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Operator: Good afternoon, and welcome to the Edison International Third Quarter 2025 Financial Teleconference. My name is Denise, and I will be your operator today. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference. Sam Ramraj: Thank you, Denise, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also on the call are other members of the management team. Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, prepared remarks from Pedro and Maria and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation. During this call, we'll make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to 1 question and 1 follow-up. I will now turn the call over to Pedro. Pedro Pizarro: Thanks a lot, Sam. Good afternoon, everybody. Today, Edison International reported third quarter core earnings per share of $2.34 compared to $1.51 a year ago. This comparison is not meaningful because during the quarter, SCE recorded a true-up for the 2025 General Rate Case final decision, which is retroactive to January 1. Reflecting the year-to-date performance and our outlook for the remainder of the year, including the costs for potential early refinancing activities later this year, we are narrowing our 2025 core EPS guidance range to $5.95 to $6.20. We have also refreshed our projections through 2028 and are reaffirming our 5% to 7% core EPS growth target. Maria will discuss our guidance and financial performance in more detail. California's legislative session concluded with the passage of SB 254, a constructive and important step to support IOU customers, address wildfire risk and boost the financial stability of the state's investor-owned utilities. The bill passed with near unanimous support, and that's a clear signal that policymakers understand the urgency of the issue and the need for durable solutions. SB 254 creates an up to $18 billion continuation account jointly funded by IOUs and customers to provide a backstop for wildfires ignited after September 19, 2025. Importantly, it enhances the existing framework by basing the liability cap on the year of ignition rather than the year of disallowance, providing certainty for stakeholders. It also allows for the securitization of wildfire claims payments for 2025 wildfires ignited between January 1 and September 19, if the initial wildfire fund is exhausted, which would apply to the Eaton Fire if needed. These provisions are constructive for potential cost recovery and help utilities like SCE continue to invest in safety and reliability while maintaining affordability for customers. We have provided a summary of SB 254 on Page 3. SB 254 calls for an important second phase, a comprehensive report due in April 2026 that will evaluate long-term reforms to equitably socialize the risks and costs of climate-driven natural disasters. The law recognizes that customers and shareholders continuing to bear the burden of these events is unsustainable. This second phase is important to evaluate the broad scope of potential reforms that are necessary for a sustainable model. As you will see on Page 4, the 10 points outlined in SB 254 can be grouped into 3 categories: first, reducing the risk of ignitions and harm from wildfires; second, affording fair compensation for people affected by wildfires, including avoiding disparate treatment of communities. Third, allocating the risk and costs of natural catastrophes across stakeholders equitably. We are encouraged by this direction and by the executive order that Governor Newsom signed on September 30 to expedite the state's all-in response. We look forward to continuing to work with legislators and stakeholders to shape a more sustainable and equitable framework. We are confident that we will see meaningful legislative action next year. Turning to the Eaton Fire. The investigations remain ongoing. As we have said before, SCE is not aware of evidence pointing to another possible source of ignition. Absent additional evidence, SCE believes that it is likely that its equipment could be found to have been associated with the ignition. During the third quarter, SCE entered into a settlement with an insurance claimant agreeing to pay $0.52 for each dollar paid to its policyholders. Note that this is a single data point and does not provide sufficient information to develop an estimate of the total potential losses associated with the Eaton Fire. The Wildfire Fund administrator has confirmed that Eaton is a covered wildfire for the purposes of accessing the fund. Based on the information we have reviewed thus far, we remain confident that SCE would make a good faith showing that its conduct with respect to its transmission facilities in the Eaton Canyon area was consistent with actions of a reasonable utility. That said, we continue to take proactive steps to support community members. Shortly, SCE will launch the wildfire recovery compensation program for the Eaton Fire. This voluntary program is designed to provide eligible individuals and businesses impacted by the fire, direct payments to resolve claims quickly. This allows communities to focus on recovery earlier while minimizing the overall cost and outflows from the Wildfire Fund by reducing escalation, interest expense and legal fees. Moving to the regulatory front. The key message is that we've made significant progress across multiple proceedings this year, further derisking our financial outlook and bolstering our ability to deliver for customers and investors. Earlier this year, the CPUC approved the TKM Settlement, authorizing recovery of approximately $1.6 billion in wildfire-related costs. More recently, SCE reached a settlement agreement with intervenors in the Woolsey fire proceeding as highlighted on Page 5. This marks a significant milestone and puts the company one step closer toward fully resolving the 2017 and 2018 legacy events. The agreement with authorized recovery of approximately $2 billion of the $5.6 billion requested subject to CPUC approval. This structure supports