million with 6.5% EBITDA margin for the first 9 months. As highlighted in our Q2 results, we continue to generate solid free cash flow in Q3, bringing the year-to-date total to EUR 298 million. Looking ahead, we expect to maintain positive free cash flow generation in Q4, supported by increased activity levels, continued momentum in order intake and disciplined working capital management. Let's move to the next slide, where I will walk you through the key drivers behind our margin upgrade. Over the past 3 years, we have made consistent progress in strengthening our profitability. With an EBITDA margin of 8% in Q3 and 6.5% year-to-date, we have continued that positive trend. The performance, along with our updated outlook for the remaining of the year, has led us to raise our profitability guidance for 2025. The margin improvement reflects operational progress across the businesses. Project execution exceeded expectations with some of the contingencies we had built in earlier this year not materializing. Service segment continued its recovery faster than anticipated, contributing positively to the overall margins. And not least, stable supply chain conditions and disciplined pricing also supported the upgrade. We are encouraged by the progress so far, but our focus remains firmly on the execution and disciplined delivery in the fourth quarter with record high activities. Our aim is to close the year with consistency and operational strength while continuing to manage risk carefully. Moving to the last slide to the guidance. Based on a solid 9 months performance and the review of our forecast for the remaining of the year, we now expect 2025 to register a significant step-up in profitability compared to 2024 levels, bringing us very close to the medium-term EBITDA margin target of 8%. Reflecting strong service EBIT margins and solid project execution, we have raised our EBITDA margin guidance to a range of 7.5% to 8.5%. While we are not issuing formal guidance on free cash flow, we remain confident in our ability to deliver another year of robust free cash flow generation. The strength of this performance will depend on, first, continued momentum in order intake, of course, sustained profitability improvements and disciplined working capital management. All other elements of our guidance remain unchanged. With this, I'm handing over to Anja to open for Q&A. Anja Siehler: Thank you, José Luis, for guiding us to the presentation. I would now like to hand over to Moira to open the Q&A session. Operator: [Operator Instructions] The first question comes from Constantin Hesse from Jefferies. Constantin Hesse: Can you hear me okay? Ilya Hartmann: Yes, we can. Constantin Hesse: Well, first of all, congratulations, guys. Quite incredible, what Nordex has been doing in the last 3 years. So well deserved guidance upgrade. A few questions on the margin very quickly. So looking at the margin and the volume profile, it looks like these margins are now coming through at volume levels that were much below those 8 to 9 gigawatts that we were talking about before. So is that kind of the new volume level that we could expect this level of profitability? Then looking into 2026, I'm assuming that there are no major one-offs. So we're talking about this level of profitability now going forward into 2026. I'll start with those two. Jose Luis Blanco: Thank you, Constantin. I mean, this is a project business and there are always risk and chances and some materialize or not. This year I think we see better supply chain stability. So as a consequence, some risk, some contingencies didn't materialize and can be released to the profitability. But you cannot extrapolate this for the future. Today, we would like to explain you why this uptick, but 2026 is too early. I think we still have a huge quarter ahead of us in terms of activity, in terms of expected order intake and how 2026 -- we are in the middle of the budget preparation for 2026, how '26 is going to look like. We will know better beginning of next year and we will report in the schedule of the financial calendar. But I wouldn't extrapolate a quarter performance in a long-term view. Nonetheless, if all things being equal, we are confident that we can do a better year than '25. Constantin Hesse: Okay. That's understood. Can I just on -- so when you say contingencies, it's basically just risks that haven't materialized. It's not like there has relief... Jose Luis Blanco: Very much so, very much so. Constantin Hesse: Okay. Understood. And just on the volume levels, so it's fair to say that volume levels wise, it looks like profitability is coming through better than anticipated as levels of volumes that are lower compared to what you had anticipated previously. Jose Luis Blanco: Let's be cautious there. I think we were always signaling that this extra volume will boost extra profitability to achieve the 8% midterm target. And looks like we are going to achieve this midterm profitability target with a lower volume. But as said, project business risk and chances. So... Constantin Hesse: Okay. Fair enough. Understood. Last two questions. Order intake, you're still very confident that you're going to beat next year -- sorry, last year. And just on this Turkey situation, could we potentially expect any small liquidity damages in 2026 from any potential delays? Or how should we think about that? Jose Luis Blanco: Order intake, you know, Constantin, we don't guide order intake. So to exceed the last year performance, we need to do a good Q4. That, we expect to do. But so far, the bucket is empty. So with still 2 months to go -- no, I'm just joking a little bit. So it's still 2 months to go, and we still need to bag a big number of orders. So yes, without guiding you, we remain optimistic that we can achieve and slightly improve last year without guiding for order intake. Regarding Turkiye, the situation, as you can imagine, is quite complex. So in mind, your assumption might be correct. But I will prefer not to go into more details because complex negotiations with several stakeholders that, as we speak, we are having. So we hope that we can solve the situation. We don't know yet what the impact is going to be for '26. For '25, we know, and it's included in the guidance that we provided today. Operator: The next question comes from the line of Vivek Midha from Citi. Vivek Midha: I'll stick to one. Regarding the performance in third quarter and fourth quarter, the contingency that you're referring to, could you -- is it possible to be more specific on what the contingencies were? So how much was related to, say, project execution? How much was related to perhaps the warranty provisions you've been booking earlier this year? Any color would be helpful. Jose Luis Blanco: No, thank you for the question. I think you remember the very unfortunate situation a couple of years ago where we were missing our targets and disappointing everybody. So the situation there was quite unstable. So step by step, we tried to improve our pricing. We tried to improve our transfer conditions and we improved as well the provisions that we booked for project execution. After several quarters, you have more visibility for the year and you realize that those contingencies that were increased compared to previous years are not any longer needed, even that we could execute even below the contingencies of former time. So this released profitability to the P&L. So it's general contingencies for project execution. Ilya Hartmann: And maybe to give some color to Vivek. So this is everything that has to do with the projects, if you go to logistics, sprains, installations, crane time. So all of things that can go wrong in a project and have gone wrong in the past are baked into the project contingencies. And if they don't materialize over the year, people realize that the execution goes better than they had thought. And that is the basic principle here in the project business. Vivek Midha: Understood, understood. And just to be -- just one quick follow-up as well. On the free cash flow commentary, I fully understand it, of course, depends on the working capital developments and so on. But just in terms of what we see at the end of the year, sounds like you may do, for example, EUR 550 million to EUR 600 million or so of EBITDA. We've got the CapEx guidance, working capital. Is there anything else to be aware of when we think about what you could do for the free cash flow for this year? Jose Luis Blanco: Today, the way we see it, I mean, the building blocks is expected order intake, keep stable execution, which we are confident. And this is why we are guiding you. The risks are on a high activity level in project installation as well as high activity level in manufacturing in the last quarter of the year. But if everything is stable, Ilya, the math is correct. Ilya Hartmann: I think so. And again, as José Luis said, we're not guiding neither for cash or free cash flow, but the two of you have done the building blocks and of those assumptions, the chips fall the right way to calibrate you, but really just calibration, could we do again the same free cash flow in the last quarter on the back of the items discussed than we've done in the 9 months, so twice as much as current. Probably, we could. If some of the things don't go away, maybe a little less, but I think that is where the math is correct. Operator: The next question comes from the line of Sebastian Growe from BNP Paribas. Sebastian Growe: Can you hear me? Just to clarify. Ilya Hartmann: Yes. There is a little bit of noise on the line, but we can hear you, Sebastian. Sebastian Growe: Okay. I'll try my very best not to have any technical issues. So the first question would be around the gross profit margin. And I would like to make some reference or get some reference to the order backlog in this case. So you mentioned currently a good execution in '25. At the same time, however, you will know what you do have contracted both from a regional and also from a gross margin perspective, I think. So against the backdrop, my question is simply, if you do see any relevant changes from either a mix or a gross profit margin quality perspective based on the existing backlog when looking into sort of the future. So it will be the first one. And the other one is -- well, maybe start there. Then we take them one by one, that would be great. Jose Luis Blanco: The answer is not really, not really. I would say that the -- yes, there are certain regions with a slightly better margin, but it's not -- I would say, generally speaking, 80% of the project execution, 80% of the backlog is very much with normalized margins. So we don't see a big difference in regions so far. Sebastian Growe: That sounds good. And then the other question is on free cash flow and also more higher level discussion, if I may. I would just be curious to hear your thoughts around if there's anything visible at this stage for relevant free cash flow that might change, be it the level of cash interest, cash taxes, the working capital, terms and conditions that you find in the market, also the CapEx because I think all of those items have been fairly stable now, and just curious to hear your thoughts if there might be any changes. Ilya Hartmann: I'll start and then José Luis might think of any other levers. No, I think all the large building blocks, especially you touched upon CapEx, more or less, give or take, we believe, are on the run rate that we have been giving in the past years. Yes, the truth is that now with an improved standing of the company, our financial costs will go down. I mean, the cost for our bonds, which is our bread and butter. Business, of course, depends on the risk profile of the company, and that is improving as we're talking about it. So if anything, financial costs or interest for the bonds might go down. And that's probably the most relevant lever I can think of. But José Luis, have anything else? Jose Luis Blanco: No, no. I think the biggest building blocks, of course, expected order intake and EBITDA. And the EBITDA is mainly from keeping the stability in the supply chain. And that's it, I think understanding that there is a big activity quarter as always, winter for installation and factories fully loaded in the quarter. So the risk profile of the quarter is slightly higher. Last year, we delivered. We expect to deliver this year. Sebastian Growe: Yes. And that's actually a good segue to my last question, if I may say that. The first one is a very technical one. I'm sorry if you had answered that before. But could you quantify the impact on the revenue delays that you attributed to Turkey to the extent that is possible or give at least a rough magnitude? And would you expect the full catch-up in the fourth quarter? And on a more structural note, I'm just a bit irritated by apparently, we have seen order intake going far higher now for a couple of years really in comparison with the revenue execution volume. So when should these two lines convert? So you're running on orders of 8, 9 gigs. At the same time, the deliveries and execution are probably 6.5, 7, somewhere in that neighborhood. So how should we think about that from a timing and as I said, convergence perspective, that would be great. Jose Luis Blanco: No. Thank you, Sebastian, for these two questions. Regarding Turkiye, you need to allow me not to be -- I cannot be very specific there in the best interest of all stakeholders of Nordex because everything I say might impact the ongoing negotiations that we have with several stakeholders. The impact for this year is within the guidance and that has dragged revenue. And let's put it that way, the revenue we see we are guiding midpoint, but we see more risk on the revenue than on the EBITDA for this year. And Turkiye is one of the big contributor factors for that. But I really cannot be more specific there. We are dealing with that the best way we can. This might impact slightly 2026. But here, we are talking about Q3 and full year guidance for '25. Regarding the second question, it's a very good one. And what you see there is a shift in the order intake profile of the company and in execution coming from close to 50% of the volume in previous years. In the Americas, where the lead time is very, very short, so you contract Q4 this year and hit P&L execution Q4 the year after, to majority of the volume being contracted now in Europe and in Germany where the lead times is more in the range of 18 to 24 months. So as a consequence, you will see that delay. We expect next year to be a higher volume than this year because of that delay in the order intake going through the P&L, especially in Germany. And that's the main reason why the order or the book-to-bill has been increasing, so because the lead time in orders in Europe, mainly in Germany, takes twice the lead time of an order in North America, in U.S., for instance. Operator: The next question comes from the line of Ajay Patel from Goldman Sachs. Ajay Patel: Congratulations on the release. I have two questions. I wanted to take it a little bit high level for a second. This year, if we look at what you put out today, points to at the midpoint, an 8% margin number in terms of EBITDA. And you start to think, well, -- you haven't had the real ramp-up of Germany and typically, they're better margin projects. There is project execution or at least order intake coming on the U.S. side for the likes of Vestas and potentially that's an opportunity for you also. I find it very difficult to understand that volumes don't grow over the next 2 to 3 years. And if you're already having a base year margin of around 8% this year, that we don't see a more improved margin environment than the 7% or so margin that is in consensus for next year. Could you talk to some of the building blocks that maybe I need to think about because it feels pretty clear the direction of travel as I see it. So maybe I'm missing something. And then on the cash flow, I think Ilya pointed to the call pointed to around EUR 550 million of free cash flow -- free cash flow. That points to just over EUR 1.5 billion net cash for the full year. That's like 25% of the market cap. When are we going to get some details on what does capital allocation look like? How much do you need for the balance sheet? How much do you need to invest going forward? What can be returned to investors? And to what degree that's a consideration? Jose Luis Blanco: Thank you very much for the two questions. Let's do this together. I think starting with the second question, the first priority -- the answer is we will talk about that in the annual results presentation in February next year. But keep in mind that the first and foremost important thing for us is to strengthen the balance sheet. And we have -- we expect to have -- we have today and we expect to have a very solid cash position, but the equity ratio is still what it is. So we need to reinforce the balance sheet to make sure that we prepare the company for higher volumes in the future. And this goes in line now with the first question. Do we expect higher volumes in the future? I mean, we are not here guiding '26 or midterm. But if the high level, your assumption, we agree. I mean, if the book-to-bill is increasing and increasing, sometimes you need to process those orders because you cannot increase the book-to-bill forever. So all things being equal, we should be able to see growth, and we should see some profitability improvement associated with the growth. But as said before, project business, contingencies for the projects this year we didn't need or we don't need. This might not be the case next year. So I'm not saying that what we released today are one-off, but I want you to understand that this is a project business. And sometimes you consume certain level of contingencies in execution and in other moments, you consume a different level. And Eli, I don't know if you want to. Ilya Hartmann: No, I think on that point of what you and Ajay are discussing on the 8% and the trajectory, that is obviously everything you said I subscribe. And to the capital allocation, a little to add. But to underline, it is a very fair question. And we've been saying in the past when shareholders have been supportive of the company that we will not forget about that once the company is doing well. And right now, it is on a healthy track, as José Luis has explained. So please bear with us until the full year results. As we said, we will come back with something on that, but it is a question that is front and center on our minds and will be discussed and explained when we do the full year call. Operator: The next question comes from the line of William Mackie from Kepler Cheuvreux. William Mackie: Can I just maybe ask some questions about the contingency process in your projects business, Jose Luis, with your vast experience. I mean, since the last 3 or 4 years, clearly, you've been nursing the business back to the health we see today. And with that adopted or allowed your project teams to adopt more caution perhaps than normally you might expect. So can you talk a little bit to how you would think the contingencies were being accrued or assessed at the beginning of the year? And then when this became visible to you? So as the year progressed and the execution and the costs, were the execution better and the costs lower, when was it clear that the contingencies were overly prudent? And when we think about how you run the business into '26, '27, to what extent do you think you'll change the way you challenge the project leaders and teams in the way that they're allowed to accrue contingencies going forward? Jose Luis Blanco: Yes, that's a very good question. The way we operate, we assess the risk in the supply chain. We take into consideration previous and current experience in project execution. We assess the world and the risk and the configuration of the supply chain. And based on that, during the order intake phase of the project, we build certain contingencies for executing the project. So the order intake then moves from an offer to a contract, and then we put that into the machinery of the company. And from there, it goes into a planning for the year. And from the planning goes a budget, and then you start execution. Usually, the first quarter of the year is very low activity. So very low activity. You cannot fully assess if you are conservative or optimistic in the view of the year with a quarter of low activity. So second quarter, slightly more activity than first quarter. So you start to have a better visibility how the year might look like. And then around the third quarter, you have a way better visibility to narrow what you think the company can deliver, is this process going to change for the future? I don't think so. I think we keep the same process. What we will do is after hopefully 2 or 3 years of very stable execution, if we see that our contingencies are over conservative, we might revisit that. But for the time being, we haven't done that because the macroeconomic is quite still uncertain. I mean there is trade discussions, duties, yes, no, this influences currencies. So I don't think we are in a position where we can say, well, the macro environment is fully stable. You need to be more aggressive in the way you build your contingencies for the projects. William Mackie: Maybe the second is a follow-up to questions that have been asked a number of times. But I mean, the basic arithmetic suggests that your Q4 EBITDA margin is 11% and maybe the second half is close to 10%. Unless the world becomes topsy-turvy again or changes to the risk side, I guess the questions that are coming are more why shouldn't -- or why should we not assume that you can maintain a similar level of performance in '26 towards that we've seen in the H2 '25 when you're expecting higher volumes, your pricing has been stable. The supply chain is stable with the exception of Turkey. And therefore, already, you're going to be hitting above your midterm targets for adjusted EBITDA. And I guess I hear you need to go through the planning process before disclosing that more widely, but is there anything that we should be missing that should hold our thinking back for '26 on '25? Jose Luis Blanco: No, I think the building blocks you name them. I think the biggest -- and let's not talk '26 before time because we are in the middle of the planning. But the biggest lever is the expected order intake. So we still need to sell a lot of projects to make real the assumption that we will see a growing company next year. We expect to do so, but everything is still needs to be executed. Regarding supply chain activity, I mean, we've had years of bad surprises and years of good surprises. So if we are in a neutral supply chain and we don't deteriorate profitability in execution, is this going to be an uptick like this year or it's going to be neutral versus how we build the contingencies for the project to be seen, and the Turkey effect, we need to assess what the Turkey effect is going to be for 2026. For 2025, we know. We plan for that. For 2026 is still in discussion. And as I mentioned before, I will rather stay silent there because there are several negotiations ongoing with key stakeholders that it's important that we keep information limited. And I'm sorry for that, but I think it's in the best interest of the company. Operator: The next question comes from the line of Alex Jones from Bank of America. Alexander Jones: Two, if I can. First, just back on the supply chain. You talked about that being sort of more stable perhaps than you expected at the start of the year. Are there any signs apart from Turkey that, that changes going forward? I'm thinking things like the tighter EU steel quotas? Are you pretty happy at the moment with how things look going forward? And then the second question, just on service margins, which you called out specifically. Is there anything else that sort of improved the service margins other than the sort of strong execution you're talking about? Or to phrase it differently, is this a pull forward of the improvement you're expecting in service margins or just an indication that actually they can be more robust than you had previously expected? Jose Luis Blanco: Okay. So first question, I would say, all things being equal, there is the elephant in the room of CBAM and what the impact of that could be and who needs to pay for that impact. So this will translate into cost increases. And eventually, we would like to translate to the price. The quotas for steel is a little bit the same. Can this be a pass-through to the customers and to the tariffs and to the consumers or not in CBAM, we at Nordex, we have