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Operator: Welcome to Visa's Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Ms. Jennifer Como, Senior Vice President and Global Head of Investor Relations. Ms. Como, you may begin. Jennifer Como: Thank you. Good afternoon, everyone, and welcome to Visa's Fiscal Fourth Quarter and Full Year 2025 Earnings Call. Joining us today are Ryan McInerney, Visa's Chief Executive Officer; and Chris Suh, Visa's Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and 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. Our comments today regarding our financial results will reflect revenue on a GAAP basis and all other results on a non-GAAP nominal basis unless otherwise noted. The related GAAP measures and reconciliation are available in today's earnings release and related materials available on our IR website. And with that, let me turn the call over to Ryan. Ryan McInerney: Thanks, Jennifer. We finished fiscal full year 2025 with strong financial performance, an ever-growing obsession for our clients and a sharp focus on innovation as we build the future of payments. Fiscal fourth quarter net revenue grew 12% year-over-year to $10.7 billion, and EPS was up 10%, resulting in full year net revenue and EPS year-over-year growth of 11% and 14%, respectively. Total full year payments volume was $14 trillion, up 8% year-over-year in constant dollars, and process transactions totaled $258 billion, up 10% year-over-year. Our financial performance and growth demonstrate how Visa has become a hyperscaler, enabling anyone that wants to be in the money movement or payments business to build on top of the Visa as a Service stack. You may recall the layers of the stack, the foundation layer, the services layer, the solutions layer and the access layer. Throughout 2025 and most recently in Q4, we have intensified our investment in innovation. Today, I want to highlight Visa's progress with our clients and the ecosystem at large across the Visa as a Service stack, starting with the foundation layer. At the foundation of the stack is our global connectivity, our network and our network of networks that enable global commerce and money movement. In full year 2025, we expanded our network of networks in 3 important ways: first, more connection points, visa's network of networks now has approximately 12 billion end points. That's about 4 billion cards, bank accounts and digital wallets each; second, more settlement currencies, we are adding support for 4 stablecoins running on 4 unique blockchains representing 2 currencies that we can accept and convert to over 25 traditional fiat currencies; and third, we have begun deployment of the next generation of VisaNet, the core processing platform in our Visa as a Service stack. It offers a cloud-ready micro services distributed modular architecture that uses open languages and technologies, enabling easier scaling, configuration and faster feature deployment. Over half of the new code base was built with the assistance of generative AI, improving development speed, security and maintainability. We have specific modules in market today with plans to roll out additional modules and markets. The next level of the Visa as a Service stack is our services layer, which encompasses the building blocks of our core capabilities, including credentials, tokens, authentication, risk management, fraud detection and more, which we've turned into discrete modular components. We grew the number of Visa credentials by 270 million this year, and we continue to sign many deals this past quarter to drive further growth. I'll share a few regional highlights. We are pleased to have renewed our nearly 60-year relationship with Barclays in the U.K. and the U.S. across their millions of customers in consumer and commercial issuing and acquiring, and enabling increased focus on value-added services utilization. In the U.S., Visa continues to be the exclusive payment network for the Southwest Airlines co-brand program, and we will soon be expanding our relationship into a co-brand debit offering, providing customers a new way to earn Rapid Rewards points on everyday purchases. In Latin America, We won the new Scotiabank wealth management credit card issuance with our Visa Infinite product across 7 countries. And in Mainland China, one of our largest clients, China Merchants Bank, has renewed their long-standing relationship with us as we continue to upgrade China's magstripe dual-branded cards to contactless EMV chip cards. Moving to tokens. We now have over 16 billion Visa tokens, up from 10 billion just in May of 2024. We continue to increase the amount of Visa tokens globally in pursuit of our ultimate goal of 100% of e-commerce transactions tokenized. We continue to enhance our risk management capabilities, including Visa scam disruption, which proactively detects scam activity at the network level that no single issuer, acquirer or a merchant could see alone and leverages AI-enhanced merchant monitoring external intelligence feeds and our global expertise. Just a year since launch, we have worked closely with our clients and law enforcement to dismantle more than 25,000 scam merchants representing more than $1 billion in fraud attempts. Our stablecoin platform is another key component of our services layer. Since 2020, we facilitated over $140 billion in crypto and stablecoin flows, including Visa users purchasing more than $100 billion of crypto and stablecoin assets using their Visa credentials and spending more than $35 billion in crypto and stablecoin assets using Visa credentials. Within this, we see particular momentum with stablecoins. We now have more than 130 stablecoin-linked card issuing programs in over 40 countries. And in Q4, stablecoin-linked Visa card spend quadrupled versus a year ago. We expanded the number of stablecoins and blockchains available for settlement, and monthly volume has now passed a $2.5 billion annualized run rate. We are starting to enable banks to mint and burn their own stablecoins with the Visa Tokenized Asset Platform, and we are adding stablecoin capabilities to enhance cross-border money movement with Visa Direct. In September 2025, we announced a stablecoin prefunding Visa Direct pilot targeting banks, remitters and financial institutions seeking faster, more flexible ways to manage liquidity, and there is much more to come in this space. The next level of the Visa as a Service stack is our solutions layer, a comprehensive portfolio of solutions where we have taken the componentized capabilities from the services layer and invested in and enhanced them to create new features and capabilities we deliver to a broader array of customers and partners. If we look across our growth levers in this layer, I would note progress in a number of areas. In consumer payments, Visa Intelligent Commerce integrates Visa's token technology with authentication and predictive analytics empowering partners to deploy secure, personalized digital commerce experiences. And I'm pleased to announce that we are now powering live agentic transactions and recently released a merchant agent toolkit to make it easy for developers to embed our solutions into workflows and agentic processes. Just 2 weeks ago, we announced the Visa Trusted Agent Protocol, a framework that enables safer agent-driven checkout by helping merchants verify agents and avoid malicious bots. And since it's built on existing messaging standards, minimal integration is required for merchants. Next, our Visa Flex Credential continues to gain momentum, enabling consumers to access many underlying funding sources with a single credential powered by Visa token technology, for example, the Klarna card launched in 15 European markets, building on its success in the U.S. where it had over 1 million sign-ups in less than 3 months, and they will expand to even more markets soon. Our Visa Flex pipeline is strong, and we now have more than 20 signed clients in more than 20 countries across all regions, including our first Visa Flex announcement in LAC with [ Niko ]. Our Visa Accept Solution enables even the smallest of sellers to accept card payments with just a Visa debit card and an NFC capable smartphone. Our first live launch of Visa Accept was in Sri Lanka, which represents an opportunity to bring an estimated 7 million sellers onto the Visa network, most of which are informal sellers who primarily transact in cash today. And this is just our first launch. We are targeting 25 countries across several regions where we expect to launch Visa Accept soon with even more expansion to follow. Our Visa Pay solution connects any participating wallet to any Visa accepting seller worldwide, local or international, in-store or online. We are pleased to now be processing live Visa Pay transactions in 4 markets across AP and CEMEA, including our recently announced market launch in the Democratic Republic of Congo. In addition, we have a pipeline with more than 70 clients to expand across more markets in 2026 and beyond. Rounding out consumer payments is tapped to everything. 79% of all face-to-face transactions are taps, up 8 percentage points this year with the U.S. at 66%. Our transit initiatives contributed to this expansion, and this year, we enabled more than 100 new transit systems to now total approximately 1,000 systems globally, delivering 19% year-over-year growth in transactions. In Europe, BBVA recently launched BBVA Pay, enabling tapping from an iOS device for all Visa cards within their banking app. They also have enabled customers to use AI to create their own personalized Visa cards starting in Spain. Tap to Phone, which provides an easy, low-cost method for micro sellers to begin accepting card payments or large sellers to add additional mobile terminals, has now passed 20 million transacting devices, more than doubling since last year with strong growth across all regions. And Tap to Add Card launched a little over a year ago, has strong adoption as consumers and our partners see the value of a simplified, more secure customer experience where a simple card tap to a mobile device can add a Visa credential to a digital wallet. Since Q3, we have doubled the count of issuers participating globally to more than 600 across all regions resulting in the service being live for more than 1.4 billion Visa credit and debit cards around the world. Shifting to CMS and starting with Visa Commercial Solutions. Our full year 2025 commercial payments volume grew 7% in constant dollars to $1.8 trillion. This was helped by targeting specific segments including business owners and online travel agencies. In the premium card segment, we supported Chase with the launch of Chase Sapphire Reserve for Business on Visa Infinite, an expansion of the Sapphire Reserve product line. The Sapphire Reserve for Business card is designed to meet the needs of business owners by elevating their travel experience and offering premium benefits and value toward business services to help fuel their growth. And also in the U.S., we are excited to have partnered with Truist to launch the Truist Business Premium Visa Infinite card, a premium credit card designed for small businesses with meaningful annual spend. They are the first super regional to do so in this country. Our purpose-built travel solution offers virtual card credentials, automated reconciliation and rich data. We recently won Trip.com's global virtual travel card issuing business, which will be issued through their fintech, TripLink. In our traditional carded business, our global network agnostic enhanced spend management capabilities have helped us to expand our partnership with BMO. We recently won new commercial issuance, and BMO will offer our Spend Clarity for Enterprise tool to their corporates in the U.S. and Canada. Our unique FX capabilities enabled us to win a de novo issuing relationship with ICICI Bank for India's first corporate ForEx prepaid card, targeting both SMBs and large corporates to meet foreign exchange payment needs for business travel. In fact, in India, Visa SMB cards have doubled since 2020 and now total more than 10 million, helping us to grow total commercial cards to 340 million worldwide. Moving on to Visa Direct, which reached 12.6 billion transactions in full year 2025, up 27% year-over-year. Our push to account and wallet funding capabilities continue to help us to expand cross-border payouts. We signed with KCB in East Africa, where they will use Visa Direct to account for 8 corridors across their more than 30 million individual and business customers. Touch 'n Go eWallet, the largest wallet in Malaysia with more than 24 million users, will leverage Visa Direct to enable tourists to fund their wallets across 8 corridors. And Al Rajhi, a leading remitter with the largest branch network in the Kingdom of Saudi Arabia, expanded on its Visa Direct to card usage to now include Visa Direct to account. And our interoperability capabilities unlocked through our YellowPepper acquisition enabled us to renew with Yape and Plin, securing our position as the leader for interoperable transactions in Peru. Now moving to value-added services, where we have seen our innovations across issuing, acceptance, risk and advisory continue to power our growth. We have achieved our goal to expand Pismo's offerings to clients in more than 5 countries across 4 regions in 2025. In the fourth quarter, we signed our first Pismo deal for a stablecoin-linked card with Gnosis Pay in Europe. In Acceptance Solutions, our Token Management Service, or TMS, provides a single network and payment service provider agnostic integration to simplify token adoption, access and management for merchants and acquiring clients. This quarter, we signed with Booking.com for TMS and account updater across more than 65 markets, deepening our presence in the online travel platform space. Many of our risk and security solutions are also network agnostic. Let me highlight a few points of progress. Visa Advanced Authorization evaluates more than 400 unique attributes in a few milliseconds, and this quarter, Banco Diners in Ecuador deployed our network agnostic solution to score both Visa and non-Visa transactions, the first bank in LAC to do so. Our award-winning product, Visa Protect for A2A, is delivering value with AI. Our pilot in Brazil scored nearly $500 billion of our bank partner's, Pix, volume over a 6-month period and identified over $90 million of fraud, which could have been prevented with a detection rate of more than 80%. We believe Visa Protect for A2A can play an important role in Brazil by providing real-time fraud monitoring on Pix, helping to reduce fraud for our bank partners and ensure a safer payment experience for buyers and sellers. Our most recently acquired risk capabilities from Featurespace are being sought after by our clients with more than 100 closed client deals since January. And our advisory services continued to deliver revenue and deepen our client relationships across Visa. In consulting, we estimate that we helped clients realize over $6.5 billion of incremental revenue as a result of delivering almost 4,500 engagements during the year, including GenAI and stablecoin engagements. In marketing services, our flagship sponsorships include the FIFA World Cup 2026 in the U.S., Canada and Mexico as well as the Olympic and Paralympic Winter Games in Milano Cortina. We are already seeing significant interest from our clients as they seek to offer unique cardholder experiences and build their brand in addition to helping drive issuance, acceptance and engagement. One Olympic and Paralympic related marketing example was our first large-scale campaign created using generative AI tools for Intesa Sanpaolo, which showcased a ski race down the streets of Italy's seaside villages. We already have over 35 clients engaged with us for marketing services for the 2026 Olympic and Paralympic Games and more than 70 for the FIFA World Cup 2026 with more than 100 already in our pipeline. The fourth and final layer of the Visa as a Service stack on top of the foundation layer, the services layer and the solutions layer is the access layer, the client entry point to access Visa solutions. We take an open partnership approach and seek to provide value by enabling access to our Visa as a Service stack through multiple integration methods, including custom integrations, programmatic access via APIs and structured data exchange through our Model Context Protocol, or MCP, server. We remain the payments platform of choice in full year 2025 with more than 700 billion API calls across our more than 3,700 end points. And we recently launched our MCP server, providing access for AI systems to interface with our Visa Intelligent Commerce APIs. Our open, flexible access layer enables anyone, whether a small business, a tech partner or a global bank, to build on top of the Visa as a Service stack and operate at scale instantly. In conclusion, you can see our intense focus on innovation is delivering results for Visa and our clients. The Visa as a Service stack has positioned Visa to be a hyperscaler for the payments ecosystem. Our strong fiscal year 2025 performance is a result of our products resonating in the market and our commitment to our clients every day. I want to thank our more than 34,000 employees around the world who will continue to obsess about our clients and work tirelessly in 2026 and beyond to deliver value through the Visa as a Service stack to our clients and across our partner ecosystem. We live in remarkable times in payments as technologies are converging to reshape commerce. And at Visa, with our clients, partners, sellers and consumers, we are keeping our focus on innovation and product development, positioning Visa to lead this transformation. Now to Chris, where he will discuss our financial performance and outlook for 2026. Christopher Suh: Thanks, Ryan, and good afternoon, everyone. Building on the momentum we saw through the first 3 quarters, we had a very good Q4 to finish the year with continued strong and stable business drivers. In constant dollars, global payments volume was up 9% year-over-year, improving slightly from Q3. Cross-border volume excluding intra Europe, was up 11% and total processed transactions grew 10%, both relatively stable to Q3. Fiscal fourth quarter net revenue was up 12% year-over-year, better than expected, primarily due to value-added services revenue, commercial and money movement solutions revenue, and a benefit from FX. Fourth quarter net revenue was up 11% in constant dollars. EPS was up 10% year-over-year in both nominal and constant dollars, better than expected -- primarily due to better-than-expected net revenue. Let's go into the details. Total international payments volume was up 10% year-over-year in constant dollars in Q4, generally consistent with Q3. Of note, we saw acceleration in Asia Pacific of approximately 2.5 points on a constant dollar basis, driven by timing effects and a modest improvement in Mainland China. U.S. payments volume was up 8%, slightly above Q3 with e-commerce growing faster than face-to-face spend. Credit and debit were both up 8%, reflecting resilience in consumer spending. When we look at quarterly spend category data in the U.S., we saw broad-based strength, including improvements in retail services and goods, travel and fuel. Both discretionary and nondiscretionary spend were up from Q3. And growth across consumer spend bands remained relatively consistent with Q3 with the highest spend band continuing to grow the fastest. Now to cross-border volume, which I'll speak to in constant dollars and excluding intra-Europe transactions. Q4 total cross-border volume was up 11% year-over-year relatively stable to last quarter, with e-commerce up 13%, and travel improving sequentially to 10%. eCommerce remains strong as it has for the last 8 quarters now and still represented about 40% of our total cross-border volume. Travel spend continued to grow above pre-COVID levels. The slight step-up from Q3 was led by a combination of factors, including increased commercial volumes, helped by our efforts in virtual card and some improvement in CEMEA outbound due to holiday timing. With that as a backdrop, I'll move to discuss our financial results. Starting with the revenue components. Service revenue grew 10% year-over-year versus the 8% growth in Q3 constant dollars payments volume, primarily due to card benefits and pricing. Data processing revenue grew 17% versus the 10% growth in process transactions, primarily due to pricing and higher cross-border transaction mix. International transaction revenue was up 10%, below the 11% increase in constant dollar cross-border volume growth, excluding intra Europe, primarily due to mix, partially offset by exchange rates. Other revenue grew 21%, primarily driven by growth in advisory and other value-added services and pricing. Client incentives grew 17%, in line with our expectations as we lapped onetime adjustments from Q4 of fiscal '24. Now to our 3 growth engines. Consumer payments revenue was driven by strong payments volume, cross-border volume and process transaction growth. Commercial and money movement solutions revenue grew 14% year-over-year in constant dollars as we lap the onetime adjustment we saw in Q4 FY '24. CMS revenue was better than expected, driven primarily by our Commercial Solutions business. Commercial payments volume grew 10% in constant dollars, 3 points above Q3 growth and faster than Visa's overall payments volume growth primarily due to new portfolio wins and the lapping of certain portfolio losses with strong client performance, especially in cross-border. Visa Direct transactions grew 23% to 3.4 billion transactions with strength in both domestic and cross-border. Value-added services revenue grew 25% in constant dollars to $3 billion, driven by issuing solutions, advisory and other services, and pricing. Value-added services revenue growth was better than expected, primarily due to issuing solutions, both in network products and card benefits. Operating expenses grew 13%, above our expectations due to a larger-than-expected FX impact and higher-than-expected personnel expenses as a result of deferred compensation mark to market, which, as a reminder, is EPS neutral. Excluding those 2 factors, adjusted operating expense growth would have been as expected. Nonoperating income was $29 million, higher than expected due to investment income from the deferred compensation mark-to-market benefit that offsets the expense I just mentioned and higher returns on our investments. Our tax rate for the quarter was 18.8%, in line with expectations. EPS was $2.98, up 10% year-over-year with minimal impacts from exchange rates and acquisitions. In Q4, we bought back approximately $4.9 billion in stock and distributed $1.1 billion in dividends to our shareholders. We also funded the litigation escrow account by $500 million, which has the same effect on EPS as a stock buyback. At the end of September, we had $24.9 billion remaining in our buyback authorization. With a strong finish to the fiscal year, our full year net revenue grew 11% to $40 billion, and EPS grew 14% to $11.47. Full year 2025 CMS revenue growth was 15%, and value-added services revenue growth was 23% on a constant dollar basis. In a year marked by a significant step-up in uncertainty around the globe, we delivered strong results above our expectations. As we think about 2026, our guidance philosophy holds. We give you our best perspective based on current information. So let's get into the guidance details and a quick note, when I reference 2025 and 2026, I am referring to our fiscal years. First, let's cover our underlying assumptions for net revenue growth. As we regularly say, we are not economic forecasters, so we're assuming the macroeconomic environment stays generally where it is today and consumer spending remains resilient. On key business drivers, we are assuming no material change from the Q4 2025 growth levels in 2026. On pricing, for 2026, we expect the benefits of new pricing to be similar in magnitude and timing as in 2025, with the majority going into effect in the back half. When you combine that with the 2025 pricing timing, this implies a relatively uniform contribution each quarter with Q1 seeing the largest contribution. On incentives, we expect around 20% of our payments volume to be impacted by renewals this year, which implies incentive growth generally similar to 2025, with Q3 having the toughest comparable to 2025. On volatility, we expect volatility throughout the year to be generally consistent to where we exited Q4, which implies a drag for the first 3 quarters, with Q3 having the toughest comparable to 2025. We pull these assumptions together on an adjusted basis defined as non-GAAP results in constant dollars and excluding acquisition impacts. You can review these disclosures in our earnings presentation for more detail. In 2026, we expect full year adjusted net revenue growth to be in the low double digits. On a nominal basis, we expect an approximately 0.5 point benefit from FX, which implies nominal net revenue growth that is generally consistent with fiscal 2025, which was 11%. We have an exciting year with the Olympic and Paralympic Games in Q2 and the FIFA World Cup in Q3 and Q4. I'll speak to expense in a moment, but as far as net revenue impacts, we expect the benefit from value-added services to be spread throughout the year as our clients will utilize our solutions in the buildup to and during the events. In terms of quarterly variability of net revenue, 2 items I would call out. First, we expect Q1 to have the highest year-over-year net revenue growth rate, primarily due to the timing impact of our FY '25 pricing actions. Second, we expect Q3 to have the lowest year-over-year net revenue growth rate, primarily due to the lapping impacts of strong volatility and lower-than-expected incentives in Q3 of 2025. Now moving to expenses. We expect to continue our significant investments in our Visa as a Service stack across consumer payments, commercial and money movement solutions and value-added services in FY '26. Let me share a few examples. Within consumer payments, we will enhance our cross-border and affluent offerings, scale recently launched products and expand our stablecoin capabilities, in addition to utilizing our marketing dollars for both the Olympics and FIFA to amplify the Visa brand. Within CMS, we'll focus our investments in specific commercial vertical opportunities and build out new Visa Direct product capabilities focused on cross-border money movement. And within VAS, we'll invest in our product development as well as our sales engineering teams to deepen customer engagement and shortened deal cycles. In addition, we're also investing in our AI efforts. In fact, every leader at the company has AI targets to drive efficiencies that we intend to invest back in the business to further our differentiation, competitive advantage and drive long-term growth. We currently expect to grow adjusted operating expense in the low double digits, consistent with our net revenue growth. As we think about the cadence of spend, we expect Q2 and Q3 to have the largest year-over-year growth rates as a result of marketing expense related to the Olympics and FIFA. Now moving to nonoperating income. The nonoperating income we've had for the past 3 years has been a function of cash balances, interest rates and onetime items. In 2026, based on current interest rate forward curves, we now expect nonoperating expense of $125 million to $175 million. Now to our non-GAAP tax rate. You may recall that we've historically estimated our long-term tax rate to be between 19% and 20%, and this remains unchanged. In both fiscal 2024 and 2025, our actual tax rate was below 18%, helped primarily by our geographic mix of earnings and certain onetime benefits, such as the resolution of tax matters and positions taken on certain taxes. In 2026, we still expect to be below our long-term tax rate. When we incorporate our current tax planning strategies, we expect the tax rate to be between 18.5% and 19%, up from 2024 and 2025, primarily due to the absence of onetime benefits. On capital return, the Board has declared an increase to our quarterly dividend by 14%, and we intend to return excess free cash flow to shareholders through buybacks. All of this results in our adjusted EPS growth to be in the low double digits. Moving to Q1. Through October 21, with volume growth in constant dollars, U.S. payments volume was up 7%, with credit and debit both up 7%. Process transactions grew 9% year-over-year. For constant dollar cross-border volume, excluding transactions within Europe, total volume grew 12% year-over-year, with eCommerce up 14% and travel up 11%. Now on to our financial expectations. We expect Q1 adjusted net revenue growth in the high end of low double digits. We expect adjusted operating expense growth in the low double digits. Nonoperating expense is expected to be about $15 million. And our tax rate in the first quarter is expected to be around 18%. As a result, we expect adjusted first quarter EPS growth to be in the low teens. When we look on a nominal basis for net revenue growth in Q1, we expect an approximately 0.5 point benefit from FX. And for our expense growth, we expect an approximately 0.5 point drag from FX and a 1 point impact from acquisitions, which, taken together, result in nominal net revenue and expense growth that are more matched at the high end of low double digits. As always, if the environment changes and there are events that impact our business, we will remain flexible and thoughtful on balancing short- and long-term considerations. Visa's underlying business continues to be healthy and the growth opportunities are significant, together giving us conviction as we make investment decisions to build the future payments to drive compelling net revenue and earnings per share growth. And now, Jennifer, I'll hand it back to you. Jennifer Como: Thanks, Chris. And with that, we're ready to take questions. Operator: [Operator Instructions] Our first question comes from Sanjay Sakhrani with KBW. Sanjay Sakhrani: Like the outlook. It's very strong. I guess when I think through some of the assumptions that are embedded in it, I know, Chris, you talked about assuming the macro is stable. But we've heard some of your competitors talk about choppiness in the economy, different spending habits, especially for consumers as they've been trading down on discretionary items. I mean have you guys seen anything like that? And sort of how does that factor into your outlook? Christopher Suh: Sanjay, yes, we have great momentum exiting FY '25, and that's the underlying assumption as we go into '26 for another strong year. But let me address some of the specific points you've made about questions you had around sort of, I guess, spend and the strength of the macro economy. I mean if I just zoom out a little bit, really, one of the real strengths of our business here, Visa is the diversification of our business. And so we have the broadest exposure to credit, to debit. Our volumes are comprised of everyday spend, the special occasion spend, nondiscretionary like fuel and groceries and discretionary items like travel or holidays, goods, services, consumer, commercial and so really some of the broadest spend categories that you can imagine. And what we do is we remain data-driven and across this broad and diverse set, the growth across our spend bands has remained quite consistent all year. And it was again, in Q4, with higher spending cardholders driving more of the growth, and that's consistent with what we see across the U.S. economy. And so that all gives us good reason over that data to say that consumer has remained resilient. That is our -- that is what we saw in FY '25, and that is our assumption going into FY '26. Operator: James Faucette with Morgan Stanley. James Faucette: Great. Really appreciate all the work that you guys are doing on new initiatives, et cetera. One that's quite topical, obviously, is all things agentic commerce. And I know you've had some recent announcements on that topic. Can you paint a picture for us like the role that you expect Visa to play in agentic commerce transactions and ramp and kind of milestones we should expect to see in its development? Ryan McInerney: We see considerable opportunity in agentic commerce. But just to put it in context, when we had the first wave of digital commerce with eCommerce, we set the standards. We led the product development, and Visa was a significant beneficiary. Then you saw a second wave of commerce, which was mobile commerce. And again, Visa was the leader in terms of standards, in terms of product innovation, in terms of the capabilities enabling that to happen. And we've been a big beneficiary. You've seen that both in people buying things on their phones but also using their phones to buy things, especially with Tap to Pay. And now in this third wave of agentic commerce, we've been leading in terms of our role of setting the standards. I think one great example of that is Visa Intelligent Commerce, where we put out a set of capabilities for AI-ready cards, leveraging tokenization, AI-powered personalization, leveraging our data token service. We put out a set of standards with payment instructions that are going to allow customers like you and I to easily set spending limits and conditions to provide clear guidance for agent transactions and also our payment signals, which are going to share those data payloads in real time with Visa, enabling us to help set transaction controls, manage disputes and Chargebacks and those types of things. So I think that's a great example of the leadership role that we're taking in agentic commerce. And then just 2 weeks ago, we announced the Visa Trusted Agent Protocol. The Visa Trusted Agent Protocol is meant to really ensure that merchants know when an agent is coming to buy something on my behalf, it is actually a real agent that I have authorized to make purchases on my behalf. And I think what differentiates the Visa Trusted Agent Protocol is 2 things. One is it's open. It's an open set of standards, and we think that an open framework is critical to drive mass adoption in the way that's needed for agentic commerce. And the second is it's easy to integrate. We built it on existing web infrastructure so that it's going to be easy for merchants to integrate into existing messaging standards and get up and running quickly. So those would be 2 examples. We're very excited about it. We think it's a significant opportunity for Visa and for everyone involved in the ecosystem. Operator: Jason Kupferberg, your line is open, from Wells Fargo. Jason Kupferberg: I actually wanted to ask a follow-up on agentic. Seems to be topic of the day. I'm just curious to get your perspective on when do you think we start seeing material volumes across the industry from agentic commerce. Obviously, there's still some important security considerations to be addressed. And would also love your perspective on to what extent you see agentic as more of a substitute for traditional e-commerce versus being additive to the TAM of the overall payments industry. Ryan McInerney: Jason, let me address the second part of your question first and then the first part. On the second part of your question, I think the base case is it continues to accelerate the adoption of e-commerce and mobile commerce as we all know it. I think there's an upside case on that where you could actually see users buying from a much larger and more diverse set of merchants than they do today in traditional e-commerce given the power of these agents and their ability to go out and search the world's inventory based on whatever it is that you prefer for your agent. That might be value. That might be price. That might be inventory. That might be speed of delivery and so on and so forth. I think that could ultimately result in consumers buying more things from more merchants, which ultimately means more transactions on Visa. I also think there's a significant upside in the delivery and the relevance of our portfolio of value-added services for the entire ecosystem, especially as you said, they have to work through a number of things that involve potential fraud and disputes and chargebacks and things like that. Right. Back to the first part of your question. Listen, it's still early days. And I think what you're likely to see in the evolution of agentic commerce is not different or dissimilar to what we saw in e-commerce. I think early on, you're seeing consumers use these agents and these platforms for discovery. They're shopping. They're looking for what might be available for any given gift I'm trying to buy or any clothing item that I might try to buy. But then I might jump to the actual merchant site to make the purchase. Then the next step of what you're starting to see is the integration of the buy capabilities into that shopping journey. We're just starting to see that in the marketplace today. We've been working on that for many, many months with the ecosystem. And then I think the ultimate kind of user experience and the promise of agentic commerce will be truly empowering agents to go out to search for things on our behalf and ultimately make purchases and buy things without human intervention. That, we haven't really seen in the marketplace today, but we're working very hard with the platform players to ensure that the capabilities are in place to enable that. Operator: David Koning with Baird. David Koning: Great job. The data processing yield was up a lot, and I know that was explained somewhat. But I'm wondering, is some of that due to VAS, the biggest part of VAS outside of others probably in data processing? And I guess the question is, is there a sustainability to big yield growth in DP given VAS just keeps building. I guess that's the question. Christopher Suh: David, I'll take this one. So yes, as you pointed out, data processing revenue, 17% versus the 10% underlying transaction growth. The factors I called out in my prepared comments was around pricing and mix. And those were the 2 biggest variables. As you know, we implemented new pricing in FY '25 in the second half of the year. That's really benefiting in Q3 and Q4, and that will benefit into Q1, as I talked about as well. In terms of mix, now what does mix mean? Mix does -- across our business, different products and services, different clients in different regions can have different varying yields. And obviously, through the course of any quarter, we see different growth performance across any of those particular elements that will drive different yield outcomes. So in this particular quarter, with data processing, we did see faster growth in higher-yielding cross-border regions, and that's what contributed to the acceleration that you saw in between transactions and revenue in data processing. Operator: Darrin Peller with Wolfe Research. Darrin Peller: I just want to follow up one more time on AI and then a bigger question on the new VisaNet rollout. So first, just to be clear on AI, I mean, do you see your suite of services as a big part of what's being offered by other payments ecosystem partners? And how much are you going to participate in some of those VAS in terms of fraud versus others? And then just I know we talked -- Ryan, you talked about VisaNet rollout, the new rollout. And just help us understand what that can mean for product development or velocity and how it positions the network for things like agentic commerce or stablecoins going forward. Ryan McInerney: Darrin, short answer, long answer. Short answer is yes and yes, but let me dive into both of those. On kind of agentic commerce, I think you've seen from us, really over the course of the year, is Visa doing what we do, which is when there's new technology, new platforms emerging, take a leadership role in establishing kind of the way that payments can work most efficiently and most effectively for buyers and sellers, and we're doing that in the agentic commerce space today. And I think to the first part of your first question, yes, you should assume that we're doing the work to build the infrastructure, the operating regulations and rules, the processes to enable a lot of the things that you're seeing kind of in the marketplace today. As I said on the earlier question, I think it was Jason, it's still very early days. You're going to see a lot of announcements. You're going to see a lot of things coming out. What ultimately is going to help kind of agentic commerce achieve its promise is collaboration, collaboration among all of these various ecosystem partners that make e-commerce and mobile commerce and all of these things work today, and you should expect us to take a leadership role that we're taking. On the next generation of VisaNet, so this has been something we've been focused on as we continue to invest in our stack. We've deployed the next generation of VisaNet, which is our core processing platform at the base of our stack. And the answer to your second question is yes as well. It allows us to ship product more quickly. It allows us to adapt to ecosystem changes more quickly. It allows us to adapt to regional and country-specific requirements more quickly. Here, too, it's early days. We've just begun the deployment of it, but it's a very exciting milestone for us, and ultimately, we think it will be great for the ecosystem and our partners. Operator: Rayna Kumar with Oppenheimer. Rayna Kumar: I noticed in Latin America, there was a slight deceleration in volume versus last quarter. Anything you can call out there? Christopher Suh: Sure. Yes. In Latin America, we did see a bit of a slowdown. It still grew strong, but it was slower than we saw in Q3. And the biggest single contributor I would point to is the moderating inflation that we've seen in Argentina. But overall, across Latin America, it remains a high-growth region, and we're very pleased with the performance. Operator: Ken Suchoski with Autonomous Research. Kenneth Suchoski: Maybe just one more on agentic commerce. I was wondering if you could talk about some of the differences and similarities between Visa's Trusted Agent Protocol and Stripe's Agentic Commerce Protocol. I mean, anything you could talk about in terms of what layer is the value chain you're tackling and how your offering is differentiated versus theirs? And then maybe just talk about the broader tokenization opportunity and your leadership there with over 16 billion tokens and just how the agentic commerce ecosystem will leverage that. Ryan McInerney: Yes. Thanks, Ken. On the second part of your question, tokenization, I think, is the critical building block that ultimately will help Agentic commerce reach its promise. And if you go back -- I know you asked about the Trusted Agent Protocol, but if you go back to the Visa Intelligent Commerce set of products and standards that we put out, tokenization as a platform is what enables the bulk of that functionality and ultimately is what's going to enable us all to have safe, secure, trusted transactions with agents on our behalf. So tokenization, critical building block of that. And as you noted, with kind of 16 billion Visa tokens embedded across the ecosystem, the technology, the standards are well known, well adopted globally in countries all around the world, both on the seller side of the ecosystem and the issuer side of the ecosystem, which is ultimately why it will help scale our standards. As it relates to the Trusted Agent Protocol -- and I'll go back a moment to what I said to a couple of questions ago. Ultimately, what's going to make this all work is collaboration. And so I think you're seeing a lot of different players across the ecosystem, whether it's Visa or other networks or acquirers or PSPs or platforms start to put out their capabilities and standards. And again, here, too, I think it's where the Visa Trusted Agent Protocol can form a base layer for everyone to build on and everyone to ultimately leverage. And what we're -- the reason we're excited about the Trusted Agent Protocol scaling is the 2 things I mentioned. One is it's an open standard; and two, it is designed to be inherently lightweight and easy for merchants especially to integrate to. Operator: Bryan Keane with Citi. Bryan Keane: Just kind of a 2 quick parter. Just thinking about holiday sales growth rate this year versus last, there's some expectation that maybe holiday sales will be a little bit weaker in terms of growth rate. Just how is Visa thinking about that? And then secondly, just cross-border growth versus e-comm versus travel, any differentiation kind of what we've seen on trend line as we go through this fiscal year? Christopher Suh: Okay. I'll take both of those. In terms of upcoming holiday quarter, I've provided our guidance for Q1. It is for a strong Q1, carrying the momentum that we saw coming out of Q4 with strong and stable underlying drivers as well as benefiting from the pricing from a year ago. And so when you add that all up, it makes for a resilient consumer, a stable macro environment and the resiliency that I talked about across spend bands as well. And so we are anticipating a strong quarter going into the holiday -- our fiscal Q1, the holiday quarter that we see. In terms of cross-border, your second question was really around sort of the mix. At the total level, we shared our numbers. It's been stable. It's been a good, strong number, 11% growth in Q3, 11% growth again in Q4. As we click down into the categories of e-commerce and travel, e-commerce has been strong, continued to be strong and steady, 13% in Q3 and 13% in Q4. Travel did improve a point from Q3 as we talked about previously as well. So the thing that I would call out, though, is that when you add that all up, total cross-border growth continues to be above the trend that we saw pre-COVID. And part of the reason for that is that the e-commerce part of the mix of the volume is bigger. It was about 1/3 of the business pre-COVID. It's about 40% now and continue to grow at a faster clip than travel. And so should that trend continue, we'll continue to see a bigger weight toward the e-commerce side of the business. But all in all, again, if you zoom out, strong and stable cross-border trends, and we'll continue to see how they perform through the rest of the year. Operator: Harshita Rawat with Bernstein. Harshita Rawat: I want to ask about stablecoins. As the dust is settling a bit with the passage of the GENIUS Act, it increasingly appears that what was initially thought of as a risk to Visa could, in fact, be an opportunity in cross-border money movement, merchant acceptance in certain markets and services. Ryan, you talked about the momentum in stablecoin-linked cards. This quarter, Visa Direct kind of announced a new stablecoin prefunding option, a number of things you're doing here. I guess my question is what are the most tangible areas of opportunities as it relates to stablecoins in the coming years, maybe in cards, VAS, [ Niko ], et cetera? Ryan McInerney: Harshita, we've seen it as an opportunity for a while now. And the short answer to your question is we see opportunities in issuance, in modernizing our settlement network. I think I talked about some of the opportunities we've captured with our Pismo platform. As you said, we're leveraging stablecoins and cross-border money movement. We announced the Visa Direct prefunding work. We're minting and burning on behalf of our clients with the Visa Tokenized Asset Platform. We've been working with our clients in our consulting business with stablecoins. I mean the list goes on and on. But just stepping back, as I've said, the areas where there's product market fit for stablecoins in the world are the areas where there's significant TAMs and largely where we're underpenetrated. And that's emerging markets and that's cross-border money movement. And we are -- we have a deep product pipeline focused on putting products to market against both of those areas of opportunity and cross-border money movement broadly, whether that's remittances or B2B or gig economy payouts or the like. So we definitely see it as an opportunity. We have targeted a significant portion of our product road map to capture that opportunity and hope to talk to you more about some products that we're bringing to market in the future. Jennifer Como: We're going to take a few more questions, so we are going to go a little over. Just want to try to get in a few more. Operator: Andrew Schmidt with KeyBanc Capital Markets. Andrew Schmidt: Appreciate the Visa stack discussion. That was a good one. Maybe I could ask about the Asia Pac improvement. Chris, I know you mentioned timing in China improvement, but if we could peel back the layers there and maybe talk a little bit more about what's going on and whether that improvement is sustainable, that would be great. Christopher Suh: Yes. Thanks, Andrew. As I talked about in my prepared comments, we did -- we were pleased to see the improved results, 2.5 points, and the things that I noted, improvement in Mainland China and some smaller but idiosyncratic sorts of things around timing, those will normalize its way out. All in all, we're pleased with the momentum in China and in -- across AP in general and think that, that is going to continue to be an important growth opportunity for us. And so when we zoom out from all of that, I think AP is on a directionally a good track. Operator: Tim Chiodo with UBS. Timothy Chiodo: Great. I want to talk a little bit about the evolution of the growth algorithm. Just looking at it numerically, it looks like the biggest change really is, a few years ago, not too long ago, value-added services was about 20% of revenue, growing in the high teens. And now it's approaching 30% of revenue and growing in the mid-20s, so the growth contribution has stepped up at least 200 basis points, if not, closer to 300 basis points. And part of that has been we've seen the RPO tick up over the years. And even this year, the RPO has been up roughly, give or take, 30%. And I was hoping you could talk a little bit about that RPO. What's been driving that roughly 30% growth? I appreciate part of that is valuing timed incentives, but maybe dig into that and other drivers of the RPO. Ryan McInerney: Yes. Why don't I take the first part of the question, and then, Chris, you can take the second part of the question. Tim, I think you summarized it very well. And I think if you go back to Investor Day and you look at kind of the growth framework that we laid out and the strategies that we laid out -- by the way, both for VAS and for CMS -- and you jump forward to today, we're delivering in market those strategies, and we're delivering the results that I think we laid out in that framework that come with those strategies, and you summarized it pretty well on the VAS side of things. Do you want to talk about the... Christopher Suh: Sure, sure. Tim, I think you know this. Obviously, the RPO constitutes many things, but included in that is what you've asked about previously, which is value in kind. This is an important lever for us. It -- when we are able -- it represents a form of incentive that the clients can then use to drive value for themselves, and it's good for our client engagement and continues to drive value to Visa, sometimes in value-added services but in other parts of the business. Now it doesn't drive sort of the majority of value-added services, but it is an important lever. And I think it's an area where we'll continue to see clients really take advantage of it. Operator: Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: All right. Let's close it out. I got -- I'll ask about investments and OpEx if that's okay. Just thinking about growth and OpEx being in line with revenue, I'm curious if there's anything to share on that. Is Visa just being opportunistic with spending or perhaps it's a structural issue as you scale different layers in your service stack and some of those are less mature? Just trying to better understand incremental margins and how that might be changing. Christopher Suh: Sure. Tien-Tsin, as you know, as we've said in the past, explicitly, we don't manage our company to a margin target, at least not in the classical sense, but we do focus on many things. We focus on growing volumes with our clients. We focus on driving revenue across consumer payments, VAS and CMS, and we also focus on running our business as efficiently and as effectively as we can. And part of that is balancing the investments that we make for short-, medium- and long-term return. And when we do this well, as we have, we continue to deliver the financial performance that you've seen, which is strong growth at margins that lead the industry. So I would say in terms of where we're investing now as we talk about '26, we -- I would point you back to actually our Investor Day back in February. We laid out a pretty extensive view of the, a, the big opportunity that we're going after, the massive addressable opportunity; and two, the clear strategies, the things that we're going to go do to go capture that opportunity. And so across our industry as things continue to move as fast as they are, you've heard a lot of the conversation even today around agentic and stablecoin. We think it's important that we continue to invest in these opportunities from our position. And if we do so, we'll continue to deliver on the growth framework that we outlined at Investor Day, which means we'll deliver compelling profit growth and drive strong shareholder returns. Ryan McInerney: And Tien-Tsin, the only thing I would add on what Chris said is I don't ever recall being so excited about the opportunities ahead of this company. And I don't ever recall being so pleased with how well our teams have lined up our product pipeline, our go-to-market sales motions, our client teams, the things that we talked about today, whether it's agentic, stablecoins, Visa Pay, Visa Accept, tap to everything, the great momentum in the VAS business, the great momentum in Visa Direct, the great momentum and results we're seeing in Visa Commercial. It's just an extraordinarily exciting time for the company, and I'm just super proud of the investments that everybody is making across the place. So appreciate that question. I appreciate everybody's questions. Jennifer, back to you to close. Jennifer Como: Yes. And with that, we'd like to thank you for joining us today. If you have any additional questions, please feel free to call or e-mail our Investor Relations team. Thanks again, and have a great day. Operator: Thank you all for participating in Visa's Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call. That concludes today's call. You may disconnect at this time, and please enjoy the rest of your day.
Operator: Good day, everyone, and welcome to today's Neurocrine Biosciences Third Quarter 2025 Results Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Vice President of Investor Relations, Todd Tushla. Todd Tushla: Hi, everybody, and a very pleasant good afternoon to you wherever you may be. Welcome to Neurocrine Biosciences Third Quarter 2025 Earnings Call. I'm joined today by Kyle Gano, Chief Executive Officer; Matt Abernethy, Chief Financial Officer; Eric Benevich, Chief Commercial Officer; and Sanjay Keswani, Chief Medical Officer. During our call, we will be making forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to review the risk factors discussed in our latest SEC filings. After prepared remarks and as is our standard practice, we will try to address all your questions. With that, I turn the call over to Kyle. Kyle Gano: Thank you, Todd. Good afternoon, everyone. Our third quarter results reflect Neurocrine's exceptional execution and the strength of our enterprise-wide momentum as we continue to deliver across our commercial, clinical and operational objectives. From a commercial perspective, for INGREZZA, the recent investments to expand our sales force and improve patient access drove yet another record quarter for both new patient starts and total prescriptions. Highlighting the persistent unmet need for patients with tardive dyskinesia and Huntington's chorea. With CRENESSITY, the strong launch highlights its role as a first-in-class therapy, redefining the standard of care for patients with classical congenital adrenal hyperplasia or CAH. While there is still much to learn, we are encouraged by the early response from the CAH community and the potential to make a lasting impact for patients. Momentum for both INGREZZA and CRENESSITY is strong and we believe continued targeted investments in these commercial assets will accelerate growth into 2026 and beyond. In our clinical portfolio, I am pleased with the study enrollment progress in our Phase III studies of osavampator in major depressive disorder in direclidinein schizophrenia. We remain on track to meet enrollment objectives for the year. Beyond these late-stage programs, we continue to advance a robust early and mid-stage as expanding through high-quality preclinical programs emerging from Neurocrine's internal discovery efforts. To this end, I'm also happy to report that we are on track to achieve our R&D productivity goals for the year, specifically 4 new Phase I study initiations and 2 new Phase II initiations. Advancing 2 potentially standard of care changing medicines until the final phase of development, while simultaneously driving early and mid-stage innovation represents a record level of productivity for us and positions Neurocrine exceptionally well for the future. As I reflect on my more than 20 years at Neurocrine and just over 1 year as CEO, I'm deeply proud of how far we've come. Yet as we continue to evolve, I'm even more inspired of what lies ahead. Neurocrine is poised into a new chapter of sustained long-term growth, driven by our science, our people and our unwavering commitment to the patients we serve and investors to support our mission. With that, I'll turn the call over to Matt. Matthew Abernethy: Thank you, Kyle, and good afternoon, everyone. The third quarter was strong across the board for Neurocrine, with $790 million in net product sales, reflecting 28% year-over-year growth. Driven by continued progress both from CRENESSITY and INGREZZA, congrats to all involved in the performance of these 2 medicines. CRENESSITY grew sequentially from $53 million in Q2 to $98 million in Q3, reflecting strong early adoption and persistency rates. In addition, 80% of dispensed prescriptions are now being reimbursed. Feedback from patients and KOLs remains quite favorable in terms of CRENESSITY's efficacy, safety and tolerability profile. We look forward to continuing to add patients to therapy and to further establishing CRENESSITY as a standard of care treatment for patients with CAH. Momentum for INGREZZA also continues to build with our third consecutive quarter of record new patient additions in Q3, resulting in net sales of $687 million. Of note, as you consider modeling Q4, the third quarter benefited from a 14th ordering week. Outside of this ordering dynamic, the combination of improved access and our sales force expansion, are resulting in double-digit TRx growth, record NRx and market share gains through the first 9 months of the year. On the heels of this momentum and strength of the TD market, we have decided to pursue an additional sales force expansion with 3 goals in mind. First, accelerate the development of the TD market between now and 2029, strengthening our position as we navigate the potential impacts of the Inflation Reduction Act. Second is to maximize INGREZZA patient share during this window of time. And third, set the foundation of an expanded psychiatry portfolio, anticipating one or more of our late-stage clinical programs will have successful top line data in 2027. From a financial perspective, the expanded investment in both INGREZZA and CRENESSITY will result in an SG&A expense increase of around $150 million in 2026. We will, of course, provide a fuller financial picture for Neurocrine in February next year, but I wanted to give you this insight for now. To close, our capital allocation priority is to remain intact. Number one, drive revenue growth; number two, advance our R&D programs; number three, enable business development; and number four, return capital to shareholders. Our top line growth and financial profile of over $2.1 billion in cash is the foundation for continued investment in our internal pipeline, which will position Neurocrine for sustained growth and enable us to deliver new innovative therapies to patients with unmet needs in the years ahead. With that, I will now hand the call over to Eric Benevich, our Chief Commercial Officer. Eric? Eric Benevich: Thanks, Matt. Q3 was another banner quarter for our brands. Our commercial and medical teams continued to deliver with a record quarter for both INGREZZA and CRENESSITY with combined net sales of $785 million. Starting with INGREZZA, performance through the first 9 months of 2025 has been exceptional, reflecting both the strong clinical profile and the continued significant unmet need for people living with tardive dyskinesia or Huntington's chorea. Past strategic investments to expand the sales force and improve access have been positive, yielding a third consecutive quarter of record new patient starts and total prescriptions. Today, of a population exceeding 800,000, we estimate only about half of those living with TD have received a diagnosis for their uncontrolled movements, and only about 10% are currently being treated with the VMAT2 Inhibitor. With exclusivity out to 2038, there remains a significant organic growth opportunity ahead. Our INGREZZA prescriber base continues to expand, particularly in psychiatry, where advanced practice providers, such as nurse practitioners and physician associates now account for the majority of psychiatric patient care in the United States. As an example, our INGREZZA prescriber base is 30% larger today than it was 2 years ago at this time. In addition, TD prevalence continues to increase in conjunction with broader use of antipsychotic medications. In light of our strong momentum and the significant growth opportunity, we've made the decision to further scale up our INGREZZA sales force to meet this growing demand. Going forward, we will be expanding and restructuring our INGREZZA sales organization to create 2 dedicated teams, 1 combined neuropsych team and our existing Long-Term Care team. Both the Neuropsych and LTC teams will be expanded to enable us to engage more VMAT2 prescribers than ever before and deepen relationships across our current base of prescribers. Consistent with prior expansions, success will be measured by growth in new patient starts and total prescriptions, metrics, which typically show the full impact of field expansion several quarters after deployment. The expansion of the sales teams set INGREZZA up well for 2026 and beyond. Will also help position us for the anticipated launches of our next wave of investigational psychiatric medicines currently in Phase III development. Now turning to CRENESSITY. Our launch mantra of So Far, So Great, remains well deserved with Q3 net sales reaching $98 million in just the third full quarter on the market. During the third quarter, 540 new patients initiated therapy, bringing the total number of classic CAH patients on therapy since launch to more than 1,600. As we've said from the outset, this is a new market we are building, and therefore, this is a learning launch. With CRENESSITY representing the first therapy developed and approved specifically for patients with classic CAH we continue to gain important insights into prescriber behavior, patient dynamics and potential seasonality trends. We continue to see steady adoption. And while the pace of new patient starts may vary from quarter-to-quarter, the strong persistence and adherence rates observed to date give us confidence in continued volume growth going forward. In the third quarter, patient demand modestly favored the pediatric population versus adults, and skewed towards female patients. Prescriptions continue to be written by a range of endocrinology providers, including those practicing in multidisciplinary centers of excellence, pediatric endocrinologists and community-based adult endocrinologists. On the payer front, we continue to see strong reimbursement. Launch to date, 9 out of 10 people taking CRENESSITY have received approval for their insurance, and CRENESSITY is affordable with 9 out of 10 people paying $10 or less per month out of pocket, most pay 0. So far, insurance reimbursement has not been a barrier to treatment. As the first and only FDA-approved treatment specifically for classic CAH, CRENESSITY delivers a compelling combination of efficacy, safety and tolerability. Our ongoing open-label extension studies continue to generate valuable data on quality of life, long-term safety and differentiating outcomes, which will further strengthen an already robust data set. We estimate approximately 20,000 people in the U.S. live with classic CAH. Based on the very favorable receptivity from the CAH community and the opportunity to bring relief to more people with CAH we've made the decision to also expand our CRENESSITY sales team. As I said in my opening comments, we're executing very well from a commercial perspective. Both our products are fast-growing, innovative first-in- disease medicines. Given the significant growth potential for each, it was a straightforward decision to expand both the INGREZZA and CRENESSITY sales teams. This is an investment in growth and an investment in our future. Both sales team expansions will be fully completed by the end of Q1, and we can give further color on our progress as we get into 2026. These are very exciting times here at Neurocrine as we make good on our promise to deliver brave science. So with that, I'll hand the call over to Dr. Sanjay Keswani, our Chief Medical Officer. Sanjay Keswani: Thanks, Eric, and good afternoon to everyone. My prepared remarks for today will be brief as we remain on track for all our clinical programs. We anticipate top line results in the fourth quarter for valbenazine in Dyskinetic Cerebral Palsy as well as for the Phase II proof-of-concept and dose finding study of NBI-'770, that's our NR2B NAM as an adjunctive treatment in major depressor disorder. As a reminder, positive results from NBI-'770 could support a confirmatory Phase II study or the initiation of a Phase III trial in MDD. As Kyle mentioned earlier, the Phase III studies for Osavampator in major depressive disorder and [ direclidineine or NBI-'568 in schizophrenia continue to enroll well, alongside solid progress for the rest of our early to mid-stage pipeline. You've heard us talk about our upcoming R&D day throughout today's call. As my colleagues alluded to, we are excited to welcome the Wall Street community to our San Diego campus where we'll have an opportunity to provide greater detail into our long-term vision, much of which stems from enthusiasm around our clinical and early-stage programs, plans and recent progress. To provide a bit more detail on the agenda, I will provide an overview of our neuropsychiatry programs with a spotlight on Osavampator and our broad Muscarinic Agonist portfolio. Following my presentation, Dr. John Krystal, a leading psychiatrists from Yale University will join me for a moderated Q&A session. Afterwards, Jude Onyia, our Chief Scientific Officer, will discuss Neurocrine's ongoing R&D transformation efforts and preview a few of the next-generation programs expected to enter clinical development. We look forward to seeing many of you there as we unveil the foundation for Neurocrine's next chapter. With that, I will hand the call back to Kyle. Kyle Gano: Thanks, Sanjay. I think we're ready to take questions now. Operator: [Operator Instructions] We'll take our first question from Phil Nadeau with TD Cowen. Philip Nadeau: Congratulations on a really strong quarter and great commercial performance. I wanted to just ask about the patient dynamics and patient starts for CRENESSITY. It did seem like enrollment forms were a little bit lower in Q3 than Q2. Was this seasonality or a sign of maybe an early launch bonus? Any insights you can give us on those trends would be helpful as we look to model the next several quarters of CRENESSITY? Eric Benevich: Hi Phil, this is Eric. So Obviously, we're really pretty pleased with the overall adoption of CRENESSITY launch to date and with 540 new treatment forms in Q3. And we saw that as a continuation to the strong adoption that we saw earlier in the year in the first half. We said at the beginning, we expected this to be a steady or measured launch. And so far, it really has borne out that way. The weekly adoption has been really consistent over the course of the summer. We don't think that there's necessarily any kind of quarterly dynamics going on or seasonality. We are still early in the launch, and we'll have to see how things bear out after we've gone through a few cycles. But ultimately, we're really pleased with the enrollment. And with over 1,600 treatment forms through Q3, we're really optimistic and expect to see this accumulation of patients as we go forward. Matthew Abernethy: Phil, thanks for setting the tone also and asking just one question. So just hygiene purposes, we'll stick to the answering the first question that gets asked. Operator: And we'll go next to Paul Matteis with Stifel. Paul Matteis: Let me add my congrats on the quarter. I wanted to ask a question, I guess, about the IRA and I hope you bear with me as it has 2 subparts for this where I got is really only one question. Just can you help us set up how you guys are thinking about the upcoming AUSTEDO price that we'll learn about? And just what are the sort of implications for Neurocrine? And then for INGREZZA, given the increased discounting and now that we're looking at a gross net that's getting up into the mid- to high 30s. Should we think that the worst-case scenario for you has now changed given that the small biotech exemption has the discounting to a level that is actually potentially going to be below where your gross to net ends up? Kyle Gano: Paul. A lot to unpack there. Maybe I'll start with the first question and see how far we get on that. I think when it comes to AUSTEDO, our view of this is that we'll learn its pricing across both the current immediate release and XR formulations in November. You should hear from CMS late November, if not sooner than that, but that's what we're planning on currently. In terms of our expectations, how it might affect INGREZZA. I think where we stand right now is we're trying to understand what the plans might do in reaction to AUSTEDO's pricing. Our view at this point is both the health plans and the PBMs will use a variety of strategies for medicines that go through the IRA as well as those medicines that are not going through an IRA type of moment. And for us, there are things that we know and don't know. And ultimately, where we stand right now is that INGREZZA is an incredibly sticky medicine. Once patients start INGREZZA, they tend to stay on it, which really means we're looking at -- looking at new patient starts during a 2-year period of '27 to '29 when we reach our own IRA year. So we'll look to contract here over the next, say, 12 to 14 months. As we approach 2027, we'll look to maximize the number of patients that are INGREZZA between now and the end of '26. And that will help us negate any headwinds on NRx's which to date, it's only about 5% of our total TRx. So on a quarterly basis, that number is quite small. We'll look also to see if there's any learnings from those medicines that are negotiated and become implemented next year. And then I think most importantly here, we'll control what we can across INGREZZA, but across the portfolio, we'll look to build the company as strong as we can. Eric Benevich: Paul, this is Eric. I just want to chime in and kind of reinforce a couple of points. One is that we do believe that there's room on formularies for MFP adjacent products. We think that PBMs and health plans will behave differently. There's not going to be sort of a uniform approach that they take. And kind of tying in with our prepared remarks, it's really important that we maximize patient share going into '27 and beyond. And currently, that's what we're doing and that's part of the rationale for the sales force expansion for INGREZZA. Operator: And we'll take our next question from Tazeen Ahmad with Bank of America. Tazeen Ahmad: Mine is going to be on CRENESSITY. So is it too early to know this, but are payers already looking for a certain level of steroid tapering in order to continue covering therapy? And just in terms of number of days in 3Q versus 4Q, we're heading into holiday season. So how should we be thinking about the potential for seasonal impact for CRENESSITY sales in 4Q? Matthew Abernethy: Thanks for the question, Tazeen. This is Matt. We're not really anticipating seasonality outside of just the pace and cadence of patient visits into the clinician's office. So nothing on the seasonality front. In terms of reimbursement, really has not been a requirement for patients to titrate down steroids to a specific extent. It's really looking at do they have the underlying disease and do they have treatment with hydrocortisone? And if that's the case, reimbursement has been quite smooth. I just give a shout out to the team working on this, advocating on behalf of patients. And I'd say the insurance providers can understand the benefit of this new medicine for these patients. Operator: And we'll go next to Akash Tewari with Jefferies. Unknown Analyst: This is Steve on for Akash. On INGREZZA, given that you mean sort of AUSTEDO [indiscernible] already much more expensive than regular AUSTEDO. Is there any changes in payer preferences you've seen thus far? And then just in terms of the IRA negotiated pricing upcoming, how are you able to lock in INGREZZA's pricing through 2026 ahead of this announcement? Eric Benevich: Yes. No, thank you for the question. So I think the health plans are seeing that part of what Teva is doing is trying to push patients to higher dose strengths of both the BID and the XR formulation of Deutetrabenazine and since that product has a per-milligram pricing structure, higher doses mean more revenue per patient. Health plans are catching on to that. And we have seen examples of health plans that would, for example, cover the BID formulation, but not the XR. So I think that the fact that we've seen this dose creep dynamic and/or patients transitioning to the XR formulation being more expensive to the plan that they've been more willing to engage with us. And I think it partly explains the ability that we've had this year midyear to expand our formulary coverage. The coverage that we have now, we expect to carry through 2026. And so in terms of expectation setting for next year, we should expect at least the same level of formulary coverage that we have now. Matthew Abernethy: But in most instances, we're seeing -- we're at parity from a formulary perspective. And that's always been our goal is to take an approach to give clinicians a choice as to what medicine they prefer. And that's going to be our strategy also going forward. Operator: We'll go next to Mohit Bansal with Wells Fargo. Mohit Bansal: Great. And would love to touch upon the 10-Q filing and the talks about DOJ investigation. Any color you can provide on that? And how should we think about the next time line from this one? Kyle Gano: Hi, Mohit. This is Kyle. I appreciate the question here on this. In August, we received a CID, a Civil Investigative Demand from the DOJ requesting certain documents and information attached to sales, marketing and promotion of INGREZZA. Of course, we're fully cooperating with the DOJ. And I think right now, there's not much more to say on that. We'd certainly keep the external community updated when there's material information to share on that. The only piece I would conclude with is that we have an extremely robust compliance program here at Neurocrine. We take compliance seriously and the responsibility that comes with that. And as we move forward here, we'll continue business as usual because we think that's the right thing to do. Again, we'll keep folks updated as we learn more. Operator: We'll go next to Cory Kasimov with Evercore. Cory Kasimov: Mine is on CRENESSITY. I guess I'm wondering if you can speak to where you are with getting CRENESSITY up and running at this point at the centers of excellence and then the progress that's also being made in the community setting where doc see fewer patients. Are you more or less at every COE at this point? And do you see that opportunity on the community level? Eric Benevich: Yes. And just to recap, we estimate there's around 20 centers of excellence out there that care for roughly 15% of the classic CAH patient community. Yes. I mean, all the COEs have now started adopting though, I would say, a different pace. And I think that reflects the sort of the different ways that they work, the level of bureaucracy, the level of access, et cetera. But for the most part, our view is that the rate of adoption that we're seeing in the COEs is mostly a function of the rate at which patients are flowing through. We've also been surprised -- very pleasantly surprised, I think, by the rate of adoption with community endocrinologists that treat the adults. Most of these practices, as you rightly call out, only have 1 or 2 patients. And so that's where you get into a much wider pool of HCPs to reach. And kind of tying back to our prepared comments as part of the rationale for expanding our field sales team to go a little bit deeper into our call universe and to be able to reach some of these practices that we haven't yet tapped into. Operator: We'll go next to Anupam Rama with JPMorgan. Anupam Rama: Congrats on the quarter. Could you provide a little bit more color and maybe some quantification around the sales force expansion for both products in terms of the segments that are going to be targeted here for INGREZZA. Is its psychiatry, neurology, long term or for CRENESSITY, general endos versus pediatric endos? Eric Benevich: Yes. So in terms of scale, I would characterize it as about a 30% increase in terms of our overall sales footprint across both products. Obviously, INGREZZA is a bigger product. So most of the incremental headcount are going to be going to INGREZZA. I said in my prepared remarks that we were going to be both restructuring and expanding. And what we're doing with INGREZZA is essentially combining our existing psychiatry and neurology teams, and then expanding the headcount there because what we've seen is that we could do a better job, I think, of covering our psychiatry and neurology customers who, in many ways, are more similar than they are different by having a cohesive team versus having multiple different teams with different reporting structures. So I think that this simplifies things substantially for us going forward. We're going to keep the LTC team separate and we are expanding that group as well. There's been a continuing fast-growing segment for us. So we're excited about increasing our coverage of high-potential psych providers and neurology providers with the Neuropsych team and then adding more headcount into LTC. The expansion with CRENESSITY is obviously smaller in scale. Our existing team is less than 50. So this is going to be a relatively smaller expansion, but it does allow us to go deeper especially in those community endocrinology practices and ultimately to accelerate adoption in classic CAH and help more patients faster. Matthew Abernethy: This is really a reflection of our belief in the TD market, an opportunity that we have ahead. Eric's track record here, this is probably our fourth expansion. Every time we've done it, we've seen a tremendous response and the team has done a great job driving more patients onto therapy. So I would look at this investment as clearly being to accelerate the market development and to maximize the number of patients on therapy, and we feel fortunate to have 2 great medicines to do this with. Operator: And we'll go next to Jay Olson with Oppenheimer. Jay Olson: Congrats on the quarter. We have a pipeline question related to direclidine. As you look at potential indications beyond schizophrenia and bipolar, are you considering Alzheimer's psychosis? And are there any particular lessons you expect to learn from the Cobenfy Phase III study in Alzheimer's when that study reads out and any potential read across to direclidine? Sanjay Keswani: Yes. Thank you so much for the question. So as you mentioned, with 568 or direclidine, we're targeting our Phase III program, schizophrenia. We have initiated a Phase II bipolar mania study, that's this year. We're also very interested in Alzheimer's disease psychosis. We do have a pretty robust muscarinic portfolio, and indeed, we'll unveil that at R&D Day in December. But we have a lot of options in terms of which molecule we use, M1 preferring, M4 preferring, dual agonist for various indications. So at the moment, we're thinking about AD psychosis for one of our follow-on molecules, which has particular advantages with respect to safety considerations in the elderly. Yes, we'll be watching BMS' Cobenfy data very closely. Our understanding is that their ADEPT Phase III study will be reading out relatively soon. They're going to be lessons learned, I think, for the whole field. Operator: We'll go next to David Amsellem with Piper Sandler. David Amsellem: So I wanted to come back to the sales force expansion for INGREZZA. So you've had a number of sales force expansions over the years over the commercial life of the product. So I guess with that in mind, at what point do you think this commercial organization is going to be rightsized? And also at what point do you think the level of DTC spend is going to be rightsized? In other words, when do we start to see more aggressive margin expansion associated with the product? Matthew Abernethy: So on the margin expansion, we've made tremendous progress over the last 5 years being in the low 50% range all the way down to this year, we should be in the low 40% range. And growing revenue to almost $800 million this quarter is just a testament to the investments as well as the markets that we're playing in. So when will we be 100% rightsized? We always invest as much as we can to pull as much revenue forward in any of these situations, and we're learning a lot as we go with the TD market. But overall, from a margin expansion perspective, we look into the last part of this decade as being in a place where we'll continue to drive leverage, albeit maybe not as much as what had been anticipated in '26, but it's really with an eye to maximize the number of patients on therapy heading into the '27 to '29 window. Kyle Gano: Maybe I'll just add there to that. I think we touched on this already, but the INGREZZA market as it relates to TD is an incredibly robust growth engine for the company. And as much as we lean on the performance of the medicine, we're still only treating 10% of the 800,000 patients that are out there. And that was with the backdrop of the TD prevalence continuing to increase at the rate of growth of the antipsychotics, which is 3% to 4% per year, which is 3 to 4x greater than the general population. You put all those pieces together, the number of prescribers increases year-to-year as well. It's increasing faster than we've expanded the sales force over the years. In fact, I believe the past 2 years, the prescriber base has increased by 30%. So as much as we have looked at ways of reaching all of these patients and prescribers over time, the current structure of our sales organization is actually smaller than some of the companies out there with products just within schizophrenia. So we like where we're headed to right now, but it's still an organization that is rightsized for tardive dyskinesia and not so much for some of these larger psychiatry indications. And I think this is a step that not only helps us with INGREZZA, but as Eric said in his opening remarks, sets the stage quite well for us as we look at osavampator and direclidine in Phase III and their potential launch in the second half of this decade. Operator: We'll go next to Brian Skorney with Baird. Luke Herrmann: This is Luke on for Brian. On the upcoming 770 readout, can you talk about your expectations for the data? And what type of result in your view would support a confirmatory Phase II as compared to moving right into pivotal? Sanjay Keswani: Yes. So we are expecting the results of the Phase II study for 770, that's an NR2B NAM, this quarter. Just a context, the Phase II is a relatively small signal finding study, so 72 patients total, with 3 active arms as well as placebo. So I think the likelihood is that we would go into confirmatory Phase IIb if the results we see are encouraging. But we won't discount going to Phase III at this moment. In terms of, frankly, what we'd like to see, we would like to see esketamine-like efficacy, not too dissimilar from SPRAVATO, but without the baggage of some of the associated side effects, which mandate a 2-hour in-house observation period post dose. But I guess we'll see what we see later this quarter. Operator: We'll go next to Brian Abrams with RBC Capital Markets. Brian Abrahams: Congrats on the quarter. I was wondering if you could talk a little bit more about CRENESSITY persistence, just now that you're several quarters in. Can you be any more specific on in terms of what you're seeing there? And then just the overall KOL feedback around patients who started on the drug early in the launch and the glucocorticoid equilibration at this point now that patients have been on drug for many months. Eric Benevich: Yes. I mean the way that I would characterize it is that CRENESSITY's persistence and compliance has been really strong. And certainly, we were hopeful going into the launch that we would see this kind of overall adherence to medication based on our experience in the double-blind studies and the open-label extensions. But the vast majority of people that are starting treatment are -- in the earlier parts of the year are still on treatment. In terms of the feedback on the reduction of GCs, obviously, you all have done your doc calls, you're probably hearing the same kind of thing that we're hearing. Patients are on treatment for a period of time. Doctors want to see how they can reduce the androgens and then they start the process of tapering down the GCs and it varies a little bit from provider to provider and also, I think, is dependent on the particular situation of the patient. But overall, we're seeing really good feedback in terms of both disease control with the androgen reductions and also the opportunity to really bring down those GCs to more physiologic or near physiologic levels. Operator: We'll go next to Marc Goodman with Leerink Partners. Marc Goodman: Yes. Matt, at the beginning of the year, you were pretty conservative with respect to the CRENESSITY launch. I think your main issue, if I remember, was just reimbursement concerns and how quickly that would be adopted. Obviously, that's been adopted way better than anybody could have expected, I suppose. So how do we think about gross to nets now? I mean they clearly have come down a lot, just working through the numbers. Are we continuing to move lower quite a bit outside of maybe the first quarter next year just because first quarter is unusual? But if you think about the next 3, 4 quarters, are they just going to continue to come down and ramp down to more normalized levels for what we consider an orphan product like this? Matthew Abernethy: Marc, that's quite fair. In terms of a guide for gross to net, I would just characterize it as being less than a 20% gross to net discount and that's something that -- in the foreseeable future, that's something we would be anticipating. Part of the gross to net dynamics has to do with the nature of the patients. They're primarily commercial, but we also have a base of Medicaid patients, so you pay the statutory rebate. But overall, the rate of reimbursement, as you mentioned, it's above 80%. As Eric said, 9 out of 10 patients have ultimately ended up with an adjudicated claim. So I feel quite strong with where we're at and reaching a pretty darn good level in terms of how we think about the future. Operator: We'll go next to Sean Laaman with Morgan Stanley. Sean Laaman: Maybe just circling back on INGREZZA. But can you comment on neurology versus the psych split? And is it a focus on psych to the expense of neurology? I think I heard AUSTEDO had a strong uptake in neurology, especially during COVID? And what are your plans for neurology? Eric Benevich: Yes. Neurology represents about 15% of our total volume. Obviously, all of the business segments, neurology, psychiatry and LTC have been growing like gangbusters this year, in particular. But on a relative basis, it's now the smallest segment that we have. And we view it as important, but it doesn't have the same kind of patient potential that we see in psychiatry. As I said in my prepared remarks, the fastest-growing segment is really advanced practice providers that are in behavioral health. And so this reorganization and kind of combining our teams across psychiatry and neurology sort of puts our resources where we see the highest growth potential. And behaviorally, the psychiatry segment and the neurology segment are more similar to each other than LTC. And so we're keeping LTC separate, expanding that team. We're combining our psych and neurology teams and then expanding that team. And ultimately, we want to make sure that we can keep up with the pace of this market that's very fast growing and continue to drive new patient starts. This is an investment in growth, as we said, and we really like the trajectory that we're on now. Kyle Gano: Maybe just to add to that real quickly on the neuro piece. Just keep in mind, a lot of interest has come from the side of the chorea side of the indication opportunity with INGREZZA. For HD chorea, there are about 30,000 patients in the U.S., about 90% have chorea. So that 20,000 number is about a 40:1 ratio to the TD patients that we see out there today. So I think that speaks to some of the volume flow that we see across the neuro and psych piece and that's something that we keep in mind as we look at for their investments down the road. Operator: We'll go next to Yigal Nochomovitz with Citi. Yigal Nochomovitz: I had one on capital management. You mentioned, obviously, the increase in SG&A of about $150 million to expand both sales forces. So with that in mind, I'm just curious how are you thinking about the continuation of the buyback at the pace of that buyback related to the new $500 million buyback allocation? Matthew Abernethy: Yes. So we have $2.1 billion in cash right now, no debt. We're profitable. Where we're putting the capital right now is prioritizing top line growth as well as investing in R&D at 35% is what our target range is. We, of course, have flexibility to do share buyback. But I would say that our bias is to utilize our capital to -- for business development activities. But right now, focused on driving our own internal initiatives. Operator: We'll go next to Corinne Johnson with Goldman Sachs. Corinne Jenkins: Maybe a question for us. Can you talk about where you stand with respect to share of kind of new to category or new to class patients with INGREZZA versus AUSTEDO? And where do you think that could go? Maybe contextualize that versus where we were a year ago and where you think we could go with the expanded sales force over kind of the next year? Eric Benevich: Yes. As Matt mentioned, the new patient starts or NRx in any given week or month are single-digit percent of total TRx. But they're critically important because of the persistency and compliance that these patients have on INGREZZA, that they represent a significant number of likely refills. And what we've seen really since the beginning of the year with the prior expansion of our field sales team and then the investment that we've made in increasing formulary coverage, particularly in the Medicare segment is that we're getting the majority of new patient starts, and that's really what's driving increased total market share from a patient perspective and that's really an important part of our strategy going forward. This momentum that we're carrying through '25 into '26, we want to make sure that we continue that into that critical time period of '27 and beyond. So the way I would look at it is we're gaining the majority of new patient starts now, and we intend to continue doing that going forward. Operator: We'll go next to Ash Verma with UBS. Ashwani Verma: I'm just trying to understand the medium-term growth outlook for INGREZZA given the sales force investment and the contracts that you've done. For the years before IRA impact, do you believe that you can grow at a higher pace versus where you've guided to this year? Eric Benevich: Yes. I guess the way that I would characterize that is that this year, the VMAT2 market is experiencing double-digit growth. And our brand is growing faster than the market. So we're really pleased with the growth trajectory that we're on. In fact, as we mentioned earlier, for Q3, that was -- that represented 12% year-over-year growth. So the goal is to continue and carry that forward into 2026 and beyond, and to maximize our patient share. We'll be able to give more color as we get closer to our Q4 earnings call and talk about the projections for 2026. But at this point, it looks like we'll be able to see a continuing strong, robust growing market for VMAT2s and INGREZZA in particular, next year and beyond. Operator: We'll go next to Ami Fadia with Needham. Ami Fadia: It's on NBI-'770. Given that this study is not necessarily powered for statistical significance, just on an absolute basis, what is the level of change in the primary endpoint that you're looking to see as you think about some of the other drugs, such as SPRAVATO or rather psychedelics in the space? And eventually, are you thinking of studying this in TRD or MDD? Just sort of current thoughts. Sanjay Keswani: Yes, really good question. So yes, it's a relatively small study. So I'm hesitant to give an effect size that, frankly, we would be considered as successful versus not because I think there's a huge amount of unmet need in this population. As you mentioned, there are potentially 2 populations that we could target with 770. And one is adjunctive treatment in MDD, which is currently where the program is headed. But we clearly could go down the SPRAVATO route with respect to TRD as well with this mechanism. So we have a couple of options. We will decide that, I think, based on the data that we'll receive later this quarter. Operator: We'll go next to Sumant Kulkarni with Canaccord. Sumant Kulkarni: As the Inflation Reduction Act kicks in for your competitor, could you comment on where you might see the most impact on INGREZZA, either in terms of profile of patients or by prescriber type? And on the neuropsych side specifically, what might be the maximum number of products that you might be able to leverage the situation of your expanded neuropsych sales team? Eric Benevich: Yes, let me take the second part of your question here. We'd love to have the challenge of having 3 products into psychiatry and long-term care at the same time. Obviously, we're really excited about the late-stage pipeline with both direclidine and osavampator in Phase III trials. And as Kyle said in his prepared remarks, data and potential launches later in the latter half of this decade. This expansion that we're in the midst of now, I think sets us up well for being able to move and launch with either of those 2 products or potentially both. So I would say that it's not sufficient, meaning, for example, if we end up having the opportunity to launch osavampator, we won't have the coverage of the primary care -- future primary care prescribers that we would need to reach. So this gets us partly the way there, but not fully. And so I do think it reduces the amount of changes that we would have to make to prepare for either of those 2 launches down the road. Matthew Abernethy: In terms of impact from the IRA and the negotiation, our view is that patients are -- existing patients are ultimately going to stay on therapy during this window of time. So you're thinking about a 2-year window when you're dealing with new patients and where do they go. So a lot of what we're doing right now is to maximize the number of patients on therapy between now and 2027. And we're going to control every single thing that we can to maximize that number, and we think we'll be successful during that window of time. But we will learn more in terms of what the MFP is for AUSTEDO as well as payer behavior over the coming months. But for what we can control, we're doing everything we can possible. We have a great market with a great medicine here. Operator: And we'll go next to Yatin Suneja with Guggenheim. Yatin Suneja: One clarification, the 14-week dynamic or one extra week dynamic, that is just specific to INGREZZA? And then if you can just comment also on the inventory, if you can, for CRENESSITY. Matthew Abernethy: Yes. CRENESSITY inventory build was about $7 million for the quarter. And then as it relates to the 14 week, that does pertain to INGREZZA primarily. And you can assume that was almost a full week of impact on the quarter. So when you want to normalize Q3 to think about trajectory into Q4, I think it's safe to assume remove the week and then you can grow off of that base from there. Operator: And we'll go next to Myles Minter with William Blair. Myles Minter: This one is just on CRENESSITY new starts. I think in the second quarter, you had 664. You got 540 this quarter. So some sort of warehousing effect that's bleeding out of those patients. Can we expect that sort of trajectory for the next quarter and maybe a return to growth when you get that sales force expansion hitting into the new year? Eric Benevich: Yes. The way I would characterize the adoption in Q3 was that very consistent and steady. We said this would be a measured launch. And so far, it has played out that way. Although the overall rate of adoption, I think, since day 1 has been a little bit quicker than what we anticipated prior to the launch. We were helped out a little bit in Q2 by the wind down of the adult open-label study. And so there were some patients that transitioned towards the end of Q2 to commercial drug that bumped up numbers a little bit. But overall, I'd say that the rate of weekly enrollments has been pretty consistent across both Q2 and Q3. Kyle Gano: Maybe I'll just add here quickly. The launch continues to exceed our expectations, and that's across the board, enrollment forms, persistence, compliance and that's played out here ultimately. As time moves along, the combination of the steady adoption of CRENESSITY as well as the persistency is going to stack volume over time and gives us all the confidence that we have a need for this to be our next blockbuster here. Operator: We'll go next to Danielle Brill with Truist. Alexander Nackenoff: This is Alex on for Danielle. Another one on CRENESSITY. Just curious if you're seeing any new -- any shift in the new prescription breakdown between pediatrics and adult? And additionally, any trends in the usage of the free drug program? Eric Benevich: No major shifts from the demographic perspective. It still is skewing towards younger patients and primarily towards female patients. That pattern kind of kicked in after about a quarter or so on the market, and it's been pretty steady ever since. And then what was the second half of your question, I'm sorry? Alexander Nackenoff: Just on... Eric Benevich: That was on the drug part? Alexander Nackenoff: Yes. Eric Benevich: Yes. It's actually continues to be less than what we had anticipated it would be. The idea being that if insurance hadn't approved the claim after about a week, that we would be able to offer a month supply of CRENESSITY to get someone started pretty quickly. And as I mentioned earlier, 9 out of 10 patients that are on CRENESSITY have gotten their prescription approved through their insurance. And so not that many people end up on the free drug program, to be honest with you. Operator: We'll go next to Laura Chico with Wedbush Securities. Laura Chico: One of the pipeline with respect to valbenazine and dyskinetic cerebral palsy. The data coming up here. Can you talk a little bit more about what will constitute a meaningful change in chorea score in a CP population? But also, I guess, against the backdrop of the INGREZZA field force expansion, how should we think about the size of the opportunity and overlap with existing INGREZZA prescribers? Sanjay Keswani: Yes, I'll do the first question really quickly, and I'll hand on for the second. So this population of dyskinetic cerebral palsy doesn't have a priori-validated scale. So essentially, we're borrowing from the UHDRS, Huntington's scale. That's a total maximum chorea scale. Our assumption is that typically a significant effect in that would be meaningful enough. Clearly, we'll be seeing the totality of the data later this quarter. Kyle Gano: And maybe -- this is Kyle. Just to add to next steps on this. We would take a data set if it was robust to the agency and ensure that there's a path forward for an NDA submission. And with the current size and composition of the sales force, we would be covered there in case that was an sNDA. Eric Benevich: This is Eric. The last thing, I'll chime in here. The DCP population is larger than the Huntington's chorea population, but still substantially smaller than the TD population. And the expanded sales team, if this turned into an indication down the road, would be able to cover all the potential prescribers. Operator: We'll go next to David Hoang with Deutsche Bank. David Hoang: So again, congrats on a strong quarter. I saw you have reiterated but not raised guidance. So I guess you mentioned the extra week in Q3 for ordering, but we think about the -- what the Q4 number may look like, I think the guide implies something to like down mid-single digits to flattish. Anything else to think about in there in terms of maybe whether you envision seasonal dynamics or perhaps there's some degree of embedded conservatism? Matthew Abernethy: Yes. If you back out the 14th week, I think it gets you into a place to grow off of. And then sequentially, what you've seen over the last handful of years is the fourth quarter typically will have a range of $15 million to $20 million of sequential growth. So my recommendation, David, is to normalize Q3 to a 13-week and then think about that type of a growth trajectory. Price should be pretty consistent. It was down 6% to 7% year-over-year in the third quarter. That should be something that you would experience in Q4 as well. So nothing abnormal on the pricing side. Operator: And our final question comes from Evan Seigerman with BMO Capital Markets. Evan Seigerman: In your 10-Q filed today, there was a disclosure about the Make America Healthy Again commission issuing warning letters regarding DTC advertisements. You indicated that you got one for INGREZZA. Can you talk about what was in that letter and what you might need to correct given that, that is pretty important when it comes to the commercial plan for that asset? Kyle Gano: Yes, I'll take this question. This is Kyle. I think many of us in the industry received a similar letter with similar types of contents in there. I think what a good view to have on this as a pharma member is we're committed to conducting responsible advertising for us. It is an important part of our business. We think it's a good opportunity for us to reach patients and also educate out there. We'll continue to look at that as an opportunity. But rest assured, we continue to do this in a responsible way, and we'll look to continue doing that moving forward. Operator: And this does conclude today's question-and-answer session. I will now turn the call over to Kyle Gano for any additional or closing remarks. Kyle Gano: Thank you, and thanks, everyone, for the good discussion and call this afternoon. Looking ahead, we are confident in the company's direction and momentum. We hope you can see here today that we're executing with clarity and discipline.,, Expanding 2 commercial franchises in INGREZZA and CRENESSITY, advancing a robust and growing pipeline. We talked about some of our mid- to late-stage assets today and investing in the next generation of innovation. This is what Neurocrine is about today and in the future. It goes without saying we look forward to meeting with many of you at the upcoming and remaining conferences this year and certainly at our R&D Day on December 16. Thanks again. Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Greetings. Welcome to Varonis Systems' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Tim Perz of Investor Relations. Tim, you may proceed. Thank you. Tim Perz: Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis. After preliminary remarks, we will open the call to a question-and-answer session. During this call, we may make statements related to our business that will be considered forward-looking statements under federal securities laws, including projections of future operating results for our fourth quarter and full year ending December 31, 2025. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned, forward-looking statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available on our third quarter 2025 earnings press release and our investor presentation, which can be found at www.varonis.com in the Investor Relations section. Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson. Yaki? Yakov Faitelson: Thanks, Tim, and good afternoon, everyone. We appreciate you joining us to discuss our third quarter performance. We finished the third quarter with 76% of our total company ARR coming from SaaS which means that we have now completed the SaaS transition in less than 3 years and more than 2 years ahead of plan. In February, on our first quarter earnings call, we noted that Varonis is a story of 2 companies, and this remains true today. Our SaaS business, it drives our momentum as SaaS customers benefit from the simplicity and automated outcomes of the platform and our on-prem subscription business, the drag on total company ARR growth and masks the strength of our SaaS business. Let's start by reviewing our third quarter results. ARR increased 18% year-over-year to $718.6 million. However, in the final weeks of the quarter, we experienced weaker-than-expected renewals in our federal business in our non-federal on-prem subscription business, which resulted in Q3 coming below our expectations. As a result of continued underperformance in the federal vertical, we will be reducing the size of the team until we see improvement. Now that we have completed our SaaS transition, we are now announcing the end of life of our self-hosted solution as of December 31, 2026. We expect this to result in increased uncertainty with our remaining OPS business going forward. In each of the first 2 quarters of this year, we saw improvement in our gross renewal rate across the business, which is why the reduction in the renewal rate that happened in the final weeks of Q3 was unexpected. To account for this recent change as well as our decision to end of life our self-hosted solution, we are baking in additional conservatism to our guidance and have assumed even lower renewal rates in our OPS business for the fourth quarter. We are also taking thoughtful and prudent steps to manage expenses across the business, which includes a 5% reduction in headcount in order to reallocate our resources where we see the highest return on investment. Now I will review our results and updated guidance in more detail shortly. Despite the softness we experienced in our OPS business, we again saw strong demand for our SaaS platform during Q3. This is happening because customers are able to secure their data with significantly less effort. Within our SaaS portfolio, Varonis for cloud environments continue to show traction during Q3, which was driven by the investment we have made in our platform to expand to additional use cases and protect many more platforms. Our ability to protect cloud data represents a significant growth opportunity for us as we're just beginning to scratch the surface. Because the transition is complete, our reps can put more focus on new business and upselling existing SaaS customers as we believe this additional focus on upsell will help us unlock this market potential. Now I would like to take a step back from our near-term results and discuss the opportunities we are excited about moving forward. As I have said in prior quarters, bad actors are not breaking in, they are logging in. Once an identity is compromised, there is no perimeter and companies need a sophisticated data security platform to keep their data safe. Varonis takes a data-first approach and helps companies locate their sensitive data, visualize who has access to it, automatically lock it down and then automatically detect and respond to threats on it. Performing only 1 or 2 of these tasks is insufficient to secure data. What sets Varonis apart is our ability to successfully do all 3 of these tasks on data everywhere. Our SaaS platforms and MDDR have significantly reduced the amount of effort and resources needed to secure data. AI continues to put a huge spotlight on the need for data security and the CISOs that I speak with want to ensure 3 key things. They won't have a data breach, they won't face compliance fines and they want to secure their data to enable safe use of AI in an effortless way. Addressing this problem has always been difficult and in the age of AI, it becomes even harder to secure data without sophisticated automation. In the third quarter, we continue to see demand from companies looking to protect their data to safely realize productivity benefits of Copilot, and we believe we are still in the early stages of starting to capitalize on this tailwind. In July, we announced an update to our strategic partnership with Microsoft and are making significant investments to deepen our integration with them to better enable customers to securely adopt Copilot over time. We believe these investments will ultimately better position us to capitalize on this massive opportunity. In July, we announced the release of our Next-Gen Database Activity Monitoring or DAM, which stems from the acquisition of Cyral. Varonis Database Activity Monitoring provides a cloud-native agent-less solution that offers next-generation database security and compliance for the AI era. Unlike legacy database activity monitoring tools that are slow to deploy and offer limited compliance value, our next-gen DAM solution is part of our broader SaaS platform, which delivers rapid deployment, real-time threat detection, automated remediation and deep visibility into sensitive data access. This provides customers with automated security outcomes on any kind of data using our unified SaaS platform. Earlier this month, we introduced Varonis Interceptor, which offers customers a breakthrough AI native e-mail security solution designed to stop data breaches before they start and stand on the recent acquisition of SlashNext. The introduction of Interceptor is a natural evolution of our platform and significantly expand our total addressable market by connecting the dots between e-mail, identity and data. We believe we will dramatically increase the value for MDDR service and help customers stop threats even earlier in the attack path. With that, I would like to briefly discuss a couple of key customer wins from Q3. We continue to see strong demand for new customers and one of these was a fintech company that wanted to replace its limited DSP endpoint tools with a data security platform. The incumbent classification vendor could not scale, failed to provide forward and complete classification scale and also failed to automatically remediate risk or detect threats. Varonis was able to quickly discover overexposed PII data and credentials and plain text that were surfaced by Copilot users. Varonis also automatically remediated this exposure and provided a current and complete view of their cloud data under a single dashboard. They purchased Varonis SaaS with MDDR for hybrid environments and Copilot Azure, AWS, ServiceNow, Snowflake and databases. We also continue to see our self-hosted customers looking to convert to SaaS. This quarter, one example of this is a global financial services company that has been a Varonis customer since 2010. As a heavily regulated organization, they have historically used Varonis for compliance and auditing use case. They wanted additional visibility into their IaaS data and wanted to simplify the ongoing maintenance of its deployment under 1 unified SaaS tenant. They evaluated a number of DSPM vendors, but they did not provide the breadth of support and automated outcomes that Varonis did. This organization upgraded to Varonis SaaS for hybrid environments in Copilot, Active Directory, Exchange Online, Edge, UNIX, privacy automation and Varonis for IaaS. In summary -- although we are disappointed with the performance of our on-prem business during the final weeks of the third quarter, we continue to be encouraged by the strong demand we see for our SaaS platform, which now represents 76% of total company's ARR. This demand is driven by the automated outcomes and scale that it provides as well as customer interest in deploying AI initiatives and securing data in the cloud. With that, let me turn the call over to Guy. Guy? Guy Melamed: Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. As Yaki mentioned, we see Varonis as 2 companies: our healthy SaaS business which now represents 76% of our total ARR or approximately $545 million, and our on-prem business, whose weaker performance is masking the underlying growth of SaaS in total company results. I will expand on this shortly, but let me first recap our Q3 results and update guidance. In the third quarter, ARR increased 18% year-over-year to $718.6 million. Our quarterly results did not meet our expectations due to weaker-than-expected renewals in our federal and nonfederal on-prem subscription business in the final weeks of the quarter. In each of the first 2 quarters of this year, we saw an improvement in our gross renewal rates across the business, which is why the reduction in the renewal rate in the final weeks of Q3 was unexpected. Since it is unclear if this reduction is specific to the customers that were up for renewal in Q3 or will be applicable to the population of remaining on-prem subscription customers, we have assumed a lower renewal rate in the fourth quarter and expect continued variability in our on-prem renewal rate going forward. As it relates to our guidance, we are now baking in additional conservatism for the fourth quarter to account for our weaker Q3 results and the decision to end of life our self-hosted solution. At the same time, our SaaS business remains very healthy, even when excluding the impact of conversion, and we continue to see the SaaS NRR trend at very healthy levels. We expect that this demand will continue to be the growth driver of our business going forward. This is driven by 3 factors: one, continuation of the healthy new customer demand that we've seen since the introduction of our SaaS platform; two, an increased focus on the SaaS upsell motion starting next year due to the completion of the SaaS transition; and three, the investments that we've made in the Microsoft partnership and the acquisition of Cyral and SlashNext that we expect will start to generate returns. In the third quarter, ARR was $718.6 million, increasing 18% year-over-year. And year-to-date, we generated $111.6 million of free cash flow, up from $88.6 million in the same period last year. In the third quarter, total revenues were $161.6 million, up 9% year-over-year. SaaS revenues were $125.8 million. Term license subscription revenues were $24.8 million, and maintenance and services revenues were $10.9 million as our renewal rates remained over 90%. Moving down to the income statement. I'll be discussing non-GAAP results going forward. Gross profit for the third quarter was [ $128.3 ] million, representing a gross margin of 79.4% compared to 85% in the third quarter of 2024. Our gross margin continues to track ahead of our expectations, and we feel very confident in our long-term target set at our Investor Day. Operating expenses in the third quarter totaled [ $128.1 ] million. As a result, third quarter operating income was $0.2 million or an operating margin of 0.1%. This compares to an operating income of $9.1 million or an operating margin of 6.1% in the same period last year. Third quarter ARR contribution margin was 16.3%, up from 15% last year. During the quarter, we had financial income of approximately $10.1 million, driven primarily by interest income on our cash, deposits and investments in marketable securities. Net income for the third quarter of 2025 was $8.4 million or net income of $0.06 per diluted share compared to a total of net income of $13.8 million or net income of $0.10 per diluted share for the third quarter of 2024. This is based on 134.1 million diluted shares outstanding and 134.7 million diluted shares outstanding for Q3 2025 and Q3 2024, respectively. As of September 30, 2025, we had $1.1 billion in cash, cash equivalents, short-term deposits and marketable securities. For the 9 months ended September 30, 2025, we generated $122.7 million of cash from operations compared to $90.9 million generated in the same period last year, and CapEx was $8.7 million compared to $2.3 million in the same period last year. Turning now to our updated 2025 guidance in more detail. For the fourth quarter of 2025, we expect total revenues of $165 million to $171 million, representing growth of 4% to 8%. Non-GAAP operating income of breakeven to $3 million and non-GAAP net income per diluted share in the range of $0.02 to $0.04. This assumes 133.4 million diluted shares outstanding. For the full year 2025, we now expect ARR of $730 million to $738 million, representing growth of 14% to 15%. Free cash flow of $120 million to $125 million. And total revenues of $615.2 million to $621.2 million, representing growth of 12% to 13%. Non-GAAP operating loss of negative $8.2 million to negative $5.2 million. Non-GAAP net income per diluted share in the range of $0.12 to $0.13. This assumes 134.8 million diluted shares outstanding. Lastly, as we announced today, our Board has authorized $150 million share repurchase program. We're able to make this announcement due to our strong balance sheet with over $1 billion in liquidity and our healthy free cash flow generation. In summary, while we are disappointed with the performance of our on-prem business during the third quarter, we remain confident in the performance of our SaaS business. We will continue to thoughtfully manage our business, which we believe will ultimately benefit our customers, company and shareholders in the long term. With that, we would be happy to take questions. Operator? Operator: [Operator Instructions] Our first question comes from Meta Marshall from Morgan Stanley. Meta Marshall: Maybe a question for me is just in terms of kind of you guys had just received FedRAMP high authorization for the SaaS platform. And so I guess just what went into kind of some of the decision to kind of terminate some of the people on the federal team. And just how do you kind of pursue that opportunity going forward? Yakov Faitelson: We have the FedRAMP moderate, but we just don't have just the empirical evidence that in terms of when we're looking at all of the investment, this is the place that we need to invest in. We said all along that it doesn't behave like the enterprise business. And we haven't figured out why the federal continued to underperform. It's just the result, we are reducing the footprint of our federal team and just grouping and reevaluating the strategy there. The data there is important, but we see when we just move these customers to SaaS, it's just a tremendous value proposition with all the automation, and we believe that the database activity monitoring and the e-mail is very strong and just want to mainly invest in the place that we can move these customers to SaaS as fast as possible. Operator: Our next question is from Matt Hedberg from RBC Capital Markets. Matthew Hedberg: Yaki, was there anything you heard that was consistent for why the on-prem deals didn't renew? I mean, I guess, was there anything competitively? And then, Guy, you noted SaaS NRR trends remain at healthy levels. I wonder if you could put a finer point on what level that might imply. Yakov Faitelson: Matt, so the win rates stayed the same. We have more than 75% of our ARR coming from the SaaS and the SaaS platform is performing very well. We identified that some of our [ apps ] were very focused on the SaaS customers. And unfortunately, they didn't have the account management trigger for the last leg of the OPS customers, primarily when they are single threaded and not using the full Varonis platform on-prem. You know our methodology of find, fix, alerts. Find the critical data, do the remediation and do the threat detection. And we're just going back to the basics and make sure we are getting back of taking care of these customers in the right way and that they are going to them in a very systematic way, demonstrating the value of SaaS almost treating them as a new sales campaign and just not assuming that the fact that there are good signs and positive conversations, they will just move on. When we look at it, there is just not one common thread. There is not one common theme why this OPS customer didn't renew. And this is why we are just very careful. But I think that what we have seen more than anything else that this is crystal clear tale of 2 companies, this automated platform with just all the coverage that is very easy to take all the rest of the integration. Many customers want DA Cloud and when we are competing with this, what we call, the DSPM ankle biters, we have very, very high win rates there to these OPS customers. So this is really what we are doing now is to make sure we are very focused on the last leg and to move these customers to SaaS. Guy Melamed: And Matt, in relation to your NRR question, as Yaki mentioned, this is definitely -- there's 2 companies right now in Varonis. We talked about that in the Q4 earnings call about the fact that the SaaS business is strong. And when we look at the results in Q3, I think the overall on-prem subscription business is somewhat dragging and masking the healthy business that we have in SaaS. When you look at NRR, and I'm looking at NRR on the SaaS side because that's really what matters. We're definitely seeing that NRR continuing to be in very healthy levels and well ahead of the total company NRR. We do disclose the NRR number on an annual basis, and we will provide the SaaS NRR at the end of Q4. But just to remind you, the conversion uplift is not included in that calculation. So it's really a reflection of kind of the ability to go back to our SaaS customers and continue to sell them additional licenses. And we definitely have plenty to sell to those customers with the amount of platforms that we have. So we're extremely encouraged by the numbers that we see there, and we feel very good about the SaaS business. Operator: Our next question is from Fatima Boolani from Citigroup. Fatima Boolani: Guy and Yaki, you've sort of identified that this nonrenewal or rather churn on an enterprise customer presumably was maybe more of an isolated event, but you are being prudent and you are frankly, taking a hatchet to your ARR guidance for the year. So I'm wondering, in the 24% of the ARR base that is not SaaS. What are some of the granular assumptions or thought processes you're reflecting to give us a better sense that, hey, we've kind of hit the floor on something like this happening again and frankly, for most of next year, ahead of which maybe customers are going to have an air pocket in terms of their decision-making. So can you help us through some of that in terms of how you're putting parameters on the risk to the 24% of ARR that is not SaaS? Guy Melamed: So when you look at the fourth quarter, and I'll talk about the fourth quarter first, and then I'll give you some color on kind of how we're thinking about 2026. But the fourth quarter is really the largest quarter of the year. And we want to wait and see how the business performs before providing really a formal look into 2026. I will tell you, and I want to talk about Q4 for a second, that if we had the same renewal rate that we saw for the on-prem subscription business in H1 2025 and the same renewal rate that we saw for the full year 2024 for the on-prem subscription business, we would have raised our full year guidance. So this reduction of guidance is isolated to the on-prem subscription and the fact that it behaved, I would say, unpredictably, especially in the 2 weeks -- in the last 2 weeks of the quarter. When we were going throughout the quarter, we didn't see any change, and we really saw this happen in the last 2 weeks of the quarter. And that's why we want to evaluate when we see in Q4 and kind of take into consideration whether this was a onetime on the on-prem subscription or if this is a much more of a trend. I will tell you that from a guidance perspective, we baked in additional conservatism because we want to make sure that we account for this behavior and also for the fact that we announced end of life on the on-prem subscription. So we are baking both of those things into our guidance. And based on what we see in Q4, we will take that into consideration when we look at 2026. Operator: Our next question is from Joshua Tilton from Wolfe Research. Joshua Tilton: Can you guys hear me okay? Guy Melamed: We can, yes. Joshua Tilton: Awesome. Maybe just one for me. And the answer might be you guys are still kind of trying to figure it out. But, I guess, I'm listening to everything that's going on the call, and I'm just -- I understand what happened in the quarter, but I'm still a little confused on the why. Like do we -- like from your perspective and like what happened, what was the reason as to why you saw some of these lower-than-expected renewals in the on-prem business, both for Fed and non-Fed? And my follow-up to that, maybe just a little more directly is on the Fed side, was it related to the shutdown? And on the non-Fed side, were these customers aware that the end of life was going to happen? Or is this announcement of end of life kind of post quarter, if that makes sense? Guy Melamed: So I kind of -- we kind of heard you scrambled at the end, but I think I got the gist of the question. And I want to give some color as to kind of the what has -- within the Q3. So really, as it relates to this quarter, we really saw multiple factors that came up, but we didn't identify any big theme that relates to our customers that did not renew on the on-prem subscription renewals. I think we identified sales process issues on the convergence that weren't related to the contracts and the documentations that we've talked a lot about in the past, and we are going back to basics to address these issues. We also identified and we are seeing some additional budgetary scrutiny from customers this quarter. But it's really hard to say for certain if that was a factor because it happened so late in the quarter. And obviously, as you mentioned, we had the federal underperformance. I can tell you that one thing that was clear to us is that we didn't see a change in the competitive win rates, and we're still in discussions with some of these customers that did not renew. Yakov Faitelson: And with some of them, it was clear that they were what we call single threaded that did some classification and audit and didn't do all the find, fix, alert methodology. And in some cases, the teams just -- the heart of the sales process is a POC and then QBR that showed the value and an EBC that showed everything that we have in terms of road map and so forth and some teams didn't really follow this methodology. And also, it's a tale of 2 companies, but the vast majority is now in SaaS. And for some of the teams, it's easier to pay attention to the SaaS customers, and we want to make sure that we are managing their attention and making sure that we are taking care of this last leg of the transition in the right way. Operator: Our next question comes from Joseph Gallo from Jefferies. Joseph Gallo: Should we expect you to ease on that 25% to 30% ASP uplift for conversions? Or is there anything you can do to further incentivize the on-premise customers remaining to move to SaaS? And then just in your conversations with customers, is there any sense of the number or percentage of business that maybe would never be willing to or can't move to SaaS? Yakov Faitelson: We are just uncovering every stone here. And as we said, there is not one thing. This is something that till now just worked extremely well. It was a surprise in the last 2 weeks of the quarter. So we just need to see how it will play out. Guy Melamed: And I want to add, when we look at the Q1 and Q2 renewal rate in 2025, we saw that renewal rate increase. So I think when we're looking at the Q3 renewal rate on the on-prem subscription coming down, we're truly trying to understand if this was a one-off or if this is something that we need to pay more attention to going forward. And that's why we reduced the guidance to bake in additional conservatism. And I think when we look at the Q4 results, we can identify for 2026, what is kind of the right rate that we should assume going into the year. But when we look at kind of the actions that we have taken, including the reduction of 5% of our headcount and adjusting some of the costs to better adjust to the top line and taking into consideration that conservatism on the guidance, we're trying to do everything right and be active in addressing that and making sure that we uncover every stone to identify how to address this going forward. And that was the thought process following the Q3 OPS renewal rate. Operator: Our next question is from Brian Essex from Goldman Sachs (sic) [ JPMorgan ] Brian Essex: It's Brian from JPMorgan. I guess maybe, Yaki, for you or maybe, Guy, if you want to pick this one up. On the SaaS business, it sounds like that business is still very healthy and kind of as expected. Can you give us a sense of where you think ARR could shake out for the end of the year? I think if we use like your previous 82% guide, that puts us in the neighborhood of, I don't know, $615 million at the midpoint, somewhere in that neighborhood. But just a sense of the -- what to expect on the SaaS side? And then as a follow-up, contribution from SlashNext Cyral what you expect that could contribute for the rest of the year? Guy Melamed: So I think when we talked about growing 20-plus percent, we feel very confident with our ability to grow 20-plus percent on the SaaS business. Obviously, kind of the behavior of the on-prem subscription renewals was a surprise to us, and we're trying to address that. But when I look at the SaaS business, it's acting very strong, very healthy, both in the value that we provide to our customers, then in our ability to go back to those customers and sell them additional licenses and additional platforms. So obviously, there is that headwind from the on-prem subscription business. But I would say that -- when we look at our -- we plan to end the year with 83% of our total ARR coming from SaaS. And the fact that, that business is performing really well gives us the confidence that we can continue to grow 20-plus percent on that business. That's part of the reason that we announced the end of life being at the end of next year. We want to have this on-prem subscription business in a confined time frame to be able to -- to be 100% SaaS and show all the benefits that the platform has to our customers and all the leverage and financial benefits that it can generate for the company. Yakov Faitelson: Regarding SlashNext, we believe that it's a very good acquisition for us and a natural extension for our customers. So today, most of -- a lot of these attacks, the way that they are happening is the sophisticated social engineering from a trusted source, this supply chain attacks. And they have -- SlashNext is an unbelievable detection engine for that. And it has a very, very strong multiplier with our MDDR service. And we just started to introduce it and the reaction is very good. And regarding the database activity monitoring, there are these 2 incumbents that we can replace. People want to consolidate around one data security platform for security, compliance and AI usage and [ sterile ] proxy works extremely well and everything that we are building around it. So we just feel that these are 2 very strong additions for our platform and work very well and organically within our sales motion. Operator: Our next question comes from Rudy Kessinger from D.A. Davidson. Rudy Kessinger: It's kind of been asked. But I'm just curious, the end of life for self-hosted by the end of next year, and you just had lower renewal rates than you were expecting in Q3. I mean, do you feel at all that this push to migrate to SaaS is in any way alienating a certain portion of your customers who are just never going to move to SaaS? And if so, I guess, why do that? I imagine some of those customers might be very large strategic customers who could have very high lifetime values. Why not let them have a longer time frame to migrate to SaaS or remain on term license if they want to? Yakov Faitelson: So we wanted to move everybody to SaaS and we said -- and get rid of the OPS. We always say that it's 10% of the effort and order of magnitude, 10x more value. Just as a business to operate it, everything that we are doing with engineering and the value that customers are getting, the integration of all our products, the way that we provide support. You need the right platform, then you need the right business model and the right operating model. And all along, the whole thought process was to move to 100% SaaS business. And we just want to also make sure that we are accelerating it because we also believe that in terms of the attention because this is one of the most important ingredient of our salespeople. We want that their attention will be on getting value to customers, selling more DA Cloud that is doing very, very well this year, selling the SlashNext product, the database activity monitoring, and we are doing so many more. And we just want this low-touch support model and MDDR and provide all the automations and the whole operating and business model of the company and also the value proposition is geared towards us. Guy Melamed: Add to that, just when you go back to our Investor Day that we held in Q1 of 2023, we defined a transition to be complete when we get anywhere between 70% to 90% of our ARR coming from SaaS. This is actually the first quarter that we are above that 70% threshold, finishing at 76%. And if you go back to conversations that we've had, we always said that we don't want to maintain 2 types of code, that there are a ton of financial benefits for the organization to be only under SaaS. And as Yaki mentioned, there's obviously a tremendous difference in value provided to customers that are SaaS versus customers that are on the on-prem subscription. So if you look at the benefits for the customers and if you look at the financial benefits for the organization, we don't want to be stuck between the on-prem subscription business and the SaaS business, SaaS business performing really well. And obviously, the on-prem subscription renewals acting the way they did in Q3. So that's -- we would have announced the end of life. That was our plan all along. But obviously, with what we see in Q3, we kind of expedited that announcement, but really talking about December -- end of December of next year. And we will work with our customers to make sure that they can move to SaaS and benefit from it. But as we mentioned all along, we didn't want to maintain 2 types of code, and there are significant financial benefits for the organization, not maintaining those 2 types of on-prem and SaaS and being just on SaaS. Yakov Faitelson: And also the ability of our sales force to do effective account management to take care of our customers in the right way. The whole company now, the lion's share is a SaaS business and gear... Operator: Our next question is from Roger Boyd with UBS. Roger Boyd: Just to go back to Josh's question for a minute to just be clear, was there any change to how you're approaching renewals on maintenance and term license in the quarter relative to the second quarter or last year and whether that maybe led to some of this unpredictability. I guess, the context is we had heard some anecdotes that you were maybe more heavily encouraging on-prem customers to move to SaaS or in some cases, living in the ability for customers to renew on maintenance. And just wondering if that at all was informed by this planned end-of-life on-prem business. Guy Melamed: So again, going back to kind of the reasons for the lower renewal rate of the on-prem subscription, we just saw multiple factors. I don't think there was any one big theme that we can pinpoint to the reason of the on-prem subscription renewals behaving the way they were, especially when you look at the Q1 and Q2 renewal rates where the -- when you look at the renewal rate of the company going up in Q1 and Q2, we definitely didn't expect that the Q3 renewals of the on-prem subscription would behave that way. I think that when you go back -- if you go back historically, our sales force has been trying to convert customers in discussions with our customers for -- since we announced the transition. We were able to move as quickly as we have because our reps were discussing this with customers. We obviously believe that the benefit of having SaaS and MDDR has much greater value for our customers than being on the on-prem subscription and then having those customers manage the platform themselves. So obviously, I don't know what you heard, but our sales team has been working with customers, and we'll continue to work with our customers to make sure that they get the best platform that we have to offer, which is the SaaS plus the MDDR and all the functionalities that we have under SaaS that we don't have with the on-prem subscription. I think that as we look at the results in Q3, we see a very healthy business under the SaaS platform. And obviously, the on-prem subscription acted in a way that surprised us, which is part of the reason that we want to be 100% SaaS by the end of next year. So this -- I don't see this as something that is different in Q3 compared to Q2. I think there were multiple factors that contributed to kind of the lower renewal rate of the on-prem subscription. We talked about the sales process issues. We talked about additional budgetary scrutiny. Obviously, we talked about the federal underperformance. But as I said before, there was one thing that was clear to us, and that was that we didn't see a change in the competitive win rates, and we're still in discussions with some of those customers that didn't renew. So we think we might be able to get some of them back. We're in discussions with them. But obviously, we -- from a guidance perspective, we're assuming a more conservative guidance for Q4 because of the rates that we saw in Q3. Operator: Our next question comes from Jason Ader with William Blair. Jason Ader: So if customers are not renewing their on-prem subscriptions with Varonis and not going to your SaaS, then what are they doing? Because obviously, you wouldn't think they'd want to be exposed if they've had Varonis data protection and all of a sudden, they don't have access to the technology anymore. So maybe just talk us through that, like what are they doing? And then separately, is term -- is there an element of compression in term contract duration at all because we saw that with another software company this morning where they saw some compression in term duration. Guy Melamed: So let me address the first question and then I'll tackle the second one. When we look at those on-prem subscription renewals, most of them didn't go anywhere. And as I said before, we're in discussions with some of them. For many of these customers, they were single threaded, meaning they were only protecting on-prem data with a single use case, and they weren't using the full platform that we have with our SaaS offering. Historically, we converted these customers without many challenges. But in Q3, we encountered some of these issues and really can't really tell if it was a one-off or a new trend. And that's part of the reason that we want to see how Q4 behaves in order to get more color on kind of the rest of the non-SaaS business. In terms of the duration, that wasn't an impact here. We looked at that and analyzed that, and it didn't have an impact. Operator: Our next question is from Mike Cikos from Needham & Co. Michael Cikos: Mike Cikos here. I'm trying to get a sense if there was anything unusual about this OPS renewal cohort in the final weeks of the third quarter. And really, what I'm trying to get at is I'm wondering if the renewal rates was really tied to a smaller subset of customers, i.e., the breadth of customers really skewed to the renewal rates that we're talking to. And does that in any way help explain why the team is uncertain on the impact of these renewal rates, maybe just because we don't have enough observed data points. And then, I guess, secondly, have the OPS renewal rates that we saw on those final weeks of Q3? Have they persisted in the 4Q now that we have October, essentially behind us? I'm just trying to get a sense of what's transpired in the following 4 weeks. Guy Melamed: So let me touch on the second part of the question. And I think I -- my understanding is -- are we seeing any trends in Q4 on the renewal rates. I think it's important to note, and we've disclosed this in our SEC filings, our business is back-end loaded, and we closed a significant portion of our business in the last 3 weeks of the quarter. It's very hard to see how the renewal rate will behave in Q4 when you own the data points that we have sitting here today. And if you go back to Q3, the business was tracking on plan, but really it was only in the final 2 weeks of the quarter that we experienced a decline in our renewal rate for the on-prem subscription business, which related really to both the federal and nonfederal sectors. So it's very hard for us to bake in any assumptions. And from a guidance perspective, we have never baked in positivity before we see it come to fruition. We always assume either the trend continues or gets worse, which is what we did in this case of the guidance. In our Q4 guidance, we assumed lower renewal rates that would take into consideration not just what we saw in Q3, but some of the impact of the announcement of end of life for our on-prem subscription business. So that was the thought process there when we looked at the Q4 numbers. And obviously, as we see the results at the end of the quarter, we'll give additional color from all the analysis that we'll see and kind of look at 2026 with the lens of Q3 and Q4 and not just based on Q3 as one data point. Yakov Faitelson: There's no one thing. There is no one plan. But in some cases, definitely, there are account -- basic account management problems that customers use a small subset of the platform and our reps assumed like in other situation, they automatically will move into SaaS for the full hybrid complete. They had some positive discussions, but because of the limited usage and some deals [indiscernible] just all over it to make sure that we are getting control over these situations. Operator: Our next question comes from Erik Suppiger from B. Riley Securities. Erik Suppiger: Just can you remind us what your contribution from Fed was and maybe what the contribution from the on-premise Fed business because I think all the Fed is probably on-premise. And then you've specifically identified both your Fed on-prem and the non-Fed on-prem. Was there a difference in terms of the decline in renewal rates between those 2 categories? Or were they both down similarly? Guy Melamed: So federal business has always been around 5% of our total ARR. And when we look from a guidance perspective going into Q3, we basically assumed a flat contribution going into the quarter, but we actually had a headwind related to the federal business that was really coming from the renewals in the federal business. And we had several million dollars of a headwind coming from the federal business, which is kind of why we're making the adjustments to the team. But when you look at the renewals, there were actually -- the renewal rate decline was both on the federal side and also on the nonfederal side, which is the reason that we're reducing our Q4 numbers. If it was only the federal, I don't think we would have adjusted the full year guidance the way we did. Operator: Our next question comes from Shrenik Kothari with Robert W. Baird. Shrenik Kothari: So now that the conversion phase is largely complete, right, for your initial target for the mix and with the end of life, and in light of your kind of prior confidence in sustaining 20% top line growth, if we can really help kind of triangulate what the underlying growth cadence looks like going forward in your view now with the conversion out of the picture. Just from that $545 million SaaS ARR core, like how much of that is considered sort of early stage with significant room for upsell, cross-sell next year and after via, of course, usage and module attach and versus how much is already a little more mature with product adoption such as MDR and stuff like that. Just wanted to understand how to think about underlying growth cadence into next year and ahead. Guy Melamed: So again, it goes back to the tale of the 2 companies. And when you look at the SaaS business, we definitely see that business acting strong. We believe in our ability to grow 20-plus percent with our SaaS business really due to the momentum we're seeing with new customers and the strong NRR we see with our existing SaaS customers. I think that -- when you look at how we plan to exit the year and we raised our expectations on the SaaS mix coming out of total ARR going from 82% to 83%, I think we are kind of -- the strength of the business is very apparent to us under the SaaS ARR. So we feel very confident in our ability to continue to grow going forward. We're addressing the issue that relates to the on-prem subscription renewals. We're taking kind of the necessary measures there. But it really is -- the on-prem subscription renewals are really masking the strength of our SaaS business. Operator: Our next question comes from Junaid Siddiqui from Truist Securities. Junaid Siddiqui: As you expand your platform to cover adjacent use cases like SaaS and cloud infrastructure, just curious where is the source of that incremental budget that you are taking coming from? Are you seeing like a budget reallocation from existing security categories? Or is this tapping into net new spend from customers? Yakov Faitelson: Well, we definitely see that customers have more budget to data security. It's important for them, and this is how we sell. Operator? Operator: Ladies and gentlemen, this now concludes our question-and-answer session and does conclude today's teleconference as well. Thank you for your participation. You may disconnect your lines, and have a wonderful day.