long-term affordability for customers by reducing excess financing costs and improving credit metrics, specifically up to a 90 basis point benefit to FFO to debt and an annualized interest expense benefit of approximately $0.18 per share. Combined with the TKM Settlement, this will result in recovery of 43% or about $3.6 billion of the total cost above insurance and FERC recovery. We anticipate a final decision from the CPUC toward the end of this year or early next year. And assuming CPUC approval, we expect to receive proceeds from securitization mid-2026. Details of both proceedings can be found on Page 6. SCE also received a final decision on its 2025 General Rate Case in September, as highlighted on Page 7. The decision authorizes 2025 base revenue of $9.7 billion and support significant investments in wildfire mitigation, safety and reliability and upgrades for increased load growth while incorporating affordability considerations for customers. It also authorizes average revenue increases of about $500 million per year for 2026 to 2028, subject to adjustment based on inflation. On capital expenditures, the final decision authorizes 91% of SCE's request. Importantly, the commissioners highlighted that these investments in the grid provide long-lasting value to customers, especially given the need to protect against wildfires, advance electrification and ensure a ready, reliable grid for the clean energy future. On wildfire mitigation, SCE has now deployed more than 6,800 miles of covered conductor. I'm pleased to share that by the end of the year, SCE will have hardened nearly 90% or more than 14,000 miles of its total distribution lines in high fire risk areas. The GRC authorizes installing another 1,650 miles of covered conductor for wildfire mitigation as well as 212 miles of targeted undergrounding. Similar to covered conductor, which continues to be an important risk mitigation tool, SCE believes that its targeted undergrounding program will also provide substantial benefits to further safeguard its customers and communities. Public safety power shutoffs remain a critical tool in wildfire prevention. This year's updates include revised criteria and wind speed thresholds, expanded circuit coverage and broader boundaries around high fire risk areas. Additionally, SCE has now enabled fast curve settings on approximately 93% of its 1,100 distribution circuits in high fire risk areas, further reducing ignition risk and improving system safety. As we've shared before, SCE's system average rate continues to be the lowest among the major IOUs in the state. Importantly, the utility expects this will grow at an inflation-like level on average through 2028. Incorporating the GRC approval, TKM Settlement and pending Woolsey settlement, we continue to expect that CAGR to be in the range of 2% to 3%. In closing, I want to thank our team members for their continued dedication and resilience. And I also want to thank our investors for your support and our customers for the opportunity to serve them. This has been a year of meaningful progress on the legislative front, in the regulatory arena and in our operational execution. We've taken important steps to resolve legacy wildfire liabilities, strengthen our financial position and advance the utility's mission to safely deliver reliable, affordable and clean energy. But we also recognize that this has been a challenging time for so many of the communities we serve, particularly those impacted by wildfires. We remain deeply committed to learning from our experiences and supporting recovery and resilience to rebuild stronger. We are grateful for the opportunity to partner with customers, local leaders and other stakeholders to build a safer and more sustainable energy future. Well, we look forward to continuing our dialogue with many of you at the EEI Financial Conference in November. We'll see you there. And with that, Maria, let me turn it over to you for your financial report. Maria Rigatti: Good afternoon, and thanks, Pedro. I will echo your comments that we have made significant progress across multiple proceedings this year, further derisking our financial outlook and bolstering our ability to deliver for customers and investors. With the GRC final decision in hand, we now have increased certainty and visibility into the work SCE will do to meet customers' needs and have refreshed our projections through 2028. Consequently, we are reaffirming our 5% to 7% core EPS growth target, which I will discuss in detail. Starting with third quarter 2025 results, EIX delivered core EPS of $2.34, up from $1.51 a year ago. The year-over-year variance analysis is on Page 8. As Pedro noted, this comparison is not meaningful because SCE recorded a true-up of approximately $0.55 for the 2025 GRC final decision, which is retroactive to January 1. Based on strong year-to-date performance and our outlook for the rest of the year, we are narrowing our 2025 core EPS guidance to $5.95 to $6.20, as you will see on Page 9. This range now includes the potential for $0.10 per share of costs associated with refinancings tied to the TKM and Woolsey cost recoveries. As previously mentioned, our 2025 guidance does not include the potential earnings associated with the Woolsey settlement. SCE is awaiting a proposed decision on the settlement and a final decision could be issued later this year or early next. We want to be clear that for measuring our core EPS growth through 2028, the 2025 baseline of $5.84 is unchanged from prior disclosure. Now I would like to discuss our refreshed projections, which we have summarized on Page 10. Additionally, on Pages 14 through 17, we put together a comprehensive list of frequently asked questions on guidance-related topics for background and easy reference, which we hope you will find helpful. Please turn to Page 11, which lays out our 4-year capital plan of $28 billion to $29 billion. This compares to our previous forecast for the same period of $27 billion to $32 billion. The plan incorporates substantial