a clear position. I think CBAM is an environmental tool that put a lot of burden on the supply chain, and that might delay the biggest contribution to fight climate change. So every turbine we sell has a CO2 payback of 2 months. So if you put a CBAM increased prices, this might delay the installation of turbines and as a consequence, delay the net zero. So it's a tool that goes against the intent of the tool that puts a lot of pressure on supply chain and on customers and consumers. So let's see because negotiations are ongoing. If this could be extent for our sector, yes or no. The second impact, which is related with that is steel and the quotas and the prices, and we'll try to manage this portfolio in the best possible way and translate the cost increases to customers. And Turkey, we already mentioned. Regarding services margin, we are very happy with the service performance. And it's very much that you pay less liquidated damages because the company and the technology is doing well and the failure rate is moving into the right direction. And I don't think this is a one-off. I think this is sustainable. But to what extent the service business growth and what the profitability of the service business growth is a slow moving -- is a slow but steady moving business, both in the top line and in the profitability improvement and that we expect that for the future. Operator: The next question comes from the line of Anis Zgaya from ODDO BHF. Anis Zgaya: I have only one left question on prices, they are holding quite well for quarters now. But don't you see that it could be additional pressure going forward coming from Siemens Gamesa's return to the market and increasing Chinese competition? Jose Luis Blanco: That's a very good question. I think we try to keep the price that we need based on our cost base to deliver a decent profitability for our company and for our shareholders. So far, we managed to achieve that. But of course, there are geographies that we suffer more. In Latin America, we suffer. In South Africa, we suffer where we compete against Chinese competitors. But the geographies where we operate in, it's not straightforward for Chinese competitors to land because it's very complex, the permitting, the characteristics of the turbines that you need and so on and so forth. So far, we have been managing to keep market share, eventually improve while not compromising in prices and margins. To what extent this could continue in the future, we just don't know. We think -- I wish that the sector behaves reasonable, but you never know what other competitors can do if they want to improve their market share. We just don't know. Operator: The next question comes from the line of Xin Wang from Barclays. Xin Wang: I just want to clarify one thing. Is it possible to break out how much of the margin upgrade is underlying and how much is contingency release? Is it aiding Q3 already or will release in Q4? And also, when you say '26 margin will be better than '25, does this mean '26 underlying without a similar level of contingency release against '25 underlying? Or is it against '25 with contingency release, please? Jose Luis Blanco: Maybe, Ilya, I don't think we can give too much clarity there. Ilya Hartmann: No, I think we can. I think we can. Maybe we do that again because I think you did a very good explanation of the contingency, how that works. So I think it's worthwhile to say that this is the underlying margin so that we're talking of an operational performance of the company. I think Jose explained quite well how we do the planning, the budgeting and then the execution. And I think William asked you about how do you think about the profile going forward. And I think for now, we're not going to change much. So this is how the company operates. It's not something special. Jose Luis Blanco: Yes, that's it. Ilya Hartmann: So the further you progress in the year and if you have a good year of good execution and you don't see the risks materialize, the people and their projects start to release those contingencies. And if you -- 9 to 10 months into it, you do a review of the forecast again and look what do you think for the rest of the year is going to happen. So it's a project discussion. It's an operational discussion, nothing else. Xin Wang: Okay. Understood. Yes. So I think how contingency release works is explained very well. But I'm looking at the midpoint of your new guidance suggests potentially EUR 2.6 billion revenue in Q4. And at the same time, it's a massive margin uplift. So essentially, do we expect a similar level of tailwind going forward in Q4 next year? Is that needed for the margin in '25? Jose Luis Blanco: You cannot do that correlation because the portfolio of projects next year is a different portfolio of projects. So this year, in Q4, we have high activity levels and very good execution profile. So provided that we deliver these high activity levels in the factories and in the projects and provided that our view one quarter ahead of the expected cost to go goes in the direction, that releases that level of contingency and that gives you a profitability for the quarter. Q1 next year is going to be lower activity than Q4 this year. So the profitability -- I mean, I haven't seen because we are in the middle of the planning process for next year. But I bet that the profitability of Q1 next year will be substantially lower than the profitability of Q4 this year. And in Q1 next year, we will look at the year. We will assess risk and chances of the projects. And very much, we will see if we were over conservative in the contingencies bill or not or if the contingencies are needed because the execution of next year is a different profile than the execution of this year. Xin Wang: Okay. And maybe -- I mean, we will get the full release next week. But can we get some indication of how much of the free cash flow generation is the net working capital tailwind from order intake? Ilya Hartmann: Yes. Let's discuss that in detail for -- on the quarterly call next week. But for this year and the full 9 months, the working capital is not the key driver. It is more from the operational free cash flow that comes from the profitability. But the details we'll give you and a bit of an outlook for the full year on the call next Tuesday. Operator: Next question comes from the line of Kulwinder Rajpal from Alpha Value. Kulwinder Rajpal: So firstly, just wanted to come back on service margins. So would it be fair to assume that we reach the 18% to 19% range this year itself and then continue from there on, all things being equal from what we see so far this year? And secondly, just wanted to understand how the discussions with customers in U.S. have evolved during Q3 and maybe what you have seen so far in the month of October? And how is that market looking for you? Jose Luis Blanco: Sorry, we couldn't get in full the first question. Will you be so kind to repeat, please? Kulwinder Rajpal: Yes, absolutely. So I just wanted to confirm something regarding service margins. So is it fair to assume that we will already be somewhere between 18% to 19% for this year and then continue progressing from there on, all things else being equal? Jose Luis Blanco: I think, yes, service margins, I mean, you can have quarterly variations, slightly up, slightly down. But if you take the last 12 months as an indicator, this should be slowly growing going forward. So we don't see any reason why this should not be the case. So we see service business as a high single-digit revenue growth going forward and the associated profitability improvement, and you should not look at it from a quarterly because there are adjustments on the warranties on certain things, but you should look at it from the last 12 months profitability. And this, we expect to have a small improvement going forward. Regarding U.S., it's very much a moving target. I think we are in discussions with customers. And that's so far as far as we can go. We think that we will have a role in that market. And we think that, that market will have a role in the energy supply that the country needs, but discussing as we speak. Operator: The next question comes from the line of Richard Dawson from Berenberg. Richard Dawson: Just one clarification from me and going back to what you said about Q4 order intake and sort of needing that to give you the confidence that FY '26 margins could be a similar run rate to H2. But just given that it takes new orders sort of 18 to 24 months to really hit the P&L, why do we wait to see where Q4 order intake lands? Ilya Hartmann: The line wasn't super clear. Could you help us one more time with the last part of that question? Sorry for that. Richard Dawson: Yes, no problem. Is this better? Ilya Hartmann: Way better, way better, yes. Richard Dawson: Perfect. It was just a question on -- you had comments there about sort of waiting to see where Q4 order intake lands to really give you some confidence into where margins could be for FY '26. So just comments on why do you need to wait for Q4, given you have such a long sort of 18- to 24-month period before any of those orders actually would hit the P&L, so sort of post FY '26? Jose Luis Blanco: No, because it's the way -- of course, we issued the guidance in February, around February. In February, we still have expected demand in our planning process that have impact in the P&L of the year. If we advance 2 quarters, then the visibility is way lower. So we don't feel comfortable to guide the company 5 quarters ahead. We feel comfortable to guide the company 3 quarters ahead with certain level of expected demand to be closed. In other words, the expected demand to be closed today is higher than the expected demand to be closed in February '25. So the risk profile, if we guide you today for next year, we will be assuming a higher risk profile that we don't want to do. Richard Dawson: Okay. That makes sense. And maybe just one other question, just going back to Turkey. And I appreciate you can't go into too much detail on this. But do you expect those temporary supplier-related delays to actually result in additional revenue being recognized next year as that situation reverses? Is that sort of how we should be thinking about Turkey? Jose Luis Blanco: I think we need to -- and we are working in a plan to produce local content blades there. To what extent that plan will succeed or not and how many blades can be produced is still to be seen and what the impact for the projects might be that might impact our revenue, and we will try to avoid liquidated damages if we can. But first, we need to have a plan of how many blades and when will be available in Turkey. Operator: We have a follow-up question from Sebastian Growe from BNP Paribas. Sebastian Growe: One quickly around service. It's just about the attachment rates apparently in the first half of '25, that had nicely improved if I look at what is under service from the installed base perspective. I would just be curious to hear your latest thoughts about if this is continuing at the sort of mid or even higher 70 percentage sort of rates? And then the second question is in regards to the supply chain more related to specific components, rare earth apparently topic of last few days, I think. So what's the visibility here? And how many years would you potentially have secured from a rare earth perspective in particular? Anja Siehler: Sebastian, and we couldn't really understand you. Could you maybe repeat and be closer to the microphone? Sebastian Growe: So probably just as before with a one-to-one sort of taking the questions. So the first one is on service. And the question was that the attachment rates had nicely increased. So if one just looks at what you have under service contracts as opposed to what the installed base overall is. My question is simply if these high attachment rates would have continued and if you would dare to say that probably with the higher exposure towards Germany, this is sort of also structurally improving from here? That's question number one. And maybe start there. Ilya Hartmann: Sebastian, it's not about you being near to the microphone. The line is quite -- there's a lot of distortion. But let me try. I think what we gathered from the service question is whether you believe that -- or whether we believe, sorry, that by the kind of orders we have that we have a high grade of order intake that come with long-term service contracts, that at least how we understood the question. If that is the question, the answer is yes because we continue to have a geographical mix, which is very largely driven by European contracts and European contracts very, very standard come with those long-term service contracts. So then the answer would be yes. But we're afraid we're not 100% sure we got your question there. But if that was the question, that is the response. Sebastian Growe: Very close and for sure good enough. So move on to the other question that I had and that was around the supply chain and the question then for around rare earth. So I was just curious if you could share how many years eventually of the required rare earth materials you would have contractually agreed at this point? Jose Luis Blanco: I don't think -- we are using very limited quantities of rare earths. And so our exposure is quite limited. We are working in contingency plans to put in place to have alternative designs. But our generator doesn't use rare earths. So we only use small, very small quantities in some very minor motors that we are working on to have diversity of supply, but we rely on China. Even for those small quantities, we rely on China suppliers. But our technology can be adapted to induction motors. It will take us some time, but we are working in a plan in case needed not to use rare earths. Operator: There are no more questions at this time. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good day, and welcome to the Smithfield Foods' Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Julie MacMedan, Vice President of Investor Relations. Please go ahead. Julie MacMedan: Thank you, operator, and good morning, everyone. Welcome to Smithfield's Third Quarter 2025 Earnings Call. Earlier this morning, we announced our results. A copy of the release as well as today's presentation are available on our IR website, investors.smithfieldfoods.com. Today's presentation contains projections and other forward-looking statements. They are being provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or other factors. Please refer to our legal disclaimer on Slide 2 of the presentation for more information. Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating profit and margin, adjusted net income, adjusted earnings per share and adjusted EBITDA. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our slide presentation on our website. Finally, all references to retail volume and market share are based on Circana data. With me this morning are Shane Smith, President and CEO; Mark Hall, CFO; Steve France, President of Packaged Meats; and Donovan Owens, President of Fresh Pork. I will now turn the discussion over to Shane. Shane? Shane Smith: Thank you, Julie. Good morning, everyone. I'm pleased to report that we delivered record third quarter adjusted operating profit of $310 million, which represents an 8.5% increase year-over-year and an adjusted operating profit margin of 8.3%. We achieved record third quarter results by delivering innovation, value and convenience to our customers and consumers and through a continued disciplined execution of our strategies. Our Packaged Meats segment achieved its second highest third quarter profit on record despite persistent higher raw material costs and a more cautious consumer spending environment. This underscores the power of our brand and private label portfolio strategy to deliver quality and value across all price points. Our Packaged Meats segment performance was driven by product mix improvements, our well-diversified portfolio of products and price points, new product innovation and operating efficiencies. Our Fresh Pork segment was pressured by a compressed industry market spread, which was driven by higher hog prices. As a result, a portion of our Fresh Pork profits moderated to our Hog Production segment, both were retained within our pork operations due to our vertically integrated model. In the face of challenging market conditions for our Fresh Pork segment, I'm proud of our team for mitigating more than half of the year-over-year compression in the industry market spread. Additionally, Fresh Pork has been navigating in a challenging tariff environment. To achieve the level of profitability that the segment has accomplished demonstrates our team's outstanding execution on all controllable aspects of the business, including optimizing the net realizable value of each hog and continuing to drive operational efficiencies. As I noted a moment ago, our Hog Production segment benefited from higher hog prices Additionally, the team has tirelessly executed our strategy to improve operational performance and lower our raising cost. Hog Production segment adjusted operating profit more than doubled since last year as a result of more favorable markets, coupled with the improvements on our retained farms. Now turning to our outlook for fiscal 2025. I'm pleased to report that we've raised the midpoint and tighten the range of our outlook for 2025 adjusted operating profit by staying true to our strategies and delivering on our commitments. Mark will share more details in a few minutes. Now I'll turn to our key growth strategies. Our five strategic growth priorities are as follows: Increased profits in Our Packaged Meats segment through enhanced product mix, volume growth and innovation; grow profits in our Fresh Pork segment by maximizing the net realizable value across channels; achieve a best-in-class cost structure in our Hog Production segment; optimize operations and deliver operating efficiencies in manufacturing, supply chain, distribution, procurement and SG&A; and finally, evaluate synergistic M&A opportunities across North America. First, in Packaged Meats, which is our largest and most profitable segment. Protein remains a growing category with quality protein representing a core staple in consumer diets. Consumers are also looking for value, convenience and new flavors. Our Packaged Meat segment is delivering on each of these consumer preferences without sacrificing profitability. Our 3-pronged strategy to grow Packaged Meat segment profit encompasses product mix improvements, volume growth and innovation. First, product mix. We remain focused on continuing to improve our product mix, which enhances margins and drives unit velocity. A key driver of this strategy is to confirm sales of our more commoditized heritage products, like large holiday hams, into increased unit sales of higher-margin products for everyday consumption, such as packaged lunchmeat and quarter hams. Smithfield Prime Fresh packaged lunchmeat continues to win with both customers and consumers. Our premium lunch meat offering delivers the quality of a freshly sliced daily meat without the wait. During the third quarter, while volume for the $6.3 billion packaged lunch meat category was down, Prime Fresh volume increased double digits, and we gained a full point of volume share versus the third quarter of 2024. This outstanding volume growth was driven by higher ACV and product innovation, and we see a long runway ahead. Our Smithfield Anytime Favorites quarter hams are another great example. Unlocked large holiday hams, quarter hams are perfect for everyday family dinners. They are also a great value, which consumers love. Smithfield Anytime Favorites quarter hams increased volume share by 5.7 points versus the third quarter of 2024. Another key component to unit sales growth is expanding our drive sausage offerings to capitalize on the popularity of pepperoni and salami. These products are growing faster than the packaged meats category as a whole and have higher margins. To position our dry sausage products with well-diversified price points, we market them under specialty brands like Margherita and Coronado as well as value brands like Armour. During the third quarter, our total branded dry sausage category grew volume by nearly 8% versus the third quarter of 2024. Second is volume. We participate in 25 key packaged meat subcategories in retail, 10 of which are valued at over $1 billion, and we see continued white space opportunities to grow volume and increase market share in each of these categories. Year-to-date, through September 28 versus the same time period a year ago, we grew branded market share in 6 of these $1 billion plus categories. We are driving volume in today's economy by delivering quality protein at a good value. Our portfolio of quality branded products spans multiple categories and price points and is an important competitive advantage for Smithfield. We are attracting and retaining consumers within our branded portfolio, even as they trade up and down the value spectrum. Value seekers are also turning to private label, which is a key competitive advantage for us. Retailers and food service operators look to us as a trusted partner who consistently and reliably deliver high-quality products at scale. Over the past several years, we have improved private label profitability, which represents just under 40% of our retail channel sales. Another great example of delivering value is in the sausage category, which spans all dayparts with an average retail price per pound of $4.23, our sausage offerings, help today's consumers get their protein cost effectively. Our sausage offerings collectively grew volume by 2.9% in the third quarter versus the third quarter of last year. In addition to delivering value, we are driving volume by investing behind our brands with direct-to-consumer advertising and by executing effective trade promotion. During the third quarter, our Smithfield brand launched a new We Speak Pork national advertising campaign. For decades, Smithfield has set a standard for quality and craftsmanship in pork. The new campaign is already driving positive engagement across digital and social platforms and helping us reach younger audiences with the focus on millennials and Gen Z shoppers. Beyond awareness, we are seeing early indications of stronger purchase intent and improved brand affinity. Earlier this year, we launched a new campaign for our Records National brand, themed Eckrich, the sausage that takes you home. We are also proud to continue our partnership with the College Football Playoff Foundation and its Extra Yard for Teachers initiative for the 2025, 2026 season. Our brand-building efforts are showing returns. Average cook dinner sausage volume increased 7.8% versus the third quarter of 2024, which was more than 5x the category growth. Next, product innovation. Innovation is an important pillar of our packaged meats growth strategy. We continuously develop new concepts to address emerging consumer trends. These new products target consumers through line extensions of our trusted brands, new flavors and more convenient packaging and sizing options. On October 1, we launched our Smithfield Mike's Hot Honey Bacon, a sweet heat innovation that merges our signature honey-smoked bacon with Mike's Hot Honey's iconic flavor. The product taps into the fast-growing sweet heat trend and strengthens our connection with younger consumers. It also serves as a strong proof point of how Smithfield is modernizing the category and driving brand relevance through innovation. This exciting new launch is spot line of Smithfield's We Speak Pork brand campaign. Another great example of an innovative product that aligns with evolving consumer preference for new flavors is our Curly's Ready In Minutes BBQ Meals. Curly's is the #3 brand in refrigerated barbecue meats and enjoyed the #1 year-over-year volume share increase during the third quarter at 1.4 points. The growth for Curly's is being aided by innovation from our New World flavors such as Korean barbecue Pulled Pork, Chimichurri Pork Carnitas and Thai Sweet Chili Pulled Chicken. Innovation is also a key driver of our 13.5% increase in foodservice sales in the third quarter versus the third quarter of last year. Despite high food away-from-home inflation, our innovative new offerings are attracting foodservice customers. Year-to-date, our foodservice sales increased over 10% with 3% volume growth. Key foodservice innovations include our Smithfield ready-to-eat bacon as well as 55 new limited time offers. We have introduced across value-added packaged meats categories. We are giving customers and