Operator: Hello, and welcome to the Greenbrier Companies Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] At the request of the Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President of Financial Operations, the Americas. Mr. Roberts, you may begin. Justin Roberts: Thank you, Megan. Good afternoon and evening, everyone, and welcome to our fourth quarter and fiscal 2025 Conference Call. Today, I am joined by Lorie Tekorius, Greenbrier's CEO and President; Brian Comstock, Executive Vice President and President of the Americas; and Michael Donfris, Senior Vice President and CFO. Following our update on Greenbrier's record-setting 2025 performance and our outlook for fiscal '26, we will open up the call for questions. Our earnings release and supplemental slide presentation can be found on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2026 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. We will refer to recurring revenue throughout our comments today. Recurring revenue is defined as leasing and fleet management revenue, excluding the impact of syndication activity. Finally, Greenbrier will be participating in the following conferences over the next few months. The Stephens Annual Investment Conference on November 19, the Goldman Sachs Industrials and Materials Conference on December 4 and the Susquehanna Virtual Freight Forum on December 10. And with that, I'll hand the call over to Lorie. Lorie Leeson: Thank you, Justin, and good afternoon, everyone. I appreciate you joining us today. A strong finish in the fourth quarter made fiscal 2025 Greenbrier's best year yet. We achieved record full year diluted earnings per share and delivered record core EBITDA, supported by disciplined execution across our business. Our aggregate gross margin was nearly 19%, and Greenbrier generated more than $265 million in operating cash flow. We also achieved a return on invested capital of nearly 11% within our long-term target range. These results reflect our team's resilience and the strength of disciplined execution paired with efficient operations. We're seeing the tangible results of the transformation we set in motion nearly 3 years ago, with key long-term performance goals being realized. Greenbrier today is a stronger, more agile organization, a business better positioned to deliver performance across market conditions as proven by our record financial results for 2025 on 2,000 fewer deliveries than in fiscal 2024. Strong operating performance in manufacturing led to healthy margins and our network is operating with greater efficiency, precision and alignment than ever before. Process improvements, balanced production lines and disciplined cost control have driven sustained expansion in manufacturing margins. Our flexible manufacturing capacity allows us to rapidly respond to changes in demand and maximize operating efficiency. Our in-sourcing capacity expansion in Mexico is effectively complete and the full value of the initiative will be realized as production scales through 2026 and beyond. Likewise, we continue to drive overhead efficiencies throughout our global manufacturing network. This agility and responsiveness are a competitive advantage for Greenbrier. In Europe, we continue to unlock efficiencies through ongoing footprint rationalization driving cost savings and developing a more competitive and responsive platform for the region. As we announced today, we're proceeding with the closure of 2 additional facilities. Combined with our previously announced actions, we expect annualized savings of $20 million from this footprint rationalization. I should note that these actions and savings will not impact our European production capacity. Rather, they position Greenbrier to sustain higher margins in varying demand environments. The steady growth of our Leasing & Fleet Management business has been an important contributor to our performance. Our lease fleet continues to perform exceptionally well with high utilization rates and strong renewals. We've maintained a disciplined approach to growth and are on track to meet our goals of doubling recurring revenues by fiscal 2028. Our capital allocation framework remains focused and disciplined. We deploy capital where returns are strongest while maintaining balance sheet strength and liquidity. This prudent approach and a strong liquidity position support our ability to fund strategic priorities while delivering attractive returns to shareholders. The growth of our recurring earnings, combined with our strong manufacturing provide a durable recycle foundation for Greenbrier. Integration is a defining feature of our model. Manufacturing generates efficiencies and scale and leasing provide stability. And together, they create an earnings base that differentiates Greenbrier. The operational progress and recurring earnings we've built into our business means that Greenbrier now operates at a structurally higher level of resilience. Our results this year clearly demonstrate that our efficiency and lease fleet growth initiatives have raised the baseline of our performance and position us to achieve what I described as higher lows. Today, we are well positioned to continue generating cash flow, financial performance and shareholder value for years to come. Our fiscal 2026 guidance reflects this improved foundation. Our model is designed to perform with durable returns and the flexibility to respond to market demand. Looking ahead, we remain committed to operational excellence, innovation and responsible growth. In closing, I want to recognize our employees, customers and shareholders for their trust and partnership. Fiscal 2025 was a milestone year for Greenbrier, setting the stage for continued momentum into the year ahead and beyond. And with that, I'll turn the call over to Brian. Brian Comstock: Thanks, Lorie, and good afternoon, everyone. Greenbrier delivered exceptional performance in fiscal 2025. In addition to the record financial results already mentioned, we maintained consistent execution during the year and our gross margin improved from the actions we've taken over the last 2 years to enhance our production efficiency. Many of these improvements are structural and are continuing to deliver benefits. We view the near-term market conditions as an opportunity to intensify our focus on production layout, process improvements, cost reduction initiatives and optimization projects ahead of a production ramp-up anticipated later this year. While demand is an external factor, we remain relentlessly focused on improving operating efficiencies and reducing costs. In Q4, Greenbrier received approximately 2,400 new railcar orders valued at more than $300 million, bringing full year orders to more than 13,000 units. We closed the year with a backlog of 16,600 units valued at $2.2 billion. This backlog reflects a healthy mix of product types and customers demonstrating our market leadership. As a reminder, programmatic railcar restoration work is excluded from these figures. This work bolsters manufacturing margin and it's performed on approximately 2,000 to 3,000 units annually. We continue to focus on order quality with activity that supports efficient production scheduling and sustained attractive margins. Our commercial team has done an excellent job navigating a complex operating environment. In North America, freight trends and tariff dynamics are moderating new railcar demand, leading many fleet owners to extend acquisition time lines. I think it's worth reiterating what Lorie mentioned earlier, we achieved record earnings despite operating in a modest market for new railcar demand. In my 27 years at Greenbrier, earning more than $6 per share in a 30,000 car build year seemed unlikely until now. This is a clear reflection on how this leadership team has evolved and what it's capable of achieving. Across our global businesses, we are focused on optimizing our manufacturing footprint and driving additional cost efficiencies. In Europe, ongoing footprint actions are expected to yield about $20 million in annualized savings. Leasing & Fleet Management delivered another solid year. Recurring revenue reached nearly $170 million over the last 4 quarters, representing almost 50% growth from our starting point of $113 million just over 2 years ago. Our lease fleet grew by about 10% in fiscal '25 to just over 17,000 units with high fleet utilization at 98%. The fleet remains diversified by car type, lease term and customer. In fiscal '26, 10% of our leased railcars are up for renewal, and we've already renewed 1/3 of those units at substantially higher rates. We're building a balanced railcar portfolio through discipline and selectivity and we see opportunities to accelerate fleet investments in the medium to long term. Our lease fleet debt facilities, including the warehouse credit facility, senior term debt and asset back term notes are structured as nonrecourse obligations. They are prudently aligned with current needs and support growth at an average interest rate in the mid-4% range, well below prevailing market rates. These facilities provide stability, flexibility and efficient access to capital. Greenbrier enters fiscal '26 with backlog visibility, a disciplined commercial pipeline and an operating platform designed for consistencies. Our teams remain focused on sustaining execution, optimizing mix and maintaining the balance between manufacturing and leasing which has proven so effective. As Lorie noted, the transformation of our business has positioned Greenbrier to deliver more stable outcomes through the cycles. The commercial organization is fully aligned with that goal, pursuing opportunities that enhance the through cycle of earnings, strengthen relationships and extend our competitive advantage. We are confident in our near-term performance and long-term outlook. Our experienced leadership team has consistently demonstrated the ability to successfully manage through market cycles. We remain focused on steady execution and sustained performance as we advance our strategic plan. The progress we've achieved meaning or surpassing every target we have put forward reflects the expertise, commitment and teamwork of Greenbrier employees worldwide. I'm deeply appreciative of their efforts and proud of what we continue to accomplish together. And with that, I'll hand the call over to Michael. Michael Donfris: Thank you, Brian. Greenbrier's momentum carried through the fourth quarter, driven by strong operational performance and meaningful progress on our strategic priorities. We delivered record profitability through effective cost management and disciplined execution. These results position us well entering fiscal 2026. Fourth quarter revenue was nearly $760 million, in line with expectations, enabling us to meet our full year revenue guidance. Aggregate gross margin for the fourth quarter was 19%, an improvement of 90 basis points sequentially. This was driven by stronger operating performance at our Mexico facilities, favorable foreign exchange from a stronger Mexican peso and disciplined manufacturing execution. These gains were partially offset by a $3 million impact related to our European footprint rationalization. Notably, this marks the eighth consecutive quarter in which we've met or exceeded our mid-teens gross margin target. Operating income was $72 million, nearly 10% of revenue and this was partially impacted by $6 million in our European footprint rationalization. Our effective tax rate of 36.4% above -- was above both our prior quarter and our full year structural rate of about 28% to 30%. This was primarily due to jurisdictional income mix. Core diluted earnings per share was $1.26 and core EBITDA for the quarter was $115 million or 15% of revenue. For the 12 months ending August 31, 2025, our return on invested capital was nearly 11% and continues to be within our 2026 target of 10% to 14%. Shifting our focus to the balance sheet. Greenbrier's Q4 liquidity level was the highest in 10 quarters at over $800 million, consisting of more than $305 million in cash and almost $500 million in variable borrowing capacity. We generated nearly $98 million in operating cash flow for the quarter and delivered positive free cash flow for the year, driven by strong operating performance and working capital efficiencies. Liquidity remains robust, supported by solid operations, continued improvements in working capital and expanded borrowing capacity. On debt specifically, we updated our financial statements and disclosures to clearly distinguish between our leasing debt, which is nonrecourse and the rest of our business. This additional disclosure should help us clarify metrics and performance as we grow our lease fleet and nonrecourse debt. Now switching to capital allocation. We are committed to responsibly returning capital to our shareholders through a combination of dividends and stock buybacks. Greenbrier's Board of Directors declared a dividend of $0.32 per share. This is our 46th consecutive quarterly dividend and reflects our confidence in our business. Additionally, during fiscal 2025, we repurchased about $22 million in shares, leaving $78 million remaining in our share repurchase authorization. We will access the capacity opportunistically during the fiscal year and within the framework of a broader capital allocation strategy. With a resilient business model and strong balance sheet, we're positioned for continued performance and long-term value creation. Our guidance for fiscal 2026 is as follows: New railcar deliveries of 17,500 to 20,500 units, including approximately 1,500 units from Greenbrier Maxion in Brazil. Revenue is expected to be between $2.7 billion to $3.2 billion. We expect aggregate gross margin between 16% and 16.5%. Operating margin is expected to be between 9% and 9.5%. I will point out that included within our guidance is a reduction in SG&A of about $30 million versus fiscal 2025. Earnings per share will be between $3.75 and $4.75. For capital expenditures, we expect investment in manufacturing to be approximately $80 million and gross investment in Leasing & Fleet Management of roughly $240 million. Proceeds from equipment sales and -- are expected to be around $115 million, resulting in net capital investment around $205 million. With our strategic goal of investing up to $300 million to grow our lease fleet each year, we plan to continue to look for opportunities to increase this investment. This year, our team delivered record earnings and the highest liquidity in 10 quarters, while continuing to execute our long-term strategy to strengthen the business ahead of the next growth phase. We remain focused on consistent execution and disciplined capital deployment with strong financials and operating excellence, we're well positioned to navigate near-term market conditions and drive long-term shareholder value. And now we'll open it up for questions. Operator: [Operator Instructions] Our first question comes from Ken Hoexter with Bank of America. Ken Hoexter: So just looking at the outlook, right, so you're starting off at 17,500 to 20,500 cars down from 21,500 this year. At earlier in the Industry Conference at the start of this year, the expectation was car builds are going to be lower for the next few years. Maybe just your insight on the backdrop in the market. Your anticipation of if Europe can help offset that? And is this -- we just heard from another company, I guess, a locomotive manufacturer last week that the expectations are down 30%, 40% for car builds into next year based on industry stats. Can you just talk about what's going on in the backdrop and how you can kind of make up for that? Brian Comstock: Yes. Ken, it's Brian. I'll take a stab and maybe Lorie can color in around in around the edges. At the end of the day, when we look at -- we think we're -- if you look at the cycle, we think we're at the low point of the cycle right now and our inquiries are getting substantially more robust. We are forecasting bringing back some product in the back half of the year. And keep in mind that we made a material shift in the way that we think about this business a couple of years ago when we pivoted to utilizing some of our manufacturing space for programmatic railcar restorations. These are large programs that were typically done at repair shops in a very inefficient manner. And they have offset a lot of the degradation that we've seen over the last couple of years in backlog, and we continue to see that building as a partial offset. But we also think the market is a bit stronger than what a lot of people are predicting, particularly when you think about the tank car side of the world and the market and what we're seeing with some resurgence in oil demand as well as just upstream and downstream chemicals and replacement. Lorie Leeson: Let me just say -- I think you said it really well, Brian. While we see green shoots coming in our markets, the interesting thing [ to think ] about what we have done here at Greenbrier is deliveries and backlog is an important metric, but it's not the only metric that's driving our financial results and our cash flow. So we're really proud of how the team is putting up great performance and results even in a more modest background. Ken Hoexter: Great. And then you noticed at the -- noted at the beginning of the call, something was done in Mexico. I just didn't hear what you said. Can you explain what's going on? And I just want to understand within that, right, given the tariffs, what has been the impact on whether it's cost of inputs, pass-through of costs? Maybe just take a minute on what's going on. But if you could start with what you had noted, you had done or changed or improved in Mexico. I missed that. Lorie Leeson: Sure, Ken. So this is -- actually, I think we announced it at our Investor Day a couple of years ago, where we embarked on a journey to invest in our facilities in Central Mexico for in-sourcing because as we ramped up demand, we realized that we were having to go further and further to source significant components. So we've wrapped up the in-sourcing project this year, and it has been providing benefits to our financial results, our manufacturing and aggregate gross margin over the last couple of years and we expect that to continue for many years to come. Brian Comstock: Yes. I'd just add on to what Lorie said is our charter has been taking cost out of the business for the last couple of years, along with the in-sourcing investment, we've really been focused on taking hours out of our units and reducing cost overall, which provides us a bit of lift in softer markets. Ken Hoexter: And any thoughts on the tariff implications? Brian Comstock: No. On the tariff side, I just want to remind everybody that we take pride in the way that we construct our contracts. We feel like we're pretty well protected in our contracts just depending on which way they go. The U.S. footprint is also an important strategic part of what we've always maintained. And so we have some ability to pivot in the event that there are some substantial changes. And then again, we continue to work with our colleagues on the [ Hill ] to really find balance in these negotiations as they're -- they seem to ebb and flow every day. Ken Hoexter: Okay. And if Bascome can indulge me for 1 or 2 more. Just you mentioned after closing 2 facilities, how many did you have in Europe? And what are you down to? Lorie Leeson: We had 3 facilities in Romania and 3 in Poland. So now we will be down to a total of 3 facilities, 2 in Romania and 1 in Poland. Ken Hoexter: Okay. Are you done with the rationalizations at this point do you think? Or have you -- is that just consolidating production? Or is it reduced activity? Lorie Leeson: Actually, Ken, what is really great about this. And if you are ever over in Europe, we'd be more than happy to host you into one of our facilities. But the properties that we acquired, particularly in Romania, have fairly significant acreage. And what we've been on a journey over the last few years is to really bring more modern -- modernization to how we produce wagons. Now wagons in Europe are a lot more specialized than they are in the North American market because we share the rails more frequently with passenger transportation. But what we realized as we modernize some of our processes, is that you have more footprint than we really needed, which meant that we have more overhead than we really needed. So we embarked on the closure of the Arad facility, which was the largest facility in Romania in our second quarter. And then with economic uncertainty in Europe, we accelerated the pace of rationalizing 2 other of our smaller locations in Poland. I think that, yes, this wraps up what we think we need to do, but I think that this leadership team has shown that as opportunities present themselves or as we need to make adjustments in whatever market we are in, we will make that adjustment. Brian Comstock: Yes. And Ken, it's Brian. Maybe just a little escalation point on what Lorie said is we really are consolidating production into fewer facilities. Lorie Leeson: Maintaining the same amount of capacity. Brian Comstock: Exactly. Just consolidation because we have a lot of capacity at those facilities. And as far as the journey goes, we continue to look at North America as well and what we can do to continue to bring cost out. So I'd say, while it's kind of 80-20 rule we're done, there's still always opportunity to continue to improve and rationalize further. Ken Hoexter: Last 1 for me is you gave the full year. Anything you want to comment on first quarter outlook? I guess you ended at 4,900 deliveries. How should we think about first quarter? And with that, I thank you for your time. Lorie Leeson: Hats off to you Ken. You don't never know if you don't ask. But no, we're not inclined to give quarterly guidance. Unless Justin or Michael, you guys want to have something you want to share. Justin Roberts: No, I think that's fine, Lorie. Ken Hoexter: Is there a normal seasonal move from how you end in fourth quarter to first quarter? Or does that not play just given your move to balance production? Justin Roberts: Yes. And I'll take that one. I do think we'll see a stronger back half of the year than the beginning of the year. We're still working through our backlog, and we're still really excited about, as Brian mentioned in his prepared remarks that we're expecting the back half of the year to pick up as well. So it's probably stronger in the back half than the first half. Lorie Leeson: And I would say we've also been reminding workforce that just because we moved from August 31 to September 1, it's not like we reset the clock. We've focus on just moving forward each day, doing the best that we can and looking to create long-term value for our shareholders. Operator: Next question comes from Bascome Majors with Susquehanna. Bascome Majors: I'll start out where Ken left off. I know you don't want to give quarterly guidance nor probably should you. But can we talk about maybe the build pace? I mean, I think there were some prepared remarks talking about we hope they get better in the second half of the year. I would assume that suggests some back-end loadedness but doesn't necessarily flow through to the bottom line -- the bottom line. So can we just walk through kind of maybe frame it as like where we were in 4Q? Is that the run rate into 1Q just from a pure production standpoint, and what sort of recovery are we embedding in the second half? And is that order driven? Justin Roberts: Yes. So Bascome, good to hear from you, by the way. And I would say that we kind of -- if you think about the last 4 quarters and then what we see in the next 4 quarters ahead, you'll see kind of the first 2 quarters of fiscal '25 were higher production, but we kind of stair step down throughout the year. And we expect the Q1 and Q2 of fiscal '26 to be at similar rates as what we're -- at what we exited fiscal '25. And then we'll be ramping up in Q3 and into Q4 to kind of ideally have more state stability in fiscal '27. But it's a little more of our normal seasonal back half loading and some of that is explicitly order driven at this point, just driven by when customers need cars and some of it is driven by expectations. It's just kind of you think about longer lead time items and things that we've talked about in the past. You just have to allow a little extra time. You don't turn on light switches or reactivate or ramp up lines overnight, unfortunately. So -- and we could probably -- if there's any additional kind of detailed questions, we can handle on our call [ downs ] as well. Bascome Majors: Yes. And just to maybe frame it up qualitatively, though, is the production plan based on the current backlog back half loaded? Or is there an assumption that orders could improve to drive that back-end loaded those primarily? Justin Roberts: It's based on backlog orders that we're in discussions with that we expect to finalize and then a fair amount -- not a fair amount, but some improvement as we turn the year into calendar '26 just based on what customers are telling us they need. Lorie Leeson: And I would say that we go into every single fiscal year with some open production because we actually -- that's beneficial for us to be able to be quickly responsive to customers' needs. Brian Comstock: Yes. And just -- this is Brian, just chiming in a little bit as well on the order side. So when we think about the previous question, it was related to locomotives, keep in mind that there's a real large number of cars that continue to attrit out of the North American fleet. And we're at the lowest levels that we've been in probably 4 or 5 years from a national fleet perspective. So there still is a lot of replacement-driven demand versus growth demand, which may be different than what the locomotive people and some others are seeing in our space. Bascome Majors: All right. And can we talk a little bit about the balance sheet and funding for the leasing business? I mean you talked about hitting your recurring revenue or being on pace for your recurring revenue target. And do you expect your investment in the lease fleet to be similar? And over the long term, I know you have a CapEx guide for this year, but over the long term, do you think that's pretty similar year-to-year? Or is there some cyclical gyrations to that? And maybe lastly, as part of that, has the secondary market maintained its stability? And do you have product to continue to support a P&L impact from that net revenue or sorry, our net sales piece of the net CapEx? Lorie Leeson: And so maybe I'll just say something right quick, and then I know Michael and Brian will fill in behind me. But we are looking at all opportunities. We do see secondary market opportunities as well as new lease originations that can go into our lease fleet. So we have got a focused and agile leadership team that is going to be velcro to our customers to understand their needs and figure out how we can drive value. Brian Comstock: Yes, it's Brian. I just would add that our strategy remains consistent. We have talked about adding about $300 million net each year that continues to be our plan, good steady growth. However, to Lorie's point, the secondary market is still very robust. There's a number of books in the market today that we're looking at as well as sort of others. And we have assets that we continue to trade as we rebalance portfolios and we think strategically about how we align our lease fleet long term. So we're very active in the secondary market. Bascome Majors: And from a shaping perspective, you talked a little bit about the production plan and reasons why you think it can be stronger in the second half, both seasonality and some of the conversations you're having with your customers that you think will convert in the calendar '26. Is -- I mean you've talked about your cost takeout program in Europe and frame that as maybe one driver to margins. But beyond that, is it really just production rates and absorption that are going to be the biggest directional driver of margins? Or are there some other things going on between pricing and other inputs that we should think about on the margin cadence for the year? Justin Roberts: As we think about, Bascome, from a cost takeout perspective, this is actually an interesting time period from an operational perspective because this is giving the manufacturing teams an opportunity to take a little bit of a deep breath and look at our -- not just our overhead costs as we've talked about in the past, with an eye for reduction, an eye for reducing inefficiencies, but also take a look at overall our production processes and take unnecessary moves out and basically take hours out, take cost out. And it's kind of a soup-to-nuts approach of how can we reimagine some of our production processes and manufacturing. And so what we're seeing is as we started this journey, as Lorie and Brian and Michael mentioned over the last few years. But this is an opportunity this year as we've got a little bit of a slower cadence in the first half to focus on some of that activity versus just trying to get cars out the door as effectively as possible. And so this is an opportunity where we're able to redeploy some of our plant engineers, our industrial mechatronic engineers and move them around to different facilities and cross-pollinate to make sure that we're sharing best practices, make sure we've got uniform designs. And all of these are really adding up to improved margins. It's not just about overhead absorption, although that always plays a key role as well. Lorie Leeson: Which I'll then throw in a plug for why we keep thinking differently about how do we serve our markets and if it means doing what you call it, programmatic... Brian Comstock: Yes, railcar restoration and [indiscernible]. Lorie Leeson: Programmatic railcar restoration in what would be traditionally a new car facility, that's fantastic. And it's taking -- it's utilizing capacity where we've made an investment. It absorbs overhead, and it generates good returns. Bascome Majors: Maybe lastly for me, can you talk really high level about the competitive landscape in new car builds and order taking? I mean, has price become more difficult as the production rate of the industry has gone down to this level? Has it been pretty stable? I mean, you've been pretty clear on focused on doing the right things for your shareholders and returns on your business. But if you could just kind of talk about the back and forth between you and the remaining competitors in the space and whether that's stable or getting more competitive into this downturn? Brian Comstock: Yes. It's a good question, Bascome. It's Brian. And at the end of the day, it's a little both. So when you look to more commoditized markets, some of your covered hopper cars and what have you, you're seeing a lot more pricing pressure on cars, I say that everybody can build versus tank cars and some of the more niche cars that we're building today. So it's a mixed bag. You're seeing good discipline on the tank side. You're seeing good discipline on other specialty type cars, which is quite a bit of the market today. But where you do see the pricing pressures on those cars that I deem more commoditized, grain cars and things like that. Justin Roberts: And with that, we'll go ahead and end the call. Thank you very much for your time and attention. And --- Oh sorry, Lorie wants to say something. Lorie Leeson: And I'll just say for all of our employees that are listening to the earnings call today, I want to, again, appreciate all of the work that each of you bring every day, staying safe and executing to take care of our customers, each other to generate a record year of financial performance. Thank you very much. Justin Roberts: Thank you very much, everyone. If you have questions, please reach out to Investor Relations at gbrx.com. Have a great evening. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to today's FEMSA's Third Quarter 2025 Results Conference Call. My name is Serge, and I will be your coordinator for today's event. [Operator Instructions] And now I'd like to hand the call over to Juan Fonseca. Please go ahead, sir. Juan Fonseca: Good morning, everyone, and welcome to FEMSA's Third Quarter 2025 Results Conference Call. Today, we are joined by our CEO and Chairman, Jose Antonio Fernandez Carbajal, Jose Antonio Fernández Garza-Lagüera our current CEO of our Proximity and Health division and future CEO of FEMSA; Martin Arias, our CFO; and Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations team. The plan for today is a little different than usual. We will begin with our CEO and Chairman, who is traveling today and is therefore joining us remotely. Jose Antonio will share with us some thoughts on the past couple of years, where he sees our company today, and how he sees FEMSA position for the future as he gets ready to step down from the CEO role at the end of this week. He will not be able to stay for the remainder of today's call. Next, we will hear from Antonio Hernandez Velez Leija, still in his capacity as CEO of our Proximity and Health division. As you know, he will assume the role of CEO of FEMSA in a few days. But most of his comments today will focus on the performance and trends in our key retail operations during the third quarter, as well as some thoughts on the short- and long-term initiatives we are taking to address an evolving consumer. Next, Martin Arias, we'll discuss FEMSA's consolidated and operational results for the quarter in further detail. And finally, we will open the call for your questions. For the Q&A, please keep in mind that as of today, Jose Antonio is still the CEO of Proximity and Health, and there is a lot to discuss regarding those operations. If you would rather ask him about his views on the broader FEMSA platform, I'm sure he'll be happy to provide some high-level directional comments today, but these are early days as he onboards to his new role. Obviously, we'll be happy to dedicate ample time to this topic during our February call and beyond. And with that, let me turn it over to our Chairman, Jose Antonio, please go ahead. Jose Antonio Fernandez Carbajal: Thank you, Juan. Good morning, everyone. As you all know, in June of 2023, I returned to the role of CEO at a challenging moment because of our good friend, Daniel Rodriguez have fallen gravely ill, and we were in the thick of executing on our ambitious FEMSA Forward strategy. I committed at the time to where the 2 hats of CEO and Executive Chairman for a certain time with a clear plan to fill the CEO position and return to the separation of these key roles within that time frame. With the help of our Board, we've been able to deliver on that plan. And while I'm happy to hand over the keys to the incoming CEO next week, I appreciated the opportunity in these past 2 years to get close to the operations again, particularly through such a key process as FEMSA Forward. Today, I would like to share some thoughts on our recent past and on our future. FEMSA Forward was all about maximizing long-term value creation by focusing on our core verticals, retail and beverages, enabled by digital, and setting out very clear capital allocation target. In the past 32 months, we've been hard at work executing that plan, divesting nearly $11 billion of assets while in our core at the same time. In addition, the capital allocation framework we put in place in February of last year is guiding our actions and allowing us to move steadily toward our leverage objective by distributing between March of 2024 and March of 2027, and expected a total of approximately $7.8 billion of capital through [ ordinary ] and extraordinary dividends, and also through some share buyback. As I briefly recap these last 2 years, there are 2 message -- 2 messages I want to highlight. First, that everything we set out to do when we announced FEMSA Forward, we have delivered on. We told you what we were going to do, and then we did it. Second, that these actions have been driven by our share pursuit of long-term value creation for all of our stakeholders. Our purpose and interests are well aligned. Finally, I would like to quickly touch on how I see FEMSA position today. I feel very confident that our business units have never been stronger. I know this year has been sluggish in Mexico. And I know that the team has addressed this, and we will discuss this later during this call. But I also know that the last year was a banner year. So I am talking about the forest, not the trees. On the retail side, we have OXXO Mexico still with at least a decade of continued store growth at the current pace, world-class returns on capital, and a full range of levers to adjust as we ensure our value proposition continues to satisfy a growing number of needs for an always evolving consumer. In Mexico, we have successfully completed the leadership transition to Carlos Arroyo, an experienced retail operator with a decade -- with a decade's long track record, who is bringing a new set of capabilities that will serve us well for the challenges ahead. In the proximity convenience environment outside of Mexico and in the discount space in Mexico, we have a compelling set of higher growth opportunities that are ready to be scaled up, such as OXXO Brazil, OXXO Colombia and Bara among others. Any one of these opportunities has the potential to create billions of dollars of value over the next decade and beyond. In our other retail investment, specifically Health in Europe, we are laser focused on organic growth and on improving the returns on our invested capital. At Coca-Cola FEMSA, we are in the middle of an ambitious multiyear investment phase, continuing to increase our production and distribution capacity, as well as our long-term growth capabilities. Underscoring the strength and resiliency of this business even as we navigate a challenging short-term environment. On that note the recently announced tax increase in Mexico will present challenges, but we believe this will be the -- like the one we have faced in the past. And we will make the necessary adjustments in order to balance our return on investment capital while allowing us to take advantage of some growth opportunities. At Spin, we continue to grow our user base and engagement as we make steady progress in developing. Unknown Executive: Hello Jose Antonio? Excuse us while we try to reconnect to connect with Antonio. [Audio Gap] Operator: Ladies and gentlemen, we experienced a momentary interruption in today's conference. Please continue to stand by. [Audio Gap] And we've got -- we've back Jose Antonio. Please go ahead. Jose Antonio Fernandez Carbajal: Thank you. I'm very sorry. I don't know what happened and I kept talking, and I didn't notice when I left. Can you tell me where I... Unknown Executive: The paragraph of Spin Jose Antonio. Jose Antonio Fernandez Carbajal: Okay. So I will repeat that paragraph. Thank you. At Spin, we continue to grow our user base and engagement as we make steady progress in developing a digital ecosystem that will better enable our millions of users to navigate and improve their financial lives in a world that is increasingly digital. Although this is one of the longest term bets in our core verticals, we have a firm belief that the digital capabilities we are building are indispensable to OXXO Mexico, and will prove to be a source of value creation, creation for decades to come. Jose will certainly bring a fresh perspective to this business. I have been at FEMSA for nearly 40 years. During that time, I have lived through several reinventions of FEMSA. And today, I am as excited about our long-term growth opportunities as I have ever been, and I hope you are too. I will continue to work to capitalize on those opportunities in my role as Executive Chairman, but I will have fewer chances to speak with you. So I want to take this moment to thank every one of you for your interest in our company and for your full support through all these years. And with that, let me turn it over to our new CEO. Jose Antonio Garza-Laguera: Thank you, [indiscernible]. Good morning, everyone. Today, I want to structure my comments around three topics. First, the quarter's results with a particular focus on OXXO's Mexico same-store sales and traffic, where despite a still challenging environment, we are seeing some encouraging signs. Next, I want to talk about the actions and initiatives the team has put in place at both the short-term tactical level, but also some ideas about more strategic considerations and projects aimed at strengthening the value proposition and relevance of the OXXO store in the medium and long term. Finally, I will share with you some initial thoughts as I get ready to step into the FEMSA CEO role in a few days. So firstly, let's talk about the third quarter. As you saw in our release, same-store sales for Proximity Americas increased 1.7%, with average ticket rising 4.9%, and average traffic contracting 3.1%. This represents a clear improvement versus the first half, marking an inflection in our trend that seems to be improving further in October. This quarter was the first to show positive same-store sales growth since the middle of last year, and importantly, we believe a significant part of the improvement came not from a meaningful change in macro conditions, the weather or the consumer environment, but rather from adjustments we made to address category and channel-specific challenges. As a result, we improved our competitive position in several key categories like beer, soft drinks and snacks. And in terms of the channel, we believe we also improved our overall competitive position versus the traditional trade, reversing the trend we saw earlier in the year. Which brings me to my second topic regarding the short- and medium-term initiatives we have launched to improve performance. There is a long list of actions and initiatives designed to drive our short-term results which are aligned with our long-term strategic objectives. One of our most important such initiatives, which I want to highlight is pursuing affordability in our core categories of beer, soft drink, snacks and tobacco. To this end and working in tandem with our key supplier partners, we were able to improve our assortment and our price package architecture by adding presentations at both ends of the out-of-pocket spectrum. Larger multi-serves and returnable presentations in beverages, smaller packages for snacks and beverages, and lower-cost brands for cigarettes. In addition, we have implemented aggressive promotional campaigns in these categories and a variety of other categories. These initiatives are being supported by strong communication efforts, access to Premia related data, and a focus on store execution, and we are already seeing positive results, improving our competitive position during the quarter for most of these categories relative to the traditional trade. At the same time, we are executing ambitious initiatives to drive productivity and efficiency across the proximity and health organization aligned with our long-term strategy, including our recently launched fit-for-purpose corporate overhead efficiency program, which will make our organization leaner and achieved significant cost savings over the next several quarters, generating a reduction in SG&A. Beyond the short term, we are in the early stages of developing the strategy that will guide the evolution of our OXXO platform in the years to come. As powerful as our value proposition has been to satisfy certain consumer needs and occasions around thirst, gathering and impulse, we believe we can expand our relevance and increase the scope of our value proposition while ensuring affordability in a more integral manner. We also see that coffee and food categories are categories where we can win by making significant improvements. We have performed a deep diagnostic on our current value proposition and are currently in the experimentation phase to launch new offerings. We are excited by the opportunity and we will keep you posted as we advance on this ambitious multiyear effort. Finally, let me talk about FEMSA and my role as future CEO for a minute. As you might imagine, I have been rapidly getting up to speed in all the matters outside the scope of Proximity and Health. However, although it is still early, and I do not start the job until next week, I want to share an initial message of strategic continuity. Over the past few years, we achieved meaningful progress driven by the vision, courage and strategic clarity of those that came before me. They led a powerful transformation, streamlined our portfolio and positioned FEMSA to compete with greater focus and strength. I have the privilege of learning from them and their example continues to shape how I live and think about the future. As a member of the senior leadership team, I was informed and fully supportive of FEMSA Forward and the resulting focus on our core business verticals, and I am completely designed our capital allocation framework and strategy. I am convinced we have in Coca-Cola FEMSA and OXXO Mexico, two of the most remarkable and valuable assets in their respective global industry. Not just because of what they represent today, but just as importantly what they can become in the future. Our retail platform is poised for dynamic long-term growth through OXXO Brazil, OXXO Colombia, Bara and although still at an earlier stage of development, OXXO USA. Our other retail platforms, in particular, Health and Europe, our solid self-funding operations where our focus should be on maximizing the returns on our existing assets through efficiency and primarily organic growth. And I am a firm believer in the potential and optionality of the Spin ecosystem. I also want to take this opportunity to share with you that I am bullish on Mexico. We continue to deploy more than $1 billion in our CapEx in our home country every year. As attractive as some of our international long-term bets are, Mexico will continue to play an outsized role in the value creation at FEMSA for the foreseeable future. As for my management style, I favor thinking in decades while lasting in days, balancing a long-term view on value creation with a sense of urgency in setting the right conditions for execution. We will have plenty of opportunities to talk about these topics in the future. But I can share some examples with you of what I mean by that. Thinking in decades requires that we methodically consider our strategy, ensuring that we do not mortgage our future for short-term fixes and gains at the expense of our long-term growth and competitive position. We should always be driven by the objective of long-term value creation, instilling a relentless focus on sustaining or having an achievable and realistic path to ROIC over WACC. Acting in days requires us to rigorously tighten our grasp on actionable expense and cash flow levers, making it a daily habit across the organization. It includes getting the right people in the right seats right now, as well as testing frequently, learning quickly, moving on fast when we fail, and acting decisively when we find a new solution that serves our customer needs. I would also add that I'd like to communicate in a no nonsense straightforward way, and one thing I can offer you now is a commitment to be in touch with you, our investors and analysts more than in the past. Not just on these quarterly calls, but by meeting you on the road. We are already developing the plans for next year with Martin and Juan, and I look forward to seeing you all in the not-too-distant future. And with that, let me turn it over to Martin to go over the quarterly results in detail. Martin Arias Yaniz: Thank you, Jose Antonio. Good morning, everyone. Let me begin by discussing our consolidated results for the third quarter of 2025. During the quarter, we delivered total revenue growth of 9.1% despite a still challenging but improving environment in Mexico, impacting both Proximity and Coca-Cola FEMSA, which was offset by solid top line trends outside Mexico. Some currency tailwinds, particularly in Europe and the consolidation of the OXXO USA operation. Operating income increased by 4.3% year-over-year, reflecting inflationary effects on our costs and expenses, partially offset by expense efficiency efforts across multiple operations, especially at OXXO Mexico, Coca-Cola FEMSA Mexico, Health and Europe. Net consolidated income decreased by 36.8% to MXN 5.8 billion, driven mainly by a noncash foreign exchange loss of MXN 1.3 billion, compared to a gain of MXN 4.3 billion last year, a swing of more than MXN 5.5 billion. Related defense U.S. dollar-denominated cash position, which was negatively impacted by the sequential appreciation of the Mexican peso during the period. Two, higher interest expense of MXN 5.5 billion, compared to MXN 4.8 billion the previous year, reflecting higher debt at Coca-Cola FEMSA and higher lease obligations across our retail network. And three, lower interest income of MXN 1.9 billion compared to MXN 2.6 billion the previous year, reflecting lower interest rates and lower cash balances. Our effective tax rate for the quarter was 29.3%, showing a sequential improvement. We understand that the spike in the first half of the year in our effective tax rate 42.2% in the first quarter, and 40% in second quarter raised certain concerns. In that regard, I want to make several comments. The quarterly movement of our tax rate can be volatile and difficult to project on a quarterly basis, since it can be impacted in any given quarter by any of the following things. Extraordinary settlement of fiscal contingencies from the past in 1 quarter, reflecting issues from several years in the past. As the year progresses, we also make adjustments to provisions for tax payments given the performance of the business. Foreign currency gains and losses on our foreign currency cash balances and debt can cause important swings. We are requiring our tax rules to include or write-off deferred tax assets relating to NOLs based on adjustments to internal projections. Movements of accumulated cash, excess cash from our subsidiaries to Mexico, reflecting several years of profits can cause an increase in taxes. There are certainly structural reasons why our tax rate is higher than the 30% corporate income tax rate in Mexico, including nondeductibility of certain expenses, losses relating to Spin, and higher [ tax ] rates in countries outside of Mexico. We have guided investors towards a tax rate in the mid-30s range, and we continue to believe that this is the right number under current legislation. Turning to our operating results and beginning with the Proximity Americas division. Same-store sales increased modestly by 1.7%, once again reflecting a combination of a solid average ticket growing 4.9%, offset by a traffic decline of 3.1%. This is an improvement over the previous several quarters. And as Jose Antonio just said, it includes some encouraging information regarding the effectiveness of our tactical initiatives, and an incipient recovery in our competitive position in key categories. Total revenues for Proximity Americas grew 9.2%, or 4.8% on an organic and currency-neutral basis, mainly driven by the expansion of our network 1,370 stores year-on-year, a strong performance in our LatAm markets, which continue to grow at very attractive rates. The consolidation of OXXO USA, as well as favorable exchange rate effect in several of our operating currencies. Gross margin expanded by 80 basis points to 45%, reflecting a continued expansion in Mexico and LatAm, despite undertaking the affordability efforts mentioned previously in Mexico, and the consolidation of the U.S. operations which have a significant component of lower margin fuel. Operating income increased by 7.1%, while [indiscernible] 20 basis points to 8.8%, mainly due to the consolidation of the U.S. operations, which are slightly above breakeven. And despite the fact that Mexico's margin was flat, and OXXO LatAm continued to reduce its operating income losses relative to its revenues. The combined selling and administrative expenses grew at 12%, reflecting continued pressure on wages in Mexico, continued expansion-related expenses in LatAm and consolidation of the U.S. operating expenses. There were some reclassification of administrative expenses to selling expenses in LatAm, which makes comparison more difficult on a disaggregated line item basis. We expect, over the next few quarters, you should be able to see the effects on SG&A as we streamline corporate overhead through our fit-for-purpose initiatives. On the store expansion front, Proximity Americas added 198 new stores in the quarter, in line with our plan for the year. At OXXO USA, the conversion of DK stores into the OXXO banner continue to pace, reaching 50 converted stores in Midland-Odessa and Lubbock. We are making progress in food service with revamped hot food menus and offerings in the 50 OXXO stores, adding new partnerships aimed at driving consumer frequency and strengthening the overall food service value proposition, including clip-ins from our [indiscernible] and [indiscernible]. We are also initiating the conversion process in El Paso, as well as testing stand-alone nonfuel OXXO stores in certain locations. At Bara, during the quarter, we continued our accelerated store expansion opening with 40 new stores, and we remain on track to achieve or surpass a 30% growth rate in 2025. We continue optimizing our discount value proposition by scaling our private label strategy. Bara same-store sales grew 10.8%. In Europe, Valora delivered solid results as total revenues increased by 10.1% in pesos, or 3.3% on a currency-neutral basis, driven by higher Swiss retail sales, coupled with positive trends in Swiss B2C food service, partially offset by softer sales in B2B food service, particularly in the U.S. Gross profit grew 10.1% in pesos, or 3.4% currency neutral, in line with revenues and representing a stable margin compared with last year. Total operating expenses grew below revenues. However, selling expenses grew at almost the same rate as sales, reflecting wage pressures and inflation, but were offset by nearly flat administrative expenses. This reflects broad efforts to reduce corporate overhead expenses. Valora reported a 29.1% increase in operating income, 20.7% on a currency-neutral basis, representing a 70 basis point improvement in operating margin, and reflecting strong growth in Swiss retail, positive contribution from Swift B2C food service, and effective corporate overhead cost management offset by our B2B food service business. Now let me walk you through the performance of our Health division. Total revenues increased 2.9% in pesos with same-store sales growing 0.8%, mostly explained by strong top line performance in Chile and Colombia, offset by Mexico. On a currency neutral basis, total revenues grew 4.5%, evidencing currency headwinds relative to the U.S. dollar in Ecuador and the Chilean peso. Growth in revenues occurred despite the continued challenging environment in Mexico, which saw same-store sales declines and the closure of 423 underperforming stores versus the same quarter in 2024. Operating income declined 4%, and 1.3% on a currency-neutral basis, resulting in an operating margin dilution of 30 basis points to 4%. This reflects operating deleverage in Mexico and higher labor expenses in South America, particularly driven by the rapid expansion in Colombia. [indiscernible], same-station sales increased by 8.3%, and total revenues grew by 5%, reflecting growth in retail volume, offset by a decline in the wholesale business. Gross margin stood at 11.8% and operating margin at 4.6%. It is worth highlighting that during the quarter, selling expenses decreased 1.7% underscoring our continued effort to look for efficiencies and savings to support profitability in such areas as labor costs. Now moving to Coca-Cola FEMSA. During the third quarter, they delivered gradual sequential improvement amid a challenging environment. Total volume declined slightly, driven mainly by Mexico, or a softer macro environment continued to weigh on consumption. On the other hand, South America delivered a resilient performance with volume growth across most territories, demonstrating the adaptability of the business across regions. In terms of profitability, cost protected its margins, mainly through the implementation of mitigation actions, controlling expenses and generating efficiencies, recognizing a more difficult 2025 than expected. You can dive deeper into the results by listening to the webcast of their earnings call held last Friday. Finally, regarding capital returns to shareholders in the context of our capital allocation framework. During the quarter, we distributed a total of [ MXN 11.8 million ] in a combination of ordinary and extraordinary dividends. In terms of share buybacks, we were not active during the third quarter, so we are a bit behind schedule. As you know, whenever we become active, we will make the required filings and you will be able to follow. As we look ahead to the coming year, we are cautiously optimistic. As we mentioned before, we are beginning to see signs of improvement in the October data in Mexico. In terms of the levers and variables under our control, we are confident we are making the right adjustments and achieving the desired results across our platform. From the consumption side, we will have the additional tailwind from the FIFA World Cup to be held in our continent, with matches being played at the right time of day. And hopefully, we will also get a slightly better environment in which to operate in Mexico. We will provide a more detailed update in our next call. And with that, we are ready to open the call for questions. Operator: [Operator Instructions] The first question is from Ben Theurer from Barclays. Benjamin Theurer: Jose Antonio, congrats on the new job. And I actually have a question for you on the old jobs. So as it comes to retail, just wanted to understand a little bit and dig a little deeper into your commentary on the same-store sales performance. Well, clearly, traffic was down only 3% versus the give or take, 6% we saw in the first half. There was a very easy comp versus last year because of some of the hurricanes. But you did mention there is sequential improvement into October. So I wanted to kind of like understand if you could give us a a couple of more data points as to maybe how the performance was from July through September? And how that carried into October? And what we should expect here as we move throughout the fourth quarter and then maybe into next year, just with the closing remarks being slightly optimistic into next year? So I just want to understand a little bit the traffic dynamics at OXXO. Jose Antonio Fernandez Carbajal: Sure. This is great. I was expecting this one to be either the first or the second question. Unknown Executive: Fantastic. Be prepared for that. Jose Antonio Fernandez Carbajal: So -- I mean, obviously, I would say, I am glad that I see a reversing of the trends in OXXO Mexico on this quarter. And I do see better performance in traffic compared to last -- the first half of the year. But obviously, I'm not satisfied because we had, as you say, some easy comps. To the defense of my team and also there were some adverse effect in weather, especially obviously in September and especially in the Central of Mexico, but I -- and I mean what gives me some optimism is that the last couple of months, we've seen market share gains in beer, in soft drinks, and even in snacks, and even in tobacco, especially with the introduction of some lower-priced tobacco. I am -- October is still not over, but I am very encouraged by the results. So if that trend continues, I think we should be facing a much better end of the year. What else I can tell you? I can tell you some of the things that we've been putting in place that we think we're going to take effect much more -- or they were going to take longer to take effect. Like promoting coffee and some food items around coffee and breakfast are really beginning to shape up. Coffee is growing at double digits, and that gives me optimistic. And then the ability to be introducing multi returnable packages, affordability stuff in beer in soft drinks are really, really beginning to take place. And I would say in services, we're implementing new increasing services every, every quarter. And so even though, for example, we're growing a lot with the Asian e-commerce retailers, those things have now scaled back given some tariff restrictions. We're beginning to see other increases in traffic in services that are -- give us high expectations for growth. We're still waiting for the permit to get back into Banorte and other banks. But cash withdrawal with the main banks, some of the big fintechs and with Spin are growing double digits as well. So I would say still not satisfied because I wish we were going better in traffic, but very encouraging signs towards the fourth quarter. Does that help you? Benjamin Theurer: It does. And then obviously, into next year, we get the really easy comps, correct? Jose Antonio Fernandez Carbajal: Well, hopefully, yes. I do think there's a lot of things we need to still do on our part, and I am very encouraged by the obsession towards market share gains that we're following through in OXXO, and I think that's a discipline we will go forward. But we should get better comps. And I do think the World Cup should help as well. Benjamin Theurer: Congrats again on your new role as well. Jose Antonio Fernandez Carbajal: Thank you. Operator: We'll now take our next question from Alejandro Fuchs from Itau. Alejandro Fuchs: Congratulations on their new role to Jose Antonio. I have 2 quick ones, if I may. The first one on OXXO Mexico, another strong performance on gross margins this quarter. I wanted to see if you could maybe elaborate a little bit more into how much of this is the service mix continue to add to the business? How much of this is maybe a little bit of pricing? And where do you see just gross margins in Mexico continue to develop at OXXO in the future? And then the second, on Bara and also in Brazil and another also strong quarter of growth, so congratulations on that. I wanted to maybe Jose Antonio grab your thoughts on where do you see these 2 businesses in the next 10 years? How much of our priority are them to you and to the team? And then maybe if you could elaborate a little bit into what would be the best case scenario, sort of medium to longer term of Brazil and Bara. Jose Antonio Fernandez Carbajal: Yes. Thank you, Alejandro, for I would say, obviously, I've always said that OXXO Mexico has a lot of momentum and still a lot of gross margin to gain. If you look -- I think always the gross margin it's an incomplete number. And obviously, we don't have the full answer, but you would have to say, look, at the full profit pool all the way from the -- of our supplier partners all the way to the consumer. And I always like to see gross margin gains, and I think there's a lot to gain still. But some of that should be given back to our consumer in affordability. Obviously, some categories are more elastic than others. And so we have the smart data to play with that and give back to our consumers some of the gross margin gains. As to this quarter and the gross margin gain, it has a little bit to do with the commercial income that we continue to grow incredibly well. It has a little bit to do with mix. The affordability things allows us to even gain some gross margin as we implement some very profitable promotions in some of the affordable SKUs that we we are trying to promote. So the mix also helps sometimes with the broad margin. But I would say, mainly, it's -- that we continue to win commercial income. And as we grow what you can expect through the year I do expect that there's more gross margin to make, but some of it will be given back to the consumer in affordable promotion and price pack architecture. Afterwards -- afterwards Bara and OXXO Brazil, as I said in this forum, and I will say it in the future, those are 2 of the most exciting avenues for long-term growth for FEMSA. I am incredibly encouraged by the amount of progress that OXXO Brazil has been able to achieve in the last couple of years. We were -- just 2 years ago. We still needed to believe almost a quantum leap in gross margin expansion, in operating cost reduction, in top line goal. And now we are within arms reaching all of those areas. So we know we're going to have a profitable business in OXXO Brazil. We know where our next areas of growth beyond Sao Paulo will be. We're already mapping them. We're already starting them carefully. The big, big question to ask is, do you believe of that it will be a 40,000 store business in Brazil, or a 4,000 business in Brazil? I think it will be something somewhere between. Sorry for the wide margin. But it's up to us to really continue to perfectly engineer the whole process of the business to make it -- to be closer to the higher end belief. But it's one of my big, bigger ambitions for the next decade in FEMSA. Imbera, we are incredibly happy with the progress in terms of increasing our return on invested capital of new opening stores. We still need to polish and perfect the value proposition of Bara towards more -- towards -- closer towards harder discount. We're happy with the deployment and growth of our private label brand, but we still have a long, long way to go, but we are following closely and working with the private label manufacturers from other countries that are one to come and install in Mexico. And we're beginning to grow beyond our core region of El Bajio. And we're seeing very positive results in Guadalajara in Jalisco and we just opened in the north of Mexico. So we're very excited with the progress there. Operator: And we will now take our next question from Antonio Hernandez from Actinver. Antonio Hernandez: Congrats on the results and this new position. So question regarding an update on the health business, both in Mexico and Chile, some news also... Jose Antonio Fernandez Carbajal: Antonio can you be closer to the mic? I'm not being able to... Antonio Hernandez: Yes. Can you hear me there? Jose Antonio Fernandez Carbajal: Yes, better. Antonio Hernandez: Okay. Perfect. Just wanted to get an update on your health business. Both in Mexico and Chile saw some news -- recent news on a new format in Chile. Also, there's a very different trend in Mexico. So I wanted to get an update on that business in both countries. Jose Antonio Fernandez Carbajal: Yes. So in Chile, we were facing a very tough competitive environment in Chile for the last couple of years, and we are very happy that we continue to Gain market share. We're growing in all of our channels. As you know, Chile is a multichannel business. We are in the pharmacy. We're in the franchise business. We're in the distribution to independent pharmacy. And we continue to gain -- and we just even opened our discount pharmacy chain in Chile. And we are seeing incredible growth in sales and in market share, in all of that. Given that it's a very competitive market, sometimes that does not translate to bottom line growth. But even given the huge competitive environment that we see in Chile, we are happy that we are growing even in the income statement. So -- and we expect Chile, it's a mature market. We have very high market shares. But I do feel there's a lot of room for growth in even newer categories in the health and beauty space, in the premium and in the discount space, and we're beginning to get into other adjacencies in the elderly care, I mean the pet and veterinary care, and so we see new avenues for growth for Chile. Very different outlook for Mexico. In Mexico, we are the #6 player. I could obviously put as an excuse. A big chunk of our stores are in the Sinaloa region, which have been affected by security. But it's not enough to explain the drop. To be honest, we need to fix Mexico. We're working very hard to fix it. We have now the right talent in place. But we had to close many stores in Mexico, and we're still on working on fixing that operation, and we hope to fix it in the next few months. Thankfully, we have a very high-growth business in Colombia. And even in Ecuador, we're seeing market share and revenue and profit gains. So in general, health as a business we're happy except for Mexico. Operator: And we will now take our next question from Alvaro Garcia from BTG Pactual. Alvaro Garcia: All the best in your new role Jose Antonio. Two questions. One, the fit-for-purpose /corporate restructuring comments you mentioned earlier, the reduction in SG&A. In my head, I have this $100 million amount that you've typically guided for on the corporate front. Is that subject to change? And if you could just give us more color on how you're thinking on structuring the corporate expenses there? And then just one really quick one on interest expense. Martin, I don't know if you could expand on -- you saw a pretty big uptick at the FEMSA level, ex-cost. What explain that? Jose Antonio Fernandez Carbajal: So I would say, I would split the corporate overhead in 2 phases. The first one, the fit-for- purpose component is something that me and the OXXO team have been working on, and we are -- there were opportunities as we prioritize certain projects in OXXO Mexico and prioritize others. There was a good opportunity to reshuffle the overhead in OXXO Mexicos headquarters, and there will be some opportunities for savings, but also to leave some room for executives to dedicate to the big projects around food, around services, around the affordability that we want to invest. I do expect a big hit on savings. You will see the full number probably by the end of the year and as we start next year. As -- eventually, I would -- when I become CEO of FEMSA, I do plan to take a deeper look on -- and as always, with big changes in management, there are opportunities to look at the overhead in the full company, and I will comment more on that probably in February and beyond. Hopefully, that's what I can answer for now. Alvaro Garcia: The comments on -- fit for purpose for OXXO Mexico specifically at the moment? Jose Antonio Garza-Laguera: Yes, for now, yes. Martin Arias Yaniz: Alvaro, could you repeat your second question? I just want to make sure I got it right. Alvaro Garcia: Sure. On the interest expense, specifically, ex-KOF, we saw a pretty big sequential increase there. I was wondering if maybe there's some derivatives in there that's driving that? Or what drove that sequential uptick there? Martin Arias Yaniz: Well, looking at the total interest expense, KOF, actually went up from -- looking this correctly from [ $1.59 billion to $1.3 billion ] interest expense net and it was flat on interest expense. And so the interest expense went up by MXN 600 million. I don't -- I'd have to get back to you on the detail exactly in the context of everything, it's not that big a number. Interest income is certainly coming down as our cash balance has come down. As interest rates generally come down, particularly in Mexico, but to some degree in the United States. But specifically, that what appears to be a MXN 600 million increase in interest expense at FEMSA, I'll get back to you. Operator: We'll now take our next question from Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: First of all, best of luck on your expanded challenges. And also congrats to your father on another successful transition. We'll be looking forward to connecting more going forward. I have two questions. One is more conceptual, right? When you think about the one thing that you'd like to do differently in FEMSA going forward. What do you think this is the clear opportunity? This is more conceptual, right? But it still related to your vision for the company, and this is somehow also linked to the capital allocation strategy. How do you think the role that Coca-Cola FEMSA will have in the FEMSA overall portfolio going forward? Jose Antonio Garza-Laguera: Thank you, Thiago. Obviously, great question. I would say -- I will answer you with the second one. I would say, obviously, I am in love and have a huge appreciation for the KOF as a business and the talent. It's an incredible business, and it's an operation that has a lot of things going on for themselves to really keep growing, growing the core. I'm incredibly impressive what the opportunities that are -- we see for the digital transformation of the bottling platform. For growth opportunities, not only in their soft drink category, but in their non-KOF. And I see a lot of potential for organic growth in Brazil, Guatemala, Colombia and even in Mexico, with all the -- even with the taxes. So I'm very excited for Coca-Cola FEMSA. The relationship with the Coca-Cola Company is the best one we've had probably in decades, probably since the JV was formed. It's incredible that what the management team from both sides have been able to construct as a growing and fruitful relationship. I do think Coca-Cola FEMSA should play a part in a consolidation space through eventual M&A. And I am excited for the opportunity. I have huge respect for the bottlers in South America. And obviously, here in Mexico, I have a huge appreciation for all of them. And I do think there are opportunities to keep exploring possibilities with other families and bottlers in the space. I will comment more -- in more detail on what I see cost in the future, but that could give you some color of my excitement for Coca-Cola FEMSA. And from what I would say, I would do different? I think I let it be known in what -- in my earlier comments. I do think we need a bigger sense of urgency and a bigger sense of counting every penny. We have the ambition in FEMSA to be one of the best, or the best proximity retailer in the world. Obviously, with the Coca-Cola FEMSA company as part of it. As to do that, you have to have the best management team. You have to have a very demanding workforce, but also lead to the culture that you want to instill for the long-term growth of the company. So I would say my big, big focus on conceptually bigger demand for excellence in our corporate office, bigger demand for excellence throughout the channels in management, bigger speed in making big decisions on capital allocation. And I think that should give you the color on the sense of urgency that we plan to move versus previous years. Martin Arias Yaniz: And going back to Alvaro Garcia's question, the increase in interest expense, excluding Coca-Cola FEMSA, was slightly over MXN 600 million. 2/3 of that can be attributed to an increase in the financial expense associated with the lease accounting under IFRS, and likely the consolidation of the U.S. business is a big reason for you seeing the sort of uptick relative to other periods. For other periods, most of it is related -- all of it is related to organic growth of leases. Operator: We'll now take our next question from Bob Ford from Bank of America. Robert Ford: Congratulations on the promotion, Jose. Martin mentioned some reclassifications. Were there any reclassifications or onetime items that contributed to the gross margin improvement at OXXO Mexico? And Jose, where do you see opportunities to make further improvements in the value propositions at OXXO Mexico? And then one other question, if I could. Could you discuss the charge in discontinued operations, it was a little bit bigger than what we were looking for. We're just wondering how you're thinking about Solistica and the LTL business. Martin Arias Yaniz: Some of the reclassifications -- all the reclassifications that happen in Proximity Americas had to do with OXXO LaTam. None of them had to do with OXXO Mexico. And OXXO Mexico, even on a standalone basis did have an expansion of its gross margin. Juan Fonseca: In fact, I think Bob, expansion in Mexico was something like 130. Yes. Jose Antonio Garza-Laguera: Thank you, Bob. I would say if you look into also Mexico, we are, by far -- or we have a very important market share in what we call impulse gathering the beer, the soft drinks, the services category. But we still have a long ways to go in a couple of categories that OXXO right for winning. One is around food. We are the biggest sellers of coffee. And if you look at our LatAm operations, all of our coffee occasions go paired with very good tasty food. And I think we have a lot of opportunity to win in food around coffee. And obviously, that leads you to breakfast. And if you look at it, there's not really an affordable winning food opportunity. And that's a segment on that we have lower traffic than average. So we are very excited with increasing the opportunity for that. We still are very excited about the opportunities we see on segmentation. And I think we're going to go bigger and tougher on segmentation. We know all of the stores that are close to a discount store, or discount supermarket. And we have very clear actionable steps that we can put in place in the affordability space, not only in the categories that compete in the grocery space, but in the impulse and gathering. So we're beginning to do some of that and it's beginning to react incredibly. And there are things that will take longer to mature. But I am very excited about them. Some of them around the beyond trade and other services. And that requires working with team towards creating payment options that you can pay at Spin, but you can also send people money that they can withdraw at OXXO, and you can reward them for withdrawing at OXXO in a way. We're beginning to see some interesting things. We are still very excited about our growth in OXXO Nichos. They continue to outperform in terms of ROIC and we are continuing to accelerate that. This year, 25%, a little bit lower than what we planned, but still much bigger than previous year. 25% of our stores would be on the niche space, and that should just continue to gain momentum. I would leave it on that. Those are the things that we see are beginning to help us gain share beyond the inputs and gathering categories and towards food and groceries and others. Does that respond your question, Bob? Robert Ford: It certainly does. I just had that one follow-up with respect to the discontinued operations in Solistica. Jose Antonio Garza-Laguera: Martin, you'll take that one? Martin Arias Yaniz: Yes. So Solistica was -- the transaction was completed in early July. So you will see an impact from Solistica being removed from discontinued operations for that quarter. And it should not return. We've had so many transactions going -- going forward. We really have no major transactions to complete or close that should impact other than this quarter, we reconsolidated the only part of Solistica that we kept, which was less than truckload in Brazil, a very small business. But that's the only one that also got removed from discontinued operations and is now consolidated at the holding company level. Operator: We'll now take our next question from Rodrigo Alcantara from UBS. Rodrigo Alcantara: Jose, I would like to focus here a bit on food, right, which is a topic we also discussed back in those days. I mean, food is not a new thing, right? I mean, has been there for a while, remember Doña Tota, right? A couple of years ago, was part of the speech, right? Still ever since food as a percentage of sales in OXXO remains relatively low, right? I mean, kind of like it's on this front over the last decade has been relatively slow. So my question here for you is what makes you feel so excited about food again? Why this time could be different? Or could we expect faster adoption on this front presumably with Sbarro, what you're doing with Andatti, right? That would be my question. I mean, can we expect something faster on this front as opposed to previous years? And my second question would be as presumably, you will consolidate this operation, right, once the transaction is approved. Any indications on how the consolidation of OXXO Brazil may impact your consolidated or your proximity Americas margins once you consolidate these operations? That would be my -- those would be my two questions. Jose Antonio Garza-Laguera: I'll answer you first with the second one. Hopefully, by next year, we will give you more clarity, or a distinction between South American and our Mexico proximity business. So hopefully, that will not bring a lot of noise. Obviously, it's still our operation there. It's 600 stores. So even if we still combine it on the proximity of Americas, it shouldn't move the needle significantly. But our plan is to propose to you guys a different outlook when we show the proximity numbers. We're still working on that with Juan and Martin. On food, obviously, food is a very challenging topic, and we always get the question and what is different? What are you going to do that's really going to change? I would say one of the things that encourages me is that all of our South American operations are incredibly well -- really grew the operations since probably they didn't have the services business to rely on. They were very focused on being customer-centric in food first. And since we had a lot of Mexican executive there, they were very humble in asking really the consumer what you guys need and want? And Brazil, we sell a lot of powre [indiscernible]. We sell a lot of bread, our SKU bread is our #1 SKU. And it's twice in numbers than our second even in sales than our second SKUs. So it tells you a little bit of how big food can be for the on-the-go consumer. It's no different to Mexico. And obviously, you would say, well, but Mexico is still eat on the street. That happens in Colombia, that happens in Peru. That happens in Chile. And so I think that's no excuse. What we're doing different is we are really starting with the coffee offering first. We see the opportunity for coffee. We've always treated coffee almost as a margin developer, and we still -- now we see it as a huge traffic. We still make money on coffee, but I think it should be a much more of a traffic driver. And where we do promotions on coffee, we instantly see the results. I'm very excited with preparing coffee with breakfast products. I would say that's the main thing we're experimenting. But obviously, I am a firm believer that OXXO is not a place for you to sell tacos. It is very complex to sell taco. That is a red ocean. That is taken over by the street. And to be honest, street tacos are very, very good. And so we are beginning to play around different things that our consumer wants, that they want to carry on their hands. They want to get in and out quickly out of the store. And we are beginning to try some things that excite me. Obviously, pizza and our Sbarro partners. It's too early to say. We have two restaurants here in Mexico, but we are incredibly impressed by the results. But that's, I would say -- I don't know if a decade away, but very few years away for being something that can really move the needle. We are doing some clippings in [indiscernible] Doña Tota and they are impacting well. But I think where you will see things moving fast is on affordability for breakfast. For on the road, the road warrior of Mexico, where we see a need where our consumers are really demanding more opportunities and where I think we can differentiate from the taco category. Hopefully, we will be proven right. Operator: We'll now take our next question from Ricardo Alves from Morgan Stanley. Ricardo Alves: Thank you, Jose Antonio, for all the support and all the interactions with the investor community over the past few years. We really appreciate that and wishing all the best to the new CEOs going forward. A couple of questions, guys. Actually, follow-ups. On the gross margin, when we exclude the U.S. in proximity, I think that we're getting to something like 46%. And my question initially was if we were close to a ceiling, but I think that from the commentary that was already made, you made it clear that the answer to that question is no. That you see more opportunity to continue to expand gross margin here. My question is, how is that possible when you compare your business to other convenience store business outside of Mexico globally in Asia. What do you think is going to be this next lag up driver for your gross margin to continue to expand? That's my first follow-up question. And the second one, I think that as Juan suggested, I will leave more strategic questions at the FEMSA level to next year, but taking advantage of the transition that is happening right now for the new CEO. I think that we can still talk about longer-term strategic issues at proximity. There's a lot of things going on there. You have full control of Brazil, now. Mexico, you're focusing on recovering traffic, all these efforts that we discussed here today. Colombia is growing, then you have the U.S. So there's a lot of things moving on going on, on the proximity alone. What do you think should be your focus and our focus to see what is really going to move the needle under your leadership as you think about the different regions for the next 2 or 3 years? Jose Antonio Garza-Laguera: Thank you very helpful. I would say -- on traffic, I mean, on margin, we are I always say the gross margin is a very incomplete number, and I know I said it before, but I think it's important to emphasize. You need to look at the CPG's gross margin, or margins, and the consumer let's say, relative or end price and the relative value. And in that respect, I do think Mexico is an outlier. And you see it in all the major CPG players that come to Mexico. Mexico is one of the most profitable markets for all of the guys that you guys know well, obviously, for the soft drink guys, for the snacks guys, for the beer guys. It's incredible the margins that they make here. And Mexico is an outlier because they do have a big love for brands. And I think the traditional trade still plays an incredibly large amount of -- which creates a moat for the CPG players. We have the added benefit of the commercial income. And as the discount players continue to gain -- grow and they will continue to grow off and others will continue to grow, the CPGs rely more on obviously, the traditional trade, but also on convenience, and they love to use us as a defensible place to promote -- and to promote their brands. And they do see a great benefit in return on promotional income from OXXO. And that's why we still see a lot of potential for growth. Going forward, as we try to gain share in categories where we're not huge, we're obviously beyond impulse, beyond gathering and beyond food, we will go into categories in groceries where we see an opportunity to gain share against the traditional trade and even against the supermarket. And some of that margin will be given back to the consumers. I don't know yet the amount, you will have to do -- a lot to do with elasticity. So I still -- it's very hard for me to say where the end game is. But when I see the margins of my CPG partners, which I love, and I love for them to do business with us, I do still see room for growth, both in promotional income and in gross margin fully in Mexico. So I would give it at that, and I will give -- you will see clearly how we evolve as we begin to get into other categories in groceries in OXXO where I see a big opportunity. Martin Arias Yaniz: I would also complement what Jose is saying with a couple of things. Comparisons with other players outside of Mexico, I think, is also difficult because there are very few players that have the weight of financial services. And the income that we earn on financial services is very high margin. Because the -- there are no COGs really associated with the commissions that we charge for our financial services. It's really more as G&A related to the transportation of cash, and technology that we need to have in place. Number two, the issue of our -- when you strip out financial services, the reality is the margin is different and more comparable to things that you may be looking at. Number two, there are very few players outside of Mexico that have such a scale and breadth as opposed to OXXO in meeting proximity needs, really, our competitors are the traditional mom-and-pop. And I think our value proposition is very, very specific and very distinct which allows us in certain categories, given the imports that we have, that Jose mentioned, to partner up with suppliers for any number of initiatives and work that we do with them. And then finally, it's an evolving thing. The waves of value at OXXO will also impact the margin as we go forward. Food, for example, is properly executed, should be an attractive margin business at the gross margin if you manage to control an issue of waste. So I will tell you, it's very hard. We don't look at the business sort of targeting a gross margin. We look at the entire ecosystem. There are things that can produce enormous gross margin, but that would destroy the economics of the store because of the complexity it would bring to distribution, or the complexity it would bring to the execution in the stores, so we pass on them. And then there are things that are lower margin but drive traffic are very simple to execute, and it may be very attractive. So each one of our categories is really judged on the merits of competitive dynamics, issues in the store, growth going forward, and so we spend a lot less time sort of trying to project what the total amount of gross margin is going to be as opposed to looking at each category, maximizing the value in that category, and let the chips fall where they may. Jose Antonio Garza-Laguera: And for opportunities for proximity, I would say, first and foremost, Mexico. And I would say even also Mexico, in terms of absolute value, an incredibly optimistic about the future. Even I know there's a lot of volatility and there's some of our categories where we have been having lower declines like tobacco and alcohol and others. But some categories go and some categories come. So I'm very optimistic. We just finished an analysis of how many stores fit and even if you put account a drop in services, a drop in tobacco, we still see thousands of stores. The number is so high that I'm scared to give it to you guys, but it's still at least a decade of growth at this rate. And obviously, beyond -- I mean, within Mexico, Sbarro is increasingly getting its act better and getting better and better with every cohort. And so we do see a few thousand Sbarro's in the foreseeable future. And obviously, that market is huge. It's very, very competitive, and the competitors are getting better by the year, but I think there's room for a few of us. So I'm very happy with our results and the expansion. And I would say Brazil is very top of my mind. We still need a lot of work to getting it better and better. But we are impressive by -- I mean, we've been growing same-store sales at double digits for the whole year and the business keeps accelerating. So I'm very optimistic on Brazil, Colombia. And I would say U.S.A hopefully, eventually, we will grow more confident and confident to keep growing it. But it's still on a very early stage there. But I would put my focus on that order. I would finally say, I'm incredibly impressed by the progress we've made in Europe. We have a superb management team. I've said it before. Our biggest challenge is to grow it, and we're beginning to see opportunities for growing -- especially organically. But we are very happy with the progress in Europe, and we are happy with the economic development of Europe in certain markets where we see opportunities. So we're happy there as well. Operator: We'll now take our next question from Renata Cabral from Citigroup. Renata Fonseca Cabral Sturani: Jose Antonio, congratulations on the new role, exciting times ahead and I wish you every success. My question is a follow-up on OXXO digital ecosystem or financial services. The markets in Mexico is quickly evolving on this front and recognizing that OXXO success on this digital front. My question is regarding -- looking ahead, what is Spin's ambition? And where do you see OXXO as distinctive in right-to-mean versus wallet, telco, fintech solutions. And what would be the top capabilities that the company are targeting to invest on those fronts? So that's my question. Jose Antonio Garza-Laguera: That's a very good question, Renata. Thank you. I would say for me Spin is a digital extension of OXXO's value proposition. That's how I see it. We see it as a lever to really enhance the lifetime value of our users. The Premia user average, or Premia users, which are our power users who have the loyalty program, do 3x the average consumption in OXXO in a month than the rest. But if you have a Spin, or your wallet, and the Premia the loyalty program, that's 42% above the Premia user. So I do think there is a lot of value in embedding the whole Spin ecosystem throughout our core missions. We can offer rewards, we can offer personalized promotions. We can offer frictionless experiences that really incentivize you to go more often to the store. So for me, we're in the very early stages on creating an ecosystem with Spin that strengthened the OXXO relevance in our customer lives. Obviously, that includes -- so what some people see as an apocalyptic scenario where everything will go digital like in Brazil with [ PIX ], which could happen. But for us, the potential value shift from in-store to digital, we don't see it as a value migration. We do see it as an opportunity for increasing dramatically the way people interact, and use OXXO almost as a place to cash in your rewards, your points. So we're still very focused on that. I do think at the end, it's about convenience and Spin is much more convenient than cash, but a lot of people need cash, and will need cash for the foreseeable future. Even if we go to a peak level ecosystem cash will still be important for a big sector of the economy. I am incredibly impressed now that I'm in the onboarding phase seeing how people are using Spin in ways that we even didn't imagine. Just to give you an example, people -- the way people are tipping, you're paying your waiter or your people at the gas station. People take a picture of the QR code, the QR code that you can just scan in OXXO and withdraw cash. And it's becoming the main source of people going to the OXXO store to withdraw cash. And it's easier than having to give someone else a Spin account or having to give them your WhatsApp account. You just take a picture of the QR and you scan it in OXXO. And so we see an enormous amount of little things like that, that can enhance the value ecosystem. So obviously, there will be -- there will be a lot of movement towards digital transactions. But digital transactions grow so massively, sometimes exponentially, that the percentage, even if it's 10%, that still means to withdraw cash will be enough to cover, I think, a big chunk of the services decline that we can see at the store. So to me, it's an optimistic angle. We'll see. Operator: We'll now move to our next question from Froylan Mendez from JPMorgan. Fernando Froylan Mendez Solther: Congrats on the new position, Jose. You spoke about that the pace of growth can be maintained for at least 10 more years. Can you go deeper into how the breakdown of this growth should be in terms of store expansion, same-store sales, incremental revenue from commercial income? And your thoughts on what is the adequate level of cannibalization that you can see at any point in time? And how do you feel on the ROICs of the new stores versus the more vintage space today? Jose Antonio Garza-Laguera: That's a very -- if I had a -- a crystal ball to be able to predict exactly that. I wouldn't be here. But I would say, obviously, I mean, if you look at the acceptance level of cannibalization that we take when every time we open a store, and we -- and you extrapolate that for the next 10 years at our expansion. We do think we have at least 10,000 stores to -- and about 60% of that should be normal stores and about 40% of that should be OXXO Nichos. Our numbers say that's even bigger. I would say -- but it's too early to say. So you cannot estimate the stores. How much of that growth would come from same-store sales? I don't know, but we are expecting same-store sales at least to be flat, or even growing slightly with inflation adjustment. So I think there's that. If we win on breakfast, we win on grocery and we win -- we continue to gain share on gathering. Obviously, that number could get higher. But hard for me to give you a precise number at this time. Juan Fonseca: I think, Froy, this is Juan. In terms of -- normally, we separate in terms of new stores. If you model 1,100 per year. Today, that's 4% and change. And over the years, that will probably get smaller into the 3. But then same-store sales, it's a separate part of the growth algorithm. And there, as you know, our kind of our long-term guidance has been to mid-single digits. If you assume an inflation of 4%, which is the upper band of the Central Bank for inflation and add a point from mix and pricing. It gets you to the mid-single digits. So that's usually what we use for kind of long-term broader expectation management, right? So what I'm talking about is, right now, we're almost at 10%. If you add the two together over the years, probably gets you to the very high singles. Geographically, as you know, there are also differences. It's very different for us. when we look at white space in Guadalajara or in the Bajío or even in Mexico City compared to Tijuana or Juárez, right? So a lot of the openings happening in Central Mexico. But yes, that's how I would -- if I were building a model, those are the numbers I would put in. Martin Arias Yaniz: Although you should expect that the type of stores -- this is Martin speaking, the type of stores will also shift over time. Nichos are becoming are about 15%, 20% of the stores that we're opening. Also Nichos our stores that are open within institutional contacts the factory, hospitals, universities. They tend to have significantly lower staffing. They have slightly different assortment because obviously, you're not going to be selling beer in a workplace. Over time, you could also see us -- we've been testing, although we're not ready to roll it out because we don't think there's yet an opportunity what are called OXXO Smart stores, which are unmanned stores. you can one day see OXXO smart stores and apartment buildings, or smaller offices that we meet needs. So the composition of the type of stores will probably shift over time creating new white spaces and new opportunities in the consumption occasions. Jose Antonio Garza-Laguera: And one data point that we provided in the past, having to do with cannibalization is that it probably represents something like 30 basis points of growth in the overall number. So I would also use that for my own modeling. Operator: We'll now take our next question from Hector Maya from Scotiabank. Héctor Maya López: Would love if you could give us your view, please, on how you are progressing on the banking license ambitions in Mexico and the role of Spin and Spin Premia for OXXO to have an edge with that? Also, if we think about innovation at Spin and Spin Premia, what do you think could move the needle in the next 2 years? And how could this help being to compete versus strong alternatives in Mexico that are accelerating the Nubank, Mercado Pago and potentially Cashi from Walmart? Jose Antonio Garza-Laguera: So I will let Martin answer you the first one, and I will defer to February to give you a more detailed outlook as I'm still on the re-onboarding faith on Spin, and I would love to give you more clarity but on February. But for now, Martin will give you some answers. Martin Arias Yaniz: I think we will not be presenting our banking license for a year now -- for a year. We've decided to start with a bigger focus on our credit part of it. That does not mean we're going to be increasing our credit. The pace of our credit business much quicker than we had. As I told you, and I promise we'll keep you informed and up to speed. We don't expect that to be more than a $20 million or $30 million deployment next year in terms of trying out new things. But we came to the conclusion that we want to have greater visibility and a sense of our ability to use our data to be successful in credit before we went for the full banking license. So I'd say we're about a year from making that decision of actually filing the banking license. It's already and prepared -- and we've done a lot of work on it, but we decided to just wait 1 year. Jose Antonio Garza-Laguera: We promise better details on February, Hector. Sorry. Operator: We'll now take our next question from Carlos Laboy from HSBC. Carlos Alberto Laboy: Congratulations Jose. And also thank you to Jose Antonio for really turning over the leadership of FEMSA at a moment in history when the business are really at their most dominant, their most focused, maybe the most talent-rich and fiscally sound position that we've seen, right? So it's a gift that we can get Jose Antonio to put his full focus on and growth and value creation here. So Jose, can you please give us more insights on affordability? Beyond, obviously, the savings aspect. Can you speak to what else is driving consumer sampling, repeat consumption and adoption, or maybe some of the more successful discount brands that you're running into in Mexico. And are there any specific categories where this is most evident? Kind of related to that also, is this pressure improving the differentiated proposition that OXXO is getting from its big branded suppliers to drilling foot traffic? Jose Antonio Garza-Laguera: I didn't hear the last part. Carlos Alberto Laboy: Yes. Is all this pressure, Jose, from discount brands, improving the differentiated proposition that OXXO is receiving from your larger branded suppliers to help you draw in foot traffic. Jose Antonio Garza-Laguera: Yes. It's still semi hypothesis. Obviously, it's an educated, not guess, because we've been talking to our CPG partners. And as they see the growth of the discount channel, they reinforce their partnership with OXXO with strength. I would say, first, if you look at the national level, how many stores are next through a discount of our stores are between 600 meters of a discount store, and it's still below 10% of our stores. So that tells you it's still not really moving the needle so much. But they will continue to grow, ours and others. So we -- where we are next to them, something interesting happens. Some -- we lose sales in some categories, and we even win traffic in some categories because people -- it's very easy to walk into one of our stores and to the other ones. And so you see people may be buying the ice with us or buying or buying the beer with us and then going to do their top-ups and their weekly grocery bill in the other one. So it's an interesting dynamic. But that said, it's an increasingly competitive dynamic. Affordability is here to stay in OXXO because the Mexico consumer is very -- is becoming much more price conscious. And we see the opportunity to really gain a much more relevance in what we call the replenishment occasions. And obviously, that has a role to play in beer where you are beginning to see more returnable glass, or the famous Caguamón, we're beginning to increase our coverage in Mexico, but also multipacks. And we're beginning to see that a lot in soft drinks. I think we were a little late in the game and getting into mini multipacks, or the mini cans, 6 pack or 12 pack, which we're beginning to introduce in the soft drink category. It's driving a lot of success for the bottlers, and we are beginning to introduce that in Mexico. So that's a top-up or a weekly type of consumer occasion, and that's where we're beginning to see affordability taking place. We're seeing it in tobacco. And interestingly enough, we're not seeing a lot of migration from the premium tobacco smoker to the brand -- about 70% of the value brand. About 70% of the -- given the information we have from the tickets and the Premia is that most of the value brand buyers in OXXO in tobacco are people that were not coming into the store that frequently. So we are beginning to lose our fear of cannibalization from premium products to mainstream or value. And so we are beginning to develop more and more assortment of affordable prices and sort of affordable SKUs. And our -- our supplier partners are collaborating with us to help us throughout the spectrum. Part of what I tell them is, if we're going to put a value beer in OXXO, which we didn't use to have for Barrilito, for example, let's also put Negra Modelo in a promotion in San Pedro. And so we like to play on both ends of the spectrum. And I think one of the beauties of our model is that we can really drive affordability in certain regions and corners of Mexico, and we can really drive premiumization in certain regions and corners of Mexico. So we will continue to play that gain. I would say that's all about what I can say for affordability now, but I will bring more information as we continue to gather more granular data about our progress there. Operator: That's all the time we had for today's question. With this, I'd like to hand the call back over to our host for closing remarks. Juan Fonseca: Thanks, everyone. Obviously, we're always available for follow-ups and incremental questions. But other than that, have a great rest of the week. Jose Antonio Garza-Laguera: Thank you, everyone, and we will be seeing each other here in every conference call. So looking forward to more interactions. Operator: This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