investments in infrastructure replacement, electrification and system resiliency approved in SCE's GRC. Additionally, the plan now incorporates the utility's next-gen ERP project and other updates across the business, including Wildfire Mitigation capital that SCE will securitize under SB 254. We also continue to see the need for substantial grid investments beyond our forecast period. We've highlighted on the right side of the page 2 examples of this, with much of that spending occurring beyond 2028. Driven by the capital plan, we project rate base growth of 7% to 8%, as shown on Page 12. This growth is after incorporating the expected Wildfire Mitigation capital expenditures that will not earn an equity return under SB 254. Moving on to our long-term core EPS growth target, as shown on Page 13, we continue to expect 2028 core EPS of $6.74 to $7.14. You will find additional information on this topic on Pages 14 and 15. Our confidence in delivering on our commitments is underpinned by the clarity we have from the GRC and our ability to manage our operations for the benefit of all stakeholders. Let me now turn to our financing strategy and balance sheet strength. Over the last several years, we have executed efficient financing to support our target 15% to 17% FFO to debt framework. We have used hybrid securities to generate equity content when needed, avoiding substantial common equity issuance to prefund our capital plans. By year-end, SCE expects to receive approximately $1.6 billion in securitization proceeds from the TKM settlement. Following Woolsey settlement approval, the utility plans to request a financing order to securitize an additional $2 billion. These actions further strengthen our credit metrics and financing flexibility for funding future rate base and dividend growth. Altogether, this leaves us very well placed among our peers on 2 key credit metrics. EIX has one of the strongest consolidated FFO to debt ratios projected by S&P. Also, we have one of the lowest levels of parent company debt as a percentage of total debt. Page 13 details our 2025 through 2028 financing plan. Let me highlight that this plan does not require any equity issuance. This expectation is supported by the TKM and Woolsey recoveries. Further, as you know, the Wildfire Fund provides reimbursement for claims paid above an IOU's $1 billion of insurance. Additionally, for buyers between January 1 and September 19, 2025, the recently passed SB 254 allows the utility to issue securitized bonds prior to a reasonableness review to fund claims payments should the initial fund be exhausted. While we currently cannot estimate the probable losses associated with the Eaton Fire, the constructive California liquidity and prudency framework means neither equity nor debt would need to be issued in connection with that event. Following the passage of SB 254, the rating agencies issued updates on the company. Moody's affirmed its ratings for both EIX and SCE with a stable outlook. Fitch removed its rating watch negative from both companies, citing SB 254 as a meaningful policy shift. While S&P downgraded EIX and SCE by 1 notch, we believe this view does not fully recognize the legislative intent or commentary from the Governor's office. Importantly, S&P still expects our credit metrics to remain within our target with upside potential from a constructive Woolsey outcome. At the parent company, we are working on how to best address the preferred equity issuances that have upcoming rate resets. We are looking at cost-efficient options for early refinancing, which will bring forward both the costs and the benefits of the transaction. The core benefit is the optimization and clarity of financing costs before the rate reset, which further derisks our financial outlook. We have considered the potential cost of this optimization in our narrowed 2025 core EPS guidance and see the long-term benefits outweighing the near-term costs. I would like to update you on another positive trend we are seeing, load growth. As we have laid out on Page 18, SCE remains well positioned to meet the diverse and accelerating demand across its service area. Our team continues to anticipate significant investments in infrastructure upgrades to meet this growing demand, many of which were included in SCE's recent GRC approval. Importantly, our demand forecast is not reliant on a single sector. For one, SCE is at the heart of California's EV adoption, helping the state maintain its national leadership in transportation electrification. In fact, the state recently announced a record 29% of new cars purchased in Q3 2025 for zero-emission vehicles. We're also expecting growth in new housing developments and increases in commercial and industrial consumption. To sum up, we are expecting a near-term load growth CAGR of up to 3%. In the long-term, we project electricity sales will nearly double over the next 2 decades. I will conclude by saying that the company has made significant progress achieving certainty across numerous regulatory proceedings this year, allowing us to confidently reaffirm our long-term guidance. It underscores our ability to execute on our commitments and deliver for the customers and communities SCE serves and for our investors. That concludes my remarks, and I'll turn it back to Sam. Sam Ramraj: Denise, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow-up. So everyone in line has the opportunity to ask questions. Operator: [Operator Instructions] The first question is coming from Nicholas Campanella with Barclays. Nicholas Campanella: I just wanted to ask, you brought up the $0.10 for the equity preferred as it relates to the '25 guide. So can you just kind of confirm, is this -- is the $0.10 just a charge for both the '26 and '27 maturities? Or is that still kind of up for debate? And then maybe just expand on what some of your options are for addressing that? Obviously, there's no equity coming to replace this, if I'm reading it correctly. Maria Rigatti: Sure. Right. So just to recap what you