consumers reasons to keep coming back. In summary, our Packaged Meats segment is successfully driving volume and profitability by improving our product mix, offering value, building brand awareness and delivering on product innovation. Now let's talk about our second quarter growth strategy, increasing our Fresh Pork segment profitability. We are focused on growing Fresh Pork operating profit by maximizing the net realizable value of each hog and driving best-in-class operating efficiency. A key to effective whole hog utilization is developing multiple channels as outlets for our fresh pork products and operating with agility across these channels. The execution of our strategy is why our third quarter results outpaced the significant compression in industry market spread. At a time when volume and consumer staples is challenged, our fresh pork segment delivered 5% volume growth in the U.S. retail channel. This was driven by consumers' desire for quality protein in their diets. We saw U.S. retail profit enhanced by value-added case-ready items. We also have increased profitability in our pet food and pharmaceutical channels. These channels offer alternatives to certain export markets for some of our products. Our Fresh Pork segment continued to deliver operating efficiencies and cost savings which also helped mitigate the impact of the compressed market spread on segment profitability. Now to our strategy to optimize our Hog Production segment. I'm proud of the team's work to achieve a best-in-class cost structure on our retained farms. Over the past several years, we have sold underperforming farms and improved our genetics, our nutrition and feed procurement and herd health. While we still have work to do, we are pleased with our progress to date, and we are already demonstrating the power of our vertically integrated model with our more streamlined hog production operations. Improved sow productivity and fee conversion are key contributors to our cost savings versus last year. We still have more room to benefit from continued optimization. We expect our raising costs will continue to trend lower from the benefit of our reform measures and our genetics and overall herd health initiatives. This year, our Hog Production segment is on track to produce under 11.5 million hogs, which represents about 40% of our Fresh Pork segment's processing needs. Over the medium term, we remain focused on actively resizing our business to reduce to approximately 30% the number of hogs we produce ourselves. We believe this will provide a sufficient assured supply of high-quality raw materials to our Fresh Pork segment, while reducing the impact of commodity fluctuations on our consolidated results. Next, our strategy to optimize operations and deliver operating efficiencies in manufacturing, supply chain, distribution, procurement and SG&A. Each year, we look for cost savings to offset inflation. We also dedicated a large portion of our capital investments toward automation, waste elimination and throughput maximization. Automation has enabled us to redeploy labor to higher-value activities as well as to reduce our overall labor count. We also continue to refine and optimize our transportation and logistics activities. Through these strategies, we continue to lower our overall operating costs. Finally, we continue to evaluate opportunistic M&A in North America to support our growth strategies. We will remain disciplined in evaluating complementary and synergistic opportunities for our packaged meats business. In summary, we delivered a record third quarter result through solid execution across all segments. Our Packaged Meats segment has demonstrated resilience in today's market, underscoring our ability to grow share and expand profitability over the long term. Our Fresh Pork and Hog Production segments support the packaged meats segment with an assured supply of quality protein, and our disciplined operating approach continues to help us navigate a dynamic macro environment. With that, I will turn it over to Mark to review our financials in more detail. Mark Hall: Thanks, Shane, and good morning to everyone joining the call. As Shane stated, we set a record for the third quarter adjusted operating profit and net income which reflected the resilience of our business model in a challenging market environment. Strong profit growth in our Hog Production segment more than offset market headwinds in our other operating segments, underscoring the benefit of our vertically integrated model. I'm pleased to report that we ended the third quarter with a strong balance sheet, and we have the financial flexibility to invest in growth and return value to our shareholders. Turning to the details of our third quarter results, starting with the consolidated results and then a review of our performance by segment. Consolidated sales in the third quarter were $3.7 billion, representing a 12.4% or $412 million increase compared to the prior year. This was driven by sales growth across all segments. Our record third quarter adjusted operating profit was $310 million with an adjusted operating profit margin of 8.3%. This was 8.5% higher than the adjusted operating profit of $286 million with a margin of 8.6% in the third quarter of 2024. Third quarter 2025 adjusted net income from continuing operations was also a record at $230 million and compared to $203 million in the third quarter of 2024. Adjusted EPS was $0.58 per share representing a 9.4% increase from $0.53 per share in the third quarter of 2024. Now on to our third quarter segment results. Our Packaged Meats segment delivered third quarter adjusted operating profit of $226 million, which was the second highest third quarter profit on record and a healthy adjusted operating profit margin of 10.8%. These strong results in the face of persistent higher raw material costs and a challenging consumer spending environment demonstrates the success of our Packaged Meats segment strategy. Third quarter packaged meat sales were up $2.1 billion, increased by 9.1% compared to the third quarter of 2024. This was driven by a 9.2% increase in the average selling price with flat sales volumes. Industry-wide, volume growth has been challenged due to inflation and consumers' tight budgets. As Shane mentioned, we were able to maintain volume by delivering innovation, value and convenience. The higher average selling price was driven primarily by higher market prices across the pork value chain with key raw materials such as bellies up 40%, trim up 35% to 68% and ham up 14% year-over-year in the quarter. Next, in Fresh Pork, for the third quarter of 2025, we delivered adjusted operating profit of $10 million and an adjusted operating profit margin of 0.5%. While this was down from the third quarter of 2024, it is an impressive achievement given the compression in the industry market spread year-over-year at roughly a $40 million unfavorable impact on profitability during the third quarter of 2025. By delivering outstanding execution on all controllable aspects of our business, our Fresh Pork segment results only declined by $18 million or less than half the market impact. Profitability was strengthened by sales and volume growth in the U.S. retail channel with profit enhanced by value-added case-ready items. We also grew volume and profitability in our pet food and pharmaceutical channels, executing well on our next best sales strategy. In addition, we continue to deliver operating efficiencies and cost savings, which helped mitigate the impact of the compressed market spread on segment profitability. Fresh Pork segment sales of $2.2 billion increased 12% year-over-year, primarily driven by a 12% increase in average selling price and flat volume. Turning now to Hog Production. We're pleased to report adjusted operating profit of $89 million for the third quarter of 2025 versus a profit of $40 million in the third quarter of 2024. The substantial increase was driven by improved commodity markets as well as actions we've taken to optimize our operations. Third quarter 2025 Hog Production segment sales of $813 million increased by 10.1% year-over-year. This was despite a 25% or approximately 850,000 head reduction in the number of hogs produced as part of our planned rationalization strategy. The third quarter sales increase was primarily due to increased external grain and feed sales of $120 million, largely due to sales to our new joint venture partners while our average market hog sales price was up 8% year-over-year, inclusive of the effects of hedging. Adjusted operating profit for our other segment, which includes our Mexico and Bioscience operations of $10 million in the third quarter was down $10 million compared to the third quarter of last year, primarily due to lower bioscience sales volumes. Our corporate expenses came in at $4 million below the prior year, reflecting our disciplined cost management strategies. In summary, we are pleased to deliver record third quarter operating profit and net income despite challenging market headwinds due to solid, consistent execution across all of our operations. Next, let's review our strong balance sheet and financial position. At the end of the third quarter, our net debt to adjusted EBITDA ratio was 0.8x, well below our policy of less than 2x. Our liquidity at the end of the quarter was $3.1 billion, including $773 million in cash and cash equivalents. This is well above our policy threshold of $1 billion of liquidity. Capital expenditures for the first 9 months were $246 million compared to $268 million for the first 9 months of 2024. We now expect to spend between $350 million to $400 million in capital expenditures this year, primarily due to the timing of projects moving into 2026. Approximately 50% of our planned capital investments this year are to fund projects that will drive both top and bottom line growth. This consists primarily of various plant automation and improvement projects as we continue to lower our manufacturing cost structure and better utilize labor. Reinforcing our commitment to return value to shareholders, we expect to pay $1 per share in annual dividend this year subject to the board's discretion. To date, we have paid dividends of $0.75 per share. Now on to our outlook for fiscal 2025. Today, we again raised our outlook for adjusted operating profit, this time by $25 million at the midpoint, given strong year-to-date performance as well as our forward outlook. This brings the total increase to $75 million since the original guidance we provided in March. While we continue to navigate higher raw materials and a dynamic consumer spending environment, we still expect to continue to increase total company profitability by executing our core strategies that Shane reviewed. First, we continue to anticipate total company sales to increase in the low to mid-single-digit percent range compared to fiscal 2024. Please note for comparability purposes, our sales outlook excludes the impact of Hog Production segment sales to the newly formed joint venture partners. Outlook for segment adjusted operating profit is as follows: For our Packaged Meat segment, we anticipate adjusted operating profit in the range of $1.06 billion to $1.11 billion. Our revised outlook reflects the impact of persistent higher raw material costs and a cautious consumer spending environment, including the potential impact of delayed SNAP benefits. For Fresh Pork, we now anticipate adjusted operating profit of between $150 million to $200 million. Our revised outlook primarily reflects the impact of the tighter market spread that we expect to see throughout the end of the year. For Hog Production, we've raised our anticipated adjusted operating profit range to $125 million to $150 million. Our revised outlook reflects the improved market conditions and better operational performance. As a result, we now anticipate total company adjusted operating profit in the range of $1.225 billion to $1.325 billion, which is a midpoint increase of $25 million from our guidance last quarter and $75 million from our original guidance. This primarily reflects the consistent execution by our flagship Packaged Meat segment combined with the benefits of our vertical integration. In summary, we're executing our strategy and delivering record results in a challenging market environment. We've raised our consolidated fiscal year 2025 adjusted operating profit outlook based on the stability of our $1 billion-plus Packaged Meat segment, combined with our ability to capture the outperformance of our Hog Production segment through our vertically integrated model. Our strategies are working, and we're well positioned to continue to grow profitability over the long term. Now I'll ask the operator to open up the call for Q&A. Operator? Operator: [Operator Instructions] The first question comes from Leah Jordan with Goldman Sachs. Leah Jordan: I just wanted to ask about packaged meats. I saw that volumes were flat in the quarter. You talked about a cautious consumer, you're even kind of considering some SNAP funding changes here. So as you look to the fourth quarter and maybe an early look into next year, how are you thinking about the balance of volume and price as top line drivers there? And I may have missed it, but I recall last quarter, you were talking about 1% volume growth in this segment for the full year. I mean, any change to that look as you think about elasticity in the current environment? Shane Smith: Thank you, Leah. Steve, do you want to take that question? Steven France: Sure. Thank you. So first, I'll start out on the retail side of the business. So I would say that despite a soft retail environment, we are gaining ground. So if you take a look at Q3, so retail sales were up 6%, and our dollar share and unit share were both up 0.1%, while the industry is flat on dollars and down 0.8% on units. So the big thing is we continue to execute our strategy to grow our value-added items and really focus on higher-margin units versus commodity bulk items, which really continues to drive our industry-leading profitability. So when you think about it, we're winning not only on our bottom line performance, but we're also seeing strong category performance. So a good example would be, in Q3, our ham units were up 11% versus last year, while the industry was down 1.7%. And then if you dig deeper into that ham category, Smithfield Anytime Favorites the quarter ham was up 3.8%, while the category was down 5.9%. And then as Shane touched on when he went through his opening comments, dry sausage really continues to deliver some excellent results with units up nearly 13% versus last year, while the industry units were down almost 2%. And of course, Prime Fresh continues to be an outstanding item for us and very positive results, not only for Q3 but also as we go through the year. Leah Jordan: Okay. That's very helpful. And then just sticking with packaged meats, just a little bit more on profitability, just given the continued input cost pressure there. And just how are you thinking about the ability to keep -- putting price through? And then as you kind of look into '26, how do you be thinking about the long-term margin recovery there in the time line there? Shane Smith: Yes. Thanks for the question. So first, I would say that I feel very good about where our packaged meats business stands today when you think about the sales increase that we were able to deliver in Q3, and also the strong profit margin coming in at 10.8%. So when you compare that to last year, obviously, yes, it's down slightly. And from a dollar standpoint, is down about $13 million. But I think the key point to take into account is that our overall costs were up about 12%. And just the raw material side that was over $200 million increase in Q3 this year versus last year. So I think that really shows the ability that we have to take pricing with our customers and also manage and mitigate some of those higher raw material costs with a lot of the different activities that chain had kind of walked through, whether it's from a manufacturing footprint standpoint and really lowering our cost, supply chain, SG&As and other areas. So when you take into account all those different initiatives, it's really helped us offset some pretty significant inflation, including about 20% increase in the raw materials that I mentioned. Operator: The next question comes from Heather Jones with Heather Jones Research. Heather Jones: I wanted to talk about your -- ask about your comment regarding another 30% decline in the final target for number of hogs. And I'm asking because the packaged meats environment is getting increasingly competitive, new capacity coming on, I think it's next year in sausage and bacon. So just was wondering how you're thinking about that ultimately and how you think about Smithfield's vertical integration as a competitive advantage vis-a-vis the rest of the space? Shane Smith: Yes, Heather, when you think about our production, if you go back to where we were back in 2019, we were raising about 17.6 million hogs. We began a process of lowering that down to about $10 million. So about 30% vertically integrated that you referred to. Today, as we look at 2025, we expect to be at about $11.5 million. And that will be, again, 40%. I think it's important to recognize where we've taken those hogs out. And so what we've done is removed our highest-cost farms. And so those are farms that are maybe they're geographically displaced, meaning there's an incredibly high cost in transportation, whether that means taken feed through the farms or grain through the feed mills, or moving those hogs to the processing plant. So even in this environment of increased profitability in Hog Production, those particular farms that we've rationalized on a per head basis would have been, in some cases, negative even in this environment. So we still -- it's still the right strategy to continue to reduce. Now as we go from $11.5 million to $10 million over the medium term, I would say, the process there is still to make sure we have an adequate number of hogs coming into the plants. So we'll do that in a number of areas or a number of ways, like we've seen in the East Coast for the last 2 years. We've reduced our exposure in the East Coast by converting contract growers into independent hog producers. And so overall, the goal of that reduction is to remove the commodity side volatility in Hog Production. So I still think 30% is the right number. I think we're on that path still, and we've seen that in the reductions to date. And I don't think it will have a negative impact on our hog availability going into the Fresh Pork business and ultimately feeding to the last part of your question, into the packaged meat side of our business. So we're really comfortable still looking at that 30% number from an overall vertically integrated model and the profitability with inside that model. So we're comfortable still continuing towards that 30%. Heather Jones: And the follow-up, just wondering, I mean, clearly, this year, input costs have been affected by widespread disease. But as we're thinking about over the next few years and more of the industry becomes forward integrated into packaged meats and all, are you all expecting more volatility on that belly side? And is there anything you can do to mitigate that, just less of those become available to trade on the open market? Shane Smith: Yes. Well, when you look at -- what we see, again, from the supply side, hog producers have been under pressure for a number of years now. And returning to profitability this year and seeing profitability when you look at the futures market out into 2026, though we don't hear of a lot of expansion that's taken place in hog production, at least not on a material level. You can look at what the USDA is calling for 2026, and they're calling pork to be up to about 28 million pounds. And so about a 3% increase. But then you look at the hogs and pigs report, and it's implying there's actually a decrease. And so we're aware of or conscious of what the industry is saying, but we're also paying a lot of attention internally to what we're actually seeing. 2025 -- early in 2025, there was a lot of disease, particularly out in the Midwest part of the industry. And we're paying attention to those external reports now to see what the disease outlook is as we go into these colder months where disease spread tends to be a little more prevalent. But I don't see a lot of expansion taking place on Fresh Pork side. Donovan, you want to talk to anything on the Fresh Pork side? Donovan Owens: Well, I guess, in terms of the availability piece, I think she's mentioning, we still believe we're going to see a robust product markets well into 2026. So I don't think we're going to -- we're not expecting expansion or the lack of disease in order to mitigate some of the markets we have. I mean we're very poised to see elevated pork markets, especially when you look at how the protein sector is sitting right now would be being so high. So we do believe our product categories are sitting priced reasonably. And when you compare against competitive proteins, then I think that's going to continue. And again, I know the question was really specifically around bellies and bacon. But we do think that we've had -- we've seen some recent pressure on the belly market, but still relatively high compared to historical market trends on bellies. And I think that we're going to see that relatively higher belly market continue well into 2026. Operator: The next question comes from Peter Galbo with Bank of America. Peter Galbo: Maybe to stick on the topic of cost inflation. I guess, Shane, like one of the surprises was how high some of the cut markets remained over the course of the summer between bellies and trim. But now even since the end of the quarter, those have come in quite a bit. So I just want to get maybe an understanding from you whether that's just normal seasonality in terms of what you've seen even since the start of the quarter? Or has there been any sort of demand destruction that's caused some of the hog markets to kind of roll a bit more? Additional color there would be helpful. Shane Smith: No, I don't think we're seeing demand disruption, Peter. I think this is normal seasonality that we're beginning to go through. As Donovan said a while ago, the belly market is still elevated compared to historical terms, where we're sitting at in the fourth quarter. So I don't think we're seeing any level of demand destruction across the industry. Again, we don't see and hear a lot of expansion talk, at least not at a material level across the industry. And so when we look at that going into 2026, especially with beef markets still at elevated levels. I think pork is set up to continue to perform well in comparison to the other proteins. And again, Donovan, Steve, I don't know if there's anything you would add there, but I really don't see any type of demand destruction taking place. Donovan Owens: Yes. From -- again, I'll just piggyback again on what we just talked about. We're in an elevated market. Hence, the -- much of the conversation about the compressed industry spread that is what's leading to that, but in relationship to some near-term relief, you're going to get the normal seasonality, which we see. We see in the markets back off as we head into Thanksgiving, but quite honestly, I don't think we're going to see a huge plunge in these markets. Demand is still very, very good for pork from what we see on our end. And we're going to continue to see that fresh pork demand surge as we get beyond the holiday season of Thanksgiving and we certainly see pretty good demand for the first quarter of 2026. So from the demand side, I think it's going to temper really any weakness because we just don't have enough supply right now in the market to come in and really, really hurt the overall structure of where we see pork prices. So I think pork is in a good situation as we head into 2026. Steven France: And I'll add -- I'll add to that real quick because we're having a lot of conversations on the belly side. But specifically on bacon when you think about Packaged Meats, so we're actually pleased with the overall performance that we've seen in Q3 for Packaged Meats. And despite the high belly market that we had to deal with, we've actually been very intentional on discipline in how we manage our pricing and promotions, and that's really to protect the category profitability during these inflated markets. And not only inflated, but also sustained throughout the quarter. So even if we have to give up a little bit of volume, but for the most part, across the board, our volumes