Operator: Good day, and welcome to today's FEMSA's Third Quarter 2025 Results Conference Call. My name is Serge, and I will be your coordinator for today's event. [Operator Instructions] And now I'd like to hand the call over to Juan Fonseca. Please go ahead, sir. Juan Fonseca: Good morning, everyone, and welcome to FEMSA's Third Quarter 2025 Results Conference Call. Today, we are joined by our CEO and Chairman, Jose Antonio Fernandez Carbajal, Jose Antonio Fernández Garza-Lagüera our current CEO of our Proximity and Health division and future CEO of FEMSA; Martin Arias, our CFO; and Jorge Collazo, who heads Coca-Cola FEMSA's Investor Relations team. The plan for today is a little different than usual. We will begin with our CEO and Chairman, who is traveling today and is therefore joining us remotely. Jose Antonio will share with us some thoughts on the past couple of years, where he sees our company today, and how he sees FEMSA position for the future as he gets ready to step down from the CEO role at the end of this week. He will not be able to stay for the remainder of today's call. Next, we will hear from Antonio Hernandez Velez Leija, still in his capacity as CEO of our Proximity and Health division. As you know, he will assume the role of CEO of FEMSA in a few days. But most of his comments today will focus on the performance and trends in our key retail operations during the third quarter, as well as some thoughts on the short- and long-term initiatives we are taking to address an evolving consumer. Next, Martin Arias, we'll discuss FEMSA's consolidated and operational results for the quarter in further detail. And finally, we will open the call for your questions. For the Q&A, please keep in mind that as of today, Jose Antonio is still the CEO of Proximity and Health, and there is a lot to discuss regarding those operations. If you would rather ask him about his views on the broader FEMSA platform, I'm sure he'll be happy to provide some high-level directional comments today, but these are early days as he onboards to his new role. Obviously, we'll be happy to dedicate ample time to this topic during our February call and beyond. And with that, let me turn it over to our Chairman, Jose Antonio, please go ahead. Jose Antonio Fernandez Carbajal: Thank you, Juan. Good morning, everyone. As you all know, in June of 2023, I returned to the role of CEO at a challenging moment because of our good friend, Daniel Rodriguez have fallen gravely ill, and we were in the thick of executing on our ambitious FEMSA Forward strategy. I committed at the time to where the 2 hats of CEO and Executive Chairman for a certain time with a clear plan to fill the CEO position and return to the separation of these key roles within that time frame. With the help of our Board, we've been able to deliver on that plan. And while I'm happy to hand over the keys to the incoming CEO next week, I appreciated the opportunity in these past 2 years to get close to the operations again, particularly through such a key process as FEMSA Forward. Today, I would like to share some thoughts on our recent past and on our future. FEMSA Forward was all about maximizing long-term value creation by focusing on our core verticals, retail and beverages, enabled by digital, and setting out very clear capital allocation target. In the past 32 months, we've been hard at work executing that plan, divesting nearly $11 billion of assets while in our core at the same time. In addition, the capital allocation framework we put in place in February of last year is guiding our actions and allowing us to move steadily toward our leverage objective by distributing between March of 2024 and March of 2027, and expected a total of approximately $7.8 billion of capital through [ ordinary ] and extraordinary dividends, and also through some share buyback. As I briefly recap these last 2 years, there are 2 message -- 2 messages I want to highlight. First, that everything we set out to do when we announced FEMSA Forward, we have delivered on. We told you what we were going to do, and then we did it. Second, that these actions have been driven by our share pursuit of long-term value creation for all of our stakeholders. Our purpose and interests are well aligned. Finally, I would like to quickly touch on how I see FEMSA position today. I feel very confident that our business units have never been stronger. I know this year has been sluggish in Mexico. And I know that the team has addressed this, and we will discuss this later during this call. But I also know that the last year was a banner year. So I am talking about the forest, not the trees. On the retail side, we have OXXO Mexico still with at least a decade of continued store growth at the current pace, world-class returns on capital, and a full range of levers to adjust as we ensure our value proposition continues to satisfy a growing number of needs for an always evolving consumer. In Mexico, we have successfully completed the leadership transition to Carlos Arroyo, an experienced retail operator with a decade -- with a decade's long track record, who is bringing a new set of capabilities that will serve us well for the challenges ahead. In the proximity convenience environment outside of Mexico and in the discount space in Mexico, we have a compelling set of higher growth opportunities that are ready to be scaled up, such as OXXO Brazil, OXXO Colombia and Bara among others. Any one of these opportunities has the potential to create billions of dollars of value over the next decade and beyond. In our other retail investment, specifically Health in Europe, we are laser focused on organic growth and on improving the returns on our invested capital. At Coca-Cola FEMSA, we are in the middle of an ambitious multiyear investment phase, continuing to increase our production and distribution capacity, as well as our long-term growth capabilities. Underscoring the strength and resiliency of this business even as we navigate a challenging short-term environment. On that note the recently announced tax increase in Mexico will present challenges, but we believe this will be the -- like the one we have faced in the past. And we will make the necessary adjustments in order to balance our return on investment capital while allowing us to take advantage of some growth opportunities. At Spin, we continue to grow our user base and engagement as we make steady progress in developing. Unknown Executive: Hello Jose Antonio? Excuse us while we try to reconnect to connect with Antonio. [Audio Gap] Operator: Ladies and gentlemen, we experienced a momentary interruption in today's conference. Please continue to stand by. [Audio Gap] And we've got -- we've back Jose Antonio. Please go ahead. Jose Antonio Fernandez Carbajal: Thank you. I'm very sorry. I don't know what happened and I kept talking, and I didn't notice when I left. Can you tell me where I... Unknown Executive: The paragraph of Spin Jose Antonio. Jose Antonio Fernandez Carbajal: Okay. So I will repeat that paragraph. Thank you. At Spin, we continue to grow our user base and engagement as we make steady progress in developing a digital ecosystem that will better enable our millions of users to navigate and improve their financial lives in a world that is increasingly digital. Although this is one of the longest term bets in our core verticals, we have a firm belief that the digital capabilities we are building are indispensable to OXXO Mexico, and will prove to be a source of value creation, creation for decades to come. Jose will certainly bring a fresh perspective to this business. I have been at FEMSA for nearly 40 years. During that time, I have lived through several reinventions of FEMSA. And today, I am as excited about our long-term growth opportunities as I have ever been, and I hope you are too. I will continue to work to capitalize on those opportunities in my role as Executive Chairman, but I will have fewer chances to speak with you. So I want to take this moment to thank every one of you for your interest in our company and for your full support through all these years. And with that, let me turn it over to our new CEO. Jose Antonio Garza-Laguera: Thank you, [indiscernible]. Good morning, everyone. Today, I want to structure my comments around three topics. First, the quarter's results with a particular focus on OXXO's Mexico same-store sales and traffic, where despite a still challenging environment, we are seeing some encouraging signs. Next, I want to talk about the actions and initiatives the team has put in place at both the short-term tactical level, but also some ideas about more strategic considerations and projects aimed at strengthening the value proposition and relevance of the OXXO store in the medium and long term. Finally, I will share with you some initial thoughts as I get ready to step into the FEMSA CEO role in a few days. So firstly, let's talk about the third quarter. As you saw in our release, same-store sales for Proximity Americas increased 1.7%, with average ticket rising 4.9%, and average traffic contracting 3.1%. This represents a clear improvement versus the first half, marking an inflection in our trend that seems to be improving further in October. This quarter was the first to show positive same-store sales growth since the middle of last year, and importantly, we believe a significant part of the improvement came not from a meaningful change in macro conditions, the weather or the consumer environment, but rather from adjustments we made to address category and channel-specific challenges. As a result, we improved our competitive position in several key categories like beer, soft drinks and snacks. And in terms of the channel, we believe we also improved our overall competitive position versus the traditional trade, reversing the trend we saw earlier in the year. Which brings me to my second topic regarding the short- and medium-term initiatives we have launched to improve performance. There is a long list of actions and initiatives designed to drive our short-term results which are aligned with our long-term strategic objectives. One of our most important such initiatives, which I want to highlight is pursuing affordability in our core categories of beer, soft drink, snacks and tobacco. To this end and working in tandem with our key supplier partners, we were able to improve our assortment and our price package architecture by adding presentations at both ends of the out-of-pocket spectrum. Larger multi-serves and returnable presentations in beverages, smaller packages for snacks and beverages, and lower-cost brands for cigarettes. In addition, we have implemented aggressive promotional campaigns in these categories and a variety of other categories. These initiatives are being supported by strong communication efforts, access to Premia related data, and a focus on store execution, and we are already seeing positive results, improving our competitive position during the quarter for most of these categories relative to the traditional trade. At the same time, we are executing ambitious initiatives to drive productivity and efficiency across the proximity and health organization aligned with our long-term strategy, including our recently launched fit-for-purpose corporate overhead efficiency program, which will make our organization leaner and achieved significant cost savings over the next several quarters, generating a reduction in SG&A. Beyond the short term, we are in the early stages of developing the strategy that will guide the evolution of our OXXO platform in the years to come. As powerful as our value proposition has been to satisfy certain consumer needs and occasions around thirst, gathering and impulse, we believe we can expand our relevance and increase the scope of our value proposition while ensuring affordability in a more integral manner. We also see that coffee and food categories are categories where we can win by making significant improvements. We have performed a deep diagnostic on our current value proposition and are currently in the experimentation phase to launch new offerings. We are excited by the opportunity and we will keep you posted as we advance on this ambitious multiyear effort. Finally, let me talk about FEMSA and my role as future CEO for a minute. As you might imagine, I have been rapidly getting up to speed in all the matters outside the scope of Proximity and Health. However, although it is still early, and I do not start the job until next week, I want to share an initial message of strategic continuity. Over the past few years, we achieved meaningful progress driven by the vision, courage and strategic clarity of those that came before me. They led a powerful transformation, streamlined our portfolio and positioned FEMSA to compete with greater focus and strength. I have the privilege of learning from them and their example continues to shape how I live and think about the future. As a member of the senior leadership team, I was informed and fully supportive of FEMSA Forward and the resulting focus on our core business verticals, and I am completely designed our capital allocation framework and strategy. I am convinced we have in Coca-Cola FEMSA and OXXO Mexico, two of the most remarkable and valuable assets in their respective global industry. Not just because of what they represent today, but just as importantly what they can become in the future. Our retail platform is poised for dynamic long-term growth through OXXO Brazil, OXXO Colombia, Bara and although still at an earlier stage of development, OXXO USA. Our other retail platforms, in particular, Health and Europe, our solid self-funding operations where our focus should be on maximizing the returns on our existing assets through efficiency and primarily organic growth. And I am a firm believer in the potential and optionality of the Spin ecosystem. I also want to take this opportunity to share with you that I am bullish on Mexico. We continue to deploy more than $1 billion in our CapEx in our home country every year. As attractive as some of our international long-term bets are, Mexico will continue to play an outsized role in the value creation at FEMSA for the foreseeable future. As for my management style, I favor thinking in decades while lasting in days, balancing a long-term view on value creation with a sense of urgency in setting the right conditions for execution. We will have plenty of opportunities to talk about these topics in the future. But I can share some examples with you of what I mean by that. Thinking in decades requires that we methodically consider our strategy, ensuring that we do not mortgage our future for short-term fixes and gains at the expense of our long-term growth and competitive position. We should always be driven by the objective of long-term value creation, instilling a relentless focus on sustaining or having an achievable and realistic path to ROIC over WACC. Acting in days requires us to rigorously tighten our grasp on actionable expense and cash flow levers, making it a daily habit across the organization. It includes getting the right people in the right seats right now, as well as testing frequently, learning quickly, moving on fast when we fail, and acting decisively when we find a new solution that serves our customer needs. I would also add that I'd like to communicate in a no nonsense straightforward way, and one thing I can offer you now is a commitment to be in touch with you, our investors and analysts more than in the past. Not just on these quarterly calls, but by meeting you on the road. We are already developing the plans for next year with Martin and Juan, and I look forward to seeing you all in the not-too-distant future. And with that, let me turn it over to Martin to go over the quarterly results in detail. Martin Arias Yaniz: Thank you, Jose Antonio. Good morning, everyone. Let me begin by discussing our consolidated results for the third quarter of 2025. During the quarter, we delivered total revenue growth of 9.1% despite a still challenging but improving environment in Mexico, impacting both Proximity and Coca-Cola FEMSA, which was offset by solid top line trends outside Mexico. Some currency tailwinds, particularly in Europe and the consolidation of the OXXO USA operation. Operating income increased by 4.3% year-over-year, reflecting inflationary effects on our costs and expenses, partially offset by expense efficiency efforts across multiple operations, especially at OXXO Mexico, Coca-Cola FEMSA Mexico, Health and Europe. Net consolidated income decreased by 36.8% to MXN 5.8 billion, driven mainly by a noncash foreign exchange loss of MXN 1.3 billion, compared to a gain of MXN 4.3 billion last year, a swing of more than MXN 5.5 billion. Related defense U.S. dollar-denominated cash position, which was negatively impacted by the sequential appreciation of the Mexican peso during the period. Two, higher interest expense of MXN 5.5 billion, compared to MXN 4.8 billion the previous year, reflecting higher debt at Coca-Cola FEMSA and higher lease obligations across our retail network. And three, lower interest income of MXN 1.9 billion compared to MXN 2.6 billion the previous year, reflecting lower interest rates and lower cash balances. Our effective tax rate for the quarter was 29.3%, showing a sequential improvement. We understand that the spike in the first half of the year in our effective tax rate 42.2% in the first quarter, and 40% in second quarter raised certain concerns. In that regard, I want to make several comments. The quarterly movement of our tax rate can be volatile and difficult to project on a quarterly basis, since it can be impacted in any given quarter by any of the following things. Extraordinary settlement of fiscal contingencies from the past in 1 quarter, reflecting issues from several years in the past. As the year progresses, we also make adjustments to provisions for tax payments given the performance of the business. Foreign currency gains and losses on our foreign currency cash balances and debt can cause important swings. We are requiring our tax rules to include or write-off deferred tax assets relating to NOLs based on adjustments to internal projections. Movements of accumulated cash, excess cash from our subsidiaries to Mexico, reflecting several years of profits can cause an increase in taxes. There are certainly structural reasons why our tax rate is higher than the 30% corporate income tax rate in Mexico, including nondeductibility of certain expenses, losses relating to Spin, and higher [ tax ] rates in countries outside of Mexico. We have guided investors towards a tax rate in the mid-30s range, and we continue to believe that this is the right number under current legislation. Turning to our operating results and beginning with the Proximity Americas division. Same-store sales increased modestly by 1.7%, once again reflecting a combination of a solid average ticket growing 4.9%, offset by a traffic decline of 3.1%. This is an improvement over the previous several quarters. And as Jose Antonio just said, it includes some encouraging information regarding the effectiveness of our tactical initiatives, and an incipient recovery in our competitive position in key categories. Total revenues for Proximity Americas grew 9.2%, or 4.8% on an organic and currency-neutral basis, mainly driven by the expansion of our network 1,370 stores year-on-year, a strong performance in our LatAm markets, which continue to grow at very attractive rates. The consolidation of OXXO USA, as well as favorable exchange rate effect in several of our operating currencies. Gross margin expanded by 80 basis points to 45%, reflecting a continued expansion in Mexico and LatAm, despite undertaking the affordability efforts mentioned previously in Mexico, and the consolidation of the U.S. operations which have a significant component of lower margin fuel. Operating income increased by 7.1%, while [indiscernible] 20 basis points to 8.8%, mainly due to the consolidation of the U.S. operations, which are slightly above breakeven. And despite the fact that Mexico's margin was flat, and OXXO LatAm continued to reduce its operating income losses relative to its revenues. The combined selling and administrative expenses grew at 12%, reflecting continued pressure on wages in Mexico, continued expansion-related expenses in LatAm and consolidation of the U.S. operating expenses. There were some reclassification of administrative expenses to selling expenses in LatAm, which makes comparison more difficult on a disaggregated line item basis. We expect, over the next few quarters, you should be able to see the effects on SG&A as we streamline corporate overhead through our fit-for-purpose initiatives. On the store expansion front, Proximity Americas added 198 new stores in the quarter, in line with our plan for the year. At OXXO USA, the conversion of DK stores into the OXXO banner continue to pace, reaching 50 converted stores in Midland-Odessa and Lubbock. We are making progress in food service with revamped hot food menus and offerings in the 50 OXXO stores, adding new partnerships aimed at driving consumer frequency and strengthening the overall food service value proposition, including clip-ins from our [indiscernible] and [indiscernible]. We are also initiating the conversion process in El Paso, as well as testing stand-alone nonfuel OXXO stores in certain locations. At Bara, during the quarter, we continued our accelerated store expansion opening with 40 new stores, and we remain on track to achieve or surpass a 30% growth rate in 2025. We continue optimizing our discount value proposition by scaling our private label strategy. Bara same-store sales grew 10.8%. In Europe, Valora delivered solid results as total revenues increased by 10.1% in pesos, or 3.3% on a currency-neutral basis, driven by higher Swiss retail sales, coupled with positive trends in Swiss B2C food service, partially offset by softer sales in B2B food service, particularly in the U.S. Gross profit grew 10.1% in pesos, or 3.4% currency neutral, in line with revenues and representing a stable margin compared with last year. Total operating expenses grew below revenues. However, selling expenses grew at almost the same rate as sales, reflecting wage pressures and inflation, but were offset by nearly flat administrative expenses. This reflects broad efforts to reduce corporate overhead expenses. Valora reported a 29.1% increase in operating income, 20.7% on a currency-neutral basis, representing a 70 basis point improvement in operating margin, and reflecting strong growth in Swiss retail, positive contribution from Swift B2C food service, and effective corporate overhead cost management offset by our B2B food service business. Now let me walk you through the performance of our Health division. Total revenues increased 2.9% in pesos with same-store sales growing 0.8%, mostly explained by strong top line performance in Chile and Colombia, offset by Mexico. On a currency neutral basis, total revenues grew 4.5%, evidencing currency headwinds relative to the U.S. dollar in Ecuador and the Chilean peso. Growth in revenues occurred despite the continued challenging environment in Mexico, which saw same-store sales declines and the closure of 423 underperforming stores versus the same quarter in 2024. Operating income declined 4%, and 1.3% on a currency-neutral basis, resulting in an operating margin dilution of 30 basis points to 4%. This reflects operating deleverage in Mexico and higher labor expenses in South America, particularly driven by the rapid expansion in Colombia. [indiscernible], same-station sales increased by 8.3%, and total revenues grew by 5%, reflecting growth in retail volume, offset by a decline in the wholesale business. Gross margin stood at 11.8% and operating margin at 4.6%. It is worth highlighting that during the quarter, selling expenses decreased 1.7% underscoring our continued effort to look for efficiencies and savings to support profitability in such areas as labor costs. Now moving to Coca-Cola FEMSA. During the third quarter, they delivered gradual sequential improvement amid a challenging environment. Total volume declined slightly, driven mainly by Mexico, or a softer macro environment continued to weigh on consumption. On the other hand, South America delivered a resilient performance with volume growth across most territories, demonstrating the adaptability of the business across regions. In terms of profitability, cost protected its margins, mainly through the implementation of mitigation actions, controlling expenses and generating efficiencies, recognizing a more difficult 2025 than expected. You can dive deeper into the results by listening to the webcast of their earnings call held last Friday. Finally, regarding capital returns to shareholders in the context of our capital allocation framework. During the quarter, we distributed a total of [ MXN 11.8 million ] in a combination of ordinary and extraordinary dividends. In terms of share buybacks, we were not active during the third quarter, so we are a bit behind schedule. As you know, whenever we become active, we will make the required filings and you will be able to follow. As we look ahead to the coming year, we are cautiously optimistic. As we mentioned before, we are beginning to see signs of improvement in the October data in Mexico. In terms of the levers and variables under our control, we are confident we are making the right adjustments and achieving the desired results across our platform. From the consumption side, we will have the additional tailwind from the FIFA World Cup to be held in our continent, with matches being played at the right time of day. And hopefully, we will also get a slightly better environment in which to operate in Mexico. We will provide a more detailed update in our next call. And with that, we are ready to open the call for questions. Operator: [Operator Instructions] The first question is from Ben Theurer from Barclays. Benjamin Theurer: Jose Antonio, congrats on the new job. And I actually have a question for you on the old jobs. So as it comes to retail, just wanted to understand a little bit and dig a little deeper into your commentary on the same-store sales performance. Well, clearly, traffic was down only 3% versus the give or take, 6% we saw in the first half. There was a very easy comp versus last year because of some of the hurricanes. But you did mention there is sequential improvement into October. So I wanted to kind of like understand if you could give us a a couple of more data points as to maybe how the performance was from July through September? And how that carried into October? And what we should expect here as we move throughout the fourth quarter and then maybe into next year, just with the closing remarks being slightly optimistic into next year? So I just want to understand a little bit the traffic dynamics at OXXO. Jose Antonio Fernandez Carbajal: Sure. This is great. I was expecting this one to be either the first or the second question. Unknown Executive: Fantastic. Be prepared for that. Jose Antonio Fernandez Carbajal: So -- I mean, obviously, I would say, I am glad that I see a reversing of the trends in OXXO Mexico on this quarter. And I do see better performance in traffic compared to last -- the first half of the year. But obviously, I'm not satisfied because we had, as you say, some easy comps. To the defense of my team and also there were some adverse effect in weather, especially obviously in September and especially in the Central of Mexico, but I -- and I mean what gives me some optimism is that the last couple of months, we've seen market share gains in beer, in soft drinks, and even in snacks, and even in tobacco, especially with the introduction of some lower-priced tobacco. I am -- October is still not over, but I am very encouraged by the results. So if that trend continues, I think we should be facing a much better end of the year. What else I can tell you? I can tell you some of the things that we've been putting in place that we think we're going to take effect much more -- or they were going to take longer to take effect. Like promoting coffee and some food items around coffee and breakfast are really beginning to shape up. Coffee is growing at double digits, and that gives me optimistic. And then the ability to be introducing multi returnable packages, affordability stuff in beer in soft drinks are really, really beginning to take place. And I would say in services, we're implementing new increasing services every, every quarter. And so even though, for example, we're growing a lot with the Asian e-commerce retailers, those things have now scaled back given some tariff restrictions. We're beginning to see other increases in traffic in services that are -- give us high expectations for growth. We're still waiting for the permit to get back into Banorte and other banks. But cash withdrawal with the main banks, some of the big fintechs and with Spin are growing double digits as well. So I would say still not satisfied because I wish we were going better in traffic, but very encouraging signs towards the fourth quarter. Does that help you? Benjamin Theurer: It does. And then obviously, into next year, we get the really easy comps, correct? Jose Antonio Fernandez Carbajal: Well, hopefully, yes. I do think there's a lot of things we need to still do on our part, and I am very encouraged by the obsession towards market share gains that we're following through in OXXO, and I think that's a discipline we will go forward. But we should get better comps. And I do think the World Cup should help as well. Benjamin Theurer: Congrats again on your new role as well. Jose Antonio Fernandez Carbajal: Thank you. Operator: We'll now take our next question from Alejandro Fuchs from Itau. Alejandro Fuchs: Congratulations on their new role to Jose Antonio. I have 2 quick ones, if I may. The first one on OXXO Mexico, another strong performance on gross margins this quarter. I wanted to see if you could maybe elaborate a little bit more into how much of this is the service mix continue to add to the business? How much of this is maybe a little bit of pricing? And where do you see just gross margins in Mexico continue to develop at OXXO in the future? And then the second, on Bara and also in Brazil and another also strong quarter of growth, so congratulations on that. I wanted to maybe Jose Antonio grab your thoughts on where do you see these 2 businesses in the next 10 years? How much of our priority are them to you and to the team? And then maybe if you could elaborate a little bit into what would be the best case scenario, sort of medium to longer term of Brazil and Bara. Jose Antonio Fernandez Carbajal: Yes. Thank you, Alejandro, for I would say, obviously, I've always said that OXXO Mexico has a lot of momentum and still a lot of gross margin to gain. If you look -- I think always the gross margin it's an incomplete number. And obviously, we don't have the full answer, but you would have to say, look, at the full profit pool all the way from the -- of our supplier partners all the way to the consumer. And I always like to see gross margin gains, and I think there's a lot to gain still. But some of that should be given back to our consumer in affordability. Obviously, some categories are more elastic than others. And so we have the smart data to play with that and give back to our consumers some of the gross margin gains. As to this quarter and the gross margin gain, it has a little bit to do with the commercial income that we continue to grow incredibly well. It has a little bit to do with mix. The affordability things allows us to even gain some gross margin as we implement some very profitable promotions in some of the affordable SKUs that we we are trying to promote. So the mix also helps sometimes with the broad margin. But I would say, mainly, it's -- that we continue to win commercial income. And as we grow what you can expect through the year I do expect that there's more gross margin to make, but some of it will be given back to the consumer in affordable promotion and price pack architecture. Afterwards -- afterwards Bara and OXXO Brazil, as I said in this forum, and I will say it in the future, those are 2 of the most exciting avenues for long-term growth for FEMSA. I am incredibly encouraged by the amount of progress that OXXO Brazil has been able to achieve in the last couple of years. We were -- just 2 years ago. We still needed to believe almost a quantum leap in gross margin expansion, in operating cost reduction, in top line goal. And now we are within arms reaching all of those areas. So we know we're going to have a profitable business in OXXO Brazil. We know where our next areas of growth beyond Sao Paulo will be. We're already mapping them. We're already starting them carefully. The big, big question to ask is, do you believe of that it will be a 40,000 store business in Brazil, or a 4,000 business in Brazil? I think it will be something somewhere between. Sorry for the wide margin. But it's up to us to really continue to perfectly engineer the whole process of the business to make it -- to be closer to the higher end belief. But it's one of my big, bigger ambitions for the next decade in FEMSA. Imbera, we are incredibly happy with the progress in terms of increasing our return on invested capital of new opening stores. We still need to polish and perfect the value proposition of Bara towards more -- towards -- closer towards harder discount. We're happy with the deployment and growth of our private label brand, but we still have a long, long way to go, but we are following closely and working with the private label manufacturers from other countries that are one to come and install in Mexico. And we're beginning to grow beyond our core region of El Bajio. And we're seeing very positive results in Guadalajara in Jalisco and we just opened in the north of Mexico. So we're very excited with the progress there. Operator: And we will now take our next question from Antonio Hernandez from Actinver. Antonio Hernandez: Congrats on the results and this new position. So question regarding an update on the health business, both in Mexico and Chile, some news also... Jose Antonio Fernandez Carbajal: Antonio can you be closer to the mic? I'm not being able to... Antonio Hernandez: Yes. Can you hear me there? Jose Antonio Fernandez Carbajal: Yes, better. Antonio Hernandez: Okay. Perfect. Just wanted to get an update on your health business. Both in Mexico and Chile saw some news -- recent news on a new format in Chile. Also, there's a very different trend in Mexico. So I wanted to get an update on that business in both countries. Jose Antonio Fernandez Carbajal: Yes. So in Chile, we were facing a very tough competitive environment in Chile for the last couple of years, and we are very happy that we continue to Gain market share. We're growing in all of our channels. As you know, Chile is a multichannel business. We are in the pharmacy. We're in the franchise business. We're in the distribution to independent pharmacy. And we continue to gain -- and we just even opened our discount pharmacy chain in Chile. And we are seeing incredible growth in sales and in market share, in all of that. Given that it's a very competitive market, sometimes that does not translate to bottom line growth. But even given the huge competitive environment that we see in Chile, we are happy that we are growing even in the income statement. So -- and we expect Chile, it's a mature market. We have very high market shares. But I do feel there's a lot of room for growth in even newer categories in the health and beauty space, in the premium and in the discount space, and we're beginning to get into other adjacencies in the elderly care, I mean the pet and veterinary care, and so we see new avenues for growth for Chile. Very different outlook for Mexico. In Mexico, we are the #6 player. I could obviously put as an excuse. A big chunk of our stores are in the Sinaloa region, which have been affected by security. But it's not enough to explain the drop. To be honest, we need to fix Mexico. We're working very hard to fix it. We have now the right talent in place. But we had to close many stores in Mexico, and we're still on working on fixing that operation, and we hope to fix it in the next few months. Thankfully, we have a very high-growth business in Colombia. And even in Ecuador, we're seeing market share and revenue and profit gains. So in general, health as a business we're happy except for Mexico. Operator: And we will now take our next question from Alvaro Garcia from BTG Pactual. Alvaro Garcia: All the best in your new role Jose Antonio. Two questions. One, the fit-for-purpose /corporate restructuring comments you mentioned earlier, the reduction in SG&A. In my head, I have this $100 million amount that you've typically guided for on the corporate front. Is that subject to change? And if you could just give us more color on how you're thinking on structuring the corporate expenses there? And then just one really quick one on interest expense. Martin, I don't know if you could expand on -- you saw a pretty big uptick at the FEMSA level, ex-cost. What explain that? Jose Antonio Fernandez Carbajal: So I would say, I would split the corporate overhead in 2 phases. The first one, the fit-for- purpose component is something that me and the OXXO team have been working on, and we are -- there were opportunities as we prioritize certain projects in OXXO Mexico and prioritize others. There was a good opportunity to reshuffle the overhead in OXXO Mexicos headquarters, and there will be some opportunities for savings, but also to leave some room for executives to dedicate to the big projects around food, around services, around the affordability that we want to invest. I do expect a big hit on savings. You will see the full number probably by the end of the year and as we start next year. As -- eventually, I would -- when I become CEO of FEMSA, I do plan to take a deeper look on -- and as always, with big changes in management, there are opportunities to look at the overhead in the full company, and I will comment more on that probably in February and beyond. Hopefully, that's what I can answer for now. Alvaro Garcia: The comments on -- fit for purpose for OXXO Mexico specifically at the moment? Jose Antonio Garza-Laguera: Yes, for now, yes. Martin Arias Yaniz: Alvaro, could you repeat your second question? I just want to make sure I got it right. Alvaro Garcia: Sure. On the interest expense, specifically, ex-KOF, we saw a pretty big sequential increase there. I was wondering if maybe there's some derivatives in there that's driving that? Or what drove that sequential uptick there? Martin Arias Yaniz: Well, looking at the total interest expense, KOF, actually went up from -- looking this correctly from [ $1.59 billion to $1.3 billion ] interest expense net and it was flat on interest expense. And so the interest expense went up by MXN 600 million. I don't -- I'd have to get back to you on the detail exactly in the context of everything, it's not that big a number. Interest income is certainly coming down as our cash balance has come down. As interest rates generally come down, particularly in Mexico, but to some degree in the United States. But specifically, that what appears to be a MXN 600 million increase in interest expense at FEMSA, I'll get back to you. Operator: We'll now take our next question from Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: First of all, best of luck on your expanded challenges. And also congrats to your father on another successful transition. We'll be looking forward to connecting more going forward. I have two questions. One is more conceptual, right? When you think about the one thing that you'd like to do differently in FEMSA going forward. What do you think this is the clear opportunity? This is more conceptual, right? But it still related to your vision for the company, and this is somehow also linked to the capital allocation strategy. How do you think the role that Coca-Cola FEMSA will have in the FEMSA overall portfolio going forward? Jose Antonio Garza-Laguera: Thank you, Thiago. Obviously, great question. I would say -- I will answer you with the second one. I would say, obviously, I am in love and have a huge appreciation for the KOF as a business and the talent. It's an incredible business, and it's an operation that has a lot of things going on for themselves to really keep growing, growing the core. I'm incredibly impressive what the opportunities that are -- we see for the digital transformation of the bottling platform. For growth opportunities, not only in their soft drink category, but in their non-KOF. And I see a lot of potential for organic growth in Brazil, Guatemala, Colombia and even in Mexico, with all the -- even with the taxes. So I'm very excited for Coca-Cola FEMSA. The relationship with the Coca-Cola Company is the best one we've had probably in decades, probably since the JV was formed. It's incredible that what the management team from both sides have been able to construct as a growing and fruitful relationship. I do think Coca-Cola FEMSA should play a part in a consolidation space through eventual M&A. And I am excited for the opportunity. I have huge respect for the bottlers in South America. And obviously, here in Mexico, I have a huge appreciation for all of them. And I do think there are opportunities to keep exploring possibilities with other families and bottlers in the space. I will comment more -- in more detail on what I see cost in the future, but that could give you some color of my excitement for Coca-Cola FEMSA. And from what I would say, I would do different? I think I let it be known in what -- in my earlier comments. I do think we need a bigger sense of urgency and a bigger sense of counting every penny. We have the ambition in FEMSA to be one of the best, or the best proximity retailer in the world. Obviously, with the Coca-Cola FEMSA company as part of it. As to do that, you have to have the best management team. You have to have a very demanding workforce, but also lead to the culture that you want to instill for the long-term growth of the company. So I would say my big, big focus on conceptually bigger demand for excellence in our corporate office, bigger demand for excellence throughout the channels in management, bigger speed in making big decisions on capital allocation. And I think that should give you the color on the sense of urgency that we plan to move versus previous years. Martin Arias Yaniz: And going back to Alvaro Garcia's question, the increase in interest expense, excluding Coca-Cola FEMSA, was slightly over MXN 600 million. 2/3 of that can be attributed to an increase in the financial expense associated with the lease accounting under IFRS, and likely the consolidation of the U.S. business is a big reason for you seeing the sort of uptick relative to other periods. For other periods, most of it is related -- all of it is related to organic growth of leases. Operator: We'll now take our next question from Bob Ford from Bank of America. Robert Ford: Congratulations on the promotion, Jose. Martin mentioned some reclassifications. Were there any reclassifications or onetime items that contributed to the gross margin improvement at OXXO Mexico? And Jose, where do you see opportunities to make further improvements in the value propositions at OXXO Mexico? And then one other question, if I could. Could you discuss the charge in discontinued operations, it was a little bit bigger than what we were looking for. We're just wondering how you're thinking about Solistica and the LTL business. Martin Arias Yaniz: Some of the reclassifications -- all the reclassifications that happen in Proximity Americas had to do with OXXO LaTam. None of them had to do with OXXO Mexico. And OXXO Mexico, even on a standalone basis did have an expansion of its gross margin. Juan Fonseca: In fact, I think Bob, expansion in Mexico was something like 130. Yes. Jose Antonio Garza-Laguera: Thank you, Bob. I would say if you look into also Mexico, we are, by far -- or we have a very important market share in what we call impulse gathering the beer, the soft drinks, the services category. But we still have a long ways to go in a couple of categories that OXXO right for winning. One is around food. We are the biggest sellers of coffee. And if you look at our LatAm operations, all of our coffee occasions go paired with very good tasty food. And I think we have a lot of opportunity to win in food around coffee. And obviously, that leads you to breakfast. And if you look at it, there's not really an affordable winning food opportunity. And that's a segment on that we have lower traffic than average. So we are very excited with increasing the opportunity for that. We still are very excited about the opportunities we see on segmentation. And I think we're going to go bigger and tougher on segmentation. We know all of the stores that are close to a discount store, or discount supermarket. And we have very clear actionable steps that we can put in place in the affordability space, not only in the categories that compete in the grocery space, but in the impulse and gathering. So we're beginning to do some of that and it's beginning to react incredibly. And there are things that will take longer to mature. But I am very excited about them. Some of them around the beyond trade and other services. And that requires working with team towards creating payment options that you can pay at Spin, but you can also send people money that they can withdraw at OXXO, and you can reward them for withdrawing at OXXO in a way. We're beginning to see some interesting things. We are still very excited about our growth in OXXO Nichos. They continue to outperform in terms of ROIC and we are continuing to accelerate that. This year, 25%, a little bit lower than what we planned, but still much bigger than previous year. 25% of our stores would be on the niche space, and that should just continue to gain momentum. I would leave it on that. Those are the things that we see are beginning to help us gain share beyond the inputs and gathering categories and towards food and groceries and others. Does that respond your question, Bob? Robert Ford: It certainly does. I just had that one follow-up with respect to the discontinued operations in Solistica. Jose Antonio Garza-Laguera: Martin, you'll take that one? Martin Arias Yaniz: Yes. So Solistica was -- the transaction was completed in early July. So you will see an impact from Solistica being removed from discontinued operations for that quarter. And it should not return. We've had so many transactions going -- going forward. We really have no major transactions to complete or close that should impact other than this quarter, we reconsolidated the only part of Solistica that we kept, which was less than truckload in Brazil, a very small business. But that's the only one that also got removed from discontinued operations and is now consolidated at the holding company level. Operator: We'll now take our next question from Rodrigo Alcantara from UBS. Rodrigo Alcantara: Jose, I would like to focus here a bit on food, right, which is a topic we also discussed back in those days. I mean, food is not a new thing, right? I mean, has been there for a while, remember Doña Tota, right? A couple of years ago, was part of the speech, right? Still ever since food as a percentage of sales in OXXO remains relatively low, right? I mean, kind of like it's on this front over the last decade has been relatively slow. So my question here for you is what makes you feel so excited about food again? Why this time could be different? Or could we expect faster adoption on this front presumably with Sbarro, what you're doing with Andatti, right? That would be my question. I mean, can we expect something faster on this front as opposed to previous years? And my second question would be as presumably, you will consolidate this operation, right, once the transaction is approved. Any indications on how the consolidation of OXXO Brazil may impact your consolidated or your proximity Americas margins once you consolidate these operations? That would be my -- those would be my two questions. Jose Antonio Garza-Laguera: I'll answer you first with the second one. Hopefully, by next year, we will give you more clarity, or a distinction between South American and our Mexico proximity business. So hopefully, that will not bring a lot of noise. Obviously, it's still our operation there. It's 600 stores. So even if we still combine it on the proximity of Americas, it shouldn't move the needle significantly. But our plan is to propose to you guys a different outlook when we show the proximity numbers. We're still working on that with Juan and Martin. On food, obviously, food is a very challenging topic, and we always get the question and what is different? What are you going to do that's really going to change? I would say one of the things that encourages me is that all of our South American operations are incredibly well -- really grew the operations since probably they didn't have the services business to rely on. They were very focused on being customer-centric in food first. And since we had a lot of Mexican executive there, they were very humble in asking really the consumer what you guys need and want? And Brazil, we sell a lot of powre [indiscernible]. We sell a lot of bread, our SKU bread is our #1 SKU. And it's twice in numbers than our second even in sales than our second SKUs. So it tells you a little bit of how big food can be for the on-the-go consumer. It's no different to Mexico. And obviously, you would say, well, but Mexico is still eat on the street. That happens in Colombia, that happens in Peru. That happens in Chile. And so I think that's no excuse. What we're doing different is we are really starting with the coffee offering first. We see the opportunity for coffee. We've always treated coffee almost as a margin developer, and we still -- now we see it as a huge traffic. We still make money on coffee, but I think it should be a much more of a traffic driver. And where we do promotions on coffee, we instantly see the results. I'm very excited with preparing coffee with breakfast products. I would say that's the main thing we're experimenting. But obviously, I am a firm believer that OXXO is not a place for you to sell tacos. It is very complex to sell taco. That is a red ocean. That is taken over by the street. And to be honest, street tacos are very, very good. And so we are beginning to play around different things that our consumer wants, that they want to carry on their hands. They want to get in and out quickly out of the store. And we are beginning to try some things that excite me. Obviously, pizza and our Sbarro partners. It's too early to say. We have two restaurants here in Mexico, but we are incredibly impressed by the results. But that's, I would say -- I don't know if a decade away, but very few years away for being something that can really move the needle. We are doing some clippings in [indiscernible] Doña Tota and they are impacting well. But I think where you will see things moving fast is on affordability for breakfast. For on the road, the road warrior of Mexico, where we see a need where our consumers are really demanding more opportunities and where I think we can differentiate from the taco category. Hopefully, we will be proven right. Operator: We'll now take our next question from Ricardo Alves from Morgan Stanley. Ricardo Alves: Thank you, Jose Antonio, for all the support and all the interactions with the investor community over the past few years. We really appreciate that and wishing all the best to the new CEOs going forward. A couple of questions, guys. Actually, follow-ups. On the gross margin, when we exclude the U.S. in proximity, I think that we're getting to something like 46%. And my question initially was if we were close to a ceiling, but I think that from the commentary that was already made, you made it clear that the answer to that question is no. That you see more opportunity to continue to expand gross margin here. My question is, how is that possible when you compare your business to other convenience store business outside of Mexico globally in Asia. What do you think is going to be this next lag up driver for your gross margin to continue to expand? That's my first follow-up question. And the second one, I think that as Juan suggested, I will leave more strategic questions at the FEMSA level to next year, but taking advantage of the transition that is happening right now for the new CEO. I think that we can still talk about longer-term strategic issues at proximity. There's a lot of things going on there. You have full control of Brazil, now. Mexico, you're focusing on recovering traffic, all these efforts that we discussed here today. Colombia is growing, then you have the U.S. So there's a lot of things moving on going on, on the proximity alone. What do you think should be your focus and our focus to see what is really going to move the needle under your leadership as you think about the different regions for the next 2 or 3 years? Jose Antonio Garza-Laguera: Thank you very helpful. I would say -- on traffic, I mean, on margin, we are I always say the gross margin is a very incomplete number, and I know I said it before, but I think it's important to emphasize. You need to look at the CPG's gross margin, or margins, and the consumer let's say, relative or end price and the relative value. And in that respect, I do think Mexico is an outlier. And you see it in all the major CPG players that come to Mexico. Mexico is one of the most profitable markets for all of the guys that you guys know well, obviously, for the soft drink guys, for the snacks guys, for the beer guys. It's incredible the margins that they make here. And Mexico is an outlier because they do have a big love for brands. And I think the traditional trade still plays an incredibly large amount of -- which creates a moat for the CPG players. We have the added benefit of the commercial income. And as the discount players continue to gain -- grow and they will continue to grow off and others will continue to grow, the CPGs rely more on obviously, the traditional trade, but also on convenience, and they love to use us as a defensible place to promote -- and to promote their brands. And they do see a great benefit in return on promotional income from OXXO. And that's why we still see a lot of potential for growth. Going forward, as we try to gain share in categories where we're not huge, we're obviously beyond impulse, beyond gathering and beyond food, we will go into categories in groceries where we see an opportunity to gain share against the traditional trade and even against the supermarket. And some of that margin will be given back to the consumers. I don't know yet the amount, you will have to do -- a lot to do with elasticity. So I still -- it's very hard for me to say where the end game is. But when I see the margins of my CPG partners, which I love, and I love for them to do business with us, I do still see room for growth, both in promotional income and in gross margin fully in Mexico. So I would give it at that, and I will give -- you will see clearly how we evolve as we begin to get into other categories in groceries in OXXO where I see a big opportunity. Martin Arias Yaniz: I would also complement what Jose is saying with a couple of things. Comparisons with other players outside of Mexico, I think, is also difficult because there are very few players that have the weight of financial services. And the income that we earn on financial services is very high margin. Because the -- there are no COGs really associated with the commissions that we charge for our financial services. It's really more as G&A related to the transportation of cash, and technology that we need to have in place. Number two, the issue of our -- when you strip out financial services, the reality is the margin is different and more comparable to things that you may be looking at. Number two, there are very few players outside of Mexico that have such a scale and breadth as opposed to OXXO in meeting proximity needs, really, our competitors are the traditional mom-and-pop. And I think our value proposition is very, very specific and very distinct which allows us in certain categories, given the imports that we have, that Jose mentioned, to partner up with suppliers for any number of initiatives and work that we do with them. And then finally, it's an evolving thing. The waves of value at OXXO will also impact the margin as we go forward. Food, for example, is properly executed, should be an attractive margin business at the gross margin if you manage to control an issue of waste. So I will tell you, it's very hard. We don't look at the business sort of targeting a gross margin. We look at the entire ecosystem. There are things that can produce enormous gross margin, but that would destroy the economics of the store because of the complexity it would bring to distribution, or the complexity it would bring to the execution in the stores, so we pass on them. And then there are things that are lower margin but drive traffic are very simple to execute, and it may be very attractive. So each one of our categories is really judged on the merits of competitive dynamics, issues in the store, growth going forward, and so we spend a lot less time sort of trying to project what the total amount of gross margin is going to be as opposed to looking at each category, maximizing the value in that category, and let the chips fall where they may. Jose Antonio Garza-Laguera: And for opportunities for proximity, I would say, first and foremost, Mexico. And I would say even also Mexico, in terms of absolute value, an incredibly optimistic about the future. Even I know there's a lot of volatility and there's some of our categories where we have been having lower declines like tobacco and alcohol and others. But some categories go and some categories come. So I'm very optimistic. We just finished an analysis of how many stores fit and even if you put account a drop in services, a drop in tobacco, we still see thousands of stores. The number is so high that I'm scared to give it to you guys, but it's still at least a decade of growth at this rate. And obviously, beyond -- I mean, within Mexico, Sbarro is increasingly getting its act better and getting better and better with every cohort. And so we do see a few thousand Sbarro's in the foreseeable future. And obviously, that market is huge. It's very, very competitive, and the competitors are getting better by the year, but I think there's room for a few of us. So I'm very happy with our results and the expansion. And I would say Brazil is very top of my mind. We still need a lot of work to getting it better and better. But we are impressive by -- I mean, we've been growing same-store sales at double digits for the whole year and the business keeps accelerating. So I'm very optimistic on Brazil, Colombia. And I would say U.S.A hopefully, eventually, we will grow more confident and confident to keep growing it. But it's still on a very early stage there. But I would put my focus on that order. I would finally say, I'm incredibly impressed by the progress we've made in Europe. We have a superb management team. I've said it before. Our biggest challenge is to grow it, and we're beginning to see opportunities for growing -- especially organically. But we are very happy with the progress in Europe, and we are happy with the economic development of Europe in certain markets where we see opportunities. So we're happy there as well. Operator: We'll now take our next question from Renata Cabral from Citigroup. Renata Fonseca Cabral Sturani: Jose Antonio, congratulations on the new role, exciting times ahead and I wish you every success. My question is a follow-up on OXXO digital ecosystem or financial services. The markets in Mexico is quickly evolving on this front and recognizing that OXXO success on this digital front. My question is regarding -- looking ahead, what is Spin's ambition? And where do you see OXXO as distinctive in right-to-mean versus wallet, telco, fintech solutions. And what would be the top capabilities that the company are targeting to invest on those fronts? So that's my question. Jose Antonio Garza-Laguera: That's a very good question, Renata. Thank you. I would say for me Spin is a digital extension of OXXO's value proposition. That's how I see it. We see it as a lever to really enhance the lifetime value of our users. The Premia user average, or Premia users, which are our power users who have the loyalty program, do 3x the average consumption in OXXO in a month than the rest. But if you have a Spin, or your wallet, and the Premia the loyalty program, that's 42% above the Premia user. So I do think there is a lot of value in embedding the whole Spin ecosystem throughout our core missions. We can offer rewards, we can offer personalized promotions. We can offer frictionless experiences that really incentivize you to go more often to the store. So for me, we're in the very early stages on creating an ecosystem with Spin that strengthened the OXXO relevance in our customer lives. Obviously, that includes -- so what some people see as an apocalyptic scenario where everything will go digital like in Brazil with [ PIX ], which could happen. But for us, the potential value shift from in-store to digital, we don't see it as a value migration. We do see it as an opportunity for increasing dramatically the way people interact, and use OXXO almost as a place to cash in your rewards, your points. So we're still very focused on that. I do think at the end, it's about convenience and Spin is much more convenient than cash, but a lot of people need cash, and will need cash for the foreseeable future. Even if we go to a peak level ecosystem cash will still be important for a big sector of the economy. I am incredibly impressed now that I'm in the onboarding phase seeing how people are using Spin in ways that we even didn't imagine. Just to give you an example, people -- the way people are tipping, you're paying your waiter or your people at the gas station. People take a picture of the QR code, the QR code that you can just scan in OXXO and withdraw cash. And it's becoming the main source of people going to the OXXO store to withdraw cash. And it's easier than having to give someone else a Spin account or having to give them your WhatsApp account. You just take a picture of the QR and you scan it in OXXO. And so we see an enormous amount of little things like that, that can enhance the value ecosystem. So obviously, there will be -- there will be a lot of movement towards digital transactions. But digital transactions grow so massively, sometimes exponentially, that the percentage, even if it's 10%, that still means to withdraw cash will be enough to cover, I think, a big chunk of the services decline that we can see at the store. So to me, it's an optimistic angle. We'll see. Operator: We'll now move to our next question from Froylan Mendez from JPMorgan. Fernando Froylan Mendez Solther: Congrats on the new position, Jose. You spoke about that the pace of growth can be maintained for at least 10 more years. Can you go deeper into how the breakdown of this growth should be in terms of store expansion, same-store sales, incremental revenue from commercial income? And your thoughts on what is the adequate level of cannibalization that you can see at any point in time? And how do you feel on the ROICs of the new stores versus the more vintage space today? Jose Antonio Garza-Laguera: That's a very -- if I had a -- a crystal ball to be able to predict exactly that. I wouldn't be here. But I would say, obviously, I mean, if you look at the acceptance level of cannibalization that we take when every time we open a store, and we -- and you extrapolate that for the next 10 years at our expansion. We do think we have at least 10,000 stores to -- and about 60% of that should be normal stores and about 40% of that should be OXXO Nichos. Our numbers say that's even bigger. I would say -- but it's too early to say. So you cannot estimate the stores. How much of that growth would come from same-store sales? I don't know, but we are expecting same-store sales at least to be flat, or even growing slightly with inflation adjustment. So I think there's that. If we win on breakfast, we win on grocery and we win -- we continue to gain share on gathering. Obviously, that number could get higher. But hard for me to give you a precise number at this time. Juan Fonseca: I think, Froy, this is Juan. In terms of -- normally, we separate in terms of new stores. If you model 1,100 per year. Today, that's 4% and change. And over the years, that will probably get smaller into the 3. But then same-store sales, it's a separate part of the growth algorithm. And there, as you know, our kind of our long-term guidance has been to mid-single digits. If you assume an inflation of 4%, which is the upper band of the Central Bank for inflation and add a point from mix and pricing. It gets you to the mid-single digits. So that's usually what we use for kind of long-term broader expectation management, right? So what I'm talking about is, right now, we're almost at 10%. If you add the two together over the years, probably gets you to the very high singles. Geographically, as you know, there are also differences. It's very different for us. when we look at white space in Guadalajara or in the Bajío or even in Mexico City compared to Tijuana or Juárez, right? So a lot of the openings happening in Central Mexico. But yes, that's how I would -- if I were building a model, those are the numbers I would put in. Martin Arias Yaniz: Although you should expect that the type of stores -- this is Martin speaking, the type of stores will also shift over time. Nichos are becoming are about 15%, 20% of the stores that we're opening. Also Nichos our stores that are open within institutional contacts the factory, hospitals, universities. They tend to have significantly lower staffing. They have slightly different assortment because obviously, you're not going to be selling beer in a workplace. Over time, you could also see us -- we've been testing, although we're not ready to roll it out because we don't think there's yet an opportunity what are called OXXO Smart stores, which are unmanned stores. you can one day see OXXO smart stores and apartment buildings, or smaller offices that we meet needs. So the composition of the type of stores will probably shift over time creating new white spaces and new opportunities in the consumption occasions. Jose Antonio Garza-Laguera: And one data point that we provided in the past, having to do with cannibalization is that it probably represents something like 30 basis points of growth in the overall number. So I would also use that for my own modeling. Operator: We'll now take our next question from Hector Maya from Scotiabank. Héctor Maya López: Would love if you could give us your view, please, on how you are progressing on the banking license ambitions in Mexico and the role of Spin and Spin Premia for OXXO to have an edge with that? Also, if we think about innovation at Spin and Spin Premia, what do you think could move the needle in the next 2 years? And how could this help being to compete versus strong alternatives in Mexico that are accelerating the Nubank, Mercado Pago and potentially Cashi from Walmart? Jose Antonio Garza-Laguera: So I will let Martin answer you the first one, and I will defer to February to give you a more detailed outlook as I'm still on the re-onboarding faith on Spin, and I would love to give you more clarity but on February. But for now, Martin will give you some answers. Martin Arias Yaniz: I think we will not be presenting our banking license for a year now -- for a year. We've decided to start with a bigger focus on our credit part of it. That does not mean we're going to be increasing our credit. The pace of our credit business much quicker than we had. As I told you, and I promise we'll keep you informed and up to speed. We don't expect that to be more than a $20 million or $30 million deployment next year in terms of trying out new things. But we came to the conclusion that we want to have greater visibility and a sense of our ability to use our data to be successful in credit before we went for the full banking license. So I'd say we're about a year from making that decision of actually filing the banking license. It's already and prepared -- and we've done a lot of work on it, but we decided to just wait 1 year. Jose Antonio Garza-Laguera: We promise better details on February, Hector. Sorry. Operator: We'll now take our next question from Carlos Laboy from HSBC. Carlos Alberto Laboy: Congratulations Jose. And also thank you to Jose Antonio for really turning over the leadership of FEMSA at a moment in history when the business are really at their most dominant, their most focused, maybe the most talent-rich and fiscally sound position that we've seen, right? So it's a gift that we can get Jose Antonio to put his full focus on and growth and value creation here. So Jose, can you please give us more insights on affordability? Beyond, obviously, the savings aspect. Can you speak to what else is driving consumer sampling, repeat consumption and adoption, or maybe some of the more successful discount brands that you're running into in Mexico. And are there any specific categories where this is most evident? Kind of related to that also, is this pressure improving the differentiated proposition that OXXO is getting from its big branded suppliers to drilling foot traffic? Jose Antonio Garza-Laguera: I didn't hear the last part. Carlos Alberto Laboy: Yes. Is all this pressure, Jose, from discount brands, improving the differentiated proposition that OXXO is receiving from your larger branded suppliers to help you draw in foot traffic. Jose Antonio Garza-Laguera: Yes. It's still semi hypothesis. Obviously, it's an educated, not guess, because we've been talking to our CPG partners. And as they see the growth of the discount channel, they reinforce their partnership with OXXO with strength. I would say, first, if you look at the national level, how many stores are next through a discount of our stores are between 600 meters of a discount store, and it's still below 10% of our stores. So that tells you it's still not really moving the needle so much. But they will continue to grow, ours and others. So we -- where we are next to them, something interesting happens. Some -- we lose sales in some categories, and we even win traffic in some categories because people -- it's very easy to walk into one of our stores and to the other ones. And so you see people may be buying the ice with us or buying or buying the beer with us and then going to do their top-ups and their weekly grocery bill in the other one. So it's an interesting dynamic. But that said, it's an increasingly competitive dynamic. Affordability is here to stay in OXXO because the Mexico consumer is very -- is becoming much more price conscious. And we see the opportunity to really gain a much more relevance in what we call the replenishment occasions. And obviously, that has a role to play in beer where you are beginning to see more returnable glass, or the famous Caguamón, we're beginning to increase our coverage in Mexico, but also multipacks. And we're beginning to see that a lot in soft drinks. I think we were a little late in the game and getting into mini multipacks, or the mini cans, 6 pack or 12 pack, which we're beginning to introduce in the soft drink category. It's driving a lot of success for the bottlers, and we are beginning to introduce that in Mexico. So that's a top-up or a weekly type of consumer occasion, and that's where we're beginning to see affordability taking place. We're seeing it in tobacco. And interestingly enough, we're not seeing a lot of migration from the premium tobacco smoker to the brand -- about 70% of the value brand. About 70% of the -- given the information we have from the tickets and the Premia is that most of the value brand buyers in OXXO in tobacco are people that were not coming into the store that frequently. So we are beginning to lose our fear of cannibalization from premium products to mainstream or value. And so we are beginning to develop more and more assortment of affordable prices and sort of affordable SKUs. And our -- our supplier partners are collaborating with us to help us throughout the spectrum. Part of what I tell them is, if we're going to put a value beer in OXXO, which we didn't use to have for Barrilito, for example, let's also put Negra Modelo in a promotion in San Pedro. And so we like to play on both ends of the spectrum. And I think one of the beauties of our model is that we can really drive affordability in certain regions and corners of Mexico, and we can really drive premiumization in certain regions and corners of Mexico. So we will continue to play that gain. I would say that's all about what I can say for affordability now, but I will bring more information as we continue to gather more granular data about our progress there. Operator: That's all the time we had for today's question. With this, I'd like to hand the call back over to our host for closing remarks. Juan Fonseca: Thanks, everyone. Obviously, we're always available for follow-ups and incremental questions. But other than that, have a great rest of the week. Jose Antonio Garza-Laguera: Thank you, everyone, and we will be seeing each other here in every conference call. So looking forward to more interactions. Operator: This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now 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 morning and welcome to Whirlpool Corporation's Third Quarter 2025 Earnings Call. Today's call is being recorded. Joining me today are Marc Bitzer, our Chairman and Chief Executive Officer; and Jim Peters, our Chief Financial and Administrative Officer. Our remarks today track with a presentation available on the Investors section of our website at whirlpoolcorp.com. Before we begin, I want to remind you that as we conduct this call, we will be making forward-looking statements to assist you in better understanding Whirlpool Corporation's future expectations. Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K, 10-Q and other periodic reports. We also want to remind you that today's presentation includes the non-GAAP measures outlined in further detail at the beginning of our earnings presentation. We believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from ongoing business operations. We think the adjusted measures will provide you with a better baseline for analyzing trends in our ongoing business operations. Listeners are directed to the supplemental information package posted on the Investor Relations section of our website for reconciliations of non-GAAP items to the most directly comparable GAAP measures. [Operator Instructions] With that, I'll turn the call over to Marc. Marc Bitzer: Good morning, everyone. Over the next hour, we will discuss our Q3 results, and we will provide you with plenty of data in detail. However, if you ask me to summarize the Q3 message in just one sentence, it is, our Q3 results demonstrate organic growth, while our margins are still impacted by tariff preloading in the industry. Let me first talk about our organic growth. We had 2 sources of growth in our business. One, our KitchenAid small domestic appliance business, which achieved a double-digit revenue growth; two, market share gains in our North American major appliance business on the back of our new product launches despite an intense promotional environment. As discussed in prior earnings calls, we have the largest number of new product launches in North America in over a decade. These new products have already secured strong flooring gains, and we are beginning to see very encouraging sell-out performance. Now let me address our operating margins. Our North American operating margins are point below our expectations, which is not where we want to have them. So why is that? During our last earnings call, we presented 3 catalysts for value creation and margin improvement in North America. One, our new product launches, they are fully on track. Two, the housing cycle, which will undoubtedly benefit us, but not in 2025, which leaves the tariffs as a third catalyst for margin improvement. Tariffs come in various forms and have been slowly ramping up during Q3. In fact, the full burden of reciprocal tariffs which were announced on August 7 only became effective as of October 5 and are now finally fully in place. This ramp-up brought extensive preloading of inventories ahead of tariffs, and while this is not a surprise, it lasted longer than we anticipated. Regardless of these temporary impacts, the fundamental perspective on tariff remains the same. We are the domestic producer with more than 80% of our U.S. sales produced in the U.S., while our competitors are largely importers. Tariffs by definition, support the domestic producer. The question is not if, but when. And we do believe we are close to a turning point. Container import volumes suggest a deceleration of imports in August and September following the peak in July. This is also supported by 17 consecutive weeks of container rate declines from mid-June. We do strongly believe in our value creation upside, in particular in our North American business, not only because of our promising new products, but also because of our U.S.-based manufacturing footprint, which will, without any question, emerge as a competitive advantage. And our recent announcement of a $300 million investment in our U.S. laundry facilities is evidence of our confidence in our North American business. With this, let me hand it over to Jim, who will discuss the Q3 results as well as our full year guidance. James Peters: Thanks, Marc. Good morning, everyone. Turning to Slide 6. I will provide an overview of our third quarter results. We delivered 100 basis points of revenue growth year-over-year, driven by our new product launches in MDA North America and a strong double-digit growth of our SDA global business. Global ongoing EBIT margins of 4.5% were unfavorably impacted by the ramp-up effects of tariffs and foreign competitors preloading of Asian-produced inventory. This resulted in a continued highly promotional environment through the third quarter of 2025. Ultimately, we delivered ongoing earnings per share of $2.09, which was also supported by an updated adjusted effective tax rate of 8%, resulting in approximately $1 of favorability. Our free cash flow was unfavorable versus prior year by approximately $320 million, driven by the timing impact of tariff payments and the inventory build to support both new product launches and the incremental cost of tariffs. Turning to Slide 7. I will provide an overview of our third quarter ongoing EBIT margin drivers. Price/mix favorably impacted margin by 50 basis points. We are seeing positive momentum from the cumulative effect of our new product launches and benefits of previously announced pricing actions. At the same time, these benefits have been dampened by the effects of inventory preloading, resulting in continued promotional intensity. Our cost takeout actions delivered as expected, resulting in margin expansion of 100 basis points year-over-year, led by our manufacturing and supply chain efficiencies. Raw materials were essentially flat as expected. In the third quarter, we experienced incremental cost of tariffs of approximately 250 basis points. While marketing and technology was flat versus prior year, we have continued to invest in our products and brands. Lastly, currency depreciation associated with the Argentinian peso and Indian rupee resulted in an unfavorable margin impact of 25 basis points. Turning to Slide 8, I'll review the third quarter results for our MDA North America business. The segment achieved revenue growth both sequentially and year-over-year as new product introductions gained momentum and supported share gains. The tariff policy implementation delays and on-the-water exemptions led to continued preloading of Asian produced products in the third quarter. While our tariff costs are near steady state, some of our competitors are operating with largely pre-tariff inventory, which has resulted in a continued promotional environment, which negatively affected price/mix. Despite these challenges, we are seeing positive signs that import volumes by foreign competitors are likely decelerating, giving us confidence that we will operate in a more level playing field as we enter 2026. Turning to Slide 9. Let me review our new products supporting our growth in our MDA North America business. As previously mentioned, we have had a very strong lineup of product launches this year, with MDA North America transitioning over 30% of its products. A few highlights of our new product lineup include the Whirlpool and KitchenAid French door refrigerators. The true counter depth size seamlessly fits into your kitchen, allowing you to maximize your kitchen space, while the full depth size offers increased capacity and elevated aesthetic appeal to meet modern consumer expectations. The new KitchenAid dishwasher will allow you to discover next-level dishwashing with the automatic door open dry system, versatile third rack and filtration system that cleans itself. Finally, we have our new Whirlpool top load laundry, which combines refreshed aesthetics with performance, allowing you to choose how to wash with the 2-in-1 removable agitator. These products are just a few examples of how we continue to position our business for growth in MDA North America by bringing new innovation into consumers' homes. Turning to Slide 10. I'll review the results for our MDA Latin America business. In the third quarter, MDA Latin America experienced a net sales decline of 6% year-over-year, excluding currency due to volume decline. The challenging business environment in Argentina has negatively impacted the segment performance by approximately 100 basis points, resulting in an EBIT margin of 5.7%. Turning to Slide 11, I'll review the results of our MDA Asia business. In the third quarter, MDA Asia saw a net sales decline of 4% year-over-year, excluding currency, driven by volume decline. Continued cost takeout was offset by industry volume declines, resulting in approximately 2% EBIT margin for the segment. Turning to Slide 12, I'll review the results of our SDA Global business. The segment achieved double-digit net sales growth of 10% year-over-year, driven by the success of its new product launches. The segment continued to deliver a very strong EBIT margin of 16.5% as favorable price/mix and strong direct-to-consumer business continued to deliver margin expansion. Turning to Slide 13. I will highlight how our SDA Global business continues to create consumer loyalty and excitement while bringing relevant new products to market. First, I want to highlight the highly sought-after walnut wood accents now available in the espresso kit, beautifully crafted with the warmth and natural texture of real walnut wood. Our 3-in-1 pasta stand mixer attachment is designed to simplify the pasta making process, allowing the maker to roll and cut their pasta, enhancing overall kitchen experience with one easy-to-use attachment. We also recently held an exciting stand mixer sweepstakes, where our limited edition Tangerine Twinkle color sparked interest across generations, earning approximately 2.5 billion media impressions in the first 5 days. These initiatives are just a few examples showcasing the success of our SDA global business and the strength of this iconic brand. Turning to Slide 15, I will review our guidance for 2025. As Marc highlighted, the near-record levels of preloaded Asian imports have unfavorably impacted our 2025 financial results. As a result, we are narrowing our full year EPS guidance and revising other components of guidance to reflect the timing at which we expect some of these headwinds to subside. Our net sales guidance of $15.8 billion is unchanged. As we continue to experience promotional intensity due to foreign competitor inventory preloading, we now expect to deliver a full year ongoing EBIT margin of approximately 5%. As mentioned, we are narrowing our full year ongoing earnings per share to approximately $7, supported by an improved adjusted effective tax rate. The One Big Beautiful Bill Act enacted in July 2025 includes the permanent extension of certain tax provisions and modifications to the international tax framework. As a result, we now expect an adjusted full year tax rate of approximately 8%. Without the benefit of our updated tax rate, we would be at the low end of the previous ongoing EPS guidance. Lastly, we have updated our free cash flow guidance to approximately $200 million. This reflects the updated expected EBIT margin and the impact of cash payments related to tariffs. Turning to Slide 16. We show the drivers of our updated full year ongoing EBIT margin guidance. We have updated our expectation of price/mix to 75 basis points to reflect the intense promotional environment continuing through Q4 of 2025. Net cost takeout is unchanged and reflects the expectation to deliver approximately $200 million. The expected impact of incremental tariffs is still projected to be 150 basis points. It is important to reiterate that these impacts represent currently announced tariffs and do not factor in any future or potential changes in trade policy. Marketing and technology investments reflect our continued efforts to invest in our products and brands, and the improvement of 25 basis points demonstrates our ability to deliver more efficient marketing assets. Currency and transaction impacts are unchanged. Turning to Slide 17. I will review our revised segment expectations. We have adjusted EBIT margin in North America to reflect the lower-than-expected price/mix due to competitor preloading. We expect a full year MDA North America margin of 5% to 5.5%. With unfavorable currency impacts and continued macro volatility in Argentina, we now expect an EBIT margin of approximately 6% in MDA Latin America. We expect MDA Asia and SDA Global EBIT margins of approximately 5% and 15.5%, respectively, unchanged from our prior guidance. Turning to Slide 18. I will review our free cash flow guidance. We've updated our cash earnings and other operating items consistent with full year EBIT guidance to reflect the impact of tariff costs. We now expect capital expenditures of approximately $400 million as we continue to prioritize and optimize our capital investments. We expect to build approximately $100 million of working capital, primarily driven by incremental tariff costs in our inventory. Additionally, the timing of tariff payments is negatively impacting our working capital as tariff payment terms to the government are much shorter than our existing supplier payment terms. The full effect of tariffs is now reflected in our free cash flow expectations. Our restructuring costs due to previously announced organizational actions are unchanged at approximately $50 million. Overall, we expect free cash flow of approximately $200 million for the year. Turning to Slide 19, I will review our capital allocation priorities. As demonstrated through our 100-plus new products launching this year, investing in innovation that meets our consumer needs is a critical priority to drive our organic growth. Secondly, we are committed to reducing debt levels. We continue to expect to pay down $700 million of debt, taking a significant step toward our long-term target of 2x net debt leverage. As the ramp-up effects of tariffs impact our 2025 financial results, our debt paydown will be delayed into 2026. Lastly, we have declared a fourth quarter dividend of $0.90 per share, continuing to return cash to shareholders through funding a healthy dividend. Turning to Slide 20, I will give an update on the anticipated Whirlpool of India transaction. As you may have seen announced earlier this month, we have now entered into strategic agreements between Whirlpool Corporation and Whirlpool of India, which include brand and technology licensing. These agreements, along with the transition services agreement, paved the way for how Whirlpool Corporation and Whirlpool of India will operate together over the next several years. This is a critical and prerequisite milestone to support the advancement of our expected transaction. With this structure in place, we continue to work toward an ownership reduction to approximately 20%. Ultimately, the proceeds from this ownership reduction will be used to pay down debt. We expect to announce a share sale transaction by December of 2025 and are targeting transaction completion in the first half of 2026. Now I will turn the call over to Marc. Marc Bitzer: Thanks, Jim. And turning to Slide 22, let me revisit why North America is well positioned to create significant value in the mid and long term. As mentioned earlier, there are 3 fundamental components that serve as catalysts for growth for our North America MDA business. First, we are strengthening our product portfolio with over 30% of our North American products transitioning to new products in 2025. This compares to less than 10% product renewal in a normal year. Secondly, our strong U.S.-based manufacturing footprint positions us as the net winner of new tariff and trade policies. Thirdly, turning to the U.S. housing market, we continue to see strong underlying fundamentals that point to a likely multiyear recovery. It is a well-established fact that the U.S. housing market is significantly undersupplied by approximately 3 million to 4 million homes, which is compounded by an aging housing stock with a median age of 40 years. Additionally, the elevated mortgage rates have created pent-up demand that we expect to unlock once interest rates start to ease. Turning to Slide 23. I'm pleased to showcase the new KitchenAid suite, which we began shipping to our trade customers in September. To put this in perspective, this is the first full KitchenAid redesign in a decade, and this line of products represent over $1 billion of annual business with strong margins. We've seen both strong flooring gains as well as very promising sellout trends over the past weeks, and our KitchenAid market share is now trending towards its highest level in over a decade. Beyond the exciting new colors, the modern design is aesthetic. This line is unique in its personalization opportunities. The personalization comes from a combination of interchangeable colors of handles and knobs, which can be easily changed at the consumer's home. Turning to Slide 24. I will reinforce how Whirlpool will be the net winner of trade tariffs. So far, in 2025, tariffs have been a headwind to our business. As they ramped up, our margins were impacted by approximately $100 million of incremental costs in the third quarter. These costs are largely related to imported components and to a lesser extent, to imported finished goods. Our competitors, on the other hand, took advantage of implementation delays and on the water exemptions to accelerate imports from Asia and flood the market with lower-cost inventory. In fact, during the first half of 2025, we experienced nearly the highest level of appliance imports from Asia on record. As a result, and not surprisingly, the promotional environment has remained elevated, preventing us from realizing our competitive advantage as the largest U.S.-based producer of appliances. Since reaching peak levels in June and July, we have seen signs that point towards a deceleration of imports. While we do not have import data for August and September available, the ocean container costs have been dropping at a rapid pace, a clear indication of lower demand for ocean containers. Also, as of October 5, we are operating in an environment where all imported appliances will be subject to the full reciprocal tariffs as well as the Section 232 tariffs. With this, the tariffs will finally begin to turn the tide in our favor given our unmatched domestic footprint. As a domestic producer with more than 80% local production, we will have a clear relative advantage over our competitors. To put this relative advantage in numbers, as Whirlpool, we expect to face approximately 3% cost increase on an annualized basis. Our foreign competitors, on the other hand, are estimated to experience approximately 5% to 15% cost increase depending on their production footprint as they are largely importers in the U.S. We are confident that these headwinds are temporary and ultimately, Whirlpool is uniquely positioned to benefit from these policies mid and long term. Turning to Slide 25. Let me summarize our progress against these catalysts for growth. One, we are pleased by the early success of our new products launched this year. We've seen a positive reaction from our trade customers, gaining 30% increase in flooring compared to prior year. Two, with our domestic manufacturing becoming a competitive advantage, we're investing even more capital in our U.S. footprint. We just announced a $300 million investment in our laundry factories, which will add capacity and further fuel our innovation pipeline. And three, even though the housing market will need further mortgage rates reductions to finally gain momentum, we're exceptionally well positioned to win in the eventual housing recovery. We continue to see strength in our builder channel position and have just recently renewed a multiyear contract with one of the top 3 builders. As a reminder, we have contracts with 8 out of the top 10 U.S. builders, supported by our product and brand portfolio as well as our final mile delivery capabilities. Turning to Slide 26. Let me just summarize what you heard today. We're pleased to have achieved organic revenue growth in the third quarter. Our SDA Global business continues to be a bright spot. New products and a successful D2C strategy delivered sustained growth and margin expansion throughout 2025 and will continue to drive value creation. Our market share gains in North American major appliances are just the beginning, and we're encouraged by the success of our new products. Beyond the success of these new products, there is no doubt that the 2 big macro cycles, U.S. tariffs and U.S. housing will ultimately turn in our favor. Even with these macro cycles turning into our favor, we remain very focused on cost takeout initiatives and see more cost takeout opportunities as we head into 2026. And now we will end our formal remarks and open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Susan Maklari from Goldman Sachs. Susan Maklari: My first question is around the share gains that you have seen this quarter. Can you talk a bit about how much of that is driven by the new product launch and the momentum that you're seeing there relative to promotions? And any changes that you saw company specific in that during the quarter? Marc Bitzer: Yes. Susan, so obviously, your share gains refer to our majors business in North America, where we had a 2.8% revenue growth, which is obviously very encouraging, promising sign, and it's the first growth which we had in quite a while so. The share gains, which we had in Q3 essentially completely offset anything which we lost in the first half. So we're right now, we feel good about the share position. To your question about where it's coming from, in very simple terms, the share gains came from new products. And on the promotional side of the business, we pretty much held our line. So it's a combination of both factors. So we held our line in promotions despite the pressure, but the share gains came with all the new products. I think you heard in my previous remarks that we're particularly good about the KitchenAid business. KitchenAid had pretty much an all-time record market share in majors. And obviously, that is not the promotional part of the business. That is really new product launches. But we feel also very good about we launched a new French door for both [indiscernible]. We have an entire mid-layer of top load laundry, which came out. So we feel very, very good about where we are with these new products, not only the flooring, but you now with a couple of weeks in the market, we have also some pretty good sellout data, which is lining up very well for what's about to come. Susan Maklari: Okay. That's helpful. And then it's nice to see the continued strength in the SDA business. Can you talk about what is driving that? And especially, it seems to be coming despite the weakness that we're seeing in housing and even with the consumer volatility out there. So can you just talk about the momentum there and how you're thinking about that business going forward? Marc Bitzer: Yes, Susan, in short, we feel very good about where we are from an SDA perspective and the momentum which we have, which we also think bodes very well also for next year. I think there's a couple of factors here at play. First of all, because you mentioned the housing, the small domestic appliance market is less driven by the housing than the majors. It's just a fundamental difference. So it's much more of a discretionary sale, less a replacement market than discretionary sale. What helped us? I would say, is essentially 3 factors coming together. 2 internally one macro. The first one, we have a lot of new products already launched in the last year. We have a lot of new products in the pipeline. And I think we also -- we've demonstrated and you've seen that on our advertising investments, we supported these new product launches with significant investments. So all these new products help us building the business, particularly outside the stand mixer also, but also inside the stand mixer, that's one. Two, we continue to see great growth and strength in our D2C business, which, as you know, this is the kind of business, the more volume we get from the D2C business, the more profitable becomes just because of the search and traffic costs are spread over in a much more favorable way. So we feel very good about the D2C progress. And thirdly, and this is -- and it may feel like SDA is not so much of a tariff story. It's a different one because almost the entire production of SDA, call it, outside our Ohio Greenville, Ohio factory is largely China-based production. So you had an earlier impact of tariffs in the SDA market because the China tariffs came into effect a little bit earlier than the rest of Asia. So that drove already a lot of industry changes and behaviors in the SDA segment. So I would say, in some ways, you could say the tariffs have found their way in the marketplace earlier in the SDA than we have seen it in the major business. Operator: Your next question comes from the line of David MacGregor from Longbow Research. David S. MacGregor: Marc, you talked about the gains in retail flooring. And I'm just wondering, I realize each of these listings would have a different velocity. But in total, under current demand conditions, what would those incremental listings represent in terms of 2026 unit growth? Marc Bitzer: David, that's a very specific question. So -- and I'm obviously shying a little bit away from giving the '26 unit growth perspective. But again, first of all, there's 2 parameters, which we already referred to. We replaced about 30% of the SKUs in North America in '25. Now that's not all completed, but now with the KitchenAid VBL that, I would say, 90% of our products which we want to launch in 2025 have been launched. As a little reminder, and I know it's only footnote, the launching product comes with a cost because we typically pay for display costs, et cetera, which, of course, you see reflected in the margins. So we don't immediately give you value accretion because you pay for the floor. Now typically, when you launch with new products, you have, first of all, the flooring discussions, where we feel exceptionally good about where we are. We -- with 30% of our new products, which again compares to typically slightly less than 10% in a normal year, we gained about 29% more floors than we had in a pre-succession SKU. So that's very encouraging. Now everybody in the retail industry knows getting flooring is one thing, then you need to get the sellout. The sellout data is, of course, in some elements already a little bit more mature and some elements less mature. But I would say across the board, in particular the KitchenAid launch, but also on the Top load launch, which I mentioned before in the French door, we feel very, very good. So put this all together, David, I would say we feel very good about the organic growth opportunities heading into '26 in North America, irrespective of what the market does. We feel really good about the momentum which we have. Then the flooring cost will be behind us. So we feel -- and I know it may not fully reflect in Q3 margins, but trust me, we feel we have a good tailwind in our back coming from these new product launches. David S. MacGregor: And just to be clear on this, and I have a follow-up question. But just to be clear, you're expecting the flooring costs, the upfront flooring costs to be fully realized by the end of the calendar year. Marc Bitzer: Yes, there will be -- by the end of Q4, we will have pretty much fully absorbed it. Now you also -- next year, we will also have some product launches, but it will be just, of course, a lot less than this year. This year has been the peak of all the product launches. David S. MacGregor: Right, right. Okay. And the second question is regarding the tariffs and the $225 million of expected unrecovered 2025 tariff expense. How much of this do you expect to recover in 2026, presumably once you have the benefit of tariff protection? Marc Bitzer: Well, again, David, the tariff is -- there's a gross on the net component. On the gross side, we pay tariffs. So right now, the $225 million, which we pay this year, assuming the tariffs are now stable. That is, of course, a big assumption because as we all experience, there's a lot of moving pieces. you basically -- the same amount next year probably will be in the ballpark of $300 million to $350 million. And just this is an early number. So of course, when you need to look at the delta of the gross tariffs. But the year-over-year comparison basically happen the Q1 and apart from Q2, which you basically have to kind of transition into. Now the real benefit comes to us is, as we mentioned before, for us, this represents about 3% of our North America sales. If you calibrate the country of production of our competitors with respective tariff rate, you would come to the conclusion that their respective headwind is about 5% to 15%. So of course, it puts us on a relative competitive advantage, which we ultimately should see in volume growth and overall margin appreciation in North America. Operator: Your next question comes from the line of Michael Rehaut from JPMorgan. Michael Rehaut: First, I just wanted to kind of take a step back and look at -- obviously, the continued promotional environment is the culprit here, and you expect it to continue through the end of the year. Just wanted to understand how this promotional environment compares to pre-COVID norms. And if there are certain metrics that you could kind of point to that would say this is 5% more intense from a net pricing standpoint than prior periods or certain metrics that can -- we can kind of grab on to, to understand maybe if things normalize and inventory -- excess inventory or excess promotions come out of the channel or so forth, we can kind of get a better yardstick of what to expect as things kind of calm down, let's say? Marc Bitzer: Yes, Michael, it's Marc. Obviously, that's a big question, and there's no precise answer to it, to be very transparent. So first of all, on a multiyear perspective, as you all remember, we had, I would say, pre-COVID more or less a normal promotional environment. And it's just a consumer market, which everyone in a while needs to be stimulated with some promotion around the holidays. That's nothing new, nothing anormal. Now post-COVID, in particular in the context of supply chain crisis, there was essentially a no promotional environment. And then these promotions quickly ramped back up again into the market in late '23, but in particular in '24. So these were the big cycles. Now this year, on top of this massive swing, you have a very rapid change and volatile environment because, of course, when everybody started the year, we didn't anticipate tariffs to that extent. We didn't anticipate the preloading. So you have right now a lot of industry volumes shifting in the market, which is just not comparable to any normal year. So your question around normal or not normal, I would more refer to the volumes which were shipped into the country, which is just outside a normal pattern. The consumer will always need some stimulation around some holidays, but that is nothing new. So the real normalization effect comes from just industry shipments balancing and reflecting both the normal trends, but even more important, reflecting real underlying costs. The volumes which were shipped into the country and to give you a little bit more expansion is we have a July import data, but we do not have the August and September data because of the government shutdown. So the July shipment data still showed elevated shipments into the country despite the flat market, which we all know. And as Jim showed earlier or mentioned earlier, the first half of '25 pretty much was close to an all-time record on applying shipments from Asia. So it's very, very high and certainly above the market demand. So we know there's quite a bit of inventory overhang. Inventory, which was at pre-tariff cost, that's an important one. Of course, by definition, as you go through Q3 and Q4, with the anticipation that import volumes come down, that excess inventory at one point will flush through the system. We would expect that to be happening kind of towards the end of Q4. We assume Black Friday volumes are pretty much set and prices are being determined already. So I would strongly believe that by Q4, any pre-tariff inventory is more or less gone out of the system. So with that in mind, I would expect in '26 to see industry behavior, which is more reflective of the normal shipment patterns and particularly more important, the underlying cost base. James Peters: I mean, Michael, just to highlight, as Marc kind of discussed earlier in some of his remarks, I mean, next year in the industry, the tariffs will create an unprecedented level of cost increases for many of the participants. And so it's very hard to predict, but obviously, that should have an impact. Michael Rehaut: Right. No, I appreciate that. I know it's obviously a very fluid environment to say the least. Secondly, I wanted to shift focus a little bit to the balance sheet. And you've kind of outlined that you've delayed the $700 million debt paydown into, I guess, the first half of next year. I was wondering if you could also just kind of address with -- over the next couple of years, how you're going to manage the revolver and financing needs as certain elements of the revolver come due over the next 2 years? And if the remainder of those financing needs are going to be simply refinanced and pushed out or if there's going to be additional debt paydown? Any other kind of details around that front would be helpful. James Peters: Yes. And Michael, this is Jim. And I'd probably start with that our long-term goals haven't changed. And our long-term goals to get to a 2x net debt to EBITDA have not changed. As you highlighted, I think the timing of some of that has changed. And maybe we start with the beginning of the year where we were able to refinance $1.2 billion of the term loan that we had, and we feel very good about that, setting us up very well. As you mentioned, the India transaction, which we feel we're progressing very well with, and we've just announced that we've got all the major agreements in place that we need to, to get that transaction done now. That's delayed into 2026, at least from a closing perspective, but we still feel good about getting the proceeds of that and using that to pay down debt. And so as you look at that, again, from an overall liquidity perspective, we feel good. Obviously, with the revolver that we utilize right now, that's always a cycle, and we've gone through that years -- for many, many years that we go out, we renew it, we continue it forward. So we believe we're in a good position there right now. So as I said, really from an overall capital allocation and debt perspective, nothing has changed other than pushing the timing out. From a liquidity perspective, we feel good about where we are and what we have access to. And then in terms of the actions that we're taking to reduce our debt levels, we also feel good about how we've positioned ourselves to complete those in the not-so-distant future. So again, as we go forward, we never talk about what our intentions are in terms of different things and all that, but the overarching strategy has not changed, and our intention to continue to pay down debt has not changed. Operator: Your next question comes from the line of Mike Dahl from RBC Capital Markets. Michael Dahl: I wanted to follow up on effectively a balance sheet and cash flow dynamic. The free cash flow guide, while reduced still implies a pretty meaningful ramp in the fourth quarter, and that's kind of despite what you've articulated in terms of the higher product costs. So can you help us understand the moving pieces on free cash that you can drive that? And then if tariff payments, the second part of this are step up again in next year, obviously, there's going to be moving pieces on other lines. But your free cash at $200 million is roughly in line with your reduced dividend. So it doesn't exactly drive incremental deleveraging. So how are you thinking about -- how are you thinking about the dividend? And any other color you can provide on kind of maybe the path of free cash beyond '25? James Peters: Yes, Mike, this is Jim, and I'll kind of take this here. What I would say is, first off, the path to get to our free cash flow at the end of the year, right now, we are sitting on a higher level of working capital than even we typically are at this point in time. And if you really look at it, one, we've -- with all the new product launches that we've done and everything, the amount of inventory that we've built ahead of time to position ourselves well through that as well as the cost of the tariffs that goes into inventory. And so you've got an elevated level of inventory there. Also, our receivables are at a typical level that they are before year-end, which they come down as we ship a lot of product and then collect the cash before year-end. So just working capital alone is probably a $600 million-plus benefit to us as we head towards the back half of the year. Additionally, what you've got is with the promotional payments that we make. A lot of those happen early in the year for the prior year, and then we build up the accrual as it goes. So that's another thing that benefits us late in the year because we then don't pay a lot of that out until next year. So from a free cash flow perspective, at least for this year, there's a lot of big moving parts. But the piece that I alluded to earlier that is unusual for many other years that the tariffs are such a significant amount and that we had to pay those within 30 days, and that was a onetime effect right now that we've now fully absorbed into there. And so for next year, it's not a negative effect anymore. It's just an ongoing type of thing that occurs. Now your point on the dividend there and then our free cash flow matches about at the dividend level, we do believe, obviously, our free cash flow will be higher next year. And like I said, to begin with, you don't have the one-off impact of the tariffs coming in, which automatically gives you a benefit going into next year. I would say as we look towards next year, and we're not giving guidance or anything right now, but I think we get back to a more normalized level and get some of these working capital effects out, especially the timing of some of them and kind of return to what is a more earnings-driven free cash flow type of profile. Michael Dahl: Okay. Yes, that's helpful color, Jim. The second question, I guess, is on the implied fourth quarter guidance and the margin dynamics seem pretty clear. It seems like the revenue guidance implies that there's a healthy step-up in year-on-year growth in the fourth quarter despite this competitive environment and soft macro. Can you just talk a little bit more about what's underlying that fourth quarter assumption to get to the 15.8% for the full year? Marc Bitzer: Yes, Mike, it's Marc. So actually, ultimately, the Q4 revenue or implicit revenue guidance for the fourth quarter is largely driven by what I mentioned before, our Q3 itself from a growth perspective, the organic growth perspective was very good. And in particular, on the 2 components, SDA, which by definition, even Q4 is bigger than Q3. So you have this SDA component where you carry a lot of momentum into Q4, and we feel very good. But the same is true for majors, North American majors. The new products are working and particularly the KitchenAid suite, which I presented earlier, that is only flowing now. So we start now seeing the full revenue benefit. So we feel really strengthened by these product launches in majors and with SDA, and that ultimately drives that. So we do not assume a higher-than-usual participation in promotional environment. We do what is right for our business and what creates value. So it's really coming from new products. Operator: Your next question comes from the line of Jeffrey Stevenson from Loop Capital. Jeffrey Stevenson: How has demand historically trended the following year after elevated levels of new product introductions and incremental floor space wins like we've seen this year? And have you typically seen an acceleration in demand in the following year for new products benefiting from areas such as brand and marketing investments and then a full year of in-store floor displays? Marc Bitzer: Yes. So I'm smiling. There's an old thing in the appliance industry that the best year for product launch is the year after. And there's some truth to it. And the truth comes -- when you have a phase in and phase out, it cost you quite a bit of money industrially because you have a factory ramp down with all spare parts, which might be obsolete and we have to ramp up, which typically is expensive. And the same, of course, on trade floor. So you basically need to take care of the old products, the new products, there's physical flooring costs, there's margin expectations of retailers, et cetera. So a new product introduction as exciting as it is, it costs, okay? And the year after, you just have a benefit of a full year product available and you don't carry the cost. But there's also the dynamics on the retail side. Sales associates may also need to get accustomed to the new product. They need to know which features to sell, what sells. And I think with every month after launch passing by the sales associates to get more confident in selling the product and particularly if they see the right rotation. So very often, Jeffrey, to your point, the year after is actually a stronger year. We certainly assume it's true in our case as well, but that's historically been the norm. James Peters: But the KitchenAid product, the KitchenAid major products that we've launched, there will be a multiplier effect as the housing market recovers eventually because this is the segment that's probably been hit the hardest, the discretionary segment and the premium segment. And so to Marc's point, you get the benefit of the launch into next year. But then as the housing market recovers, this is the segment that will benefit the most. And so we kind of see this as a multiyear opportunity. Jeffrey Stevenson: Okay. Great. No, that's very helpful. And then I wanted to shift to the $300 million capital investment to add new capacity to your Ohio laundry manufacturing facilities. Can you just walk me through what went into that decision and why now was the right time to move forward with both projects? Marc Bitzer: Yes. So basically, what you're referring to is a $300 million investment decision, which we did, in particular, focus on our Clyde and Marion laundry factories. First of all, our laundry business is doing very well. In some cases, in particular, in the top load the new products, we're almost running out of capacity. So it's going really well, not across the board, but there are some constraints here. Whenever you do a capital investment of that size, first of all, it's not an investment in 1 quarter. This is extended over 1 or 2 years. It's never an investment against the past. It's an investment against the future. And we are ultimately -- based on everything which we said before about the macro cycles, we are convinced right now that the investments, in particular U.S. manufacturing U.S.