said, we have 2 preferred equity series with a rate reset in March of '26 and then again in March of '27. We issued those back in 2021, and that was to address sort of the claims that we were paying related to TKM and Woolsey. And now that we have the TKM settlement approved and the securitization coming later this year as well as the Woolsey settlement pending approval, which will also be securitized, we're taking a look at all of our options at the holding company. So we are still evaluating the options, but we think that maybe taking some steps earlier rather than waiting for those March '26, March '27 reset dates would be beneficial overall for the company. Any time we do a refinancing, there will be a write-off of deferred transaction costs, et cetera. And so that's what the $0.10 represents. That would happen regardless of whether we do it early or whether we did it at the actual reset date. But the options that we're looking at are pretty broad, and we'll have more to come on that. Nicholas Campanella: Okay. Okay. I appreciate that. And then I guess as it relates to Eaton, you've launched this kind of recovery compensation program. maybe you can kind of just discuss what the participation level has been in that? And does that allow you to have kind of a view on claims in more of an expedited manner? Is that something that we can maybe expect with the 10-K? And I understand that there's very clear new protections in place from SB 254, which are helpful. But just when do you think that we'll have a low-range estimate for what the liability against the fund would be? Pedro Pizarro: Yes. Nick, let me jump in here. So we're not quite where you -- I think we are yet. We haven't launched the program yet. We've announced that it's coming. We went through a process of releasing a draft protocol in September and then opening it up to feedback from the community. And so as I said in my remarks, we expect to be able to finalize the program and launch it shortly. And so regarding though, when that might lead or if it might lead to an estimate on losses, first, as you point out, we'll need to see what the participation rate is. I think that there's -- we're doing everything we can, and we have engaged really the world's best outside experts on this, Ken Feinberg and Camille Biros who were, among other things, the architects of the 9/11 fund. So they've been providing great advice on this. We've gotten good input from the community. We're considering a number of potential changes beyond what we had released in draft form. But I do want to make sure I temper expectations. This is -- this will be a long process. And it's only one of the components of potential losses in a complex event like Eaton. So you saw that, I mentioned in my remarks already that we did the 1 SoBro settlement. It was meaningful, but it's only one. And so we're not able to estimate even SoBro losses just from that one data point. And so similarly, we'll have to see what kind of participation rate we get. And at some point, does it become material enough that it maybe allows to start getting our hands around that portion of losses. But of course, there are other kinds of losses in this. So a very long way of saying that we're still kind of where we were last quarter. We don't yet have an estimate of when we'll have an estimate, Nick. Maria Rigatti: And Nick, maybe just picking up on a couple of the other things you raised. The direct claims program is, of course, a good way to be good stewards of the fund. But you pointed directly to SB 254 protections that were introduced. So building on the protections of AB 1054, there are a couple of things that we think can apply to Eaton and do that in a constructive manner. First, the date at which the liability cap is calculated is the point of ignition. So we know with clarity what the cap is for Eaton, which is approximately $4 billion based on our current rate base. The second piece relates to the securitization that I mentioned earlier for fires that occur between January 1 and the effective date of the legislation to the extent there is a need to go above the fund. And again, we don't know what the estimate is for Eaton. The company can securitize those claims before going in for a reasonableness review with the CPUC. That outcome is good for customers because it minimizes costs and interest expense. It's also good for the utility because it wouldn't need to issue any debt at that point or equity to fund the claims payments. Operator: The next question comes from Gregg Orrill with UBS. Gregg Orrill: Thank you for the update on guidance. Just a clarification. Is it -- is there a part within the growth rate range that you feel you're trending toward now, the upper half or the lower half or whatever or maybe things that -- I know you provided some disclosure on what would take you within that range, but any other thoughts on that would be helpful. Maria Rigatti: So Greg, we are very comfortable and confident in the 5% to 7% EPS growth. Obviously, we run a lot of scenarios when we take a look at that, and there are many variables that can change either because it's a 4-year period or because this is a complex business. I would just say that we did incorporate a lot of new information into our outlook. We have the GRC in hand. We had multiple regulatory proceedings over the past year around recovery of memo accounts that also contribute to capital. We had the TKM settlement. We have the securitization that's coming up. The Woolsey settlement that's pending approval. With all of that, we put that together in the mix. And I think the 3 key takeaways for me are not just reaffirming the 5% to 7% EPS CAGR, but also that we have significantly more clarity around that forecast and we have a stronger balance sheet. So we're still 5% to 7% is where we are, but I think there's a lot more behind that, that is very positive. Operator: The next question comes from Shahriar Pourreza with Wells Fargo. Shahriar Pourreza: Pedro, I know there's -- obviously, there's clearly