flat, but it's really about managing those higher markets and making sure that we're working specifically with our customers, either on the retail side or food service side to make sure we're getting the appropriate promotions in place, but not just giving the pricing away or the product away because of high raw material markets and then trying to drop our pricing due to increased promotions or peak promotions. Peter Galbo: Great. And Shane, I actually wanted to get your perspective on beef as well. You mentioned it a little bit. I know it can be upwards of like 20% of your buy for packaged meats. Obviously, we've had some commentary out of the administration, both kind of informally and formally through USDA. But just -- how do you kind of see the beef trim markets shaping up over the next call it, 12 months? Do you feel like there's potential for some relief there? It can be, again, a decent chunk of your raw material buy and it's been a pressure point? So would love your perspective on that going forward. Shane Smith: Yes. Everything we see, Peter, is still reporting pointing to a recovery in beef being out in '27, later parts of '27. And I know there's been a lot of discussion recently in the last few days about Argentina and what can come in from there. If you look at what Argentina produces or what they're looking to go to, it could equate to about maybe 175 million, 176 million pounds. But to put that in context, the U.S. as an industry produces 25.5 billion pounds a year. So even if all of that export from Argentina was to come to the U.S., it represents about 1% of U.S. production. And about 85% of that is lean trim. Again when we think about the positioning where forecast from a value perspective as it relates to beef. I think we're really well positioned as a protein because, again, me personally, I don't see a material recovery in beef, again for another probably 18 months or so. Operator: The next question comes from Ben Theurer with Barclays. Benjamin Theurer: Shane, Mark, thanks for opening space for some questions here. Most of it has been asked, but just wanted to follow up a little bit within Packaged Meats across the portfolio, your brand versus private label. Obviously, a very successful give or take 9% increase here on pricing with essentially no impact on volume. So can you help us understand a little bit about the pricing initiatives and the mix effect maybe in between the different segments and the strategy you've been following? And how should we think about this price level as we move into the fourth quarter and maybe into the first quarter of next year? Is that something you think you could stick on? Or is there a component of it that might come back if the commodity markets were to come down? That would be my first question. Shane Smith: Yes, Ben, thanks for the question. And Steve, do you want to take that? Steven France: Sure. So I guess I'd start off by saying that when you think about the pricing and the elevated markets that we've been dealing with, one of the big things we have to our benefit is we've really reduced the volatility in our business through our formula pricing on our private label business. And then on top of that, we have our well-known brands, whether it's a national brand or regional brand along with strong consumer loyalty, really enables us to maintain those margins and pass along higher raw material costs. But at the same time, as Shane had walked through, we've been relentless on our operational efficiencies and lowering our costs. So all those things combined help us mitigate some of those higher raw material costs. And then how are we managing that? So when you think about some of the promotions that we run and not only what we're seeing, but also what we see our competitors do is that we are actually being very selective with our promotions. So we're focusing on quality over quantity. And we've really seen others in the industry do some pretty sporadic heavy discounting that might drive some short-term volume spikes. But the reality is it has limited impact in overall share growth or long-term consumer loyalty. So instead, we're focused on leaning into promotions that are more effective at driving volume and also keeping our brands top of mind. So the reality is our end game is to not trade dollars at the shelf with our competitors, but for us to build our brands actively with our retail categories, retailers categories. So really, our end goal is we want to make sure that we attract new consumers to a category. We also want to increase consumption. And at the end of the day, we want to reengage consumers that may have walked away from some of these categories. So I think when you combine all those things, that's how we're addressing the market and also dealing with some of these higher raw material costs. Benjamin Theurer: Okay. Got it. And then just for clarification, you've lowered the CapEx guidance for the year. So maybe a little bit of clarity here and like what is delaying that? Is that a delay? Or is that just a review? How should we think about the lower CapEx versus the prior guidance? Mark Hall: Yes, Ben, it's Mark. Really, it's largely just due to the timing of some projects that are shifting into early 2026, whether it's availability of the plant for downtime purposes, et cetera. We're going to continue to be prudent stewards of cash and make sure that the return justifies the investment, but we still have plenty of opportunities to grow the business and improve our cost structure through capital investment. So it's just -- it's really more timing than anything. Operator: The next question comes from Megan Clapp with Morgan Stanley. Megan Christine Alexander: Just a couple of follow-ups from me as well. First, on the Packaged Meats profit outlook, I was wondering if we could just go back to Leah's question, if you could just unpack the change and the deceleration kind of in the year-over-year profit decline that's implied in the fourth quarter for Packaged Meats? And is there any way to just contextualize to what extent does that just reflect maybe pricing lagging the raw material costs because they stayed higher for a bit longer? And how should we think about that correcting as pricing catches up in the first half of next year, if that's the case? Shane Smith: Steve, you want to go first? Steven France: Yes, I'd say it's really two things that I kind of touched on. So one is our ability to take pricing with the markets. And obviously, with the private label business that we have, it represents about 40% of our -- just our retail mix. So we have that flexibility to take that pricing as the market moves now. As far as timing, a lot of that depends on the categories. So there's a difference within categories as far as when that time will take into -- go into -- really go into effect. And then on the branded side, so we have that flexibility, same on the retail side and also the food service side to take pricing when it makes sense, depending on where that market is and also from a competitive standpoint. But the reality is, as far as what our outlook is for the rest of the year, it's really taking the best view that we have of our business today, but also where we believe the market is going to end up. So -- and that's really why we're providing that range. But when you think about the focus areas that we have, between our national and regional brands and the ability to be very disciplined about our pricing and also promotional strategy, but it's that mix optimization that you continue to hear us about or hear us talk about is really focused on growing our unit volume on high-profit items, innovation and then the operational efficiency. So when you take all those into account, those help drive that guidance that we provided for Q4. Megan Christine Alexander: Okay. That's helpful. And that's a good segue to my follow-up, which is just -- Shane, and you talked a lot about all the momentum you're seeing in the strategies and Packaged Meats, the mix improvements, efficiencies and innovation. Maybe if we just could take a step back. Can you give us a sense of what inning you think you're in on these strategies, particularly around the mix optimization and the efficiency side of things, just provided a lot of ballast in the margins this year? I'm just trying to think about how that trends through next year and beyond? Shane Smith: Yes, Megan, I don't know exactly how to call what inning we're in, last night's ballgame went 18 innings. So I don't know exactly what innings we would be in. But what I will tell you is like mix, you talked about mix. Is that something that's going to be an ongoing evolution. And so for example, if you think about our holiday ham components, we know just as an industry, we're going to lose 5% to 6% of that volume per year. Our goal at Smithfield is to replace that volume with more smaller packaging, everyday use type items. And so that will -- every year as we lose that holiday ham volume, we'll be transitioning that as well. In dry sausage, another category that Steve talked about, where we've seen just great growth. We invested in plant in Nashville a couple of years ago that's really given us a lot of capacity that now we're growing into and pushing into. So it's really going to be a never-ending look at our mix, where we should be, flavor profile. We've talked a lot over the course of the year about reaching younger consumers, and I think we're doing a great job with that through flavors, which again, continues to change that mix into the overall more profitable mix portfolio. But stepping even just outside of Packaged Meats and looking at the company in total, I think what you're seeing is the benefit of our unique supply chain runs our vertically integrated model. And so now that we've really streamlined the Hog Production operations. What we're seeing on the bottom line. Q3 was a record quarter for us. And what's interesting inside of that, if you look at the individual segments, it's not a record quarter for any one of our segments. But the collective company is making record profits. And so you're seeing where we see profit migration. So this -- we see hogs putting pressure on the spread, which is causing higher meat cost in our Packaged Meats business. But overall, a higher level of profitability. And so when I think about the momentum of the company, that's where I think about it, is across that vertically integrated model and making sure the bottom line is continuing to grow, that is continuing to generate consistent earnings and cash flow across the company. Operator: We have time for one more question. Our last question comes from Max Gumport with BNP Paribas. Max Andrew Gumport: You mentioned throughout the call the cautious consumer spending environment that you're seeing now. I was hoping you could expand on what you're seeing and how that's informing your outlook for the next several months? Shane Smith: Yes, Steve, you want to talk to the consumer environment? Steven France: Sure. So it's a good question. We actually spend obviously a tremendous amount of time really understanding what's happening to the consumer. So I would say from a -- from a settlement standpoint, it certainly remains cautious, and we really continue to observe value-seeking behavior. So this trend is really consistent across the industry. So higher income consumers are really demonstrating more resilience in maintaining spending levels. While we continue to see lower income households across age groups really becoming more selective than what they're spending. So I would say the bottom line is consumers are definitely feeling challenged, and they're adjusting their shopping habits by making more shopping trips with fewer items, opting for larger pack sizes, stretching meals and cooking at home more often, all those things are to really reduce their overall cost. Now despite these trends, we feel that we're in a great position because our protein really remains a clear priority for the consumer to provide their families, and pork products, whether it's fresh pork, with Donovan's team or Packaged Meats, the items are really doing well due to its affordability, also its versatility across both retail and food service. So really, when you think about it, our expensive brands that we continue to talk about and the portfolio that we have is really playing into the current state of the consumer because we have the ability to really capture that consumer across that pricing spectrum in a lot of different categories. And you've heard me mention several times that we've got strong brands that fit those needs for that consumer and it really puts us in a good spot. And then when you take into account private label as well, it really provides us the opportunity that as the consumer moves up and down that value spectrum. There's a good chance we can capture that consumer with a Smithfield made product, whether it's branded or private label. Max Andrew Gumport: Great. And then just related to that, you had mentioned in the prepared remarks that your outlook for 4Q, it embeds an impact from delayed SNAP payments. I was hoping you could quantify what that impact is that's embedded in your outlook for 4Q and then provide a bit of color for how you got to that quantified impact? Shane Smith: Yes. So I would say for SNAP, so we're definitely paying close attention to what's happening with SNAP right now. So obviously, there's a lot of uncertainty around the federal funding and the potential for benefit disruptions happening in November. Now with categories that we sell, so this is for the total industry, about 7.5% of dollars are really tied to SNAP usage. So while any reduction will be a major issue for those consumers who rely on that, the overall impact to our business would be relatively minor. At the end of the day, families still need to buy protein to feed their households. And we don't expect a dramatic shift really in demand for the products that we sell. Now that said, I'd say we're certainly concerned about the broader impact to the American consumer. And we're working closely with our retail partners to make sure we're promoting items that really deliver on strong value and affordability based on the current situation with SNAP. And we do believe that our diversified portfolio that I just talked about really gives us a significant competitive advantage, and we're better positioned than others due to our pricing strategy to deliver really quality products across that pricing spectrum that we continue to reference. And of course, that would also include our ability to produce private label products. So we're taking that into account. Obviously, it's a very fluid situation and continues to change, but we did take some of that into account into the guidance that Mark was referencing. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to President and CEO, Shane Smith, for closing remarks. Shane Smith: I'd like to thank everyone who joined the call today. We are pleased with our record third quarter results. I think the solid execution by our teams demonstrated this year underscores how well we're positioned to deliver growth and increase value for our shareholders over the long term. So thank you all for joining. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the 3Q 2025 Arch Capital Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed with the -- by the company with the SEC from time to time, including our annual report on Form 10-K for the 2024 fiscal year. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The reconciliation to GAAP for non-GAAP financial measures can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC website at www.sec.gov. And now, I would like to introduce your host for today's conference, Mr. Nicolas Papadopoulo; and Mr. Francois Morin. Sirs, you may begin. Nicolas Alain Papadopoulo: Good morning. And welcome to Arch's Third Quarter Earnings Call. We delivered record results in the quarter with over $1 billion of after-tax operating income and over $1.3 billion of net income both up 37% year-over-year. After-tax operating earnings per share of $2.77, another record represented an 18.5% annualized operating return on average common equity. These results reinforce the strength of our diversified platform, which enables our underwriter to pursue opportunities and deploy capital across the enterprise. Meaningful contribution from all three segments combined with solid investment returns, pushed year-to-date book value per share growth to 17.3%. Our quarterly consolidated combined ratio of 79.8% reflect excellent underwriting and low cat activity in the quarter. Big picture, our 9 months combined ratio of 83.6%, which include the impact of California wildfires and severe convective storms highlights the strong underwriting performance across our businesses. Now some comments about market conditions. As you have heard on other calls, competition is generally increasing. As cycle managers who lean into the strikes of our brand, including underwriting discipline and using risk-based pricing tools to generate profitable business. We deployed capital into businesses we believe will generate superior risk-adjusted returns. However, given relatively weaker market pricing and an attractive entry point for our stock, we repurchased $732 million of shares in the quarter. Critically, our strong balance sheet and strong capital-generating capabilities permits us to both invest in our business and return capital to investors. Our objective is clear throughout the cycle to maximize return for our shareholders over the long term. Importantly, I want to emphasize that we are actively looking to deploy as much capital as possible towards attractive underwriting opportunities. Our playbook remains consistent, allocate capital to attractive opportunities that meet our risk-adjusted target returns, pursue profitable growth while prioritizing renewals that meet our return thresholds and take full advantage of our operating flexibility across insurance, reinsurance and mortgage. Over time, this playbook has been key in enabling us to deliver consistently strong returns without regard to market cycles. I will now provide some color from our reporting segment, starting with our Property and Casualty Insurance Group. Underwriting income for the quarter was $129 million, up 8% year-over-year or nearly $2 billion of net premium written. Our combined ratio was 93.4%, with a current accident year ex cat combined ratio of 91.3%, reflecting the strong underlying margins of our insurance portfolio. The distinguishing strengths of our insurance segment is its breadth across specialty lines, areas where our team applied deep knowledge and experience to drive better risk selection. Successfully navigating a transitioning market demands that our underwriter employ the capabilities and experience they have developed to leverage our differentiated offerings and market leadership position as we look to drive profitable returns. When compared to the third quarter last year, we grew net written premium in North America other liability occurrence by 17%, supported by growth in middle market and double-digit rate increase in E&S casualty. Net written premium in our North America property and short-tail book increased 15%. Growth in middle market and middle property more than offset declines in excess and surplus property. International premium volume was essentially flat. The strategic element of our insurance growth is our middle market business in North America, which was significantly enhanced through the MidCorp and Entertainment acquisition last year. As discussed previously, the acquired business provides a significant platform from which we intend to build further scale in the middle market sectors. Importantly, it is already driving growth and yielding tangible returns. At the outset, we set three integration priorities for the acquired business: roll over the portfolio, remediate less attractive areas and separate from legacy systems. We have completed the portfolio rollover, remediation and separation are on target. Even though there is still work to do, we remain excited about this opportunity, which has been well received by our distribution partners. Next to reinsurance, which delivered another strong quarter with a record of $482 million of underwriting income, a 76.1% combined ratio was a significant improvement over last year's cat heavy third quarter and illustrates our ability to generate attractive underwriting returns. Net premium written were $1.7 billion, down roughly 11% year-over-year, reflecting current pricing conditions in short-tail and property cat lines and increased retention by cedents. The diversity of our reinsurance platform means we aren't overly concentrated in any one line. For example, property cat, which has been a hot topic of recent industry conferences, represent only 14% of reinsurance total net premium written for the trailing 12 months ended September 30. Our diversified reinsurance platform, supported by strong partnership with our broker and ceding company across multiple lines and geographies, further enhances our ability to navigate a competitive environment. We continue to like our prospects in most lines of business and with improving conditions in casualty lines, our agility and ability to create opportunities is an advantage for us in this market. Moving to mortgage, which continues to operate exceptionally well, generating $260 million of underwriting income for the quarter. The segment remains on pace to deliver approximately $1 billion of underwriting income for the year and is a steady diversifying contributor to Arch's earnings. While mortgage originations remain modest due to affordability challenge, our high-quality in-force portfolio continued to outperform expectations. We are well positioned to support first-time homebuyers when the U.S. housing market eventually expands. The broader mortgage insurance market remains healthy with disciplined underwriting and stable pricing. Now turning to investments, where strong earnings and cash flow grew investable assets to $46.7 billion this quarter with net investment income of $408 million, a quarterly record for Arch. We continue to position the portfolio to remain conservative in the current environment with an eye towards generating reliable and sustainable earnings and cash flows for the group. To conclude my opening remarks, I want to emphasize that we manage Arch with a long-term lens. That was true in the past, it is true today, and it will be true tomorrow. Market cycles span years, not quarters. And in a transitioning environment, our focus remains on producing superior returns and profitable growth. Our ability to remain successful is rooted in our differentiated customer experience, superior risk-based pricing and the creativity of our underwriting teams, which are empowered and incentivized to generate profitable business aligned with shareholder value. Today, we are well positioned to outperform in an increasingly competitive market. Our strong capital position gives us the flexibility to invest in the most attractive risk-adjusted opportunities, whether in the business or by returning capital to shareholders. This transitioning market is a moment to lean into our strengths with confidence and clarity. I'll now turn the call over to Francois before returning to answer your questions. François Morin: Thank you, Nicolas, and good morning to all. Last night, we reported our third quarter results with after-tax operating income of $2.77 per share and an annualized net income return on average common equity of 23.8%. Book value per share grew by 5.3% in the quarter. Similar to last quarter, our three business segments delivered excellent underlying results with an overall ex-cat accident year combined ratio of 80.5%, down 40 basis points from last quarter. Our underwriting income included $103 million of favorable prior year development on a pre-tax basis in the third quarter or 2.4 points on the overall combined ratio. We recognized favorable development across all three of our segments and in many of our lines of business. The most significant improvements were once again seen in our short-tail lines in our P&C segments and in mortgage due to strong cure activity. Current year catastrophe losses were low at $72 million, net of reinsurance and reinstatement premiums in what is typically our most active quarter for catastrophes. The Insurance segment's net premiums written grew by 7.3% compared to the same quarter 1 year ago, mostly due to the contribution of the MidCorp and Entertainment unit for a full 3 months this quarter compared to only 2 months from the same quarter 