-made products drive very attractive returns. And frankly, I mean, in very simplistic ways, the tariffs make just the return on investment of the payback cycle just much more attractive. That's what it does. So yes, that is an investment done consciously against the perspective of a very promising future with U.S. manufacturing. Operator: Your next question comes from the line of Sam Darkatsh from Raymond James. Sam Darkatsh: So a couple of just clarification questions. First obvious one would be, any view yet, Jim, on what a ballpark '26 tax rate might be? James Peters: Yes. Sam, we -- obviously, we aren't giving guidance yet and all that. But I think if you go back to the beginning of this year, as we kind of said where we think our rate eventually normalizes could be in the 20% to 25%. But again, we've had numerous years here where we've been well below that. I think as we continue to evaluate what has happened with the environment and the different things that we've been able to take advantage of with recent changes, we'll obviously update that at year-end, but I think that's a good thought to at least continue to use as a long-term type of rate. Marc Bitzer: Sam, it's Marc. Just as a reminder also, a big part of a favorable tax rate came on the back of a Big and Beautiful Bill, which we didn't know at the beginning of the year. So I'm not -- well, of course, we can always wish I don't think there will be a similar tax bill change next year. And with that in mind, I think we should expect a more normalized tax rate. But we will, of course, give more details in January. Sam Darkatsh: And my second question, and I respect that you're being hesitant to talk too much granularity about '26, but you do have a bit of an unusual situation with steel costs in that you've locked in a lot of your costs in '26, whereas your peers have not. What's your sense as to -- as it stands right now, what that relative cost advantage might be versus your -- for next year specific to steel? And then if there's typically this time of year around the third quarter, you do at least give us a sense of what raw materials might look like on a year-on-year basis for the following year? Any kind of color you can give on that would be helpful. Marc Bitzer: Yes. Sam, I appreciate your question. And as in every year, we've not yet giving the exact guidance on raw materials. But first of all, on steel, as you rightfully pointed out, pretty much 1 year ago, we went from typically 1-year contracts to multiyear contracts. We're largely locked and they're not all the same, but they pretty much operate within certain parameters. So in some ways, you couldn't consider our 2- to 3-year steel contracts pretty much as hedge kind of setup from a contract. So they give us a very predictable and stable steel cost base. Bearing all to mind, 96% of the steel which we purchased for our U.S. products are U.S. Steel made so in U.S. made. So that gives us a very good predictive base. Typically, when we set up these contracts, we expect a certain discount versus the public available market data. And right now, we're well within that range. So we buy on average better than the market. Now sometimes you have spot rate fluctuations. But we're right now buying, I would say, slightly below market, and that's what we expect for next year. Keep also in mind, we still pay a lot more than for any China steel, hence, the whole discussion about the tariffs. So we're still about 2.5x as much as China steel, never forget that. So it's still a very significant cost burden. But to put it in a positive context, we do not expect any surprise on the steel side. And I would also, at this point, do not expect major, major negative or positive surprises on the raw material side in next year. I would say on the raw material, there's a couple of pluses and minuses. We all see the copper trends, but then there's other offsetting elements. So by and large, I would expect a normalized raw material environment for '26. Operator: Your next question comes from the line of Andrew Carter from Stifel. W. Andrew Carter: First question I wanted to ask, getting back to kind of the cash flow for the year. It went from a neutral to $100 million since the last quarter. I realize things changed, but the tariff has changed a little bit. So I'd ask why such a significant change? And also, what does that say kind of in terms of your visibility into all the tariffs and all the dynamics? And do you have complete visibility into what the actual cost should be, what your buy should be, et cetera? James Peters: Yes. I'll start this off, and this is Jim, and then Marc can kind of comment if he wants. But I think to begin with on the tariff environment, obviously, it's been evolving throughout the year. And for everybody, it's been -- you've had to understand what the tariffs are, how they should be calculated. You're working with -- it's not just internal. You're working with third-party brokers and other folks and all that. So it's a more complex process than probably all of us anticipated at the very beginning. With that said, I feel that now we have a very good understanding of it, and that's why we've kind of updated our numbers to reflect what they show. Now from a cash flow perspective, again, the thing is that as you go through that and as we talked about earlier, the payment terms being relatively short was something that we obviously knew, but the dollar amount has continued to change. We feel we've got that revised right now. Then you look at how that just flows through your cash conversion cycle. And unfortunately, it doesn't change on the other side, your ability to collect the cash further. And so that became very apparent throughout the process. And that's why when you look at -- I think you were referring to the $100 million change is really with working capital as that reflects, obviously, the cost of the tariffs, but also as we talked about in there, with all the new product launches and all the other things we've had going on, obviously, we've built to certain levels of inventory, which on a normal year, you can have some variability there. But on a year like this with this much product, new product introduction, you have a little bit more variability that comes into it. And we believe that, that will normalize itself as we continue to stock up the retailers with this inventory because, as Marc also talked about earlier, the flooring has done very, very well. And so we want to make sure now that we have enough product to support the sell-through that goes with that flooring. Marc Bitzer: Maybe, Andrew, just adding a fundamental question on tariffs. First of all, we -- of course, we -- you read a lot and we are a very good and constructive dialogue with various parts of the administration, very transparent, very supportive. But of course, the appliance industry is not the only tariff element. So there's a lot going on right now. But again, I really want to emphasize a very good constructive way. I would, right now -- there are certain parts of the tariff landscape, which I would consider absolutely stable and will stay. That's in particular about the 232 tariffs because we have been in place since 2016. So these parts are very stable. We also know there's other parts which are challenged. I still would ultimately believe, but that's purely my guesstimate that the Supreme Court will confirm in one way or another. But again, that's just me. So from today's perspective, I would consider the tariff environment entering a more stable phase, but we should still be -- there could still be moving elements. Obviously, the biggest question mark is what happens about the China negotiation, but also here, I would assume there will be some form of a solution, a smaller one, which may have gone unnoticed, but it's a good thing for us. We were heavily impacted by the tariffs from U.S. into Canada. That was about $20 million to $25 million every quarter, and there -- that has been pretty much gone now. So that is a good news, but that pretty much only impacted us in a negative way. So moves off a similar fashion, I still expect going forward, but compared to where we were 2 quarters ago, I think you have a much more stable and, to some extent, more predictable tariff environment. W. Andrew Carter: And the second question I have on MDA North America, margin for the year, 5.5%. I believe the guidance from a couple of years ago for '26 was kind of 11% to 12%, correct me if I'm wrong, in the long term. I guess how much of that do you think you can recover? How much of that is tariff impacted? And I know you talked a lot about discretionary being below trend line, if you will, that would be the dishes and cooking. Any estimation of if those revert back to trend line, what margin tailwind would that be? Just any kind of helping blocks to get back to that long term? Marc Bitzer: Yes. So Andrew, so again, to repeat what I said before, we're very pleased with the growth which we have in North America, but our margins are not where we want to have them. I just don't want to mislead in any way. No, we do not like where the margins are. The reason why we probably talk a little bit different today about the margin than usually is because we know there's such a big promotional impact coming from these inventories. And that's -- we consider that a temporary effect, which is unfortunately. But of course, we also know the fundamental drivers for the change. So that's why you hear us maybe talking with more optimism about it than you would usually expect on these margin levels. Our expectation in North America remains crystal clear. North America is a business where you can and we should be able to deliver more than 10% EBIT margins. There are certain elements, call it, which is in our control, which we can do irrespective of the market environment, such as new products, which I think we've demonstrated we can do. But the other element, we will continue and will double down even more so on cost, and you will hear more in the earnings call in January. We do believe we still have ample of cost opportunities ahead of us. But then, of course, in addition, you have the 2 big macro cycles, the one, the tariff cycle and the housing cycle, which at one point will swing in our favor. I think the tariff cycle will clearly swing in our favor in '26. The housing cycle, I think, is more back half or more '27 related, but then will be a multiyear trend. So what I'm trying to say is we have ample opportunities in our own control to get much closer with double digits. But of course, ultimately, you will also need the housing cycle to be clearly on the double digits or above. Operator: Our next question comes from the line of Eric Bosshard from Cleveland Research. Eric Bosshard: Two things. First of all, I would love a little bit of color on what you're seeing regarding retail sell-through. You've given some sense of retail pricing. But just curious what you're seeing on retail sell-through and retail pricing in 3Q and then the trend in the 4Q? Marc Bitzer: Yes. So Eric, so -- and I think I mentioned this in the earlier earnings call, we have our sell-through data on about 65% of the retail landscape. There is unfortunately no data source which reports across the board for all retailers. But I would say 65% of our retailers, of course, excluding the builder space, gives you a pretty good perspective. And then you always calibrate against what we know is our respective balance of sale or "market share" with the respective retailers. You calibrate these numbers that gives you a reasonably good perspective about where industry is likely to be. I would say, on a year-to-date basis, the overall industry sell-through in appliances is very close to what we communicated at the beginning of the overall market demand. So I would say it's somewhere between 0% and plus 1%, not a whole lot strong with a lot of ups and downs. So whatever you see is industry shipment data, which fluctuates, that's more driven by just imports, et cetera. The actual sell-through is, I would say, best in low single digits. We also see that continuing through Q3. So it's not negative. But keep in mind that slightly maybe 1% or 2% plus sell-through is more driven still by the replacement market and less by the discretionary. That hasn't changed, but it's not a negative market. Now in all transparency, and obviously, we can't get into too much detail, it differs pretty strongly by retailer. There are some retailers more on the winning side and some retailers more on the losing side. But overall, across the market, it is I would say, a very low single-digit growth rate. Eric Bosshard: Okay. And then secondly, just to clarify, the preloaded imports, obviously, you've talked a lot about this. Is this crowding out volume? Your revenue growth in North America was better-than-expected number. Is this just facilitating or delaying an increase in pricing a reduction in promotion? Or is it having a negative impact on your volumes? I'm just trying to square where this -- where you're implying that this is having an impact? Marc Bitzer: Yes. So Eric, I would say, in simple terms, the volume growth for us, and that I referred to is on came largely back -- but real growth came on the back of a new product. And on the promotional side of business, we held the line, and that was a conscious decision. I don't want to scale our factors, we held our line. So going forward, of course, it's impossible to say what our competitors might do. I would say once the inventory overhang is reduced or diminished then you will see a more, what we would call, normalization promotion environment, i.e., promotions reflecting the true, including tariffs cost base. Operator: Your next question comes from the line of Rafe Jadrosich from Bank of America. Rafe Jadrosich: It looks like the unmitigated tariff impact is unchanged at like 150 basis points. Can you talk about the mitigated impact, like what you're planning for this year and if some of that's going to carry into next year? And what's like changed on the assumptions there? James Peters: Yes. I think, Rafe, the biggest thing is -- and more if you go through -- and this is Jim. If you go through the margin walk, what you can see is that the tariff cost is in line with where we thought. But to Marc's point and what he was just talking about earlier, with the amount of preloaded inventory that's been in the marketplace, the level of intensity in the promotional environment has been higher than we really anticipated throughout the year-end. And so I think that's the biggest thing right now is that, as Marc said, we really held the line in terms of our promotional spend and all that, but we really thought that at some point, you would see it taper off later in the year. And right now, with the amount of just inventory that was preloaded, it's continued, but we do expect now that tapering off to probably come more next year. Marc Bitzer: I guess that brings us to the end of the questions. But first of all, we're already a little bit over time. Thank you all for joining us today. I don't want to recap everything we said, but I just want to come back to what I said at the very beginning. We feel really good about our growth, the underlying organic growth in particularly North America, new products and small domestic. We don't like where our margins are right now. At the same time, and I think you heard that, we strongly believe this is a temporary effect. And in the meantime, we do what is in our control, namely with new products and cost launches. And I think the 2 macro cycles, which we talk about, they will turn in our favor. It's not a question of if, it's entirely question about when. But again, we also have a lot of opportunities with our internal growth levers and cost levers, and we will remain focused on these ones. So again, thanks for joining us, and we will talk to each other again in late January. Thanks a lot. Operator: Ladies and gentlemen, that concludes today's conference call. You may now disconnect.
Operator: Good morning, and welcome to Banco del Bajio's Third Quarter 2025 Results Conference Call. My name is Leonard, and I will be your coordinator today. [Operator Instructions] Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. Please note that this video conference is being recorded. Joining us today from BanBajio are Mr. Carlos De la Cerda, Executive Vice Chairman of the Board of Directors; Mr. Edgardo del Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Rodrigo Marimon, Investor Relations Officer. They will be available to answer your questions during the Q&A session. For opening remarks and introductions, I would now like to turn the call over to Mr. Rodrigo Marimon. Mr. Marimon, you may now begin. Rodrigo Marimon Bernales: Good morning, everyone, and welcome to Banco del Bajio's conference call to discuss our third quarter 2025 results. Today, we will review our quarterly performance and discuss the strategic evolution of our key financial trends. The industry information cited throughout this presentation is based on CNBV's data as of August, representing the most recent publicly available information. Without any further ado, let's start with the presentation. Let's start on Slide 3 with a brief look at our key financial highlights for the quarter. Our total loan portfolio expanded 5.4% year-over-year, fueled by the 7.7% growth in our company loan portfolio. This growth was supported by total deposits, which grew 13.7% year-over-year, showing a sequential growth of 4.3% in the quarter. Regarding asset quality, our nonperforming loan ratio stood at 1.97% with our coverage ratio at 1.16x. Our cost of risk stood at 109 basis points. Turning to profitability. We reported a quarterly net income of MXN 2.3 billion to an ROE of 19.7%. Our net interest margin was 5.9% and the efficiency ratio stood at 39.5%. Looking at the 9-month period in 2025, the ROE was 19.9%. The net interest margin was 6.1% and the efficiency ratio at 38.6%. Our capital position remains strong. The preliminary capitalization ratio reached 15.9%, an increase of 136 basis points from the second quarter 2025. This increase was partially the result of our decision to no longer apply our internal methodologies for portfolio reserves and capital requirements for the SME and company portfolio. This decision increased our capital ratio by 82 basis points. Moving to Slide 4. We highlight the success of our digital transformation strategy and the evolution of the number of transactions processed through BanBajio's channels. The charts on this slide illustrate the structural shift we have executed in client transactions. Today, digital channels are by far our most important transactional channel, leading to a decrease in absolute branch transactions compared to 5 years ago when they were still dominant. The chart below shows a similar evolution for the transacted amounts at these channels. We have achieved a compound growth rate of 24% in transacted amounts over the last 5 years. Within that period, volumes processed through BajioNet have increased by a multiple of 3.7x, while branch volumes grew only 1.5x. Transacted amounts through BajioNet now accounts for 82% of all transacted amounts, up significantly from 64% in the third quarter of 2020. The increase in volume and transacted value processed through our digital channels demonstrate an effective strategy that has led to higher client engagement in BanBajio. This is evident when you consider that transaction volume growth has outpaced the 6% CAGR in our active clients over the last 5 years. This evolution is a supportive driver of our sustained growth in our deposit base and the structural growth of our noninterest income. Our digital channels related income grew at a sound 18.2% CAGR over the past 5 years. Moving to Slide 5. We continue to observe good growth trends for our company and consumer loan portfolios. Company loans grew 7.7% and consumer loans 13.1% year-over-year. Overall, the total loan portfolio reached MXN 268 billion, a 5.4% increase compared to the third quarter of 2024. Our total loan growth was achieved despite the contractions observed in government, financial institutions and mortgage portfolio. It is worth mentioning that during this quarter, we have successfully continued our strategic reallocation of our portfolio, supporting higher-yielding loan classes with better margins. Simultaneously, our total deposits reached MXN 274 billion, which represents a 13.7% increase year-over-year. We will detail these growth trends in our funding structure section on Slide 8. On Slide 6, we detail the evolution of our consumer portfolio, excluding auto loans. This portfolio reached MXN 7.2 billion, with growth rising to 13.6% year-over-year compared to the third quarter of 2024. As we have emphasized in previous quarters, we view this segment of consumer loans as a strategic high-yield asset that is critical to our efforts to diversify our income generation and our overall business. We have managed to achieve this expansion with asset quality that outperformed the industry standards. As shown in the charts, this is reflected in our NPLs ratio across the board with payroll loans at 2.26%, credit cards at 2.98% and personal loans at 2.31%. Turning now to Slide 7. We will examine our asset quality trends. Our headline NPL stands at 1.97%, while the NPL adjusted ratio stood at 2.51%. Most importantly, both ratio continues to compare favorably against the industry average. As shown in the bottom right chart, our cost of risk was 109 basis points for the quarter. We expect the cost of risk will converge to more normalized levels over the next 2 to 3 quarters. Our coverage ratio remains strong at 1.16x. Furthermore, we will continue to hold MXN 681 million in additional reserves on our balance sheet, mostly created during the pandemic. In line with our decision to cease applying our internal methodology for additional reserves and to fully transition to the standard regulatory methodology, we plan to absorb these reserves over the next 9 months. Moving on to Slide 8. Our total funding reached MXN 324 billion, reporting a 10.6% increase year-over-year. Within the funding mix, our demand deposit base reported an increase of 20.5% year-over-year, and our overall client deposit base remains stable relative to the institutional funding. Within our funding structure, we have observed a trend over the last 2 years with clients that are gradually migrating to interest-bearing demand deposits away from zero-cost accounts, a shift that has gained relevance in the mix. The funding mix now comprises zero-cost demand deposits at 17%, interest-bearing demand deposits at 26%, time deposits at 41% and institutional funding at 14%. On Slide 9, we observed the evolution of interest margins. The net interest margin for the third quarter was 5.9%, a year-over-year decrease of 110 basis points. This reduction was primarily due to the sensitivity to rates, which accounted for 62 basis points of the reduction, while 48 basis points were driven by the negative impact on the asset liability mix. Our current ex-ante sensitivity to rates, considering the current mix of assets and liabilities stands at around 20.4 basis points of net interest margin per every 100 basis point change in the benchmark rate. We estimate this would represent a full year impact of around MXN 730 million on revenues and MXN 460 million on net income. You will see the performance of BanBajio's revenues on Slide 10. Please note that we are excluding nonstrategic asset sales from the third quarter and the 9-month period of 2024 to provide a clear pro forma comparison. Total adjusted revenues decreased by 2.8% compared to the third quarter of 2024, which reflects an aforementioned impact of the reduction in interest rates. Consequently, our financial margin contracted 9.0%. However, our strategy is paying off in noninterest income, which grew strongly by 50% pro forma year-over-year. Our adjusted net fees plus commission and trading income grew a robust 22.7% in the third quarter. We continue to make important progress in key fee-generating businesses. Bancassurance grew 36.9% Interexchange fees grew 5.9%. POS fees grew 13.4%, while BajioNet related fees grew 37.3%. The reported total noninterest income growth was boosted by MXN 156 million sale of our written-off portfolio in the quarter. We can see the evolution of our efficiency ratio on Slide 11. It came in at 39.5% for the third quarter of 2025. BanBajio's efficiency ratio stands strong against the industry levels. In this third quarter, expenses grew 9.6% year-over-year, consistent with a 9.1% year-over-year growth in September year-to-date and in line with our guidance. We continue to prioritize our efforts to bring down expense growth, and it is one of our priorities for this year. However, the bank continues to invest strategically in key initiatives such as branch openings and some upgrades to our infrastructure. Slide 12 presents the evolution of the profitability metrics of BanBajio. As shown in the charts, the quarterly ROE was 19.7% and the quarterly ROA stood at 2.4%. On a per share basis, the third quarter earnings per share stood at MXN 1.91, which represents an annualized earnings yield of 17.1% computed with the average stock price for the third quarter. Moving to Slide 13. The preliminary capitalization ratio as of September 2025 was 15.89% entirely composed of core equity Tier 1 capital. Around 60% of the 136 basis points increase in our capitalization ratio from the previous quarter was attributed to the aforementioned methodological adjustments applied to our portfolios, and the remaining 40% was a result of our sound earnings generation capacity. Finally, on Slide 14, we are pleased to announce that the Board of Directors has approved a proposal to the Ordinary General Shareholders Meeting for an extraordinary cash dividend payment equal to 10% of 2024 net income, which is equivalent to MXN 0.9 per share. This distribution, combined with the previous payouts throughout the year would result in a total payout ratio for 2025 of 60% of last year's net income with a proposed payment date set for December 3, 2025. The total of the 3 dividend payments will represent MXN 5.39 per share, equivalent to a dividend yield of approximately 12.2% calculated using the most recent share price. We will continue to closely monitor the evolution of the drivers for the fourth quarter, and we feel comfortable in our ability to deliver on the guidance that we have provided to the market. With this, I conclude my presentation, and we can open the call to the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo. Ernesto María Gabilondo Márquez: Ernesto Gabilondo from Bank of America. My first question will be on your net income guidance. When looking to the accumulated earnings as of the third quarter, it's around MXN 6.9 billion. If we analyze it, it's around MXN 9.2 billion and the growth is of minus 14%, which is above the company's guidance range of minus 18% to minus 20%. So just wondering if it will be reasonable to expect at least the high end of your guidance? And what will be your assumptions on that? My second question will be on your expectations for dividends. As you mentioned in your last slide, you're expecting a special dividend for December 3. and you have an ordinary dividend payout ratio of 50% this year. So just wondering how should we think about the dividend payout ratio next year? And this is especially in a context in which you will no longer have a high reserve coverage ratio. As you mentioned, you are expecting it to be trending to 103% and actually is at 116%. So just wanted to know your thoughts on the dividend payout ratio? And also, how should we think about the cost of risk during the next quarters while you are transitioning into this lower reserve coverage ratio? Edgardo del Rincón Gutiérrez: Thank you, Ernesto, and good morning, everyone. This is Edgardo del Rincon. Several questions, Ernesto. So about net income, I agree with you. We believe we can be in the high end of the guidance that is MXN 8.8 billion, and we feel comfortable in general with all the guidance. Regarding the coverage ratio, there are only 2 banks in the Mexican financial system with additional reserves. The complexity of the regulatory rules that we need to comply with the CNBV and additional rules that are coming in the following months take us -- I mean, we decided to abandon, let's say, the methodology for additional reserves and go only to regulatory reserves. That's why based in the mix of our assets, the level of collaterals and guarantees that we have, we feel comfortable with the regulatory reserves. So we still have MXN 680 million that will be -- I mean, those will be absorbed in the following 6 to 9 months, mostly at the beginning of 2026. And regarding your last question before the dividend, about the cost of risk, we are very glad with the behavior of the cost of risk in the third quarter. Actually, it came 14 basis points better than the second quarter. But for us, the good news is that it's very concentrated in few names, very well-known clients. And a few of them is very possible that they will transition to current during the fourth quarter. So we feel that in the following several quarters, maybe 2, 3 quarters, maybe 4 quarters, we should transition in cost of risk to a more normalized level, let's say, between 0.9% and 1%. And now I pass the microphone to Carlos about the dividend. Carlos De la Cerda Serrano: Hello, Ernesto. Hello, everybody. Regarding your question, we usually feel comfortable with a 50% payout ratio that we believe allow us to maintain a capitalization rate that we feel comfortable with between 14% and 15% capitalization rate. This year, the capitalization rate went up since the loan growth has not been as strong as we expected, the economy is -- and all the uncertainties related to the tariffs and many things, we have seen a weak demand for loans. So that and the change in methodology took our capitalization rate well above 15%. So we decided to propose to the shareholders' meeting an additional 10%, considering that in a few months, we will be evaluating the payout -- the dividend that we will be paying out for the 2025 net earnings. So that will be an important amount again. So we feel comfortable with a 50% ratio that we would have to adjust depending on how the year looks. And that's why we added a 10% additional dividend. Ernesto María Gabilondo Márquez: Excellent. And just if may I, a last question on your ROE expectations. How do you see it in the long term under normalized rates? Where do you see the interest rates ending by the end of 2026? Edgardo del Rincón Gutiérrez: Sure. This quarter, Ernesto, we delivered an excellent ROE of 19.7%. We believe it was a strong recovery and also confirming the bank's ability to maintain solid profitability even in a more challenging environment. As we have been mentioning in the previous quarters, our view is that the sustainable ROE remains in the high teens range. During the year, interest rates declined faster than we initially expected and also that put some pressures on margins. And at the same time, we have been experiencing a higher cost of risk than originally planned. So it is already trending down and should normalize, as I said, in the following quarters. But we really believe that the strong fee income growth, the discipline in expense control and the solid capital levels all of which support a very healthy profitability. So even in a low rate environment that we feel the trend in rates will continue to go down maybe to 6.5%, 6.25% at the end of '26, we feel confident that we can deliver high teens in ROE even under that environment. Operator: Our next question comes from the line of Brian Flores. Brian Flores: This is Brian Flores from Citi. I have 2 questions. My first question is on asset quality. Just wanted to understand the perspective on the coverage that is already below the 120% you guided. So is the fourth quarter expected to have some reversals or improvements? I think that would be great to know. And also wanted to -- on my second question, see how that is related to asset -- sorry, to loan growth. Because as you mentioned previously, Edgardo, loan growth is probably running well below historical rates, right? It's 5% year-over-year. I wanted to ask you maybe the same question in 2 different aspects. The first one is what is happening in mortgages? Is there some anticipation on the -- I don't know, the write-off policy changes that we could see from CNBV. Is it just demand? Is it pricing? If you could share with us what is happening in mortgages that is the portfolio that is shrinking the strongest, that would be great. And also, if you could share your expectations of loan growth for 2026, I think that will be also very, very helpful. Edgardo del Rincón Gutiérrez: Thank you, Brian. Let me start with loan growth. As you know, came in 5.4% year-over-year. That is below previous periods, mainly because we have been very selective on where we want to grow. Corporate lending continue performing well, up around 7%. And within corporate loans, SMEs, I mean, we are having very good momentum. On the other hand, we have been intentionally reducing exposure on government loans in mortgages, but also in financial institutions segments that we either carry lower margins or higher risk. So it's a decision based in profitability. In the case of financial institutions, you know very well what has been happening in the market with several financial institutions not related with banks that have been having problems. So we are also seeing good growth in consumer loans, and that will continue in the future, mainly in credit cards, payroll and personal loans, a little bit growing 13%, a little bit more than that. Overall, as Carlos was saying, credit demand has been somewhat softer than we were expecting. And it's a reflection of what is happening in the economy, the uncertainty locally and globally and all the geopolitical factors that you know very well. So looking ahead, the fourth quarter typically is our strongest period, and we expect to meet the full guidance without any problem for this fourth quarter. For 2026, we believe it will depend in having more clarity about the economy, how it's going to perform the economy, the expectation today is a little bit more than 1%. So we will continue with economy, let's say, growing at a very slow speed. And also what is going to happen with the trade negotiations. I believe that will provide clarity and more certainty in the scenario and then we can have a more robust loan demand. Regarding asset quality that you mentioned, we have several quarters with several isolated cases. For example, in this third quarter, we have 3 particular corporate exposures that moved to Stage 3 during this quarter. As I have been saying, very well-known clients of BanBajio of many years. And we expect at least the most important one in an amount to return to performing status in the fourth quarter. So yes, we believe we will continue this normalization of the cost of risk going forward. Regarding cost of risk, I mean, I already mentioned it came at 1.09%. But we believe that during the first semester of 2026, we will get to a normalized level that we should be between 0.9% and 1%. Sorry for the long answer. I don't know if I covered everything, Brian. Brian Flores: No, you did, Edgardo. Maybe a quick follow-up. So with the 1%, maybe the base case assumption for next year, do you think the base case for now, obviously not official, but that is very similar to loan growth for 2026, which is between 5% and 6%, I don't know, 5% to 7%, would that be, in your view, reasonable to assume? And then I don't know if you could expand a bit on mortgages, if there is some impact of the regulation, particularly the changes in write-offs that you're anticipating here also for that category of the loan book? Edgardo del Rincón Gutiérrez: Actually, the decision in mortgages has, I mean, more time than the regulation that is changing today. So our decision is based totally in profitability, and we'd rather use the capital in other portfolios with better profitability than mortgages. That is the decision. Regarding 2026, and this is not, of course, any guidance for 2026. But we feel that we will continue with softer demand during the first months of 2026. And then as we have more clarity in what is going to happen with the trade agreement with the U.S. and locally and the performance of the economy in Mexico, then maybe at the end of the first semester, beginning of the second semester, we can have a better environment to grow. Operator: Our next question comes from the line of Ricardo Buchpiguel. Ricardo Buchpiguel: This is Ricardo Buchpiguel from BTG Pactual. The bank has been focusing a lot on growing more in SMEs. So I want to get a little bit more color on this portfolio. Can you comment what is the share of the SME portfolio today? And what is feasible to expect in the next 3 years? And also, what are the key difference between the SME and the large corporate lending in terms of overall risk-adjusted NIM and overall profitability? And you mentioned also for my second question, you mentioned in the call that you plan to absorb the additional reserves over the next 9 months, like helping mainly 2026. But you also mentioned that the first half year of 2026, we expect cost of risk to be between 0.9% and 1%, which is a little bit below your -- sorry, a little bit above your historical levels. So I wanted to understand if it makes sense that these additional reserves will be used to absorb -- to offset a higher NPL formation over the next following quarters. Edgardo del Rincón Gutiérrez: Thank you, Ricardo. The SME portfolio accounts for a little bit more than MXN 70 billion, actually MXN 72 billion. So it's an important part of the portfolio. And it's a portfolio with very good profitability with a cross-sell ratio of more than 5 products and services. So it's not only loans, but also cash management, electronic banking, FX, acquiring business, et cetera. So it's very profitable and it's the part of the portfolio that is growing more. So is what we have. The second part of your question was about additional reserves. The idea is not to take the additional reserves and just pass through the P&L. The additional is to use those additional reserves gradually to cover the need of reserves that the bank is having in the following 9 months. That is the idea. So that is going to be a very gradual use of those reserves. Ricardo Buchpiguel: Perfect. And so it makes sense for us to expect the cost of risk around like 0.9% and 1% in 2026, right? Edgardo del Rincón Gutiérrez: That's right. Operator: Our next question comes from the line of Eric Ito. Eric Ito: Carlos, Edgardo, this is Eric from Bradesco BBI. My first question here is regarding OpEx. I just want to get a sense of -- I think you guys have a pipeline of [ 50 ] new branches over the next years, if I'm not wrong, you have been deploying some over the past quarters as well. So I just want to get a bit on the opportunity here to see efficiency gains improvements in 2026? Or maybe as more deployment should happen, we could see more efficiency gains in 2027. This is my first one, and then I can ask my second later. Edgardo del Rincón Gutiérrez: Sure. Thank you, Eric. Expenses continue to perform better than planned, growing, as you saw, 9.1% year-over-year for the 9 months. The idea is to keep the expense growth below 10%. That was the original guidance. So we have maintained a very strong discipline even while we continue to expand our branch network that today we have 331 branches. During the last 12 months, we have opened 10 branches. That is -- those branches are adding close to 1% to the expense growth. So it is important. The good news is that these new branches are ramping up profitability quickly. So we feel comfortable with this investment. And the idea is to continue with this expansion between 10 to 15 branches every year. On the technology side, investment remains focused on security, cybersecurity and system stability rather than new projects. The big investment, for example, in digital banking, et cetera, was done previously. Of course, we need to continue investing in that, but the big investment is coming in cybersecurity and providing the right stability. Our priority has been to strengthen the resilience of the IT ecosystem and ensure reliable operations across the bank. Overall, expense control remains a strategic priority, and we expect to end the year below 10% growth while keeping operating efficiency under 42%, that is the guidance that we have today. That is, as you know, one of the best levels for the financial system today. Eric Ito: Okay. Very clear. And then my second question, real quick on the written-off portfolio sale that you guys did this quarter. Just want to get a size -- I just want to get a sense of what's the size of the portfolio that you guys sold? And if this was just an opportunistic approach or maybe we could see further sales going forward? Edgardo del Rincón Gutiérrez: Yes. It was an impact of MXN 156 billion. It was a sale of an asset as the money came not from the customer, actually come from a third party that made the acquisition of the asset -- that's why we didn't record this as a recovery that in that case, we would have a very positive impact in cost of risk. Based on the accounting rules, we -- I mean, this was an additional revenue, and that's why you saw that impact in the revenue growth. So -- but even with that, nonfinancial income, as you saw, we have a very good quarter with 50% growth. But without considering this one-timer, the growth is 27%. That is still very strong. So for us, that is very good news. We are very glad with this. And we feel that in the following quarters, we can continue at least with high teens growth in nonfinancial income. That is a very good level and much higher than the growth in active clients, that is 6% or the growth in the drivers in the loan growth portfolio, et cetera. So we are very glad with the performance this quarter in nonfinancial income, and we feel that we should continue with very good levels in the following quarters. Operator: Our next question comes from the line of Pablo Ordonez. Pablo Ordóñez Peniche: Congrats on results. This is Pablo Ordonez from GBM. My question is, could you comment on your funding dynamics? Deposits have been growing way faster than the loan portfolio at 13% year-over-year. In addition to this, as you mentioned in your remarks, the mix is not improving. So why taking the additional deposits and also for next year, what level of funding cost as a percentage of the interest rate would you expect? Should we expect some improvement because we have seen some deterioration in the past year? So any color here would be very helpful. Joaquín Domínguez Cuenca: Thank you for the question. This is Joaquin Dominguez. Yes. We took these deposits because that generates marginal income for the bank. We pay a lower rate than the rate we invested those deposits. So it is still a good business for the bank and it's not -- it prepares the banks for a further growth in loans, so we can change the liquidity in investment in assets, in securities for loans. So it provides the banks good enough liquidity to be prepared for the loan expansion. And at the same time, it is a positive business. Pablo Ordóñez Peniche: Perfect. And second question is regarding the fiscal package, Joaquin, could you comment on what should we expect? I mean, I think that the change for the IPAB fee is very straightforward. But any color that you have on the potential impact for Banco del Bajio at the P&L level and the financial impact from the changes in how the write-offs will be reduced going forward with this proposal from the [indiscernible]? Joaquín Domínguez Cuenca: Yes. What we have calculated is that -- the impact will be an increase in 2 basis points -- 200 basis points in the effective tax rate. It means it's around 3% of the net income for the next year. In terms of the write-offs, it will have no impact in the P&L, but in the -- it will increase the deferred taxes. Operator: Our next question comes from the line of Yuri Fernandes. Yuri Fernandes: Yuri Fernandes from JPMorgan. I have a follow-up on asset quality and the written-off portfolio sale you had, and it was clear like the directional. What is not clear for me is that given the outlook for asset quality is a little bit more challenging, right, like several [ cases ] here and there, and I know they are like kind of one-timers, but still becoming somewhat frequent. Why not you use this case to increase your coverage, given you have like a coverage ratio guidance, you are slightly below. So just checking the box, why not increase like this quarter doing more provisions and take the opportunity of this kind of one-timer on the positive side? And then I have a follow-up on your Stage 2 and Stage 3. When we try to look to the coverage of those stages, so trying to look to the amount of allowances divided by the portfolio by stages, we have been seeing an increase on the amount of reserves for Stage 2, Stage 3. So basically, Stage 2 used to be 10%, 11% allowances to loans. Now this number is going to 15%. And the same is happening for Stage 3. So Stage 3, now you are doing some 47%, 48% allowances to loans on your Stage 3. This number used to be closer to 40%. So just checking if we are going to see this to increase like basically the amount of required provisions for stages being somewhat higher in each of those buckets. Edgardo del Rincón Gutiérrez: Thank you, for your question. Let me go back to the pandemia. Before the pandemia, the level of reserves that we have was very close to the regulatory methodology. So the methodology coming from the CNBV. Because of the pandemia, we decided to increase the coverage ratio because we were expecting in a stress scenario, very high losses that at the end with the measures that we take together with the CNBV didn't happen, and we have been carrying for a long period, several years, those additional reserves. We have been using those reserves in the last maybe 4, 5 quarters for those isolated cases that we have been mentioning. During this period, we realized that we -- in the financial system, there are only 2 banks. One of those is a big, big bank. And BanBajio, we are the only ones with additional reserves. Since the pandemia, the CNBV has been very close to us reviewing constantly the methodology we are using and the calculations we use every month. But during that the last, let's say, 2 years, the regulation and the complexity to comply with that methodology has been harder and harder. The level of coverage ratio is based on the mix of the portfolio as we have 86% of the portfolio in corporates that is very different from the G7, for example, but they carry a lot of consumer business that normally, the level of coverage ratio of those portfolio is close to 2x. So based on that mix, you can see the coverage ratio of those big banks really high, but it's not really comparable with the portfolio we have in BanBajio. We have 86% in companies with a very high level of collaterals, and we are very active using guarantees from FIRA, from Bancomext and from Nafinsa. So because of the mix and the level of collaterals we have, the coverage ratio that we have based in regulation is very close to 1x. If you see other banks, for example, that has a lot of mortgages and auto loans, you can -- you will see that the coverage ratio is even below 1x in other cases. So we feel comfortable with that level that this is coming from the pandemia. The complexity is really high. If we don't comply with the methodology and the rules of the CNBV, we can have sanctions. So that's why we decided to abandon this methodology and have in the future, in the following months on the reserves we need based in the regulations as all the rest of the banks. Yuri Fernandes: No, no. It's totally clear that part. My only question on that is that some portfolios, I don't know, mortgage, historically, they have much lower coverage, right, and you are reducing your mortgage portfolio. So in period by mix, maybe your coverage should be higher, right, because you're not growing in mortgage, you are decreasing. Government loans, I think it's tricky because you don't have a lot of allowances, but you also have a lot of [indiscernible]. But part of your portfolio is decreasing in products that should have like lower reserves also, right? Edgardo del Rincón Gutiérrez: Yes. In the case of mortgages, it's not [indiscernible] reserves that are required. The decision of not growing, of course, we can cross-sell if a customer that is already with the bank ask for a mortgage, of course, we provide that mortgage that there is not a decision to grow faster the mortgage portfolio that is based on the best use of capital and profitability. Yuri Fernandes: Great. And regarding the Stage 2 and Stage 3, like when we do reserves by loans, this increase that we observed, like should we continue to see? Or is this kind of a more quarterly specific trend? Edgardo del Rincón Gutiérrez: Yes. We feel that we will continue improving the Stage 3 portfolio. Actually, we are expecting a few recovers during this fourth quarter. And the idea is to continue improving the performance during the following quarters. Of course, there is some mathematical -- I mean, as we have been growing a very low speed 5% this quarter, that has an impact, of course, in the NPL. But we feel that we will continue trending down in the following quarters. And we are working in recovering those Stage 3 cases. Even by a legal action, as we have a lot of collaterals, there is always a big possibility of recovering those loans. Operator: Our next question comes from the line of Tejkiran Kannaluri Magesh. Tejkiran Magesh: This is Tej from WhiteOak. I just want to understand with the change in methodology of capitalization that you're calculating, does the range of CET1 you're comfortable with change? Or does it remain 14% to 15%? Edgardo del Rincón Gutiérrez: Yes. Thank you. The change that we have during this third quarter actually was in August. But that was something that we decided last year. And it's also a methodology that we used to have for several years, to make the calculation -- I mean, to calculate the reserves for SMEs and for the corporate portfolio as well as it's the same case that additional reserves. We decided that, that didn't provide the flexibility that we needed and any benefit and the complexity as well of the rules are every year is higher and higher and higher. So it was very difficult to comply with all the rules. So we decided to abandon -- it's a process that took one year with the CNBV, so we have been in that process during the last 12 months. So the last month in which we saw that change, it was a couple of months ago in August. And that has an important impact in the capital levels of 82 basis points. That's why we still saw the capitalization rate going to 15.9% together with the accumulation of earnings during the last few months. Tejkiran Magesh: Okay. Understood. There's no 2 methodology changes. It's just one, the reserves, which also affected the capital. Understood. Operator: Our next question comes from the line of [ Andrew Geraghty. ] Unknown Analyst: I just wanted to double-click a bit on noninterest income and then also the NIM. On noninterest income, you guys have communicated a pretty bullish outlook for going forward of continued high teens growth, faster than the client base growth, faster than loan book growth. Can you just expand a bit on what gives you confidence in this? And is it coming specifically more from the fees and commission side? Or can trading income continue to deliver the pro forma year-over-year growth was 35%. So just a little bit more detail on the noninterest income side. And then in terms of NIM, if the benchmark rate goes to, I believe you said 6.5% is your expectation for the end of next year, considering lower rates and maybe changes in mix, what is your thought process on the direction of the NIM for 2026? Edgardo del Rincón Gutiérrez: Thank you, Andrew. Yes, we -- what we have been doing is, as we said in previous calls, the concentration of the bank is really providing the best digital functionality to our customers. So that is working very well. You saw the metrics, but we are very glad with the compound growth that we are seeing both in transactions and also amounts transacted. That 24% growth in amounts transacted is really, really high and it is the growth of the last 5 years. So we are very glad with that. So the use of digital transactions, digital channels from our customers is really evolving very well. And that is coming with more, what I call operational dependency of the customer with the bank. You are really the bank of the customer when you have the loans, of course, but it's very important also to manage their payroll, their sales through the acquiring business, the FX, et cetera, all the different services that we can provide. So just the BajioNet fees that our customers are paying are growing 37% year-over-year. So that is a fantastic growth. But also all the transactions made through digital channels. That includes, for example, of course, transfers, but also for example, FX that is growing very well. Those -- all those transactions that are in that digital platform, the compound growth of that income is 18.2%. That is also let's say, much more than the growth we are having in active customers that is 6%. So we are very glad with that, and we feel that we can continue with a very good growth. Of course, we have a one-timer this quarter. But even without that one-timer, the growth was 27%. So having high teens, I think, is a very realistic expectation in nonfinancial income. I pass to Joaquin to talk about the NIM. Joaquín Domínguez Cuenca: Yes. The NIM that we recorded at the end of the third quarter was 5.9%. For the next year, you can guide with the sensitivity we have provided; however, there is an important impact depending of the loan growth and the mix of the deposits. Right now, we have a strong liquidity. We have investment in securities. If we get success with the loan growth expectation, we will change those assets with lower return to the SMEs or corporate loans with higher return. So it could be an improvement in the net interest margin in case of we success with the loan growth expectation. For the next year, it's very similar what could happen. It will depend on the loan growth expansion and the mix of deposits, how big can be the change of the NIM. But if you consider the ceteris paribus structure of the balance sheet, the sensitivity we have provided could give you a good approach of the NIM for the next year. Operator: Our next question comes from the line of Andres Soto. Andres Soto: This is Andres Soto from Santander. Just a follow-up on NIM. Based on your comments, Joaquin, it sounds like you guys are not expecting to see NIM to go under 5.5% even if policy rate normalizes in Mexico. I would like to understand how this compares to your historical NIM and what makes you optimistic on delivering this type of NIM, which is superior to what BanBajio had in the past at similar levels of interest rates. What has changed in the story of BanBajio in terms of loan mix, funding mix or any other factors that could sustain this type of NIM? Joaquín Domínguez Cuenca: Thank you, Andres. And what your perception is correct. If you compare the NIM when the interest rate in the past few years was pretty close to the actual level, we had -- we used to have a lower NIM. So we have improved as well the mix and assets as in deposits. So based on that and that we are expecting to maintain this improvement in the mix in assets and deposits that we will be able to maintain a higher, of course, that 5% NIM the next year with a reference rate around 6.25% for sure. Operator: Our next question comes from the line of Neha Agarwala. Neha Agarwala: Quick question on the trade negotiations with the U.S. What part of your loan portfolio could be directly or indirectly impacted by the upcoming trade negotiations? Edgardo del Rincón Gutiérrez: Thank you, Neha. We have about 10% of the portfolio in customers that do exports, I mean, to different countries, to the U.S. mainly. But I believe the trade agreement has a broader impact, not only in those customers, but also in what we should expect for the economy. As you know, the transformation of Mexico in the last 30 years with -- at the beginning of the NAFTA, you compare the structure of the economy at that moment compared with today is completely different. So that has an impact not only with the base of customers that they do export, but also in the whole economy. So that's why it's so important. Neha Agarwala: Any other part of the loan book that you would be concerned that could be maybe directly impacted by these negotiations? Edgardo del Rincón Gutiérrez: Not really. As you know, our presence in the agro business is very important. It's very difficult to replace those products with production in the U.S. because of the weather and the geography of the U.S. So -- and it's very difficult even to replace Mexico as a supplier of those products to the U.S. economy. And the investment that we have in Mexico in manufacturers, we have a lot of investment coming from the U.S. that I believe is very difficult to move again to other geography or to go back to the U.S. that is going to take a while. So not really, we don't see -- we believe our best scenario, but really what we expect is the trade agreement will come to a good end, maybe different from the one we have today. But I believe the best scenario for these 3 countries, Canada, U.S. and Mexico is to continue together with the trade agreement. And we believe it has been very positive even for the U.S. economy as well. Operator: We have not received any further questions at this point. So that -- I would now like to hand the call back over for some closing remarks. Rodrigo Marimon Bernales: Thank you all very much for joining us today. We remain available to address any follow-up questions via e-mail and meeting request. We look forward to speaking to you again in January 2026 when we release our full year and fourth quarter 2025 results. Thank you very much, and have a nice day. Operator: That concludes today's call. You may now disconnect.
Operator: Good day, and welcome to the Sensata Technologies Third Quarter 2025 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. James Entwistle, Senior Director of Investor Relations. Please go ahead, sir. James Entwistle: Thank you, operator, and good afternoon, everyone. I'm James Entwistle, Senior Director of Investor Relations for Sensata, and I would like to welcome you to Sensata's Third Quarter 2025 Financial Results Conference Call. Joining me on today's call are Stephan Von Schuckmann, Sensata's Chief Executive Officer; and Andrew Lynch, Sensata's Chief Financial Officer. In addition to the financial results press release we issued earlier today, we will be referencing a slide presentation during today's conference call. The PDF of this presentation can be downloaded from Sensata's Investor Relations website. This conference call is being recorded, and we will post a replay on our Investor Relations website shortly after the conclusion of today's call. As we begin, I would like to reference Sensata's safe harbor statement on Slide 2. During this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that can involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K as well as other filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Much of the information that we will discuss during today's call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations, are included in our earnings release, in the appendices of our presentation materials and in our SEC filings. Stephan will begin the call today with comments on the overall business. Andrew will cover our detailed results for the third quarter of 2025 and our financial outlook for the fourth quarter of 2025. Stephan will then return for closing remarks. We will then take your questions. Now I would like to turn the call over to Sensata's Chief Executive Officer, Stephan Von Schuckmann. Stephan Von Schuckmann: Thank you, James, and good afternoon, everyone. Let's begin on Slide 3. Before we get into the third quarter results, I'd like to start today by briefly reflecting on what we have accomplished so far this year and where we are in our transformation journey. In our first earnings call after I joined Sensata at the beginning of 2025, I outlined the transformation ahead of us built around 3 key pillars: operational excellence, capital allocation and a return to growth. In each of our subsequent earnings calls, we provided updates on our transformational journey framed around these 3 pillars. I've been pleased with the incremental progress in each of these quarterly updates. With the Q3 results we are reporting today, we have reached a significant milestone in our transformation journey. While we have more work to do and plenty of challenges ahead, our exceptionally strong Q3 results give me confidence that we have meaningfully improved our core business. Our emphasis on operational excellence and margin resilience has positioned us to overcome challenges such as tariffs and end market volatility. Our laser focus on free cash flow and optimizing capital allocation to reduce net leverage has been successful, and we are now well ahead of our net leverage and cash conversion targets. As a result, earlier today, we commenced cash tender offers to purchase $350 million of our long-term debt. And finally, with respect to growth, we've conducted a thorough assessment of our product portfolio, production capacity and growth investments and we are taking action to position our business to maximize the benefit from secular tailwinds. I'll now share some additional color on the third quarter through the lens of our key pillars. Our Q3 results represent a compelling proof point in the progress we have made on operational excellence. The third consecutive quarter, we delivered on expectations, reporting results at or above guidance ranges. Third quarter adjusted operating margins and adjusted EPS both expanded sequentially from Q2 despite seasonally lower revenues. We're now on path to expand the full year adjusted operating margins on a year-over-year basis, excluding the dilutive impact of pass-through revenue, this is yet another compelling proof point in the progress our team has made with our 2025 full year outlook standing in sharp contrast to the preceding 3 years when our business experienced year-over-year contraction in adjusted operating margin. Now let's turn to Slide 4, and I will discuss cash flow and capital allocation. Our near-term capital allocation strategy is simple. We're focused on rapidly deleveraging our business. While we are comfortable with our balance sheet, we believe that reducing leverage to a level more consistent with our peers removes a potential barrier from -- for some investors, making Sensata a more compelling investment. Our operational excellence pillar has been a key enabler of this strategy as we optimize working capital and improve free cash flow conversion. After converting free cash flow at above 90% of adjusted net income last quarter, we made more progress in the third quarter with conversion now exceeding 100%. As a result of our strong free cash flow generation and strong cash position with $791 million of cash on the balance sheet as of September 30, we're taking decisive action to deploy capital and retire debt. Today, as I mentioned, we commenced cash tender offers to purchase $350 million of our long-term debt. More information about these cash tender offers can be found in the press release that we issued on this transaction earlier today. Discipline around our capital expenditures and reducing the capital intensity of our business has been a key driver of our progress toward improving cash flow conversion, and we are acting on these priorities without compromising on growth. In fact, as we look ahead towards growth, we have studied past capital allocation to ensure we are making the right investments going forward. On our July earnings call, we defined a 3-part framework through which we would evaluate growth. Allow me to recap that again here today. First, we will stick to our core product technologies with sensing and electrical protection. Second, we'll prioritize platform-driven applications with an emphasis on regulated or mission-critical sockets. And third, we'll focus on our key markets, prioritizing those with secular tailwinds and ensuring appropriate diversification. We will continuously evaluate our product portfolio using this framework and where we identify areas where it is necessary to shift our strategy, we will be decisive. In our Dynapower business, which provides microgrid power inversion and rectification, it has become clear that the investment thesis and strategic plan around clean energy no longer offers the most compelling growth vector for this business as government policies have shifted and investment has slowed. That said, we do see other areas where Dynapower aligns to our growth framework, specifically in applications where grid stabilization and redundant power supply are mission-critical, such as defense and data center power delivery. Accordingly, we have recast our growth plans for this business, enabled by a more focused strategy. We believe this provides more compelling long-term growth with higher certainty of outcome. However, due to recent changes in clean energy policy and the anticipated slowdown in the clean energy sector, it was necessary to reevaluate the book value of this business today. As a result, we recorded a noncash goodwill impairment charge in the third quarter, which Andrew will discuss in more detail in a few minutes. Now let's turn to Slide 5, and I'd like to take a moment to highlight some of the recent additions to our executive leadership team as we embark on the next phase of our transformation journey. I'm pleased with the momentum we have built in our business through our operational excellence pillar. Not only have we delivered on our quarterly targets, we have done so with demonstratable margin resilience as we continue to perform in the face of multiple challenges in our end markets. Given the relatively short period of time in which we have made this progress, it is clear that our most significant opportunities are ahead of us. At this juncture, it is imperative that we install the right leadership to ensure that we continuously unlock value by optimizing our cost structure, streamlining our production network and serving our customers well. In the Form 8-K that we issued along with our earnings press release today, we announced that Nicolas Bardot will join Sociata effective November 1 as Chief Operations Officer. Nicolas has more than 20 years of operations leadership experience, including supply chain optimization, manufacturing excellence and leading transformations, which will be a tremendous asset to Sensata as we strengthen our global operations footprint to meet the needs of changing and dynamic markets. Most recently, Nicolas served as Division Operations Officer at ZF Commercial Vehicle Solutions. Previously, he held leadership roles at WABCO, including Chief Supply Chain Officer and Vice President of Sourcing and Purchasing. His accomplishments include leading several organizational transformations and applying innovative technologies to achieve measurable productivity and quality gains. With operations on solid footing and with accelerated progress on our capital allocation pillar, we are now ratcheting up the intensity of our focus on our third pillar, returning Sensata to growth. This, too, requires experienced leadership. Earlier this quarter, we announced that Patrick Hertzke joined Sensata as our Chief Growth and Transformation Officer. Patrick has extensive automotive and industrial experience, both in industry as well as at McKinsey & Company, where he was a partner in the automotive practice. During Patrick's 13 years at McKinsey, he led projects, including go-to-market strategy, enterprise transformations and AI technology strategy. We also announced today that Jackie Chen has been promoted to Executive Vice President and President of Sensata China effective January 1, 2026. Jackie joined Sensata in January 2024 as Vice President and General Manager, China Automotive and has been instrumental in positioning Sensata to rewin market share and increase the localization of our business and supply chain. In his expanded role, Jackie will have P&L responsibility and primary management oversight of all of Sensata's business in China. Jackie's promotion underlines the importance of succeeding in China and he has demonstrated that he is the right leader. Under Jackie's leadership, our automotive business in China has returned to outgrowth with double-digit growth over market in the third quarter and 90% of our new business wins this year have been with local OEMs. Now let's turn to Slide 6, and I will discuss some recent product innovations that will drive growth across multiple end markets. We previously mentioned that we are first to market with a tire burst detection solution for a vehicle stability control application. We continue to make progress here, and we have now secured business with 2 leading Chinese OEMs. We're proud to see our tire burst alert feature gaining traction in the market and becoming a trusted component in vehicle safety strategies. These wins highlight a common theme. As vehicles become more intelligent, so must the systems that support them, giving us a clear road map for how to expand content and win new business. Looking ahead toward the medium term, it's clear that our path to expanding content will be driven by meeting the global shift towards sustainable mobility with smart, impactful solutions. One such example is our high-efficiency contactor, which simplifies EV charging by enabling vehicles to work seamlessly with both 400- and 800-volt architectures. As 800-volt vehicles launch in markets where the charging infrastructure is predominantly 400 volts, our contactor enables a switch architecture. This product was recently recognized as a finalist for EV charging innovation at the 2025 Battery Show in North America. As we have discussed on past earnings calls, global regulations are requiring more sustainable refrigerants in HVAC systems. And with that, demand for reliable gas leak detection is accelerating. Our A2L sensor is helping customers across key markets detect and manage refrigerant leaks with speed and precision. By supporting compliance and improving system performance, this solution is becoming a trusted part of HVA platforms. We have recently secured 2 customer agreements, solidifying our market leadership position for the next several years. As additional customer programs are awarded in the coming months, we foresee this business accelerating to more than $100 million of revenue in the near future, and we see expanded opportunities outside of the United States in the years ahead, making this product a potential growth driver for many years to come. Finally, as we look more broadly at secular trends, we expect our aerospace business to emerge as a meaningful growth engine for Sensata going forward. Sensata's proven capability in this space and a clear right to win as we have been selling into the defense sector since the 1940s. Looking ahead over the next decade, U.S. and allied nations defense spending is expected to increase significantly from $1.7 trillion in 2025 to $2.8 trillion in 2035. The vast majority of this spend is expected outside of the U.S., primarily driven by EU defense spending. Given our global footprint and deep business relationships in Europe, we are focused on winning our share of this growth. While I'm excited by the additions to our leadership team, I would also like to acknowledge the exceptional progress from the whole Sensata team. Collectively, we embrace our 3 pillars approach and ready to bring forward and build initiatives around these pillars. We have worked relentlessly in pursuit of value creation, guided by the pillars and enabled by the initiatives that underpin them, and we're getting results. We have turned a corner on financial performance, consistently meeting or exceeding our plan and delivering on our commitments. We have unlocked free cash flow and meaningfully accelerated our capital allocation strategy and net leverage is improving. And we returned to market outgrowth in the third quarter with our automotive business outgrowing global vehicle production by approximately 1%, HVOR outgrowing its end market by approximately 5% and our Sensing Solutions business delivering organic revenue growth of 2.5% with approximately 1% outgrowth in industrials, while Aerospace grew approximately 2%, roughly in line with the market. With that, I'll turn the call over to Andrew to provide greater detail on Q3 financial results, market outlook and our guidance for the fourth quarter. Andrew Lynch: Thank you, Stephan, and good afternoon, everyone. Let's turn to Slide 8. We delivered another strong quarter in Q3, once again achieving results that exceeded our expectations across all of our key metrics. We reported revenue of $932 million for the third quarter of 2025, which exceeded our expectations due to stronger global auto production, amplified by our return to outgrowth. Third quarter revenue of $932 million represented a decrease of $51 million or 5.2% as compared to $983 million for the third quarter of 2024, primarily due to our previously discussed divestitures and product life cycle management actions. On an organic basis, revenue increased approximately 3% year-over-year. We delivered adjusted operating income of $180 million and adjusted operating margins of 19.3%, which is up 30 basis points sequentially from the second quarter of 2025 and up 10 basis points year-over-year. Our adjusted operating margins were diluted by approximately 20 basis points due to $12 million of 0 margin pass-through revenues related to tariff recovery. Excluding the dilutive impact of tariff pass-through, third quarter adjusted operating margins increased by 30 basis points year-over-year. Tariff pass-through revenues did not meaningfully impact sequential performance as we recorded approximately equal levels of tariff costs and pass-through revenues in both the second and third quarter of 2025. Adjusted earnings per share of $0.89 in the third quarter of 2025 increased by $0.02 sequentially from the second quarter of 2025 despite seasonally lower revenues as we delivered on our margin expansion plans. Adjusted earnings per share was flat with the third quarter of 2024 on lower revenue. Free cash flow generation has been a primary focus for us this year, and our improvements accelerate our capital allocation objectives. I am pleased to report that we delivered free cash flow of $136 million in the third quarter, which was an increase of approximately 49% year-over-year. This represents an exceptionally strong conversion rate of 105% of adjusted net income an increase of 14 percentage points compared to the second quarter of 2025 and 37 percentage points compared to the third quarter of 2024. Now let's turn to Slide 9, and I will discuss capital deployment. With our strong free cash flow, we reduced net leverage to 2.9x trailing 12 months adjusted EBITDA compared to 3.0x at the end of June. Last quarter, we indicated that our capital allocation strategy would prioritize deleveraging. Today, we took initiative to deploy capital in furtherance of this priority as we commenced cash tender offers to purchase $350 million of our long-term debt. Our capital allocation strategy, combined with the performance of our business is delivering returns with return on invested capital increasing to 10.2%, which is an improvement of 10 basis points sequentially from the second quarter of 2025 and 20 basis points year-over-year compared to the third quarter of 2024. In the third quarter, we returned $17 million to shareholders through our regular quarterly dividend. Last week, we announced our fourth quarter dividend of $0.12 per share payable on November 26 to shareholders of record as of November 12. Turning to Slide 10. I'll talk through the results for our segments. Performance Sensing revenue in the third quarter of 2025 was $657 million, approximately flat year-over-year on a reported basis. Organically, revenue increased 3.6% year-over-year as we outgrew our end markets in both automotive and HVOR, consistent with the expected return to outgrowth in the second half of 2025 that we had communicated earlier this year. Performance Sensing adjusted operating income was $156 million or 23.7% of Performance Sensing revenue, representing year-over-year margin expansion of 160 basis points, inclusive of any dilutive impact from tariffs. Sensing Solutions revenue in the third quarter of 2025 was $275 million, which was approximately flat year-over-year. Organically, revenue increased 2.5% year-over-year, driven by new content in our Industrials business and growth in our Aerospace business. This marks our third straight quarter of year-over-year organic growth. Sensing Solutions adjusted operating income was $85 million or 30.9% of Sensing Solutions revenue, representing year-over-year margin expansion of 150 basis points, again, inclusive of any dilutive impact from tariffs. The margin expansion in both our Performance Sensing and Sensing Solutions segments represents the significant strides our teams have made in the last year in unlocking productivity, and I want to echo Stephan's comments regarding the great work being done by team Sensata. Corporate and other adjusted operating expenses increased by $12 million compared to the third quarter of 2024, primarily driven by higher variable compensation due to better underlying performance. Finally, just a brief follow-up on the Dynapower topic that Stephan mentioned earlier. In the third quarter, we recorded $259 million in noncash charges as a result of changes in clean energy policy and emissions regulations. This included a goodwill impairment charge of approximately $226 million related to the Dynapower business as well as certain other noncash charges, primarily due to excess capacity related to electrification. These costs were excluded from adjusted operating income as they are noncash and nonrecurring in nature. More detail regarding the reconciliation of our GAAP to non-GAAP financial metrics is available in our SEC filings, in the appendix to today's earnings presentation and on our Investor Relations website. Turning briefly to Slide 11. I will share some high-level thoughts on our markets. Within Performance Sensing, we have been pleased with the durability of automotive demand. We are encouraged by the growth in China, where we continue to increase our share. And in North America, despite concerns around end market demand, production has lagged SAAR and inventory levels remain relatively normal, indicating further durability. The HVOR end market has been soft, particularly with on-road trucks in North America, though we have been pleased with our ability to expand margins overall despite weakening end market demand in this high-margin business. In Sensing Solutions, gas leak detection has provided meaningful growth against an end market that has not yet fully recovered. Given our exposure to HVAC and appliance, we look at housing recovery and interest rates as the likely catalysts for this end market. And lastly, in our Aerospace business, we have seen reliable market growth in the low to mid-single-digit range all year, and we expect that to continue with strong order books across the sector. Before I discuss our fourth quarter expectations, let's turn to Slide 12 for a brief update on tariffs. In the third quarter of 2025, we recorded approximately $12 million of tariff costs and associated pass-through revenues. This was approximately flat with the second quarter of 2025. And looking ahead, we expect the same exposures in the fourth quarter based on trade policies currently in effect. The vast majority of our imports into the United States are from Mexico and over 80% of those imports are USMCA qualified. We do not expect any meaningful changes in our USMCA qualification levels moving forward. Additionally, Sensata is not directly exposed to either the automotive parts nor heavy truck parts tariffs as the products we produce are not included within the scope of these tariffs. And finally, just a brief reminder on our operating posture regarding tariffs. Sensata will produce to customer demand signals and will make product available to our customers at our production locations or deliver to any appropriate destination of our customers choosing. Should our customers require that we import materials into any jurisdiction that applies the tariff to such imports, we will only do so with a reimbursement agreement in place. We are grateful to our customers and suppliers for their continued support in this process. Their partnership and collaboration has been invaluable. With that, let's turn to Slide 13, and I will walk through our expectations for the fourth quarter of 2025. We expect fourth quarter revenue of $890 million to $920 million, adjusted operating income of $172 million to $179 million, adjusted operating margins of 19.3% to 19.5% adjusted net income of $121 million to $127 million and adjusted earnings per share of $0.83 to $0.87. Our revenue guidance range reflects a cautious outlook in light of recent idiosyncratic events such as the Novelis factory fire and the potential supply disruptions related to Nexperia. To be clear, we have not projected any major disruptions to our business in connection with these events. However, we are taking a more cautious view on the market and our order book. At the midpoint of our guidance range, we expect approximately 10 basis points of sequential margin expansion, and we have assumed the same level of tariff costs and pass-through revenues to what we incurred in the third quarter. As noted in our press release and earnings materials, our guidance and tariff assumptions are based on trade policies and tariff rates in effect as of October 28 and do not incorporate any impacts from proposed changes to trade policies. Finally, while we are not yet providing 2026 guidance, I would like to share initial thoughts on 2026. We are reasonably comfortable with consensus estimates for the full year. However, as we look at the quarters within 2026, we see a wider range of estimates, particularly in the first quarter. As a reminder, Q4 to Q1 margin seasonality is driven by pricing dynamics in our automotive business. Specifically, contractual price downs to our customers typically take effect at the beginning of the year as do our supplier price reductions. However, with approximately 90 days of inventory on hand, the majority of our first quarter sales reflect higher cost inventory. As we progress into the second quarter, margins normalize and each quarter thereafter, we typically see margin expansion driven by productivity in our factories. This trend was observed in the years preceding the pandemic and the inflation that followed and was observed again in 2025 as pricing returned to pre-pandemic norms. We expect similar seasonality moving forward. With that, I will turn the call back to Stephan. Stephan Von Schuckmann: Thank you, Andrew. As we look ahead, I'd like to leave you with a few parting thoughts. Over the last 9 months, we have executed with consistency, laying a solid foundation on which to build. Beyond significantly improving our say-do ratio, we have also improved underlying performance in our business and our free cash flow conversion is a compelling proof point. Additionally, we have demonstrated a return to market outgrowth, beginning with our industrial and aerospace business earlier in the year and with our third quarter results also in our automotive and heavy vehicle businesses. And lastly, we're acting decisively to set ourselves up for long-term shareholder value creation by installing the right leadership team, adjusting course on strategy as end markets change and deploying capital to retire debt. Look forward to continuing to update you on our progress as we transition towards the next phase of our transformation. I'll now turn the call back to James for Q&A. James Entwistle: Thank you, Stephan and Andrew. We will now move to Q&A. Operator, please introduce the first question. Operator: Your first question today will come from Wamsi Mohan with Bank of America. Ashley Wallace: This is Ashley on for Wamsi. Congrats on the results. Just one question for me. On the tire burst detection, last quarter, I believe it was mentioned that wins might be able to help contribute to revenues relatively quickly. Just can you help us think through quantifying this revenue impact in China from these additional wins? Andrew Lynch: Thank you, Ashley. Yes. So in China, the design cycle tends to be much shorter than in the West. It can be as quick as sort of 6 to 9 months from a design win to start of production. With respect to individual wins, given that these are only at a couple of OEMs so far, we're unable to disclose the actual value of these wins. What I can say is that we expect to -- we returned to outgrowth in China in the third quarter, and we expect to continue to outgrow the market moving forward. And these wins and other wins with local OEMs in China are a big reason why. We'd expect our outgrowth to be in the low single-digit market -- low single digits above market range initially. Operator: And your next question today will come from Mark Delaney with Goldman Sachs. Mark Delaney: I also was hoping to better understand what the company has seen in terms of its ability to outgrow the auto market. So just recognize you outgrew globally in the third quarter. I think you said double digits in China. And your comments, Andrew, about outgrowth going forward is really where I was hoping to focus. So as you look into 2026 and you think about the auto business more generally, both in Asia and on a global perspective, based on the wins you have and your discussions with customers, do you think your overall auto business can outgrow auto production next year? Stephan Von Schuckmann: So Mark, nice to hear you. Let me answer that question for you. So yes, I mean, you're absolutely right. We've had like double-digit outgrowth in China. We've won a fantastic business. I just -- as you heard in my script, we have a new President in China with Jackie, and he has really done a great job to win new business on the contactor side, but as also just mentioned on the tire burst system. And that has enabled us to outgrowth in that market and given us an overall, I would say, modest outgrowth in quarter 3 of this year. And going forward, with those wins and potential further wins that we're currently working on, we're looking at further outgrowth going forward into 2026. Operator: And your next question today will come from Guy Hardwick with Barclays Capital. Guy Drummond Hardwick: I'm just looking at the revenue by end market. Am I reading this correctly that HVAC stepped up very considerably sequentially and quarter-on-quarter at 6% of revenues compared to just over 4% a year ago and 4.6% in Q2. So kind of implies almost 40% growth in the HVAC business. Is something -- has there been some segmental change? Or is that real growth? Stephan Von Schuckmann: That's real growth, definitely real growth. So overall, what's obviously fueling this growth is our so-called HL gas leak detection product. We won new business. We've won 2 new businesses, and we're continuing to gain market share. We've got a substantial market share from today's perspective, and that is basically fueling this growth and then also fuel the growth going forward. That's the main reason for that. Andrew Lynch: And Guy, just for clarity, we presented the gas leak detection revenue in industrial last quarter. We've recast both on a Q3 and on a year-to-date basis into the HVAC segment. So I think that may be what you're seeing in those end market disclosures. Operator: And your next question today will come from Joe Spak with UBS. Joseph Spak: Andrew, there's 3 debt securities listed in the tender offer. Obviously, the 5 and 7 days are the most expensive. Is there any reason to believe you wouldn't go after those first? And just somewhat related, is the lower interest expense considered in your fourth quarter EPS guidance? Andrew Lynch: Yes. So given that the tender is still open, we're sort of limited in how much we can share about what notes we prefer to retire or anything like that. But what I can share on the interest is we're earning roughly at parity between cash on the balance sheet and the interest expense that we're incurring on those 29 notes. And then obviously, the other notes are a little bit more pricey. But on balance, I wouldn't expect it to have a material impact on net interest in the fourth quarter. And so nothing to consider from a guide perspective there. And then beyond that, we'd refer to the tender offer materials that we issued with the press release earlier today. Operator: And your next question today will come from Joe Giordano with TD Cowen. Joseph Giordano: Nice job. As you think through the capital structure here, I think everyone probably likes what you're doing with the charging -- the charges and taking down Dynapower and the debt reduction. But how do you think -- like how do you marry the innovation internally that you're doing with like the desire to ultimately deploy more in the future? So I know now we're talking about retiring debt and paying down and getting leverage down. But what's the target where you start to feel comfortable enough that you can start to take iterative steps outside of the current portfolio again? Andrew Lynch: Sure. Thanks for the question. So I think in the short term, we're very focused on our core business. We believe that we have all the building blocks that we need to grow, succeed in our end markets and return to outgrowth, like Stephan mentioned. So I want to be very clear, that's our core focus right now. A big part of our -- a big part of that involves improving the cash generation in our core business and then prioritizing the deployment of that capital to reduce our leverage. And I think you can look for that to be our primary focus for the near to medium term. Stephan Von Schuckmann: And let me add to that, Joe. So basically, I mean, yes, for now, the story that we've been continuously telling us on the last call is, first want to deleverage the company. We use some excess cash to strengthen our operations. So we've been very busy around smart automation in our factories to increase productivity. And that's proven to be the right investment, as you can see in the results as one effect. Yes. And going forward, obviously, we'll reevaluate if we'll deploy cash somewhere else. But at this point in time, we're sticking very much to what we've been telling you and deleveraging the company and improving performance. And that's the focus for the next quarters ahead. Operator: And your next question today will come from Luke Junk with Baird. Luke Junk: Stephan, hoping you could just double-click on the aerospace portfolio, especially your IP and the innovation cycle in that business relative to your right to win comment in the prepared remarks. I guess if I look, it's been growing low single-digit plus in recent years. It seems like the market has been growing a little bit faster in aggregate, just the levers that you see to growing that business more quickly into the future, too. Stephan Von Schuckmann: So first of all, let me reflect back on the growth. We've had steady growth, like you say, mid-single digit. And this has basically been both in commercial and defense markets. in quarter 3 of this year, this was actually a record revenue result. And I think as mentioned -- Andrew mentioned in his script, it was basically the fifth straight quarter of positive outgrowth. Now I think one topic is well known, but I'd like to repeat it. We still have high customer backlogs. They still persist. They're still there. And this is basically in -- basically, this persists, but recent information that we received, FAA is now approved with our biggest customer, one of our biggest customers, an increase to 42 aircraft per month. And as you can remember, back since January 2024, that was roughly 38 aircraft per month. So basically, that's going to increase our part of that growth. And the other part of it is our exposure to defense business, and that will be the other area we'll be growing in this business unit. Operator: And your next question today will come from Shreyas Patil with Wolfe Research. Shreyas Patil: I wanted to better understand the strategic positioning of Dynapower at this point. You talked a little bit about the potential for applications related to data centers. I wanted to maybe see if you could expand on that a little bit more. And are you seeing engagements from customers in some of those end markets, either grid storage, utility or grid applications or then even data center? Stephan Von Schuckmann: Basically, the main focus for now around data power, high energy requirements, which for us create use cases around grid stabilization. That is the major use case around data centers from today's perspective. Operator: Your next question today will come from Konsta Teslas with Wells Fargo. Konstandinos Tasoulis: I think you guided organic growth over the next 12 to 18 months to be in the 2% to 4% range. I think the commentary last quarter was a lot of that was being helped by the non-light vehicle business. But I think H4 housing still looks kind of challenged. Can you just parse out how you're thinking about that now? Andrew Lynch: Sure. Happy to. So I think, first, so obviously, we've seen a slowdown in some of our non-auto businesses this year, HVOR and specifically on-road truck in North America has slowed. And so while we're outgrowing that end market, the ability to grow with it is hampered by the lower levels of production that's impacted organic growth a little bit this year. I think we're still on track for about 1%-ish organic growth if you look at where third parties are for the fourth quarter and then -- where the midpoint of our revenue guide is. And admittedly, that was a cautious guide given some of the risks that we see in the fourth quarter. So we'll see how that all settles in terms of production levels, et cetera. I think as you look forward beyond the fourth quarter, so certainly, again, we're not giving 2026 guidance, but we -- the biggest outgrowth headwind we've had this year, which has challenged our organic growth rate has been the China market. And we turned the corner here in the third quarter where we're now outgrowing production in China. So if end markets hold up and we continue to deliver the level of outgrowth that we've had here in the third quarter, we'd have very high confidence in our ability to grow organically low single digits moving forward. Operator: And your next question today will come from William Stein with Truist. William Stein: I'm hoping you can remind us of your longer-term margin outlook. I forget what you've targeted in the past, and I forget if it's a single year or expansion view or multiyear. Can you just catch us up on that, please? Andrew Lynch: Thanks for the question, Will. So you may recall on the last call, we talked about a margin floor of 19%. We're still committed to that floor. The reason that was an important data point for us is because there's obviously a lot of end market volatility and challenges we're dealing with. Mix matters in our business, certainly. We feel very comfortable in our ability to defend that floor on a full year basis. And then beyond that, I would point to -- we've demonstrated an ability to sequentially expand margins throughout the year as we've done this year. And lastly, I would just point out that our 2 of our higher-margin businesses, HVOR and industrial are both in markets that are relatively soft right now. So if and when those markets recover, certainly, there's some margin help that we get with that. But without clarity on that and without having guided 2026, where we stand today is that we're very comfortable defending a margin floor of 19%. Operator: And your next question today will come from Rob Jamieson with Vertical Research Partners. Robert Jamieson: Nice results tonight. Just had a couple on free cash flow. Just a really strong conversion this quarter again. I just wonder if you could walk through some of the details on working capital improvements, cash discipline that's driving this performance. And then just kind of your thoughts around the sustainability of this level. And then, Stephan, just on the of the benchmarking initiatives that you talked about in terms of getting different manufacturing facilities to kind of get to best-in-class internally. Just wanted to see what you're starting to see there in terms of early improvement. Stephan Von Schuckmann: Let me start with the second question. Thanks for the question. Look, we've continued with our -- with benchmarking progress. First of all, the idea was to benchmark ourselves internally. So from a product family perspective, we would take the best-in-class product from a cost perspective and then benchmark that against all the other factories where that product is produced. And we've made good progress. So we've reduced our cost significantly on each and every product, but we still have some way to go. And then the other view is obviously outside of Sensata. So if we can obtain benchmarks where we find products being produced better than our factories, we'll take that benchmark and work off against -- work ourselves off against that target, which we also do for certain product families. So it's continuous progress. I think we've improved a lot, but still ongoing. Andrew Lynch: Yes. And on the cash flow question, so the biggest lever there has been lower capital expenditures in our business. And I think that's really reflective of the level of discipline we're applying to CapEx. We're certainly looking at things like the certainty of the production outlook on the programs that we're investing in as well as the timing, and that's driven a lower level of CapEx in our business. I'm comfortable that we can continue to convert free cash flow at a relatively healthy level. And the number that we've committed to is greater than 80%. I don't think that our relatively low level of CapEx this year is a benchmark for where we're going to be indefinitely. But certainly, as we're looking at EV production outlook that's a little bit uncertain, volumes that are maybe softer than where they were expected to be a few years ago, we're applying a lot more rigor on the CapEx that we're improving, and that's showing up in our free cash flow conversion. So I'm comfortable that we'll continue to convert at a high level. And I think the year-to-date result has been reflective of CapEx discipline. Operator: And your next question today will come from Samik Chatterjee with JPMorgan. Manmohanpreet Singh: This is MP on for Samik Chatterjee. I just wanted to double-click on your return to growth pillar of the overall strategy. Just wanted to understand in terms of end markets, which end markets are strategically of higher importance in terms of returning to growth? Or like where do you expect the growth will be more skewed in terms of the overall end markets? Stephan Von Schuckmann: From an end market perspective, I think Andrew has given some highlights on that, having we see from Sensata's perspective, strong market outgrowth on the HVOR sector that is mainly driven due to construction and agricultural business, and that's basically offsetting the softness in that market. And we also see, as I've mentioned earlier, with very, very strong order books in the aerospace area, we'll see a potential of growth going forward there as well. That is another area of high growth. Automotive, I would say, is rather soft with a slight outgrowth going forward. So the 2 strong ones being aerospace and HVOR. And industrial -- sorry, Industrial was a third one that I also wanted to mention, especially with our gas leak detection product that's enabling us to outgrow the market. And going forward, that will also be pushing growth. Operator: That concludes our question-and-answer session. I would like to turn the conference back over to Andrew Lynch for any closing remarks. Andrew Lynch: Thank you, operator, and thank you all for joining today's presentation. We look forward to seeing you at various investor events later this quarter. We are currently expected to participate in the following events: the R.W. Baird Global Industrial Conference in Chicago on November 12, the UBS Global Industrials & Transportation Conference in West Palm Beach on December 3; and the Oppenheimer Winter Industrial Summit, which is a virtual conference on December 11. This concludes our third quarter earnings conference call. Operator, you may now end the call. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Third Quarter 2025 Armstrong World Industries, Inc. Earnings Call. [Operator Instructions] It is now my pleasure to turn the conference over to Theresa Womble, Vice President of Investor Relations and Corporate Communications. You may begin. Theresa Womble: Thank you, Nicole, and welcome, everyone, to our call this morning. Today, we have Vic Grizzle, our CEO; and Chris Calzaretta, our CFO, to discuss Armstrong World Industries third quarter 2025 results and rest of year outlook. We have provided a presentation to accompany these results that is available on the Investors section of the Armstrong World Industries website. As a reminder, our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of the SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of the presentation we issued this morning. Again, both are available on the Investor Relations website. During this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, October 28, 2025. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of the risks and uncertainties in our SEC filings, including the 10-Q we issued earlier this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. Now I will turn the call over to Vic. Victor Grizzle: Thank you, Theresa, and good morning, everyone, and thank you for joining our call today to discuss our third quarter 2025 results, the progress we are making on our initiatives to deliver consistent profitable top line growth and our expectations for the remainder of the year. Today, we announced record-setting third quarter net sales and earnings results with strong Mineral Fiber average unit value, or AUV, a second consecutive quarter of Mineral Fiber volume growth and double-digit net sales growth in Architectural Specialties. On a consolidated basis, we delivered year-over-year top line growth of 10%, resulting in record-setting quarterly net sales with robust performance in both our Mineral Fiber and Architectural Specialties segments. Consolidated company adjusted EBITDA increased 6%, while adjusted net earnings per share increased 13%, along with strong double-digit free cash flow growth in both the quarter and in the year-to-date period, allowing for execution across all our capital allocation priorities. This includes the increase in our quarterly dividend of 10% we announced last week, and our latest Architectural Specialty acquisition of a Canadian wood sealing manufacturer, Geometrik. These results were driven by our differentiated and resilient business model, along with solid operational and commercial execution across our enterprise that once again allowed us to overcome lingering market softness and some timing-related cost headwinds. I want to take this opportunity to thank our teams across the company that continue to execute at the highest level that make these consistently strong results possible. So thank you. Like the last several quarters, we have remained laser-focused on operational efficiency, commercial execution and our growth initiatives as we continue to navigate a dynamic and uncertain macroeconomic backdrop. These efforts not only contributed to strong top line growth, but also continue to support our industry-leading profit margins even as we dealt with timing-related costs this quarter. While Chris will discuss these in a bit more detail, it's worth noting without these timing-related expenses, we would again have expanded EBITDA margin in the Mineral Fiber segment and at the total company level, and we remain poised to deliver margin expansion for the full year on both of these metrics. Despite these timing-related expenses, with our consistent underlying execution, the building blocks of Armstrong's formula for profitable growth remains strong and on full display in the third quarter. And as a reminder, what these building blocks are, they include: first, our focus on delivering consistent AUV growth in Mineral Fiber, all driven by the innovation and quality that feeds the category dynamic to mix up and our best-in-class service levels supported by technology that help us earn our pricing in the marketplace. Secondly, our laser focus on achieving consistent annual productivity gains throughout our operations. Thirdly, our investments to expand our product offerings and capabilities to continue our successful penetration in the Architectural Specialties segment. And lastly, our investments in digital growth initiatives like Project Works and Canopy that drive volume, AUV and contribute to margin expansion. In the third quarter in our Mineral Fiber segment, net sales increased 6% versus 2024 results, primarily driven by strong AUV growth and positive contribution from sales volumes. This marks the first time since 2022 that we reported back-to-back quarters of Mineral Fiber volume growth. This volume result was slightly ahead of our expectations as demand conditions in our markets remain relatively stable compared to our expectation of a modest slowdown expected mostly in the more discretionary type renovation activity. That said, the most notable volume growth driver was strong commercial execution and the contribution from our growth initiatives continuing to gain traction, enabling above-market growth rates as well as positively contributing to our strong AUV performance. Adjusted EBITDA in the Mineral Fiber segment also grew 6%, reaching a third quarter record and a continuation of our strong performance in 2025. On a year-to-date basis through September, Mineral Fiber EBITDA has increased 9% with margins expanding 160 basis points on a year-over-year basis in overall flattish market conditions. Importantly, we continue to expect strong Mineral Fiber adjusted EBITDA margin performance for the full year of approximately 43%, which would be the highest full year result since our last high watermark in 2019. Now before moving to discuss Architectural Specialties results, I'd like to take a moment to highlight some of the ongoing efforts within our Mineral Fiber plants that contributed to our results as they have all year. First, we continue to generate solid productivity gains in our operations at a similar rate as in the second quarter, and this helped partially offset the timing-related expenses I mentioned earlier. We also continued our execution at a high level on quality and service. One measure we use to gauge our quality and service to customers at our Mineral Fiber plants is called our perfect order measure that combines 6 different metrics that determine a perfect order in the eyes of our customer. The way it works is if any line item on a customer order misses any of these metrics, it's a 0 on the scale of 100% perfect order. These metrics include things like accurate order fill rates and on-time delivery and billing quality. It's a tough measure and rightly so as this is what our customers expect and are willing to pay for. I'm pleased to report that our plant teams delivered a record result in this measure this quarter. It's service and quality results like these that builds customer trust and loyalty that enables the retention of customers and pricing support for the value that we create. Now moving to the Architectural Specialties segment. Our third quarter net sales in this segment increased 18%, driven by the benefits of both our 2024 acquisitions, 3form and “Zahner”, along with solid organic growth. Adjusted EBITDA for the segment increased 10%, generating an adjusted EBITDA margin of approximately 19%. On an organic basis, adjusted EBITDA margins for the segment remained in line with our long-term target of 20% for the second quarter in a row despite these timing-related expenses mentioned earlier. I'm pleased with how we continue to leverage our Architectural Specialties network and together with our new acquisitions and the benefits of more Architectural Specialty products incorporated into our Project Works platform, we continue to improve our ability to win more projects. And this is most evident in the continuation of double-digit growth in orders and backlog for our Architectural Specialty products. We're also excited to welcome another acquisition, Geometrik, to our growing portfolio of products and solutions. Based in British Columbia, Canada, Geometrik is a leading designer and manufacturer of wood acoustical ceilings and wall systems that expands the variety of wood species we can offer our customers. With 9 complementary wood species across multiple products, including highly sought-after Western Hemlock, this company strengthens our wood portfolio and adds geographic diversification to our manufacturing footprint. Geometrik's on-trend products and design expand our portfolio with more of the warm wood looks and biophilic designs that are in high demand from architects and owners. Their Western Canadian production location also enhances our ability to serve our customers in Canada and on the West Coast. We're excited to welcome the Geometrik team to Armstrong's industry-leading specialties platform. Along with our acquisitions, we continue to be delighted by how our digital initiatives are progressing and making a positive contribution to both our segments. I mentioned Project Works earlier as it continues to gain traction with architects, designers and contractors by quickly providing visualization of complex designs, eliminating the waste in the design process and providing a complete bill of goods for clear and simple ordering. With increasing demands on limited construction labor availability, Project Works provides significant productivity value to our customers and strengthens our ability to hold on to project specifications throughout the construction process and ultimately improves our win rates in the market. Again, in both the Mineral Fiber and Architectural Specialties segments. Another one of our digital initiatives contributing nicely in the quarter is Canopy. Canopy like Project Works benefits both our business segments by providing an easy way for smaller customers to access a wide range of products through an online education and selling platform. And I'm pleased to share that the Canopy platform had both record sales and EBITDA in the quarter and continues to be a key differentiator for Armstrong. Now I'll pause and turn it over to Chris for more detail on our financial results. Christopher Calzaretta: Thanks, Vic, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website. And please note that Slide 3 details our basis of presentation. Beginning on Slide 6, we summarize our third quarter Mineral Fiber segment results. Mineral Fiber net sales were up 6% in the quarter, primarily driven by favorable AUV of 6% and a slight increase in volumes. The growth in AUV was primarily due to favorable like-for-like pricing with a modest contribution from mix. The benefits of increased volumes and favorable mix were driven by the strong execution of our commercial sales organization, along with benefits from our growth initiatives. Mineral Fiber segment adjusted EBITDA grew by 6% and adjusted EBITDA margin was 43.6%. Q3 Mineral Fiber EBITDA growth was primarily driven by the fall-through of AUV, contribution from our WAVE joint venture on strong price/cost benefits and slightly higher Mineral Fiber volume versus the prior year. As Vic mentioned, our results were negatively impacted this quarter by some timing-related discrete costs in both segments. In Mineral Fiber, these costs primarily related to an increase in medical claims above our normal run rate, which mainly impacted manufacturing costs. In addition, our strong year-to-date financial performance and updated full year outlook resulted in higher incentive compensation in the quarter, which primarily impacted SG&A. We do not expect the third quarter SG&A results to be indicative of our go-forward run rate. As a result of these in-quarter cost headwinds, Mineral Fiber adjusted EBITDA margin compressed 30 basis points over the prior year. For the Mineral Fiber segment, the total discrete costs in the quarter represented approximately $5 million of an outsized headwind, which is reflected in both manufacturing and SG&A expenses. Excluding this cost headwind, adjusted EBITDA margin in the Mineral Fiber segment would have expanded in the quarter versus the prior year period. On Slide 7, we discuss our Architectural Specialties or AS segment results, where we highlight net sales growth of 18%. This growth was driven primarily by contributions from our 2024 acquisitions, 3form and Zahner, both of which continue to perform better than expected as well as a 6% increase in organic sales, driven by growth across most of our specialty product categories. AS segment adjusted EBITDA grew 10% with an adjusted EBITDA margin of approximately 19%, which includes the dilutive impact of our recent acquisitions. On an organic basis, we are pleased to have achieved an adjusted EBITDA margin of approximately 20%. Q3 AS EBITDA growth was driven by the benefit of higher net sales, partially offset by higher manufacturing costs as well as an increase in SG&A expenses. Higher SG&A expenses were primarily due to our 2024 acquisitions in addition to an increase in selling expenses, driven primarily by higher net sales as well as additional investments in selling capabilities. Slide 8 highlights our third quarter consolidated company metrics. We delivered 10% sales growth and 6% adjusted EBITDA growth with total company adjusted EBITDA margin compression. Additionally, adjusted diluted net earnings per share grew 13%. Incremental volume from both segments, strong AUV performance and solid equity earnings from WAVE drove our adjusted EBITDA growth in the third quarter versus the prior year period. These benefits more than offset higher SG&A expenses, which were primarily driven by our 2024 acquisitions as well as the previously mentioned impact of discrete costs in the quarter. At the total company level, the total discrete costs in the quarter were approximately $6 million, which impacted both manufacturing and SG&A expenses. Excluding this cost headwind, adjusted EBITDA margin at the total company level would have expanded slightly in the quarter versus the prior year period. Turning to Page 9. We highlight our year-to-date consolidated company metrics, which reflect double-digit net sales and adjusted EBITDA growth with margin expansion. Through the first 9 months of the year, with sales up 14% and adjusted EBITDA up 15%, margins expanded 20 basis points versus the prior year period, which includes the year-to-date dilutive impact of our 2024 acquisitions. Adjusted diluted net earnings per share increased 21% and adjusted free cash flow increased 22%. The drivers of year-to-date adjusted EBITDA growth are similar to the previously mentioned third quarter drivers. Slide 10 shows our year-to-date adjusted free cash flow performance versus the prior year. The 22% increase was driven primarily by higher cash earnings, lower income tax payments and dividends from our WAVE joint venture, partially offset by an increase in capital expenditures as we continue to invest back into the business. Our demonstrated ability to consistently deliver strong adjusted free cash flow allows us to execute on all of our capital allocation priorities. As a reminder, these are: first, to reinvest back into the business with a disciplined focus on opportunities that deliver high returns. Among our year-to-date investments was the enhancement of manufacturing capability at one of our Mineral Fiber plants to support the growth of our Templok Energy Saving Ceiling offering. Target investments such as these underscore our commitment to executing our growth strategy while maintaining a balanced capital allocation approach. Our second capital allocation priority is to execute strategic acquisitions and partnerships that add unique attributes or capabilities to our business that will create value. Recently, in the third quarter, we acquired the issued and outstanding shares of Geometrik for a purchase price of $7.5 million, subject to customary post-closing adjustments for working capital and future earn-out potential. Lastly, our third priority is to provide direct returns to shareholders through dividends and share repurchases. On this front, then as Vic mentioned last week, we announced a 10% increase to our quarterly dividend, marking the seventh consecutive annual increase since the inception of our dividend program in 2018. This increase reflects our Board of Directors' continued confidence in our growth strategy and ability to consistently generate strong adjusted free cash flow. Additionally, in the third quarter, we provided a direct return of $40 million, comprised of $13 million in dividends and $27 million of repurchased shares. As of September 30, 2025, we have $583 million remaining under the existing share repurchase authorization. With a healthy balance sheet and ample available liquidity, we remain well positioned to execute our strategy. Slide 11 shows our updated full year 2025 guidance. With strong year-to-date net sales and adjusted EBITDA growth and stabilizing market conditions, we are raising our full year guidance across all key metrics. We are pleased with the full year double-digit growth outlook for net sales, adjusted EBITDA, adjusted diluted net earnings per share and adjusted free cash flow. We now expect full year Mineral Fiber volume to be flat to down 1%, an improvement from our prior expectation of flat to down low single digits due to stabilizing market conditions. We expect AUV growth of approximately 6%, modestly lower than prior expectations on slightly stronger Big Box volume than expected in the third quarter. Additionally, we expect full year AS sales growth to be approximately 29%, driven by robust contributions from our 2024 acquisitions, coupled with high single-digit AS organic growth. We continue to expect full year margin expansion in both segments with a Mineral Fiber adjusted EBITDA margin of approximately 43% and an AS adjusted EBITDA margin of approximately 19%, with an organic adjusted EBITDA margin of approximately 20%. Additionally, we now expect full year adjusted free cash flow growth of $342 million to $352 million or 15% to 18% over the prior year. Our improved outlook for adjusted free cash flow growth is primarily driven by higher expected net cash provided by operating activities, excluding an approximately $21 million full year cash tax benefit related to the tax reform bill that was passed in July. As a reminder, this onetime cash tax benefit relates to unamortized research and development tax credit fully recognizable under the Act in 2025 and is excluded from our full year adjusted free cash flow guidance reconciliation, which is a normalized metric. Note that sales, adjusted EBITDA and cash flow contributions from our recent acquisition of Geometrik are not expected to be material for the full year. With our strong year-to-date results and robust full year outlook, we are confident that we will finish 2025 strong and enter 2026 with momentum. And now I'll turn it back to Vic for further comments before we take your questions. Victor Grizzle: Thanks, Chris. 2025 is proving to be another strong performance year for Armstrong as we've successfully navigated uncertainty at the macroeconomic level and its ripple effect on our end markets. It's been a challenging year to call in terms of the level of market activity. As you all will recall, in February, we were expecting the market to be softer in the first half of the year, given the transition to the new administration and its potential new policies and then a modest pickup in the back half once there was more clarity around what these new policies would be. However, beginning in April and through the second quarter, the macroeconomic outlook became cloudier as the impact of more significant tariffs increased the level of uncertainty, which led us to modestly adjust our volume outlook for the back half of the year. Now sitting here today, we have not seen the anticipated modestly softer market conditions, but rather more of the same of flattish kind of stabilizing market conditions. And we expect these market conditions to continue for the remainder of the year. The Dodge first-time bidding activity data in terms of the number of projects continues to be at lower levels. However, the value of projects being bid overall has increased ahead of inflation and was up nicely in the quarter. A look at actual starts, which reflects how much of this bidding activity turns into actual projects was mostly flat and coincides with the overall market conditions that we're currently experiencing. Looking at specific verticals, a recent research from JLL provides some positive signs for the office market. After 2 years of stabilization and signs of leasing footprints beginning to expand, U.S. office vacancy rates declined in the third quarter for the first time in 7 years. Their research notes that as occupancy of Class A offices increases, the need for renovating Class B office space is expected to accelerate. Factors influencing these trends include a continuation of return to office mandates and the potential for lower interest rate environment. While we've discussed that New York and cities across the Sunbelt have been quicker to recover, their research now shows strengthening across more regions in the U.S. And this is encouraging data for the office vertical that represents about 30% of our demand profile. The transportation vertical remains strong from a bidding and start perspective. An additional tranche of funds was recently released by the federal government, specifically for airport projects, and we continue to expect airports and other transportation hubs to be a multiyear opportunity for Armstrong. Within these stabilizing market conditions, our Architectural Specialties segment is experiencing broad-based strength in quoting and ordering, which in part is driven by Armstrong's ability to provide the broadest portfolio of specialty products with our industry-recognized commitment to service and quality. In addition, we're continuing to see benefits from the sales and marketing optimization program that I mentioned last quarter. We've strategically realigned the commercial team to drive greater efficiency and unlock selling capacity to better serve both our A&D customers and our distribution partners and more effectively sell our industry-leading product portfolio. These changes alongside our ongoing innovation and growth initiatives are contributing to strong performance, delivering above-market performance. In terms of recent product innovation, we continue to be excited by the opportunity for our Templok Energy Saving Ceiling products to drive future growth. With Templok's innovative use of phase change materials, these ceiling products help regulate temperature in buildings and can meaningfully reduce the energy used for cooling and heating. We've also completed some successful validation projects, including a pilot project with the Palm Springs Unified School District in California using Templok. The results were compelling. Classrooms equipped with Templok experienced a measurable reduction in cooling energy demand and a nearly 2-hour delay before air conditioning was needed. Findings like these across the country and in various verticals, including education, health care and offices are validating the energy saving potential of our technology and reinforce our belief that Templok could ultimately become the standard across the ceiling category. As the innovation leader, we are committed to continue to innovate to make these energy-saving products even better and more cost effective. This month, we launched an upgraded Templok product line that is now part of our sustained portfolio of products that meets the industry's most stringent sustainability requirements. In addition, the latest version of Templok has improved passive heating and cooling capacity at a higher fire rating and increased thermal comfort attributes. This makes it even more attractive and specifiable by architects and designers and more compelling for building owners and operators. In the quarter, as Chris mentioned, we also completed a capital project at our Macon, Georgia plant to expand production capacity for this new upgraded version of the product. In closing, with the strong results achieved thus far in 2025, we are expecting continued momentum and a strong close to the year. As our financial guidance indicates, we expect 2025 to be another record year with double-digit top and bottom line growth as we once again outperformed the market. Our consistent AUV growth, Architectural Specialties penetration, innovation leadership and productivity gains remain our building blocks for profitable growth. And these building blocks, coupled with a healing office vertical and ongoing contributions from our growth initiatives positions us well for another year of profitable growth in 2026. And with that, now we'll be happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Susan Maklari with Goldman Sachs. Susan Maklari: Nice job on the quarter, Vic. My first question is, can you talk a bit about the benefit that you're seeing from the new products, how that's helping the mix component of that AUV in there? And also how that's coming through in terms of the strength of quoting and bidding activity that you talked to in your comments? Victor Grizzle: Yes. Susan, on our mix, we continue to do very well at the high end of our portfolio. The -- even recent years, our innovation around the smoother, wider look, our higher acoustical performance and the combination of the look and the higher acoustical performance is really coming through in 2025 again. We're growing at near double digits at the high end of our portfolio. And again, just really confirms that the technology that we're bringing to the marketplace at the high end and where the products are most specified, which is at the high end is where Armstrong continues to do very, very well with our innovation. That's really on the Mineral Fiber side because that's how we measure mix is at the Mineral Fiber business. In the Architectural Specialty business, although we don't measure mix the same way there because of the custom nature of that business, the innovation that we're bringing to the marketplace in both metal and wood, our turf, our felt products, they're all making an impact driving what as I reported, double-digit orders and backlog growth in Architectural Specialties. And that's really important. The new products are really important there to make sure that we're winning the large renovations and the new construction projects. So really pleased with how our innovation is driving mix in both the Mineral Fiber and the Architectural Specialty business. And again, double-digit growth in our Architectural Specialty business like that, both in orders and backlog is really encouraging because we all know the market is not growing double digits. And so this is a good measure of how well we're penetrating and participating in that market. Susan Maklari: Yes. No, absolutely. That's great -- are you there? Victor Grizzle: Yes, Susan, we can hear you. Susan Maklari: Okay. Sorry, I thought I lost you for a second. No, that all sounds really good. And I guess building on that, right, Architectural Specialties is getting close to that 20% margin target that you've had out there. Can you talk about the forward trajectory of that as we continue to see these acquisitions coming through? And how we should think about where that can go over the course of the next year if the environment does stay more challenging like it is today? Victor Grizzle: Yes. Susan, the -- I'm really proud of how our teams have driven the improvements over the last 4 years really in Architectural Specialties, every year making an impact on operating leverage and doing a great job in the marketplace and pricing our products. And organically, even with some of the timing-related headwinds that Chris mentioned, organically, we're at the 20% level. And we expect for this year for the first time on this side of the pandemic is to get back to that 20% level organically. And of course, so as the base gets bigger in our Architectural Specialty business, organically, we can offset more and more acquisitions as we add them on. As you know, most of the acquisitions we're buying are dilutive until they get scaled up on our platform and then we're able to drive the operating leverage to the 20% or greater. The forward look on this, as we've said very publicly, we think this is a really good spot for us to be as long as we have double-digit growth opportunities in the marketplace as long as we're continuing to penetrate the market and take share, we don't want to optimize on margins at the expense of growth. And so as long as we have that growth curve in front of us, and we do see that ahead of us still for several years, we like greater than 20%, but we don't need to optimize much greater than that at the expense of growth. That's kind of how we're going to run the business. Operator: Your next question comes from the line of Tomohiko Sano with JPMorgan. Tomohiko Sano: My first question is EBITDA margin pressure. So while sales and EPS was strong, both consolidated and segment EBITDA margins declined year-over-year in 3Q. Could you elaborate on the timing-related cost headwinds such as higher incentive compensation and medical costs and how you expect these to trend in 4Q and into 2026, please? Victor Grizzle: Yes. Chris, do you want to take that? Christopher Calzaretta: Sure. Yes. So on the SG&A side, let me just start with just an overarching comment around our mindset around cost control and the continued thinking around employing a cost control mindset even in more stabilizing market conditions that we mentioned in our prepared remarks. So in the quarter, we had highlighted higher SG&A costs in the Mineral Fiber segment, and that was really driven by higher incentive compensation costs. These are related both to our annual incentive plan and our longer-term incentive plan. And the driver of these costs really relate to our year-to-date financial performance and our updated full year outlook that I commented on in my remarks. And I also said we don't expect this third quarter SG&A result in Mineral Fiber to be indicative of our quarterly run rate moving forward. Vic mentioned the thinking around continuing to get leverage on our investments, and that certainly is the case. We look to get operating leverage out of our SG&A investment base, and we'll continue to be mindful of the rate and pace of our spending. Again, the compensation -- the incentive compensation costs were really timing in nature and were an outsized cost in the third quarter. Let me take the second part of your question next around medical and just take a step back a bit and talk about the higher medical costs that we experienced in the third quarter. We're self-insured from a medical perspective. So when higher medical claims are incurred, they impact the P&L directly. And what we saw was an uptick in several high-cost claims in the third quarter, and these claims were above our normal run rate of medical experience. So while we do experience medical costs in the ordinary course, the number and the magnitude of what we saw in Q3 was atypical. It would be very unusual to see that level of medical claims in consecutive quarters as well. Tomohiko Sano: And my follow-up is, Vic, macro end market trends. You talked about office and also on transportation mainly. But could you talk about education, health care and data centers and those kind of vertical into Q4 and 2026 expectation, please? Victor Grizzle: Yes. The Education and Health care segments continue to be, I would say, stabilized as we've experienced throughout the year. So no real inflection in health care and education that we're seeing. In fact, health care remains slightly positive, both on the new construction and the renovation forecast that we're seeing. So I would say kind of stabilized activity levels in the health care and education. Of course, the data center is -- the opportunity continues to be very robust, and we're very active in participating in that with our new products. We have a new launch of tile products as well as some of the grid products that we've been talking to you about. We're also launching some additional structural grid products to go along to target that marketplace. So it's an exciting opportunity, and it continues to have a lot of growth behind it in addition to what we're seeing in transportation and the green shoots that I'm talking about in office. Operator: Your next question comes from the line of Keith Hughes with Truist Securities. Keith Hughes: Yes, I'm here. Okay. A question -- I'm sorry, so these SG&A expenses, it's health care related. Would those most likely come down over the next quarter or 2 to something more consistent with what we've seen in the past? Is that the message you're trying to send? Christopher Calzaretta: Yes. I think, Keith, it's fair to assume that both on the incentive comp and the medical side that they'd be kind of more at a normal run rate. Again, very atypical to see the outsized impact that we saw in medical this quarter. And again, that wasn't tied to a specific operation or event. But yes, to your point, not the expectation going forward. Keith Hughes: And what's the outlook for manufacturing costs in the next few periods? Or is inflation starting to creep in to the inputs? Christopher Calzaretta: Yes. I'd say on the manufacturing side, I mean, for sure, we have inflation, but our ability to continue to drive productivity in our plants remains one of the value creation drivers and building blocks of the business. So I'd expect more of a run rate that we saw through the first couple of quarters of this year. Again, continued strength in both a continued cost control mindset across the enterprise, coupled with our productivity programs and productivity gains. Keith Hughes: Okay. And final question for Vic. I hear you what you're saying on the office and the Class C moving to Class A. Has that started to occur yet in quantities that are moving the numbers? Or is office still a lagging category? Victor Grizzle: Yes, it seems to be a lot of ground level activity, which -- so it's moved from some of the bidding activity and some of the start activity that we've been tracking into what I'm hearing in the marketplace from our regional teams is that there is more tenant improvement type projects on the ground there. So I think we're just beginning to see some of that. So I wouldn't say they're needle movers. It's -- they're real -- it's a stabilized, I would say, vertical at this point and with some green shoots in terms of the improvement that could be out there going into 2026. Operator: Your next question comes from the line of Adam Baumgarten with Vertical Research Group. Adam Baumgarten: Question on the AUV, just on the home center mix. It sounds like that impacted year-over-year mix benefits in the quarter. I know you said it was positive but maybe less so than it's been in prior quarters. I guess do you expect that mix headwind to abate in the fourth quarter? And then if we think about the August price increase starting to flow through, should you see some level of year-over-year AUV improvement in the fourth quarter? Victor Grizzle: Yes, you're right, Adam. The -- as you know, the retail business is a limited set of products and lower AUV. So when we get some additional strength in one of those -- well, in that channel, you're right, it does drag down the overall mix. I will say we still -- these are profitable products, and they're profitable contributors to our bottom line. So we like that volume. But you're right, on the AUV line, it can be a drag a bit on our normal AUV run rates, and that's what we experienced in the third quarter. We don't expect that to continue into the fourth quarter. I just will caveat that sometimes this is not forecastable in terms of some of their inventory replenishment or even drawdowns as we've reported on in quarters past. But we're not expecting that to continue into the fourth quarter at this stage. Christopher Calzaretta: And I would just add on to that and say we still expect a strong AUV quarter in Q4. Again, that was the Big Box that we mentioned in the third quarter kind of pressured the full year outlook, if you will, but still expecting a strong Q4 and about 6% AUV for the full year. Adam Baumgarten: Okay. Got it. Great. And then just switching gears to AS. Just given kind of the strong backlog and order commentary that you made and some level of visibility, especially on larger projects, are you still -- or should we expect growth next year? And maybe any kind of additional color in terms of end markets and kind of what's getting you excited about 2026 at this point? Victor Grizzle: Yes. I mean what's encouraging, Adam, in our order rate and our backlog build is not just for the rest of the year, which it is contributing to the rest of the year and our confidence for the rest of the year, but how it's building for '26. So yes, we would expect to continue to grow in 2026. Again, almost irrespective of what the market is doing because, as you know, most of our growth there is really through penetration, really taking share. So our expectations and the way it's building in our backlog, we would expect growth in '26. Operator: Your next question comes from the line of Rafe Jadrosich with Bank of America. Rafe Jadrosich: I wanted to just follow up on some of the comments on office, which has obviously been sort of a headwind for, I think you guys said 7 years. Can you talk about -- if that comes back or we start to see an improvement, is there any either ASP or margin tailwinds, like particularly either on the Class A side or anything from a regional perspective? And are you seeing like specific green shoots on any like San Francisco or New York? Is that meaningful in any way? Victor Grizzle: Well, I think what the data is showing now, and I mentioned this in my prepared remarks is how it's broadening out beyond some of the major cities and the Sunbelt, as we've talked about, how the South has been actually an early recovery zone for the office segment. So in addition to that, what the research says it's actually much broader now. In fact, into 18 regions across the country, we're starting to see some positive activity there, both on the leasing front. And of course, that drives the renovation activity in the market. So that's encouraging, I think. As I mentioned earlier, we're still very early into seeing some of this work actually land into the marketplace. But the -- certainly, the signs are encouraging and supported by some of the forecasts that we're looking at as well. Rafe Jadrosich: Got it. Okay. And then I understand that like sort of it's tough to give a volume outlook into '26. But wondering if you have any at least directional visibility on cost inflation, AUV, SG&A, any of those points as we think about trends into next year? A just like specific puts and takes? Christopher Calzaretta: Yes. Rafe, it's Chris. I'd say at this point, we're still preparing our modeling and going through assessing the market, et cetera, for 2026. But if I could take a step back and just talk a little bit about the building blocks of the business and what we've talked about in terms of AUV growth, our ability to continue to drive productivity and really how we're thinking about SG&A investments and margins next year. I'd say our thinking and the mindset really hasn't changed. I think those value creation drivers are in place. We'll continue to invest and invest back into the business where there are the highest returns. And I think we'll absolutely be thinking about EBITDA growth and margin expansion heading into next year. But absent that, too soon to formulate any more details around the specific inputs of those. But I'd be thinking about the value creation drivers of this business on a relatively consistent basis going forward. Vic, I don't know if you want to add anything more. Victor Grizzle: I think that's well said. Operator: Your next question comes from the line of Brian Biros with Thompson Research Group. Brian Biros: Last quarter, your outlook was for a slightly softer second half kind of driven by that uncertainty with discretionary commercial work expected to slow. A lot of commentary today around market stabilizing here. Can you just help compare the current outlook to your expectations from 3 months ago, kind of what stabilizing really means in this scenario? And I guess really just what is driving that kind of positive change from uncertain to stable? Victor Grizzle: Yes, Brian, thank you for the question. It's a good question because if you remember, the way we talked about some of the smaller, more discretionary type renovation activity is where we have the least amount of visibility in the marketplace, right? It doesn't involve an architect and they tend to be, again, smaller in nature. So it kind of shows up through distribution. So -- and really full disclosure of that, we don't have great visibility. And we've been using prior models to kind of predict what happens there because we know because it's highly discretionary, it can move to the sidelines very quickly in higher degrees of uncertainty in the marketplace. We saw that. We experienced that in prior years, namely in 2022. And so with the forecast for the back half of lower economic activity, lower GDP and expecting some of that activity overall in the economy to slow down. We expected that to create some uncertainty -- additional uncertainty that would affect this discretionary renovation activity. As we all know, some of the economic activity has actually been revised upward. And we've not seen the slowdown in that discretionary work as we were expecting. And remember, it was a slightly modest, so it wasn't a significant downturn, but just some softening there. We did not see that. But I'll say, Brian, most encouragingly in the quarter was on the volume side was the contribution from our initiatives and our growth initiatives. Given a little flatter plane here, we can really start to see the impact of our growth initiatives above and beyond what is still relatively flattish to softer market conditions. So really pleased by that. And sitting here today, where we are into the fourth quarter, we continue to not see a softening in that discretionary renovation activity pipeline. And so we're basically calling the rest of the year as we've been experiencing all year and this kind of more stabilized flattish market conditions and then executing very well there to expand margins, grow our earnings and our top line double digits. Brian Biros: Good to hear. And then second question, I guess, on the Mineral Fiber margins, stronger this quarter, even with the discrete expenses, even excluding discrete expenses. Can you just help unpack that number a little bit more here? I think you provided some drivers. But maybe just putting it really in the context around this level of margin you have with this level of volume and kind of just how it compares historically because it's -- I believe it's a good number on a lower volume base. So just any more context around how you guys are thinking about that? Victor Grizzle: Yes. That's again, another good question. Let me take that, and Chris, I'll let you add some color to this. But I mean, really, when you look at -- in spite of some of those unusual and atypical expenses that Chris talked about, we delivered a 44% EBITDA margin in the Mineral Fiber segment. That's really strong. And so when you think about for the rest of the year, we're going to finish at 43%, as I was saying in my prepared remarks. And that's back to the highest watermark that we experienced before the pandemic in 2019. So we're really encouraged by the way the business underlying is performing. And the building blocks of that, again, is really making sure we're getting good price realization to more than offset inflation in the marketplace, which we're continuing to do very well. selling a richer mix into the marketplace, which we're doing very well, slightly offset a little bit as we talked about earlier on the retail channel. And then productivity, continuing to drive meaningful productivity in our plants to help us offset inflationary costs. So that's what leads to really good margin performance in the business, and we expect that to continue. And Chris, I'll let you add any additional color there. Christopher Calzaretta: Yes, absolutely. You hit on all the key building blocks. The only additional item to mention there in terms of Mineral Fiber EBITDA margins is the contribution from WAVE equity earnings expected to grow about 6% this year. So again, with that contribution, really pleased with the overall EBITDA margin for the Mineral Fiber segment. Operator: Your next question comes from the line of Garik Shmois with Loop Capital. Zack Pacheco: This is Zack Pacheco on for Garik. Maybe just one more on the Mineral Fiber margin over 43%, that pre-pandemic level. Do you guys kind of see a natural cap getting over that through maybe just the industry dynamics or your level of investment? Or how do you kind of view taking that next step above that pre-pandemic level? Victor Grizzle: Yes, it's a common question we get. And honestly, we just keep pointing back to the building blocks, what the drivers of margin. And really -- and that's a good measure of the efficiency in how we run the business, right, in terms of making sure we're pricing and getting enough price to cover inflationary dynamics and driving productivity in the plants, innovating to make sure that we're bringing higher-margin products, higher AUV and value products to the marketplace. Those same building blocks we were just talking about, I think as long as those are present and we continue to invest behind those, which we're committed to do, we continue to look for greater efficiency and greater margins from here. Zack Pacheco: Understood. And then just quickly an update on the Geometrik acquisition from earlier in the quarter and kind of just the M&A environment in general as you guys see it. Victor Grizzle: You bet. Yes, the Geometrik is a great add for our business, our Architectural Specialty business and in particular, for the Wood platform, which is one of the fastest-growing platforms in the Architectural Specialty business. It's an exciting on-trend look and feel that architects and owners are looking for. And this really adds two real dimensions of competitive advantage. Number one, the extension of the product portfolio to include a greater number of species, really on-trend type species in our wood portfolio. And it gives us a geographic advantage also by being out West. So it's a really great add to the portfolio. And we like these kinds of acquisitions that bring competitive advantage, additional capabilities for us to bring into the architects' offices with the rest of our portfolio. So it's a good example. It's on the smaller side, but we're open for business in terms of our acquisitions. We have a dedicated team that's getting up every day and it's working our pipeline. And we believe there's more of these bolt-on type acquisitions out there for our Architectural Specialty business. So more to come on that front as well. Operator: Your next question comes from the line of John Lovallo with UBS. John Lovallo: I guess the first question is just on the Mineral Fiber volumes up slightly in the quarter. How do you think the performance there compared to the underlying market? Victor Grizzle: Yes, it's really hard to put a very precise number on that. But when the markets are flat, they're anywhere from plus or minus 1, maybe 0.5 point either way. So -- but what we do know is that the growth initiatives and the volume contribution from our growth initiatives really was a nice contributor to the overall upside that you saw that we experienced in the quarter. Markets are still relatively soft. So these flattish conditions can actually be reflective of these -- of the market activity at a lower level that we've been experiencing all year. So I think that's the best way I can describe it, John, in terms of how the overall market is performing. John Lovallo: Okay. Got it. And then sticking on Mineral Fiber, it looks like sales to the distribution channel were actually very strong, up 9% year-over-year. What drove this kind of relative strength compared to the other channels? Christopher Calzaretta: Yes. I'd say, John, just to continue to point to our strong commercial execution, really, again, coupled with the initiatives that Vic mentioned, we continue to be pleased with the level of performance there in the quarter and are excited about just the way that we've executed in that particular part of the market. Operator: Your next question comes from the line of Philip Ng with Jefferies. Philip Ng: A question for Chris. Can you give us an update how you're thinking about inflation broadly for the full year, some of the major inputs and whatnot and the pace in the back half? And then in terms of productivity, you sounded pretty upbeat about what's still in front of you. Should we expect a pretty consistent steady dose of productivity that you still have available for 2026 to kind of tap into? Christopher Calzaretta: Sure. Yes. Thanks for the question, Phil. Yes, I'll take the second part of that first. In terms of productivity, yes, pleased with our level of productivity in our plants, certainly year-to-date in the quarter and what we're expecting for the full year. And going back to our comments around the value creation drivers and the building blocks of the business, I feel very confident about our ability to continue to get those productivity gains on a go-forward basis. From an inflation perspective, just a reminder in terms of call it, the categories of inflation. In Mineral Fiber, about 35% of our inflation of COGS is raw materials and then energy is about 10% freight is about 10%. So from a total input cost perspective for the full year, we're outlooking low single-digit inflation with freight about flat compared to prior year, raws in that low single-digit inflation range and then energy in that low double-digit inflation range. So hopefully, that gives you a little bit more color around the bits and pieces of how we're thinking about inflation on a percentage basis versus prior year for '25. Philip Ng: And Chris, any big nuances in front half versus back half in terms of some of those inflation components, if it's moderating or it's been pretty steady all year? Christopher Calzaretta: Yes, I'd say slightly moderating a bit in the back half but not significantly. Philip Ng: Okay. That's helpful. And then Vic, AS has been a home run for you guys, really strong growth, strong organic growth. And I think you pointed out in your prepared remarks, orders and backlogs are still growing at double-digit clip. And I think you mentioned if you could grow at double-digit clip, I mean, 20% EBITDA margin is a good way to think about the business in the medium, longer term. So my question really comes down to, obviously, you have some really tough comps in the first half of '25. What's a good way to think about organic growth in that business when we look out to 2026? Is it double digits the right way to think about? Or that's the number that includes M&A? I just want to be mindful of the tougher comps next year. Victor Grizzle: Yes. On the organic side, we've been running in the high single digits this year. And we'll stop short to forecast what that looks like for next year. But again, with the double-digit growth in our order intake, a lot of that's organic. So I would expect the growth for next year organically to continue to be at a really good clip. What exactly that is relative to this year yet, I think we still have to do our work and our modeling on that to accurately answer that. But I still expect good solid organic growth in that business in addition to the inorganic bolt-on acquisitions that we expect to continue. Christopher Calzaretta: Phil, if I could come back. Yes, my comment on the moderating versus back half was really around what we expected back in July. So if I were to take a look at the fourth quarter relative to our actual run rate for the first 9 months of the first 3 quarters, a little bit of an uptick in energy and a little bit of an uptick in raws, but it's really not that big. But relative to July, a moderating expectation versus where we were last quarter for the full year. Operator: Your final question comes from the line of Stephen Kim with Evercore ISI. Aatish Shah: This is Aatish on for Steve. Just one quick one for me. You touched on it a little bit in the prepared remarks, but could you talk a little bit more about the digital initiatives and kind of how you've seen that -- the impact of that grow over time and evolve over time, maybe some lessons learned? Victor Grizzle: Yes. The ones that I called out in our -- my prepared remarks around Project Works, let me just start there for a second because I think this is an automated software platform that takes the intelligence of a long time of designing ceilings and automates those design rules and a platform that can help architects really expedite the iterations on different types of designs or iterations of designs. And that's a huge productivity tool that the architects are learning about as we get more and more products onto the platform to meet their needs. In addition to that, because of this automated platform is based on historical data, we can pump out very accurate bill of materials that allows them to really predict the project costing and also the ordering for the contractor. If you think about these really complex projects, there's a lot of parts and pieces that go into the installation of these on the job site, and we can get really precise with exactly the number of pieces and components that have to go. And that's really attractive for the contractor community to not have to guess about how much they need of something. So for both of those customer bases, this Project Works platform continues to grow every quarter, more and more users and more and more activity. And we're really pleased with -- we think when we look at the data, the win rate of projects that go through Project Works is higher than when they don't because of the value that we're creating with architects and the contractors. So we continue to be very encouraged by the traction it's getting in the communities that we're operating in. Canopy was the other one that continues to adjust itself and serve the smaller customer that we feel like kind of falls through the cracks that doesn't really know where to go or how to get their ceiling repaired or replaced. And it leads them through an educational process that gets them to placing an order. It's turning out to be a very effective platform, and we continue to improve it every quarter on making it even better and better of a customer experience. And so I was really pleased with the traction that it's getting, not only at the top line, setting a record top line, but really the profitability of that platform, delivering a record EBITDA level of performance and contributing now to the overall business. So those two digital initiatives I was talking about, I think that's a little bit more color behind them, but we continue to get really good operating leverage on both of those investments. Operator: With no further questions in the queue, I will turn the call back over to Vic Grizzle for closing remarks. Victor Grizzle: Great. Thank you, and thank you all for joining our call today. Again, we're on track to have another record year in 2025. Really pleased with both double-digit top and double-digit bottom and maybe mostly the traction that we're getting with our investments and the way that we're expanding margins in the business. So we're excited for finishing the year strong and setting up what is going to be another exciting year in '26. Thank you again for joining our call. Operator: Thank you again for joining us today. This concludes today's conference call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the BrightSpring Health Services Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler, Investor Relations. Please go ahead. David Deuchler: Good afternoon. Thank you for participating in today's conference call. My name is David Deuchler with Investor Relations for BrightSpring. I'm joined on today's call by Jon Rousseau, Chief Executive Officer; and Jen Phipps, Chief Financial Officer. Earlier today, BrightSpring released financial results for the quarter ended September 30, 2025. A copy of the press release and presentation is available on the company's Investor Relations website. Please note that today's discussion will include certain forward-looking statements that reflect our current assumptions and expectations, including those related to our future financial performance and industry and market conditions. Such forward-looking statements are not guarantees of future performance. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We encourage you to review the information in today's press release and presentation as well as our quarterly report on Form 10-Q that will be filed with the SEC, including the specific risk factors and uncertainties discussed in our Form 10-K and Form 10-Q. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any duty to update any forward-looking statements, except as required by law. During the call, we will use non-GAAP financial measures when talking about the company's financial performance and financial condition. You can find additional information on these non-GAAP measures and reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort in today's earnings press release and presentation, which again are available on our Investor Relations website. This webcast is being recorded and will be available for replay on our Investor Relations website. And with that, I will turn the call over to Jon Rousseau, Chief Executive Officer. Jon Rousseau: Good afternoon, everyone, and thank you for joining BrightSpring's Third Quarter 2025 Earnings Call. First off, I would like to thank all of our BrightSpring employees in the field and in administrative support roles who make a real impact for patients and people every day. I'm grateful for their continued dedication and commitment to providing the high-quality and compassionate care and services to the individuals we serve. BrightSpring is a leading health services provider in home and community settings in large and growing pharmacy and provider markets, and we believe a scaled platform in home and community health care differentiates and positions us well for the future. Today, we reported third quarter financial results that are in line with the preliminary financial results we announced on October 20. The third quarter exceeded our expectations and our ongoing commitment to high-value and high-quality services, operational execution and continuous improvement, all hallmarks of our company culture have driven the financial results so far this year. Before discussing BrightSpring's third quarter performance, I would like to remind you that the company's financial results and 2025 guidance pertain to the continuing operations and do not include results from the Community Living business. At this time, we now expect the Community Living divestiture transaction to close in the first quarter of 2026, which remains subject to final federal regulatory approvals and typical closing conditions. For the third quarter, BrightSpring revenue grew approximately 28% and adjusted EBITDA grew approximately 37% versus last year's comparable quarter. Total company revenue was $3.3 billion, with Pharmacy Solutions revenue of $3.0 billion, increasing 31% year-over-year and provider services revenue of $367 million, increasing 9% year-over-year. Total company adjusted EBITDA of $160 million in the quarter grew 37% compared to the same period last year, driven by strength across the businesses. EBITDA margin for the company was 4.8%, which grew approximately 30 basis points compared to the third quarter of last year and up 30 basis points versus second quarter. Margin expansion was primarily driven by disciplined operating expense management and modest revenue mix shift within pharmacy with greater contribution from generics. On cash flow, the company realized over $100 million of cash flow from operations in the third quarter and leverage declined to 3.3x at the end of the quarter sooner than previously communicated expectations with an updated goal of 3x by year-end as is and below 3x pro forma for both the Amedisys and LHC Home Health branch acquisitions and the Community Living sale. The company continues to deliver growth, reflective of each business line executing on our internal goals. Given the third quarter update today and current expectations for the fourth quarter of 2025, we are increasing total revenue and adjusted EBITDA guidance for 2025. A week ago, in the October 20 release, we increased our adjusted EBITDA guidance to a range of $605 million to $615 million, which compares to $590 million to $605 million communicated in August following our second quarter results. As a reminder, this 2025 guidance excludes Community Living and any M&A activity not yet closed. We continue to expect the Amedisys and LHC branches to close later this quarter and expect this to be immaterial to our 2025 results. We look forward to having the Amedisys and LHC colleagues join BrightSpring and Jen will discuss BrightSpring's third quarter financial results and 2025 outlook in more detail shortly. At BrightSpring, we're focused on quality and continuous improvement in our people and services to deliver comparatively low-cost, timely and attentive patient-centric care to complex populations. Quality and patient satisfaction scores across our service lines in the third quarter remained at very high levels. In home health, 94% of our branches are at four stars or greater with timely initiation of care at an industry-leading level of 99%. In hospice, we continue to be a top 5% ranked hospice program in the U.S. with a CAHPS overall hospice rating of 89%, up from 85% in the second quarter. Overall, hospice quality index scores and the number of visits we provide patients per month on average remain well above national average. In rehab, our patient satisfaction scores remain exceptionally high. And in personal care, we have strong internal client records and quality indicator audit scores, along with a satisfaction score of 4.54 out of 5. In infusion, our patient satisfaction score was approximately 95%, and our discharge rate due to completion of therapy was stable at 96%. Home & Community Pharmacy demonstrated 99.5% order completeness and on-time delivery of 97.2%. In Specialty Pharmacy, our medication possession ratio remains much higher than the national average at approximately 95%, and we have a time to first fill of 3.7 days. Our company continues to demonstrate high levels of execution and customer satisfaction across service lines. Turning to the company's financial results by segment. Total Pharmacy Solutions revenue grew 31% in the third quarter and adjusted EBITDA grew 42% versus the prior year, with total pharmacy census growth facilitating total pharmacy script volume of $10.8 million in the quarter. Though script volumes demonstrated strong growth in both specialty and infusion with over 30% script growth in the subsegment, total pharmacy volumes declined 1% versus the prior year due to the majority of scripts being in Home & Community Pharmacy and a decline in the Home & Community Pharmacy total scripts dispensed due to divestitures associated with the customer that previously declared bankruptcy as well as flu season beginning later in 2025 as compared to 2024, operational decisions made to exit specific uneconomic customers and a difficult comparison to last year when we added the same aforementioned customer in the third quarter. In the specialty and infusion business, revenue grew 42% year-over-year, which exceeded expectations. The performance in specialty and infusion was driven by limited distribution drug launches, generic drug utilization from conversions over the past year, strong commercial execution from the team and excellent patient service. Specialty scripts grew approximately 40% in the third quarter, driven by strength in both brand LDDs and generics. We ended Q3 with 144 LDDs, including five LDD launches in the quarter. Through the end of October, our LDD portfolio has now expanded to 145 therapies, and we continue to expect 16 to 18 additional LDD launches over the next 12 to 18 months. We are honored and proud to have been chosen as a preferred specialty pharmacy partner for these new therapies that are being utilized to treat a range of cancers and rare orphan diseases. We work diligently to deliver high-quality care to patients and gain the trust of manufacturers, prescribing physicians and patients to support long-term therapy innovation and growth. Within Infusion, performance in the quarter was in line with expectations, driven by solid double-digit volume growth and continued benefit from operational improvements and procurement initiatives to streamline the business and improve profitability with strong year-over-year EBITDA growth well into the double digits. Our strategy is a broad-based one in terms of both acute and chronic therapies. We remain excited about the acute market where we believe there exists a multibillion-dollar market where our leadership team can leverage best practices and scale the business in new geographic markets efficiently. We also remain constructive on our ability to expand chronic infused therapy offerings as we look to innovate delivery to patients living with chronic disease. In Home & Community Pharmacy, revenue performance in the quarter was in line with our expectations, and we continue to optimize the go-to-market strategy and customer mix to ensure profitable growth in attractive and targeted end markets. Under a new and expanded leadership team, we continue to implement operational initiatives to augment efficiency with year-over-year EBITDA up outside of several unusual items in the quarter. Over time, we expect to continue to expand our presence in target markets with industry-leading operational processes, quality and efficiency. Turning to the Provider segment. We are pleased by the performance across each of our service lines in the third quarter. Provider revenue grew 9% year-over-year and segment adjusted EBITDA grew 16% with a segment adjusted EBITDA margin in the quarter of 16.5%, up approximately 90 basis points year-over-year. Home health care, which represents about 50% of the revenue in provider segment and is comprised of home health, hospice and primary care grew 12% year-over-year. The home health care business continues to perform very well, driven by strong quality metrics and patient satisfaction scores, ongoing operational investments and advancements, de novo expansions and preferred provider Medicare Advantage contracts are continuing to advance. Average daily census in home health care was 29,592 in the third quarter, representing a 3% increase year-over-year with hospice increased approximately 15% year-over-year in the quarter. In the third quarter, home health settings in five states were awarded accreditation by the Accreditation Commission for Health Care, or ACHC, reflecting compliance with ACHC standards and CMS' conditions of participation, highlighting our commitment to providing safe and high-quality care to patients. Home-based primary care also delivered solid growth in the quarter. We believe primary care at home remains a large opportunity as we continue to build out the business, particularly as it relates to the benefits of our integrated services and ACO and SNP payment models, which we continue to make steady progress on. Moving to rehab care, which represented approximately 20% of provider revenue in the third quarter, growth was 9% year-over-year, underpinned by 11% growth in person served and approximately 17% growth in hours billed in the core neuro rehab services. We have continued to see a long history of performance and positive momentum in the rehab business and the expansion of our rehab into ALS and home settings with Part B rehab for seniors is now ongoing as we went live in the quarter with a key milestone and integrated home health and rehab offering in ALS. In personal care, which represented approximately 30% of provider revenue in the third quarter, revenue grew 6%. Personal care growth, operations and performance remained very steady, including solid growth in person served. Overall, we continue to realize and see many benefits from our high-value services in targeted markets with one integrated and coordinated enterprise. Finally, we are excited to announce that we will be hosting an Investor Day on March 17 in Louisville. We look forward to the opportunity to review our company strategy with the investment community, discuss each of our service lines and outline the prospects for each in the years to come. To close, we are pleased with BrightSpring's operating performance and financial results in the third quarter and the progress we have made so far in 2025, and we look forward to entering 2026 from a position of strength with continuing investments for long-term differentiation and sustainable growth across the organization. With that, I'll turn the call over to Jen. Jennifer Phipps: Thank you, Jon. Before I discuss our financial results for the third quarter of 2025, I'd like to remind you that in the first quarter of this year, we began to record the Community Living business in discontinued operations as indicated in the press release and 10-Q to adhere to accounting standards required on an interim basis. As such, all BrightSpring financial results and forecasts that I will discuss are related to continuing operations and exclude Community Living. Management believes the presentation of the non-GAAP financials from continuing operations is a useful reflection of our current business performance. In the third quarter of 2025, total company revenue was $3.3 billion, representing 28% growth from the prior year period. Pharmacy Solutions segment revenue in the quarter was $3.0 billion, achieving 31% year-over-year growth. Within the Pharmacy segment, Infusion and Specialty revenue was $2.4 billion, representing growth of 42% from prior year and Home & Community Pharmacy revenue was $590 million, which was approximately flat year-over-year. In the Provider Services segment, we reported revenue of $367 million in the third quarter, which represented 9% growth compared to the prior year. Within the Provider Services segment, Home Healthcare reported $188 million in revenue, growing 12% versus last year. Rehab revenue was $76 million, growing 9% versus last year, and Personal Care revenue was $102 million, representing growth of 6% year-over-year. Moving down the P&L. Third quarter company gross profit was $392 million, representing growth of 21% compared with the third quarter of last year. Adjusted EBITDA for the total company was $160 million in the third quarter, an increase of 37% compared to the third quarter of 2024. Adjusted EPS for the total company was $0.30 for the third quarter. In the third quarter, continuous lean automation and efficiency programs at the company contributed to growth and margin improvement, and we anticipate additional improvements in the fourth quarter from ongoing operational initiatives. Further, we have seen a positive impact in the third quarter and into Q4 from our targeted growth investments, including in recent home health volume, hospice volume, rehab volume and an accelerating infusion volume and growth in LDD and generics in the specialty oncology and rare and orphan therapy business. Turning back to segment performance in the third quarter. Pharmacy Solutions gross profit was $246 million, growing 30% compared with the third quarter of last year. Adjusted EBITDA for Pharmacy Solutions was $141 million for the third quarter, an increase of 42% compared to last year, representing an adjusted EBITDA margin of 4.8%, which was up approximately 40 basis points versus last year. Provider Services gross profit was $146 million, growing 9% versus the third quarter of last year. Adjusted EBITDA for Provider Services was $61 million for the third quarter, growing 16% versus last year, representing an adjusted EBITDA margin of 16.5%, up approximately 90 basis points versus last year. Not included in the company's reported adjusted EBITDA of $160 million, as previously stated. Community Living's adjusted EBITDA was an additional $40 million in the quarter, an increase of 18% from the prior year in this business. On a total company basis, cash flow from operations was $108 million in the third quarter, we continue to expect to deliver over $300 million of annual run rate operating cash flow in 2025, and we remain focused on improving our leverage ratio towards our year-end goal of below 3.0x pro forma for both the pending home health acquisition and the Community Living divestiture. Our adjusted EBITDA growth, combined with our cash flow generation during the quarter has led to a leverage ratio at September 30 of 3.3x. Longer term, with continued growth, execution and cash flow generation, we remain on track towards a leverage target of 2.5x, which at current trends could be realized by mid or later next year, excluding acquisitions or other uses of cash. As of September 30, net debt outstanding was approximately $2.5 billion. As mentioned previously, in January, we expect to receive approximately $715 million of net cash proceeds from the $835 million of gross cash consideration in the pending Community Living sale. As a reminder, net interest expense includes interest income related to cash flow hedges due to our three received variable pay fixed interest rate swap agreements that we have in place, which matured on September 30, 2025. As part of our process to monitor and address risks, during the quarter, we entered into two three-year interest rate hedges, which are additional to the one-year extension that was entered into during the first quarter, providing stability to our interest rate risk through September 2028. Prior to any proceeds from the pending Community Living divestiture, quarterly interest expense is still expected to be approximately $43 million, including approximately $1.2 million of interest expense related to the TEU instrument. Turning to guidance for 2025, which excludes the Community Living business as well as any acquisitions that have not yet closed. Total revenue is expected to be in the range of $12.5 billion to $12.8 billion, including Pharmacy Solutions revenue of $11.05 billion to $11.3 billion and provider services revenue of $1.45 billion to $1.5 billion. This revenue range reflects 24.1% to 27.1% growth over full year 2024, excluding Community Living in both years. Total adjusted EBITDA is expected to be in the range of $605 million to $615 million for full year 2025. This would reflect 31.5% to 33.7% growth over full year 2024, excluding Community Living in both years. I will now turn it back to Jon. Jon Rousseau: Thanks, Jen. Thank you for your time today to go through BrightSpring's Third quarter 2025 results. We will now open up the call for questions. Operator? Operator: [Operator Instructions] And our first question comes from A.J. Rice of UBS. Albert Rice: Just one question and a follow-up maybe. On the discussion about the pacing of new drug launches, I know for some time, you talked about 16 to 18 launches over an 18-month period. Earlier this year, you sort of said that, that pacing had -- you've seen that go in a year. I know today, you made the comment that looking ahead, you still see that 16 to 18 over the next 12 to 18 months. I guess I'm just trying to understand, is the pacing of new drug launches that are relevant to you accelerating? Is it about what it's always been? And is the -- if it's accelerated, is the pipeline still pretty robust? Jon Rousseau: A.J., how are you? Thanks for the question. I think the pipeline remains unchanged, just given the magnitude of it, both in the next year and over the next five to seven years on the brand side. We have had probably one of our strongest years in terms of brand wins going back several years, it's been robust, but this year has been a very good year. So we've seen some therapies come to market sooner, and we've been in a good position to be a partner on most all of those therapies. So it has been a good year, a little bit ahead of expectations, but we still expect a similar number of the 15 to 18 over the next year, 1.5 years. Nothing's really been pulled forward that would affect the future. Some things happen a little bit sooner, but the pipeline remains robust as we go bottoms up drug by drug, we still feel confident in that pace going forward. Albert Rice: Okay. And then the follow-up question I was going to ask is, in your prepared comments about the pending transaction, I know you mentioned Amedisys and LHC branch acquisitions. How -- it sounds like maybe what you're buying has changed a bit. Can you give us any specifics on is it significantly bigger than what you were originally looking at? Or any other ways in which you ultimately are ending up buying has changed? Jon Rousseau: Yes. There's always been some of the divested branches were LHC, but it's been the minority. So I think we've just more or less said Amedisys in the past. It is the significant majority of those branches as United was working through all of its final agreements with the FTC, the universe did increase a little bit, not dramatically at all, but a little bit. So there's been a handful more branches that have been included in the group in the past couple of months, and we do expect that transaction to close in the quarter. Albert Rice: Do you have any early read on whether it will be accretive to '26? I know you said it would be neutral this year. Is it meaning any significant accretion next year? Or is it neutral? Or how should we think about it? Jon Rousseau: I think accretion is a fair comment, yes. Operator: And our next question comes from David Larsen of BTIG. David Larsen: Congratulations on a great quarter. Can you talk about the sources of accretion for like the Amedisys transaction or quite frankly, any transaction, where do you drive the incremental margin and profit from, please? Jon Rousseau: We're limited -- I'm trying to make sure I understand the question. We're limited on what we're able to disclose about this transaction still due to some of our agreements with the other party. I think it's fair to say that we would look to integrate the operations as seamlessly as we can. We've had a really good partner, which has enabled us to dialogue with the other side to make sure we do this as well as we possibly can. We're very excited about it, and we're optimistic about applying some of our practices, some of our payer contracts, some of our IT and technology and people practices to the organization. But look, it's well run, always has been well run. That's one of the things that we were very enthused about, and we look forward to keeping up that consistency. And if there's any synergies that are really beneficial, really more from a growth and efficiency perspective because we'll retain all the employees for sure. But if there's any other synergies in the technology area or other areas similar to those that we're able to drive on other acquisitions, we're certainly going to be planning and looking to do those. David Larsen: Okay. That's very helpful. And then I think I'm calculating an EBITDA per script increase of 32% year-over-year. Is that correct? That sounds high, which is good, obviously. Just any color around sort of the sustainability of that growth rate and what some of the key drivers there would be? Jennifer Phipps: Yes. So, I think directionally, that is accurate. It's really probably just a little bit higher on a per script adjusted EBITDA basis from a pharmacy perspective. The sources of those changes are really mix. We've had higher growth in specialty and specialty scripts, which those are our highest gross profit and adjusted EBITDA scripts that we have. And so we -- as Jon mentioned in his prepared remarks, we had over 40% growth in specialty scripts during the quarter. And so you see a mix impact associated with that. David Larsen: Great. And one more quick one. Can you just remind me, as a drug launches biosimilar or goes generic, how much of an earnings lift is there typically in terms of margin per drug? Jon Rousseau: David, that's not really information that we really reference. But when a drug goes generic, I think it's common knowledge that there are more manufacturers and that reduces the procurement cost. And overall, the price of the drug comes down pretty dramatically. But net-net, that's a very positive thing for all stakeholders and everybody in the industry. But really as a function of a lot more manufacturers typically able to provide the drug, you see a dynamic there, which is favorable to all stakeholders. Operator: And our next question comes from Charles Rhyee of TD Cowen. Charles Rhyee: Jon and Jen, just wanted to ask, obviously, in one of the big competitors in community and pharmacy would be Omnicare and they declared bankruptcy. Just curious to what do you think of that as an opportunity to pick up incremental share? What kind of overlap in the markets are you there? And is that an opportunity to enter into new markets? Or is skilled nursing really maybe not that attractive to keep expanding into first? Jon Rousseau: Charles, I don't know that we have any view that, that's going to be material. As we understand it, it was really related to some litigation going a ways back, less to do with operational performance. But we're just very focused on our customers and our end markets. including some that we think are really interesting, like assisted living, behavioral, hospice, et cetera. And that is where the majority -- the vast majority of our Home & Community Pharmacy EBITDA comes from. I will take a second to talk a little bit further about the script growth in the quarter on the hospice, on the infusion, on the specialty pharmacy side, all really, really strong growth, well, well, well into the double digits. On the SNF side, just a few dynamics that will probably be dynamics for the next couple of quarters, but doesn't impact anything from an EBITDA standpoint. We signed a large customer last Q3, which at the time was a really great event. That's the customer that has subsequently declared bankruptcy. And we've been unwinding some of those buildings. We've also taken the opportunity with the new leadership team to heavily scrutinize the customer base and make some decisions proactively about what we want to do there to make sure we don't ever encounter sort of any payment issues or unprofitable customers. And so we've been very proactive about that. It's been very constructive. The flu season also started later this year. And so you have basically a huge customer that was coming online last Q3 that is going offline. And from an EBITDA perspective, the business is doing extremely well, just given growth in the other markets and our focus on a lot of operational efficiencies. And so -- but that's a dynamic that you'll see for the next quarter or two as we work through just the timing element around that, really that one customer. I think importantly, we are growing and doing extremely well in the areas that matter that drive EBITDA. And we're extremely excited about Home Community Pharmacy's prospects over the long term. Their EBITDA was up this quarter. I couldn't be more enthusiastic about a lot of the operational automation, AI efficiency projects in there with the new team and super excited about the business, but that is the dynamic when you look at last Q3 versus this Q3. And since Home & Community scripts are 77% of the pharmacy scripts, that's the net number for the year-over-year. But in some of our key service lines, exceptional performance and again, where we're looking to drive the most growth with Home & Community being a play around targeted end markets and continued operational and automation improvement there. Charles Rhyee: That's helpful. Just one follow-up on LDDs. Obviously, the FDA, I think there's been some concerns about the pace of drug approvals. I know that there were relatively fewer drug approvals in the first half of this year. Just curious what you're seeing, if you're starting to see that pick up, if that causes any concerns for you in terms of sort of the LDDs you have on deck in terms of timing? Jon Rousseau: We haven't seen any impact. Our performance on the LDD side has really kind of been a record year and the pipeline is as big as ever. Operator: And our next question comes from Pito Chickering of Deutsche Bank. Kieran Ryan: This is Kieran Ryan on for Pito. Apologies if I missed something on this, but I was wondering if you could kind of provide a little more color on the breakout of the pharmacy guidance between SEC and infusion and Home & Community, but with a focus on kind of what it implies for SEC and infusion. I just wanted to see if maybe a little bit of the potential slowdown there in 4Q, if that was kind of related to your comments on how it's been kind of a record year on the branded side and maybe that's normalizing a little bit. Jennifer Phipps: So what we would say is that we don't really see a slowdown. We did update our revenue guidance. And when you look at that, I think you'll still see strong growth year-over-year, and we do expect that in Q4. From a pharmacy perspective, from a revenue standpoint, we did have obviously increased revenue guidance. That largely relates to the specialty and infusion business as it relates to the continued strong growth from a scripts perspective that we continue to see in that business. I would also add, though, that from a margin perspective or an EBITDA perspective, we do have -- we have increased our guidance to include additional efficiencies in the projects that we had talked about earlier and throughout our script, the operational projects that are going on, both infusion and home and community pharmacy, and we do expect those to accelerate in Q4 as well. Kieran Ryan: Got it. That's helpful. And then if you could just provide maybe a quick update on what you're seeing within M&A pipeline and kind of your priorities there. I know it's mostly focused on the tuck-in style deals, but just a quick refresher there would be helpful. Jon Rousseau: Yes, that's right. Nothing imminent outside of that other than obviously the Amedisys, LHC transaction. So as we've been working through the Community Living divestiture and then the Amedisys, LHC branch acquisition, we have just been focused on really small deals and target attractive geographies that are highly accretive. And that will probably continue at least for another quarter or so. There's nothing imminent in terms of anything sizable, but our M&A strategy will remain primarily focused on accretive tuck-ins in target geographies and probably a little bit more activity in deals of a little bit higher size, call it, in the $3 million to $10 million of EBITDA range. Those might start to get more focus again as we get past these two transactions into next year. We remain open and flexible to something interesting, a little bit larger, but certainly nothing transformational that's on our radar screen whatsoever right now. We really like our current strategy and where our organic growth is and where the balance sheet is. Operator: And our next question comes from Brian Tanquilut of Jefferies. Brian Tanquilut: Congrats on the quarter. Jon, maybe as I think about generics really quickly since you touched on that in your prepared remarks, anything you can share with us in terms of the cadence of upcoming patent expirations in your portfolio and also the dynamics in terms of the margin ramp? Like what is the runway for margin ramping on a per script basis for a new generic launch? Jon Rousseau: Yes. I think some of the information, Brian, we've laid out publicly remains the same. We expect numerous more brand to generic conversions over the next couple of years, including a more significant one probably at the end of Q1 next year. And we expect similar overall dynamics in these conversions that we've seen and experienced in the past and over the past 10 years. So our ability to partner with manufacturers and win innovative new brand therapies, the very strong growth in our fee-for-service business in that business and then the steady stream of these brand to generics really all underpinned by our service levels and commercial team and efforts. I think really remains very consistent as we look out still over the next five years. So, I think the information that we've put out there publicly and in our slide deck remains our current view. Brian Tanquilut: Got it. And then, Jon, just on the delay on the Community Living divestiture, anything you can share in terms of what that is or what caused that? And just anything we should be on the lookout for to get that closed? Jon Rousseau: Yes. No, nothing unusual. Unfortunately, these processes can just take time these days. The recent government shutdown wasn't overly helpful. But we remain very optimistic that this will close in Q1. There were a handful of markets that the buyer needed to work through with the FTC, which is ongoing and seems very straightforward and is well down the path. So we expect that to occur in Q1. Operator: And our next question comes from Ann Hynes of Mizuho. Ann Hynes: Great. Just anything on the Washington front that we should be on the lookout in the next coming months, especially with a potential health care bill going through Congress at the end of December? Jon Rousseau: Yes. Ann, there's nothing too noteworthy from our perspective on that front. It's been pretty consistent over the last few months. On the home health rule, that's supposed to come out any day. It could be delayed a little bit due to the government shutdown. While any potential -- if you look at what's historically happened and some strong industry advocacy, we expect to see some mitigation of the proposed cut in the final rule. While any cut is not a meaningful impact on us today, just given the percent of revenue and EBITDA that, that business is, we'll navigate any rate changes pretty readily. And ultimately, these critical services need to be appropriately funded going forward. So we'll continue to be very vocal about that, try to educate where we can, and we look forward to partnering with CMS as best possible on some aligned solutions there. On the IRA front, we're very pleased that CMS sent a letter to the payers in the quarter directing them to account for the IRA and their 2026 pricing. And we're also pleased to our advocacy on the hill and with the administration that we have a lot of champions who understand the unique impacts on LTC pharmacies from IRA. There's a bill in the House. There's one hitting the Senate soon. But that said, there's a lot going on in D.C. up until the end of the year. And regardless of what happens, we feel like our internal mitigation plans along with the strength of the breadth of the enterprise put us in a really good situation. And so really no material update since how we framed that before. Operator: And our next question comes from Matthew Gillmor of KeyBanc. Matthew Gillmor: I wanted to drill down on the EBITDA guidance raise. You raised the outlook a bit more than the beat on the quarter. From Jennifer's comments, it sounds like that reflects the combination of core performance and then pulling through some efficiency efforts. Was that about the components of the change? Jennifer Phipps: That is correct, yes. Matthew Gillmor: Okay. And then as a quick follow-up, I think in the past, you've talked about being conservative with the value-based care accruals, but you have some potential shared savings to go get. I just wanted to see if there's been any change in thinking there, if there's still some potential to pull through some shared savings at some point later in the year. Jon Rousseau: Yes. I think at this point, we've gained clarity that we will get some shared savings there. But that after receiving news about last year here just very recently, looks to be probably a little bit of opportunity there that will be realized. Operator: And our next question comes from Joanna Gajuk of Bank of America. Joanna Gajuk: So, I guess a couple of follow-ups. So, first, I appreciate the comments around the acquisition of the assets from Amedisys and LHC will be accretive next year. But anything else we should be thinking about heading into next year in terms of any high-level tailwinds and headwinds? I'll stop here. Jon Rousseau: Yes. Joanna, look, I mean, I think there's been just real consistency throughout the year. And certainly, as we sit here today, we expect that to continue really something we've seen all year long every quarter is each service line is performing really well individually. And I would say here more recently, a lot of our efforts, as we've talked about in infusion in the past 18 months or so are bearing fruit. Extremely excited about that being a real tailwind for next year. Hospice continues to perform extremely well. That rate increase will go into effect in Q4. And obviously, some of the momentum around the LDDs and the conversions on the specialty side, home health with the acquisition of the divested branches A lot of great things going on there in the business, too, including automation initiatives, hiring a new sales team. We had the best admissions month ever in September in home health, and that's where we have a new sales leadership team in place. We're tracking right now to have our biggest customer win quarter ever in home and community pharmacy. We're excited about that. And as Jen mentioned, we are really investing heavily. We've always had a focus on lean continuous improvement and efficiency. We're just continuing to invest there. We -- as maybe mentioned last quarter, I can't remember. We have a new CTO, and we're building out an internal AI team that is well underway. We've got all of our projects identified. We're also working with outside vendors on AI implementations. And so look, from a growth and from an efficiency standpoint, we just continue to push as hard as we can and a lot of positives there. I would also note just the balance sheet and where that's gotten to here. Even a quarter ago, we were sitting at about 3.64x leverage. Now we're at 3.31x. That's a pretty good decline in a quarter. I think a quarter ago, we were talking more about 3.5x year-end leverage. Now our view is 3x, 3.0x year-end. We were talking about getting down to 3.0x after the Community Living sale. Now we think that puts us well below 3x when the Community Living transaction closes, even net of the Amedisys and LHC acquisition. So we just feel really good and are enthusiastic about our progress on the balance sheet and being at or quite a bit below 3x leverage at the end of the year on the other side of that Community Living divestiture. We also have been talking about $300 million of OCF this year. That number is probably more like $375 million, maybe a little bit more, probably $260 million, $270 million of free cash flow before debt, amort. So, a lot of focus in the organization too on the balance sheet around cash flow, and that's been really positive. Joanna Gajuk: And if I may a couple of follow-ups. So on this comment about infusion, right, you sound very excited about this, and I guess you've been growing it nicely. But as we think about the pharmacy segment, I guess, in totality or maybe the specialty infusion, but the Pharmacy segment, the revenue is going to grow more than 25% this year, right? So how should we think about your ability to kind of grow on top of this fast growing into next year? Jennifer Phipps: So, from an infusion standpoint, obviously, as they're growing faster than they are today, we would -- so specialty, we don't see any changes as it stands today, we don't see significant changes to their pace of growth. We do see infusion accelerating. So we think that provides a little bit of a tailwind for us into next year. Operator: And our next question comes from Erin Wright of Morgan Stanley. Erin Wilson Wright: A couple of questions. First one is kind of bigger picture. Just can you speak to kind of some of the future opportunities across kind of pharmacy solutions and specifically kind of specialty pharmacy. The focus has been on oncology, but can you speak to rare disease or other areas and also the opportunity around some of those value-added manufacturer biopharma services and the respective margins associated with some of those opportunities evolving over time? Jon Rousseau: Yes. Thanks, Erin. I mean those are all accurate. The -- we do, do quite a bit of the rare and orphan therapies today. Quite a few of those are in the oncology space, too. That is certainly a big focus, whether it's inside or outside of oncology, and we'll continue to do that. The fee-for-service business, whether it's data agreements, clinical hubs or other programs with pharma, it's been good to see that continue to gain a ton of traction over the last couple of years. It's become a meaningful piece of EBITDA in the business, and we expect that to continue with a lot more launches next year of programs with them. On the infusion -- with manufacturers. On the infusion side, we are really trying to grow both acute and chronic therapies. Acute is a very big market, multibillion-dollar market in the U.S. Some folks have stepped away from that market. It can be more operationally challenging. We are leaning into that. We saw the benefits of that in Q3. It was a big part of our growth rate. And then really focusing on customized programs for chronic therapies, including some LDDs on the infusion side. That's really where we're spending a lot of time. And then in Home & Community Pharmacy, some of these markets like assisted living, IBD, behavioral hospice and PACE can still be significantly bigger for us from a market share perspective, and we're excited about that. writ large then across all of the pharmacies, just a large focus on process and efficiency in the organization, deploying automation, deploying AI throughout the businesses to try to be as efficient as we possibly can and to try to leverage our scale as much as we possibly can. So I think quite a few growth drivers within each one of the businesses and a constant across all of them is the process and automation work that we're doing. And I think the net of that makes us really enthusiastic about next year and the coming years. Erin Wilson Wright: Okay. Great. And then can you speak to what percentage of the portfolio is now more directly tied to drug pricing dynamics with potential MFN pricing as well as you spoke to IRA earlier, which we spoke to, I think, at length before. But what percentage of the book would be branded therapeutics that would be potentially exposed? Jon Rousseau: Yes. So the fee-for-service part of what we do is still the minority, the far minority. But as we've talked about before, we do our best to drive generic utilization for the industry, which is positive and good for all stakeholders. We also have a lot of our therapies, for example, in acute, which is immune from any of this discussion, too. So if you look across the breadth of our portfolio, branded GP is not the majority just given the diversification of what we do. And then as it relates to things like DTC, our pharmacy services are really to complex and high acuity patients. and often very local with significant clinical support needs. So they really don't lend themselves to DTC. Operator: And our next question comes from Stephen Baxter of Wells Fargo. Stephen Baxter: Obviously, the sequential progress you made on margins in the pharmacy business has been really notable. It sounds like you're expecting that to continue in the fourth quarter based on the guidance that you've given. And then broadly, you're describing kind of the conditions around further progress on LDDs and further the generic dynamics continuing in 2026. I guess how do we think about the trajectory of margins exiting this year and opportunity for further improvement in 2026? Jennifer Phipps: Yes. So from a guidance perspective, margins in Q4 are expected to be higher than what we've seen in the last couple of quarters. Q4 tends to be our highest margin quarter for a number of different reasons. But we do see continued growth in our different businesses that -- and different mix of products that will cause Q4 to be a slightly higher margin, landing us from an annual perspective, slightly higher as indicated in the guidance. Jon Rousseau: I would just say from an enterprise perspective, as we think about margins, it's a lot of these lean and efficiency and operational initiatives that we continue to drive across the organization, which will be really helpful as provider grows, they have a higher margin. Some of our -- a lot of our acquisitions with synergies come over as a result, pro forma with a higher margin. So we're really focused on being efficient in the organization while also providing as best quality as we possibly can and leveraging that quality where we can to partner with payers in preferred ways to help with appropriate and more enhanced rates, too. So margin fundamentally, obviously, is a key function of mix, but some very intentional efforts across the organization to try to make sure we're operating as smoothly and efficiently as we can. Operator: And our next question comes from Larry Solow of CJS Securities. Lawrence Solow: Great. Congrats on another great quarter. Just from a high level, quickly, I really appreciate all the color. Things sound really good. Just your visibility as we look out, Jon, I know maybe you'll share some of this too, coming up in March. But as we look out three to five years, maybe this 30% or even 40% volume growth this quarter, that's not sustainable. But from a high level, I know you've spoken about double-digit growth in Pharmacy Solutions going forward. Clearly, that seems very attainable. But how do we -- I mean, can we continue to grow at these rapid 25%, 30% levels? Or directionally, do we -- the Street is coming down to low double digits as we look out over the next few years. Where do we think we end up? Is it closer to that? Or clearly, maybe this 30% is not sustainable, but can we continue to grow at well over the low double-digit rate? Any color on that would be great. Jon Rousseau: Yes. I mean it's a good question, obviously, and one we spend a ton of time thinking about. Our historical CAGR going back really a decade now has been about 15%. It's been higher than that in the last couple of years. And that's been a function of a lot of things. I mean we've really tried to assemble a platform that we feel like is well positioned and in particular, comparatively well positioned for the future in a lot of different environments. And so one of the reasons why corporate was up a little bit in the quarter and has been up this year, we continue to make investments for the future, for example, building out an AI team and hiring very real people from the tech world to do that. These are things that we're going to continue to do, investing in new marketers and numerous of our businesses, heavily investing in our development teams. And so we will continue to do that. Hard to -- really impossible, I think, to sit back today and say you would expect these growth rates over the next four to five years. I don't know who would say that. But we don't. As we sit here today, and we've got to get through Q1, obviously, I think it is fair to say, based on everything we know, we would expect to grow again next year well above that historical CAGR, and we'll see. But as we look at each one of the businesses, other than maybe personal care, we aspire to grow at or above 20% in every business. And we really try to do that based on quality, operational process and then really educating and advocating for these services for as many patients as we can to drive better outcomes and lower cost. in the industry. I mean that's really what we're passionate about. Some of the businesses from time to time have opportunities to do better than our internal goals. Some of them might fall a little bit short. But we always set a really high bar. We like the markets we're in. We've tried to really curate what we do pretty well. I think we will get acceleration in the future from more and more integrated care across our platform. We're just getting into some ALS now with a combined offering, which is very well received. I do think primary care and some value-based contracting, which is all upside, will continue to scale. So we think about the business in terms of core growth and strategic growth. Core growth is each and every one of our businesses having very clear objectives over the 1-, 3-, 5-year time lines. And then we think about strategic growth being things like home-based primary care, value-based care contracts, pulling it all together, things like integrated selling into ALS, things like building out AI products, et cetera. So -- and it all really makes a lot of sense and fits together well within the constellation of assets that we have. So look, as we sit here today, as we said on the call, we think we're in a good position heading into next year. We learned a lot more in Q1. But we're very optimistic, and we'll continue to do what we can to grow the platform as best we can, leveraging numerous different businesses that all have really attractive opportunities, driving some strategic growth and then all the while trying to drive a lot of these operational and technology investments and innovation throughout the organization. Lawrence Solow: Great. I appreciate that color. Really helpful. Just quickly, on the bankruptcy in Home & Community, is that actually a little bit of a drag on EBITDA in this quarter, maybe for the next couple? Jon Rousseau: No, we don't expect it to be whatsoever. So that was announced in the last quarter. I think based on the strength of our platform and our diversification, it was a nonevent for us in Q2. We talked about that. I only mention it because that's part of the reason why the home and community scripts had a tough year-over-year comp just given we were coming on to that contract last Q3, and now we're kind of going off. And so that's that. But really attractive growth within all of our pharmacy businesses and the ones that matter the most across specialty infusion, hospice, behavioral, et cetera. So, and in Home & Community Pharmacy, we're seeing right now, our pipeline has us looking at our biggest customer signing in three to four or years. So things are moving