some improvement in the wildfire constructs from Phase 1, even though they kind of kicked the can down the road and some of the key items there. I guess in terms of Phase 2 process, what do you see as viable for limiting EIX's liability? And what will be the data points that you anticipate going into the legislative session? Like is this going to be a public process? Is this going to be a private process? How do we track it? Pedro Pizarro: Yes. Thanks, Shahriar. Good set of questions. And as I mentioned in my remarks, we are very encouraged by the legislature not only having taken the steps that Maria recapped just now on Phase 1, but setting up this Phase 2 process. It's still being shaped, but the California Earthquake Authority as the lead entity here has been pretty articulated already in some key parts of the process. They've given the time line, right, for submission of abstracts across the various topics, that's November 3, is the deadline for those abstracts. And then they have a deadline of December 12 for the full papers that parties can submit. They have said already that they plan to make all of those submissions, both the abstracts and the papers public as they come in. So I think that's really helpful because it will give really nice transparency to everybody in terms of what various stakeholders are submitting and how they're thinking about things. For our part, we continue to work very closely with our colleagues at the other investor-owned utilities, and we'll also be looking to engage with a broader set of stakeholders as we develop our ideas or compare notes with their ideas. We also understand that CEA will have perhaps still being defined a little bit, but some process for open discussions, meetings, et cetera, between the submission of papers and the April 1 deadline for the final report. It was also encouraging, I touched on this very briefly in my remarks, but it's very encouraging to see Governor Newsom turn to the various agencies with this executive order and essentially give out homework assignments for the expectations on how each agency would be contributing to specific items within the 10 areas that were outlined by SB 254 that I covered in my remarks as well. So it's really nice to see not only the CEA putting out their process, but the Governor then turning to the agencies. And for some of the agencies that he can direct, actually gave them direction for the agencies that are more constitutional where he can only provide advice or suggestions, he suggested focus areas for each of those. We'll see what comes out in the report, although we're encouraged, frankly, by this responsibility, the leadership of it, having placed by SB 254 in the hands of the California Earthquake Authority, very professional entity. They have a solid understanding of broad natural catastrophes and risks, starting with their original mission around earthquake. But as you know, they've been the Wildfire Fund administrator since the inception of the fund through AB 1054 in 2019. So they also have deep experience now in terms of the wildfire topic that gives us a lot of comfort that there's good professional management, and they have the ability and we understand that they're in the process of engaging outside help as well. And then I go a little long-winded here. Hopefully, I won't quite go into 18 innings like the Dodgers. Go Dodgers. But maybe I'll give you one more point on this. As Maria is laughing right now. I wish we had video so you could see her. As we turn to the legislation and the outcome of the report itself, we expect that there's a potential here for taking action across the economy. This is not just about utility connections to wildfire, right? And so everything from reducing the exposure that the state has by -- we would hope to see -- seeing strengthening building codes and standards and frankly, strengthening of the implementation of building codes and standards because today's codes and standards are actually rather strong. But reviewing those and then making sure those are being implemented effectively statewide, reduction in the overall exposure to losses, right, by looking at what are potentially some fair caps and specific kinds of claims or fees involved in the process. And then, of course, looking at how does California equitably allocate the ultimate cost of natural catastrophes like wildfires. It was very encouraging to see the legislature acknowledge right upfront in the preamble of SB 254 that the current process of essentially making utility customers and utility shareholders, the insurers of a catastrophe is simply not sustainable. When you take a horrible heartbreaking fire like Eaton, and we still haven't concluded what happened here, but you heard me say it's likely that the equipment could be found and have been associated. But even if the spark did come indeed from our SCE equipment, the catastrophe was about so much more. The extreme weather, the 100-mile an hour winds, the grounding of firefighting aircraft, the homes that unfortunately were beautiful, great neighborhoods, but we're not ready for this high fire risk, the lack of evacuation notices in areas that covered all but one of the fatalities. So you add all of that up, and we simply can't have utility customer shareholders continue to be the insurers of this catastrophic risk, and we're encouraged that the legislature seems to recognize it and setting up 254. Sorry for the PhD dissertation there, but you hit on such an important topic, Shahriar. Shahriar Pourreza: No, no, it's helpful. And then just, Pedro, really lastly for me quickly. I mean, obviously, '26 seems to be a pretty big inflection year for the California utilities. And I know one of your peers in the state is talking a little bit more on capital allocation depending on what could be the outcome of Phase 2, i.e., buybacks, dividends, returning more to shareholders, looking at how they're deploying capital in the state. I guess, how do you -- where do you stand around that, given how binary '26 could