1 year ago. The ex-cat accident year loss ratio improved by 10 basis points to 57.5% compared to the same quarter 1 year ago, and the 220 basis point increase in the acquisition expense ratio is primarily due to the benefit we observed in the third quarter of 2024 from the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP. Profit commissions paid for prior accident years also explains some of the increase from the same quarter 1 year ago by approximately 40 basis points. The reinsurance segment produced its best quarter ever in terms of pre-tax underwriting income at $482 million, a direct reflection of the strong underlying profitability of the business written over the last few quarters and the absence of significant catastrophe activity in the quarter. Overall, net written premium was down by approximately 10.7% from the same quarter 1 year ago. Of note, approximately 75% of the overall reduction is the result of two large transactions from the third quarter in 2024 in our specialty line of business that did not renew this quarter. The absence of reinstatement premiums also negatively impacted our top line this quarter. Our ex-cat accident year combined ratio remained very strong at 76.8%, reflecting the robust level of underwriting margins in our book of business. Once again, our mortgage segment delivered another very strong quarter with underwriting income of $260 million. The improvement from last quarter was primarily due to a lower level of ceded premiums as a result of the tender offers we executed in the second quarter for two Bellemeade Re securities. There was also a slight benefit due to a higher level of cancellations on CRT transactions. The delinquency rate of our USMI business increased to 2.04%, in line with our expectations due to seasonality in the business. On the investment front, we earned a combined $542 million from net investment income and income from funds accounted using the equity method or $1.44 per share pre-tax. Net investment income remains an important source of income for us. And with the help of strong positive cash flow from operations, $2.2 billion in the quarter, it should continue to grow in line with the size of our investment portfolio. The allocation of our portfolio remained neutral relative to our targeted benchmark. Income from operating affiliates was strong at $62 million due especially to a very good quarter at Somers Re. Our operating effective tax rate on a year-to-date basis stands at 14.7% and reflects the mix of income by tax jurisdiction. It is slightly below the 16% to 18% previously guided range, mostly due to a 1.7% benefit from discrete items. As of October 1, our peak zone natural cat probable maximum loss for a single event, one in 200-year of return level on a net basis remained flat at $1.9 billion and now stands at 8.4% of tangible shareholders' equity. Our PML remains well below our internal limits. On the capital management front, we repurchased $732 million of our shares in the quarter and added $250 million to this number so far in October. On a year-to-date basis, we have repurchased 15.1 million shares, representing 4% of the outstanding number of common shares at the start of the year. As Nicolas mentioned, our balance sheet is stronger than it's ever been, and it remains a significant asset for us as we focus on executing our playbook and leveraging the value of the Arch brand as we move forward in this dynamic market. With these introductory comments, we are now prepared to take your questions. Operator: [Operator Instructions] And your first question will be from Elyse Greenspan at Wells Fargo. Elyse Greenspan: My first question is just on capital. The level of buyback went up in the quarter. So, I guess my question is maybe two-pronged. Just how do we think about the level of buybacks going forward just given the strong earnings this year? And then, I know last year, you guys had gone the route of a pretty substantial special dividend. So, is this year the route more of buyback versus a special in terms of capital return? François Morin: Yes. The last one, I think it's -- for us, we think of those as two options, but most likely not going to do both at the same time. So, in this current environment where, yes, we certainly see our earnings profile being very strong, and we think there's -- as we've seen, right, limited opportunities for grow -- for us to grow aggressively in the business. So, capital return to shareholders will be -- will remain a focus. And given the stock price, I think share buybacks will be our preferred method going forward. At least for the short term, we'll see how things play out moving forward, but that's obviously something we talk with our Board on a regular basis. So, I'd say that's kind of where we're at. And again, balance sheet remains very strong. So, is there room for us to do more buybacks as we move forward? And I think the answer is, is definitely yes, and something we'll keep evaluating as we move forward. Elyse Greenspan: And then, my second question is just on the insurance premium growth. So, we've annualized the mid-corp deal, but there is going to be some impact from non-renewals there. And obviously, just the overall market, which is softening in spot. So, how do we think -- as you guys think about pricing, the combination of the non-renewals on MidCorp, how do you guys see the premium growth outlook for your insurance book from here? Nicolas Alain Papadopoulo: On the insurance side, I think, we're still very much bullish about the business. I think, we like the market we trade in, and we would like to grow and we talk about profitable growth. That's what we're really focusing on. And you have to divide the market in three broad categories. First one being areas where we still see some rate increase, like casualty will be the main one and the middle market business where we think, we have the rate increase, and I think we have the propensity to grow. Then, you have the second segment, which is the one that have witnessed headwinds in the past, which is mostly professional lines, whether it's GNO or cyber. The good news there, I think the rate decrease has really moderated on the GNO, pretty flat. And on cyber, there are signs that they are moderating. So, that should be less of a headwind going forward. And third, it's really the property, whether it's the large account property and the E&S property. The good news for us is that, we don't write much of the shared and layer property business. And we have a relatively small footprint on the E&S side, which is really under a lot of pressure today. So, I think overall, if I look at the outlook for us and our positioning in the London market as well, if I look at the outlook, I would expect us to have the ability of the insurance to grow better than the market we play into. Elyse Greenspan: That's helpful. And then just one last one. There's a hurricane out there right now with the potential to impact the Caribbean. I don't think there is a lot of insurance or even reinsurance exposure there. But do you guys just have high level -- some high-level thoughts there just on potential exposure? Nicolas Alain Papadopoulo: I think, it's just too early to tell. I think for sure, it will be -- it's going to be a, it looks like a big event potentially for Jamaica. And we're -- it's big enough to have repercussion, that goes effect the Caribbean overall, too early to tell. François Morin: Just quickly, I mean, obviously, depending where it hits like some of the resorts might be the insured values that might be more that we might participate on, just not knowing at this point where, again, where things may land, but I think that's -- in terms of where the exposures are and what could be impacted, that would be the focus area, I would say. Operator: Next question will be from Andrew Kligerman at TD Cowen. Andrew Kligerman: So, maybe starting with, you just touched on growth in insurance with a lease, maybe shifting over to reinsurance. You kind of kicked off -- I remember in the first quarter, you thought that -- I think you did adjusted net written premium growth of 6% or 7%. You kind of repeated that in reinsurance in the second quarter. And then in this quarter, you talked about the two deals and the reinstatement premium is kind of creating a bit of noise. So Part A of it is, what would the normalized growth have been in the absence of those items? And the Part B is, how are you thinking about growth going forward in that segment? François Morin: Well, I'll take the first part, and then maybe Nicolas can share in the second. I mean, the normalized growth absent all of these kind of one-offs or again, and they happen, right? We talked about it in the past, it's reinsurance can be lumpy. There's deals that happen, they don't happen. The timing of it is not always predictable. But yes, the fact that with a little bit of the headwinds that we're seeing, again, coming from a very high bar on the property, property cat 7/1 renewals, I'd say our growth in the quarter might have been around, like, call it, a decrease of 3% to 4% not the 10% that we -- that is -- was reported in the quarter. Nicolas Alain Papadopoulo: Yes. Thank you, Francois. And on the outlook for growth on the reinsurance side. So, I think, think of reinsurance, it's pretty much the same outlook as insurance. I think, you have rate pressure on the short-tail lines, but I think you're seeing a rate increase in this location on the casualty lines that could provide opportunity. So, I think, I would say a similar picture, but for, I think, a big headwind is like a lot of ceding company like the business like we do. We like the insurance business. So, after a few years, there's less fear in the marketplace. People feel better about their balance sheet. So, what we're seeing is company retaining more, which is -- creates a significant headwind for the reinsurance group. I mean by doing so, they either retain the business or move -- very often you move more to an excess of loss position that presents additional opportunities for us. And I would say that the margin on the excess of loss is usually better than the margin on the quota share. So, I think we may see a different makeup of the margin going forward. Andrew Kligerman: I see. And then, maybe shifting back to insurance. As a specialty writer and especially with pressure in E&S property these days, just more from the industry perspective, and you touched on your view of how Arch is going to do, but maybe again a little bit. But how do you see E&S premium for the industry playing out over the next few years? I mean, not only have we've seen such tremendous growth over the last few years, but is it possible that E&S premium as an industry starts to decline over the next few years? So, outlook and then just Arch in E&S over the near intermediate term as well. Nicolas Alain Papadopoulo: So, I think, the outlook of the industry, I think, is -- I think it's a tale of two stories. I think, on the casualty side, I think, because of what's happening in the market and because of the issues people are having with the prior years, and I think my view is that the trend of more of the business moving to the excess and surplus side where you have freedom of rate and forms and where you can add exclusion that take a much longer time to be able to do on the admitted side. That will continue. On the shorter line, we could see some of the shared and layer business and cat exposed business going back to the admitted market as we've done historically. So I think, it's hard to predict, but I think the fundamental shift, which is been driven by casualty that I expect to continue. Andrew Kligerman: I see. And then Arch, how do you see yourselves? Do you see gaining share on the short-tail and the casualty, respectively? Nicolas Alain Papadopoulo: I mean, the short-tail will be a challenge based on what we see in terms of the pricing. I think, we are more optimistic on the casualty side where we've been underweight in the difficult years. And I think, we're -- I think, our loss picks have been holding pretty well. So, that gives us confidence in how we price the business forward. So, I think that as rates continues to improve, I think that gives us an opportunity certainly to do more at a time maybe where our competitors are still kind of caught up into looking at the right things they did in the earlier years. Operator: Next question will be from Josh Shanker of Bank of America. Joshua Shanker: Yes. I don't want to pigeonhole you too much, but obviously, you did a lot of buybacks in 3Q. Some companies don't do buybacks in 3Q, because they're worried about the outcome of the hurricane season. But I'm trying to gauge your appetite for 4Q and maybe 1Q. When did you start buying back? And how much -- were you buying the whole quarter? Or really you were able to do $732 million within about a month ending up the quarter? François Morin: Yes. I mean it's pretty consistent throughout the quarter. I think, there was a little bit more in September and that kind of -- as I mentioned, I think we've been active in October as well. I think, again, it's -- I think, I touched on it on the last call. I think no question that some years ago, we would have said we would not buy during the hurricane season. But I think Arch is different today than it was back then. I think, Arch is much more diversified, much stronger, less exposed on a percentage of equity from a massive or a cap PML even at the 1 in 250 or below. So, for all these reasons, we felt -- we do feel and felt a lot more comfortable buying back during the wind season. And I think, as I said earlier, I think we're going to keep pursuing that opportunity as we move forward. Joshua Shanker: And you're not worried, in the past, you've said part of the reason to do a special dividend was because you just don't think you can return as much capital as you desire to through the buyback of the limitations as you look out into the end of this quarter and beyond? Do you think you can satisfy every bit of capital return you need through repurchases? François Morin: It's a daily thing. We look at daily. I certainly think we can do more capital return, where, as can we -- I mean, we don't set a target for ourselves, right? So, I think it's an ongoing process, but there's a lot of liquidity in the stock right now, and we're able to buy back stock. We think what we perceive to be a very attractive price. And we'll do as much as we can, how much we think is right, and then we'll see where we're at. Operator: Next question will be from Tracy Benguigui at Wolfe Research. Tracy Benguigui: This is a bit belated, but it's been a while since I've been on your call. Congrats on your S&P upgrade back in June. Since capital is so topical, my question is, while it's great that you have a AA- rating, it's a new category. You now have to hold AAA capital, back when you were rated A+, you only had to hold AA capital. And I realize a lot of that was just model methodology driven. But my question is, how important is it to you to stay in this new rating category when you're thinking about your ability to deploy capital? François Morin: I mean, is it critical? I mean, it's not, but it's certainly an advantage, and we've seen the benefits of that already in some places, particularly in Europe. So, no question that the new higher rating, I think, has been well received, and we're able to benefit from that. But you're right, I mean, it comes at a certain cost. I'd say, though, that the S&P capital model is only one of the things we look at. We have our own internal view of capital. We have our -- I mean, there's other rating agencies that we look at as well. So, all in, I think our capital position is -- remains very strong. It was always strong. And again, we try to optimize within all those constraints from all the rating agencies and regulators that look at us. But the AAA level of capital that you mentioned is really not something that is not really new to us, because we were, I'd say, we're already at that level. So, that's kind of -- it wasn't an additional kind of burden or initial step we had to meet. Nicolas Alain Papadopoulo: And I think, we don't only manage one point. I mean, usually, we look at AA, AAA -- and for a while, I think we were a little bit on the penalty box, because of the MI. So, I think now I think it's more. I don't think it changed completely our capital structure. And also, I think it's been helpful on the -- some of the MI, CRT and SRT where the buyer are extremely sensitive to the rating of those layers and they actually pay a differentiated price for better ratings. And as Francois said, I think in Europe, as we lean to, especially on the reinsurance side, but also on the insurance side to -- our strength is really casualty professional lines. And as we lean into those markets, I think having a AA- rating is an advantage. Tracy Benguigui: Okay. I mean, do you view it just opportunistically? Or could you see a scenario where you could reduce capital and live with the back to the A+ rating? François Morin: It's obviously something, I mean, it's a trade-off we constantly look at, right? I mean, how much capital do we need to hold on the margin to get the incremental rating. Right now, we already have the capital. We're not -- we're in a very strong capital position. But if down the road, if conditions change, the question you ask is something that we've asked ourselves many times in the past, like how much capital do we -- is it really worth it to us to hold that incremental level of capital. But right now, given our capital position, and again, given the strength of our earnings, the earnings profile that where we generate internally the capital on a regular basis, I think we're in a very, very good position. Tracy Benguigui: Okay. My next question is, you said you liked insurance and you're bullish on the business, and you mentioned casualty rate increases. Casualty can mean a lot of things. So, once I strip out some of the casualty lines like you mentioned professional lines, what is really left -- what you're left with in terms of like attractive pricing as GL, commercial auto, and excess liability, which includes auto. So, I'm wondering where you're seeing the opportunities? Is it more auto-orientated? Or if you could just let me know the different casualty lines that are attractive? Nicolas Alain Papadopoulo: So, I think the -- one of the opportunities on the E&S casualty side, which would be excess, excess liabilities. So that will include some auto, but usually, we don't focus on the auto on the E&S side. And then, we have other franchise, like sensitive business, like national accounts or constructions, which are casualty-led lines with heavy components of workers' comp, general liability and a lesser amount of auto. So, those are the places where we think we have the ability to grow. Operator: Next question will be from Ryan Tunis at Cantor. Ryan Tunis: Just wanted to go back, I thought it was an interesting comment that on the reinsurance side, you're seeing cedents proactively retain more. And I guess I'm curious, when I look at like the facultative property decline of 17% this quarter, how much of that is, I don't know, you guys proactively walking away or a decline in exposure as opposed to rate, because I was thinking it was kind of more rate driven, but that comment maybe think it might be more volume-based. Nicolas Alain Papadopoulo: No, I don't think we are cutting back. I think, at this stage, I think we -- on the other property, which, I think you should clarify other property line of business, I think the main factors there is a couple of our clients on the E&S side of the business and on the retaining more of the business at this stage. So, that's really -- we would like to do more. And also, I think -- let's not forget, the rates are also going down. So, some of our cedents are also revising some of their ceded premium to the downside. And so those are the two components. Their ability to wanting to retain more of the business and also they're reforecasting their growth downwards, which impacts our insurance volume. François Morin: Ryan, I think, just to confirm, I mean, it's no question that the rate environment is down in property. There's also a drop in exposure, but the -- just to be clear, I think, that drop in exposure is typically not our decision, right? It's the cedent decision. There are some situations where, again, they decide to keep it net or they use a different structure, but we still like the product. We still like the line. I think, most of what we do, we like a lot. And any reduction in exposure that you see that we experience is generally at this time, more because the cedents choose to do something different, not because we decide to walk away. Ryan Tunis: Got it. And then just a follow-up. You guys talking about the transitioning market. I think a lot of times, we just kind of, focus on pricing. But I'm curious if what type of lines or -- it might be in primary, because there's business going back to admitted and just some of the more bad stuff stays E&S or facultative, I guess, it could be a cedent just choosing to, I guess, just continue to seed the stuff where they feel like there's an arbitrage. But like are there pockets you point out that are kind of particularly challenging to underwrite in this type of market where you really got to kind of cross your Ts and dot your Is? Nicolas Alain Papadopoulo: I think, it's a competitive market, Ryan. So, I would say a lot of the market today, you get a lot of anti-selections. So, we develop a lot of data analytics tools to really segment our portfolios and provide underwriters some really granular information that, which price for which risk, which limit for which risk. So, I think underwriting the market, we are bullish because we have those tools. I think, if you don't have the tools, I would be a lot less bullish about our ability to write profitable business going forward. Operator: The next question will be from Mike Zaremski at BMO. Michael Zaremski: Great. Pivoting to the mortgage side of the business, I feel like when we were to quiz most people and ask them what the historical, I don't know, 5-, 6-, 7-year loss ratio was, most people wouldn't guess it was 0. And obviously, there was unique circumstances in the past 5-ish years. But just curious, and we know it's a future family business, but curious if your views on a normalized loss ratio is different than what it was in the past if we think about kind of the current cycle and the next cycle coming. François Morin: Well, not knowing what the next cycle will look like, I think we'd be speculating. I think, we have talked about a normalized loss ratio in the 20% range across the cycle. I think, we have said and we believe strongly that home prices are the key driver of what the performance will look like for the mortgage book. And so far, I mean, home prices have remained very strong. I mean, there's been -- in some pockets, there's been some home prices decline. Some home price declines in a few areas, but across the nation, across the U.S., you can see that home prices remain very strong. So that, I think, explains in large part, I'd say, the outperformance of the mortgage business relative to what we would have thought over an extended period. Does that remain the same going forward? Again, there's a lot of macro factors that will come into play on that. But as long as -- and we do have strong beliefs that based on lack of inventory and kind of there's a lack of housing in the U.S., I think, will support home prices for the foreseeable future. And on that basis, we'd like to think that the performance will remain strong. Now does it -- again, does it inch up a little bit over time? Maybe a little because it feels like it's been really, really good for a long, long time. But the time being, again, we've said it, and we still are very, very, very bullish about the mortgage business because it's been truly a terrific business for us. Nicolas Alain Papadopoulo: And the underwriting remains excellent. I think, if you look at the FICO distribution, I think they are getting better. So that will drive a better outcome. Michael Zaremski: Got it. Moving to capital management. Clearly, you signaled buybacks are high on the list. Maybe you can just give us an update. Has anything changed quarter-over-quarter on maybe inorganic opportunities? Is U.S. small commercial still something that's on the retail small commercial still high up on the wish list? François Morin: Yes. The wish list is long. I mean, we -- but by the same token, we have a lot that we are working on and can work on. Middle market is obviously a big focus