in a really good direction. And one of the things surely we will talk about at the Investor Day is how much automation and process innovation is going into that pharmacy business today, which is going to be extremely constructive. Operator: We have no further questions at this time. I'd like to turn it back to Jon Rousseau for closing remarks. Jon Rousseau: Yes. Thank you for the time today, everybody. We appreciate the interest in the company. Thank you for all the questions, and we look forward to talking with you again in another quarter. Have a great rest of the day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Ladies and gentlemen, good morning. My name is Abby, and I would like to welcome everyone to the JetBlue Airways Third Quarter 2025 Earnings Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the call over to JetBlue's Director of Investor Relations, Koosh Patel. Please go ahead, sir. Koosh Patel: Thanks, Abby. Good morning, everyone, and thanks for joining us for our third quarter 2025 earnings call. This morning, we issued our earnings release and a presentation that we will reference during this call. All of those documents are available on our website at investor.jetblue.com and on the SEC's website at www.sec.gov. In New York to discuss our results are Joanna Geraghty, our Chief Executive Officer; Martin St. George, our President; and Ursula Hurley, our Chief Financial Officer. During today's call, we'll make forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding our fourth quarter and full year 2025 financial outlook and our future results of operations and financial position, including long-term financial targets, industry and market trends, expectations with respect to tailwinds and headwinds, our ability to achieve operational and financial targets, our business strategy and our plans for future operations and the associated impacts on our business. All such forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in these statements. Please refer to our most recent earnings release as well as our fiscal year 2024 10-K and other filings for a more detailed discussion of the risks and uncertainties that could cause the actual results to differ materially from those contained in our forward-looking statements. The statements made during this call are made only as of the date of the call, and other than as may be required by law, we undertake no obligation to update this information. Investors should not place undue reliance on these forward-looking statements. Also, during the course of our call, we may discuss certain non-GAAP financial measures. For an explanation of these non-GAAP measures and a reconciliation to the corresponding GAAP measures, please refer to our earnings release, a copy of which is available on our website at www.sec.gov. And now I'd like to turn the call over to Joanna Geraghty, JetBlue's CEO. Joanna Geraghty: Thank you, Koosh. Good morning, and thank you for joining JetBlue's Third Quarter 2025 Earnings Call. As Hurricane Melissa makes landfall today, I'd like to begin by extending my thoughts to our JetBlue crew members, their families and the communities that we serve in Jamaica. As the largest airline in Jamaica, we are focused on caring for our crew members and resuming operations when we can safely do so. Our crew members are at the heart of providing the reliable and caring service that makes the JetBlue experience so special and I'd like to thank them for their dedication throughout the challenging summer travel season. Thanks to your hard work, we are continuing to make meaningful progress on our JetForward plan while taking care of our customers and each other. Throughout the year, our team has worked with urgency to adapt to the evolving demand environment, adjusting supply, implementing new revenue initiatives and pursuing self-help measures to continue reducing costs. Our results this quarter are an outcome of these efforts. We ended the period at the better end of our guidance ranges across all metrics, including unit revenues and costs, realizing meaningful margin improvement compared to initial expectations. The whole industry took a step back this year. But despite these challenges, we are gaining momentum from JetForward and making progress on our plan, operating a stronger airline every day and delivering on or beating our commitments. Building on the progress since we've announced JetForward 5 quarters ago, our operational metrics and customer satisfaction scores continued to improve in the quarter. We improved completion factor and on-time performance versus last year with A14 up 2 points, successfully navigating a challenging July in which air traffic control programs impacted operations nearly every day. As a result, customers are more satisfied with their JetBlue experience as demonstrated by improvements in our Net Promoter Scores, both in the quarter and throughout the year, and I'm proud of the team for achieving double-digit NPS gains year-to-date. Even though our operation has consistently been challenged by external factors, our results demonstrate that the investments we've made in reliability are working. This fall, airfield construction at both Boston Logan and JFK is negatively impacting on-time performance, but we expect that to improve in November when this phase of construction wraps up. Regarding the government shutdown, we have not yet seen any material impact to demand or our operation. From TSA and air traffic control to Customs and Border Protection, it's truly a team effort. We are grateful for their dedication in keeping us safely moving, and we also thank Secretary Duffy for being a strong partner as we navigate this situation. By delivering a reliable operation and improving customer satisfaction as part of JetForward, we are building a greater customer loyalty and generating more repeat customers. Last quarter, for example, our TrueBlue attachment rate was up 7 percentage points year-over-year and our loyalty members are increasingly choosing JetBlue for multiple trips per year. At the same time, we continue to modernize our fleet to drive efficiencies across our operation and enhance the customer experience on board. During the third quarter, we retired our remaining Embraer E190 aircraft, marking nearly 2 decades of service. We want to thank Embraer and GE for their partnership over the years. This completes our transition to a more customer-friendly onboard product and cost-efficient all-Airbus fleet, allowing us to take full advantage of additional network opportunities from our East Coast focused cities. Along those lines, in support of building the best East Coast leisure network, we are taking deliberate steps to deepen our presence in Fort Lauderdale. This expansion, which mostly launches in the fourth quarter, enables us to further strengthen our position in this highly valuable focus city, adding more leisure destinations for our South Florida customers and increasing connectivity to the Caribbean and Latin America. JetBlue has deep roots in Fort Lauderdale. It's where our first revenue flight landed from New York, New York's JFK, on February 11, 2000. And now, 25 years later, the opportunity is ripe to reaffirm our leadership position there. With our far better customer experience and competitive low fares and now more destinations, we are pleased to bring even more value and choice to customers in Fort Lauderdale and across South Florida. Looking ahead to the fourth quarter, we remain optimistic that the environment will continue to improve. And as Marty will discuss further, we are pleased by the overall health of bookings. Demand for peak period travel remains strong, led by the resilience of the premium leisure segment, which aligns well with our new premier card, our plans to open our first lounge this quarter as well as domestic first class launching next year. We've built a strong foundation with JetForward and we are on track to generate a cumulative $290 million of incremental EBIT this year. Our efforts to boost reliability, recalibrate our network, enhance our products and services, supercharge our loyalty program and execute on costs have fueled transformational change, delivering double-digit NPS gains and industry-leading operational improvements. Blue Sky implementation is on track with last week's loyalty launch, marking the first major milestone of our collaboration, and domestic first class is scheduled to launch next year, both expected to be meaningful drivers of incremental earnings in 2026 and beyond. We are encouraged by the progress so far and we are confident we are on the right path to restore profitability, building a stronger JetBlue for our customers, crew members and our owners. Over to you, Marty. Martin St. George: Thank you, Joanna, and thank you to our crew members for a strong summer. We continue to make meaningful strides on JetForward to refresh our commercial strategy and drive incremental revenue by refining our network, expanding our reach through partnerships, increasing the value and utility of our loyalty program and enhancing our products and perks. Turning to Slide 6 in the presentation. As Joanna mentioned, we have reestablished our position as the largest carrier in Fort Lauderdale, a market where our differentiated product and robust network resonate well with customers. As previously announced, we plan to launch 17 new routes and increase frequency on 12 high-demand markets, with our schedule now representing a 35% year-over-year increase for the IATA winter season. Our schedule also features over 25 daily flights touching Fort Lauderdale with our award-winning Mint service, offering more transcontinental lie-flat seats from South Florida than any other carrier. To support continued growth in premium flying, we also announced our intent to establish a Mint base for in-flight crew members in Fort Lauderdale, alongside growing the size of our overall crew base, bringing more jobs to the region. These investments reaffirm our leadership in Fort Lauderdale and leverage our caring service, differentiated product, premium Mint experience and robust network. Turning to Slide 7. Implementation of Blue Sky, our collaboration with United Airlines, is progressing as planned and has already begun delivering value to our customers. Last week, we enabled point accrual and redemption across our loyalty ecosystems, enhancing the utility of each program. We are already seeing significant customer interest. And since announcing Blue Sky at the end of May, we've seen a sustained double-digit increase in average daily card acquisition growth across geographies, particularly in non-focus city markets. We expect to continue the momentum into the first quarter as we begin cross-selling each other's flights on all digital channels. This industry standard interline agreement is expected to expand distribution reach for both airlines and provide customers with more choices to travel across the globe on our complementary networks. Loyalty reciprocity and cross-selling are 2 of the largest drivers of value from Blue Sky, and we expect the successful implementation of both to generate significant earnings momentum for JetForward. Later, in 2026, we plan to launch reciprocal loyalty benefits and Paisly integration, driving high-margin growth and additional value for the partnership. As we improve our customers' network options, we are also enhancing the customer experience on board and at the airport. In September, we became the first airline to partner with Amazon's Project Kuiper to provide faster and more reliable connectivity to our onboard Wi-Fi, furthering our leadership in onboard connectivity. JetBlue launched Fly-Fi in 2013 to become the first and still only major U.S. airline to offer free high-speed Wi-Fi on every aircraft in its fleet. The rollout is expected to begin in 2027. We continue to build on our decade-long commitment to premium and are progressing our plans to further capitalize on the demonstrated industry shift to the segment. This month, we enhanced merchandising EvenMore, and now customers can book on a single transaction through the GDS and online travel agencies. Previously, purchasing the product required 2 separate transactions on our third-party channels, and the simplicity and increased visibility is expected to support buy-ups and higher yields. In addition to EvenMore, preferred seating continues to outperform expectations. Finally, we remain on track to launch domestic first class in 2026, with the first equipped aircraft expected to begin flying in the second half of the year. The domestic first fleet modification is planned to include our entire non-Mint fleet. By the end of '26, we anticipate having approximately 25% of the retrofit complete, with the vast majority of the fleet expected to be completed by the end of 2027, over which time we expect to see meaningful EBIT contribution. On the ground, we are on track to open our first airport lounge at JFK by the end of this year, while our Boston lounge is set to open in 2026. The lounges will offer complementary access to transatlantic Mint customers, premium credit card holders, where signups have already exceeded 2025 targets, and TrueBlue Mosaic members. Passes will also be available for purchase on days where space allows. Alongside our construction of the JFK lounge, we are in the middle of a total refresh of Terminal 5, which is set to bring more than 40 new concessions and a redesigned center concourse. Moving to third quarter results. Over the summer, the demand environment continued to show signs of recovery characterized by strong close-in bookings, healthy demand for peak travel and the sustained strength in premium. As a result, unit revenues ended the quarter down 2.7% year-over-year, just above the midpoint of our revised guidance range and more than a point better than our initial guidance midpoint. Premium continued to outperform core, and year-over-year, premium RASM growth was up 6 points relative to core. Our managed corporate yields also showed strength, with yields up high single digits. And while our domestic flying saw the most sequential RASM improvement quarter-over-quarter, its relative margin performance still lagged international. We continued our string of double-digit loyalty growth in the quarter with co-brand remuneration up 16% and TrueBlue revenue up 12%. The card and TrueBlue trends are evidence of our improved customer satisfaction scores, recalibrated network of product as well as the strong benefit we are already seeing from the Blue Sky collaboration announcement. For the fourth quarter, we expect unit revenues to be between flat and down 4% year-over-year on capacity of up to 3/4 of the midpoint. Third quarter demand trends are forecasted to largely continue into the fourth with continued robust demand for premium products. Peaks are expected to remain healthy, while troughs continue to see challenges, which we have and will continue to actively manage through capacity adjustments. We are seeing the booking curve normalize, and we expect the same trend to continue throughout the fourth quarter. We expect continued macro-related tailwinds going forward in addition to the ramp of our JetForward commercial initiatives. On the network side, our capacity investment in Fort Lauderdale will be in its early stages of ramp after launching in November, December. And coupled with the step-up in domestic competitor capacity are expected to be just over a point of headwind to RASM for the quarter. Lastly, it's too early to size the impact of Hurricane Melissa on our operations in Jamaica, so our guidance does not contemplate any impact. Jamaica represents about 2.6% of our capacity in the fourth quarter. As we look ahead, we know there's still more work to do, but JetForward is the right plan. The initiatives we outline today from our Fort Lauderdale growth to Blue Sky and enhancing our premium products will be key to getting us back to sustained profitability. I'll now turn it over to Ursula to provide more detail on our cost and financial performance. Ursula Hurley: Thank you, Marty. We ended the quarter with an operating margin 3 points better than what was implied by our July guidance ranges, supported by a more reliable operation, greater close-in demand for our products and our team effectively controlling costs. Despite a tough air traffic control and weather environment in July, completed capacity growth of 0.9% was above the midpoint of our revised guidance. This, coupled with strong execution, helped to deliver excellent cost performance for the quarter. We ended the quarter with CASM ex fuel up 3.7% year-over-year, beating the midpoint of our initial guidance by over 1 point, marking yet another quarter of cost execution. It is clear the investments we are making in our operation are increasing efficiencies across the business. Over the year, the team has demonstrated solid cost execution, and we are improving our full year CASM ex-fuel guidance from up 5% to 7% to up 5% to 6% year-over-year, lowering the midpoint by half a point despite less capacity than initially planned. For the fourth quarter, we expect CASM ex fuel growth of up 3% to 5%. For the third quarter, fuel price came in at $2.49 in the lower half of our revised guidance range. We expect fourth quarter fuel to be between $2.33 and $2.48. Our fuel guidance is based on the forward curve as of October 10. As we work through our budgeting process for 2026, we expect our unit cost next year to be low single digits, underpinned by low to mid-single-digit capacity growth. We plan to grow capacity through new aircraft deliveries as well as the return of a sizable number of parked aircraft to service. As we get back to growing once again, we're doing so with our balance sheet in mind by adding capacity despite reducing CapEx. We expect our capital expenditures to be at or below $1 billion next year and each year through the end of the decade, supporting our balance sheet and our return to positive free cash flow over time. We ended the quarter with a healthy liquidity level of $2.9 billion in cash and marketable investments, excluding our $600 million revolver, representing 32% of trailing 12 months revenue. At the end of 2025, we expect to carry liquidity in excess of our 20% liquidity target. Looking forward to 2026, we expect to raise a modest amount of capital to maintain our liquidity target, driven by the maturity of $325 million of our 2021 convertible notes and new aircraft deliveries. I believe our healthy unencumbered asset base of over $5 billion will provide us flexibility to meet our funding needs. Finally, JetForward remains on track to hit its target of $290 million of incremental EBIT by year-end, and I am confident we are also on the path to meet our $850 million to $950 million 2027 commitment. The exciting commercial initiatives Marty detailed, including Blue Sky, domestic first and lounges are expected to drive significant earnings momentum for JetForward in 2026 and into 2027. And alongside these efforts, we plan to remain focused on cost discipline and managing our fleet to preserve liquidity and drive capital-light growth. Taken together, we are confident we have the right initiatives in place to drive meaningful profitability improvement in 2026. And while we are still in the early innings of our budget process, it is our intention to build a plan that gets us to breakeven or better operating margin for 2026. We look forward to sharing more details during our January call. We will now open it up to your questions. Back over to you, Abby. Operator: [Operator Instructions] And our first question comes from the line of Dan McKenzie with Seaport Global. Daniel McKenzie: Thanks for the preliminary outlook for 2026. But backing up, JetForward didn't factor in the Chapter 11 filing of one of your toughest competitors. And so I'm wondering if you can talk about what that means to the Fort Lauderdale operation and what that means to revenue upside to the JetForward plan? Martin St. George: Dan, it's Marty. Well, I'm not going to go into detail about our competitor's action, but most important thing is our reaction. And frankly, we have been hamstrung in Fort Lauderdale because of our lack of access to international gates in the middle of the day. And it's a relatively constrained customs facility at the airport and we have multiple carriers haul trying to fly at the same time. What's worked out very well for us is that as our competitor has done some pretty significant pull-downs in Fort Lauderdale, we have seen a lot of opportunity to move flights into that custom facility at a time when it's actually good for our local customers and also very good for generating connections to markets to the north. So if you look at the growth that we have put into Fort Lauderdale, it is notwithstanding our reputation as being a Northeast airline, the growth is very much focused to markets in the Southeast and south of Fort Lauderdale. I'm actually very optimistic about the opportunity this creates. I mean I use the word generational about this. I mean our ability to get such significant growth for international services in such an important market for us is something we're absolutely going to take advantage of at the time. As I mentioned in the script, in the very short term, it's going to create a bit of a headwind in the fourth quarter, but we perform very well in Fort Lauderdale today as is shown by the fact that we have such a big Mint operation there. We compete very well against our competitor, which is probably one of the reasons why they are going through the restructuring they're going through. And we are very bullish on Fort Lauderdale. So thanks for the question. And I think it's actually one of the good parts of the story. With respect to the impact of JetForward, there are an awful lot of puts and takes in there. There was a big chunk of network rebuild in there. We have made the commitment to investors that we'll update every 6 months on JetForward. And I don't want to give an update now, but that's something we'll probably talk about at the end of the year. Daniel McKenzie: Yes. Very good. And then if I can just kind of go back to the end of the year and kind of how we're closing out the year. It looks like the government shutdown probably cost JetBlue maybe $500 million in lost revenue. And please correct me on that. But is it right to think that this is lost revenue that comes back in 2026? And then on top of this, all of the JetForward initiatives that you've outlined? And I'm really just going back to -- well, the first quote in the release from Joanna just about the momentum into 2026, if you can just help flesh that part out a little bit more. Joanna Geraghty: Yes. I think first I just want to emphasize, we hit every guidance metric since April and improved 3Q margins versus internal expectations. And that was against an industry-wide setback due to volatility involving customer confidence in the airline space. And so really proud of the work the team has done to make up for some of that lost ground. JetForward, it's a multiyear plan. We remain on track to hit the $290 million of EBIT this year. We launched it 5 quarters ago. We are making excellent progress. I think when you read through the numbers, what you see is a 4-point impact to full year operating margin relative to our initial full year guidance. And our analysis shows that is squarely tied to our premium mix versus other carriers' premium mix. We've done an analysis that shows those who have more premium exposure have actually been less impacted. And when you look at JetForward, it is all about leaning into premium, and we are well on the way, whether it's the Premier Card this year, whether it's the lounges opening up, whether it's preferred seating. You pivot to next year and you look at more lounges. You've got our launch of the domestic first class. So we are squarely in the middle of execution and ramp, and I could not be more excited about the trajectory as we move into 2026. Our NPS score -- you can't have a premium customer if you don't have strong NPS scores. We're back at the top of the industry. So as we look forward to 2026, we do need to continue to see an improving macro environment, but that, coupled with JetForward and the momentum we have, that gives me a lot of confidence that we're going to build a plan, breakeven or better, get us back on track and regain that which we lost this year. Operator: And our next question comes from the line of Savi Syth with Raymond James. Savanthi Syth: I wonder if I could ask Dan's question in a slightly different manner. Just I was wondering if you could kind of give us an understanding of like the incremental contribution in '26, '27 from JetForward. And then what type of headwinds -- you talked about some of the tailwinds like macro that will kind of come on top of that. Just trying to understand like how to think about an EBIT bridge as you kind of look out to kind of '27 and kind of get to solidly profitable footing there? Ursula Hurley: Yes. So we've always said that in terms of the JetForward breakout at $850 million to $950 million, it's really coming through 1/3, 1/3, 1/3 pretty equally. And that just happens to be -- I mean, there's 200-plus initiatives, but the way that they level up, it's 1/3 per year. As Joanna mentioned and what I said in my prepared remarks is next year we have a goal of building a 2026 plan with op margin breakeven or better. So we are going to make up some ground that clearly we lost this year given the macro step back. The puts and takes, I'm pleased with the progress that we're making in general across all JetForward initiatives. Obviously, the premium initiatives are performing well year-to-date. But we're also -- we have a lot more to come between lounges, the premium credit card and also domestic first next year. And I would say I'm also really excited about domestic first. I think this is going to allow us to better compete compared to where we are today. I would say at a macro level, we need the macro backdrop to continue to improve. So we do have that assumption baked into our 2026 guide. But all in all, we feel like we have a lot of good momentum and JetForward is tracking exactly where we thought it was and we look forward on delivering further details on our 2026 plan next year. Savanthi Syth: That's helpful. And may I just –- another question for you is just kind of how are you thinking about liquidity and leverage and kind of what type of financing needs you kind of anticipate over the next 12 to 18 months? Ursula Hurley: Yes. Listen, we did the strategic capital raise back in August of 2024. So that's really provided a strong liquidity runway for us through the end of 2025. We're projected to end the year above our 20% liquidity target. We are going to need a modest amount of capital next year just to support the new aircraft deliveries that we have coming as well as we do have a convertible debt maturity of $325 million in the April time frame. By no means will the capital raise be anywhere near the size that we did in August of 2024. In terms of what assets will we use, I mean, we're in a pretty powerful position in terms of having over $5 billion of unencumbered assets, about 40% of that $5 billion is aircraft and engines, and then the remainder includes our slots, gates and routes as well as our brand. I would say we'll look at all markets. I mean we're clearly focused on the level of interest expense and obviously the debt level that we have currently on the balance sheet. So we're going to try to be super thoughtful and strategic just given market availability with all the different types of unencumbered assets that we have. Operator: And our next question comes from the line of Michael Linenberg with Deutsche Bank. Shannon Doherty: This is Shannon Doherty on for Mike. Just for start, I apologize if I missed this, but can you quantify any impact that you're seeing today from the government shutdown since we're about a month in? I wouldn't typically think of JetBlue as having much government exposure, but since you called it out in the release, it's probably worth asking. Joanna Geraghty: Sorry, I missed a little bit at the tail end of your question, but we haven't seen any meaningful impact with regard to the government shutdown. We obviously are monitoring it closely. And the longer it goes on, obviously, for the industry, I'd say there's more acute concerns. But we have not seen anything and are just really appreciative of all of the government workers showing up, doing their job and keeping the national airspace and our industry running safely. Shannon Doherty: That's great. And maybe one for Marty. With domestic seemingly improving, do you expect domestic RASM to outperform international this quarter? Maybe you can just give us an update on demand by region? Martin St. George: So we don't do a lot of color as far as demand by region. And what we said in general is that international is better than domestic and premium is better than the back of the airplane. And that continues to stand. I'd say if you look at our overall RASM performance and recognize that -- I mean, this is a math issue of weighted average. If international is better and domestic is worse, domestic has some ways to go. I would say, in general, the thing that gets me most excited about improving our domestic RASM is the continued introduction of premium products. As we do a competitive look at our RASM, sort of coach-to-coach, we actually do fine on RASM. The challenge is that we're missing that whole front of the airplane, which is a pretty good revenue kick to our competitors. So we do extremely well against the ULCCs of the world who have premium products that are not really premium, but we see a lot of upside for the premium products that we're adding as far as getting us up to where the legacies are -- close to where the legacies are. So it's not something I'm predicting in the fourth quarter. And again, when we go to '26, we can probably talk in more detail about that. Operator: And our next question comes from the line of Jamie Baker with JPMorgan. Jamie Baker: So Ursula, building on Savi's question earlier, modest cash raises next year. Can you -- where do you think the incremental cost of debt is today? And if we do accept that aircraft debt is typically the lowest, are you leaning more towards sale leasebacks or just borrowing against aircraft? Ursula Hurley: Yes. Listen, I think the benefit of the assets that we have unencumbered is that we can look at all markets and hone in on what is, quite frankly, most cost effective. I think the other priority we look at is building in prepayment flexibility. I mean our #1 priority is getting the business back to consistent operating margin positive. Then it's delivering free cash flow so that we can start to delever. Clearly, the most cost-effective money you can raise right now is with aircraft. So given we are focused on the level of interest expense, that could be a likely path. So how we do the aircraft, it will be what's the most attractive market. Is it bilateral bank loans? Is it capital markets? Is it sale leaseback? We'll look at everything. Jamie Baker: Okay. Fair enough. And following up on that, if memory serves, it was this call last year that I remember first hearing you reference approaching breakeven from a forward year operating margin basis. And look, 2025 kind of went off the rails. I'm not going to hold that against you. But here we are a year later and you're reintroducing that narrative. So I guess the question is for you or -- Marty's color would be appreciated as well. But compared to how you were thinking this time last year, do you think that industry fundamentals are more or less aligned with getting JetBlue back on track? After all, given what you shared on capacity and cost for next year, it's a really high RASM hurdle to get you to breakeven or better. Joanna Geraghty: Jamie, let me take that. So we think industry fundamentals are more aligned with where we're headed. And I fully recognize that it feels a little bit like Groundhog Day and that we were sitting in this room last year around this time with the same commitment. Thanks for recognizing the industry took a step back, and we're all now trying to recover out of that. But leaning into the premium customer is absolutely the right strategy. We've been doing this for 10 years with Mint. We see it in our Mint performance. And we're a year later and we've actually launched a number of initiatives already that support that. And so the progress we made since last year is actually execution on JetForward and continuing to make sure we remain laser-focused on delivering the initiatives we laid out so that as the economy recovers we can take full advantage of those in a later stage of ramp, whether it's the preferred seating, whether it's the even more space changes, launching the JFK lounge this December. We've got Boston next year. We're that much closer to launching the domestic first class. And then as I mentioned in the first question, our analysis this year showed that carriers who have greater exposure to premium had less of a margin impact from the step back. And so that reconfirms that JetForward is the right path. And we're excited about getting closer to profitability and continuing this momentum. And so that's -- from my perspective, the industry fundamentals actually support where we're going and excited to see that come to fruition this year. Operator: And our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just on the GTF impacts, do you have any update on the grounded aircraft and the forecast for next year embedded in your preliminary '26 comments? And can you remind us, is there any compensation that's actually baked into the results this year? Ursula Hurley: Sure. So the GTF challenges has improved. So if you recall, back in January, we thought we would have mid to high teens number of aircraft on the ground. The average for 2025 is going to be 9. We currently have 6 on the ground today. 2025 is the peak in terms of AOG. So that number will come down next year. So the projected AOG that we'll have on the ground in 2026 is low- to mid-single digits. So this is going to position us to actually be able to grow again, which we mentioned in our prepared remarks. In regards to our 2025 full year controllable cost guidance, it does not assume any Pratt & Whitney compensation. We continue to be in constructive conversations with Pratt. And just given the magnitude of impact it's had on our business, we will settle when we get to the right place. I would say the other last comment from me is this is putting us in a position where we're growing in a capital-light way. So obviously, we've previously paid for these aircraft with the GTF engines, and having them return to service is great. This is definitely a tailwind for us and we're happy with where we're at in terms of getting these aircraft back up in the air. Duane Pfennigwerth: And then maybe just for the follow-up, can you remind us for your domestic business class or first class -- or I forget what you're calling it. Can you just remind us of the implementation timing of that? Like where will you be from a kind of year-end '26 and when you expect to complete that? Ursula Hurley: Sure. So just to give you some context. So we are outfitting all of the non-Mint aircraft that we have. So it's about 250 airplanes. Marty mentioned in his prepared remarks that by the end of 2026, we'll have about 25% of the fleet complete. And then by the end of 2027, we'll have the overwhelming majority complete. So very much looking forward to rolling out the first aircraft in the back half of next year. Operator: And our next question comes from the line of Atul Maheswari with UBS. Atul Maheswari: We are getting pushback that profit decline ex JetForward is accelerating just based on the fourth quarter guidance. So why do you think that is the case? And what needs to happen for the portion of profits not touched by JetForward to start improving again such that JetForward can truly be all incremental? Ursula Hurley: Yes. Listen, as we look at the fourth quarter, we do see an improvement in fuel year-over-year. But you have to remember, we're still operating from a much lower base in terms of the overarching demand environment. While it's improving, and we've seen that along with the rest of the industry, we're still operating way below where we had anticipated this year. We are showing RASM progression from Q3 to Q4. Our JetForward initiatives continue to ramp up. And you've heard us in our prepared remarks as well as in the Q&A highlight all of these premium initiatives that are coming to market. So we are seeing progress. I will remind you yet again, like if it were not for the macro setback earlier this year, which was 4-point impact to JetBlue, we would have hit our full year breakeven or better operating margin. So we believe we're on track and we've got solid momentum as we head into 2026. Joanna Geraghty: Atul, if I can also mention, we've announced very close-in capacity and launch for Fort Lauderdale in Q4. So that's pressuring RASM a bit. Hence, the 1-point step forward in RASM. But that's a really great opportunity for JetBlue and absolutely the right long-term decision for this company because of the opportunity to really reclaim Fort Lauderdale as the third leg of our stool. Atul Maheswari: Right. That makes sense. And just as my quick follow-up on the fourth quarter guidance, can you share some color on booked yields quarter-to-date or some color on what portion of fourth quarter is booked and what's your yield assumption for the portion that is unbooked? Martin St. George: So as far as booking levels, we're about 90% booked for our forecast in October, 55-ish or so for November and I think 35%, 38%, something like that for December. So very, very focused around peaks for November, December. We don't really guide specifically the difference between yield and load factor, but I think the guidance we laid out is based on what we're seeing right now. I think that to give you some more color, if you look at the demand environment as it exists right now, the booking curve is not fully back to sort of 2024 distribution as far as advanced purchase dates, but it's very, very close. And the trend of peak versus trough has really continued. We have very good strength in the peaks and still challenges in the trough. So to me, that is the last piece of the puzzle. That I think when that comes back, we'll be in a much better spot to recover sort of the 2024 demand levels. But again, the line we use is people are still taking that one vacation at Thanksgiving and Christmas. They're not all taking the second vacation. They may take. And I think that's sort of what we're seeing in general. Atul Maheswari: Good luck for the rest of the fourth quarter. Operator: And our next question comes from the line of Catherine O'Brien with Goldman Sachs. Catherine O'Brien: So I realize it's still early, but can you speak to how the impact of Fort Lauderdale adds is shaping up for 1Q? Guessing since you add that capacity so close into year-end should be less of a drag in the first quarter. And then maybe a bigger picture, a bit of a follow-up to Savi's question earlier. Could you just walk us through high level what the biggest tailwind from JetForward to be in '26? Blue Sky kicks in a more meaningful way, domestic first on 25% of the fleet by year-end. Just trying to get a sense of what the unique JetBlue revenue tailwinds are into next year, like as you see them in the biggest buckets. Martin St. George: Okay. First of all, with respect to the Fort Lauderdale, if you look at a lot of the capacity we added, it is going to be good first quarter capacity. I mean a lot of beach destinations. I think seasonality is our friend. Again, we'd like to have the full 300 days booking window, but we're going to be more at that point more like 130, 140 booking day window for that period. So I don't think the sort of headwind will be gone, but I think we're -- certainly seasonality is our friend at this point. I will also say that the -- again, with the ability to add more international arrivals in the peak in Fort Lauderdale, we are going to have a lot of opportunities for customers to connect from the north into the Caribbean and Latin America. And actually, we're really excited about that because I think -- again, we're a low-cost airline, we don't really build hubs, true hub-and-spoke networks, but we certainly carry internal connections. And I think based on the sort of the local timing of when flights are good for Fort Lauderdale and then when they've been good for the beach markets, we're actually getting a lot of good connectivity opportunities. So we're actually very bullish about this. I know historically we talked about a 3-year ramp. We are not in any way forecasting anything close to a 3-year ramp. Joanna Geraghty: And maybe I'll take the second part of your question, Catie. So there are several key and big initiatives ramping into next year. I'd say Blue Sky is probably one of the biggest, all the significant drivers. So we just announced, obviously, earn and burn, so reciprocity loyalty for JetBlue and United last week. We've got Interline sales launching next year, Paisly launching next year and then recognition of loyalty launching next year. So that's -- all of those will be delivered -- implemented and delivering value in 2026. The network continues to ramp. I mean we've moved 20% of the network around. Most of those changes went in about a year ago. And so given the ramp time frame, those will continue to ramp into 2026. We're returning to growth next year. So that's going to be, I think, a nice tailwind for JetBlue, buttressing our cost control. And then when you think about operational reliability, lounges, domestic first, we're really trying to create this flywheel for that premium customer where they want to come back to JetBlue because we have the full product offering that they would like. And that's underpinned by this fantastic improvement in our operations, specifically around Net Promoter Score and winning the hearts and minds of customers again. Marty touched on Fort Lauderdale and that ramping into '26. But those are the big buckets. Catherine O'Brien: That's really helpful. May I just ask one quick follow-up on Mint? You're adding the new Mint crew base in Fort Lauderdale and some new flights to the West Coast. Can you talk about where you think there are further opportunities to add more Mint flying, if any, just given the focus on adding premium products? And can you just remind us the margin uplift of the Mint versus non-Mint flight or RASM, however you want to talk about it? Martin St. George: Okay. So first of all, we are coming to the end of the line of Mint delivered –- of airplanes with Mint on them. I think '26 and '27 really focus on domestic first class. We have a few more Mint airplanes coming. But in general, we're out of the Airbus 321 business until 2030 or 2031. So we're going to reach a plateau for Mint flying. I think what's been the most exciting for us about Fort Lauderdale is how incredibly helpful it is as far as being counter seasonal. We have very good results across the Atlantic in the summer. Frankly, we could probably use some more lift in the summertime if we can get it. But obviously, you need to fly the airplane 12 months a year. And where Fort Lauderdale has really come into its own is with fantastic demand in the winter. So having airplanes in markets like Dublin and Edinburgh, which are great summer markets, maybe not so great in the winter, and having those airplanes move to Fort Lauderdale is a major, major win for us. And frankly, I don't think any of us expected to see that good -– the demand that strong in Mint out of Fort Lauderdale, but it's been a very happy surprise for us. And then obviously, the demand goes down in the summertime because it's hot down there, and that's a very good time for the planes to move across the Atlantic. So we love the ability to swing these airplanes back and forth. And frankly, we will get a nice little cost benefit by having a Mint base down there as far as having -- not having to have Boston and New York crews fly the Fort Lauderdale West Coast services. So we're really bullish about that. With respect to Mint overall, it continues to be extremely successful. And I think the combination of quality, fantastic service delivery by our crews and really good prices has been a great winning formula for us. The 321 has proven to be a very good low-cost airplane platform for us. So I think it's worked out extremely well for us. We haven't really gotten into individual profitability numbers, but certainly the Mint network is the best of our domestic network right now. I think I'll leave it at that. Operator: And our next question comes from the line of Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: I was just wondering if you could speak to what you're seeing in terms of reliability and time on wing on your A220 fleet and how you're thinking about that as you go into 2026 planning? Ursula Hurley: Yes. So starting high level, we provided capacity indications for 2026 being in the low to mid-single digits next year. I would say that's really driven by 2 things. Number one, the number of new deliveries that we have coming next year in terms of the 220. And then the second driver is really all of these aircraft returning from AOG. So I mentioned going from an average of 9 this year to low to mid-single digits next year. We do have some reliability challenges on the A220 that we're working collaboratively with Airbus Canada on. But it is impacting us. It's just the materiality when you look at the capacity growth next year isn't as large. It's really the new deliveries and the return from AOGs. Thomas Fitzgerald: Okay. That's really helpful. And then -- so I'm kind of curious how you're thinking about -- I know the technology was a big part of how you -- the operational and reliability improvements. I'm just wondering how you're thinking about that on the distribution side and any levers to drive more direct channel sales? Martin St. George: First I'll start by saying we are 3/4 direct booked right now. So we've got very, very strong penetration in direct channels. And we have -- we've taken a different strategy with OTAs than some of our competitors. We do not work with all the OTAs. We work with a very select number, and we've got very preferential distribution relationships with them. So I think the benefit of some of the technology solutions is not quite the same for us as it is for others. That being the case, we are in the process of adding NDC as a technology for JetBlue and we expect to -- I don't think we've given a date for it, but the team is working on that right now. And frankly, I think the thing that I'm most excited about is the potential it has for continuous pricing. It's very clear that airlines pricing 26 letters or 26 buckets or 26 booking codes is a technology of the 70s. And I think with what we have seen elsewhere in the world as far as the benefits of continuous pricing, I think is a great opportunity for us, and you really need NDC to make that happen. So nothing to report yet, but hopefully when we have some more firm dates, we'll come back and talk about it a little bit. And frankly, I'm having -- used continuous pricing in my previous place. I think it's going to be a great opportunity for our customers. I think there's a stereotype that continuous pricing is a trick to have price increases. When I did this before, half the prices were price cuts and half the prices were price increases. All you're really doing is trying to benefit the demand curve. And it will absolutely include lower prices as much as it could include higher prices. So we're very bullish on it. No date to report yet, but it's very much on our radar. Operator: And our next question comes from the line of Scott Group with Wolfe Research. Scott Group: So we've got lower CapEx starting next year. Any other puts and takes to be thinking about with free cash flow? I guess if we're getting back to operating income breakeven, do you think we can get back to positive free cash flow in '27? Is that the right way to think about it? Ursula Hurley: Yes, it is. As you recall, we did a $3 billion aircraft deferral last year. Really we did that in order to give us the runway to deliver free cash flow. Priority #1 is positive op margin. Priority #2 is free cash flow. And I still believe that there is a path to achieve that at the culmination of this JetForward program in 2027. We're making good progress. I'm pleased with the momentum across the initiatives. And once we hit free cash flow, priority #1 is going to be improving the balance sheet and delevering where we can because we still want to get our metrics, quite frankly, back down to pre-COVID like levels. Like that is a priority of this leadership team. And so I feel good about the path that we're on. Scott Group: Okay. And then, Marty, maybe it's way too early to ask, but any –- and we're just getting launched with Blue Sky, but what are you seeing so far, if anything? Anything different than you would have thought? Just any kind of color. Martin St. George: First of all, I'd say it's pretty much acting the way we expected it to. We've seen redemptions go both directions as far as JetBlue customers redeeming on United, United customers redeeming on us. If you look at the Os and Ds where they're doing it, I'd say, in general, it is more or less what we had expected. I will say our first redemption on United was Denver-Las Vegas from Mosaic in Denver. So that was a bit of a surprise. But to me, that's actually a good thing. And I'm happy that our customer in Denver, who's in Mosaic, is now getting utility of United. And to me, that is the fundamental goal for this, which is making sure that customers who align with TrueBlue have a full assortment of places where they can earn and burn. So as much as -- nobody had Denver-Vegas on the bingo card. I think I was really happy that that's who it was, because you have a customer who has raised his or her hand in Denver, has flown up till Mosaic, who now is getting some great utility. So to me, it's a big win. And I actually love this and this is exactly why we did this program. Operator: And our next question comes from the line of Brandon Oglenski with Barclays. Brandon Oglenski: And I don't mean to be too critical here, Ursula, but when you said modest capital next year and then in relation to the way you answered Scott's question there, maybe breakeven free cash flow by '27, I don't know -- I mean, is modest like maybe $1 billion, $1.5 billion ballpark, like the incremental capital you need to get there? Ursula Hurley: No, the number is not going to be that large. I mean I think I mentioned in one of the Q&A responses, we're not anywhere in the realm of the raise that we did in 2024 in terms of quantum. I think what I highlighted in my prepared remarks is we do have 10-plus deliveries next year, then we do have a convertible debt paydown of $325 million. So modest is much lower than what you foreshadowed. I will call out, clearly, we've seen fuel spike in the last 5 days. It's just something to be aware of. We are watching that closely, as well as the more general like macro like demand environment. But I still believe that we have a path, and we're trying to be very thoughtful about when and how we raise any level of debt just given where the balance sheet is today. Brandon Oglenski: Okay. I appreciate that clarity. And then on the outlook for growth next year, I get it, like you're getting AOGs back in the air. But is the cost structure already in place, meaning you've just been inefficient for the past 18 months and you're putting that back to good use? Or do you need to incrementally scale up crews and other infrastructure? Ursula Hurley: No, I would say that the capacity growth next year is going to be efficient for us. We've done a great job managing the cost structure as we've navigated this year, but we're not going to find ourselves in a position where we need to hire excessively to support next year's growth trajectory. So I think this is -- from a unit cost perspective, the growth next year is definitely a tailwind for us. Joanna Geraghty: And I'll just add maybe. I mean, our crew members have been great over the last year taking voluntary programs, agreeing to reduce hours. So we've really done a good job trying to reduce the costs we've had because of the grounded fleet as much as possible. And when we think about growth in general, it's really about making sure we grow responsibly. We will continue to manage the peaks and the troughs. As Ursula has mentioned, it's focused on capital preservation and capital-light growth. We're managing for returns and then obviously ensuring our unit costs remain in check. And so at the end of the day, I think we've navigated a very challenging period with these aircraft on the ground and we've navigated it as well as one can and our crew members have been a hugely important part of that. And we're looking forward to growing next year because that's ultimately going to get us back on the right path to sustained profitability. Operator: And our next question comes from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker: Marty, you said that troughs continue to be challenging. Obviously, that's very understandable given the macro. But do you feel like that's cyclical or structural? And if it is more structural, then how are you thinking about 2026 capacity planning especially in 1Q, which tends to have more trough periods? And do you think you need to be more aggressive on taking out capacity there? Martin St. George: Ravi, a good question. I mean, here's what I would say. Troughs are always challenging as a leisure-focused airline. This is not new. I would say that having looked at previous economic slowdowns or I'm not sure what you want to call the 2025 situation, but previous times where revenue has gone down, this is a very, very common change and nothing that we were unprepared for when the time came. I think that we'll sort of be able to finally call this change in demand done when we see troughs get back to a little bit more normal level. But they will always be a challenge for us and that's just the status of being a leisure airline in general. Ravi Shanker: Understood. That's helpful color. And maybe a quick follow-up. Can you just expand on your corporate comments? I think you said that yield was pretty strong. What are you seeing in the East Coast in particular? I think there's some optimism about a pickup in activity clearly in that? Martin St. George: So just to be clear, Delta corporate business is a very small part of our business, I think very much given our network. And year-over-year -- Joanna talked about the changes we made to the network in 2024 and very early '25. That really pretty significantly reduced our presence in corporate markets. I mean, at a point in time, we had 50-something flights to LaGuardia. We're now in the teens. So a lot of our corporate supply has actually gone away. And frankly, I've been very, very happy with what we've seen on yields. I mean, yields up double digits in our Delta corporate markets. I think it's very clear to say, just to scale this, our total sales team, I can count on 2 hands. We don't have the incredible breadth of corporate contracts. And it's basically -- it's really based on our network. In New York, LaGuardia is the preferred airport. We have some good corporate customers in Boston and Fort Lauderdale. I'd say, by far, our biggest attractiveness for corporate has been Mint and our pricing. And I think overall, it will always be a part of our network, but leisure will still be the bread and butter for us. Operator: And our final question comes from the line of Conor Cunningham with Melius Research. Conor Cunningham: Just 2, if I may. Just on the RASM outlook for 4Q. Can you maybe parse out the -- what you're seeing on the U.S. domestic side versus Latin and transatlantic? And then I'll just squeeze my second question in. On maintenance next year, it seems like you have –- your maintenance is up 30-something percent this year. The E190s are gone. I think that there's a huge tailwind into 2026. Just trying to understand how that all flows through. Martin St. George: All right. Conor, I'll take the first half on the RASM. In general what we're seeing in RASM is -- from a regional perspective is more -- it is pretty consistent is what we're seeing overall, which is better numbers in international than domestic. So I don't think there's anything -- there's sort of no dramatic news there as far as any significant change in trend. And frankly, I think that what we're seeing as far as changes in capacity from the ULCCs will ultimately help that. It's very clear that as capacity has come out overall, that should put less pressure on the back of the airplane. But I think it's a little bit early to call that trend right now. And I'll leave the maintenance comment to... Ursula Hurley: Yes. Just on maintenance, Conor, I would say when you look across all the P&L cost line items, maintenance is still going to be a headwind next year. I mean, about half of our fleet is the A320. And that fleet is aging. It's not on a flight hour agreement. It's on a time and material agreement. So it is still going to be a headwind. Obviously, that's going to be offset by all of the JetForward cost initiatives, I think technology, I think productivity. So maintenance will be the one headwind. But as I mentioned in my prepared remarks, we are targeting a low single-digit CASM ex fuel next year. So I'm pleased with the overarching like trajectory and the team's ability as we navigated through this year to execute to the cost performance. We improved the midpoint of our full year guide, and that's really attributable to the teams. And that's despite a 1 point pull in capacity. So super pleased with the execution, and that's going to continue as we navigate through 2026. Operator: And ladies and gentlemen, that will conclude today's conference and we thank you for your participation. You may now disconnect.
Operator: Greetings. Welcome to Ecolab's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. At this time, it is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations for Ecolab. Thank you, Andy. You may now begin. Andy Hedberg: Thank you, and hello, everyone. Welcome to Ecolab's third quarter conference call. With me today are Christophe Beck, Ecolab's Chairman and CEO; and Scott Kirkland, our CFO. A discussion of our results along with our earnings release and the slides referencing the quarter's results are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplement materials include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10-K and our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. With that, I'd like to turn the call over to Christophe Beck for his comments. Christophe Beck: Thank you, Andy, and welcome to everyone joining us today. And I'd like to start by recognizing the strength and the resilience of Ecolab's team. Because in a year defined by a persistent macro uncertainty that we've all lived through and shifting global dynamics, our team continues to deliver consistent double-digit earnings growth. And they focus on what matters most, our customers, our strategy and our long-term goals, is what enables us to perform at a very high level quarter after quarter. And we've seen that in the third quarter where sales growth improved fueled by accelerating pricing, up to 3% from 2% last quarter, while volumes increased 1%. This momentum was driven by double-digit organic growth in our growth engines, which is remarkable and which includes Pest Elimination, Life Sciences, Global High-Tech and Ecolab Digital. Our core businesses, Institutional & Specialty and the rest of Global Water, delivered solid growth. All of this supported by exceptional total value delivery through best-in-class breakthrough innovation and disciplined execution of our One Ecolab enterprise growth strategy. In total, our growth engines and core businesses represent about 85% of our total sales, and they delivered 4% organic sales growth and mid-teens organic operating income growth. This strong performance more than offset ongoing market softness in our underperforming businesses, Basic Industries and Paper, which together represent the remaining 50% of our global sales. And these 2 businesses declined 3% and had an impact of 1 percentage point of volume in the quarter. So let me briefly expand on each of these drivers before sharing how we're thinking about the remainder of the year and how we're positioned to deliver another strong year of double-digit EPS growth in 2026. Pricing accelerated to 3% this quarter, driven by the full implementation of our trade surcharge and continued value pricing that's working really well. As always, the total value we deliver to customers continue to outpace and by far our total pricing, as our technologies and services help to deliver enhanced business outcomes, operational performance and environmental impact for our customers. Our breakthrough innovation is the strongest it's ever been, delivering significant value for customers and growth for Ecolab. In Institutional & Specialty, breakthrough innovations like the ones you've seen at Investor Day, like DishIQ, AquaIQ and ReadyDose, are growing double digits as these solutions help our customers improve operational performance, optimize the scarce labor resources and reduce total cost. In our Pest Intelligence platform, we've now installed over 400,000 intelligent devices, formerly called mousetraps, on our way to deploying over 1 million devices. With this leading technology, we aim to deliver 99% pest-free outcomes as we harness the power of our ECOLAB3D digital infrastructure and our expert service capabilities. Within Global Water, we recently launched 3D TRASAR for direct-to-chip liquid cooling for next-generation AI data centers, which uniquely monitors and optimizes coolant performance in real time. And when combined with our full portfolio of data center cooling technologies, we're helping to reduce up to 10% of the power used to cool data centers, which can now be utilized for compute power. And this is just the beginning as we build our leadership position in data center cooling and water circularity [ in microelectronics ]. And finally, within Global Life Sciences, we've launched a series of cutting-edge drug purification resins for the bioprocessing industry, which drives the improved product quality and significant operational efficiencies for our customers. When Ecolab focuses its breakthrough innovation on solving critical customer challenges like these, everyone wins. One Ecolab is helping us unlock significant cross-sell opportunities across our customer base. In total, this represents a $65 billion growth opportunity, with $3.5 billion of this sitting with our largest customers. And we're seeing early successes in businesses like Institutional & Specialty and Food & Beverage that are growing very nicely. Talking about that, in Institutional & Specialty where organic sales grew by 4%, outpacing end market trends, and this good performance is being fueled by the exceptional value we are delivering to customers, which we capture through value pricing and growth from One Ecolab. With this, we're working to deliver best-in-class operating performance for customers as they utilize more of our breakthrough technologies across more of their locations. In Food & Beverage, growth continued to accelerate with organic sales up 4% this quarter, once again ahead of market trends. This strong acceleration is being driven by One Ecolab where we bring together our industry-leading cleaning and sanitizing water treatment and digital technologies. This comprehensive offering delivers significant customer value to improve food safety, lower operating cost and optimize water usage, which was always our promise. And of course, our growth engine delivered another quarter of double-digit sales growth. These businesses are gaining momentum and Ecolab is well positioned to capitalize on the strong secular tailwinds driving these markets. So let me unpack them one by one. Pest Elimination delivered 6% organic sales growth. And as mentioned earlier, the Pest Intelligence rollout is going extremely well. Our Pest team has just won another very large retailer here in the U.S., which has thousands of locations which we will be deploying in the coming months. This innovation is transforming our Pest Elimination model as we shift from spending 95% of our time physically checking every device to 95% of our time solving critical customer problems and selling new solutions. Even with ongoing investment in Pest Intelligence, operating income margins improved to nearly 21%, driven by our strong sales growth and the leverage we're generating from Pest Intelligence. Life Sciences sales growth also improved to 6%, led by double-digit growth in biopharma and pharma and personal care. This very strong performance overcame capacity constraints within our water purification business. Looking at the fourth quarter, we expect Life Sciences year-on-year sales growth to moderate a little bit from third quarter's 6% growth as we compare against nearly 70% growth in our bioprocessing business last year, but underlying same trends. Despite this strong comparison, we expect bioprocessing to still grow double digits in the fourth quarter as we continue to gain share in this super-attractive market. Global High-Tech continues to grow rapidly, with sales up 25%. We've built an incredible growth platform where we're uniquely positioned to serve the high-growth data center and microelectronics industries. And the pending acquisition of Ovivo electronics will more than double the size of Ecolab's Global High-Tech business to nearly $900 million, further strengthening this growth engine by bringing together Ovivo's very unique, attractive water technologies with Ecolab's leading water solutions, digital technologies and global service capabilities. The combined technology platform will enable Ecolab to expand our offerings to provide circular water solutions for microelectronics, helping to maximize chip production and quality for this booming industry. Ecolab Digital maintained its strong momentum, delivering 25% sales growth this quarter. Ecolab Digital now has annualized sales of more than $380 million, driven by rapid growth in subscription revenue and digital hardware. Overall, Digital is a $13 billion growth opportunity for Ecolab, with $3 billion of this sitting within our existing customer base. So we remain focused on capturing this high-margin opportunity as we leverage our leading digital technologies and monetize our large and expanding installed base. We're not only leveraging AI to build new fast-growing capabilities in Global High-Tech and Ecolab Digital; we're rapidly leveraging it in our own operations to dramatically improve our customer experience and enterprise performance. With this, I'm very proud to share that Ecolab has ranked #9 on the Fortune AIQ 50 List recognizing the companies most prepared for the age of AI. Our global teams are quickly scaling AI to drive innovation, deliver customer impact through our best-in-class model and deliver significant cost savings. Finally, we remain confident in our team's ability to get our 2 underperforming businesses, Basic Industries and Paper, back to growth. And they're already making meaningful progress. We've shifted resources to support emerging opportunities, like in power and precious metals where they're supporting AI-driven power build-outs. For end markets still facing near-term demand headwinds, like Paper, we're focusing on innovation that can drive significant operational savings for customers. We're also leveraging our One Ecolab growth strategy in these businesses to expand relationships with existing customers. These actions are working as evidenced by our share gains and relative outperformance in these end markets. But we're not satisfied. While we expect these markets to remain soft in the near term with actions well underway, we anticipate these businesses to return to growth during 2026. One of the greatest strengths of Ecolab for decades has been the breadth and diversity of our portfolio. While not every business delivers strong performance at all times, our diverse portfolio is the key reason Ecolab collectively delivers double-digit EPS growth in nearly any environment. With our strong performance, we drove a 110 basis point increase in our organic operating income margin, which reached a record 18.7% this quarter. We continue to expect our operating income margin to expand at steady levels due to growth in high-margin businesses, value price, share gains and productivity improvements reaching a strong 18% for the full year '25. Importantly, our margin expansion also includes significant and ongoing investments in our business. We continue to make these growth investments as they fuel high performance in the quarters and years ahead. As a result, we're increasing our '25 full year adjusted diluted EPS midpoint to $7.53, with a range of $7.48 to $7.58. Beyond this year, we remain firmly on track to achieve a 20% OI margin by '27. And as mentioned during our Investor Day last month, we expect to continue our momentum with 100 to 150 basis points of annual OI margin expansion to 2030. This positions us extremely well to continue to deliver steady 12% to 15% earnings growth in '26 and beyond. In closing, our third quarter results reflect the strength of our business and the power of our strategy. Our pricing discipline, breakthrough innovation and One Ecolab execution continue to drive share gains and margin expansion across our core business. Our growth engines are scaling rapidly and positioned to benefit from long-term secular tailwinds. All of this is enabling us to deliver consistent earnings growth even in a complex and complicated macro environment. With strong and resilient free cash flow and an extremely strong balance sheet, we're very well positioned to capitalize on both organic and inorganic growth opportunities to create significant value for our customers and drive attractive returns for our shareholders. I remain very confident in our ability to deliver sustained strong performance in Q4 this year and beyond. Thanks again for your continued trust and your investment in Ecolab. I look forward to your questions. Andy Hedberg: Thanks, Christophe. That concludes our formal remarks. Operator, would you please begin the question-and-answer period? Operator: [Operator Instructions] And the first question is from the line of Tim Mulrooney with William Blair. Benjamin Luke McFadden: This is Luke McFadden on for Tim. I wanted to ask about the Global High-Tech business. We noticed the slides mentioned some recent market share wins in data centers. Can you talk a bit more about how you're achieving and measuring the gains here? And I know you haven't closed the deal yet, but curious to hear any updated thoughts on the Ovivo acquisition and how you would characterize the growth opportunity in microelectronics post deal close relative to your already strong performance in this end market today. Christophe Beck: Thank you, Luke. Love that field, as you know. So let me step back a bit because it's important. So for all of us to understand, so High-Tech for us is a combination of data centers and microelectronic plants, many call it fabs, which at some point will be 2 businesses focused on different technologies, obviously. But for now, it's really High-Tech, combining data centers and microelectronics. And it's a field that attracts most of the global investments, as we know. And we expect these global investments to continue to drive that growth trend. Even though we don't expect it to be a straight line to heaven, there will be, obviously, some more difficult and some better times ahead, but generally, it's going to be the growth of our times. When we think about some of the facts, talking about metrics, Luke, so 1 data center opens in the world every 1 to 2 weeks, with an investment ranging from $500 million to $3 billion. And there are 10,000 data centers in the world today. So it's showing a hard -- a strong base that's getting even bigger as we speak. On the other hand, you have 1 fab, 1 microelectronics plant, that's opening up roughly every month or so with average investments in the billions. There are 500 fabs today and expected to be 100 more, getting to 600, in the next 10 years. So we can see the pace at which those data centers and fabs are opening up, and our objective is ultimately to be in and hopefully own each of them around the world. So the key thing is that all of this will require way more power and way more water, which is where our role comes into it. Because as mentioned as well, by 2030, we expect that this industry, powering AI with fabs and data centers, will need the incremental power of the whole of India in the next 4 years and the drinking water needs of the whole of the United States as well at the same time, because data centers will need to be cooled and fabs require vast amounts of ultrapure water. And the cool news is that those are technologies that we master, we've been mastering for a very long time. Nobody understands water better than Ecolab. We've been in the cooling business for a very long time and we've been in the water business, obviously, for a very long time as well. So we're building offerings that are helping data centers to be cooled in more efficient way by reducing the amount of water and moving towards direct-to-chip technologies. That helps cooling faster, this means more compute power, and this means less power for cooling and more power for compute, which is exactly what the tech industry is looking for. On the other hand, we're providing circular water solutions for microelectronics manufacturers because 1 fab requires roughly the drinking water needs of 17 million people. And the pace at which it's being built, well, that's not going to work for the communities, obviously. So the tech industries, the famous ones, especially in Asia, but in the U.S. as well, well, are looking for solutions to reuse and recycle water. But here is the key point, that water that's being used in those fabs needs to be ultrapure water, which means roughly 1,000 times more pure than the water that you would use in drugs, that you inject in your bloodstream, which is exactly what Ovivo is doing. So by bringing what Ecolab has always done in water circularity plus the capabilities of Ovivo in ultrapure water, we help microelectronics, ultimately, reuse and recycle water at ultrapure water level. So at the end, '26 for Global High-Tech, assuming we close, obviously, on Ovivo, will be roughly a $900 million business, growing double digits, with very strong margins. And it's important to keep in mind that, for us, it's a new step, a further step on our high-tech journey and one that will change over time the growth profile of our company. So a very good new chapter for our company. Operator: Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: I just wanted to focus on the Basic Industries and Paper returning back to growth in 2026. I was wondering if you could drill down further about on shifting resources, innovation as well as share gains, how that can help offset some of the end market weakness? Christophe Beck: Yes. Thank you, Ashish. I really like the underlying performance of that business. It's a good margin business, just that you know as well, it's slightly below our company average. But it's still a good business, good margin and good underlying performance. The biggest issue we have in that industry is it's consolidating, which means that they are closing mills. And mills are very big. And those mills, obviously, when they close are impacting our growth and there's not much we can do. We lose very little to competition; we gain share in the existing and new mills. But when a mill is closing, well, we lose those sales. And that's what's happened over the last 18 months. We see that process of consolidation slowing down. We see our underlying performance driven by what you were saying, innovation, improving as well. And I think the combination of both ultimately will be positive for Paper. So I think that we are reaching the bottom of that cycle in Paper. And I think in the next, I don't know, 1, 2, 3 quarters, Paper is going to get back to a growth trajectory, and the sooner the better, obviously. And on the Basic Industries, we have regrouped our resources, we're driving critical mass as well, driving efficiencies. But it's really making sure that we capture as much market share as we can right now as the market recovers as well. And similar to Paper but for different reasons, we see as well kind of the bottom come in the next couple of quarters, and then we should get back to a good place. So in both businesses here, 50% of our company, we need to keep that in mind, and there will always be a few businesses that are having subpar performance. I like the underlying performance. The market trends have been hard in the past. This is changing. So that's why I'm quite optimistic we will like where those 2 businesses are going to go. But at the end of the day, let's keep in mind that 85% of the company is growing very well with mid-teens operating income growth. So in a very healthy place. Operator: Our next question comes from the line of John McNulty with BMO Capital Markets. John McNulty: So I had a question on pricing. I guess if you can take the tariff surcharge out of the equation, I guess would you say that pricing is getting easier to push through just because the value proposition is becoming more evident? Or would you say -- or would you characterize it as maybe getting tougher just because there may be price fatigue, inflation may be moderating a little bit? I guess, how would you characterize it? Christophe Beck: Thank you, John. I would say the same. It's hard to put a metric obviously on that. But generally, the fact that pricing is getting stronger -- our total value delivered, by the way, is getting much stronger too. And we're always trying to get 2% to 3% -- sorry, more total value delivered than pricing that's being captured. So it's a good deal for customers. I feel that we're in a pretty good place. And our retention is very high, in the 90s, as you know, and it's remaining very stable as well at the same time. So a good story of customer for life with good retention, sharing the savings that they get in their operations, that translates into value pricing. And you're right, on top of it, so the tariff surcharge, or trade surcharge as we called it, is helping as well. But that's why I feel that 2% to 3% value price for the long run seems to be the sweet spot for our company. Operator: Our next question is from the line of Andrew Wittmann with Baird. Andrew J. Wittmann: Great. I had 2 questions. I guess, Christophe, just talking about the Water business as well here, you discussed the top line impact, the quarter, very detailed. Just wondering if you could just help us understand a little bit about how that top line is affecting that segment's margin performance? So maybe if you could bifurcate that as well. And then just quickly, kind of a technical question here, you mentioned a large new Pest customer. I was just wondering, was that referencing to an entirely new customer that is not a customer today? Or were you saying that's just a conversion to the new technology? Christophe Beck: Thank you, Andy. So 2 different questions, obviously. I think the easiest way to talk about Water top line and margin, if you exclude Basic Industries and Paper, which I know is a bit of a challenging accounting approach here to make sure I remain in GAAP. But generally, Water would be having a 4% top line growth and a 15% operating income growth excluding those 2 businesses. So it's pretty clear where our work is focused on, and that's why we're focusing on these 2 businesses, to make sure that we enjoy all the good side of the Water business that we really love and that keeps getting better. Now on the Pest question, so we never mentioned which customer that is just to respect, obviously, their own confidentiality. But it's a new one, which has been really interested by that new technology. The fact that we focused early on, on the biggest out there helps, obviously. So everyone else see that it's good, the leading companies are embarking on that journey and that it's really working. So that's going to be, I think, helping us for the future as well because the more of those great retailers we have onboard, the more others will join as well. It's an ideal proposition for them, 99% pest-free. A good deal for their own operations, it's good for us. It's exactly the model that we want to build in the future. We're early on that journey, as mentioned, 400,000 devices today, but we will be at 1 million first half of next year. So it's showing how quick we're moving here, and we're clearly leading the industry, which is helping customers come to us. Operator: Our next question is from the line of Vincent Andrews from Morgan Stanley. Vincent Andrews: Christophe, if I could ask you for an update on One Ecolab. In particular, I know the focus initially was the top 35 customers, so as we get to year-end 2025, where will you be in terms of sort of the work you wanted to do with that top 35? And as we get into '26, will you be rolling it out more aggressively to the next 25 or 50 or what-have-you? Or how should we think about the layering in of incremental One Ecolab efforts from '25 to '26? Christophe Beck: Thank you, Vincent. So the way we approach it -- and I don't remember how public I was with it. So we launched One Ecolab a year plus ago, as you remember, mid of last year. And we said we will start with 3 customers in 3 major industries of the company, to move towards, we called it internally the Mag 7. They're not exactly the same as the ones you would have in mind, but some are, obviously, in '25. And then to move towards the top 20 E15 in 2026, to really make sure we can demonstrate that customer after customer and learn as an organization as well without boiling the ocean. It's progressing very well. Customers are very receptive. And the best example is really Food & Beverage United, where we brought Hygiene and Water together in North America, which you see the results in Food & Beverage, how the growth trends have shifted towards higher growth. It's exactly driven by One Ecolab, focused on some of those critical customers. It's where the whole idea came from when we acquired Nalco, by the way, in 2011. So it's an old idea that's coming to life, very well received by customers, working in terms of growth, and we will expand as we move forward in 2026. Operator: The next question is from the line of Patrick Cunningham with Citigroup. Patrick Cunningham: How should we think about SG&A leverage, particularly in Pest and Life Sciences, next year as you start to lap some of the growth investments you've made across both businesses? Is it a relatively linear path to your 2027 targets? Or is there sort of a continued step-up in growth investments embedded next year? Christophe Beck: Thank you, Patrick. Scott was looking for a question, so this is a perfect segue. And I would suggest we start with SG&A in general as well and then focusing on these 2. Scott Kirkland: Yes. Thanks, Patrick. As we've talked about, SG&A productivity has been a great story over the last several years. Since 2019, our SG&A leverage has improved 150 basis points, and we're expecting to improve another 20 to 30 basis points this year for full year 2025. As we talked about at Investor Day, beyond 2025, with the benefit of the One Ecolab savings that we're driving and net of investments, we will continue to invest in the business. And that leverage, I expect it to be pretty broad-based. Certainly, we are investing in the growth businesses, the growth engines, but expect going forward to deliver 25 to 50 basis points of SG&A leverage, benefiting from the One Ecolab program and the technology we're deploying. Christophe Beck: And what I really love on that whole journey, it's not becoming cheap and saving money left and right. It's leveraging digital technology, agents. We have many now in our organization. That's why being recognized as one of the leading AI companies in the world was a really cool news for us. It's really leveraging technology to do more with less. And we are still early on that journey, so I think it's going to keep getting better. So really good work here that's feeding ultimately the growth story that we want to capture. Operator: The next question is from the line of Manav Patnaik with Barclays. Manav Patnaik: I just had a question. The 85% of your business, core, I guess, you said was growing 4%. Assuming the macro stay the same, I guess, it sounds like it's the growth engines that could take that higher. And so I'm just trying to understand from your perspective, how long do you think before that mix is big enough to start moving the needle? Because you've obviously delivered well on the margins and EPS, and I think we're all looking to see if revenue growth can be better. Christophe Beck: That's a great question. As I was sharing at the Investor Day and with the team, the beauty of the company is our broad exposure to end markets, which means that we won't have all end markets in the red at the same time, but which means that we won't have all end markets in the green at the same time as well. So focusing on this 15% a little bit of our time to make sure that those ones are becoming less of a drag and, ultimately, a positive driver. But when we look at this 85% growing 4% and mid-teens, the growth engines are growing 12%, and even more on operating income. So which is a very good story. Ovivo is going to add to it as mentioned earlier, obviously, so High-Tech is going to get bigger. Since that group of growth engines is growing double digit, obviously, the mix is going to shift towards them over time. And I think that in the next few years, growth engines are going to become a really relevant part of our company. It's roughly 20% today at $3 billion. I would not be surprised if it becomes 30% to 40% in a few years down the road. Operator: The next question is from the line of David Begleiter with Deutsche Bank. David Begleiter: Christophe, on the price surcharge, how much did you realize? And with the surcharge now fully in place, should we think about this 3% pricing continuing for the next perhaps 2, 3 quarters? Christophe Beck: It's hard to know exactly because some businesses, like institutional, for instance, decided to bring -- and that was the same in '22, so nothing here to have it directly, so within the structural price. So we don't have a perfect tracking of that. And obviously, I don't really care because, anyway, also converging towards structural price. So with the surcharge, we're closer to 3%, obviously. That's why I'm saying 2% to 3% is the sweet spot. And since we round those numbers, sometimes you might be rounding down to 2% and sometimes to 3%, but I feel pretty good with where we are now. Our objective is to stay closer to 3%, but it depends what's happening with the tariffs as well. We're looking as well as what's happening with China, this week, we will know that in the next few days as well. The good news is that we know exactly how to manage that if we need to, and it leads to very good margin performance. So for me, 2% to 3% is the sweet spot, and our objective is to be as close to 3% as we can. Operator: The next question is from the line of Chris Parkinson with Wolfe Research. Christopher Parkinson: Could we just dig in a little bit more into the Life Sciences segment? Understanding it's been volatile over the last few years, however, it seems like there's a decent recovery pending in bioprocessing and pharma, so on and so forth. So if you could hit on the top line first, that would be helpful. And then if we could move into just the capacity additions, where we stand there and your ultimate progress towards '27 goals and how you feel about them. Christophe Beck: Thank you, Chris. It's a business and an industry that I love. And as hard as it's been the last few years, I would do it again, and we will love where this business is heading. Great team, focused exactly on the right innovations that the pharma industry is looking for to produce faster, high-quality, lower-cost drugs at a lower environmental impact. So really converging with an Ecolab model. When I look at the 3 elements that you mentioned, so top line, capacity and margins, let me take them one by one. So the top line, we've been growing low to mid-single the last few years. That was less than what we had planned for when we acquired Purolite. Well, that was during a time when the market went down, most of our competitors went down in terms of growth. Doesn't make it great for us, but at least it's adding some perspective. When I look at the growth trajectory that we have now, it's clearly accelerating. I mentioned this Q4 is going to be a bit softer because it compares to a huge growth in Q4 last year. But underlying, it's clearly accelerating. The new business is very strong. We're getting more commercial drugs as well in our pipeline, which makes a big difference, obviously. And the team keeps getting stronger and better as well. We're one of the only few companies having as well capacities in various places around the world. That adds to the resilience as well to it. And we add the whole water components and environmental hygiene that the other ones do not as well. So top line, finally, so getting from good to much better, and it's going to keep accelerating. With one caveat, is this capacity challenge that we have in our purification business, just because we have max capacity of what we can manufacture. But our plant in China in mid-2026 is going to open and it's going to enable us to unleash that growth in that part as well as the business, which is going to be great for the local market and as well for some international markets. And last point, on the margin, as we've shared as well at Investor Day, we are kind of in this mid-teens today, but underlying, it's more mid-20s because of the investments that we are making in that business as we build that franchise. So from the mid-20s to the 30, we see a clear path. But our focus is really to drive growth in that phase of the investment and then start to drive margins once we get enough growth that we can leverage the critical mass that we've built. Operator: Our next question is from the line of John Roberts with Mizuho Securities. John Ezekiel Roberts: In hospitality, you use a metric called seats in the seats. Could you give us an update on that? It seems like we have a lot of mix trends going on in the full-service restaurant market. Christophe Beck: So thank you, John. So I'm using the terms of food traffic for our business here. As you know, it's been very different versus than 2019, so before COVID, so people going and sitting in restaurants. So down 30% versus 2019. And that hasn't changed. Unfortunately, or fortunately, depending on how we want to look at it, 1/3 of the people are just going for takeaway, for delivery or for drive-thru, the famous 3D. So we see a stabilization of the food traffic, which is kind of a good news. But we've gotten used to that new model. And ultimately, with all the digital solutions that we have offered to that industry to manage this different way of selling products with less people as well, it's been a very good story, because we could grow very nicely because what we did was even more important to the hospitality industry. And it was sold at a high margin. as well. So less volume, better margins, very good growth. And I think for us, it's been exactly what we needed and it's made Institutional or the hospitality business even much better than what it used to be, and you can see it in the margin that's north of 20% today. And it's going to keep moving up with very nice top line growth as well. So far, so good. And the last point I'd say as well is our Specialty business is doing extremely well, doing even better than full-service restaurants. So the QSR, the fast food businesses growing in the high single. It's a very good story as well there, which helps us capture wherever people go depending on the economic times that we're facing. So overall, net-net, a very good story in a very new market. Operator: The next question is from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: In the Water business this quarter, did volume grow? And in Basic Industries and Paper, was volume growth negative high single digits? And did that represent a deceleration from the numbers you would experience in the previous quarters? Christophe Beck: So thank you, Jeff. As you know, so we don't disclose volumes by business, for obvious reasons. But as mentioned, every segment had positive growth, that we reported. So that's a good news. So there was no segment that was going down. And for me, it's really important that all businesses maintain positive growth, whether you're in High-Tech where it's much more obvious because the flow of the river is very strong, or you're in more challenged businesses, like hospitality, as we talked about before and seen there. So our teams are doing really well. So Water was positive with that perspective, obviously. Paper within Water was not, and it's in the low to mid-single. But it's improving. So that's why I feel quite optimistic with the next few quarters with our so-called underperforming businesses of Paper and Basic Industries. They're not where they should be. They do exactly the right things. So the underperformance -- underlying performance of underperforming businesses is strong, markets are not. But net-net, we're going to get to a good place in the next few quarters. So we're doing all the right things here. Operator: The next question is from the line of Matthew DeYoe with Bank of America. Matthew DeYoe: Just follow up on Vincent's question earlier on cross-selling in One Ecolab. Do you have any idea how much that contributed to organic growth in the quarter, or an expectation you can kind of give us for this year as it relates to just overall revenue generation? Christophe Beck: Well, Matt, it's very good actually. So we are a corporate account, as call it, driven organization, enterprise customers, to use a different term as well. And the top 20, E15 focus is contributing over average to the growth of the company. So this is exactly the right place to focus. It's always been true as a company. But to get the whole One Ecolab within an enterprise is harder to make it work very well. And that's why we've chosen to go with all our innovation, all our technology, bringing One Ecolab digital services together towards those Mag 7, as mentioned before, then the T20, E15, so the top 20 customers and emerging 15, so for next year as well. But they're doing better than the average of the company as well. So it's clearly a strategy that's working. And as we expand the focus beyond those 35 customers, it's going to help drive as well better performance for the overall company at higher margin because it's helping customers drive even more efficiencies within their own operations. And the best example is Food & Beverage, Food & Beverage United as we call it within our own company, where we brought Hygiene and Water together. And you can see the performance of Food & Beverage has been remarkable in the third quarter, and it's going to keep getting better. It's only North America that we've done it, by the way, and it's a very global business, serving global customers, with global quality standards, as you would imagine. And this one is going really well. It's a great team, with customer feedback, also because no one else can do it as well, which is a great way for us to strengthen our moat. So generally, this One Ecolab approach, our enterprise customers, is really working, and it's going to be a growth driver for the years to come. Operator: The next question is from the line of Mike Harrison with Seaport Research Partners. Michael Harrison: Christophe, just kind of following up on what you were just talking about with Food & Beverage. The performance this quarter was, I think, the best organic growth that you've shown in several quarters. You mentioned that there is some momentum from One Ecolab and from pricing. But I was hoping you could help us understand a little bit more about what's going on with underlying market dynamics that you're seeing there. And to the extent that you are winning new business, is that mostly share of wallet and One Ecolab opportunities with existing customers, or are you seeing some new wins in that business in Food & Beverage as well? Christophe Beck: Good question, Mike. It's -- 4% organic growth in Food & Beverage is strong, so for sure. It's much better than the market. Consumer goods are not exactly growing fast. When you look at the companies out there or the, obviously, saw famous names out there are closer to flat than to mid-single type of growth. So really pleased with the performance that we're driving. And we're doing it while increasing our margins as well at the same time. So it's almost a perfect play what's happening in Food & Beverage here, with this unification of Hygiene and Water. And again, it's only North America that we've done it so far, which is less than half our global business, but it's showing how well it's working, that whole approach. And to your point on the share of wallet and white spaces, it's a combination of both. We're getting, gaining definitely some new customers, new plants as well within existing customers as well. Because by bringing Water and Hygiene together, we help them not only produce higher-quality, safer food, but reduce a lot of costs as well at the same time. So in a slow growth industry, that's exactly what they're looking for. So what we're doing for them is exactly what they're expecting. But at the same time, we're adding digital technology that we monetize, charge for, using a different term. And we get as well the value share, so our share of the savings we're generating for them in terms of value pricing, that's also incremental. So it's a combination of white spaces and share gains. Overall an awesome story for probably one of our best global businesses that we have. Operator: Our next question is from the line of Laurence Alexander with Jefferies. Laurence Alexander: It looks like your operating results are running -- I mean, your organic growth is running pretty much in line or better than what you thought earlier in the year. FX looks like it's basically double the tailwind of what it was last year. Can you talk a little bit about the gives and takes and what levers you have to pull if currency moves the other way next year? Christophe Beck: Yes. Good question, Laurence. Let me pass it to Scott because it's an FX, DPC question. Scott Kirkland: Yes. Thanks, Laurence. Hey, as we've talked about, the underlying performance remains really strong. So even with FX, I mean the underlying EPS, the OI is growing double digits. And as you think about just in Q3 itself, while FX is in line with what we expected and as we guided, you also have the impact of year-over-year SG&A comp that is offsetting that FX in benefit of the nonoperating. So that underlying growth is really very strong. We previewed the year-over-year comp in SG&A during the Q2 call, and expect that Q2 -- our Q4 performance to continue as the SG&A normalizes. But we also are seeing commodity costs growing low to mid-single digits, and overcoming that as well. Operator: The next question is from the line of Jason Haas with Wells Fargo. Jason Haas: I'm curious if you could talk about the Pest business, if you've seen any increasing costs for leads or any increased competition in that space recently? Christophe Beck: If I understood well your question, so on Pest, Jason, so the SG&A versus competition? Is that what you asked? Jason Haas: Sorry, just to be more clear, I'm asking if the customer acquisition costs have gone up at all, if you've seen any step-up in competition from one of the major players out there? Christophe Beck: Customer acquisition costs. Okay. I wanted to make sure I got it right, Jason. Actually, it's become easier because -- and we're early on that journey, as mentioned. So we got 1 major retailer in the U.S. We're getting the second as we speak. We wanted to do it large customer by large customer. It's not a geographic play. It's a customer play because, ultimately, one brand wants to be safe and not have any issue in social media or whatever, really to concentrate on guest satisfaction and quality of the experience and the food, obviously, here. But what we offer here with all the digital technology, all the AI that we've developed within the company for many years now, well, is serving the needs of our Pest Intelligence business. No one else can provide as much technology as we can and have such a backbone like ECOLAB3D as well at the same time. So it's a leading offering. It's ahead of the competition. Customers are very open to it. And what I really like as well with it is that the whole industry, even if not moving all at the same pace, is trying to add value to customers and get paid for it as well at the same time. So very healthy competition. And it's a good thing for customers and for the guests, called the ultimate consumers of the thing, whatever those locations are, ultimately. And in terms of operating costs, well, when 95% a few time was spent in the past checking devices that were empty and you spend 5% of your time doing it tomorrow within your system, your operating costs are getting better and you can spend much more time acquiring new customers and serving them even better, which is why our margins is improving as well at the same time. We love that business. It's going to keep -- it's on a strong base of performance right now. It's going to keep improving as we move forward. And margin is going to improve as well. But I want to make sure that we keep investing as well in there because until we are 100% with the Pest Intelligence model around the world, well, we will not slow down our investments that has real impact on the operating margin, but it's still improving, as you could see since we're north of 20% now. Operator: Our next question is from the line of Josh Spector with UBS. Joshua Spector: I wanted to ask from a general context. You talked about '26 confident in the low to mid-teens EPS growth. I think around this time a year ago, you made comments around you don't really need strong volumes to get there. You're really confident in the price/cost equation. I guess when you sit here today and look out a year, do you feel the same way that you can kind of get there with 0% to 1% volumes and, if you start to see an acceleration, that's upside? Or would you frame it differently? Christophe Beck: I see exactly the same way the way that you described it. With the only caveat, we don't know how the environment is going to be in '26. We had some very firm plans for '25 with very strong FX headwinds and delivered product cost that would be really helping. Well, it was exactly the other way around that it happened in 2025. And still we delivered what we had promised in terms of top line, but most importantly, in terms of bottom line. So when I think about '26, for me, it's going to be a strong year, very similar to '25 with 3% to 4% top line, positive volume, 2% to 3% price, to drive this 12% to 15% EPS, and at least 100 basis points in terms of operating income margins, to get to 19% plus, which is bringing us closer to the 20% that we committed to for '27. FX are going to be a help. Inflation might be a little bit of a headwind in '26, and everything else that we don't know. But I feel really good on that trajectory. And to your point, if things improve, if our end markets are even more open to what we do, well, that's going to be upside. That's why I feel really good with where we're heading in 2026 one more time, like it's been in the past few years. Operator: Our final question is from the line of Kevin McCarthy with Vertical Research Partners. Matthew Hettwer: This is Matt Hettwer on for Kevin McCarthy. Thanks for all the color on data centers that you gave earlier. Just following up on that conversation, I wanted to get your thoughts on how Ecolab is positioned with regards to next-generation cooling technologies such as direct-to-chip cooling. Do you have everything you need to compete and win there? Or should we expect additional bolt-on deals in that arena? Christophe Beck: Love that question, Matt. No one has everything they need for direct-to-chip cooling. This is leading-edge, obviously, technology. It's 5% of the data centers; those are the newest. But interestingly enough, when you say direct-to-chip cooling, liquid cooling, this is fluid management. This is exactly what we've done for a very long time, so managing fluids in a bunch of different industries, obviously. So in a way, it's coming closer to our own mastery of science and technology. So when I think direct-to-chip cooling, well, we've talked about our cooling distribution units that we call coolant intelligence unit, because they integrate 3D TRASAR technology that we've been obviously developing for many, many years. So we have that technology in the middle of a data center integrating 3D TRASAR. We've developed as well connected coolant, so the liquid itself, so to make sure that you have the best thermal performance to cool the chips as well. We have coolant monitoring systems as well to make sure that you don't have leaks, you don't have fouling, you don't have anything bad that's happening as well, to maximize as well the performance of the data center. And you have everything else obviously that's going up the chain, in chillers and towers, on the roof. The latest data centers that we're serving have no cooling towers on the roof and have no water in there as well. So we have many pieces that we need and we're developing and exploring the new pieces that we will need as well in the future. And that's why I think we're just at the beginning of that journey, but that's a field that's exactly what Ecolab should be focused on. We should become the owner of cooling technology for data centers in the world. And that's refocusing all our efforts, all our resources and all our investments as well in Global High-Tech. And on top of it, we do similar, obviously, with microelectronics, different technology. As mentioned before, it's reuse and recycle of ultrapure water, and that's where Ovivo is playing exactly, in that field. So it's really serving our dual strategy in high tech, to be the owner of circular water -- ultrapure water standards in microelectronics, and cooling technologies in data centers. And that's why I'm so bullish about what we've done, where we are today, but most importantly, where we're going. And that's why I'm saying, it's going to change over time the growth profile of this company because it's a huge growth wave and we're very well positioned on that wave. So we like where we are. The competitive set is strong out there, but no one understands cooling and water better than we do. So I would clearly bet on the Ecolab team. Operator: Thank you. At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to management for closing comments. Andy Hedberg: Thank you. That wraps up our third quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation. I hope everyone has a great rest of your day. Operator: Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Have a wonderful day.