be? Pedro Pizarro: Yes. I'll turn to Maria in a second here, but let me just start by saying, above all, and this is really an important part of the messaging for Edison and I think for our peers as well. This is ultimately much more about customer cost than anything else, right? The weakening of financial health, which you mentioned some options here, one of our peers has mentioned here. But ultimately, this is really about how do we maintain healthy balance sheets and importantly, healthy credit ratings because the cost of debt is borne by customers. And so as we engage with legislators, we are laser-focused on that customer impact as being the reason or one of the key reasons in addition, obviously, to public safety to reforming how the state addresses its catastrophic risk. Maria, do you want to talk? Maria Rigatti: Sure. So I think, first, I would say, Shahriar, we've always taken a very measured and efficient approach to how we capitalize the business. You've seen that over the course of the last 5 or 6 years where we went down the path of using hybrid securities as opposed to issuing common equity at times when it would have been more value destructive perhaps to do the latter. I think the other thing to say is we find ourselves in a somewhat different position. We have no equity issuances in our forecast at this point. We are looking at cost-efficient opportunities to take care of the holding company hybrids. So we'll be going down that path. And also, frankly, we have been returning capital to shareholders for the past several decades with an increasing dividend. We're still targeting our 45% to 55% payout ratio. We have a lot of confidence in our forecast, and so we have a lot of confidence in that. So I think you'd find our company in a slightly different position. Operator: The next question comes from Anthony Crowdell with Mizuho. Anthony Crowdell: I just wanted to follow up on Nick's question earlier on the $0.10 related to the preferred equity. It seems that it's -- I don't know if you're calling it earlier or expected earlier financing. Was it not contemplated in like the '26 and '27, '28 forecast when you previously issued that a financing on their maturity, meaning that if they -- if you waited until when they actually matured, it was getting absorbed into the 2026 and '27 guidance, whereas now by pulling it forward, it's hurting '25, but yet '26 and '27 are not going up. Maria Rigatti: Frankly, Anthony, we were taking a look at a lot of options before as well. The fact is that with the TKM settlement earlier this year and the securitization and the Woolsey settlement pending and a subsequent securitization there as well, we find ourselves maybe with more options. Some of those options introduced potentially having to write-off the deferred financing costs. Yes, if we were going to go down the path of refinancing in any event, you would get them in the year in which the event occurred. But if we were just going to continue them on, then there wouldn't have been anything there to write-off. So it does very much tie to the success we've had around some of the regulatory proceedings this year, the certainty that we've gotten from them and the ability to introduce these additional options when we consider the preferred as a holding company. Operator: The next question comes from Paul Zimbardo with Jefferies. Paul Zimbardo: The first one I was going to ask, I know you had one of the comments, and I appreciate the frequently asked questions. How would you describe the linearity beyond 2025 of the EPS trajectory? I know it's been a little bit lumpy in the past, but thinking without rate cases in between, it would be a little bit more linear. So if you could give some color on that, it would be appreciated. Maria Rigatti: Sure. So we will be giving our 2026 guidance on the Q4 call. That's our typical practice. But I can share a little bit more with you about the process that we have and really what's underscoring our very strong confidence in the 5% to 7% growth rate. So I think about the GRC as the frame for the entire 4-year process. And now that we have that final decision in hand, we know the total amount of work that we have to accomplish over that 4-year period. But frankly, annually, we always go through a very detailed planning process to develop the work plan and how we will execute on each piece of the process. And we have to consider a lot of different things. We have to consider resources. We have to consider operational priorities, timing of the work. All of those can introduce some amount of input and structure around our guidance on a go-forward basis. So we are looking at that right now. We have the GRC in hand, but our detailed planning process has not started or it's just recently started underway in -- now that we have the GRC decision in hand. And so we will be providing more of that detail in response to your question on the Q4 call, but it certainly underscores our confidence in the overall 5% to 7% EPS CAGR. Paul Zimbardo: Great. And the other one I had was just on the credit profile. I think the commentary was solidly within that FFO to debt range. But just with the benefit of the enhanced recovery you're getting on the legacy fires, is it fair to think you're trending towards the upper half of that range over time? Maria Rigatti: So we're certainly comfortable in our range, and we're looking at our various financing options, and we'll come back to you once we decide on those. And we can -- we will still, though, always be comfortably in our 15% to 17% range. Operator: The next question comes from Carly Davenport with Goldman Sachs. Carly Davenport: Pedro, maybe going back to some of your comments earlier on customer costs. Just wanted to ask on the cost of capital filing in that context of customer affordability and the rhetoric in California. Just curious your latest temperature on the outcome there relative to what you have baked into the financial plan that you've laid out here. Pedro Pizarro: Yes. I'll start, Maria, you