for us. We've talked about other areas that we'd like to grow in. But as you know, these M&A opportunities, they don't happen that often. They take a while to materialize. And so we're not going to hold a ton of excess capital just in the -- on the potential that we might do an M&A transaction. I mean, our -- our leverage ratio is maybe the lowest it's ever been. So we've got a lot of flexibility. The balance sheet is strong. We got some excess capital. So, we've got a lot of flexibility and our ability to execute on that, I think, is really good. So, if there's other things that we can get our hands on that would make us better, we'll be happy to do that. But in the meantime, there's a lot that we already have that are -- that is -- we can generate good earnings on as well. Michael Zaremski: Got it. And maybe just sneaking one last one in since you guys provide excellent market commentary. And Nicolas, you provided a good view of kind of how to think about the E&S marketplace going forward. Do you have a view on what has also been the kind of exponential growth of the MGA marketplace and kind of how it's been impacting Arch or maybe the industry? And do you view the MGA's marketplace growth to continue to grow much faster than the rest of the market? Nicolas Alain Papadopoulo: Interesting subject. I'm personally bullish on the MGA. I think historically, strong growth in the MGA, except for a few exceptions, didn't turn out to be good. I think, the lack of incentive alignment, the delay in the information to the insurance carrier or the reinsurers, I'm not bullish on that model. So, I think, it's been the flavor of the months and the last few years. And I'm still a little bit questioning what the outcome is going to be. So, but... Operator: Next question will be from David Motemaden of Evercore ISI. David Motemaden: Just had a question. Obviously, still very good reserve releases. Just focusing in on insurance and reinsurance specifically. Could you talk about the movement between long-tail and short-tail lines between those two? Any sort of things to point out on that front? François Morin: I'd say nothing unusual, very similar to prior quarters. There is a little bit of adverse on casualty. I mean, nothing that stands out. It's a couple -- it could be one accident year within one business unit, the one line of business. So, small adverse on casualty, which I don't think is surprising, at least to us. But when we look at the overall picture around kind of where -- how the reserves are performing, our quarterly actual versus expected, which is still showing favorable, meaning lower than expected, I think, gives us a lot of comfort there. So, we're reacting to the data. And in some places, there is no question, there's trends that are showing up that we're addressing. But big picture, the short-tail stuff did extremely well as it has for quite some time, and we'll keep evaluating it every quarter. David Motemaden: Got it. And then just taking a step back, the mix shift to casualty lines in both insurance and reinsurance. At least if I look at it on an earned basis, that definitely is up a bit year-over-year hasn't really increased much, I guess, over the past few quarters. Is that having any bit of an impact at all on the underlying loss ratios in either segment? And how should we think about that going forward? Nicolas Alain Papadopoulo: So, I mean, at some point, it will, but because I think the loss peak on the casualty line is a bit higher than the loss peak on the short-tail lines. But I think the shift -- the mix hasn't really changed fundamentally at this stage, I think. So, I think down the road, I think it might. Operator: Next question will be from Rob Cox at Goldman Sachs. Robert Cox: Just curious, as you start to renew the MCE book, anything interesting you're seeing either on the delegated or the non-delegated side? And how far are we through the non-renewals on the programs book? Nicolas Alain Papadopoulo: So, I think what we've seen so far, and I think we've renewed the entire book has been transferred to Arch. I think, we -- I'm personally very pleased with the -- what we've seen so far. And I think, the stickiness of the business, the ability to provide additional lines of business to our distribution partners to be more relevant to them, the property expertise that in the admitted property business that we really didn't have that we acquired, all those assumptions that we had made at the time of the purchase turned out to be true. So, I'm actually very pleased with the strategic decision we made to go for the acquisition. On the dedicated side, the MGA, I think we knew, we didn't do the deal, because of the MGA portfolio that was coming with the acquisition. So, I think we started the remediation. And there, I think we is pretty much what we expected. So, and I think we -- it takes more time than you think, because all these MGAs have notice period. So, I think we'll see the impact really in 2026 of the non-renewal of the notice period that we signed a number of those MGAs this year. Robert Cox: Got it. And then just wanted to follow up on credit. I mean, just given the mortgage book and the investment in Coface and I think a relatively larger private credit book that you guys have. Any thoughts on the credit environment and anywhere you're leaning into or out of just given some of the noise in private credit? François Morin: Yes. I think you got to be careful, I'd say, what we're looking at. No question that certainly maybe the headlines around subprime auto loans not performing well. I think that's a totally different type of customer than what our borrowers would be on the USMI front. So, I think that -- and we're not seeing any of the same kind of results and I guess, the proof is what we reported this quarter. So, again, very specific around kind of the type of borrowers in the U.S. The trade credit world, no question that there's been a couple of insolvencies that have made the headlines that we -- Coface, we don't know, but may be exposed and that's for them to work on. But there's no question that, when these types of events happen, people will start to think a bit harder about dependencies in the credit and lines of credit they extend, et cetera. But that's not unusual. So at this point, we're very, very comfortable with the exposure we have. We understand it well. And obviously, we look and monitor all the external data and the trends that are happening. But so far, there's nothing really that stands out that we think where we have to adjust our thinking or strategy. Nicolas Alain Papadopoulo: And more specifically on Coface, I think, is a short-term credit. So, the game here of the underwriting is really as you are aware of a weaker credit is really to over time, cut your line to that particular credit name so that when the inevitable happen, your exposure is much less. So, I think they played that game really, really well. And I don't know about the latest insolvencies, but historically, they've been very good at that. Operator: Next question will be from Alex Scott at Barclays. Taylor Scott: First one I had was just circling back on Rob's question on the remediation. Could you frame for us at all like how much impact that could have on the insurance segment? Just thinking through trying to dial in premium growth estimates and knowing how much some of us missed our reinsurance growth this quarter from not knowing about the transactions. I just want to make sure I'm layering in enough for this lagged remediation impact. François Morin: Yes. So, specifically on the programs that we acquired, the premium that we've identified and has been -- will be non-renewed is roughly $200 million. And again, as Nicolas said, the notices went out and then there's a notice period and then MGA has 3 to 6 months to find another carrier and some are more -- I mean, some are more successful in getting a replacement sooner. So, some of that may actually start happening in the fourth quarter. I don't have the precise like projections of when it's going to hit the top line in each of the next few quarters. But just at least give you an idea, like, call it, $200 million part of $1.5 billion to $1.6 billion book is -- which was the overall MCE premium volume is kind of the impact that we expect to see. The flip of that, though, is that the middle market business that we really was attractive to us was really what we were trying to get has done very, very well. So, the rate environment both on casualty and property in that business has been very good. And we just came back from a couple of industry conferences where our business partners are very supportive, and they are very happy to do business with Arch. So, we like to think that some of that kind of headwind in terms of giving up or non-renewing some of those programs, we can make up some of that, at least in the middle market side. Taylor Scott: Got it. That's helpful. Second question I had is on the reinsurance business and casualty specifically. The repricing efforts, I guess, are -- a lot of it's on the quota share, the actual underlying primary taking rate. Can you characterize what you're seeing there? I mean, are the underlying primaries taking enough rate where it's in excess of loss cost and it's actually building improving margin in there? Is that why you're speaking more optimistically about it? Or is it still pretty obviously high loss cost environment. So I'm just trying to get a feel of whether that's actually improving or not. Nicolas Alain Papadopoulo: So, I think, you got it right. I think, we believe in casualty in general, we're getting more rate than the loss cost. And it's an elevated loss cost. So, I think that's what -- if you back on the reinsurance side, if you back the right specialty underwriters, people that manage their limits well, avoid some of the heavy auto or other difficult class of business, I think you would want to do more business with them. And I think over time, we expect to be able to write more of that business. Operator: Next question will be from Andrew Andersen at Jefferies. Andrew Andersen: Maybe you could just expand a bit on how you're thinking about 1/1 prop cat renewals. Do you still see returns of kind of 20% here on this line? And how are you thinking about ILS impacting kind of return levels and industry capital? Nicolas Alain Papadopoulo: Yes. On the cat side, we remain bullish. The outlook is bullish. We like the margin. And maybe a couple of data points. The market really peaked in July 2024. So, a little bit over a year ago. And I think in 2025, market -- the price went down between 5% and 10%. So, we are into our second round of rate decrease. And depending on the region, the increase that we witnessed from 2021 to 2024, some of those rate double. So, I think we are really -- we are in a good place. It depends on the region. But generally, we remain optimistic that the business is attractive. There's more demand. We had more demand last year. We expect more demand to come to the market in the U.S. on an international basis. So overall, we think despite pressure -- expected pressure on the rates, we remain -- we think the margins are still very attractive. Operator: Next question will be from Meyer Shields at KBW. Meyer Shields: I guess, in the past, you've talked about ramping up some spending associated with mid-corporate. I was hoping if you could get an update of timing and maybe amounts of increased spending? François Morin: Well, increased spending, I think, was more the focus -- no question that we got -- I don't want to call it a barebones organization, but the people that transferred back in August of 2024 was, call it, primarily underwriters and claims people, right? So, that was the bulk of the staff that transferred. And what we talked about at that time was that, yes, we would need to hire to reinforce our capabilities in terms of actuarial data analytics, and a few support functions here and there. So, that we knew would take some time. It's a competitive job market. We've been able to address some of that, too. But I think ultimately, it's still -- I want to say on the expense ratio on the OpEx side, I mean, we can run the incremental mid-core business at a more efficient or lower expense ratio than we had pre the acquisition given the synergies and kind of some of the infrastructure costs that we can spread to a bigger base. So, I think we're -- we still have a few, I'd say, openings that we're trying -- both on the underwriting side and on the kind of support functions that we're trying to fill. But we've done a lot of the work has been done in the last year. And it's shown, right? The business is doing well, and we're able to execute on the strategy and try to grow in some specific areas. So, we're -- again, a little bit of work to do, but we're in a good spot. Operator: Next question will be from Brian Meredith at UBS. Brian Meredith: Two quick ones here. Just going back to the whole MCE, MidCorp and the program business runoff, the underlying loss ratio improvement in insurance, is that a direct result of some of the actions being taken there? Is that something else? And therefore, as we start to see this runoff, should we start to see underlying loss ratios continue to improve in insurance? François Morin: It's more the latter. The impact of the non-renewals has not really come into play into our -- on an earned basis. So, the improvement, again, somewhat not huge on this quarter, but I think the -- there -- hopefully, there should be some benefit as this business runs off, and we'll see some improvement or at least some stable loss ratios. Brian Meredith: Great. And then, Francois, I wonder if you could talk a little bit about the substance base tax credits that Bermuda came out with, I think it was the end of September, what that impact could potentially be for you all? François Morin: A bit early to tell. No question, yes, the consultation paper is out. Comments have been submitted. We have had meetings with, obviously, as an insurance community with the government expressing our views. The biggest, I'd say, remaining item that we don't have clarity on is, is on the transition credits. I mean, at what pace will these kind of credits be allowed to be reflected starting in 2025. So, that is still to be determined. There's work being done on that right now. We expect to have clarity in the first, call it, first half of December, clarity/almost finality, because it has to be enacted before the end of the year for us to be able to reflect it in our financials. But to your question, Brian, I think it will be substantial, we hope. And when we have like the law, I mean, we'll be very quick to share that with you all and give you a bit more color on what that might mean for us. Operator: At this time, I'm not showing any further questions. I would like to turn the conference back over to Nicolas Papadopoulo, for closing remarks. Nicolas Alain Papadopoulo: Yes. Thank you for spending time with us this morning, and we're looking forward to talking to you next quarter. Operator: Thank you, sir. Ladies and gentlemen, again, thank you for participating in today's conference. This concludes the program. You may all disconnect your lines.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Airtel Africa Half Year Results for the year ended March 2026. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Chief Executive Officer, Sunil Taldar. Please go ahead, sir. Sunil Taldar: Thank you. Hello, everyone, and a very good evening, good morning to you all, and thank you once again for joining us today. I have with me Kamal, our CFO; and Alastair, who is Head of our Investor Relations. Let me give you some brief highlights over the last 6 months before running through our strategic and operational achievements and how this has translated into a strong set of results we have reported today. After that, I will hand over to Kamal to run through the financials. We have seen our performance over the last 6 months supported by a much more stable macroeconomic and currency backdrop. This has been a very welcome development, and I believe enables us to clearly showcase the scale of growth that is available to us across the region and the ability of our team to execute against the opportunity. Not only is it positive for us and our business, but the most stable environment is really encouraging for our customer base as well as given the significant volatility that they have faced in the last few years. While this most stable environment is supportive, it is also extremely important that we really double down on our strategic focus to ensure that we can capture the opportunity that is available to us. We have seen strong growth momentum in both our operational and financial performance, and this has left our constant currency revenue growth to 24.5% for the first half of the year with reported currency growth of almost 26% as currencies appreciated in many markets. This strong growth combined with continued cost efficiency measures have helped drive EBITDA margins to 48.5%. Importantly, we have seen another sequential increase in EBITDA margin to 49% in quarter 2, reflecting the sustained momentum we have seen across the business. Importantly, the overall performance we have reported today would not have been possible without a continued focus on CapEx investment, which is the foundation of our ability to sustain the revenue performance. The strong backdrop and strong operating performance gives us increased confidence in the outlook, and it is this that has driven our decision to increase our CapEx guidance for this year, which Kamal will talk through later in the presentation. The strong performance has driven free cash flow generation, which has further enhanced the capital structure of the group, enabling the Board to declare another 9.2% growth in the dividend. Our purpose is to transform lives across Africa by bridging the digital divide and drive financial inclusion through the continued rollout of our mobile money services. This slide serves to highlight the key components of our performance over the last year, which is facilitating our purpose across Africa. Over the year, we have seen a continued increase in smartphone penetration and an accelerating growth in our mobile money customer base to approximately $50 million. We will unpack this a little later on in the presentation, but we have been consistently expanding the ecosystem by offering more services, which have contributed to over 35% growth in TPV or transaction value to over $193 billion annualized. The constant currency revenue growth of 24.5% for the group, again, reflects that we are a business that continues to see one of the industry-leading levels of growth in the global telecom industries, and we will continue to drive growth through the consistent deployment of our strategy. The revenue growth and cost efficiency measures have contributed to a further uptick in EBITDA margins, as I mentioned earlier, and we remain optimistic on our ability to realize further efficiencies. In addition, our capital structure remains attractive, which gives us the flexibility to continue investing across our network. With lease adjusted leverage down to 0.8x and 95% of debt in local currency, we are in a strong position to accelerate network investment while also enabling shareholder returns. This slide serves as a snapshot of our financial performance over the last 6 months. Revenues of almost $3 billion for the last 6 months, growing at almost 25% is certainly a very strong performance. The EBITDA growth of almost 32% is once again a strong performance with improving margins, which has significantly contributed to the 10x increase in basic EPS. Importantly, FCF generation was very strong in this period as well. It's worth reminding you that it is not only this period's performance, which has been strong, even on a 5-year CAGR, revenue and EBITDA have increased by 20.6% and 24.8%, respectively, showing that this performance is not a one-off. It is a reflection of a sustained performance over the last 5 years. Let me now spend a few minutes explaining the significant opportunities across our markets and how our strategy will enable us to continue executing on this opportunity. Many of you will recognize this slide, which summarizes the key components of our strategy. Our business strategy is designed to ensure we continue to address the huge opportunities in our 14 markets and deliver sustainable, profitable growth that creates value for all our stakeholders. The 6 pillars of our strategy focus on our investment and the expertise of our talented people on the core business activities that will unlock the significant opportunity. It is underpinned by a continuous drive to keep optimizing cost, meeting our sustainability objectives and sustained investments in our talent. At the heart of the strategy are our customers. Our success is driven by enhancing their experience, and this is why everything is designed around the customer. Now let me briefly touch upon a few initiatives, which showcase how our strategy is being embedded across the business, and how it is driving practical benefits for our customers to increase customer loyalty and drive an improved offering. Let me address a few of them very brief. The first is the Airtel AI SPAM alert, which was really designed to protect our customers and provide a solution -- and provides a solution to tackle our customers concerned about the high level of spam messages and calls they receive. We are receiving very positive feedback from our customers as the technology really provides a differentiated customer experience and increase loyalty. Developing partnerships across our markets is key to strengthen our customer proposition and promoting digital inclusion by expanding access to reliable connectivity across our markets. We have partnered with Starlink to enhance our offerings and our network sharing agreements with Vodacom and MTN will also contribute to the accelerated rollout of services across our key markets. We're also seeing very pleasing progress as we scale HBB and enterprise with the continued growth in HBB customers and the recent launch of East Africa's largest data center. This is just a brief snapshot of key strategic initiatives across the business. Let me now briefly reflect on the opportunity and the recent performance of our business. The scale of the opportunity across Africa remains substantial despite the strong operating performance we have reported of late. From a high level, we have a population of over 660 million people. But importantly, the demographics are very attractive with the median age of under 20 years, which compares to over 42 years of age in developed markets. This shows the scale of the population that will be the customers of the future, supporting the outlook for our customer base. This, combined with relatively low levels of smartphone penetration will continue to support data customer growth but also data usage as new and existing customers increasingly use more data services often for the first time. Home broadband is an area which we are very focused on. And the chart on the bottom left reflects why we are encouraged by the potential. We have very low home broadband penetration across our markets, will inevitably increase as rollout of these services to a wider segment of the homes across the region. And then for our mobile money segment, many of you will be aware of the levels of financial inclusion across our markets. With only 35% to 40% of adults owning a bank account compared to over 90% in more developed markets, this is a key opportunity for us, and you will be able to see how we are executing against this opportunity. Before running through the individual segments, this chart aims to show that our growth of almost 25% in constant currency at the group level is not only down to one segment, instead it is broad-based growth across both businesses with the Mobile Services segment growing by over 23% and Mobile Money by 30.2%. We continue to see this as a differentiating factor for us with both business segments delivering on growth opportunities. Now let me first focus on the Mobile Services segment. We continue to see the onboarding of customers as a key priority. The focus remains on strengthening our go-to-market to ensure we remain accessible to our customers, a key strategic objective. But it is not all about our distribution. It is also maintaining network investments to ensure increased capacity and coverage and embedding digital services across our footprint to simplify the customer journey. The results speak for themselves with customer-based growth accelerating to 11% in the