Operator: Ladies and gentlemen, welcome to the Temenos Q3 2025 Results Conference Call and Live Webcast. I am Matilda, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Takis Spiliopoulos, Interim CEO and CFO. Please go ahead. Panagiotis Spiliopoulos: Thank you, Matilda. Good evening, good afternoon. Thank you all for joining us for our Q3 '25 results call. I will talk you through our key performance and operational highlights for the quarter before updating you on our operational and financial performance. So starting with Slide 6. We delivered a strong performance in Q3 '25, benefiting from a stable sales environment throughout the quarter. There was no impact from the U.S. bank credit concerns in Q3, and we have not seen any impact so far in the current quarter. Demand in Q3 was broad-based, and we signed a number of deals across new logos and the installed base. I would note that there were no large deals in the quarter, though we do have several we expect to sign in Q4. We announced a number of AI-powered products this year, in particular, our AI agent for financial crime mitigation and Money Movement and Management, and we have seen good traction on both of these. From an investment perspective, we have continued executing our strategic road map, investing across the business. Sales headcount, in particular, is on track to increase by around 50% by year-end. When we launched our new strategic plan in November last year, we indicated we expected around $20 million to $25 million of cost savings in 2025, and these efficiency gains are largely funding the investments we are making this year. The operating leverage in our business model is evident. Our profitability has therefore benefited from the sales momentum and the cost efficiency programs, which are funding our investments. We remain prudent in our outlook given there are a number of large deals expected in Q4. However, based on our Q3 performance and the stable sales environment, we are raising our guidance for 2025 for subscription and SaaS, EBIT and EPS and are reconfirming our 2028 targets. Turning to Slide 7. We signed a number of deals with new and existing clients this quarter, and we have highlighted 4 of these on this slide. A couple of the highlighted deals are in the Middle East with clients either expanding into new geographies or launching new digital banks on our platform. We also have a client in the ASEAN region upgrading and moving to the cloud and a client in LatAm moving on to Temenos core banking in the cloud. The key things across all of these clients are the reliability and scalability of our platform, the uniqueness of our country model banks that clients can leverage to rapidly expand into new geographies and the flexibility to deploy in the cloud or on-premise, and we will continue to expand our offering in all of these areas through our R&D road map. Moving to customer success on Slide 8. This quarter, we went live on a major U.S. SaaS expansion with FundBank a global bank offering banking and custodial solutions to the asset management industry. FundBank selected Temenos to support their U.S. expansion due to our comprehensive SaaS banking capabilities tailored specifically to the U.S. market. We deployed a full suite of services, including digital and core banking, payments and data analytics on Temenos SaaS allowing FundBank to launch new products faster, elevate the digital experience and scale efficiently. Notably, FundBank can now offer a fully digitized corporate onboarding experience allowing clients to complete the process quickly and securely. This go-live continued the extension of our leadership in best of suite in the U.S., in line with our 2028 strategy around 3 core levers. On Slide 9, we have our latest payments innovation that we launched at SIBOS in September. Money Movement and Management is a single pre-integrated AI-powered platform that enables our clients to replace fragmented, siloed legacy platforms or to rapidly launch new lines of business. It is deployable on-prem, in the cloud or as SaaS depending on the clients' needs. We have already seen good traction on this and other AI-powered products such as FCM AI agent, and we will continue investing in specific AI use cases to meet the needs of our customers. Moving to the next slide. I am proud of the industry recognition Temenos continues to receive. It is a great achievement whether that is for the strength of our core banking platform, specific aspects of our offerings such as deposits or from our employees where we have been recognized as a Great Place to Work in 15 countries. This last recognition is particularly important to me and a testimony to our values and culture. People are the key to our success. Finally, on Slide 11, I would like to give an update on the execution of our strategic road map. We have been hiring talent across the R&D organization globally, in particular in India and the U.S. Our innovation hub in Orlando is having a visible impact on our U.S. expansion strategy with the first prospective clients leveraging the hub to co-innovate with our teams in the quarter. And we are on track to increase sales headcount across the regions by 50% by end of December. We have also been making investments in our sales training and governance process to maximize the quality of our pipeline. Lastly, we are looking to improve the efficiency of our operating model rolling out AI initiatives across the business, including in software, legal, marketing and finance, in addition to R&D, where the focus is on leveraging AI for development, testing and support. Moving to Slide 13. We delivered 11% total revenue growth this quarter, driven by broad-based wins with both new and existing customers. We had another strong quarter for subscription in SaaS, which grew 10% in Q3 as well as maintenance, which was largely driven by premium maintenance signings. Services revenue also grew for the second quarter in a row. Moving to Slide 14. Our EBIT grew 36% in the quarter, driven by the strong revenue growth and operating leverage. Our ongoing investments in product and tech and go-to market were largely offset by our cost savings program, in line with our self-funded investment strategy that we announced at last year's CMD with an expected $20 million to $25 million of cost savings in 2025, funding the majority of our investments. There is also some impact from cost phasing with some catch-up expected in Q4 '25. EPS grew 41% in Q3, largely driven by EBIT growth and benefiting from the lower share count. Moving to ARR. It has once again benefited from the growth in subscription in SaaS and maintenance. As a percentage of last 12 months revenue, ARR equaled 88%, up from 87% in Q3 '24. This gives us excellent visibility on future recurring revenue as well as our future cash flows helping underpin our 2028 targets as well. On Slide 16, I would like to highlight a few items. Maintenance grew nicely in Q3, up 14% and we now expect maintenance to grow around 11% constant currency for the full year. I would also flag that subscription and SaaS has grown 12% year-to-date, total revenue 10% and EBIT 24%, which supports the increase in full year guidance we announced today. Given the continued strength in EBIT growth in Q3, we now expect our EBIT margin to be up at least 170 basis points for the full year. On Slide 17, net profit was up 35% in the quarter, in line with EBIT with higher tax charges, offset by lower financing costs. The tax rate in Q3 was around 21%, and we maintained guidance of our 2025 reported tax rate of 15% to 17%, benefiting from a one-off tax benefit from prior years, which will materialize in Q4 '25. The normalized underlying tax rate, excluding this one-off benefit, remains at 19% to 21%. EPS grew by 42%, ahead of net profit growth as it did last quarter, once again supported by the lower share count. Moving to free cash flow. We delivered significant growth of 30% in Q3 '25. As expected, we are showing an acceleration in H2 '25 driven by the growth in deferred revenue and lower restructuring costs than in H1 '25. We have now absorbed $30 million of restructuring headwind in the first 9 months of the year. Free cash flow has now grown 13% year-to-date. So we are confident that we will deliver on our full year guidance of at least 12%. Next, on Slide 19, we show the changes to group liquidity in the quarter on a reported basis. We generated $61 million of operating cash and bought back $148 million worth of shares, completing our CHF 250 million buyback program in August. We ended Q3 '25 with $184 million of cash on the balance sheet. Our leverage stood at 1.4x at the end of the quarter, and we also expect to end 2025 within our target leverage range retaining flexibility for either further share buybacks or bolt-on M&A. Now moving to Slide 20, a couple of items to highlight on our balance sheet. We completed our CHF 250 million share buyback program in August at an average price of CHF 63.25 per share, representing 5.5% of registered share capital. These shares will be proposed for cancellation at the 2026 AGM. In July, we closed a $500 million revolving credit facility signed in Q2. As previously mentioned, we have no further refinancing requirements until 2028. The bond maturing in November of this year has already been refinanced by the bond issued in March of this year. Our reported net debt stood at $702 million at quarter end. Turning to Slide 21. I would first like to note that we remain prudent in our 2025 outlook, given there are several large deals in the Q4 pipeline. However, given the good performance in the first 9 months of the year, we are increasing our subscription and SaaS guidance to at least 7% to reflect the sales momentum. As a result of our operating leverage, premium maintenance signings uplift to Q3 EBIT and the self-funding of our investments, we are raising our EBIT growth guidance from at least 9% to at least 14%. Correspondingly, we are also upgrading our EPS growth guidance from 10% to 12% to 15% to 17%. We are keeping ARR guidance of at least 12%, given the delayed benefit to ARR from stronger subscription and SaaS growth, and we're also keeping free cash flow guidance of at least 12% growth unchanged. As a reminder, our guidance is non-IFRS in constant currency, except for EPS and free cash flow, which are on a reported basis. Both the 2025 guidance and the 2024 pro forma numbers exclude any contribution from multifunds. And free cash flow is, of course, under our standard definition, including IFRS 16 leases and interest costs. And lastly, we have reconfirmed our 2028 target. Before we head to Q&A, I'm sure you will have seen the statement from our Chairman in the press release that the CEO search conducted by the Board is currently ongoing. As you can appreciate, this is not something I can comment on any further. With that, operator, can we please open the call for questions. Operator: [Operator Instructions] The first question comes from the line of Sven Merkt from Barclays. Sven Merkt: Maybe one on the pipeline. Can you just comment on the quality of the pipeline and the visibility you have into Q4? You called out that there are a number of large deals in the pipeline. I guess this is the case usually in the fourth quarter. So is there anything unusual here to point out? And what sort of pipeline conversion do you assume for these large deals compared to prior years? Panagiotis Spiliopoulos: So on the pipeline, there is nothing that has changed from the previous 3 months. Clearly, we have the large deals in the pipeline as we commented back in July. And we also do not assume any change in conversion rates. The way we look at this is always as a weighted average at the start of the year when we provide guidance, clearly, we take an assumption on conversion rate of large deals, which is lower than we use for, let's say, the average deal. So nothing has changed in terms of the pipeline. What we have clearly seen is no impact from any macro uncertainty. I think that's good to highlight, given we're 3 months more into the year. We have seen in Q3 good execution and good conversion rates across the regions. So also nothing to highlight. But clearly, we want to remain prudent on how we assess the pipeline. Clearly, the pipeline is growing quite nicely, as you would expect with a substantial increase in the number of salespeople working to build the pipeline. But again, let's remain prudent. There is still some macro uncertainty out there, but we have seen no change in bank's behavior in terms of spending plans. Clearly, they still want to invest. They prioritize digital transformation. So this is, I would say, what we call a stable sales environment, and we expect this to remain for the remainder of the year. Operator: The next question comes from the line of Laurent Daure from Kepler Cheuvreux. Laurent Daure: I have one and a follow-up. First is on the support revenue. I mean you had another great quarter. Where do you stand in terms of the mix between the premium maintenance and classic maintenance, in order to help us to see what could be the growth rate in maintenance a bit normalized 1 or 2 years out? And my follow-up is on the U.S., if you could give us an update on a penetration of some Tier 2, Tier 3 banks that were part of your long-term plan. Panagiotis Spiliopoulos: Laurent, let me address the maintenance question first. Clearly, 14% was a good number. Discontinued the trend from what we have seen last year and also the first half, clearly benefiting from premium maintenance, but it's not just premium maintenance. Also, keep in mind, we get uplift from renewals, and we also have the CPI indexation, which over the years, obviously falls into the number. We have seen clearly clients taking up our premium maintenance offering on the one hand, but on the other hand, we have also seen clients not churning on this. So they maintain those premium maintenance offerings for a much longer period than in the past, and clearly, that helps. If you don't have churn, that helps a lot. And this is what we also see in terms of visibility going forward. Now we said 11% for the full year. So that's about the number in Q4 as well. For the next years, I think it's too early to provide specific guidance, and we're not disclosing the split other than we're growing on all the maintenance streams. For the next years, I think what we had implied in our original CMD plan was somewhere 5%, 6% as a base rate because clearly, we have seen some catch-up, so some normalization is probably what we would model in, in that case. On the U.S., as you would expect, clearly, we're seeing a very nice buildup in our pipeline for the U.S. I think also in terms of the signed deals, we will see even more of the impact materializing in 2026, in line with our strategy. The sales team is now fully in place. And I think this is clearly shown in the pipeline generation. We see -- we get with more people and a better understanding of our offering. Clearly, we get into more RFPs and also our win rate is improving from the data we have. And clearly, you need to keep in mind we are tackling a huge market with a real need and a long runway for banks to modernize. I think we have a much better value proposition in terms also of strategic road map versus where we were 1 year ago. The investments we have done, both on the product side but also on the go-to-market side. And some of that road map, some of the products in the road map that are very specific to the U.S. market. And we need to be -- as we said, we wanted to be closer to the customers, and clearly, they see our investment in go-to-market in the product as well. So yes, the innovation hub clearly has helped a lot also for awareness building. As you know, pipeline is 12 to 18 months to develop. This gives us a good level of confidence that the conversion of this pipeline in to signed deals will clearly will accelerate next year. Operator: We now have a question from the line of Frederic Boulan from Bank of America. Frederic Boulan: If I may, a question around Q4. So if I look at your guidance, weighted guidance still implies much less growth in Q4 versus what you've done year-to-date and the same on EBIT, you're guiding for 170 bps margin expansion. I think you've done 4 points in the first 9 months. So any specific moving parts you want to call out for Q4? And then anything you can share on your free cash flow conversion? You've grown EBIT $22 million year-on-year in Q3; net profit, $16 million, but the cash flow growth is about $6 million. So if you can talk about some of the drivers for free cash flow conversion? Anything specific you want to call out for the rest of the year, DSOs or else? And any specific elements you want to call out into next year? Panagiotis Spiliopoulos: Okay. A lot of questions, Fred, let me take them one by one. I think on -- if we start with subscription and SaaS and keep in mind that we want to remain prudent as we started the year, there is still macroeconomic uncertainty. And what we did, given we have not changed the outlook for the sales environment, the -- if you want the upside, we were going for around 6% in Q3, delivered 10%. So the upside of, let's say, $5 million, we let it flow through the -- into the guidance. So this is where the upside for subscription and SaaS is coming from. We are not flagging any explicit risks other than we have large deals in there. No change to visibility. Again, it's at least 7%, and we want to remain prudent for this time. Also keep in mind, we have -- and this shows maybe the underlying very robust growth that we still have the impact from this BNPL customer in every quarter. So if you exclude the impact from that, we would show -- this really shows the underlying growth, which is very healthy. So nothing specific to flag here other than large deals, and we want to remain prudent. On EBIT, yes, the guidance implies some deceleration. We have seen year-to-date EBIT growth of 24%, clearly has benefited from a strong growth in subscription and SaaS of 12%, strong maintenance growth. And clearly, there also been the full impact of the cost savings initiatives, but clearly not yet the visibility on the investments, which are tracking somewhat slower. But if I look at the Q3 exit cost in September and October trend that clearly is the right number to target. Also keep in mind, we have the majority of our variable costs, bonus accruals, commissions always in H2 versus H1, even more loaded towards Q4. So clearly, that is driving some of the cost increase. And it's very similar to last year. If I look at the cost we added H2 versus H1 last year, H2 versus H1 this year, this is very similar, maybe even some higher costs there. And ultimately, it's at least 14% is the guidance. So that's where we would go. Finally, on free cash flow. Yes, 30% in Q3 was clearly materially ahead of our full year guidance. But keep in mind, we had the bulk of restructuring costs of $30 million out of the $35 million in the year-to-date number and substantial outflows linked to that. And then it was really in line with our expectations, the 30%, which gives us 13% for year-to-date growth, so well on track. And there's clearly nothing special to there. If you were to exclude -- if you take the EBIT to free cash conversion, if you were to exclude restructuring costs, we will be at a very high conversion. But even with that, let's say, EBIT of 14% or at least 14% and free cash flow at least 12%, so there is not such a big delta. We have a bit of catch-up to do on investments in Q4, so we feel comfortable with the at least 12% free cash flow guidance. Nothing special to flag on cash. Operator: The next question comes from the line of Josh Levin from Autonomous Research. Josh Levin: Two questions for me. Just to be clear on the new guidance, you've talked about large deals. To what extent does the new guidance bake in the new deals? Are they fully baked in or partially baked in? And then second question, I read how Morgan Stanley is using AI to rewrite old outdated code written in COBOL to more modern programming languages. Is that a good thing or a bad thing for Temenos? Panagiotis Spiliopoulos: I think there has not much change in terms of how we assess large deals. Clearly, number one, we clearly want to remain prudent. What we -- what I said before is at the start of the year, we have a view on large deals evolution and for any specific quarter and the full year we always take a risk-weighted approach to large deals, i.e., we assume -- for the same dollar value of large deals, we assume a lower conversion rate than for a standard deal size. So this is how it's reflected in Q4 and the full year guidance. There is no excessive dependency on large deals. We had this in Q2, given Q2 was a much smaller quarter than Q4. This is why we had flagged this in Q2. On AI, we are -- I mean, we are using AI ourselves quite a lot. And clearly, AI is a big opportunity. I think on both sides, we are clearly investing on AI use cases on the client side. We showed some of the AI-enabled products. But clearly, we have rolled out a substantial double-digit number of AI initiatives internally as well. So we are product and tech organization, we are having some pilots with some clients. It doesn't -- it's not that straightforward to take COBOL code and just use AI and make it modern. It sounds nice and there is a lot of challenge given there is no documentation and anything. What we can -- what AI can help with is in the documentation of old code and then trying to map this into new functionality. A Tier 1 bank like Morgan Stanley, they will always have the capacity of internal development. So they have done it before. So it's unlikely they would change that. But what we see is helping banks reduce implementation effort helps them move faster to a newer release, move faster in upgrades. This is where we see the AI opportunity. And I think this is tracking well with the pilots we're doing. Operator: We now have a question from the line of Charles Brennan from Jefferies. Charles Brennan: It sounds like 2025 is in good shape. I was wondering if you can just lift horizons to 2026. And specifically, you think about the subscription revenues. You started to shift to subscription in [ anger ] in 2022. And if those deals run to the natural 5-year duration, I guess that's a 2027 renewal cycle. Do you think that's how it will play out? Or do you think it's inevitable that those deals renew slightly earlier than the contract termination date? And we start to get a renewal cycle start in 2026. And is that going to start to help the visibility and the predictability of the business? Panagiotis Spiliopoulos: It's an interesting point you raise. And we had the start. And if you go back and look at the numbers in 2022, clearly, we started with the subscription transition, but we still had quite considerable term license business there as well, so not all the license business in '22 was subscription. It's correct that those will come up for renewal in 2027. It's also correct that you're going to see the 10-year renewals from 2017, which was a strong year for Temenos, renewing in 2027. Let's not get into the debate about when these contracts will renew. In general, as you know, clients never wait until last minute to renew because that's not a good starting point from their side. So do we have the visibility on 2026 subscription? I think we have good visibility stemming especially from the pipeline build we have seen over the last 12 and 18 months. The renewal cycle is something you take as it is planned. It's not -- we don't have a specific renewal strategy. So let's see, we have good visibility on '26. Let's not speculate on the renewals. Operator: Next question comes from the line of Justin Forsythe from UBS. Justin Forsythe: I've got my one question here and follow-up. So Takis, I guess, from the outside looking in, it would seem like the year has gone quite well to start under the guidance and shepherding of Jean-Pierre. So maybe you could talk a little bit about your initial conversations with the Board, what they expect you to do? Are you continuing to execute on the strategy that he laid out? I would imagine that, and I caught this from the commentary on the management call that there are some things that the Board would expect to change going forward. So are you then, therefore, beginning to implement some of those changes? And maybe you could just outline a little bit on the strategy going forward. And then I just wanted to hone in a little bit on the big contract loss. So maybe you could just remind us when you expect to lap the impact of that and the magnitude of it. And just circle back on what exactly happened there? If the provider, I think it was PayPal, decided to go with just a different provider or if that was something that they decided to in-source? Panagiotis Spiliopoulos: First, on strategy. Keep in mind, our strategy is not created by 1 person. So the strategy which was presented last year at the CMD and validated before by the Board was created by the entire management team and actually the leadership team. So this is how we came up with a bottom-up strategy looking at what we need to do on the product, what we want to do on product and go to market and aligning this with the market perception. So it was not Jean-Pierre creating a strategy, it was really the leadership which was then validated by the Board. So the strategy, as our Chairman mentioned early September, remains unchanged, and this is also why my primary focus is on executing the strategy. We've done this in Q3, we'll continue to do this also in Q4 and beyond. We have the people in place, and it's actually great to see that everyone is delivering. And the team is very motivated and standing behind the strategy. So it's really a focus we all have. And if you look at the progress we have seen across the different elements, we said we're going to substantially expand our sales force across the regions, they have done that. We will increase the headcount 50% by year-end. On the product side, Barb has brought in some great talent. And we're also hiring both in the U.S. and in India complementing our road map. So it's really executing this and then on top of all the operating model changes. On the BNPL, we -- I think there is no new information to give on BNPL on the reasons we can't comment on individual customers. And whether the name you mentioned is correct or not. Clearly, there is a headwind this year, which we communicated already at the start of the year. It's equal numbers in every quarter and the guidance is fully reflecting this. Justin Forsythe: Okay. Got it. No, that's fair. Maybe I'll just ask then since you can't answer that one, a quick follow-up, which is on the sales force that you expect to increase quite drastically. Could you just give us a little bit of a lean on what types of customers you expect them to serve. So is that Tier 1, Tier 2, Tier 3 or down in the credit union space and what geographies you expect them to come in or if that's more balanced? Panagiotis Spiliopoulos: So again, back to the strategy. We're growing in all regions. So the sales force is expanding in all regions across -- really across the world. It was a scale-up, which we needed and wanted to do also to support our 2028 targets. We emphasize the U.S. where we started first, but Will and his MDs have expanded the sales force across the world. And it's -- nothing has changed in terms of the strategy. In the U.S., we go Tier 2, Tier 3, the three growth levers we have defined best of suite, the modular approach and adjacent solutions. So the growth levers are valid and still applied globally. So no change to tiering or regional focus or anything. It's just really adding capacity and capabilities to deliver the 2028 targets. As we said, it's an investment year. The good thing is we do a lot of self-funding for those investments, but no change to that. Operator: [Operator Instructions] We now have a question from the line of Toby Ogg from JPMorgan. Toby Ogg: Maybe just one quick one and then a follow-up. First one, just on the guidance. EBIT and EPS upgraded, but no change to the free cash flow guidance. What are the factors driving that? And then just on AI. You mentioned in the release a number of AI product launches gaining traction. So FCM, AI agent and the money movement and management piece. Can you just give us a sense for how you're monetizing this? Is this through higher pricing or is there incremental modules being cross sold? And then can you just give us a sense for the size of these AI product revenue streams today and then when you'd expect them to start becoming a more meaningful revenue driver for you? Panagiotis Spiliopoulos: Toby, let me get back to the free cash flow question first. Clearly, as we said, if you look at the pure numbers, there is not that much change in terms of the EBIT growth and the free cash flow growth expected for this year, if you want to go back to the conversion question. But ultimately, there is always a lag. It's similar to ARR. We can't translate a positive subscription and SaaS impact to free cash flow immediately given there is a time difference. And as we said, there is still some catch-up in terms of investments to do. And finally, there is -- we still have a large Q4 ahead of us. This is always the most important quarter for us in terms of free cash flow. So yes, we're quite happy with our 12% free cash flow guidance. Now on the AI products. So clearly, we had some product launches at the flagship event TCF, FCM AI agent and also the other product. Now clearly, we're not going to go into that level of detail, although that we have seen a number of deals signed for -- or especially the FCM agent already in the last few months. Usually, this comes as an add-on to existing core installations, so clearly, there is a good market demand there. We have also seen a very large Tier 1 bank using this, so that's a testimony to the real use case we're providing here. And it's a very interesting product, substantially reducing the number of false positives in screening, which is driving a lot of manual work at banks. So there is clearly a business need for that. So the numbers are still small, especially in the context of our of overall business. But this is what we are seeing together with banks, developing use cases. And referring to our development partner program, we're not just going out there and inventing something in the lab and then see whether this sticks. We're really codeveloping use cases, which we know banks are interested in and are willing to pay for this. Yes, but no further financial details we can provide on AI products. Operator: Ladies and gentlemen, that was the last question. 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 afternoon, everyone. Welcome to Ares Capital Corporation's Third Quarter Ended September 30, 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded on Tuesday, October 28, 2025. I will now turn the call over to Mr. John Stilmar, a partner on Ares Public Markets Investor Relations team. Please go ahead, sir. John Stilmar: Great. Thank you, and good afternoon, everyone. Let me start with some important reminders. Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operations. A reconciliation of GAAP net income per share, the most directly comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed on this conference call and the accompanying slide presentation, including information relating to portfolio companies, was derived from third-party sources and has not been independently verified. And accordingly, the company makes no representation or warranties with respect to this information. The company's third quarter ended September 30, 2025 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Third Quarter 2025 Earnings Presentation link of the homepage of the Investor Resources section of our web page. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I will now turn the call over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort? Kort Schnabel: Thanks, John, and hello, everyone, and thanks for joining our earnings call today. I'm joined by Jim Miller, our President; Jana Markowicz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team who will be available during our Q&A session. I'd like to start by highlighting our third quarter results, and we'll follow that with some thoughts on current market conditions and our positioning. This morning, we reported strong third quarter results with stable core earnings of $0.50 per share, exceeding our regular quarterly dividend and generating an annualized return on equity of 10%. GAAP earnings of $0.57 per share increased almost 10% sequentially and included robust net realized gains from the exit of a previously restructured portfolio company as well as several equity co-investments. These outcomes led to another quarter of NAV growth, marking the ninth NAV increase in the past 10 quarters and underscoring our position as one of the few BDCs with consistent and growing dividends and cumulative NAV per share growth over the last 10 years. Let me start with our views on the market environment and how we are positioned. New issue transaction volumes are returning to a more normalized pace, driven by greater clarity on tariffs and the direction of short-term interest rates and narrowing bid-ask spreads on buyouts. With this healthier market backdrop, we saw a noticeable acceleration in the volume of transactions under review, both sequentially and compared to the prior year, with more deals reviewed in September than in any month this year. We also received an increase in requests from advisers who are running sale processes and looking for our indicative terms and pricing. Amid a firming market for M&A and Ares's leading presence in U.S. and global direct lending, we reviewed more than $875 billion in estimated transactions over the last 12 months, which was a record for us and supports our view that the market continues to expand. As a reminder, we view our origination scale, which enables us to be highly selective as a critical driver of our long-term credit performance. The breadth of our origination platform provides the opportunity to pass on transactions when we cannot find acceptable documentation, terms or pricing. Our scale and sector specialization enhances our market knowledge and underwriting capabilities while also providing us a real-time view of relative value in the market. These factors contributed to net deployment for ARCC of $1.3 billion in the third quarter, more than double the prior quarter, while remaining highly selective on the transactions we pursued. Our focus on investing in the highest quality credits continues to support strong fundamental credit metrics. The last 12 months organic EBITDA growth for our portfolio companies remains in the low double digits, which is well in excess of market growth rates. Our interest coverage increased further to over 2x and weighted average loan to values continue to be in the low 40% range. Our strong credit quality is also evidenced by our declining nonaccruals on a quarter-over-quarter basis, along with net realized and unrealized gains and growth in NAV per share for the third quarter. We also take comfort in our portfolio's focus on domestic service-oriented businesses, which mitigates risks associated with tariffs, shifts in government spending and other recent policy changes. Our third quarter net realized gains reinforced our long-term track record of generating over $1 billion of net realized gains in excess of realized losses since our inception over 2 decades ago. Our differentiated results stem from our extensive origination capabilities, allowing for selectivity and strong underwriting as well as our large and experienced portfolio management team, which focuses not just on minimizing losses, but also on maximizing returns when situations don't go as planned. We also benefit from our deliberate equity co-investment strategy that has generated attractive returns over time. Our third quarter results illustrate the value we provide to our shareholders from realized equity gains. Most notably, we recognized a $262 million realized gain on the sale of Potomac Energy Center, a previously underperforming investment that was on nonaccrual in the past and was then restructured and ultimately owned by ARCC. With the restructuring of Potomac's balance sheet, the incremental capital we invested, our proactive management of the company and patience, we were able to achieve an IRR of approximately 15% on our investment rather than incurring a loss. We also generated net realized gains from the exit of 3 equity co-investments, generating over $30 million in realized proceeds and representing a 2.5x multiple on our original invested capital and an average gross IRR in excess of 30%. This supports our track record of generating an average gross IRR on our equity co-investment portfolio that was more than double the S&P 500 total return over the last 10 years. Collectively, our net realized gain performance, both this quarter and cumulatively underscores the strength of our investment strategy and deep portfolio management capabilities that drive differentiated results for our investors. As I noted earlier, we believe our portfolio remains healthy and demonstrates solid underlying credit trends. With respect to risks recently in the headlines, we have no exposure to First Brands or Tricolor nor do we have any exposure to non-prime consumer finance firms like Tricolor. Following the recent events at First Brands, we have been asked about whether our portfolio companies use receivables financing and if such financing poses any hidden risks for us. We do not believe there are hidden risks in our portfolio from the small number of portfolio companies that may use receivables financing. Additionally, as part of a normal ordinary course business practice, our team thoroughly diligences any receivables financing arrangement, along with vetting the broader capital structure of the business during the underwriting process. If such financing remains in place post close, it is typically subject to strict parameters and is monitored during the life of our investment. These structural safeguards are a core part of our documentation standards and in our view, represent one of the strengths in our documentation, especially in comparison to the broadly syndicated market. Like First Brands and Tricolor, another topic that has been in the headlines recently is software and the potential risks posed by AI. Let me make a few comments on how we have carefully constructed our software portfolio over 2 decades of investing in this sector and why we believe AI is much more of an opportunity than a risk for our software borrowers. As a starting point, our software loans are financed at what we believe are conservative leverage levels with an average loan-to-value ratio of only 36% and none of our software loans are currently on nonaccrual. Our focus is on financing large, market-leading and well-capitalized software companies with strong growth prospects. As an example, our software portfolio companies have a weighted average EBITDA of over $350 million, and they continue to demonstrate strong double-digit EBITDA growth over the last 12 months. Our borrowers are generally backed by leading sponsors in the software industry who not only have substantial capital resources, but are also proactively investing in their platforms to embrace the changes and potential prompted by AI. While we believe AI excels at analyzing data and generating high-quality content, it typically does not provide the foundational infrastructure required for critical business operations or systems of record. These functions still rely heavily on traditional software systems that can securely store data and facilitate complex transactions. We have, therefore, historically focused almost entirely on financing software companies that operate B2B platforms and typically serve highly regulated industries, leverage proprietary data or deliver repeatable, consistent results core to business operations. Importantly, these companies are deeply embedded within customer operations and also benefit from high switching costs given the risk of business disruption from moving to alternative vendors, which, in our view, provides additional layers of durability and resilience against potential AI disruption. While we believe AI poses minimal risk to our software loans, advancements in AI remain an important component to future value creation for these businesses. For example, insights generated by AI can enhance these foundational systems by improving analytics, user experience and operational efficiencies while serving as a valuable complement and not typically a replacement for mission-critical software. Importantly, these views reflect Ares's ongoing collaboration among our highly experienced software investment team, our in-house software analysts and Ares' in-house AI experts at BootstrapLabs, a leading AI-focused venture capital investment team that joined the Ares platform a few years ago. We leverage our entire platform to drive credit decisions on each software transaction we consider as well as in our quarterly valuation and risk assessment processes led by our portfolio management team. Now before turning the call over to Scott, let me address our outlook on our future earnings potential and dividend levels in light of market expectations for further declines in short-term interest rates. We believe there are distinct competitive and financial factors that position ARCC to maintain its current dividend level for the foreseeable future despite the potential headwinds to earnings posed by lower short-term interest rates. As a starting point, in the third quarter of 2025, our core earnings continued to exceed our dividend. Second, during the last period of rising short-term interest rates in 2022 to '23, we intentionally set our dividend at a level equivalent to a 9% to 10% ROE, which is a level we have historically achieved through different interest rate cycles over the last 20 years. We set the dividend at this level because we believe we can sustain this level of profitability through market cycles. The third point worth highlighting on this topic is what we view as our unique financial position with multiple levers to expand earnings or offset headwinds solely from falling market rates. Notably, our balance sheet leverage remains around 1x, which is well below the upper end of our target range of 1.25x, giving us ample flexibility to drive higher earnings by supporting prudent growth using our efficient sources of capital. We also believe there is growth potential to capitalize on higher-yielding opportunities within our 30% nonqualifying asset basket, including through strategic investments like Ivy Hill and SDLP. Additionally, given the prospects for a more active environment alongside our origination scale, we believe there is potential for increased velocity of capital, which could drive additional capital structuring fees to further support our earnings. Lastly, the historical strength of our earnings and credit performance has provided us with $1.26 per share in spillover income, which is equivalent to more than 2 quarters of our current dividends. We believe this level of spillover income gives further visibility to our investors since it provides a cushion to support our quarterly dividends in the event of temporary shortfalls in our quarterly earnings. In summary, we had a strong quarter with healthy credit performance and financial results that demonstrate our enduring competitive advantages. And with that, I'll turn the call over to Scott to walk us through our financial results and the continued progress we're making on our strong balance sheet. Scott Lem: Thanks, Kort. This morning, we reported GAAP net income per share of $0.57 for the third quarter of 2025 compared to $0.52 in the prior quarter and $0.62 in the third quarter of 2024. We also reported core earnings per share of $0.50 compared to $0.50 in the prior quarter and $0.58 for the same period a year ago. This is the 20th consecutive quarter of our core earnings exceeding our regular dividend, demonstrating our ability to consistently cover our dividends. Drilling a bit more into the net realized gains that Kort highlighted earlier, we generated $247 million of net realized gains on investments during the third quarter, which represents our second highest net realized gain quarter since our inception and brings our cumulative net realized gains on investments since inception to approximately $1.1 billion. Similar to last quarter, we incurred capital gains taxes related to certain of the net realized gains, which amounted to $72 million in the third quarter. While we do not typically pay taxes on the annual income we generate, we occasionally incur taxes on certain gross realized gains. Even net of these taxes, our net realized gains on investments remained a healthy $175 million for the third quarter. Turning to the balance sheet. Our total portfolio at fair value at the end of the quarter was $28.7 billion, which increased from $27.9 billion at the end of the second quarter and $25.9 billion a year ago. Shifting to our funding and capital position. We have remained active in adding capacity, extending our debt maturities and reducing costs in our committed facilities. In July, we added nearly $500 million of additional capacity across our credit facilities. We also reduced the drawn spreads on 2 of our credit facilities by 20 basis points each to 180 basis points over SOFR and extended the maturities on both to July 2030. We continue to benefit from our long-standing banking relationships, which are supported by our scale as well as our long-term track record through cycles. The significant diversification of our overall portfolio also has direct benefits for our credit facilities, enhancing the attractiveness of the collateral pool that supports the facilities. For context, our asset-based bank credit facility advance rates are generally similar to the AA-rated tranche of a typical middle market CLO. It is important to highlight that a AA middle market CLO tranche has never defaulted. With this low level of risk, the current bank capital framework supports a return on capital for our banks that is significantly more attractive than if the banks held the individual loans directly on their own balance sheets. Beyond the systemic benefits that this type of lending provides, the banking system as a whole, the strength of our relationships and economics that we can provide to our banks further strengthens our ability to be an investor through all cycles. In addition to our continued engagement with our banking partners, we also further expanded our nonbank capital sources in September by issuing $650 million of unsecured notes priced at 5.1% and maturing in January 2031. These notes were issued at a spread inside of our previous notes issuance in June. Consistent with our recent offerings, we swapped this issuance to floating rate, therefore, positioning our funding costs to decrease with expected declines in SOFR. As a reminder, ARCC remains the highest rated BDC across the 3 major rating agencies. In addition to the strategic advantages embedded in our funding, our overall liquidity position remains strong, totaling $6.2 billion, including available cash. In terms of our leverage, we ended the first quarter with a debt-to-equity ratio net of available cash of 1.02x. We believe our significant amount of dry powder positions us well to actively support both our existing and new portfolio companies. Finally, our fourth quarter 2025 dividend of $0.48 per share is payable on December 30 to stockholders of record on December 15. ARCC has been paying stable or increasing regular quarterly dividends for 65 consecutive quarters. In terms of our taxable income spillover, we finalized our 2024 tax returns and determined that we carried forward $878 million or $1.26 per share available for distribution to stockholders in 2025. As Kort stated, we believe our meaningful taxable income spillover provides further support for the long-term stability of our dividends and continues to be one of our significant differentiators. I will now turn the call over to Jim to walk through our investment activities. James Miller: Thank you, Scott. I will now provide some additional details on our investment activity, our portfolio performance and our positioning. In the third quarter, our team originated over $3.9 billion in new investment commitments, an increase of more than 50% from the previous quarter. About half of our originations supported M&A-driven transactions such as LBOs and add-on acquisitions, which highlights our ability to benefit from the early signs of a more active and M&A-driven market environment. Further reflecting this broader trend of growing M&A, approximately 60% of our third quarter originations were with new borrowers, a shift from the past few quarters where the majority of our originations were from incumbent borrowers. We believe the shift reflected an influx of high-quality companies coming to market in the early part of a potential M&A cycle. Our origination activity continues to underscore our broad market coverage. About 1/4 of our new investments were made in companies with EBITDA below $50 million, which highlights our strong presence in the core middle market and lower middle market as well as the more visible upper middle market. On the upper end of the market, we led the $5.5 billion financing for the take-private transaction of Dun & Bradstreet, the largest private credit LBO recorded to date. This well-established, high-quality company with strong recurring cash flows chose Ares to lead their financing as an alternative to the syndicated markets due to our flexibility and execution certainty. Alongside this increased activity, our credit spreads remained stable. Our new first lien commitments in the third quarter were completed at spreads that were consistent with the prior quarter and actually 20 basis points higher than the prior 12-month average. We achieved these pricing results with attractive risk profiles as well as the spread per unit of leverage on first lien loans completed in the third quarter was the highest in more than a year. Our broad origination team and flexible approach continue to drive our ability to source opportunities with differentiated yield profiles, including the selective use of PIK preferred investments. In the third quarter, we generated an IRR in excess of 20% on the exit of 3 preferred PIK investments. These PIK preferred securities are invested in large established companies with an average EBITDA of roughly $480 million. Our PIK preferred investments have a low double-digit fixed rate yield and implied loan-to-value ratios in the 50% to 60% range. On average, we value these investments at 98% of cost at the end of the third quarter. Reflecting a more active market environment, we experienced increased repayments through change of control transactions, including from investments that were accruing PIK income. As a result, and as disclosed in our cash flow statement, these full repayments generated PIK collections that were actually greater than the aggregate amount of PIK income we accrued for the third quarter. Shifting to our portfolio. Our $28.7 billion portfolio at fair value increased nearly 3% quarter-over-quarter and over 10% year-over-year, further underscoring the extent of our origination scale at ARCC, even during the slower transaction environment experienced in the market over the past year. Our portfolio continues to be highly diversified across 587 companies and 25 different industries. This means that a single investment accounts for just 0.2% of the portfolio on average and our largest investment in any single company, excluding our investments in SDLP and Ivy Hill is less than 2% of the portfolio. We believe our emphasis on portfolio diversification and industry selection reduces the frequency and impact of negative credit events on the company. As Kort mentioned, the credit quality of our portfolio continued to demonstrate strength and resilience in the quarter. Our nonaccruals at cost ended the quarter at 1.8%, down 20 basis points from the prior quarter. This remains well below our 2.8% historical average since the great financial crisis and the BDC industry historical average of 3.8% over the same time frame. Our nonaccrual rate at fair value also decreased by 20 basis points to 1%. Finally, on credit, our Grade 1 and 2 investments representing our lowest 2 rating buckets in the aggregate declined from 4.5% to 3.6% of the portfolio at fair value quarter-over-quarter and our portfolio companies' average leverage levels and interest coverage ratios both improved when compared to last quarter and the prior year. The health of our portfolio is also reflected in the profitability and growth profile of our borrowers. In the third quarter, the weighted average organic LTM EBITDA growth of our portfolio companies was again over 10%. Importantly, this EBITDA growth rate was more than double that of the broadly syndicated market based on a second quarter analysis done by JPMorgan. Additionally, both our sponsored and nonsponsored companies are growing EBITDA at consistent rates. As a reminder, we believe our industry specialization has allowed us to further penetrate the nonsponsored market as well as service the sponsored market in a differentiated way. Further to my earlier point on our extensive market coverage and its role in attracting strong, high-performing companies within the middle market, we continue to see healthy growth across the lower core and upper middle market segments of our portfolio. Importantly, size is not a distinguishing factor of performance in our portfolio as companies with EBITDA of less than $25 million had EBITDA growth that was modestly higher than the rest of our portfolio. Looking ahead, we are seeing healthy transaction activity levels so far in the fourth quarter. Our total commitments for the fourth quarter to date through October 23, 2025, were $735 million, and our backlog reached a new record of $3 billion as of October 23, 2025. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close or we may sell a portion of these investments post closing. In closing, our strong earnings this quarter are underpinned by many durable advantages that we believe continue to drive differentiated results for our investors. In today's environment, we remain focused on leveraging our origination scale to see as wide an opportunity set as possible, maintaining our rigorous credit standards, negotiating appropriate documentation and being highly selective around deal flow. We remain confident that sticking to our long-standing principles will support our ability to continue to capitalize on new opportunities and build on our track record of strong performance. We are proud that our declared fourth quarter dividend of $0.48 per share extends a record of over 16 straight years of stable or increasing regular dividends for our shareholders. As always, we appreciate you joining today, and we look forward to speaking with you in the future. With that, operator, please open the line for questions. Operator: [Operator Instructions]. Additionally, the Investor Relations team will be available to address any further questions at the conclusion of today's call. With that, we'll go first this afternoon to Finian O'Shea with Wells Fargo. Finian O'Shea: Kort, I just want to hit on a couple of your inputs on dividend coverage. One, with the sort of traditional levers, more on-balance sheet leverage, more perhaps junior or alpha laden opportunities. Can you remind us if on an allocable capital framework, ARCC is different to have more of this stuff tilt toward it versus ACIF as the market opens up for this kind of opportunity? Or should the 2 vehicles continue to become essentially the same going forward? Kort Schnabel: Yes. Thanks, Fin. Yes, both vehicles will get allocated any kind of deal based on the available capital math, and that is an allocation policy that we've had in place for a very long time and has not changed. Obviously, those types of transactions have been more muted of late, but I do think as we see overall transaction activity increase and in particular, changes in control activity and even potentially as rates do decline further, that hopefully will create more junior capital opportunities. We've seen that be a product of those kinds of trends in the past. And ARCC will certainly get its fair share of those transactions. Finian O'Shea: I appreciate that. And just to be clear, like that -- maybe I could have worded it better. That math is the same overall for a percentage of allocation to the more junior or plus 700 or sports equity and so forth? Scott Lem: Yes. I would also just say that ACIF has a different yield profile than ARCC. So that's also part of the decision-making in terms of the assets that may go into those funds as well. Kort Schnabel: But yes, if you're talking about different types of assets, whether it's sports and media or infrastructure assets or any kind of assets, it's all based on mandate of the fund, of which ARCC obviously has an extremely diverse and flexible mandate and then available capital. And so that's how those deals get allocated. And ARCC, obviously, being our most flexible vehicle gets a sliver, gets a piece of almost everything we do. Finian O'Shea: I appreciate that. And if I could do one on the spillover component. Can you give us color on how big of an input that would be to support the base dividend? Would you run it all the way down before cutting the base dividend or halfway down? Is there sort of a target or threshold there as to how much support that would be? And that's all for me. Kort Schnabel: Yes, Fin, I mean, I don't -- look, first of all, we have a lot of confidence as we talked about in prepared remarks of covering the dividend in the foreseeable future. And we're running lots of different modeling scenarios, including base rate declines as forecasted in the curve or further declines, all different kinds of scenarios, obviously, liability costs. And we just feel very confident. So I don't know that I really want to speculate in terms of where we would be in the instance well into the future that, that doesn't hold up. But I think the reason why we talk about the spillover income is because it does provide additional stability to the dividend if needed, if core earnings temporarily drops below the dividend level. We have rarely seen that in the course of our history. But the amount of spillover hopefully just provides a lot of comfort for shareholders. But I don't think it's worth speculating as to all the different scenarios that could occur and how much of that spillover we might need to use. Operator: We'll go next now to John Hecht at Jefferies. John Hecht: You guys gave a lot of information about the market and your sustainable competitive advantages in the call. But if you kind of step higher level, I'm wondering how you -- thinking more about broadly in the industry, how would you describe competition in light of the fact that spreads are fairly narrow, there's a lot out there, but also over the last few weeks as there's been a couple of [indiscernible] that have probably caused some disruption or reverberations industry-wide. Kind of how do you -- the 1-minute kind of explanation of your perspective of industry competition? Kort Schnabel: Yes. Look, I think it's a competitive environment as it's always been over our 21-year history. It's just sometimes new competitors come in, some competitors leave. Obviously, we've seen as the industry has matured and we've moved upmarket, certain competitors compete upmarket with us. We have a different set of competitors that compete in the middle market and in the lower middle market. We've talked a lot about how we believe we are the only scaled direct lender that competes across lots and lots of different markets. And then when we go into our non-sponsored origination in the various industry verticals, we see a whole another set of competitors. So it's really hard to generalize. The events of the last few weeks, I would say it's a little too early to say. But so far, there's been no real significant impact to the competitive landscape. If you're talking about just the news around Tricolor and First Brands and a few of these issues that are cropping up in the broadly syndicated market. It's not really impacting our market that much so far. And again, I think it probably does highlight that our documents and protections and our credit selection is differentiated relative to the broadly syndicated market. So long-winded answer of saying a little too early to say and no real impact so far. James Miller: I'll add one thing, Kort. We also get the benefit when the broadly syndicated market does see [ reberations ], as you said, that's a great time for private credit. Those are moments in time where we can take market share from the broadly syndicated market and people are looking for that certainty. So those moments and sometimes they're short a week or 2, sometimes they're a month or longer. Those moments tend to be quite favorable for us. John Hecht: Yes, that makes sense. And second, a nonrelated question, I'm just curious if there's an update on some of the, call it, regulatory opportunities like AFFE. Just I haven't heard much about that for a few months, and I'm wondering if there's anything to discuss there. Kort Schnabel: Nothing all that meaningful, John. I mean there was some temporary excitement around progress that had occurred down in Washington on that front. But it's hard for us to get too excited because we've seen it kind of go up and down in its momentum over the last few decades, frankly. So we try not to read in too much to the movements kind of month-to-month or even year-to-year. Operator: We'll go next now to Arren Cyganovich at Truist Securities. Arren Cyganovich: Just following on the line of questioning about where are we in the cycle? Is it a late cycle where it got tight credit spreads. You laid out a lot of reasons why things continue to go well for you with EBITDA is rising at your portfolio companies, a lot of activity. What are some of the guideposts that you're looking for that would maybe cause you to be a little bit more strict in terms of your underwriting? And what are some of those things that we might be able to monitor from afar? Kort Schnabel: Yes, it's not too complicated. I mean, certainly, underlying EBITDA growth or potential reductions in that growth would be something we would look at. We're always looking sector by sector as well. We talk about the overall portfolio average EBITDA growth, which again remains double-digit growth and bounces around here and there, but still remains really strong. But we're looking underneath the hood there at all the individual industries that are driving that growth, and we're not really seeing any trends in certain industries that would lead us to believe that there are points of weakness in any kind of individual sector. So if we did see those, we would certainly point those out. But that would be #1 on the list. Obviously, overall access to capital, the flow of credit in the markets. Historically, when you see credit start to seize up, that can also then flow through and create problems for businesses and lead to downturns. Again, we're seeing that actually go the other way now in terms of increased activity in the M&A market. Our transaction volume and opportunities remain really strong. So that would be something else to look for. But again, no signs on the horizon there. So I don't -- there's nothing we're seeing here at Ares Capital that would tell us that we're nearing the end of any kind of cycle. Certainly, from an M&A standpoint, the M&A cycle, I think we feel like we're at sort of an early end of a new cycle that's beginning. And you can see that in our origination numbers this quarter, which tilted toward 60% new borrowers for the first time in a long time, usually trending around 50% or even more in the last year or 2, 30%, 40%, went up to 60%. Change of control transactions were over half of our originations. So I think the M&A market really is picking up. And I think that's also a sign that people feel good about the stability of the economy, where we're going, underlying businesses, and we're seeing that reflected in that transaction volume. So that would be my answer to your question. Arren Cyganovich: Yes. No, that's very helpful and largely what I would have expected, but it's good to hear you said. And the second question is kind of a quicker one, but the -- you had commented on September being one of the busiest months, but spreads on first lien for your investments in the third quarter actually rose a little bit. It seems a little bit backwards. Obviously, not a big amount. I think you said 20 basis points, but just curious as to those dynamics. Kort Schnabel: I think the dynamics are that it reflects the broad origination funnel that we are able to capitalize on here by virtue of being managed by Ares Management and all the different deals that we're able to see come into the platform and originate. I mean it's -- yes, I'm glad you pointed it out. Look, we put out $3.9 billion of gross originations in the third quarter at an average spread of SOFR plus 560 and that went into borrowers at an average leverage of 4.8x. So we certainly feel like it is a good investing environment to be in despite the fact that it is competitive like we talked about before. We think we have meaningful competitive advantages in terms of the types of deals we see, and it will be interesting to compare our originations and those metrics that I just put out relative to our competitors as we see people put out earnings over the coming weeks. Operator: We'll go next now to Melissa Wedel at JPMorgan. Melissa Wedel: I think from our conversations, it seems like what's been driving some of the price action in the industry the last few months has been concerns about 2 things. One is earnings power and the second would be credit. I think you've addressed the credit, you're not seeing anything thematic and certainly showing up in the nonaccrual rates. I was hoping to dig in a little bit more on the earnings power and follow up on some of the levers that you talked about earlier that you could pull. One of the things you talked about was being a bit below the top end of your target range in terms of portfolio leverage of 1.25. Given that you have bandwidth there to increase leverage at the portfolio level, I'm curious how you're thinking about using the at-the-market program, especially as share prices have declined. Kort Schnabel: Yes, sure. Thanks for the question. So I think as you probably can see, we've been reducing the amount of at-the-market issuances over the last 3 quarters. So we went from $400 million to $500 million a quarter down to, I think it's $300 million last quarter, down to $200 million this quarter. So that's been influenced by a view that we are operating slightly below the midpoint of the range on leverage, that 0.9 to 1.25x range and our desire to get a little bit more into leverage here over time. Again, we do like the position that we're in at 1x. It's a conservative place to be. It positions us well to capitalize on opportunities in the market. As Jim mentioned earlier, maybe there's an opportunity the broadly syndicated market seizes up. We want to be in a position to have that kind of financial flexibility. But we do think it's appropriate to potentially start moderating that ATM, which is what we've done over the last several quarters, not to say what the future will hold, but that's been our view. So I don't know too much more to say on that topic, Melissa, but hopefully, that's helpful. Melissa Wedel: It is, and I appreciate that. And then in terms of further optimizing the nonqualifying asset bucket, I'm curious if there's anything in particular or forthcoming in the near term on that? And if not, maybe more generally, would you think about additional assets there that would be similar to your current exposures in IHAM or SDLP? Or would it be a different type of exposure? And just how you're thinking about that sort of longer term? Kort Schnabel: Sure. Yes, sure. One good piece of news that we certainly are happy to report is on the SDLP joint venture, which is that we did recently amend the documents in that joint venture and our relationship with our liability providers or the joint ventures liability providers to lower the cost of capital on those liabilities, which did result in a 100 basis point increase in the yield on the SDLP that you can see in our numbers on a go-forward basis. So I think that will provide a nice boost to the return on that program. I think our ability to increase the utilization of SDLP and to help IHAM hopefully achieve more growth as well will partially be based on the overall transaction volume in the market and our ability to originate, which again has been increasing. So that gives us confidence that we should be able to better utilize some of those joint ventures and structures within our 30% basket. I think, Melissa, that's probably -- hopefully, does that answer your question? Or is there something else you were getting at there? Melissa Wedel: No, that is helpful. Operator: We'll go next now to Casey Alexander at Compass Point. Casey Alexander: My first question, and it might sound a little convoluted, but we've gone through this mini hysteria created by the wet blanket of the words private credit thrown over the entire arena as if it's all encompassing. So first of all, you should change the name of what you do and take the words private credit out of it. But I'm wondering if this mini hysteria, did you notice any even temporary stall in the market? There's so much over the last couple of quarters of there were more loans leaving the directly originated private credit arena for the broadly syndicated market. Have you felt some relief from that because clearly, the banks have been twisting themselves into knots over this. And also, spreads have been at all-time tights, which, again, doesn't presuppose a real credit crisis. Does it feel like you might see new origination spreads in the broadly syndicated market widen out a little bit, which would also allow you some more spread relief? Kort Schnabel: Sure. Thanks, Casey. So a few things in there. I think, first of all, yes, much -- too much noise made about the banks and private credit and fighting over assets. I really think that, that is way overstated. We, as an industry, have been both working together with banks and competing with banks on transactions for decades. This is really nothing new. It's just that I think the dollar amount of the transactions as an industry that we're now providing have gotten to the point where it's starting to get more attention. But the dynamic is really nothing all that new. Banks are great partners for us. They provide leverage facilities on a lot of our funds, including obviously ARCC. And there are movements in the market from time to time where borrowers are more apt to lean toward broadly syndicated transactions, sometimes borrowers more apt to lean toward private credit transactions. The longer-term trend is obviously borrowers moving more toward private credit transactions because of the value of certainty knowing that the capital is going to be there in all market environments. And every time we go through a period of volatility where the broadly syndicated market gets choppy and maybe can't support its borrowers or banks get hung on transactions that they're looking to syndicate that just reinforces that long-term trend and makes it so that borrowers are more apt to consider private credit even when banks are back in the broadly syndicated markets back. So the banks broadly syndicated market this year. But on the whole, more transactions were still done in the private credit market than the broadly syndicated market. So I think on that, not much more there to add, Casey, but we can get more into it if there's something specific that I missed there in that part. I guess on the question about spread widening, I think you were -- sorry, maybe restate the spread question again. Casey Alexander: Well, just before we had this mini hysteria over private credit driven by 2 loans that went bad, spreads were at all-time tights. So I'm just wondering if you've seen -- and a lot of that driven by really aggressive bidding in the broadly syndicated market, have you seen any deals in the broadly syndicated market that might indicate that they're widening out a little bit because you guys do, to a certain extent, price against that market. Kort Schnabel: Yes. Well, I think Jim actually made that point, which is it could create that opportunity. It's a little early. I just think it's a little early. I'm not going to say that we've really seen that cause an effect exactly yet where all of a sudden, we're seeing deals chip our way because of that. But certainly, that would -- could potentially be an outcome. I think what really matters is how long and sustained the sort of concern or dislocation or spread widening in the broadly syndicated market lasts because our market one of the benefits of our market, I think, certainly for borrowers is that we don't move in lockstep with the broadly syndicated market, right? We lag a little bit. We're a little bit more stable. We take a longer-term view because we're holding these assets. We're not looking to sell the assets. So we're not going to move up and down 25, 50 basis points in line with the broadly syndicated market when it moves. So I think time will tell. We'll just have to wait and see. Casey Alexander: All right. And I do have one follow-on. I think that's a great answer, though. In the recent developments, you pointed out that in your exits, you recognized total net realized losses of $67 million. Can you tell us where that was relative to their third quarter marks? I mean is there likely to be an unrealized offset to that because they were close to the marks? Or is there some difference in there? Kort Schnabel: They're pretty much right at the marks. Casey Alexander: That's what I assume since it was so close after the end of the quarter. Operator: We'll go next now to Doug Harter with UBS. Douglas Harter: Hoping you could talk about your expected pace of exits in the near term and how that might influence the kind of the velocity of portfolio turnover and fee income you can generate? Kort Schnabel: It usually moves kind of in lockstep with overall transaction volume in the market and new originations. So we've talked about that in the past, too. People get sometimes a little concerned when transaction volume declines like we saw in the second quarter of this year, but then exits decline as well. So they kind of move together and the net number really is, I think, a more important number to look at. Obviously, this quarter was very strong on a net basis as well, over $1 billion, even though the exits did increase. So I don't know that I can provide anything super insightful there other than just to say it kind of moves together with overall transaction volume. Operator: We'll go next now to Robert Dodd with Raymond James. Robert Dodd: In talking about supporting earnings power, et cetera, I mean one thing that stood out to me this quarter is other income looked quite high. I mean, by any historic standards. I mean that's not usually where the origination fees go, but it could be amendments, can be consulting. Can you give us any idea like what drove that? And is that now going to be more geared to just what activity is rather than -- which obviously drives the capital structuring fees? Or has there been more of an effort to seek out like consulting kind of fee arrangements? And maybe is that going to be an ongoing story in terms of one of the tools to support earnings power? Scott Lem: Yes. Thanks, Robert. That's mainly typically like transaction or like amendment type fees. So I would not necessarily say that's replicatable every quarter. So really more onetime in nature. The capital structure fees are really more indicative of the origination volume. Robert Dodd: Yes. Got it. On the AI question, I mean, like you mentioned, you have the in-house think tank for lack of a better term from several years back. How has that changed over the last couple of years. How you go about underwriting software? I mean you laid out in the prepared remarks all the ways you do it currently. But I mean, is that fundamentally in any way different today because of the in-house AI expertise? Or is it just always been that way? Kort Schnabel: Yes. No, great question. Look, I think multipart answer. Number one, it's always been that way in terms of our desire to provide capital to software that is foundational and infrastructure-like in its business model, i.e., software that is highly ingrained in the workflows of its customer base that powers off of -- and a key part of its value prop is off of a proprietary database. And in a lot of times, software that is provided into highly regulated end markets that are extremely reliant on high-quality data and accuracy of data and auditability of data. So that has always been our strategy in software for decades. And so that really hasn't changed. I think what -- over the last few years, when -- with the rise of AI and obviously, our focus -- our focus on making sure that our portfolio is defensively positioned and certainly, any new investment we make is defensively positioned. Obviously, we're spending a lot more time thinking now about what AI is good at and what it's not good at to ensure that we continue to build a portfolio that is resistant to disruption. And when you think about what AI is good at, it's really good at creating content, can create amazing content so much faster than humans can. It is very good at analyzing and synthesizing lots of data. It doesn't actually house the data. It's not a database, but it can synthesize lots of data. And so you want to make sure that you're not investing in software companies that are simply providing content, learning modules delivered over software that can be disrupted. So those are the kind of areas we're trying to make sure that we're staying away from or software companies that are just analyzing third-party data. That would be something to stay away from. I think we want to make sure we're still very focused on providing software to companies that are actually powering businesses and are entrenched in businesses and are infrastructure like in their nature. Operator: We'll go next now to Paul Johnson with KBW. Paul Johnson: Just one a little bit further on Doug's questions for exits, but I'm just wondering if you have any sort of updated outlook, I guess, in terms of monetizations and sort of further gains from realizations this year or if the Potomac intermediate kind of represents more of the meaningful opportunity there near term? Kort Schnabel: Yes. Look, I think, obviously, our strategy is to leverage our portfolio management team to make sure, as I said in the prepared remarks, we are not only avoiding losses, but capitalizing on potential opportunities to make big gains. Potomac is a great example, but it's not the only example over our history, and I can certainly guess that it's not going to be the only example going forward into the future. I can't give forward-looking guidance or remarks about what might be the next big gain, obviously. But I guess what I would say is we provide a lot of disclosure for all of our investors in our SOI, in our 10-Q and 10-K, and you could see every investment we have, the nature of that investment, you can see the investments we have that are restructured where we own equity or own the businesses outright via those restructurings. And that could provide some clues as to what might be sitting in the portfolio that could provide future gains. But I'd venture a guess that, that will not be the last one that you guys will see. Paul Johnson: Appreciate that. Very helpful. And then last one is just kind of higher level I had. But we see like a mega financing deal like the EA SPORTS JPMorgan-led deal there, LBO financing. Does the deal of that size do enough, I guess, to kind of soak up any sort of oversupply of capital in the financing markets? Or is kind of the reality we would need to see a number of those to really accelerate sort of a balance of the supply and demand of capital in the private credit market. Kort Schnabel: Yes, I think it helps. I mean I don't know if that one deal alone is going to move markets. You probably need several, but that's a lot of capital. So I think if we start to see -- and again, it's just emblematic of what I said earlier, the markets are functioning very well. The credit market money is flowing, buyouts, new buyouts are happening. And if we start to see a number of these larger buyouts, I do think actually that will start to potentially widen spreads, soak up demand in the broadly syndicated market, move deals back our way. So every deal like that, I think, helps. James Miller: In the market, we're seeing a fair amount of the regular way activity, but we're also seeing a regular cadence of larger transactions, right? That's becoming more common. Records are broken over and over again, but it's really more about the regular cadence of large transactions that helps absorb the capital into the market. Operator: We'll go next now to Kenneth Lee at RBC Capital Markets. Kenneth Lee: Just one for me. And you touched upon this in your prepared remarks around receivables financing and more broadly, I guess, when you look at any kind of off-balance sheet financing, I wonder if you could just remind us how does Ares Capital avoid such situations? And more specifically, how are they flagged during the due diligence process when you're making new investments? Kort Schnabel: Yes. Well, so they're flagged during the due diligence process by an exhaustive analysis of all of the company's liabilities on balance sheet and off balance sheet. We obviously have in almost every transaction, we do new transaction. We have a quality of learnings provider that's coming in and doing a third-party report, scrubbing numbers, asking lots and lots of questions. Companies are required to disclose their liabilities to us as part of the reps and warranties. So it is [indiscernible] at the outset and at the underwriting of the transaction. And then on a go-forward basis, we have protections in the document. We have baskets that limit securitization facilities, which includes factoring of receivables and all different sorts of off-balance sheet liabilities, and those baskets are tight. And we talk a lot about the baskets in the private credit market or the documents in the private credit market being tighter than the documents in the broadly syndicated market. And this is just one very good public example of something where the broadly syndicated market documents were a little bit looser. And I don't expect that you would see that occur in one of our transactions. Operator: We'll go next now to Sean-Paul Adams at B. Riley Securities. Sean-Paul Adams: Most of my questions have already been asked and answered. But on the portfolio grade, the weighting improved quarter-over-quarter and the median nonaccruals declined. Do you view any general improvements in the economic environment? Or is it just a reflection of the runoff of nonaccruals from the portfolio? Kort Schnabel: I think the economic environment is pretty stable. So I think it's just the runoff of a couple of the nonaccruals. The number obviously bounces around a little bit quarter-to-quarter. The movement wasn't anything extreme. So I don't think there's much to read into there. Sean-Paul Adams: Got it. And as a quick follow-up, on spreads, you guys talked about this pretty in depth, but there is a race towards the bottom. Is there a kind of a bottom that you're envisioning as far as spread level declines just among the general economic environment for deal flow? Kort Schnabel: Yes. I mean it's just hard to prognosticate and look forward and say where everything is going to go. I guess I'd just point to you a couple of things. Number one, spreads for the last 3 quarters now have been stable in the market. So it feels like we've found a bottom for now. And I think that's due to just overall transaction activity starting to come back. I think it's also due to just the fact that private credit managers have dividends to pay, and we sort of found where this floor seems to be at least now for the last 3 or 4 quarters. So that's one important point to look at. Again, I would probably just remind people, our third quarter originations showed spread widening, modest, but some spread widening. I talked about it already. We put out $3.9 billion at [indiscernible] 560 at 4.8x leverage. So that feels like a pretty good environment to be investing into and doesn't really suggest that we are in a race to the bottom type environment. But like I said, not going to sit here and really try to predict too much what's going to happen in the future. Operator: We'll go next now to Ethan Kay at Lucid Capital Markets. Unknown Analyst: Maybe nitpicking here a little bit given very solid results, but dividend income came in a tad bit softer quarter-over-quarter. It looks like the distribution from Ivy Hill was stable. There were some exits of equity positions that you guys talked about, which ostensibly is a factor there. But can you talk about if there was maybe anything else that might have contributed to that kind of evolution in dividend income? And then as a quick follow-up, can you kind of remind us of the sensitivity of IHAM dividend to changes in interest rates given the fact that it's largely underlying -- the underlying is largely floating rate debt. Scott Lem: Yes. On the dividend, yes, you hit it. There's a couple of things there. There were some nonrecurring dividends that we got last quarter, but we also just saw some of the exits of our preferred yielding preferred equity that exited the quarter. And so the dividend income came down with those 2 factors. I will note that most of those preferred investments that paid off were picking. So it certainly helped the collection of our PIK, which I know has been a hot topic with investors as of late. Kort Schnabel: Yes, we didn't even really hit that, but we had a great PIK collections quarter. I knew we do get a lot of questions about that, and that obviously just occurred with pickup in transaction volume. And I think on the Ivy Hill question, I think you're asking about sustainability of Ivy Hill dividends and interest rate sensitivity. I mean, obviously, yes, Ivy Hill invests in floating rate assets. They have floating rate liabilities as well. And we think about the Ivy Hill dividend very similarly to the ARCC dividend, where we think there are reasons why we think it's very sustainable. One thing I'll point out is like the ARCC dividend, Ivy Hill is currently outearning its dividend pretty materially in the third quarter, we were about 107% dividend coverage at Ivy Hill. And there also exists $130 million of retained earnings down at Ivy Hill as well. So we feel like there's a lot of reasons why that dividend should be sustainable in all different kinds of environments. Operator: [Operator Instructions]. We'll go next now to Brian McKenna at Citizens. Brian Mckenna: So credit quality remains resilient. And as you mentioned, nonaccruals still well below that historical 3% average. But why do you think credit has been so resilient outside of any broader macro reasons? Is it where your exposure sit from a sector perspective, how you structure deals and price risk? Or is it being driven by greater levels of scale? And as your platform gets bigger and bigger, it's really just driving better outcomes for all stakeholders through the cycle. Kort Schnabel: Yes. Thanks, Brian. All of the above for sure. I think as a reminder, one of the benefits of running a BDC is we don't have to manage to an index. So we can select industries that are defensive and that work well for credit investing. So we've avoided a lot of industries that have been showing softness of late. And we've been leaning into industries that are very consistent growers. And so I think certainly, industry selection and industry diversification as well have been really important drivers of our outperformance on credit. And then certainly, look, you mentioned scale. So I have to take the opportunity to hit on that. The scale of our platform is unmatched and our ability to originate an incredibly broad amount of deals into our system allows us to be very, very selective, right? The more opportunities we can see, the more selective we can be and the better able we are to find the market-leading companies, the best companies in all of these different industries and then choose to invest in those companies and then pass on the other opportunities. If your funnel is more narrow, obviously, our job is to put money to work. And so you're going to put money to work into lower quality companies. So that larger funnel, I think, is a huge advantage comes from our scale, comes from our size of our team, the tenure of our team as well, the fact that we've all been working together for such a long time. And I think just the DNA in our system around underwriting and credit has been passed down and just continues to get reinforced throughout the year. So I think you hit on all the reasons, Brian, but thanks for giving me the opportunity to talk more about them. Brian Mckenna: Yes, sure thing. I appreciate the context as always. And then just one quick one, if I may. And you touched on this a little bit, but looking back historically at periods of volatility, really when liquidity dries up, how much incremental spread on average have you been able to capture in those environments? I appreciate every period of volatility is a little bit different, but I'm trying to figure out, is there a way to quantify this dynamic? And ultimately, how much incremental ROE is generated from these types of situations through the cycle for ARCC? Kort Schnabel: I don't know there's a way to really quantify it just because everything is so different. It all depends on so many different factors, right? It's what's the broadly syndicated market doing, what are base rates doing? How bad do people feel about the dislocation? I mean a couple of examples just to point to recently with the Liberation Day and the tariffs back in April, there was probably a multi-week period where we were able to capture 50 basis points of increased spread and maybe another 50 basis points of increased upfront fee. So call it, maybe 75 basis points or so of total yield. But that wasn't very long lasting, but there were certainly a couple of transactions that were going into signing that we were able to move terms on and rightly so because it was an uncomfortable and a difficult period to be investing in for most people. And then you look back in the period in 2022, late 2022 and early 2023, I think we saw spreads widen by 150 basis points back then and fees probably widened by 100 basis points upfront fees, and that was more driven just by banks exiting the market, the broadly syndicated market shutting down entirely because banks were hung on transactions as rates rose and they couldn't sell them. And so that just created a huge imbalance in the competitive landscape and the supply of capital. So really, it's just -- those are 2 recent examples of very different movements in spread and for different reasons, and it's just really hard to generalize. Operator: Mr. Schnabel, it appears we have no further questions this afternoon. Sir, I'd like to turn the conference back to you for any closing comments. Kort Schnabel: Okay. Great. Thank you all for joining us today and for all your continued support, and we look forward to seeing you on our next quarterly call. Operator: Thank you, Mr. Schnabel. Again, ladies and gentlemen, that will conclude today's conference call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.
Operator: Greetings. Welcome to Brixmor Property Group Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Stacy Slater, Senior Vice President, Investor Relations and Capital Markets. Thank you. You may begin. Stacy Slater: Thank you, operator, and thank you all for joining Brixmor's third quarter conference call. With me on the call today are Brian Finnegan, Interim CEO; and the company's President and Chief Operating Officer; and Steven Gallagher, Chief Financial Officer. Mark Horgan, Executive Vice President and Chief Investment Officer, will also be available for Q&A. Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings, and actual future results may differ materially. We assume no obligation to update any forward-looking statements. Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website. Before turning the call to Brian, please note that out of respect for Jim's privacy, we will not be addressing any questions regarding his medical leave, and we refer you to the company's October 16 press release. We do ask that you join our Brixmor family in wishing Jim good health. [Operator Instructions] At this time, it's my pleasure to introduce Brian Finnegan. Brian Finnegan: Thanks, Stacey, and good morning, everyone. I first want to say on behalf of the entire Brixmor team that our thoughts go out to Jim and his family. We care about them deeply and are grateful for the well wishes and support for him that we have received from across the industry. In the meantime, the team he built remains focused on executing our business plan, which is demonstrated in the third quarter, continues to deliver outstanding results. As usual, those results begin with leasing. As this quarter, we executed 1.5 million square feet of new and renewal leases at a blended cash spread of 18%. New leases during the quarter were signed at a record rate of $25.85 per square foot as our team continues to capitalize on healthy demand to be in our well-located shopping centers. We're seeing strong activity in both anchors and small shops, with small shop occupancy hitting another record at 91.4%, with room to run as we deliver our reinvestment program. And on the anchor front, the team is making progress on backfilling the spaces recaptured over the past year with new leases executed during the quarter on those spaces with the likes of Marshalls, Total Wine & More, Bob's Discount Furniture and Cavender's Boot City. Thanks to the continued strength in leasing, the signed, but not yet commenced pipeline remains above $60 million despite commencing a record $22 million of ABR during the quarter, which Steve will comment on further. New tenant openings are among the most exciting aspects of our business, and the third quarter included Sprouts Farmers Market in Knoxville, Tennessee, Trader Joe's in suburban Denver, and several openings at 2 of our most impactful redevelopments the Davis Collection in Davis, California, and Block 59 in Suburban Chicago. Staying with reinvestment. During the quarter, we stabilized 8 value-enhancing projects with a total cost of approximately $46 million at an average incremental yield of 11%. This included College Plaza in Long Island, New York, where we added a new Chick-fil-A out parcel and reconfigured existing in-line space for Burlington, Five Below and Ulta to complement a strong performing ShopRite supermarket. We also stabilized the first phase of Barn Plaza in suburban Philadelphia, where earlier this year, we opened Bucks County's first new Whole Foods Market. Thanks to the successful execution of the initial phase of that project by our North region team, we're adding a second phase into our active pipeline this quarter, which includes, first, the portfolio of new leases with Pottery Barn, Williams Sonoma, Sephora and Lovesac. This is one of the many examples across the portfolio where our reinvestment program is enabling us to attract a much higher caliber of tenant than we have historically. Finally, on reinvestment, our partnership with Publix continues to grow as we announced our second new project of the year in Hilton Head, South Carolina, with several more to follow in the future pipeline. Our percentage of ABR from grocery-anchored centers now sits at 82%. And as we've seen a 35% increase in year-over-year traffic when we add a grocer, we're thrilled with the opportunities to add more grocers to the portfolio as we execute our reinvestment program. Switching to transactions. As we discussed at length on our second quarter call, we closed on the $223 million acquisition of LaCenterra at Cinco Ranch in suburban Houston and are pleased with our team's progress out of the gate, with 7 new leases either signed or in process, all well ahead of our initial underwriting. Mark and team continue to raise attractive capital as we exited 8 assets where we had maximized value since our last earnings call, bringing our total disposition volume year-to-date to $148 million. We continue to evaluate opportunities to put our platform to work and still expect to be net acquirers at year-end. To that end, we have approximately $190 million of value-added acquisitions under control and look forward to sharing more about these exciting acquisitions soon. To summarize, our team continues to execute on all fronts, attracting great tenants in a supply-constrained environment at the highest rents we've ever achieved. Our redevelopment platform continues to deliver low-risk compelling returns with several years of runway for future growth. And on the transaction front, we're well positioned to continue to recycle capital out of low-growth assets into those where we see the opportunity to create value through our operating platform. Thank you to the Brixmor team for your continued focus and effort as we continue to create value for our stakeholders. With that, I'll hand the call over to Steve for a more detailed review of our financial results. Steve? Steven Gallagher: Thanks, Brian. I'm pleased to report on another strong quarter of execution by the Brixmor team as we continue to stack rent commencements from the snow pipeline that will accelerate growth over the next several quarters. NAREIT FFO was $0.56 per share in the third quarter, driven by same-property NOI growth of 4%. As expected, base rent growth decreased to a 270-basis-point contribution due to a 150-basis-point drop in build occupancy compared to the third quarter of last year. We expect base rent growth to accelerate into 2026 as build occupancy rebounds, and we continue to commence rent from the snow pipeline at higher rents. Additionally, revenues seemed on collectible contributed 80 basis points to growth in the quarter as we trend to the lower end of our historical run rate of 75 to 110 basis points of total revenue given the improvement in our underlying tenant credit. As Brian noted, we commenced a record high $22 million of new ABR in the quarter. And capitalizing on the strong leasing environment, we executed $16 million of new leases at a record high $25.85 per square foot and ended the third quarter with a 390-basis-point spread between leased and build occupancy. Our assigned, but not yet commenced pipeline totaled $60 million, which includes $53 million of net new rents. In addition, the blended annualized rent per square foot on the signed, but not yet commenced pool is $22.30 per square foot, approximately 21% above our portfolio average, reflecting the below-market rent basis in our centers. We expect 80% of the snow pipeline to commence by the end of 2026, with 2026 commencements slightly weighted to the first half of that period. From a balance sheet perspective, at September 30, we had $1.6 billion of available liquidity, including approximately $400 million from our September 2025 4.85% issuance, which prefunded our June 2026 maturity of $600 million at $4.125%. One note on the capital markets front, our SEC shelf registration statement is due to expire next month. So we'll be filing a replacement shelf registration statement this week. As part of that process, we'll also be reviewing our existing ATM program and DRIP. We will also be extending our buyback program for another 3 years, which together will continue to provide Brixmor with maximum flexibility to capitalize on a wide range of potential capital market environments and support the long-term execution of our business plan. We are pleased to announce a 7% increase in our annual dividend to a rate of $1.23. The revised dividend, which approximates taxable income, allows the company to retain as much free cash flow as possible while meeting our REIT dividend requirements. In terms of our forward outlook, we have updated our FFO guidance to $2.23 to $2.25, and affirmed our same-property NOI range of 3.9% to 4.3%. Our increased FFO expectations is driven by higher-than-expected lease settlement income in the fourth quarter as we continue to capitalize on opportunities to proactively recapture and accretively backfill space. As such, we expect lease settlement income to be a headwind to 2026 FFO growth. We are excited about how we are positioned heading into next year with significant tailwinds from 2025 rent commencements a strong snow pipeline and reduced exposure to at-risk tenancy, coupled with the strong demand from tenants to locate in our centers. And with that, I'll turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question is from Michael Goldsmith with UBS. Michael Goldsmith: Steve, a question for you. On the implied acceleration of the same-store NOI growth in the fourth quarter, can you walk through kind of the contributing factors there? Is that a function of the snow pipeline being activated, what you've already done, what you -- what is due in the fourth quarter? And then also, can you just talk about the role of the comparisons in the acceleration to just -- the sustainability of that? Steven Gallagher: Sure. Yes. I mean, as we talked about, we commenced $22 million of rent in the quarter, right? And we've talked a lot over the last several quarters about just the stacking of rent and how that provides growth heading into future quarters. So you obviously get a partial benefit of that rent that commenced in the quarter. And then you get another partial benefit in Q4 as it's fully in for the entire quarter. And then you also have approximately $19 million of rent that we expect to commence between the end of the third quarter and fourth quarter, that will provide growth into that quarter as well. I think the only other thing I would just remind you is, when you look to the prior year quarter ending 9/30, the entirety of the tenant disruption that we've experienced over the last year was in and billing as of that period. So that rent starts to fall off the fourth quarter and then through 2025, just as you're thinking about the year-over-year comparisons. But what we're really looking forward to is that tailwind that the commencement of this new pipeline is providing. Brian Finnegan: Yes, Michael, I would just add what we're really excited about there on the commencement front, too, is some of these larger redevelopments starting to come online, like Block 59 in Chicago, which I mentioned. We're also seeing the first of the boxes that we backfilled last year that we took back at the end of the year starting to come online as well to Ross boxes that we opened last week. So everything that Steve said, again, gives us good visibility to the end of the year, but some anecdotes there in terms of the nature of that as well. Operator: Our next question is from Samir Khanal with Bank of America. Samir Khanal: I guess, Brian, in your opening remarks, you talked about shop occupancy hitting another record and you also stated there's more room to run. Maybe expand on those comments as we think about occupancy into next year. Brian Finnegan: Yes. We've been pleased with the progress on the shop front, as I mentioned. But if you look at that future reinvestment pipeline, we're several hundred basis points below where occupancy sits today. And Samir, when we've seen historically, as we bring those projects on, you're seeing a lift in shop occupancy. So we do feel like we have several hundred basis points more to run. And when you think about the nature of those projects in that future reinvestment pipeline, a great future pipeline that we have with Publix think about Plano, Texas, other projects that we have in Florida, suburban Atlanta, Metro New York, which gives us real good visibility in our ability to drive that forward. So that's really that piece in terms of what's left and our ability to get it even higher than it is today, which, again, we're pretty pleased about. Operator: Our next question is from Craig Mailman with Citigroup. Craig Mailman: Brian, you had mentioned some additional acquisitions that are in the pipeline. Could you just go through what the opportunity set looks like and where cap rates are trending? And kind of are these going to be more like LaCenterra that are longer-term opportunities that maybe aren't initially accretive? Or are there some stabilizing there that can kind of boost FFO in the near term as well? Brian Finnegan: Craig, I'll hand this to Mark, but I would just say we're really pleased with what we're seeing on the transaction front, but also pleased with not just what we're doing out of the gate in LaCenterra, but what we're doing out of the gate with the $300 million of acquisitions that we closed last year. So maybe I'll hand it to Mark to give an overview on what he's seeing in the market. Mark Horgan: Sure. the market remains really competitive. As we've discussed on past calls, we're seeing new entrants and capital, actually on the sidelines really seeking exposure to open-air retail. A lot of that capital is actually seeking smaller, simple grocery anchor deals. And so what's interesting is that's really allowing us the opportunity to be efficient when we capital recycle. And we're selling some assets where we see low hold IRRs from our perspective, well below IRRs when we'd like to generate. We've got the ability to recycle that capital into assets like LaCenterra, where we see really strong growth and the ability to drive strong IRRs and really drive our return on invested capital from here. With respect to the deals that we're buying, we really try to focus on, from an acquisition perspective, value-added opportunities. So the ones that were in the pipeline today, which we think will continue to grow over time, that pipeline will continue to grow. They look pretty similar to LaCenterra and that they have very strong growth opportunities, and we're going to leverage our platform to drive strong cash flows through occupancy gains through rent mark-to-market and some redevelopment. I would say the ones that we're looking at today are not lifestyle centers. They're more traditional open air retail centers that fit right into our platform. A good example on one of those assets were using a platform to drive an immediate increase and an anchor rent that's giving us better growth through the term of the anchor rent and increasingly going in cap rate by about 50 basis points, which we feel is very compelling from an acquisitions perspective. And really, I think, speaks to the strength of the platform as we think about future acquisitions from here. Operator: Our next question is from Michael Griffin with Evercore ISI. Michael Griffin: Great. And first of all, my thought to Jim and his family, wishing him a speedy recovery. Brian, maybe you could talk a little bit about how the leasing pipeline looks as we head into next year? I mean, our retailers still looking to expand and grow their business. You guys have done some pretty strong new leasing year-to-date, but just give us a sense of what those conversations are like kind of caveating that while it seems like we've gotten some trade deals done, there is still this macro uncertainty as it relates to tariffs and the potential impact to retailers. Brian Finnegan: We appreciate the kind words about Jim, Michael. And we remain very optimistic and encouraged by what we're seeing in the leasing environment. The pipeline today is higher than it was a year ago despite the fact that we've signed 10% more in GLA this year. The retailers who were growing with are not only looking to add store count in both infill locations and where they have additional white space with specialty grocers, off-price apparel, health and wellness operators, the tenants are performing. If you listen to those second quarter calls, you saw -- you heard some very strong results from a lot of the retailers that we continue to grow with. From a tariff perspective, they've been able to navigate this with suppliers. And so as we think about our core tenant mix as well as the new operators who are expanding with us in the portfolio, they continue to have strong open-to-buys as they head into 2026. And interestingly, we have a full slate for New York ICSC coming up in a few weeks. Those discussions will be primarily around '27, right? There are still deals that we're signing towards the end of the year that we're going to get open in late '26, part of that focus to is 2027 pipeline. So we remain very encouraged. We continue to keep a close eye to see if there are any cracks in that, but to date, we're really not seeing it. Operator: Our next question is from Todd Thomas with KeyBanc Capital Markets. Todd Thomas: I wanted to go back to the same-store growth and ask a bit about the building blocks for '26, if I could. You talked about the headwinds from bankruptcies and tenant disruptions for the year. I think you noted it was about 230 basis points last quarter. Any early thoughts about how we should think about that drag today as we look into '26? Whether you expect that to alleviate, or do you see a similar level of drag? Brian Finnegan: Yes. I mean, as we sit here today, right, I think the one thing we've talked about a lot over the last couple of quarters is just to reduce exposure we have to average tenancy, right? When you look at our watch list today versus -- even versus our peer, but especially compared to 5, 10 years ago, right, you just see a lot less exposure to some of those names that you all were worried about as were we, Big Lot, Party City, JOANN. And you're seeing more exposure to things like Whole Foods, Sprouts, Publix, right? So I think as you look into '26, I mean, obviously, one of the headwinds is going to be we did recognize rent for that bank of space in '25 that's not going to recur in '26, right? But I think sitting here today, there doesn't look to be a lot of significant tenant disruption out there moving forward. Obviously, we'll see how the next couple of quarters play out, but we really feel comfortable sitting here today with the tailwind from that snow pipeline commencing in '25 and then also into '26. But obviously, just reminding that there is some [ BK ] headwinds for the rent be recognized in '25. Operator: Our next question is from Greg McGinniss with Scotiabank. Greg McGinniss: Brian, I just want to touch back on the tenant health commentary. Looking at the bad debt expense, guidance was maintained and despite previously trending towards the low end, Q3 was up versus Q2. Could you just provide some insight on that increase? And then generally -- more generally, how you're feeling about the range in the year? Brian Finnegan: Well, I'll let Steve hit the guidance piece. But just to expand on what he just said, right? Our office supply exposure has been cut in half. We have a very low drug store exposure. If you look, we have 17% of our ABR comes from local tenants. And the underlying credit quality of the tenants who backfilled the space we took back over the last year, is very strong. So we feel very confident in terms of where that watch list exposure sits today. There's always categories that we're keeping a close eye on. But as Steve noted, that has dropped meaningfully from where this portfolio was historically. And Steve, maybe you could touch on the guidance piece. Steven Gallagher: Yes. I mean, obviously, we are trending to the lower end of the range. I'm still within the range. I'd just remind you about things we've talked about over the last couple of years, right, is the first half of the year, due to some of the out-of-period cash collections on real estate taxes, generally has a lower -- when you're just looking at as a percentage of total revenue. And then the back end is all -- a little bit higher. So I think we feel comfortable where we're headed within the range, but I'd just remind you that third and fourth quarter, when you're looking as a percentage, is a little bit higher. But I think when you're comparing to the prior year, obviously, it's a favorable trend. Operator: Our next question is from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: And just echoing the speedy recovery thoughts for Jim. Mark, the cap rates in the acquisition world have definitely come in even Power Center. I know you guys really aren't looking at that, but even that's getting a strengthening bid. As you look at your opportunity set, do you sort of have a minimum threshold where you're like we can't buy below x yield because the deals need to be accretive from Day 1? Just trying to understand with more focus on REITs delivering earnings growth -- true earnings cash flow growth, do you find that you have a floor that you won't go below? Or how do you balance that given the increased competition for assets? Mark Horgan: Look, I think everyone in the room understands that our job is to grow earnings [indiscernible] and that's what we're going to be focused on over time. Our acquisitions program historically and today remains focused on driving high unlevered IRRs. When we look at the deals, we've been delivering, that tends to be in that 9.5% to 10.5% range. So when we find compelling opportunities, we're going to go after them to acquire. Last year, we acquired Plaza Britton -- Britton Plaza pointing down in Tampa, which was a lower going-in yield, where we see very, very significant value-add opportunities in that asset. So we're not going to pass up the ability to buy something like Plaza Britton in the future. With that said, the assets we're working on today, we think have attractive going in yields and growth. So we're really focused on both parts of that plan from an acquisitions perspective. Brian Finnegan: And Alex, since we're funding that through capital recycling, we're funding that with assets that we don't see that long-term growth potential into assets, just to Mark's point, where we do. So with everything Mark said, we feel that there are a lot of compelling opportunities out there for us today despite the fact that it is... Mark Horgan: The other thing I would add, and we talked about this in the past, we continue to mine out things like land parcels in this portfolio, which are not yielding any casual today are really native cash flow given the carry cost. We did that earlier this year. We have some in our pipeline today that again, will provide us some really well-priced capital to put the work in the acquisitions market. Operator: Our next question is from Cooper Clark with Wells Fargo. Cooper Clark: It looks like G&A came down in the quarter around $2 million to $3 million. Curious what drove this? And if $26 million is a good run rate moving forward, or if it was driven by a more one-timing item? Mark Horgan: Yes. I mean, we're obviously not going to provide guidance on G&A right now. But if you just look at the comparison to the prior quarter, we did do a restructuring in the prior year, which did have a charge in that quarter and importantly, gave us a better run rate going forward of a reduced G&A, which you're seeing in that line year-to-date. So it's really about the comparison and what happened in the prior quarter. We feel pretty comfortable where G&A is today. Operator: Our next question is from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Thoughts with Jim and his family. I just wanted to ask about the Publix relationship you kind of noted at the top in your prepared remarks and what we could see going forward? Any opportunities for some greenfield developments? Brian Finnegan: Yes. I'll first -- touching on the Publix relationship one, our South region team has a long-standing relationship with them. We've done into the double-digit projects in terms of in-place redevelopments. We've got 2 new projects that we've done this quarter in Southeast Florida and Hilton Head, South Carolina, which we recently announced. We just announced yesterday another redevelopment in St. Pete with them. And we've got a long pipeline with them and a great partnership in terms of they've been reinvesting, like a lot of our grocer partners in their stores in both Florida and some other Southeast markets. So team in the South region has done a fantastic job with them, and we look forward to continuing to see that grow. And you could see many of those projects in the future pipeline. As it relates to new development, our focus is on redevelopment. We've got several years of runway of future growth in that future reinvestment pipeline. As Mark touched on, he's adding additional opportunities to that as well. Never say never because we do have great relationships with the likes of Publix, Kroger, HEB, I could go down the list that we have a lot of -- we've had a lot of good report -- not just report with, but we've been able to execute with historically. So we'll continue to look at things, but generally, that focus is going to be on redevelopment. Operator: Our next question is from Haendel St. Juste with Mizuho Securities. Haendel St. Juste: Best wishes to Jim. I wanted to build on the last question, it looks like the average yields for redevelopment projects ticked down a bit sequentially to 9% versus 10% last quarter. Is that a mix issue? Are you starting to see the impact of tariffs or higher cost or maybe this is a new level we should expect near term? And then some thoughts broadly, I guess, on minimum yield or hurdles in light of the lower debt costs. I'm curious if you're changing that at all in light of lower debt cost? Brian Finnegan: Juan, -- I'm sorry, Haendel, we -- if you look at where we said historically and where we've been delivering, it's been high single digit, low double-digit returns. So it's just effectively the mix that we had of what was stabilizing during the quarter. As we look out in that future reinvestment pipeline, we still see, as I said, several years of runway similar returns. There have been instances where there have been some cost increases, but we're getting it back in terms of our rents. And we continue to be able to invest accretively. These are incremental returns. We're also not including in those returns the follow-on leasing that we continue to see in these projects several years after. So we remain very encouraged by what we're seeing in terms of the projects going forward and the nature of what those returns look like. We're not changing our threshold. If anything, as we've done some of these larger projects we want a higher pre-lease threshold from where we've been historically to limit our risk. These projects are still fully bought out, and we have a great line of sight on where costs are going to go. But generally, we're very pleased with what we've been seeing both in the existing and future pipeline as it relates to those returns. Operator: Our next question is from Caitlin Burrows with Goldman Sachs. Caitlin Burrows: A big part of the Brixmor story is your ability to quarter after quarter achieved large leasing spreads as you bring rents up to market rates. So I guess with Jim having become CEO almost 10 years ago, it would seem like a lot of this opportunity has been realized by now, but maybe that's not true. So could you give some detail on how you think about what portion of that upside, the outsized leasing spreads has been realized? How much is left? And how long leasing spreads can continue in the like mid-teens rate? Brian Finnegan: Yes. Well, Caitlin, I would just say we're very pleased with the rent growth trends in the portfolio, both with what we've been able to execute as well as what we see coming down the pipe. So if you think about the quarter, we signed the highest rents we ever have in overall small shop and anchors. Over the last year, we've signed the highest rents that we ever have in all those categories as well. If you look at that future leasing pipeline, it sits at about 40% higher than our in-place rents today. And as we continue to reinvest in the portfolio, we expect to continue to drive rents higher. And we still have a low rent basis in terms of the spaces that we are taking back, and we're backfilling these boxes accretively. So we still see a long runway for future rent growth. You could see some fluctuation in a given quarter, but really pleased with what we're seeing from the team. Operator: [Operator Instructions] Our next question is from Floris Van Dijkum with Ladenburg Thalmann. Floris Gerbrand Van Dijkum: Wanted to ask about the recycling of capital. One of the unique elements that you guys had is selling stabilized low-growth assets at attractive cap rates and reinvesting into your significant redevelopment activity. As I noticed, you haven't sold that much year-to-date. I think it's $190 million-ish or thereabouts, less than what you've acquired. Could you talk about the pipeline of dispositions and what the impact of that is going to be? Because you do have a significant redevelopment pipeline as well that is in the works and you're adding on to it. Brian Finnegan: Well, Floris, I'll start and then maybe I'll hand it to Mark. There's always going to be, and Jim has said this historically, a portion of the portfolio where we've maximized value. And then we're going to take that capital and recycle it in to places where we see more compelling growth opportunities that align with the growth profile of the company. So with that, maybe I'll hand it to Mark in terms of some more detail on the pipeline. Mark Horgan: Yes, sure. The one other comment I'd make with respect to our funding of the business, but don't forget, we do generate significant free cash flows here post dividend, post our normal leasing spend. And that's really what's funding our -- the vast majority of our redevelopment program. So yes, there's probably some limited amount of dispos that go into keeping us leverage and neutral there. But ultimately, I wouldn't forget that as you think about how we're funding the business. On the pipeline for dispositions, as I mentioned, what's most interesting to us in the market today is this new capital coming in, again, is seeking exposure to the space. We think we've got the ability here to be opportunistic and sell assets that Brian highlighted that have less growth in our overall portfolio and put it back to work in assets where we are compelled to see higher growth rates and really drive that ROIC for us over time. Floris Gerbrand Van Dijkum: And just to make sure, the cap rates on the dispos are broadly in line with what your acquiring except maybe the lifestyle center, but that it should be on a -- sort of a cap rate neutral basis? Or is there a little bit of dilution involved there? Mark Horgan: Yes. Our year-to-date cap rate, like it's been for many years, it's in and around 7%. The acquisitions are going to be slightly lower than that when you blend them all together this year. Last year, we think it was about neutral. So it depends on the mix of what we're selling. But importantly, we're really focused on that long-term hold IRR. And we think that growth of what we're buying is significantly better than what we're selling, and we're seeing that through looking back at the assets we bought. So we remained convicted in the adjustment program to add value to the company over time. Operator: Our next question is from Linda Tsai with Jefferies. Linda Yu Tsai: Can you comment on the yield for LaCenterra? And then in terms of traditional open-air centers being in your acquisition pipeline, just wondering why you highlighted that they are not lifestyle centers? Brian Finnegan: Well, I'll take the second part first, Linda, sorry about that. And we did touch on LaCenterra the last quarter, but Mark can spend a little bit more time on that. I think what Mark was saying is we are looking for assets that have compelling growth profiles. And if you look at that in terms of what we bought historically, it's been a mix. And so when Mark was comparing it to LaCenterra, it's very -- these assets are very similar in that they're grocery anchored, and we feel like we can put our platform to work to have compelling growth out of those properties. So maybe, Mark, I don't know if there's a little bit more to add on for LaCenterra? Mark Horgan: Yes. I would really point to the comments we made last quarter, we went through it in detail. And what I would highlight is that since last quarter, we've outperformed what our expectations were in the initial ownership periods. So we remain convicted in the growth that we're generating. We remain convicted that the yields were going to roll will be a little bit higher in year 1 and moreover, the growth that we see coming from that asset. We think it's a really compelling opportunity for Brixmor. And just to highlight what I was trying to highlight was the assets that we're buying, we have high conviction in growth, just like we did with LaCenterra. The ones in the pipeline today that we have under control are just -- they look more like traditional shopping centers. We're always going to focus on growth. Operator: [Operator Instructions] Our next question is from Hong Zhang with JPMorgan. Hong Zhang: I guess your lease to occupied spread has gone down throughout this year, but still remains above historic levels, just given the strong rent commencements you expect in 4Q in 2026, do you expect to be back to more historic levels by the end of 2026 going to 2027? Brian Finnegan: I'll take that. I would expect that to still remain wide. I mean, obviously, you'd expect it to tighten since we commenced a record amount of ABR during the quarter, but we're also leasing a lot of space. And we've got a large legal pipeline that where we continue to fill deals in the leasing committee in terms of the flow in the leasing committee on a weekly basis remains strong. So the pipeline remains elevated. We like what we're seeing from a demand perspective. You should expect that to remain somewhat elevated, but it is exciting in terms of the commencements that we've had here that we had in the third quarter and that we look forward to seeing in the fourth. Operator: There are no further questions at this time. I would like to turn the floor back over to Stacy for closing remarks. Stacy Slater: Thank you, guys, for all joining today. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Thank you for standing by. This is your conference operator. Welcome to the TMX Group Limited Third Quarter 2025 Results Conference Call. [Operator Instructions] The conference call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Amin Mousavian, Vice President of Investor Relations and Treasurer and Interim Chief Risk Officer. Please go ahead, Mr. Mousavian. Amin Mousavian: Good morning, everyone. We join you from our Montreal office today to discuss the 2025 third quarter results for TMX Group. We announced our results for another outstanding quarter and our fifth consecutive double-digit revenue growth, highlighting strong performance across all of our business units. Copies of our press release and MD&A are available on tmx.com under Investor Relations. This morning, we have with us John McKenzie, our Chief Executive Officer; and David Arnold, our Chief Financial Officer. Following the opening remarks, we'll have a question-and-answer session. Before we begin, let's cover our forward-looking legal disclosure. Certain statements made during the call may relate to future events and expectations and constitute forward-looking information within the meaning of the Canadian securities law. Actual results may differ materially from these expectations and additional information is contained in our press release and periodic reports that we have filed with the regulatory authorities. Now I will turn the call over to John. John McKenzie: Thanks, Amin, and good morning. [Foreign Language] Good morning, everyone, and thank you for joining the call this morning, broadcasting to you live from our Montreal office on a beautiful morning here in La Belle Province. Now as Amin mentioned, we announced third quarter results last night and TMX delivered outstanding performance in the quarter, highlighted by strong year-over-year growth in revenue, adjusted earnings per share and operating leverage. And as David will cover the quarter in more detail in a few minutes, I'm going to focus my remarks this morning to provide important context around our -- how our year-to-date progress sets the stage for future success. At last year's Investor Day, we unveiled an ambitious strategy we've been working on for a number of years called TM 2X. And I say ambitious because what we needed to do was shift the organizational mindset from a growth -- to a growth mindset from incremental to transformational. It took the organization 14 years to get from $0.5 billion in total revenue to $1 billion, but our aim was to double that pace to reach $2 billion in 5 to 7 years, and we are well on the way. People across our enterprise have embraced this challenge. And I'm happy to report that as we move along in the fourth quarter, we are delivering on the promise of bigger and faster. And we are now 5 consecutive quarters of double-digit growth into the TM 2X journey, well on our way. So turning to our results for the first 3 quarters of 2025. Our overall revenue increased 18% compared to 2024, reflecting gains across all business lines, highlighted by double-digit growth from derivatives and clearing, equities trading and Global Insights. Our organic growth, excluding acquisitions, increased 16% and adjusted diluted earnings per share increased 25% from the first 9 months of last year. Our results showcase the power of a unique diverse portfolio of interconnected global businesses as well as the resiliency of our market ecosystem. And 2025 success stories span the entire enterprise across established traditional business areas as well as new business areas and geographies. Our overall operating expenses for the first 9 months increased as well year-over-year, reflecting expenses related to recent acquisitions, and continued investment in organic growth. And David will walk through the expenses in more detail following my comments this morning. Now moving through some of our business area highlights. Trading activity on core domestic markets remained strong throughout the first 9 months. Revenue from derivatives trading and clearing, excluding BOX, increased 32% year-over-year, driven by strong trading activity across both equity and interest rate derivatives. The first 9 months also featured continued upward momentum in our Government of Canada bond futures products, supported by a record open interest and increased client adoption. Macro environmental and geopolitical factors drove record investor demand for derivative instruments. MX overall open interest reached an all-time high of 33 million contracts in September and finished the month 57% higher than the same date last year. On the equity trading side, increased activity due to market volatility as well as higher yields on premium products drove revenue gains. Overall revenue from equities and fixed income trading and clearing increased 11% compared to the first 9 months of 2024. On a combined basis, TSX, TSX Venture and Alpha volumes increased 22% year-over-year. Now looking beyond Canada, building on our early success, AlphaX U.S., our new U.S. equities trading venue continued its impressive growth trajectory during Q3. Market share grew 30% and average daily volume increased more than 30% quarter-over-quarter. But what we are most encouraged about is the pace of industry adoption with approximately 30 participants now connected representing a range of firms all connected to AlphaX U.S. Turning now to Global Insights. This has been a key contributor to our tremendous year-over-year performance and a propulsive force in our strategic growth. Revenue during the first 9 months increased 16% compared to 2024, led by double-digit increases from TMX Trayport and TMX VettaFi. TMX Trayport revenue grew 21% year-over-year or 14% in pound sterling, driven by a number of factors, primarily an increase in the number of licensees and increased adoption of analytics and other trader products. Trayport's forward strategy is focused on 3 primary client-centric components: strengthening the core jewel network by investing to improve speed, scalability and reliability while supporting enhanced capabilities and product innovation; number two, expanding into new asset classes and geographies; and three, adapting to address the evolving needs of energy trading clients with innovative data analytics tools. Our revenue from TMX VettaFi increased 24% compared to the first 9 months of last year or 20% in U.S. dollars due to higher indexing revenue driven by organic growth in assets under management and recent acquisitions. TMX VettaFi continues to execute against an opportunistic expansion strategy, moving to capitalize on specialized long-term global trends. And so earlier this month, we acquired 3 indices that track the nuclear energy sector, crucial for AI infrastructure from Range Fund Holdings and North Shore Indices, including the Range Nuclear Renaissance Index. These latest acquisitions expand TMX VettaFi's industry-leading indexing platform to over 1,250 indices across a diverse group of major asset classes. Now moving now to the third key component of Global Insights, TMX Datalinx. We also made some news earlier this month. We acquired Verity, a leading buy-side investment research management system, data and analytics provider. The addition of Verity brings a dynamic new financial data and proprietary analytics and capabilities, along with an expert group of professionals to our Datalinx team to enhance the services we offer to more than 5,000 clients worldwide. And I'd like to take that quick opportunity to welcome the Verity team into TMX. Now turning to capital formation. The first 9 months of revenue increased 8% when compared to 2024 due to higher revenue from additional listing fees and the inclusion of revenue from Newsfile. You'll recall at the beginning of the year, we separated the Capital Formation segment into 2 primary components: Traditional capital formation, the role of our stock exchanges, TSX and TSX Venture play in helping listed companies raise growth capital. And TMX Corporate Solutions, an end-to-end set of services, including TSX Trust and Newsfile to serve the needs of public and private companies through all their capital raising activity and stages of evolution. And we established then a long-term objective of generating over 50% of the revenue from capital formation from these corporate solutions. But the story of this quarter is actually really about capital raising itself and the strength of our public market ecosystem. Combined, TSX and TSX Venture market capitalization reached a record high in the quarter, topping $6 trillion for the first time, highlighted by $1 trillion in the mining sector alone, also an all-time high. And most importantly, we are also seeing sustained positive momentum in activity at the crucial foundation of the ecosystem, led by a surge in the mining sector, equity financing dollars raised by TSX Venture issuers increased 67% through the first 9 months compared to that same period last year. And over the past few quarters, we've talked about our efforts working closely with a well-defined pipeline of private companies to prepare them to join our ecosystem. Earlier this month, we proudly welcomed Calgary-based Rockpoint Gas Storage to the Toronto Stock Exchange, the largest independent owner and operator of natural gas storage in North America. The company raised over $700 million during its IPO, and we are hopeful that this is a signal to the community of issuer prospects and to the entire marketplace that the conditions for going public are right and that we are on the cusp of a robust IPO season. Growth momentum also continued through the third quarter in Canada's ETF industry. Through September 30, 200 new ETFs listed on Toronto Stock Exchange this year, surpassing the full year record set in 2024. And now as I close, I'd really like to take a moment to thank our employees around the world for their continued and essential contributions to our success. TMX has an impressive track record of leadership and innovation and we have a long proud history. Last Friday marked TMX's 173rd birthday. And in 2 weeks, we will celebrate 23 years as a publicly traded company, and I believe in celebrating our milestones. Those of you who have followed us through the years have seen the yellow evolution from a regional exchange operator into a global competitive force. Now to be clear, I haven't been here for 173 years, but it's been my absolute privilege to work here during the most transformative era. And I feel very strongly that we're on a course for an even brighter future. As we move forward towards the end of this year, we are equipped and emboldened to take TMX to new heights from promise to delivery, ambition to execution. And with that, let me turn the call over to David. Thank you. David Arnold: Thank you, John, and good morning from Montreal. I'm pleased to report that the TMX Group delivered outstanding financial results in the third quarter of 2025, reflecting the strong momentum across our franchise and the effectiveness of our strategic initiatives. We once again achieved double-digit increases in both reported and organic revenue in the third quarter. Our Q3 revenue of $418.6 million equates to a robust 18% year-over-year growth. This exceptional performance was broad-based across all of our business segments, with particularly strong contributions from our derivatives trading and clearing, TMX VettaFi, TMX Trayport, TMX Datalinx and equities and fixed income trading businesses. The strength in our revenue, coupled with disciplined expense management, led to strong income from operations and earnings per share this quarter. Diluted earnings per share increased 43% to $0.43, while our adjusted diluted EPS grew 27% to $0.52, driven by growth in our income from operations, which increased 23% compared with Q3 of last year. Now turning now to our businesses, beginning with the segments that saw the largest year-over-year increases. Global Insights revenue grew by 18% this quarter, reflecting double-digit increases across the 3 business segments -- 3 businesses in the segment. Revenue from TMX VettaFi grew 35% in Canadian dollars and 32% in U.S. dollars this quarter. This growth included $4.6 million of revenue from recent acquisitions, namely iNDEX Research, Bond Indices and ETF Stream. Revenue, excluding these acquisitions, increased 21% in the third quarter, reflecting strong organic growth in assets under management higher analytics revenue and higher revenue from digital distribution. TMX VettaFi's assets under management continued to show robust growth with over USD 71 billion at the end of September. Now as John mentioned, earlier this month, TMX VettaFi continued to expand on its indexing capabilities and product offerings through the acquisition of 3 nuclear sector indices. These thematic equity indices track nuclear energy and uranium miners, which is a rapidly expanding sector, especially as the world economy seeks to power generative AI and other energy consumption-driven technologies and services. Revenue from Trayport was up 16% in Canadian dollars or 12% in pound sterling this quarter, primarily driven by a 6% increase in total licensees, annual price adjustments and incremental revenue from data analytics and other trader products compared with last year. TMX Trayport ended the quarter with average recurring revenue for the quarter on an annualized basis of CAD 275.7 million or GBP 148.6 million, which is up 18% and 13%, respectively, compared with the same period last year. Now revenue from TMX Datalinx grew 12% from Q3 of last year, reflecting growth in benchmarks and indices, data feeds and higher revenue in subscribers and usage related to prior period billing adjustments. There was also a favorable impact from pricing changes that came into effect earlier this year, and an increase in analytics revenue, coupled with the growth in colocation. Our revenue in our derivatives trading and clearing businesses, excluding BOX, was up 27% from Q3 of last year, driven by a 31% growth in the Montreal Exchange and a 20% growth in CDCC revenue on the heels of a 13% increase in volumes and a higher rate per contract this quarter relating to the sunset of the CRA Market Making program in Q2 of this year. Our derivatives business demonstrated sustained strong performance through the first 9 months of 2025. And as John mentioned earlier, open interest in September is up 57%. Revenue from BOX increased 27% this quarter, driven by a 27% growth in volumes compared with Q3 of last year. Now turning to our Capital Formation business. We saw encouraging trends in capital formation activity this quarter, with revenue up 15% from Q3 of last year. Additional listing fees grew 42% year-over-year due to an increase in the number of transactions billed at the maximum fee on both TSX and TSX Venture Exchange or TSXV for short, and higher average fees for transactions below the maximum. Sustaining listing fees and initial listing fees also grew compared to last year, reflecting increased activity on both TSX and TSXV as well as a higher revenue from ETFs. TMX Corporate Solutions grew by 9% in Q3, reflecting $1.8 million increased revenue from TMX Newsfile, which was acquired in August last year and a higher transfer agency set of fees from TSX Trust. The revenue increase in TMX Corporate Solutions was partially offset by lower net interest income revenue, mainly due to lower yields compared with Q3 of last year. Now in our Equities and Fixed Income Trading and Clearing segment, revenue was up 10% in the quarter, driven by growth in trading, while revenue in our clearing business was up 2% from Q3 of last year. The increase in equities and fixed income trading reflected 35%, driven by higher volumes in our equity marketplaces, including 18% on TSX, 86% on TSXV and 40% on Alpha Exchange and DRK combined. Our combined equities trading market share for TSX and TSXV listed issues was approximately 61% this quarter, down approximately 3% from Q3 of last year. On the fixed income trading side, revenue decreased versus Q3 a year ago, primarily reflecting lower activity in Government of Canada bonds this quarter compared with a very active Q3 last year as well as lower credit and swap activity. Now as John mentioned, I'd like to take a closer look at expenses. So let's take a closer look at our expenses. On a reported basis, operating costs in the quarter increased by 14% and included the following items: First, we incurred $7.4 million of higher dispute and litigation costs compared with Q3 of last year. These costs include a settlement provision and external advisory services related to these matters, which are not part of our ordinary course business have been excluded from our adjusted EPS. Second, we incurred $7.9 million of additional expenses related to new acquisitions. Excluding these items, our operating expenses increased by approximately 7% or $13.2 million on a comparable basis, largely due to 3 key drivers. First, over half of this increase or $7 million is driven by higher headcount, payroll costs and year-over-year merit increases. Second, approximately 1/4 of this increase or $3 million relates to IT operating costs reflect the higher licensing and subscription fees, mainly related to supporting our growth initiatives compared to last year. And the remaining quarter of this increase relates to $2.5 million of higher amortization relating to the launch of our post trade system and $1.1 million representing higher costs related to AlphaX U.S., which was launched in January of this year. partially offset by $0.4 million of other net cost decreases. Now let me be crystal clear. We delivered double-digit positive operating leverage in the third quarter, driven by a robust 17% organic revenue growth, outpacing the 7% increase in comparable operating expenses, and our entire management team cannot be prouder of this excellent result. Turning now to our sequential results. We maintained strong momentum from Q2 into the third quarter of 2025. Total revenue decreased by $3.1 million or 1% in Q3 from a record revenue quarter in Q2. The decrease reflected lower revenue from capital formation due to the seasonality of TMX Corporate Solutions revenue, primarily driven by TSX Trust revenue related to Annual General Meetings in the second quarter and lower fixed income trading revenue from decreased activity in Government of Canada bonds. This decrease was partially offset by higher revenue from our Global Insights segment, driven by TMX VettaFi AUM growth. and higher revenue from derivatives trading and clearing, driven by higher rate per contract due to the sunset of the CRA Market Making program in Q2 of this year. Now turning to our sequential expense analysis. Operating expenses in Q3 decreased $2.8 million or 1% on a reported basis from Q2, primarily reflecting $1.6 million of lower employee performance incentive plan costs and recoverable expenses and lower costs related to the now completed post-trade modernization project. These sequential decreases in operating expenses were partially offset by $1.6 million of increased acquisition and related expenses in the second quarter and $1.3 million of higher operating expenses related to ETF Stream, which was acquired in June of this year. Our balance sheet remains exceptionally strong, providing us with the financial flexibility to pursue strategic opportunities for growth to accelerate our strategy while maintaining our commitment to long-term shareholder returns. Our debt to adjusted EBITDA ratio at September 30 was 2.3x, which is within our target leverage range of 1.5x to 2.5x. We continue to maintain a disciplined approach to capital deployment, as evidenced by the recent acquisition of Verity for approximately USD 98 million completed in early October, which was completed with existing cash and commercial paper. We continue to demonstrate our ability to execute strategic investments while maintaining financial discipline and prioritizing returns for our shareholders. Turning now to our cash and marketable securities financial position. As of September 30, we held over $585 million in cash and marketable securities, which is $371 million in excess of the approximately $214 million we target to retain for regulatory purposes. Net of excess cash, our leverage ratio was 1.9x at September 30 and 2.1x following the acquisition of Verity. Last night, our Board of Directors approved a quarterly dividend of $0.22 per common share payable on November 28 to shareholders of record as of November 14. This represents a dividend payout ratio of 42% for both the third quarter and the last 12 months, consistent with our target payout range of 40% to 50%. Our cash generation capabilities remain robust, supporting both our growth investments and our commitment to returning capital to shareholders. The strength of our financial position, combined with our diverse revenue streams and strong market positions provide a solid foundation for continued growth and value creation. So with that, I'll now turn the call back to Amin for the Q&A period. Amin Mousavian: Thank you, David. Chuck, would you please outline the process for the Q&A session? Operator: [Operator Instructions] Our first question will come from Ben Budish with Barclays. Benjamin Budish: Maybe just first on Trayport. Just curious if you can unpack what's going on maybe across the energy franchise. I think this was the first time in a while your revenues declined sequentially. There's been some headlines sort of indicating that energy trading is getting more difficult for some of the big trading firms. We generally see lower kind of volatility in gas pricing and things like that. So just curious if there's any read through for some of those macro factors into what's going on in Trayport and any other thoughts on kind of the underlying health of the end clients? David Arnold: Ben, it's David Arnold here. I appreciate the question. Yes. So look, sequentially, revenue was slightly lower, but it was actually entirely driven by onetime revenues. So we had about $1.4 million. There was a delta between the delivery of client projects and other consulting work in Q2. So that didn't obviously recur in Q3. But the underlying recurring revenues are up about GBP 0.5 million or 1.5% from Q2 to Q3. So Trayport is obviously continues to still be a high-growth business for us Ben. And we continue to target the 10% plus revenue CAGR over the long term. So as I did mention in my remarks, right, average recurring revenue is up 18% in CAD or 13% in pound sterling. So really, if I just bring it all back full circle, Ben, it's really just because of some of the, as I said, client project consulting that was in Q2 that didn't recur in Q3. Benjamin Budish: All right. Helpful. Maybe one follow-up, David, on Verity. Is there anything you can share there in terms of the P&L impact we'll see starting in Q3? How you think about cross-sell opportunities across the existing Datalinx customer base? Any other details there could -- if you could share would be helpful. David Arnold: No, I appreciate it, Ben. What I'm actually going to do is I'm going to hand it over to John first just to talk about some of the strategic rationale of the acquisition and a little bit about the business, and then I'll give you what I can regarding economics. John McKenzie: Thanks, David. And thanks for the question because we're actually very, very excited about bringing this business in and what it actually does for our product suite and for the client base. I think you hit it in a bit of the question of the cross-sell opportunities. We see those as being substantial, both from a cross-sell opportunity, but also from a product development opportunity. So the Verity business line has got some really good enhanced data capabilities in terms of unique investor insight data, that's analytics and insights, that's built from data. We're going to be able to apply that to underlying Canadian data sets as well. So we're going to be able to expand the reach of the product. And to your point, the cross-selling opportunity is how we the ability to then sell that Verity data and applications to a broader audience base that we have. And I think I gave in the notes, we've got approximately 5,000 clients and Datalinx globally that are now an addressable market for that product set. The other interesting piece on the Verity business that comes in is it does have a research management platform. So an actual solution that sits in the research site for an asset manager, that's another way for us then to engage in the asset managers in terms of a larger share of wallet because right now, what we really provide is just raw data there. So it's a complementary service. So you've got it exactly right. These are all cross-selling, upselling opportunities, but really about providing a deeper solution set into the client, and that's why we're excited about what we can do with it. So let me turn it back to David to talk a bit on the economics. David Arnold: Thanks, John. Yes. I mean, Ben, what I can tell you is the annual revenue is probably comparable to our Datalinx colocation business contained within our Global Insights segment. So that's the first data point that I can share with you. And then obviously, the most important one really for us is besides the strategic rationale that John outlined, is consistent with previous acquisitions, it's expected to be accretive to our adjusted EPS well within the first year. So that should give you enough. It's a significant investment strategically for the Datalinx business. But the grand scheme in terms of TMX overall results, it's not a material in-quarter movement in adjusted EBITDA. Operator: Next question will come from Etienne Ricard with BMO Capital Markets. Etienne Ricard: Okay, thank you, and good morning, team. So VettaFi continues to be quite active acquiring indices in specific sectors, I'm thinking energy infrastructure. A nuclear, for example. My question is, how does the team think about expanding in some of these specific sectors without having too much concentration risk AUM-wise. John McKenzie: Yes. I mean, that's a great question because what we're actually doing is diversifying some of that concentration risk as opposed to accumulating more. So this sector, we talked about in the notes in terms of the nuclear sector. If you look at any of the long-term independent analysis in terms of where energy demand is going to be supplied from in the future. This is a sector that's going to see a lot of investment, a lot of investor interest. And so it was a natural piece for us to then expand into future asset classes. While it sounds like it's more energy sector, this is very independent from the components that we've got that are in the more AMLP based indices, which are on more midstream pipeline infrastructure. So they're very unique and different in terms of the investor and the assets that they're servicing. But as you know, these are not the only transactions we've done this year. We brought in the suite of fixed income indices earlier on this year. At the end of last year, we brought in the iNDEX Research team to get access to a larger suite of European-based indices, which are up substantially now since that acquisition as well. So it is part of a core strategy of continuing to diversify the asset base that we can deliver through the iNDEX factory at VettaFi. And the bigger governor for us is actually just being pragmatic about how quickly we can integrate things really well so that they're part of our ecosystem and deliver them for clients. So I will tell you that we look at a lot of opportunities. We decline far more than we move forward with because we really want to make sure that they're going to create value for clients, we can integrate them well and deliver them on a scale basis in the platform. Those are key components that we're never going to step aside from when we're looking at these opportunities. Etienne Ricard: And John, staying on VettaFi, we know that digital distribution and data is quite a meaningful revenue driver for this business. How do you think about growth for this line item through the market cycle? In other words, are asset managers willing to get more data when the industry is experiencing market appreciation and net flows? John McKenzie: Yes. I'm always very careful about separating line items in here because what we are trying to do is grow the franchise as a whole and in some cases, using the different product lines to help create cross-sell opportunities. So if we can use a digital distribution opportunity to help drive the acquisition of a new ETF client for long-term indices and grow through AUM. We're looking at that strategic packaging of opportunities as opposed to thinking about being this as one line versus another line. It's exactly why we did the ETF Stream investment in London that we did earlier this year. It was about having some of that same distribution capability in the European market because it gives us that extra strategic and competitive advantage when we're talking to new ETF providers, but the suite of offerings that we can provide to them. So in terms of how we manage the business, it isn't on a line by line by that. It's on the overall basket and driving that double-digit growth rate across the whole firm. Now I'll just add in caveats when firms are doing well and they've got strong marketing budgets, that absolutely helps in terms of the tailwinds in terms of those stand-alone product sales. Operator: The next question will come from Aravinda Galappatthige with Canaccord Genuity. Aravinda Galappatthige: I wanted to start off with Datalinx. Obviously, you provided some detail around the growth there. It's picking up from a period of more flatter growth. I wanted to understand what sort of the bigger components were that sort of drove that spike to 12%? And just to sort of assess the sustainability there. I'll start there. David Arnold: Aravinda, it's David Arnold here. Yes, as I mentioned in my formal remarks, right, there's obviously, year-over-year pricing increases, which we spoke about in prior quarters. There was also some billing true-ups for clients, but then also just robust growth in all pockets. So there isn't really one specific item I can point to other than some billing true-ups and we're getting some feedback on the line. Could you hear me, Aravinda? Aravinda Galappatthige: I can hear. David Arnold: Okay. Good. So yes, so it was across the board across multiple parts of the product line. The only item that I called out that was slightly different was some higher-than-normal billing true-ups. And obviously, feeds volume is up too. Aravinda Galappatthige: And then for my second question, just going back to VettaFi. Considering some of the changes we're seeing in technology, in particular, sort of the rapid growth in Agentic AI and some of those platforms that are coming out. How do you see sort of the future of VettaFi? And how can you sort of insulate or future-proof VettaFi as you think about the next 3 to 5 years, ensuring that, that sort of growth can be sustained, perhaps any of the tailwinds or the headwinds or the threats you can talk to there? John McKenzie: Yes, actually, it's actually -- we think it as an opportunity. When you think about the nature of the business, and we are -- this is a technology-first platform. It is one of the first platforms that's completely cloud delivered and 100% scalable in terms of how we deliver those solutions. We already have teams working on potential AI enhancements in terms of the ability to do that smarter, faster and actually build additional scale. So we are looking at those technologies and really see them as a way to actually do more and create more productivity out of the platform. Operator: Next question will come from Stephen Boland with Raymond James. Stephen Boland: I just quickly go back to Trayport. I mean in terms of quarter-over-quarter, you kind of explained that. I just want to make -- find out and be clear that the lower energy prices is not -- like is the correlation to slowing growth or momentum? What drives that revenue growth? Is it volatility? Is it high energy prices? I'm just trying to get an idea of what the impact of lower energy prices may have. David Arnold: Stephen, it's David. I'll start and John will add if need be. I think the key thing here is -- as we've said in the past, right, the revenue model for us at Trayport is a SaaS-based recurring revenue model. There is a small amount of consulting and advisory, which is sporadic as we onboard new clients and help them connect to the network. And that really is the key driver of what's going on sequentially, as I mentioned earlier on. But I think the important point to also make is part of our revenue model is actually not tied to the trading activity of our clients on the network. So really, the movement in energy prices and/or demand in the marketplace doesn't have a direct correlation to the revenue of Trayport. Now indirectly, it can, as potentially other trading firms decide to open up a desk to trade in natural gas and power in the European marketplace. They would naturally, if they wanted to trade in that and have those trades be via brokers and on exchange, they would love to connect to the Trayport network and that would obviously result in some increased volume. But the core message here is really at the revenue perspective, it's a very, very small delta, and it's related to, as I said, some project and kind of new client onboarding expenses and revenue. But what I can also tell you is that the annual recurring revenue still being north of 100% is a critical key success factor for us that we keep looking at. Stephen Boland: Okay. That's helpful. And then just VettaFi and Datalinx, I guess some of these -- the ETF Stream, the purchase of the indices, even Verity. I mean can you just quickly give how the, I guess, integration happens on -- in TMX? Is it just a link to the existing site? Or is all the technology integrated, the tech stack and then sales was integrated? Just trying to get an idea of the process. David Arnold: Steven, it's David. Yes. So I'll touch a little bit on kind of the mechanics of our integration. I mean -- and your question is a good one, but it was quite broad-based. So I'm really going to focus on the things that are the immediate day 1 to day 120 in any of our acquisitions, right? And so when we tackle the integration, our integration team, first and foremost, is -- it's about really making the onboarding experience for our new TMX family members, a pleasant one. And really, that starts with getting them on to our productivity suite first and foremost, right? And that's everything from our e-mail system to all of our productivity tools as well as our HR and financial systems. So that really becomes the primary. And then at the same time, our sales teams are working on cross-selling opportunities and introduction and then actually leveraging the acquired businesses network with our network. And -- but it doesn't result in a day 1, let's integrate CRM systems, or let's go and integrate production systems. That's really a later decision after we kind of really tackle the productivity suite first. And then we turn to how can we actually look at reducing infrastructure costs, right? And that may result in server rationalization, cloud service provider rationalization and so forth. So that's really the general principle. And with Verity, it's following exactly the same kind of course. John McKenzie: The only piece I'll add there is from a strategic standpoint, we've gotten very good at this. So we've got actually a dedicated team that leads the organization, a lot of folks that spend full time in terms of doing integration well. We've got our own playbook in terms of what are our standards that we move things on. But more importantly, before we do transactions, before we transact, we have a hypothesis of how the business will run as part of TMX. And I think that's really important because it helps you make the right decision as to whether or not you're going to acquire or invest if you know in advance how you're going to operate it as part of our ecosystem. So knowing upfront, especially when you're doing something smaller, that this is going to run as a business line. It's going to run on TMX capabilities. It's going to be TMX people, all in one same team, gets it into a really honest conversation right upfront in terms of what we're going to do. And then afterwards, we're pragmatic around the steps that we take in terms of what order because we didn't want to have -- you don't want to have an integration activity disrupting the opportunity to build sales momentum in terms of that new relationship. So that's the strategic way that we're thinking about it. It's part of the deal decision upfront before we ever execute. Stephen Boland: Okay. And I'll sneak one more in, if you don't mind. Just the litigation and dispute seems pretty material. Maybe you mentioned this in the past. I just can't remember. Is this multiple disputes? Is this one case and maybe just what it's related to? David Arnold: Yes, it's David here. What I would say, which is important, right, is it's our policy not to Stephen, to comment on obviously ongoing legal disputes. But what we do, do is we adjust these as they're really not representative of the kind of ordinary course activity. And we do believe that by doing that, it provides a more meaningful analysis for the investor community to really understand the underlying operating and financial performance. What I can tell you is that we are not in the business of litigation. But from time to time, it does arrive. And depending on the matter, we obviously highlight the litigation costs and/or provisions. But then to the extent that there are settlements, both a positive settlement or a negative settlement, that will also be highlighted in our results as and when that occurs. So you've at least got comfort as to what we're incurring that is really not normal course. And then any settlement that may occur afterwards is obviously not normal course as well. And it's really not necessary. Stephen Boland: Sorry. So this is actually cash paid out, not like a provision that's been set up. David Arnold: No. What I can tell you is some of it is provisions and some of it is payments to lawyers. Operator: The next question will come from Jaeme Gloyn with National Bank Financial. Jaeme Gloyn: I wanted to start on the AI theme, and I guess you kind of answered a little bit of it around VettaFi. But more broadly, what are some of the strategies or technologies that you have in development right now to really sort of maintain the competitive advantage that TMX Group has? That would sort of be one. And then number two on the theme would be what is your view today of potential AI disruption around new trading platforms or exchanges that could impact your market share or growth prospects? John McKenzie: I mean that's a great question, and it's one we're spending a lot of time on. In fact, our Board session that we're doing this afternoon is really focused on what are those major industry themes that have the potential to change or disrupt in the future and AI is one of those topics. From a deployment in the firm, there are a number of pillars that we're working through right now. So first of all, we've actually already deployed a number of different AI solutions throughout the organization. Every employee in the organization has got access to certain tools the actual engagement level of employees using them is very high. And I put the categorization of those tools and things that are productivity enhancing. So the tools that help the everyday employee do their job better, more efficiently, more timely, so that they can increase their own productivity, do things faster, deliver more for clients. There are also specialty tools that were deployed. I'm not going to talk to specific tools because I don't think that would be appropriate. But as you can imagine, we've got tools that are deployed that are helping us build more enhanced data products that help you get more data access out of the proprietary data sets we have. We've got tools that we are using in the development sphere. There's multiple ones that we are testing right now in different areas that help to accelerate development. The way we've deployed these in the organization, again, is that sense of how do we actually increase productivity, the ability to go faster to build products faster. And then to your point, we're also looking at where are the product opportunities going forward. And given an organization like ours, which has actually a robust set of proprietary data, we come into this with some competitive advantage because we have the ability to build on top of data sets we already have as opposed to just acquiring market data and building things that are not proprietary on top of them. The Verity acquisition actually is right in that exact theme that there's some really interesting tools and capabilities in there that allow us to do more things with our actual data. The last thing we talked about on the trading side, I always want to remind people when we're talking about trading is trading is already highly digital and highly automated and a substantial amount of trading flow is actually already an algorithmic tool. So this is really just a next generation of those tools. So we don't see that, that's a material change. We want to make sure the appropriate guardrails are there that protect the marketplaces from essentially what you could have as really high messaging volumes that would come out of AI-generated trading activities. So you always want to make sure there's market integrity. And we'll continue to look at how we use these tools to enhance the capabilities that we've got in terms of both development, throughput, et cetera, et cetera. So you've got it exactly right. It is top of mind. I would say our strategic approach is to be fast follower in a lot of these, not to use the absolute bleeding edge because a lot of those technologies we found are already obsolete. So we're using a lot of ones that are becoming more mainstream and are also partnered with core technologies we're using throughout the franchise. So I hope that gives you a sense of how we're thinking about it strategically, but it's an everyday conversation. It's deployed right through the firm. Jaeme Gloyn: Yes. Perfect. One of the other themes out there is around a shift to semiannual reporting. Maybe you can share some of your early discussions and thoughts around that as well. John McKenzie: So I mean, I'll start with the top line, which is as much as I like talking to all you guys, if we could do that twice a year instead of 4 times a year, it would probably be better. We wouldn't talk about the quarterly trends as much, and we look more long term. But that's just a thematic piece. So this is an area where as an advocate for markets, we've been advocating this, particularly for smaller companies for over 7 years. We didn't wait for Trump to have this idea. Because at the end of the day, especially for smaller companies, when you think about the cost and burden and resources around doing reporting every quarter, and that also goes to audit resources, which are in scarce supply for smaller companies. It's an unnecessary burden compared to the value of the disclosure that the investor needs. These companies are small. Their stories don't change on a material basis. And if any company has any material change, they're required to disclose that whether you're on a quarter or not. So this is -- we've advocated this for all venture companies already. There was a move to put it in the strategic plan of the CSA earlier this year. There's now some piece out for public commentary on a proposal from the CSA to pilot this for companies under $10 million. I mean our response to that is going to be that we appreciate that this is now being made a priority, but there actually isn't a need to pilot something that's been used in 2/3 of the global capital markets of the world. It's already piloted and tested. And $10 million is too small. We should make this available for all venture companies. And should the U.S. move, we should make this available to all companies immediately. And it would be voluntary because it really then becomes a discussion between the company and their shareholders as to what's appropriate. So just because the voluntary semiannual doesn't mean you can't do more if that's what's appropriate for your business. The last simple piece is, in addition to reducing cost and burden for small companies, it actually lets companies engage with their investors more. So any company has quiet periods as soon as their quarter ends, which could be 5 or 6 weeks that you really can't engage with the investor community. When you take 2 of those cycles out, you're essentially giving 3 months back to a company every year to engage with investors, with analysts, asset managers, et cetera, and tell their stories. So we think this would be really positive in terms of meaningfully changing the burden for small issuers, helping them ease the burden of being a public company without really degrading investor access to information in a meaningful way. Operator: The next question will come from Graham Ryding with TD Securities. Graham Ryding: I wonder if I could discuss just the topic of regulation in the U.S. It looks like they're moving towards getting rid of the order protection rule and trying to set the stage for the trading of tokenized equities on blockchain type platforms. So I just wanted to get your view and your opinion on if the U.S. market does go in that direction, what's the implication for the Canadian equity market and yourself. Do we need to follow a suit in some respect? Or and if so, how would that process play out? John McKenzie: Yes, those are great questions. And I'm going to separate the 2 of them because the order protection rules, I thing our regime is already more liberal than the U.S. regime as it is. So what we know the Canadian regime is probably closer to where they're going as opposed to the other way around. And we've been able to provide some input into the SEC in terms of what's worked and not worked in the Canadian marketplace. I do see the subject on tokenization, particularly tokenization of equities to be a different topic of conversation. Sorry, I was just going to ask you if actually, could you just mure the line for a second because your typing is really, really strong. All right. Perfect. Thank you. Tokenization piece, there are a couple of components to it, and this is going to be a regulatory discussion for a while. In the U.S. market, people have been clear that if you tokenize the security, it is still a security. And that's a really important component because the rules around investor protection need to apply, and we need to have level playing field between marketplaces. However, they are exploring whether or not there are caveats or carve-outs or exemptions for some new platforms to that foster innovation. And that's an area where regulators have to be very careful because there's unintended consequences when you start to open that up without the same rules of the game. And I know the Canadian regulators are also right on top of this. When it comes to tokenization itself, this is an area as a firm. We've been looking at this for a number of years. We've got pilot projects in different parts of the franchise, either ones we've done on the trading side in terms of the ability to trade on exchange, things we've looked at on both the custody side and the clearing side, we're continuing to do that. But it is a little bit of a solution that's looking for a problem. It's not clear what the benefits are of tokenization of an existing equity to the actual retail audience. So a lot of these things have got to be driven by demand in terms of what's the benefit to the marketplace. A lot of what's getting done in the U.S. right now is actually more serving the ability to get U.S. equities that are demanded in foreign markets in overseas time zones, the ability to trade them over the counter. That's a very limited opportunity because it's really around a handful of equities that are globally interested in the Asian time zone. So it also intersects with 24/7 discussions. So -- but that's the washout. We want to make sure that tokenization is done smartly. Having just a token on a security that's then traded outside of the regulatory system is not a technology innovation. It's an arbitrage. And it actually takes risks around investor protection. It impacts liquidity and can have unintended consequences around price discovery and capital formation. So these are all the things that the industry needs to consider. There are some smart proposals that are on the table right now in the industry to look at. To your point, I would say that Canada again, would be a fast follower here. If the U.S. moves that we would be able to move with it. But again, driven by what is the actual demand from a trading standpoint. I got a really good reminder, and it came from a U.S. expert that reminded us that in the existing system today, securities are all digital. The formation, the issuance of a security, the custody, the trading of it, it is digital end-to-end. So like there is no traditional finance versus diversified finance here that actually differentiates. The tokenization of a security is actually less efficient than the current system because it takes that security out of the centralized system. You can no longer use it in terms of either collateral offsets, et cetera, et cetera. So we're watching it closely. We're going to make sure Canada is prepared. Our marketplaces are prepared, but the use case is still a question mark in terms of the value add. Graham Ryding: I appreciate the thoughtful answer. You talked about the demand for this. Should we view this really as potential for competition from crypto-based platforms, who are interested in sort of moving into the equity trading market? Is that where the push and the demand is coming from? John McKenzie: Yes. I mean I think it comes from 2 things. So I think you're absolutely right. It's a supply-side push. So organizations that are trying to, like you said, engage in the equity market. And my expectation is at the right point, regulators are going to say that's fine, but you've got to follow the same rules as other marketplaces, which in terms of fair access, DR capabilities, the audit trail, capital preservation, all those components of separation of assets, the kind of things that got FTX in trouble with a number of years ago. So there's going to have to be a bit of a level set in the playing field for those organizations to participate in that ecosystem whether it's a token or not. And even if it's done on an exemption basis earlier on, this is going to get leveled out in terms of making sure we have fair orderly marketplaces. To my other point, the second area of demand is this over-the-counter piece on overseas trading. There are now, particularly on the U.S. market, a substantial portion of the assets of some large U.S. firms are held overseas and there's a lot of retail and institutional trading interest in them when the U.S. markets are closed. So tokenized or off-market securities are being used as another way to provide liquidity into that region. But it is a very limited set of securities that are being demanded and it's really kind of the 10 biggest names in the U.S. market that are where the demand side is for the investor trading activity. Graham Ryding: Okay. Great. I'll leave it there, but just one quick question, if I could. Is this a topic that you guys are discussing at your Board meeting today? John McKenzie: Absolutely. In fact, this was a topic I was at the World Federation of Exchanges last week, meeting with exchanges from around the world. This is a topic we are talking about in all jurisdictions. So I think this has been something that the industry is right on top of. And the most important thing is we remember what the value of central marketplace is for in terms of helping companies raise capital, price discover and build businesses. And always be thoughtful of what are the unintended consequences of fragmenting that. And so that's what everyone is trying to figure out in terms of what we think is the right kind of market structure approaches going forward to get the benefits of new technology with while you can still preserve the value that efficient centralized capital markets have created. Operator: Next question will come from Bart Dziarski with RBC Capital Markets. Bart Dziarski: Congrats on a great quarter. I just wanted to follow up on the AI theme and kind of hone in on Trayport specifically. So you guys have done a good job in the past kind of highlighting some opportunities around AI as it relates to Trayport. But I was hoping you could maybe dive a bit deeper into substantively like why do you think that this business is defensible against some of the AI threats? And is it the network effect? Is it other kind of dynamics that ultimately gives you the comfort to continue that 10% plus target revenue growth rate? David Arnold: Bart, it's David Arnold. I first want to welcome you for initiating coverage on TMX on behalf of RBC. So welcome to your first call, sorry, Bart, should I say. The point that I wanted to make over here is, and you actually somewhat answered your own question. It's really the network effect of Trayport that creates the defensible and/or opportunistic ability for growth in that business. But when you talk specifically about AI and so forth. We actually were -- the predecessor for this in the kind of trading space would be algorithmic trading and large language models and so on and so forth. So that is part of one of the premium offerings in our Trayport ecosystem. So the demand is currently not there from the clients to radically change the landscape for algorithmic trading. But we continue to work closely with our clients on the features and functionality that they need as they engage in trading in the natural gas and energy marketplace in Europe. So -- and that's really a common theme, right? Like most of our innovation is driven, if not all of it, by client demand. And as opposed to when John was speaking on the last question about. It's not us trying to sell something. It's really trying to solve a problem for the clients that the clients have either made clear to us or that we've highlighted and requested whether or not they think that that's something we should address. And we're not getting a strong client demand right now to change the fundamental premise of the algorithmic trading features and functionality within the Trayport Software-as-a-Service platform. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mousavian for any closing remarks. Please go ahead. Amin Mousavian: If you have any further questions, contact information for Investor Relations as well as media is in our press release, and we'll be more than happy to get back to you. I know your valuable time is finite, and we thank you for spending with us this morning. It's also a couple of days early, but I wish you all a happy Halloween. And until next time, goodbye. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for your participation, and have a pleasant day.
Operator: Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Repligen Corporation Earnings Release Third Quarter of 2025. [Operator Instructions] I would now like to turn the call over to Jacob Johnson, VP of Investor Relations. You may begin. Jacob Johnson: Thank you, operator, and welcome, everyone, to our 2025 third quarter report. On this call, we will cover business highlights and financial performance for the 3-month period ended September 30, 2025, and we'll provide financial guidance for the full year 2025. Joining us on the call today are Repligen's President and Chief Executive Officer, Olivier Loeillot; and our Chief Financial Officer, Jason Garland. As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risks related to our business is included in our quarterly reports on Form 10-Q, our annual report on Form 10-K for the fiscal year ended December 31, 2024, and our current reports, including the Form 8-K that we are filing today and other filings that we make with the Securities and Exchange Commission. Today's comments reflect management's current views, which could change as a result of new information, future events or otherwise. The company does not oblige or commit itself to update forward-looking statements, except as required by law. During this call, we are providing non-GAAP financial results and guidance, unless otherwise noted. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen's website and on sec.gov. Adjusted non-GAAP figures in today's report include the following: non-COVID and organic revenue and/or revenue growth, cost of goods sold, gross profit and gross margin; operating expenses, including R&D and SG&A, income from operations and operating margin, tax rate on pretax income, net income, diluted earnings per share, EBITDA, adjusted EBITDA and adjusted EBITDA margin. These adjusted financial measures should not be viewed as an alternative to GAAP measures but are intended to best reflect the performance of our ongoing operations. With that, I'll turn the call over to Olivier. Olivier Loeillot: Thank you, Jacob. Good morning, everyone, and welcome to our 2025 third quarter call. We had another outstanding quarter in quarter 3 with 18% organic growth. This quarter, every franchise grew double digits, which is a testament to our differentiated broad portfolio and diversified customer base. Our portfolio of products enables us to sell one of the most comprehensive suite of innovative solutions across the bioprocessing workflow. We saw strength across our extensive customer base as both biopharma and CDMOs grew over 20% and all geographies grew double digits. The continued growth from CDMOs is very encouraging as it reflects the health of the ecosystem. From a franchise perspective, analytics led the way with over 50% growth, including more than 30% growth at CTech, while Filtration grew over 20%. Consumable demand remained very robust with greater than 20% growth in the quarter, while capital equipment had another strong quarter with over 20% growth. The better-than-expected performance in analytics and proteins this quarter underscores that growth opportunities exist across our entire portfolio, driven by our innovation engine. In particular, analytics revenue growth was aided by the launch of SoloVPE PLUS earlier this year. This new generation of at-line protein concentration analytics offers customers increased data collection speed and enhanced sensitivity and reproducibility with a streamlined workflow. This has started to drive an upgrade cycle that will last for several years as we have a sizable installed base. Transitioning to orders. Total company orders grew sequentially for the sixth straight quarter and grew over 20% year-over-year, including double-digit order growth across all of our franchises. With customer ordering patterns back to historical trends, we believe quarterly orders are a less relevant metric and plan to provide less detail around orders going forward. We will remain transparent around the trends we are seeing in our business and within the industry as we have always been. We think our Q3 results highlight the broad strength we are seeing across our franchises, customers and geographies and our 18% organic growth continues to outpace industry growth. In fact, this marks the fourth straight quarter of 14% or better organic non-COVID growth. Both our Q3 and year-to-date overall performance was not based on a single customer or product line, but rather the totality of our portfolio. We think this is a testament to our commercial execution as our team capitalizes on the growth strategies for each of our franchises. As a result, we are again raising the midpoint of our organic growth guidance for 2025. Unpacking our performance by end market, Q3 '25 biopharma revenues grew over 20% year-over-year with broad growth across all biopharma customers. Emerging biotech revenue was at the highest level in nearly 3 years. While we're hesitant to call this a trend as growth benefited from some specific opportunities in the quarter, we are encouraged by the recent funding trends we have seen. CDMO revenues also grew over 20%, driven by outperformance from our larger CDMO customers in the quarter. From a geographical point of view, we saw particular strength in Asia Pacific with approximately 50% growth, while the Americas grew 20% and EMEA was up low double digit. New modalities revenue was consistent with our expectation for a muted back half. We saw growth in cell therapy, while AAV and mRNA trends were fairly consistent with last quarter. Turning to strategy. We mentioned last quarter that digitization is a key pillar of our strategic plan. Our analytics franchise is the foundation of this strategy, so we wanted to expand on this effort and provide more detail on the very strong performance in Q3. Digitization will be a multistep and a multiyear journey. Currently, we enable measurement of protein concentration in downstream processes using our innovative solution from C Technologies, then glucose, lactate and biomass upstream with the acquisition of the 908 bioprocessing assets. With the successful in-line integration of CTech FlowVPX into our downstream TFF systems, we can provide real-time monitoring and process control. These are key enablers of continuous manufacturing, which is still in its early days, particularly in downstream applications. We're actively working to develop additional PAC-enabled solutions. Beyond this, we are looking at opportunities to leverage digital twins to utilize this real-time process data with advanced modeling to optimize process development and manufacturing. As a step in this direction, we announced a partnership with Novasign during the third quarter to integrate our system with Novasign's digital twin capability, starting with our bench scale TFF. We aim to deliver solutions that significantly reduce process development time and cost and support a more efficient and reliable scale-up for our customers. We also saw strong growth in overall service revenue in quarter 3. Services currently represents 5% of our consolidated revenue. We have a particularly high attachment rate in analytics, so we benefit from both new installations and annual maintenance. Commercially, a strong service organization allows us to best serve and delight our customers while bringing us to be closer to them. There is a sizable opportunity for us to grow this business in coming years as we expand our services offerings across our entire capital equipment portfolio. Our strategic account strategy initiative launched 3 years ago is a real success story. We are now covering 20 large pharma and CDMO accounts. The focus of our key account team is to engage with key decision-makers at our customers to better understand their needs while demonstrating the breadth of our capabilities. We are seeing great traction here with more of these customers buying multiple products from Repligen. And as a result, many of these strategic accounts are accretive to our growth. In addition to our strategic account strategy, our commercial team is also incentivized to cross-sell products across the entire portfolio. As it pertains to tariffs, we continue to evaluate opportunities to better leverage our global footprint. We are working to have dual manufacturing for the vast majority of our portfolio by the end of next year. This includes a focus on ensuring we have the right footprint to benefit from capital equipment opportunities in coming years, including potential U.S. onshoring projects. Before I turn the call over to Jason, I'll provide some more detail on our franchise level performance. Filtration revenue grew over 20% in the quarter. Flagship cassettes, fluid management, Flow Path along with ATF, all contributed meaningfully to growth this quarter. We continue to see a long runway of growth in ATF, but we think it's important to highlight that multiple products have been key drivers of year-to-date filtration growth. This highlights the breadth of our filtration franchise, which is our largest and most diverse. In addition, we have a strong backlog for fluid management, so we continue to expect robust growth from this product line in coming quarters. After a record Q2, chromatography revenue grew mid-teens in Q3 as resin mix returned to more normal levels. This was mostly driven by continued strength in large column demand from key CDMOs and pharma accounts globally. Protein revenue grew low double digits in quarter 3, driven by chromatography resin. This franchise outperformed our expectation in the quarter and is an area where we are making additional investments to drive future growth. We have several innovative solutions for the new modality market with our Avitide [indiscernible] assets and for the monoclonal antibody market by our Protein A ligand capabilities. We plan to launch additional innovative solutions across this portfolio in coming years. While it will take some time for this opportunity to grow into more meaningful revenues, we think the investment we are making today will position us well for growth in this higher-margin franchise for years to come. Finally, and as already mentioned, Process Analytics had a standout Q3 with more than 50% growth, including $3 million of revenue from the 908 bioprocessing acquisition and over 30% growth at CTech. This was driven by strength across consumables, equipment and services. With strong orders in the quarter, we are encouraged by the momentum in our analytics franchise. As it relates to the 908 bioprocessing assets, we remain on plan with the integration. To wrap up, while the last several years have been a unique period for the bioprocessing market, we believe the dynamics of this year have created additional opportunities for Repligen. Customers are looking for products that enable them to improve yield and productivity. Our product portfolio and customer centricity have opened a number of doors in recent years, and we believe the results we are seeing this year are a testament to our strategy. We remain focused on capitalizing on our growing funnel. Given the opportunities we see across our portfolio, we will continue to invest as needed to ensure we have the right foundation to support sustainable future growth. This includes planned investment in application labs to better serve our customers with differentiated solutions, investments in technology to increase productivity and investment across our business to ensure we have robust processes and tools to continue to delight customers and scale our growing business. We'll balance these initiatives with a commitment to driving margin expansion over the medium term. We're excited about the customer traction across our business as highlighted by our year-to-date performance, which demonstrates the differentiated nature of Repligen. It also reflects the execution on the 5 strategic priorities we outlined at the beginning of the year. We remain focused on closing out a very strong 2025. Now I'll turn the call over to Jason for the financial highlights. Jason Garland: Thank you, Olivier, and good morning, everyone. Today, we are reporting our financial results for the third quarter of 2025 and providing an update to our financial guidance for the full year. Unless otherwise noted, all financial measures discussed reflect adjusted non-GAAP measures. As shared in our press release this morning, we delivered third quarter revenue of $189 million, a reported year-over-year increase of 22%. This is 18% organic growth, excluding the impact of acquisitions and currency. Acquisitions contributed approximately 2 points of the reported growth, while foreign currency was also a 2-point tailwind. As Olivier offered details on our product franchise performance, I'll provide more color on our regional performance. Starting with quarterly revenue. North America represented approximately 50% of our total, Europe represented 30% and Asia Pacific and the rest of the world represented approximately 20%. Asia Pacific grew nearly 50% year-over-year, driven by Fluid Management, Analytics and ATS. Americas grew 20% with strength across the portfolio and EMEA grew low double digits driven by OPUS and TangenX. After strong orders in Q2, we saw China revenue return to growth in Q3, though not a key driver for the overall strength in Asia Pacific, it was encouraging to see growth even off a low prior year base. We remain optimistic that China will return to growth in 2026, but we still expect China to be slightly down this year as orders declined in the quarter after the order acceleration in Q2. Transitioning to profit and margin. Adjusted gross profit was $101 million, up 28% year-over-year or 25% excluding foreign currency and acquisitions. Adjusted gross margin of 53.3% increased 260 basis points year-over-year and 210 basis points sequentially. The year-over-year increase was driven by volume leverage, price and productivity. The sequential increase benefited primarily from improved mix as Repligen procured resin for OPUS columns were at more normal levels and from revenue growth of proteins in the quarter. This dynamic of gross margin fluctuation being driven by changes in sales mix is to be expected quarter-to-quarter. We are more focused on full year trends. Year-to-date, gross margin is 52.7%, which shows 230 basis points of margin expansion over the same period in the prior year and is in line with our gross margin outlook of 52% to 53% for 2025. FX was a benefit to margin in the quarter, while tariffs remained a slight headwind. Continuing through the P&L, our adjusted income from operations was $27 million in the third quarter, up 16% year-over-year on a reported basis and up about 20%, excluding the impact from foreign currency and M&A. This growth was driven by a $22 million increase in gross profit on higher volume and margin improvement, offset by $18 million higher OpEx. Q3 represented our lowest OpEx quarter last year and growth this quarter included $3 million from M&A, $1 million from foreign currency. It also includes about $2 million of onetime expenses in SG&A that will not repeat in the fourth quarter. The remaining increase includes strategic investments, which we will continue to make to support future growth. Year-to-date, OpEx has grown 14%, excluding the impact of M&A and foreign exchange versus our 16% organic non-COVID revenue growth. This translated to an adjusted operating margin of 14.2%. Margins declined 70 bps year-over-year, largely due to M&A. Our third quarter adjusted EBITDA margin was 19%, a year-over-year decline of 160 basis points, which also included a $1 million headwind from foreign currency transaction losses. Adjusted net income was $26 million, a $2 million year-over-year increase. Higher adjusted operating income was offset by $3 million of lower interest income. Our third quarter adjusted effective tax rate was 17%, which benefited from actions executed within our tax planning strategy. We now expect to see an adjusted effective tax rate between 21% to 22% for the year, about 100 basis points lower than our previous guidance. Adjusted fully diluted earnings per share for the third quarter were $0.46 compared to $0.43 in the same period in 2024. Finally, our cash position at the end of the third quarter was $749 million, up $40 million sequentially from the second quarter. This was driven by incredibly strong operating cash flow performance in the quarter, driven mostly by improved working capital. We are very happy with our strong year-to-date results, delivering above-market revenue growth and margin expansion, which positions us to deliver upon our updated outlook. I'll speak to adjusted financial guidance, but please note that our GAAP to non-GAAP reconciliations for our 2025 guidance are included in the reconciliation tables in today's earnings press release. Our guidance includes tariffs and our latest foreign currency assumptions. As highlighted earlier by Olivier and on the strength of our portfolio, we are increasing the midpoint of our revenue growth guidance as we narrow towards the high end of the guidance range. We now see 14% to 15.5% organic non-COVID growth or 12% to 13.5% organic revenue growth with the midpoint of both increasing 75 basis points from our prior guidance. Our new guidance assumes just over a 1 point tailwind from foreign exchange, while our M&A assumptions are unchanged. Putting this together, we are increasing our 2025 revenue guidance to $729 million to $737 million, up from $715 million to $735 million or an increase of $8 million at the midpoint. To summarize the update clearly, of the $8 million increase, $6 million is due to overall portfolio strength and $2 million is from foreign currency benefit. Our guidance implies 4Q revenue will grow low double digits organically at the midpoint while overcoming the headwind from a gene therapy platform mentioned last quarter. In terms of growth by franchise, we now expect the following reported growth rates: Filtration growth of approximately 10% versus our prior expectation of 10% to 12%. This represents approximately 13.5% non-COVID growth. Chromatography growth of approximately 25% versus our prior estimate of 20%. Proteins growth of 15% to 20% versus 10% to 15% previously. And finally, Analytics will grow north of 30% versus our prior guidance of 25%. This includes the 908 bioprocessing acquisition. We continue to expect adjusted gross margins in the range of 52% to 53%, which represents 210 basis points of year-over-year margin expansion at the midpoint, driven by volume leverage, price and manufacturing productivity, offset primarily by inflation and some 2024 COVID sales drag. We assume a slight headwind from tariff charges, offset by benefit from foreign currency. We expect fourth quarter gross margin to be closer to the second quarter following the impact of sales mix fluctuations discussed earlier. The fourth quarter includes a mix shift to products that are below our corporate average. We now expect our adjusted income from operations to be between $98 million to $100 million. This assumes a roughly 13.5% operating margin. As Olivier mentioned earlier, given the strength and traction we are seeing across our portfolio, we continue to make strategic investments today to support tomorrow's growth. This includes investments in specific product lines and geographies like Asia Pacific. In addition, we continue our Fit for Growth journey, and we'll invest to ensure we have the right infrastructure to deliver on these opportunities for our customers, stakeholders and shareholders. These include investments in operations and support functions. They also include investments in digital capabilities that will help drive efficiencies in the future. We will continue to balance cost efficiency and margin expansion with investments that are critical to support future growth. Continuing through the P&L, we are updating our adjusted other income guidance to $21 million, down from $22 million to $23 million due to lower interest income assumptions, along with some impact from foreign currency. As we explained earlier, our 2025 adjusted effective tax rate expectation is now 21% to 22%, a point lower than our prior guidance. Given these dynamics, we now expect our adjusted fully diluted earnings per share to be between $1.65 and $1.68. Our balance sheet remains strong as we ended the third quarter with $749 million of cash, as mentioned earlier. We will remain prudent in our spending while maintaining flexible dry powder for potential acquisitions. We still expect CapEx to be down 20% to 25% versus 2024 with our spending below pre-COVID levels. As we wrap, we are encouraged by our strong year-to-date results, especially considering the headwinds and new modalities that we overcame. We believe this performance reflects solid execution on our growth strategy and broader portfolio. Olivier and I would like to thank our Repligen teammates for helping us to deliver above-market growth yet again. With that, I will turn the call back to the operator to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Dan Arias with Stifel. Daniel Arias: Olivier, can you maybe just talk about the cadence of order momentum across the quarter and out of the quarter? I mean, obviously, positive industry developments recently. Jason mentioned the China trajectory coming in as maybe a bit of an offset. So how would you sum up purchasing activity here? To what extent does the organic midpoint capture what you're seeing? And then how do you feel like that positions you into next year, just given where expectations seem to be? Olivier Loeillot: Yes. I hope I heard you well enough, Dan. I think you were asking about cadencing of orders in quarter 3 here. So I mean, you've heard like orders went really well for us again in quarter 3. I mean we grew our orders more than 20%, which is the second quarter in a row like our orders are growing more than 20%. In fact, it's sixth quarter in a row that we've seen sequencing order growth. And what I really like among others is every single franchises really grew double digit in the quarter. So -- and then there was no real change between July, August, September. I mean, it was pretty same type of growth during the entire quarter. And then I think I heard a question about what's going on in the industry globally and with a question specifically on China. I mean, yes, we think we are back to really operating that business in a very normal environment. I mean it started with biopharma maybe 1.5 years ago, then CDMOs maybe 3, 4 quarters ago. What was really interesting to see for this quarter was a very nice recovery of small biotech, certainly too early to celebrate, but to see the small biotech business at the highest level for the last 3 years was very encouraging. And then talking about geographies, also very strong across the board. China grew nicely, which was one of the first time for several quarters, grew in terms of sales. Orders were a little bit softer. But as we all know, we're at the beginning of really full -- what we expect to be full recovery, and we do expect to be back to growth in China next year. So that's kind of the overall situation here. Operator: And your next question comes from the line of Dan Leonard with UBS. Daniel Leonard: A lot of moving parts on the margin side. Jason, I was hoping you could better help me reconcile the sales guidance increase versus narrowing your EBIT margin to the bottom end of prior guide. And wondering also if you can make a comment on what's the right level of operating margin expansion for a high teens revenue growth rate in the Repligen model? Jason Garland: Yes. Look, I mean, first, I'd say we're overall happy with our margin performance in the quarter. And to your point as well, seeing the trends in margin expansion. Gross margin, as we highlighted, are going to move a little bit with the mix of business that we have in the quarter. We are quite favorable in 3Q. And when you look more importantly at the year-to-date, we're up 230 basis points. Kind of rolling that down to operating income. In the quarter, we were up about 20% if you exclude the impact of M&A and currency, that's the dollars of operating income versus about 18% of nonorganic. So again, continuing to get some of that leverage. Look, I know for operating margin overall for the year, again, I put it in that same context, if you look at our overall guide, operating income will be up about 25% if you exclude M&A and FX impact on, again, about a 16% non-COVID organic revenue growth. So again, a lot of good leverage there. If you look specifically, okay, why didn't some of the same sales or that sales drop all the way through. We highlighted about $2 million of onetime operating expenses that we saw in the quarter, primarily driven by some leadership changes that we've been making in our Fit for Growth journey. So those -- that is a hit there. A little bit of FX pressure as well. And then finally, again, we will continue to make investments in the infrastructure and as well as in operations to make sure that we have the right way to support future growth. And we're taking really a long view here, Dan, right? It's -- at the total guide, we dropped our EPS by about $0.01, right, when you look at the midpoint. And when we're thinking about that versus the investments we can make today to keep driving future growth, we're taking a really balanced view. Operator: And your next question comes from the line of Matt Larew with William Blair. Matthew Larew: Olivier, maybe following up on Dan's question relative to potential onshoring activity or certainly a pickup in the equipment opportunity over the next couple of years. Obviously, it's still recent since some of the pharma tariff and MFN has come out. But what do you make of any change in cadence or nature of customer conversations? And how would you evaluate Repligen's ability today to potentially participate in larger-scale projects relative to certainly before you joined, but maybe 5 years ago when there was a resurgence in capital equipment related to COVID? Olivier Loeillot: Yes, really good question. Obviously, we're all very encouraged to see a couple of recent announcements that were taking place agreement between those 2 pharma companies and the administration. You nailed it down very well. I mean the big difference for Repligen today versus where we were 2 to 3 years ago. So we have become a real broad actor in the field of hardware solutions, and we are now receiving RFPs for a lot of these big hardware investments that are happening around the world. So obviously, these onshoring projects are going to represent a huge opportunity for all of us in the industry and for us in particular, with our very differentiated hardware portfolio that is, as you know, very well, combined with our PAT technology, which is a huge differentiator. So yes, we are starting to hear more about it. We would expect probably first orders to come towards the second half of 2026 and probably sales from '27, '28 onwards, and we're definitely going to be playing a big role in that exercise here for sure. Operator: And your next question comes from the line of Doug Schenkel with Wolfe Research. Douglas Schenkel: Really just a couple on guidance. So first, as I look back over the past 4 years, recognizing it's been a weird period. But if I just average things, revenue has been, I think, about 9% higher in Q4 versus Q3 on average. I think guidance implies revenue is only about 2% to 3% higher in Q4 this year versus Q3. I'm guessing this is just conservatism given the environment we continue to be in, but there's a lot of positive commentary here. You're coming off a good quarter. It's been a series of good quarters. So I just want to make sure there's no timing dynamics that we should be contemplating. So that's the first question. The second is, in your prepared remarks, I think you noted that we should expect filtration revenue growth at the lower end of the range. And I just want to make sure I heard that right. If so, one, can you delineate between ATF and non-ATF? And two, what does that mean about product mix more broadly? Specifically, are resins tracking stronger than expected? And again, I may have just heard it wrong. Olivier Loeillot: So I think your 2 questions are somewhat linked to each other, so which is going to make it an easier answer here. If you look at seasonality this year, you're absolutely right, like we are seeing much less of it than we were seeing before COVID. And probably with that very strong quarter 3, which is very unusual because we've hardly ever seen a Q3 higher than Q2 in the last 10 to 15 years. I mean this means like, obviously, there will be less seasonality also between Q3 and Q4. And our midpoint -- sorry, our guidance now implies 18% to 13% organic growth in Q4. And keep in mind, we have about 3% headwind coming from that gene therapy customer that was reporting really high sales for us in quarter 4 of last year. So that's really one of the main explanation. And by the way, this is purely filtration, which is why I was saying this is kind of also linked to the second part of your question here. But the other 2 things to take into consideration here as well is the comp was much, much tougher -- is much tougher in quarter 4 than it was in quarter 3 because comp is 9 points more difficult sequentially than it was in quarter 3. So that's another reason why you would imagine indeed that organic growth in Q4 would probably be more towards the 8% to 13% that we just talked about here. And then back to filtration more specifically, we mentioned about that blockbuster ATF project we signed about a year ago. We delivered the hardware towards the end of quarter 3. So this does play a little bit as well of a role why there is a little bit less seasonality between Q3 and Q4 here. Operator: And your next question comes from the line of Puneet Souda with Leerink Partners. Puneet Souda: So I appreciate the momentum you're seeing here now. It seems like 6 quarters of continued order growth even sequentially and the momentum you have here. But just trying to capture that for 2026, I think The Street is close to about 13% organic growth here. Given what you're seeing, is that a sort of right number to think about? And then on the gene therapy side, you pointed out the headwinds for the second half this year. There was some more news on that yesterday, not necessarily that this is an in vivo product, so maybe it doesn't affect you from CRISPR products. But just trying to understand how are you thinking about that piece of the modality overall for you? And how should we expect that to trend in 2026? Olivier Loeillot: Thanks, Puneet. Yes. So starting with the first question, as usual, we'll provide 2026 guidance on our Q4 call as we typically do, meaning towards the end of February. But what we said and obviously, with the order growth we've seen now sequentially indeed for the last 6 quarters and being, again, growing more than 20% year-over-year, we were obviously very pleased with the situation we're expecting this year, and we are still aiming to outpace industry growth by 5% over the medium term. So this year, we're probably going to be a bit higher than that 5%. We know that next year, indeed, we'll have a 200 basis point headwind from that specific gene therapy customer. So that's where we are. But again, we're going to give guidance really end of February. And then in terms of new modality, I mean, it's really playing out pretty much as we expected so far this year. I mean -- and this is where the beauty of having a very diversified portfolio with more than 80% of our product going into monoclonal antibodies is a perfect sign of us being able to grow somewhere if for whatever reason, we've got headwind somewhere else. But outside of that specific gene therapy project, I mean, we've been experiencing a pretty good year. I mean -- and yes, sometimes you get some bad news on one specific program, but then you're getting a couple of great news on some other programs. And even on the gene therapy side, beyond that specific program, there have been several announcements made over the last few months of significant funding of some of these programs, and we are enjoying great opportunities with those different programs. So what we've been doing really well this year, among others is to diversify our focus on all the type of new modalities. And indeed, we've been a bit heavier on cell therapy and also on antibody drug conjugate since the beginning of this year, and we've had numerous successes on both sides, which is something we're also very happy about here. Operator: And your next question comes from the line of Mac Etoch with Stephens Inc. Steven Etoch: Maybe just a few for me. But as you look towards your geographical performance, specifically Asia Pacific, up 50% this quarter. Maybe I'd like to get a sense of how your recent investments in the region are trending? What variables are driving that performance? And then given the long-term strategic focus here, do you intend on investing additional resources in the region? Olivier Loeillot: Yes, great question. I mean Asia Pac is representing approximately 15% of our sales on a full year basis, which is definitely too low. I mean we know if you look at the benchmark from competition is anywhere between 20% and 25%. So being of this year, we all realize we have to start investing much more into the region. And it's really -- I like to separate China from the rest of Asia Pac because China has been a very specific market. So we decided to onboard a global leader for all of Asia, but also a new leader for China. And we are really in the middle of implementing a pretty new and unique strategy on both sides. And without entering into details for China, really, it's about rebuilding our team and also making sure we now tackle the much stronger local competition that exists today versus what was the situation before COVID, where on the other side, on the rest of Asia, it's really about building infrastructure. And I say infrastructure is from the different part of our business organization, but also adding more people on the field to be able to deal more directly with customers where in some of these geographies, we are mostly going through distributors still. So the 2 strategies we are developing are pretty different. We are enjoying very nice growth for already several quarters outside of China. It's pretty good to see China being back to growth in terms of sales this quarter, but we still have a lot of homework to do down there. And yes, you're right, investment is on the list. We just literally opened our office -- first office in Singapore, yesterday. We're opening a new office in Japan in the next couple of weeks, and we are looking at some further investments across all of Asia over the next few quarters. Operator: And your next question comes from the line of Casey Woodring with JPMorgan. Casey Woodring: I wanted to follow up on some of the ATF comments. So you said you delivered hardware for the second blockbuster towards the end of 3Q. Just want to understand if you would expect revenue to fall in 4Q or in 1, '26 -- 1Q '26 there. And then my second question would just be, you called out emerging biotech revenue was the highest level you've seen in 3 years. Just talk towards trends there in terms of orders. You said you didn't really want to call out a trend there, but obviously, significant improvement. So just any further color there. Olivier Loeillot: Yes. No, on ATF, I'll start with the blockbuster first. Yes. So the answer is we don't know yet for sure here, Casey. I mean we are -- we have now delivered the equipment now it's going to be about how long it takes them to really commission the line and have it up and running. And then depending from one customer to the other, they might decide to buy consumable earlier or later. So at this stage, we just don't know. I wouldn't think it's going to come as early as quarter 4, but maybe sometime mid of next year or so would sound like a reasonable time frame. And just before I move to small biotech, maybe just to add about ATF, because I know everybody is very focused on that specific blockbuster. We continue to win a lot of late-stage commercial customers. And we have a really very diversified customer base on ATF. I mean we are probably designing in more than 50 late-stage and commercial drugs today. And every quarter, we are winning more. So we've got a really long runway for growth on ATF which is very well supported by the order trends we've seen in the last few quarters. And then going to small biotech, that was really the great surprise of the quarter. I mean, obviously, it's not a big part of our sales. It's less than 10%. But to see it rebounding as much as we have seen it rebounding in quarter 3 was a really good surprise. And we obviously connect the dot immediately with biotech funding, where biotech funding went from USD 9 billion in quarter 2 to USD 13 billion in quarter 3. So we've seen finally some turnaround in terms of biotech funding. I would like to pair it as well to a lot of M&A activities. You've seen a lot of pharma company acquiring some of these small midsized biotech company over the last 2 quarters. I think that's also going to be a tailwind for the industry because that means probably more cash to be able to accelerate on some of these very promising early phase projects, which we are very, very eager to see progressing. So that's another factor that we are very happy to see happening right now here. Operator: And your next question comes from the line of Daniel Markowitz with Evercore ISI. Daniel Markowitz: I had a quick 2-parter. First, I wanted to ask on the equipment strength. It was another quarter of really strong results, especially when you compare versus peers. I know there were some ATF equipment placements. Is that what explains the better equipment trends versus peers? Or would you say it's more broad-based across different product lines as well? And then the second part related, can you just remind us roughly the revenue contribution from these placements in 3Q? And as we look forward to 2026, how should we think about the consumable pull-through and what this means for broader momentum in the ATF product line? Olivier Loeillot: Yes. So I will spend more time on the first question because I won't answer the second one. So just, I mean, our capital equipment performance was obviously very encouraging. I mean our revenue grew more than 20%, but our orders also grew high teens in the quarter. So we were very happy about that. You're right, the main contributors of growth in quarter 3 were both ATF, but also our analytical equipment. So -- but honestly, the performance so far this year is really across the board. I mean -- so maybe in quarter 3, downstream hardware was a little bit lower than both ATF and analytics. But year-to-date, it's really across the board that our orders have been doing really well, including downstream hardware as well. I'd like to repeat like we are seeing that hardware market from a very different angle than others. First of all, we are very small. I mean we are one of the newcomer in the field. I mean, almost now where we are today 2 years, 3 years ago or so. So we are seeing it definitely from a different angle. But also keep in mind where we are differentiating ourselves a lot is that now we are also pairing our system with our PAT technologies. And so far this year for downstream, 1 system out of 4 is now being paired with our PAT technologies. In fact, customers who bought hardware from competitors in the last few years are now coming to us asking us to enable them to get access to our PAT technologies as well. But it's fair to say like peer, we haven't seen capital equipment spending return to historical level yet globally. So that's why I think all of us are very excited to see those onshoring projects coming in the next couple of years because that should accelerate overall market growth and for us be an extra opportunity to even grow further and faster than we do right now. And then as far as the specific ATF project is concerned, I won't give any specific numbers, but it's only really a small part of the reason why we saw that very nice growth in the quarter. So it's not -- it wouldn't have changed the overall picture like hardware performed very well for us in quarter 3. Operator: And your next question comes from the line of Brendan Smith with TD Cowen. Brendan Smith: Congrats [on the quarter], good to see. So I actually wanted to just follow up quickly on some of the process analytics commentary and specifically what you've actually said reclaim about integrating the MAVERICK device from 908 into ATF, for example. Can you maybe just give us a little bit more color on where some of that stands? Maybe just thoughts on timing to that and to what extent that may be playing into how you're thinking about growth opportunities across the franchises, whether or not that kind of works out as expected? Olivier Loeillot: Yes, obviously, you heard us talking a lot about analytics. I mean, again, because it's a perfect showcase of the breadth of the portfolio we have. But really, I have to say this year, one of the most important launch we had was the SoloVPE PLUS, which is a real new generation of our at-line protein concentration piece of hardware. And in quarter 3, this has just enabled us to sell the highest amount of units we've ever sold in the history of CTech. And what's very encouraging is we have a very, very important installed base, and it's probably only less than a couple of portions of that installed base that has been upgraded to the new SoloVPE PLUS. So you would think like this is going to be a real big tailwind for us for the next several years here, which we are very excited about. And then the only other stuff I would add on the CTech side is the first 2 quarters where we saw a huge rebound on both consumable and services as well. And then we will start to have a lot of focus on services with the successes we are seeing here. But it was great to see hardware now being back to this very high growth that we are expecting and with a very strong funnel. As far as the 908 is concerned, I mean, the integration is running as expected. So we've merged now the 2 sales organization, and we start to see a really nice growing funnel for the 908 part of the portfolio. And yes, we are progressing on the R&D side to combine ATF with MAVERICK. So you'll hear us talking more about it in a quarter from now. But at this stage, it looks absolutely promising. Operator: And your next question comes from the line of Anna Snopkowski with KeyBanc Capital Markets. Anna Snopkowski: Congrats on the quarter. This is Anna on for Paul Knight, and I have 2 questions. So maybe first, I think at recent conferences in your last quarter, you mentioned strength in CD and maybe more muted activity with those midsized CDMOs. So I was wondering if we could get an update around midsized CDMOs and if you're seeing activity progressing there? And then my second question is on the protein side. I was wondering how the recent launches have been for your own resins. And I think you mentioned some launching in the second half of this year. So maybe an update there. Olivier Loeillot: Yes. No, I mean, on CDMOs, again, a really great quarter for us, both from a sales and an order point of view. We did mention like the strength was particularly visible on the large-scale CDMOs. So I have to tell you, openly, I didn't really specifically look at the midsized ones, so I can't answer you very specifically. But I know this quarter, really large-scale CDMOs were the one driving that more than 20% growth we had on the CDMO side. As far as protein is concerned, that was really one of the great surprise in the quarter because we expected protein growth to be pretty muted in quarter 3. And in fact, it grew double digits. And for me, that was a great testimony of a very successful strategy that we started developing now 2 to 3 years ago, where we had to switch from being a pure OEM partner delivering protein ligands to start developing custom ligand and custom resin with the acquisition of Tantti Lab. And I mean, the traction we're having on that side is absolutely great. I mean the reason why we delivered more than expected in quarter 3 on the protein side was because of chromatography resins. We know that's a business that can still be lumpy from quarter-to-quarter, but we are working on so many custom projects right now, like we know that's going to become a huge tailwind for us over the next several years. And just to close on product launches, yes, we are still aiming to launch 2 to 3 new resin before the end of this year, and then we're going to make this announcement probably in the next couple of months now. But we are also having a pretty ambitious plan to launch several new resins in 2026. So we really want to have both a broader catalog of products for new modalities, but also working more and more on custom projects on different type of applications for big pharma customers as well here. Operator: And your next question comes from the line of Tom DeBourcy with Nephron Research. Tom DeBourcy: You mentioned the strategic accounts and 20 key CDMO and pharma accounts. I just was wondering what trends in particular, you're seeing at those accounts? Are you seeing similar strong equipment growth? And anything that, I guess, maybe differentiates those larger strategic accounts versus, I guess, the portfolio as a whole? Olivier Loeillot: Tom, great question. I mean strategic accounts have been an incredible success story for us, I have to say. I mean it has really enabled us to really cross-sell our portfolio better and better. And equipment that you just mentioned is a perfect example. I mean these accounts didn't really have a clue about what our capabilities were in terms of hardware probably a couple of years ago. They knew us for ATF. They knew us for prepack column. Now I mean, the vast majority of these people now have either bought a couple of pieces of equipment, if not more than that, or at least had a chance to get trained on how to use our equipment and are sending us RFPs for the big expansion they are working on. But across the board, the strategic accounts have been really, really accretive to growth both from a top line and from an order point of view as well on the quarter. So we are really delighted by the successes we've had. And I know we mentioned several times for a company like ours, which is very focused on innovation, we absolutely need to get access to the key decision makers, and this is what this team of key account management has brought us over the last couple of years. So really delighted about the progress here. Operator: And your next question comes from the line of Luke Sergott with Barclays. Luke Sergott: So I wanted to talk about the order between the new modalities versus the mAbs, especially as we're thinking into next year. And then for a second question, I want to think about, all right, if you guys are doing about 13% core and given the -- all the moving pieces from investments and M&A and FX and tariffs, like should we think about margin expansion opportunity next year, something like between like 100 and 150 basis points versus something north of that in a more normalized environment? Olivier Loeillot: Sorry, what was the first question? Luke Sergott: Orders for new modalities versus mAbs. Olivier Loeillot: Yes. No, I mean new modalities, I think we mentioned earlier, new modality really played out pretty much as expected in quarter 3. I mean, meaning we expected muted demand, and that's more or less what we experienced. But obviously, we've got now a significant headwind in the second half of this year because of that gene therapy program. Outside of that one, I mean, we've been doing pretty well. I mean, year-to-date sales are growing mid-single digit. And year-to-date revenue of new modality is about 17% of our total portfolio. So it's down a little bit versus last year, but still pretty much on par. And then in terms of margin, I'll let Jason comment here. Jason Garland: Yes. And again, we'll provide more guidance in our 4Q call as we normally do. But again, I'd expect our gross margin to continue to expand at the rate that we've been talking about, and then we'll drive to get additional operating leverage at the EBIT level as well. So again, with this constant balance of driving margin expansion while investing for the growth that we see ahead of us. So I think a well-rounded view on that. Operator: And your next question comes from the line of Brandon Couillard with Wells Fargo. Brandon Couillard: Jason, just real quick. Could you quantify what's embedded in the guide for net pricing this year? And just kind of quantify the tariff surcharges and whether or not those may or may not recur in '26? Jason Garland: Yes. Price has been pretty consistent at this low single digit. We've seen that through the year and expect that to wrap up in 4Q as well embedded in the overall guide and really kind of see that as we move forward. For tariffs, again, minimal impact in '25, a couple of million or so from a surcharge side in terms of, hey, I see the sales, but I'm going to have an equal amount of cost. And again, from what we see today, I don't think that changes much next year. Every day, we see new headlines. So we'll continue to watch that, but still see a little bit of, I'll say, marginal dilution at the profit level with tariffs as surcharges will remain. Operator: And I would now like to turn the call back over to Olivier Loeillot. Olivier Loeillot: Well, many thanks for joining our call today. I really want to congratulate our Repligen team for executing brilliantly in the quarter 3. We are really looking forward to meeting you all at upcoming conference. Have a great day today. Operator: And this concludes today's conference call. You may now disconnect.
Operator: Ladies and gentlemen, and welcome to UCT Q3 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that this call is being recorded on Tuesday, October 28, 2025. I will now turn the call over to our first speaker today, Rhonda Bennetto, Investor Relations. Please go ahead. Rhonda Bennetto: Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Clarence Granger, Chairman; James Xiao, CEO; Sheri Savage, CFO; and Cheryl Knepfler, VP Marketing. Clarence will begin with some prepared remarks about the quarter, and James will share his thoughts on the industry and the opportunities ahead for UCT. Sheri will follow with a financial review, and then we'll open up the call for questions. Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the Risk Factors section in our SEC filings. All forward-looking statements are based on estimates, projections and assumptions as of today, and we assume no obligation to update them after this call. Discussion of our financial results will be presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website. And with that, I would like to turn the call over to Clarence. Clarence? Clarence Granger: Thank you, Rhonda, and good afternoon, everyone. We appreciate you joining our third quarter 2025 conference call. I'll start with a brief review of our Q3 results, followed by an update on our 3 areas of focus, including new product introduction, flattening the organization and business structure and processes. After that, I'll turn the call over to James Xiao, UCT's new CEO, for a few observations from his first 60 days and insight into UCT's next phase of growth. And then Sheri will provide a more detailed financial review. First of all, we are very pleased with our third quarter results, which reflect continued progress on the priorities we've set for the year. This quarter, we realized a notable improvement in our gross margin, demonstrating some early benefits of the structural and operational improvements we've been implementing across UCT as well as some tariff-related cost recovery. These results speak to the resilience of our business model, the discipline of our global teams and our continued focus on execution in a complex and uncertain business environment. Throughout the quarter, we remain focused on strengthening our operational foundation through the 3 key initiatives I highlighted last quarter. First, we continue to drive new product introductions and component qualifications with our customers, ensuring we are positioned early in their technology development cycle. Second, we substantially completed the work to flatten our organizational structure. A key milestone that's improving our decision-making speed, increasing efficiency and better connecting our global teams. Part of this process includes driving factory-level efficiencies and consolidating select sites to further enhance productivity and optimize our cost structure. A third major area of focus, streamlining our business systems and the optimization of our prior acquisitions, including Fluid Solutions, Services and HIS into UCT's core systems and processes is on track. We installed our company-wide SAP business system into our Fluid Solutions Group at the beginning of July, and we have completed the strategic alignment between our Products Group and Fluid Solutions on qualification priorities with our customers. This alignment strengthens our position for new business opportunities and will support improved margins over time. These combined efforts represent a comprehensive transformation that positions UCT for greater agility, efficiency and long-term profitability. While it will take time for all the benefits to be fully realized, these actions are foundational to building a stronger and more competitive company for the years ahead. We all recognize that the current macro landscape remains dynamic with near-term volatility and reduced visibility. Yet the underlying fundamentals of our industry remain exceptionally strong. AI-enabled high-performance computing continues to drive a powerful new wave of semiconductor innovation, fueling demand for advanced manufacturing technologies, new architectures and next-generation processes. These structural growth drivers play directly into UCT's strength, our deep technical expertise, our manufacturing expertise and the ability to respond with speed and precision as our customers' needs evolve. With that, I'll turn the call over to James to share more about our operational progress, customer engagement and the opportunities we see ahead. James? James Xiao: Thank you, Clarence. My first [ 60 ] days as CEO has been inspiring. The talent and their drive across UCT give me full confidence in our ability to take the company to the next level. Our industry is entering a new era fueled by AI and rapid technology change. That is what I call UCT 3.0, evolving from a trusted partner into a trusted strategic partner and co-innovator deeply integrated into our customers' technology road maps. By harnessing our operation agility and innovation velocity, we will unlock new levels of growth with our world-class facilities while supporting our global customers with speed, scale, automated infrastructure and innovation. To build a little more on what Clarence already highlighted, my immediate focus remains on strengthening the profitability, optimizing our global footprint and positioning UCT for long-term growth. Operationally, we are driving measurable improvement in quality, cost efficiency and on-time delivery performance. Through lean and quality initiatives, we are streamlining our process across sites and sharing best practices, including broadening our vertical integration and optimizing the organization and our accountability. Automation and digitalization, including the integration of AI-based inspection and robotics are also accelerating factory throughput and quality consistency. With that, UCT will have more robust infrastructure and processes to better capture emerging growth opportunities during the next ramp. Our optimized footprint strategy ensures the capacity is aligned with regional wafer fab equipment demand growth. We are establishing a cluster-based manufacturing network to improve global innovation, speed and cost efficiency through regionalized centers of excellence with new product engineering and mass production transfer. To build long-term value creation, we will accelerate the design to production cycle, capitalize on high-value new product introduction at a leading-edge node and further strengthening our strategic partnerships with semi-cap customers through technology integration and execution discipline. We are aligned with our peers, customers and industry sentiment that the long-term outlook for the semiconductor market is very much intact. We see powerful sustained demand driven by AI, high-performance computing, data center expansion and advanced packaging technologies. We view these structural technology inflections as the foundation for a decade of growth across the semiconductor ecosystem. In the short term, while downstream fundamentals and sentiments are improving, it could take several quarters to see a meaningful acceleration in wafer fab equipment spending. This does not change the fact that I'm very excited about UCT's future and the opportunity to lead this company into the next AI era of semiconductor advancement. Back over to you, Clarence. Thank you. Clarence Granger: Thanks, James. I know that with your leadership, UCT will be in good hands. Since this is my last conference call, I wanted to thank all our investors, our customers and especially our employees for the trust they placed in me during this transition period. It was my honor to step in and reconnect with everyone, and I am very confident that James will take us to the next level. With that, I'll turn the call over to Sheri for a review of our financial performance. Sheri? Sheri Brumm: Thanks, Clarence and James, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As Clarence and James noted, our third quarter results highlight meaningful progress on our key initiatives for the year. These achievements demonstrate the effectiveness of our strategy and the resilience of our organization as we continue to position UCT for long-term profitable growth. For the third quarter, total revenue came in at $510 million compared to $518.8 million in the prior quarter. Revenue from products was $445 million compared to $454.9 million last quarter. Services revenue came in at $65 million in Q3 compared to $63.9 million in Q2. Total gross margin for the third quarter was 17% compared to 16.3% last quarter. Products gross margin was 15.1% compared to 14.4% in Q2 and services was 30% compared to 29.9% last quarter. Gross margin gains were supported by improved site utilization, a higher value product mix, cost and efficiency initiatives and tariff recoveries. Margins continue to be influenced by fluctuations in volume, mix, manufacturing region and related tariffs as well as material and transportation costs, so there will be variances quarter-to-quarter. Operating expense for the quarter was $57.7 million compared with $56.1 million in Q2. As a percentage of revenue, operating expenses were 11.3% versus 10.8% last quarter. As mentioned in the previous call, this increase in OpEx was mainly due to incremental SAP go-live costs. Total operating margin for the quarter came in at 5.7% compared to 5.5% last quarter. Margin from our Products division was 4.9% compared to 4.8% and services margin was 11.1% compared to 10.5% in the prior quarter. Our third quarter tax rate came in at 22.7% as we have revised our full year estimated tax rate to approximately 21%. Our mix of earnings between higher and lower tax jurisdictions can cause our rate to fluctuate throughout the year. For 2025, we continue to expect the tax rate to be in the low to mid-20s. Based on 45.6 million shares outstanding, earnings per share for the quarter were $0.28 on net income of $12.9 million compared to $0.27 on net income of $12.1 million in the prior quarter. Turning to the balance sheet. Our cash and cash equivalents were $314.1 million compared to $327.4 million at the end of last quarter. Cash flow from operations was breakeven compared to $29.2 million last quarter, mainly due to timing of cash collections and payments. Reducing our overall interest expense remains a key priority. During the quarter, we took advantage of favorable conditions in the credit markets to reprice our Term B loan, lowering our interest rate margin by 50 basis points. This proactive step further optimizes our capital structure and reduces our long-term borrowing costs. Another development includes the renewal of our share repurchase program for an additional 3-year term, authorizing up to $150 million of repurchases with a maximum of $50 million per year. Although we are not anticipating near-term repurchases, we view this program as a valuable component of our disciplined capital allocation framework. The tariff environment for the semiconductor market remains dynamic, and we continue to see the effects across the supply chain. During the third quarter, we achieved some tariff recovery, and we will continue to closely monitor developments, leverage our global footprint and localized supply chain to help mitigate the impact, maximize efficiency and protect our profitability. As stated earlier, this quarter was very favorable for product mix and factory utilization. We see Q4 returning to similar levels as the first half of the year. As a result, we project total revenue for the fourth quarter of 2025 to be between $480 million and $530 million. We expect EPS in the range of $0.11 to $0.31. And with that, I'd like to turn the call over to the operator for questions. Operator: [Operator Instructions] Your first question comes from Charles Shi of Needham & Company. Yu Shi: Maybe the first question on the near-term industry demand outlook. It sounds -- it looks like you guys are seeing maybe we won't really see a pickup over the next several quarters before an actual pickup start to happen. And I wonder what your view right now on first half next year? Should we still kind of assume that the $500 million per quarter level? And what's the early view on the second half next year? That's the first question. James Xiao: Yes. Okay. So Charles, thanks for the question. And I look forward to work with you and your firm as a long-term partner. I think that our view on this, as you already heard from some of our customers, right? They really see a kind of mid- to high range of year-over-year growth in next year's WFE in general. I think that some customers see that a little bit of a flattish outlook in first half, and they see a kind of step function increase in the second half. Others see differently. So I think that I really do not want to give you a specific because the controversial outlook we have from different customers. So I would say that we will see a mid- to high range and year-over-year growth and the timing of that to be seen. Charles, you want [indiscernible]. Rhonda Bennetto: Go ahead, Charles. Yu Shi: Yes. Maybe a second question on Q4. It looks like you're guiding Q4 slightly below the September level. I believe one quarter ago, you were expecting some pickup tied to some of the opportunities you saw in Europe. And I wonder why the guide is a little bit lighter than the expectation a quarter ago. Was that the timing of that program in Europe or something else has probably weakened a little bit? Sheri Brumm: Charles, this is Sheri. Yes, we did -- we have seen that demand and continuing to see that, but we are seeing some different forecast from other customers. So it's just causing a little bit difference in Q4 than what we initially said last quarter. But we are seeing strength in that specific revenue that we talked about in Q3. As you know, we have a large bell curve of margins that we produce for our customers. And in Q3, just happened to be a little bit better mix than what we've seen previously. And Q4 is kind of going back to the mix that we've seen in the first half of '25. But that's generally why our Q4 is slightly down from the Q3 time frame. Clarence Granger: But Charles, this is Clarence. So as we said, we were going to capture some new business in Europe in Q4. We did capture that business. It's just, as Sheri said, some other businesses slowing down and offsetting that. But overall, we are very confident in our position in capturing new business, and we feel we're well on our way to have a much stronger year in 2026, albeit maybe in the second half. Yu Shi: Got it. If I may, I have one last question. what's the -- is there anything changed -- anything that's different in terms of your view about your China for China business? We knew that at the beginning of the year, there was some technical challenges that your Chinese OEM customers saw and that kind of led to quite a bit of a decline in that part of the business. Is that on track to recover? And is it on track into the, let's say, into the fourth quarter, where do you see that China for China business in terms of maybe revenue run rate where it's going to be at? Clarence Granger: Charles, yes, we knew this question was coming from you. We were kind of flipping a coin to see who got to answer it. I got the short straw. So I guess it's my turn. So just to make sure we clarify on our China situation. Literally, a little less than 7% of our total revenue is to our Chinese customers. So it's not a huge portion of our revenue. But obviously, I understand why everybody is interested in China with all the talk going on. So -- but in terms of the revenue, our revenue this quarter and next quarter will be about the same percentage for China. So it's relatively flat right now. And frankly, because of all the political turmoil, we are migrating all of our non-Chinese customer manufacturing out of China. So as you know, we've called that China for China, but we're probably going to quit using that terminology. But essentially, all of the products manufactured in China as of the end of the fourth quarter will be manufactured in China and all of the products for our non-Chinese customers will be manufactured outside of China. So that's an important strategic direction for us, and we've accomplished what we said we would. So from a long time -- long-term perspective, we're very comfortable with our position in China. We think the Chinese market is going to be one of significant growth over the next few years, and we fully intend to participate in that market going forward, albeit on a slightly different footing where we have essentially 2 separate manufacturing organizations. Operator: Your next question comes from Krish Sankar of TD. Robert Mertens: This is Robert Mertens on the line on behalf of Krish. First, congrats, James, on the new role. We look forward to working closely with you in the future. Just my first question, could you walk us through some of the remaining synergies with these recent acquisitions you've done? I believe last quarter, maybe you had mentioned integrating the Fluid Solutions Group systems into existing products. Are those targets still on track? And then I have one follow-up. Clarence Granger: Sure. So yes. So obviously, we've talked about the acquisitions. We had Fluid Solutions, Services and HIS. And so the Fluid Solutions is the one where we've made the most significant progress right away. We have completed the inclusion or update to the SAP business system in our Fluid Solutions site. This will -- this will give us consistency between our traditional UCT manufacturing and our Fluid Solutions. We've also completed the strategic alignment between the Products group and the Fluid Solutions on qualification priorities with our customers. So we've made very good progress there. What that means, though, is the reason we need strategic alignment is the Fluid Solutions products will be utilized in the subsystems that our product systems that our products groups build. So we won't actually see -- as Fluid Solutions gets more and more qualified, we won't actually see an increase in revenue. What we'll see is an increase in margins because the Fluid Solutions products will be replacing other products that we've had to buy from other suppliers. And so that will result in improved margins for us. And so we're very pleased with the progress that we've made there. The other 2 sites are the services side, and we've made some good progress on the integration of the services side. We had previously had the business unit separated from the manufacturing arm of the services group, and we've now combined that to improve our overall efficiencies. That's been accomplished. And the HIS group, we are considering various options relative to locations and possible levels of increased utilization for new product introduction and possible site consolidation. So we have not finalized all the activities that we're doing in those major areas, but we do think that we've made significant progress, and we expect significantly more progress in 2026. Robert Mertens: Great. That's helpful. And then just for the tariff recovery benefit in the quarter, was that meaningful to the overall margin growth in the September quarter? And was this sort of a onetime benefit catch-up from suppliers? Or should we expect a bit of a tailwind in the December quarter as well? Sheri Brumm: Yes. Well -- this is Sheri, Robert. We will continue to collect surrounding our tariffs going forward. We did collect slightly more than what we anticipated in the original forecast. So that did help with our overall EPS. But we anticipate -- we have put a really good process in place and for go forward now, and that basically will assist us with that collection as we move forward. Clarence Granger: I guess the other point I'd like to make on that, we're now to the point where we're very -- first of all, this was not a onetime hit. This is ongoing. But we are very confident that we are now to the point where we are able to recover approximately maybe a little over 90% of the tariffs that we get charged. So this should be less of a factor to us on a go-forward basis. Operator: The next question comes from Christian Schwab of Craig-Hallum Capital. Christian Schwab: Congrats, James, on the new role. As far as WFE outlook for calendar 2026, I understand you're seeing conflicting data points and third-party research is kind of all over the place as well. But that being said, do you think the company is positioned to outgrow WFE growth in calendar '26 regardless of what that number is? Historically, kind of in an upturn, you've kind of done 10% or more growth on top of WFE. Is that what we should expect? Or would you expect the business to kind of follow whatever WFE looks like? James Xiao: Christian, this is James. Nice to meet you virtually. So I think that, as I mentioned, the 26% is really a kind of 5% to 8% of year-over-year growth, depending on which analyst you're looking at. And from the UCT perspective, it's hard for us really to give you a concrete forecast on how much is our year-over-year growth. For the following reasons because number one is that we still see some of the customers still have inventory. So the consumption of inventory actually kind of delay the revenue from UCT perspective, right? So we're not synchronized because of that, number one. Number two is also, if you look at the NPI cycle of our customers, it takes quite a long time for them to really ramp up their NPIs and really kind of qualify UCT, especially for the NPI products. So therefore, you probably see them to have this incremental revenue while the UCT revenue growth from the NPI product will be a few quarters behind. So therefore, we cannot fully capture the NPI growth. But -- and then the third is really the product mix. If you look at the leading-edge spending, right, you can see that the litho is more than 40% of the spending. UCT historically is really edge and that intensive. But with that said, we're working very closely with our third customer, which is a litho company and grow our revenue with them. So I think that longer term, you will see that we're more kind of matching the double-digit growth when we grow that litho business. And finally, I think that this also goes to the China factor, right? So I think the domestic OEMs in China depending on the analyst report, you kind of follow, there could be an increasing percentage of the worldwide WFE growth. And [indiscernible] not necessarily have the same market share as we have the rest of the world. With all that factors, I cannot give you the exact number, but we're pretty confident we will outgrow the WFE. Operator: Your last question comes from Edward Yang of Oppenheimer. Edward Yang: Welcome aboard, James. Can we just close the loop on your comments about reduced visibility? It just seems a bit discordant from the rest of the industry so far, where I think the tone seems to be a bit more positive. So what are you seeing specifically in your order book? Just want to better understand the offsets. Is it China? Is it memory? I saw that your memory revenue was down. Or is it specific customers that give you some caution? Cheryl Knepfler: Ed, this is Cheryl. I'll start sort of with the industry view and then let James talk a little bit more in terms of some of the products. So when we look at the industry, we do have a number of the companies and third parties who are indicating second half should be positive. There's a lot of things that are going in on that. But we also have some of our large growth customers who are indicating some level of concern, whether it translates to them saying their revenue is looking to be flat or others. So there are at least 2 of our customers who are looking at flat revenue, flat to up, others who are still forecasting significant gains opportunities, but all on the second half. So -- and we've had 2 or 3 or 4 years of saying second half growth. So I think we are just looking at remaining prudent in how we're looking at things since we are getting some level of conflicting information. However, I do think we have a lot of programs going on that James will reference that indicate that we do expect to see a level of growth through that, but we just want to remain cautious about how we're looking at it and how we structure things. James Xiao: Well said, Cheryl, I think that the only thing I want to add is that it's really the business nature. I leave in both words at semi-cap OEMs and now with a subsystem company like UCT. I see the visibility is a little bit different. The other side is about 6 to 9 months, if you will. Here, it's really a quarter plus, I'd say. So therefore, there is a visibility kind of difference. Therefore, I think we want to stay very, very precise on what we know and what we can really kind of share with you and the rest. Edward Yang: Okay. That's helpful. And James, I mean, you spoke a lot about efficiency and optimization, but I would love to get your thoughts also on your plans for restarting the growth engine at UCT. Where do you think the best opportunities are? Is it in leading edge, AI? Is it M&A, China? Would love to get your thoughts there. James Xiao: I think that those are all relevant. I would love to do all of them, but I think that we're also constrained by the resource, and I want the team really focused on the fundamental first, right? So as a subsystem partners to our OEM customers, we want to make sure we really deliver on time. We really have the least quality excursion. And also, we continue to drive the cost efficiency, right? So that's really my first priority. Then I think that the growth really -- it's always follow that Horizon 1, 2, 3 cadence. I always want to focus on Horizon 1, which is really expand the business with our partners in the OEM space. The top 3 customers is definitely our focus. And then we can look at the diversification in that space means that some of the other semi-cap OEMs. I really want to continue the vertical integration that Jim and Clarence already did in the past 5 years. And integration is part of that, that we can further expand the engineered product as long as it fit our core competency and also fit in the vertical integration strategy we have. And finally, as Horizon 2 or 3, we can look at all the areas you mentioned. So -- but I think that we'll have an upcoming investor conference, and we can share more of my growth strategy with you and the other folks. Operator: There are no further questions at this time. I will now turn the call over to James Xiao for the closing remarks. Please continue. James Xiao: Thank you for joining us for this earnings call. I look forward to further chat with you at the follow-up call. Rhonda Bennetto: Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.