have more there. We're still in that process. You've seen our filings, the range that we provided, which is higher than the current 10.33% -- 10.75% to 11.75%. That's based on our outside experts testimony of looking at the overall risks that SCE is encountered with right now and trying to have fair compensation on that. We will let the process finish its way through. And hopefully, we'll have a decision by the end of the year as has been typical with cost of capital proceedings. Maria, anything you would add there, though? Maria Rigatti: Yes. So Carly, I completely agree with Pedro. We made a very strong showing. The proposed decision based on the schedule is due in November. So we are watching for it. All of the procedural aspects of the proceeding are completed. In terms of your question about -- so how does it roll into our forecast, like many other variables, we run a range of scenarios around the current ROE. So we have a number of things baked in, and we test a wide range of outcomes. So I think that's how it really fits into the range of 5% to 7% EPS CAGR through 2028. Carly Davenport: Got it. Okay. Very clear. And then maybe just one on the updated capital plan here. It looks like the FERC piece come down a little bit on the margin. Just curious what's driving that? And then your current views on the upside opportunities for FERC investment as you manage some of the moving pieces at the state level? Maria Rigatti: Sure. So the FERC piece came down very slightly over the 4-year period. A lot of that just has to do with timing of when the work will be done. So nothing really to read into that. And then on your second question, could you just please repeat that one more time? Carly Davenport: Yes. Just kind of as you think about managing the broader capital plan in the context of maybe the supportiveness of California, some of these investments at a CPUC level, to what degree FERC could sort of be a lever to lean into a little bit more there on the upside? Pedro Pizarro: Carly, one way to think about it is, it's a pretty good delineation between which investments are CPUC jurisdictional and which ones are FERC jurisdictional. And so the CPUC jurisdictional are the ones that we just got approval for in the SCE GRC. In addition, we have other proceedings underway like the next-gen proceeding or the next-gen ERP or the smart meter proceeding, AMI 2.0. But maybe I'll help Steve Powell, the CEO of SCE, just touch us a bit on just a broad transmission plan at CAISO and how that feeds the potential for FERC level investment over the next few years. Steven Powell: Yes. So the Independent System Operator, CAISO has put out -- or puts out 20-year plans to show the long-term opportunities for transmission investment in the state. The most recent one pointed to $45 billion to upwards of $55 billion of potential investment in projects over a 20-year period. They then translate that down to 10-year plans that get rolled out each year. And so you've seen over the last number of years, us get quite a number of incumbent projects as well as bid and win a competitive project. And so as I look forward, kind of the load growth that we're seeing, especially in the 10- to 20-year period is going to continue to drive the CAISO process to create more transmission opportunities. And so we want to continue to position ourselves to be the right incumbent provider to build on the existing network, which is oftentimes the most effective way to get the reliability projects as well as the policy projects built, but also continue to position ourselves for those competitive projects where there's new lines that are needed to be established. And we've shown our ability to go in and win projects, and we expect to continue to participate in competitive opportunities in the CAISO portfolio going forward. Operator: The next question comes from David Paz with Wolfe. David Paz: This is somewhat related regarding the SB 254 CapEx that's ineligible for an equity return, do you anticipate backfilling that roughly? I think it's $2 billion -- $2.3 billion of CapEx that's not in your '25 to '28 plan with other programs. Is that with the next-gen and with the other things? Or should we anticipate there being something else? Maria Rigatti: So maybe let's clarify a little bit what's in the CapEx plan that's in the investor materials today as well as what's in the rate base. So if you recall, under SB 254, the CapEx that we're talking about is Wildfire Mitigation that is approved post 1/1/26, so this next upcoming year. In our capital plan, we have included some of the -- we have included all the CapEx that we expect to spend through 2028 that is going to be subject to that. And we have about $500 million to $700 million of CapEx on the CapEx slide that are related to the SB 254 capital. When you move over to our rate base slides, we are not including that when we convert CapEx into rate base. So you can use the rate base slides as sort of the foundation for your modeling in terms of the amounts on which we can earn equity return. The balance of what is under SB 254. So the rest of that CapEx would be spent then after this rate case cycle. So as we go into the 2029 rate case cycle, we'll be taking a look at how that all factors in. But the numbers that we provided in the materials today should be pretty clean in terms of how you would use them to look at our growth rate. David Paz: Okay. That makes sense. But just to understand for modeling purposes, that remainder, so not what's in your slides today, but the rest should we anticipate that being spread out over the '29 to '32 GRC or upfront just based on the language or your interpretation of SB 254. Maria Rigatti: So we would expect that CapEx to be spent after 2029. We don't have those -- that GRC filed yet. So we'll be working on that as we go through it. And whenever we do have that available in terms of that piece of the forecast, certainly, we would make it clear as to what pieces are in rate base and what pieces are not. Operator: The next question