period and voice remains a key driver of our mobile services segment with ARPU continuing to expand as usage on the network continues to expand, translating into a 13.2% constant currency growth for voice services. As many of you are aware, data remains a substantial opportunity for us given the scale of the demand across our footprint. With population coverage of over 81% and almost 99% of our sites being 4G enabled, we continue to prioritize investment into the network to facilitate this demand, providing enhanced coverage and capacity is all fundamental to being able to provide a customer experience that will not only maintain loyalty but also attract new customers to our network. This was all supported by the initiatives we have spoken about around digital innovation and simplifying the customer journeys, driving accelerated data customer growth. We've also seen smartphone data customers continue to grow faster than the data customer growth as more customers migrate to smartphones, ultimately driving increased usage. During the period, we saw data traffic increase over 45% as usage per customer continues to rise to 8.2 GB per month. The sustained data demand story has contributed to 37% growth in data revenues and has now become the biggest component of revenue for the group, which we see as another support for our top line growth outlook. Now turning to our mobile money business. The chart on the left and the chart shared earlier confirms our views that our mobile money business operates in a vast underpenetrated markets. We operate in one of the world's largest untapped financial services market, supported by powerful demographic tailwinds, rapid urbanization, rising smartphone adoption and surging demand for digital financial inclusions and solutions. While the outlook for mobile money looks attractive, it is important to highlight our structural competitive advantage with a captive customer base with only 29% of our telecom customer base currently using the service. This, combined with our extensive on-the-ground infrastructure provides us with a unique opportunity for increased market reach and low-cost scalability providing a substantial differentiation versus our competitors. What I mentioned in the previous slide, is clearly playing out in terms of our operating and financial performance. The opportunity, the distribution reach and the scalable customer-centric platform gives us the ability to offer a range of different services, which is ably supported by deep-rooted partnerships, which can unlock new growth opportunities and drive the business to new levels. This, combined with continued innovation and the rollout of digital offerings has seen an accelerating uptake in customers and we are now approaching $200 billion of annualized transaction value with ARPUs up 11% in constant currency terms. The result has been a strong 30% growth in revenues which has once again been sustained over a number of years, indicative of the opportunity this business holds. The strong performance of the top line should also put into context of the overall financial performance with EBITDA margins of almost 52% profit after tax for the period of $188 million and strong operating free cash flows. Let me briefly touch on how our mobile money business has evolved and is likely to continue evolving in future years. The business mix has transformed as we have innovative products, which have been rapidly adopted by highly engaged user base. This is particularly evident within payments and transfers, which has grown to 42% of our revenues from 33% 5 years back. These revenues have been growing at a 5-year CAGR of 36% and continues to see strong growth. In addition, we are particularly excited about our financial services product segment, which captures our most recent innovation in the bank to wallet, lending savings, wealth and insurance sectors. Over the last 5 years, these products have been growing at a CAGR of 61% with the last 12 months having seen the growth of 73% in constant currency. Overall, this mix shift reflects our maturing customer cohorts, adopting a richer set of use cases and illustrates our trajectory towards a diversified resilient ecosystem with high monetization per user. Let me now briefly call out the key conclusions from our recent performance in each of the regions, starting with Nigeria. We have continued to see strong operating momentum in Nigeria with customers increasing around 10% and ARPU is growing almost 40% in constant currency. We are very encouraged by the macro stability that has returned to Nigerian markets, which has enabled us to report these strong trends. While the tariff adjustments made by the regulators have certainly benefited our performance, we have seen sustained usage growth, particularly in data driving a strong revenue growth performance of almost 15% in the period. EBITDA margins have increased by over 7 percentage points as a strong revenues improved macro and stable diesel prices and execution of our cost efficiency measures have taken hold. In East Africa, trend remains strong with constant currency revenue growth of around 40% despite the high base. What we've also witnessed in the region is some appreciating currencies, which resulted in reported currency growth of almost 23% for the region. Once again, the strong subscriber base growth and increased usage of our services, which has driven rising ARPUs has been foundation of the strong growth with EBITDA margins rising to over 53% in the period. The performance in the Francophone region has also been very encouraging. We've been seeing a clear turnaround in the performance in the region driven by consistent focus on driving base level growth through the relentless focus on our strategy. This combined with increased adoption of services has contributed to an ARPU increase resulting in strong revenue growth of 16.1% in constant currency. Currencies have also benefited from appreciation resulting in reported currency revenue growth of 19.2%. This improved revenue growth -- revenue performance supported by a continued improvement in EBITDA margins over the year with EBITDA margins up 122 basis points over the year to 44%. Before handing over to Kamal, let me briefly touch upon the opportunity in enterprise and home broadband and what we are doing to capture this. We are in a unique position to really drive the home broadband opportunity, utilizing our extensive 4G and 5G network. Home broadband services can capture a higher share of wallet by bundling premium connectivity with entertainment, smart home and mobile offerings that deepens customer engagement and drives increased ARPU. We are already seeing a strong performance, and we look forward to reporting further successes. The growth of the enterprise segments and the scale of the SME sector also provides a real opportunity for us to capture the evolving needs of the enterprise and public sector, in particular, we announced recently the commencement of construction for a 44-megawatt data center in Kenya, which will run alongside the ongoing construction in Lagos of our Nigeria data center. In conclusion, hopefully, this clearly summarizes our position across the market and reflects the performance we have achieved over the period. Importantly, we believe in our strategy and the execution of this strategy is integral to capturing these opportunities. Let me now hand over to Kamal to run through the financials. Kamal Dua: Thank you, Sunil. A very good morning and good afternoon to all of you. Let me start with the key financial highlights. Overall, this was a very good quarter and the first half of the year for us with a strong set of financial results, which was also helped by stable to positive macroeconomic environment in most of our geographies. Revenues for the first half at almost $3 billion, grew by 25.8% in reported currency and 24.5% growth in the constant currency. The reported currency growth was higher compared to constant currency growth due to the appreciation of currencies in few markets. For the quarter ended September, the reported currency revenue growth was at 29.1% against constant currency revenue growth of 24.2%. The acceleration in revenue growth was also supported by tariff adjustment in Nigeria, which we did it in quarter 4 of the last year. EBITDA at $1.45 billion in reported currency grew by 33.2% in the half year. The EBITDA margin at 48.5% improved by 268 basis points in reported currency and 258 basis points in the constant currency. This expansion in margin is a result of our operating momentum, sustained benefit from our continued cost efficiency programs and stable macroeconomic environment. Quarter 2 EBITDA margin reached at 49%, up from 46.4% in the prior period. The CapEx investment for the half year was at $318 million, which was similar to the prior period spend. Given the revenue growth momentum and stable macroeconomic environment during the period, we have revised our CapEx guidance upwards to $875 million to $900 million for the current year as compared to the previous guidance given of $725 million to $750 million. Resultant operating free cash flow at $1.1 billion in reported currency is up by 46.5%, primarily driven by the growth in EBITDA. Lease adjusted leverage at 0.8x improved from 1x again due to higher EBITDA. Similarly, our leverage at 2.1x improved from 2.3x. Earning per share before the exceptional item at $0.083 in half year was up 70% as compared to prior period EPS of $0.049. Prior period also had an exceptional ForEx losses as a result of significant naira devaluation, and basic EPS for prior period was only $0.008 as compared to $0.083 in the current period. The EPS for the first half of this year is also helped by the derivative and foreign exchange given on account of appreciating currencies, the positive impact of which is $0.014. The Board has declared an interim dividend of $0.0284 per share, up 9.2% versus last year, in line with our current dividend policies. Coming to the next slide. The overall revenue growth was at 24.5% in constant currency, while in reported currency, the growth was 25.8%. The reported currency revenue growth was also supported by the currency appreciations mainly in the Central African franc, Ugandan shilling and Zambian kwacha. In constant currency, our All Service segment grew double digit with voice revenue 13%, data up by 37% and mobile money revenue up by plus 30% on a year-on-year basis. With this, the absolute data revenue is now higher than the voice revenue in our GSM business. The consolidated EBITDA at $1.45 billion is up by 33.2% in reported currency, while the constant currency EBITDA grew by 31.5%. The group EBITDA margin improved by 268 basis points in reported currency to reach 48.5% for the period. In constant currency, the margin improved by 258 basis points. As discussed earlier, the margin improvement was driven by flow-through from our accelerated revenue growth, continued benefits from our ongoing cost efficiency programs and further supported by the stable to positive macroeconomic environment in most of our markets. Coming to the next slide. This slide reflects the key component of finance cost movement from last year. In prior period, we have derivative and foreign exchange losses of $260 million, of which losses on account of naira devaluation was $231 million, which was categorized as exceptional. However, the current period was supported by a derivative and foreign exchange gain of $90 million, especially on account of appreciation in Nigerian dollar, Central African franc and Uganda and Tanzanian shilling. Excluding the impact of derivative and foreign exchange fluctuations, finance cost increased by $126 million, largely driven by higher lease interest of $108 million, which was primarily related to the renewals of our tower contracts. As communicated in the earlier periods, the increase in finance costs due to tower contract renewal is an outcome of application of IFRS accounting standard. However, the renewals have neutral to positive impact on the cash flows of the company. Higher interest on the market net was on account of our dedollarization program. As you all are aware that we have moved a significant portion of OpCo debt from low interest foreign currency debt to high interest local currency debt, which has shielded us from exchange rate volatility by reducing our foreign exchange exposure. Coming to the EPS. EPS before the exceptional item was up 70% to $0.083 in the current period as compared to $0.049 in the prior period. Excluding the impact of derivative and foreign exchange fluctuations, EPS before exceptional items improved from $0.054 in the prior period to $0.069 in the current period. This increase was driven by higher operating profits during the current period which partly got offsetted by the higher finance charges, which was primarily due to higher lease interest on account of the renewal of the contract, which has been discussed in the last slides. Coming to the normalized free cash flow. The business generated a free cash flow of $368 million in the current period as compared to a loss of $79 million in the prior period. This slide gives us a bridge between EBITDA and normalized free cash flow for the current period. The difference between the 2 other cash payments from the EBITDA in the current period will primarily include the CapEx payment of $356 million, income tax payment of $203 million, which also includes the dividend tax, the cash interest of $388 million and the other cash payments, such as lease repayments and the dividend distribution to the minorities. We continue to focus on strengthening our balance sheet by reducing our foreign currency debt exposure across OpCos. OpCos foreign currency debt is now at 5% as compared to 11% last year, while HoldCo continue to be debt free. Our group leverage at 2.1x has improved from 2.3x compared to last year as a result of increasing EBITDA. The lease adjusted leverage has also improved from 1x to 0.8x. Our strong operational and financial performance has translated to a substantial return that we have given to our shareholders in the last few years. We have returned $1.3 billion in the last 5.5 years by way of dividends and the buyback of the shares. On our capital allocation, our allocation policy remains the same and consistent as was in the last period. Our key priority remains to continuously invest in our business. strengthen our balance sheet and return cash to the shareholders. Our CapEx remained stable compared to the previous year with a notable increase in spending during the second quarter. With the stability in the macroeconomic environment and sustained industry growth, we believe this is a time for us to accelerate some of our CapEx investment to support and accelerate our business growth. Consequently, we have revised our CapEx guidance from the previous range of $725 million to $750 million to $875 million to $900 million. This additional CapEx will primarily be allocated towards network investment in expansion of 4G, 5G data capacity and the coverage expansions. The second pillar of our capital allocation policy is to ensure a sustainable capital structure with leverage having fallen by 0.2x and a low level of dollar debt on our balance sheet. I'm very pleased with the current state of our capital structure. Finally, the third pillar is all about returning cash to shareholders through our progressive dividend policy. This policy has been very consistent and is again reflected in the Board decision to pay an interim dividend of $0.0284, a growth of 9.2%, which is almost consistent over the last few years now. With this, let me now hand over the call to Sunil for his concluding remarks. Sunil Taldar: Thanks, Kamal. Finally, on Slide 30, just a few words on summary and outlook. As you've seen from our results, our strategic focus has consistently driven positive momentum across the businesses and reflects our strong track result in execution. Key to delivering value to our stakeholders is to drive continued growth across our base. Our focus will remain on investing in our network and on further expanding our distribution to be closer to our customers, while at the same time, looking at new opportunities for growth. Mobile money remains a fantastic business, and we look forward to the upcoming IPO in the first half of calendar 2026. The recent macro backdrop has been supportive for our business of late, which has been very welcome. But this does not change our relentless focus on executing our strategy to maximize our value creation for all our stakeholders. We are exposed to a region which offers a fantastic growth opportunity. We have shown a very strong track record of execution, and we have a capital structure that will allow us to continue executing on our strategy. This puts us in a very strong position to drive significant value for our shareholders. and we look forward to reporting on these successes in the future. And with that, I would like to thank you all for your attention today, and we would now like to open the floor for questions. Operator: [Operator Instructions] The first question we have comes from Ganesh Rao of Barclays. Ganesha Nagesha: So a couple of questions from my side. The first one on the CapEx guidance. So could you provide some color on the factors that are driving the increase in the CapEx for the year. So how much of this is one-off project versus the structural hike? And do you believe like this represents the peak in spending? Or how should we about CapEx trajectory heading into, let's say, FY '26, '27. My second question is on the Nigeria market. So while the data consumption remained strong in the region, so the voice usage has seen like double-digit decline during the quarter. So how do you see the trends evolving in the market? And when do you expect overall growth to return to normalized level for the voice usage? Sunil Taldar: All right. Thank you for the question. Let me just respond to the first on the CapEx guidance first. See if you look at, there's been a significant improvement in the overall macroeconomic environment across most of our markets. And this is supported by a reduction in inflation and currencies are stable. The opportunity in Africa across our footprint remains very, very compelling and additional spend will only allow us to create a platform to capture further growth. With the stability in the macroeconomic environment and sustained industry growth outlook, we believe this is the right bank for us to accelerate some of our CapEx investments to support and accelerate our business growth. Now the step -- what this does, this increase in CapEx, it actually demonstrates our confidence in the market and the opportunity that exist in the market. And as we execute our plans, we are very hopeful and confident that our customers will continue to support us and reward us. The additional CapEx that we are deploying is predominantly going into 3 areas. The first is you've seen the numbers. There is a significant increase in our data consumption, overall data usage. The first is increase in data capacity across regions, which will further future-proof our growth initiatives and unlock additional revenues for our avenues for growth. This includes a particular focus on 5G services to enhance our network quality and speed across key areas in our larger markets. So that's the first area where the additional CapEx investments are going. The other is, there remains an opportunity in Africa on expanding our coverage as we are seeing response to our investments. What we're trying to do now is to accelerate our network coverage and drive digital and financial inclusion across our markets. And this is the reason why we are significantly scaling up our capital investments in the second half. And as I said, what it does is it actually -- it reflects increased confidence that we have in the market, given the recent stable macro environment and the sustained demand that we've seen, which has also been reflected in our results. The acceleration in spend will enable us to further capture the share of the market. That's the reason why we are accelerating spends on CapEx. Coming to your question -- second question on Nigeria. See if you look at Nigeria, the overall performance remains very strong. We have seen a significant improvement in our overall revenue growth, as you pointed out. There is -- the voice revenue growth has -- from our last quarter of 36% has come down to circa 33% -- 32%, 33% this quarter. There is predominantly 2 reasons that we ascribe to this. First is, there is some amount of seasonality that we see in the business, which is what has kicked in. The second thing that has happened is voice is very closely associated with the base growth. We've seen that in Nigeria because of changes in NIMC platform, the entire industry acquisition got impacted in back half of June and some part of July. And this is something that is also getting reflected in our overall -- the voice volume that -- or revenue that you are alluding to. Lastly, there are certain -- they've also done tight rating on certain payments that we had in the business, which is getting reflected. Overall, the health of the business, underlying metrics, they remain strong. So that's how I would say is what's happening in the Nigeria business from a voice revenue point of view. Can we have the next question, please? Operator: The next question we have comes from Maddy Singh of HSBC. Madhvendra Singh: Congrats for a great set of results. Just a couple of questions from my side. The first is a follow-up on the CapEx part. If you were to give some indication on the split of the incremental CapEx. Is the more of the new CapEx going into backhaul or radios? And what about the data center part? Because it seems like your data center ambitions are also going to cost decent money. So how much of the CapEx increment or overall CapEx for this year is going into data centers? So if you could talk about that. And then secondly, on the -- your home broadband strategy, that is very interesting to see that you are talking about that in such -- I would say, increased passion. So I wonder, why do you think 4G is the right way to do that? Wouldn't 5G be a better fixed broadband, home broadband -- fixed wireless home broadband strategy from that perspective, 5G would be better? Or is that also part of the CapEx plan that you want to do more of that using this incremental CapEx. So if you could talk about that. And just on the same topic, if you could also give some indication on which countries is the CapEx actually going into? Is it Nigeria? Because second quarter in Nigeria was apparently quite low on CapEx. So I wonder which countries the CapEx is also going? Sunil Taldar: Sure. Thank you very much for your questions and your comments. Let me just quickly try and address the 3 questions that you asked. On the CapEx, as I said, most of our CapEx are going into network, and this is predominantly in driving data capacity and coverage. We don't provide split between data capacity, transmission or the size, which is going into coverage. But net-net, this entire investment is going into making sure that we are delivering the best experience to our customers in the market as we see a significant increase in our usage or consumption of our services across both voice and data. The second thing is with the improvement in the macroeconomic environment, we also felt that there is a need for us to accelerate our coverage expansion, and this is something that we are doing. And that's where the investment predominantly is going. When we look at addressing need for creating capacity for higher data consumption, it would actually mean addressing both radio as well as backhaul or transmission. So to answer your question very simply, it is radio transmission both and also capacity and coverage. That's how we're looking at our overall CapEx investments going. On your question on data center, this increase doesn't capture any investment on the new data centers that we've announced, whether the investments that we announced for our data center in Nigeria or in Kenya that we recently announced. Most of those investments will come in the future. So these are all long gestation projects. Moving on to the question that you asked on home broadband. See, home broadband, we see as a very, very attractive opportunity for Africa because the current penetration in home broadband in this category is very, very low. And that is the reason we said that this category needs a lot of attention and for us to make right investments, at the same time, build our capabilities within the business to be able to go and capture this opportunity. The approach that we are taking is to first leverage our 5G investments in spectrum through the FWA rollout because that's where we are able to -- with respect to speed to market and also the current consumption in the market for the customers is relatively low, and we believe that we will be able to meet the customers' expectations, meet their consumption requirements and offer very good experience through the FWA. So it serves both the purposes for us to be able to leverage our 5G spectrum investments or the radio investments. At the same time, also deliver the right experience to our customers. Having said that, we are also, at the same time, looking at selectively wherever we need to deploy fiber home buses in select geographies within our markets. So that's the work which is separately happening. But this is an evolving space. We have started this work. We're building a lot of capabilities, as I said, both in terms of our ability to serve our customers, our go to market and our ability to manage and deliver experience to our customers, and we'll continue to give you more updates on this front as we progress. The third question was with respect to which countries that we are looking at from a home broadband point of view. This home broadband, we're looking at across our footprint. In most cases, the opportunity actually is in the urban markets. On the CapEx, the question that you asked, which countries? We don't provide country-level breakup. The breakup at the market segment is available in the results that we have declared. In Nigeria, there is also -- overall, if you look at in the first half, our CapEx is very similar to what we had last year at an overall level. Quarter 4 of last year saw significant CapEx deployment in two of our market segments. And therefore, this is the highest EBIT, which saw some impact in the first half of this year, but we are seeing investments going across markets wherever we feel that there is a need. Because we have a very strong framework for determining our entire capital allocation and CapEx investments. And we are guided by that, and that's something that will decide, and this is something that is guiding our decisions. So as I said, Nigeria, East Africa saw a significant quarter 3, quarter 4 investments, and you will see the rest happen across markets in the balance part of the year. Operator: The next question we have comes from Rohit Modi of Citi. Rohit Modi: [indiscernible] some of them has been answered. I have 2 follow-up on 1 question on margin. A follow-up again for CapEx part. Can you confirm like this is now the base CapEx level for future years? And given you said this doesn't include the data center CapEx that you allocated for Nigeria and that has been postponed a couple of times. That doesn't include so the CapEx should -- could I believe increase from these levels if we go ahead and build those centers as well. That's my first question. Second, again, a follow-up on the Nigeria Voice [indiscernible]. I mean, again, you can just confirm like [indiscernible] normal way of voice continue to low [indiscernible] given you have seen all the [indiscernible] have now have gone in and you will see more growth from here kind of any color there. And thirdly, on the margins, your commentary around improvements in margins. Just any color in which country [indiscernible] anything or margin improvement? And just particularly especially from Nigeria because you have [indiscernible] margins in Nigeria right now, which kind of [indiscernible]. Do you see more improvement in Nigerian margins? And what will be driving that? Is this the operational leverage or [indiscernible] margin? Sunil Taldar: Yes. So let me just try and address the questions that you asked. You were not very clear on your second question that you asked on voice -- Nigeria Voice. If you can just repeat that, that will be helpful. Rohit Modi: Sure. On Nigeria Voice, [indiscernible] you mentioned last quarter that a bit of a last year such an impact that you see [indiscernible] on voice and that grew something in last quarter, but you have seen more decline. So I'm just trying to understand, is this a bottom in terms of voice you say when you go from here? Or is [indiscernible] where you see voice is declining and data is growing and there's a bit of [indiscernible]? Sunil Taldar: So -- okay, Let me just try and address the 3 questions that you asked. The first is on the CapEx for future. We don't give future guidance for CapEx. Right now, what we have done is given the, as I said, a very strong macroeconomic development and certain need that we felt and the response that we're getting to our investments is where we've increased our CapEx for this year. We will talk about our -- the CapEx for next year, when we -- at the end of this financial year. Data center, as I called out, is not part of, say, for example, this increase in CapEx that we have. That data center investment is we will see over the course of next 2 to 3 years, because as I said, it's a long gestation, and the 10-year data center we've just announced, and it will flow over a period of time. But we'll provide details for FY '27 when we meet at the end of this year. On the voice revenue, the question that we asked -- that you asked, as I said, these are -- there are 2 reasons which is predominantly, as we said. The first is with respect to -- there is a base growth sequentially that we have seen -- there was an impact because of -- there was a NIMC correction. We expect the voice revenue to recover. At the same time, there is a little bit of seasonality that we've seen. And to separate what has been the real impact of these 2? And is there any drop in voice revenue that we see, very difficult to say at this point in time. As we start to pick up on our customer acquisition and our base growth accelerates, we should see uptake on the revenue. Having said that, because we've also done some titrating of the minutes, and which is where we are seeing some amount of consumption change as well. So voice revenue on -- we remain confident that overall revenue growth for Nigeria looks very, very solid right now. But -- and there are 2 reasons, as I said, for the impact on voice revenue. Will it continue to hold? We should see because it's very difficult for us to split as to how much of this is being caused by removal of the minutes and how much is the base growth. Coming on to your question on EBITDA margins that have reached almost 56.5%. See, on Nigeria specifically, which is where you were pointing to, the margin expansion is an outcome of first and foremost is a very stable macroeconomic environment. Because in Nigeria, in the past, we were seeing significant challenges because of inflation. The second was fuel prices. The fuel prices have -- are stable in Nigeria. The second is inflation is coming down. And the third is we remain very, very focused on our cost efficiency programs, which has also significantly helped us to improve margins in Nigeria. And in macroeconomic environments remaining stable -- and we continue -- we remain focused to make sure that we continue to push for opportunities of cost saving and cost-saving initiatives in further opportunities for saving costs in Nigeria and across all our markets. Kamal Dua: Yes. And just to build on Sunil's point, this is Kamal. We have recovered our margin from the last year of 45% to 49% now. With the stable macroeconomic conditions yes, and like this continued cost efficiency program and flow-through operating momentum, we are pretty hopeful that we will keep on working on the expansion of the margin. Subject to the stability in the macroeconomic environment, we will see the improvement in the margin, but the rate of increase in the margin may not be in line with what we have seen in the last 3 quarters. Operator: [Operator Instructions] The next question we have comes from Cesar Tiron of Bank of America. Cesar Tiron: I have 2, if that's okay. They're both on Nigeria. The first one, I'd like to understand a little bit better why your service revenue growth rate is below that, which was reported by the market leader in the past quarter. We don't -- we're not sure for this quarter, right, because we've not reported yet. But what do you attribute this to when you look at the data? Is it a difference of pricing and how you increase prices a couple of months ago? Or do you think that actually relates to network availability, which actually explains why you had to increase the CapEx so much? That's the first question. Second question, I wanted to ask about the potential for price increases in Nigeria in 2026. Do you have any opinion on it? Sunil Taldar: All right. So if you look at our overall growth in Nigeria, which is approximately 50%. So we are very happy with the growth, which has benefited following the adjustments of our tariffs, which is in line with the approvals that we received from the regulator. While I will not comment on the performance of the competition, the way we look at it is, we had 75% of our total portfolio, which is where we have applied our pricing. Was it similar or different for the competitor, we will not be able to comment on that. But the way we look at, Nigeria still continues to offer significant opportunities for us for growth. We have seen strong execution of our strategy in Nigeria. We've also seen the overall pricing has settled down well with significant growth across all the revenue segment that we have. So that's where we are, and we continue to stay focused on -- and we are making significant investments in making sure that we have enough capacities in our network and our go-to-market to be able to accelerate our growth in Nigeria. So that's for So that's on your first question. The second thing that you asked about our pricing for the future, which is for next year. There is no minimum period before which we can increase pricing in Nigeria. So we will assess when is the right time. Once -- we are right now seeing that the price -- the overall price adjustment of circa 50% has been kind of well accepted. The markets have settled. We will decide at the right time to approach the regulator and go for another price increase. Whether the extent of that is something that we will have to assess, but there is no minimum time or period before which we can take another price increase. Those options are absolutely available to the operators. Cesar Tiron: I just wanted to follow up. I just wanted to understand if the price increase that was implemented this year, was it part of a multiyear framework where we agreed with the regulator to pass on back to the customers some of the inflationary impact on the business? Or was it just a one-off? Did you agree on the framework? Or did you -- just on the one-off in 2025? Sunil Taldar: This was -- because given the inflationary conditions that were during the time when we reached the regulator for a price increase, that is a time that when -- there were 2 or 3 pressures in Nigerian economy at this point in time. This was a significant devaluation of currency, very high inflation, high fuel prices. To offset all of that, this was the price adjustment that the authorities have agreed to give to the industry. This, I don't think serves as the precedent or neither was there a time period, as I said. So we have the option to go back to the regulator and ask for another price increase at the right time. And this is something that we will surely assess. Yes. Thank you. Operator: The next question we have comes from David Lopez of New Street Research. David Lopez: I have 2. The first one is on mobile money in Nigeria. If you could give us an update on how long do you think you need -- how much time to fully build the base? And when should we see a step up in revenue there? And the second question is just on the spectrum auctions, if you could tell us what are the upcoming spectrum auctions across the group, please? Sunil Taldar: All right. So let me first address the Nigeria money opportunity. So if you look at Nigeria offers a very large opportunity for the mobile money business. At the same time, it is also relatively as compared to what we see on the other parts of our footprint, it's an evolved relatively more mature markets with significantly a large fintech operators as well as banks well entrenched in the ecosystem. Having said that, we have a very clear opportunity because we currently enjoy an existing relationship with our customers. and with high smartphone adoption, this market offers significant opportunities for growth for us. So where are we focused right now is -- and I say this, I think almost I've said this even in the past quarters, that this market is going to take some time as long as we are doing the right things and building the right capabilities to be able to win with our customers. So I'll tell you what we are doing right now, and we are seeing early green shoots of some of the work that we're doing. In terms of our key focus areas, we first is acquiring quality customers. In terms of our base growth, we now have about 2 million active customers in Nigeria. And most of these customers, a very large portion of these customers is engaged in our mobile money app, which allows us to engage with them very, very actively. The second thing that we are doing is we're building capabilities to be able to meet all the asks and demands of our customers and match up to the functionalities that they get from other fintech. Whether it is a virtual card or a saving bank account, these are capabilities that we are rolling out in Nigeria. The way I see it, it's a big opportunity. Our teams are doing a fantastic job in building capabilities and acquiring customers. And the only thing that I will say is, this is relatively a difficult market because it's a well entrenched market. It's going to take us some time, but this is one area where we are -- we have a massive focus and there is -- we're not leaving any stone unturned, neither are we saying no to investments to accelerate our business in Nigeria. As I said, we are already seeing some early green shoots, which make us hopeful that we'll be able to turn around this business in Nigeria. Coming to -- Kamal, do you want to just talk about the spectrum auction business? Kamal Dua: Yes. In 2027, I think Nigeria 10 megahertz of 900 is coming for renewals and Kenya, license for 2G, 3G will start coming for renewal. So these are the 2 large renewals, which is due in 2027. Thank you. Operator: [Operator Instructions] I would now like to hand over to Alastair for any webcast questions. Please go ahead, sir. Alastair Jones: Yes. Thank you. Just a couple of buckets of questions coming in from the website. I was hoping that Sunil and Kamal address. Firstly, just in terms of the mobile money, the intragroup agreements, there were some amendments made -- and just some clarity on what those renewed agreements would impact, how they impact revenues and sort of what is the retention revenue? What you sort of define as retention revenue? So that's on one point. And then the second point, just coming back to cost efficiencies. Can you elaborate on any specific cost efficiency initiatives that you are looking at the moment? Could you just give some sort of color as to how -- what efficiencies we're looking at? And secondly, just associated with that, has there been any margin benefit from a drop in fuel prices or diesel prices in our numbers for this quarter? Sunil Taldar: Sure. So let me address your first question, which is on the IGA changes. See if you look at our GSM business and mobile money business, they are interdependent businesses. And in ordinary course of business, there are various services exchange between them such as Airtel Money providing services for -- to the GSM business like recharge collections and disbursements. Similarly, GSM providing services to Airtel Money like SMS, USSD and go-to-market, et cetera. So these -- all these agreements that we have, all these services are governed by long-term agreements that we have. And these agreements are very established, and they are also as per -- they're fully compliant with the regulation for both the businesses. As these long-term agreements came up for -- as I said, they were agreed upon some time ago, and this was time for us to -- as they come up for renewal and in line with the market benchmarks, so we've kind of revisited these agreements and renegotiated the terms of intragroup agreements in line with the changing market dynamics between the mobile services and the mobile money businesses during the second quarter, while ensuring that they continue to be on arm's length. These agreements are also discussed and aligned and agreed with the minority shareholders. So that's where we are. And the full impact -- and I must also add here, the full impact of these agreements or of these changes will come in phases over the next 8 to 10 quarters based on the current volumes. The current year impact will be circa about in terms of percentage EBITDA because Airtel Money is also a very high-growth business. In percentage terms, the impact would not be maybe more than 1 or 2 percentage points of EBITDA as we go forward. It will be in low single digits is the way I would put it, overall impact of the IGA changes on the Airtel Money EBITDA. And coming to your second question on cost efficiencies. There are 3 or 4 areas that we look at from a cost efficiency point of view. The first is if you look at where our big cost components are? Our big cost is actually in network. The way we are looking at is, first is a big -- within network, a big cost component is our tower running expenses, which is energy. So what we're doing is we're working with tower companies to invest in more energy-efficient solutions, whether it is batteries or solar, invest in lithium-ion batteries or solar equipment, and this is one area that we're working on. The second area that we are working on is, as we look at our new sites which are coming in either in rural or these are the infill sites in urban areas. So instead of having a full macro sites, do we have lean sites, which are relatively lower in terms of cost -- running cost is lower. The third area is moving sites from off-grid to grid. So these are 2 or 3 areas where we are working very closely to be able to generate certain efficiencies. And as we said that the stable oil prices is one of the reasons for us not to see margin kind of deterioration we've seen some benefit because our oil prices have, by and large, been stable. We've not seen oil prices go down. We have seen oil prices remaining stable. So we're not adding to increase in costs, but at the same time, there is -- we're not seeing a significant cost reduction because of oil prices. Alastair Jones: Thank you. Go back to the Q&A. Operator: The next question we have comes from John Karidis of Deutsche Bank. John Karidis: Is it possible, please, to explain the reasons for the nearly sort of 200 basis points reduction in mobile money EBITDA margin in the second quarter, I'm trying to figure out whether it's exceptional or not. And then secondly, regarding the CapEx, I'm sorry to come back to that. I know you don't give guidance for next year, I'm just sort of trying to figure out whether we should all go back to our spreadsheets and assume $150 million more CapEx per year going forward, from what you say in terms of coverage, once you get the coverage, you don't need to keep expanding. But for data capacity, you might need to keep adding capacity. So if I were to look at your CapEx envelope over more than 1 year, are you bringing forward capital expenditure? Or are you sort of increasing capital expenditure consistently over that period of time, just so that we know what to put in our estimates, please. Kamal Dua: Okay. Thank you for your question. I'll take your first question first on the mobile money EBITDA margins. As Sunil had just spoken about our renegotiation of the intragroup agreement, the impact of those renegotiations is roughly $11 million on EBITDA of Airtel Money, and which has an impact of roughly 2.3%, 2.4% on Airtel Money. So if we normalize for that, intrinsically, the EBITDA margin of Airtel Money is flat to slightly positive. So there is no one-off exception which has been sitting in the EBITDA margin of Airtel Money. I'll hand it over to Sunil to take the second part of the question, please. Sunil Taldar: Yes. Your second question was the future guidance of CapEx, right? Essentially, I'll be repeating myself... John Karidis: I'm sorry, I'm just trying to figure out whether this is a sort of permanent increase in yearly CapEx or not? Because if I read what you're saying, if you're going just for coverage, you only spend it once. But for data capacity, you spend it yearly. So just sort of a steer would be good. And by the way, I'm sorry, I asked the same question about the margins. The line is not good. So I'm sorry about that. Sunil Taldar: Okay. Let Kamal repeat the response of the margin. Kamal, the line wasn't clear. So... Kamal Dua: No worries. So this margin drop is on account of the new intergroup agreements, which came into effect effective first of July this year. The impact of that is the margin for mobile money is coming down. The impact on the mobile money absolute EBITDA is roughly around $11 million. And on year-on-year margin is roughly around 1.5%, 1.3%, 1.4% for the first half and 2.3%, 2.4% for the quarter, if you compare the same quarter of the prior period. So if you adjust for the impact of the renegotiation of the intragroup agreement between the group, intrinsically, the margin for mobile money is flat to slightly positive. So that was an answer on intragroup agreement. If you don't have any further question on mobile money margin, I'll hand it over to Sunil to answer the CapEx part of the question, please. Sunil Taldar: So I'm assuming that your mobile money margin question is answered. I'll respond to your question on CapEx investments. See, I'll be kind of repeating myself, but it is very -- we don't give future guidance on CapEx investment. Having said that, when we -- CapEx has -- when we did this exercise with the recent increases in data consumption and also a need for us to accelerate given the response that we are getting in the market. It's a very detailed exercise that happens to determine what's the real CapEx requirement for the businesses. Now our next year client cycle actually has just about started and we will conclude this by December, and that's when we go to the Board because there are many moving pieces. With this investment that will go in how much of the population that we are wanting to cover that gets covered, how much capacity have we added? There is also some amount of changes, which is what I was alluding to the other question on margin, which is I spoke about, which is a mix of lean sites versus macro sites. So there are a few -- and plus there are a few moving parts that we have, and therefore, it is very difficult for us to give any guidance to say whether this is a new normal or that we will go -- or this is a one-off. For this year, definitely, what it actually talks about is our confidence in the overall macroeconomic environment remaining what it is. And we felt that this is the right time for us to make investments, create capacities, deliver great experience, accelerate our growth and take higher share of the growth opportunity that Africa offers across our footprint, which is something that we've done. We'll have a little more clarity once we have done our own workings to say whether this is going to be -- which is probably that you're trying to understand, same as next year or probably a new normal. But we are not in a position to help you to plug this in your worksheets, so to speak, which is something that you're trying to solve here. Alastair Jones: Just to clarify quickly just on the commentary around the intragroup agreements amendments, just what Sunil was saying, the impact over the sort of medium term as a result of those agreements, given volume flows, et cetera, is going to be low single-digit impact on EBITDA margins. Just to clarify that. Sunil Taldar: Yes. The impact of these intergroup agreements on mobile money margins will be in low single digit. Operator: Ladies and gentlemen, unfortunately, we have reached the end of our allotted time for today's question-and-answer session. Sir, would you like to make any closing comments? Sunil Taldar: Yes, I want to thank everyone for joining the call today and for all their questions, and we look forward to our continued engagement with you all. Thank you. Thank you very much. Kamal Dua: Thank you. Operator: Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.