comes from Aidan Kelly with JPMorgan. Aidan Kelly: Yes. Just one question on my end. Could you just touch a little bit more on the near-term annual 1% to 3% sales growth a bit more? Just curious to hear any detail around the breakdown between the electrification, residential growth and C&I customers? Pedro Pizarro: I'll turn it over to Steve again from an SCE perspective. Steven Powell: Yes. So in the near-term, in terms of the customer demand growth that we're seeing, it really is a mix across those ones that you mentioned. So we certainly point to electrification and primarily around vehicles and the continued kind of strong growth in vehicle -- new vehicle purchases that are 0 emissions is really bolstering that transportation electrification load growth. It's probably about 1/3 of it is the driver in there. We continue to see residential new home starts and new residential development happening across our territory. And so that's another key piece. And then the commercial industrial load growth, and that's a breadth of different types of industries, whether it's defense, manufacturing, down to logistics are all ones that we're seeing -- getting a lot of requests. I know there's a lot of conversations around data centers and that load growth. For us, it's not a big driver like many other places, but we see a moderate amount of requests coming through there as well that kind of just blends in with the rest of our commercial industrial growth. So it's a pretty balanced set of load that we would see over the next 5 years where kind of we project that 1% to 3%. Pedro Pizarro: And we really like the durability of having that kind of diverse profile as opposed to relying just on data centers. Operator: Thank you. That was our last question. I will now turn the call back over to Mr. Sam Ramraj. Sam Ramraj: Thank you for joining us. This concludes the conference call, and have a good rest of the day. You may now disconnect.
Operator: Good afternoon, and welcome to Landstar Inc.'s Third Quarter Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Frank Lonegro, President and CEO; Jim Applegate, Vice President and Chief Corporate Sales, Strategy and Specialized Freight Officer; Jim Todd, the Vice President and CFO; Matt Dannegger, Vice President and Chief Field Sales Officer; and Matt Miller, Vice President and Chief Safety and Operations Officer. Now I'd like to turn the call over to Mr. Jim Todd. Sir, you may begin. James Todd: Thank you, Elmer. Good afternoon, and welcome to Landstar's 2025 Third Quarter Earnings Conference Call. Before we begin, let me read the following statement. The following is a safe harbor statement of the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relate to Landstar's business objectives, plans, strategies and expectations. Such information is, by nature, subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2024 fiscal year described in the section Risk Factors, Landstar's Form 10-Q for the 2025 first quarter and our other SEC filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information. I'll now pass it to Landstar's CEO, Frank Lonegro, for his opening remarks. Frank Lonegro: Thanks, JT, and good afternoon, everyone. I'd like to thank our BCOs and agents and all of the Landstar employees who support them every day. It was great to spend time with our BCO independent contractors at our annual appreciation days in Bossier City, Louisiana recently and to celebrate their incredible achievements. We were extremely pleased with the turnout. And it was my honor to preside over Landstar's 52nd Truck Giveaway, awarding Christian Sanchez Cantù from Laredo, Texas with a new 2026 Freightliner Cascadian. The capability, resiliency and level of commitment exhibited day in and day out by our network of independent business owners is unique in the freight transportation industry. Their adaptability and dedication to safety, security and service for our customers is truly impressive. They are exceptional business leaders and key to driving the continued success of Landstar's business model. The challenging conditions experienced in the truckload freight environment over the past 10 quarters continued during the 2025 third quarter. Volatile federal trade policy and lingering inflation concerns continue to generate supply chain uncertainty. However, even as overall company revenue decreased approximately 1% year-over-year, the 2025 third quarter included important positive signs for Landstar, which I'll cover shortly. As JT and I will discuss in greater depth later in our prepared remarks and as disclosed in our earnings release, the 2025 third quarter financial results were impacted by three discrete noncash, nonrecurring items. As we disclosed via the 8-K we filed with the SEC on August 13, the largest of these items related to the decision to actively market for sale Landstar Metro, our wholly owned Mexican logistics subsidiary that is principally engaged in intra-Mexico truck transportation services. We are working towards a late 2025 or early 2026 sale of Landstar Metro and have thus far experienced a good deal of interest in that company. Excluding the revenue contribution from Landstar Metro from both the 2025 and 2024 third quarters, as well as approximately $15 million in reported revenue during the 2024 third quarter that was associated with the previously disclosed agent fraud matter, the total revenue increased approximately 1% year-over-year in the 2025 third quarter. This is a positive marker for our business. Encouraging signs in our overall performance were highlighted by strength in the unsided/platform equipment business. This service type posted another strong quarter with a 4% year-over-year revenue increase driven by the performance of Landstar's heavy haul service offering. We generated approximately $147 million of heavy haul revenue during the 2025 third quarter, or a 17% increase over the 2024 third quarter. This achievement reflected a 9% increase in heavy haul revenue per load and an 8% increase in heavy haul volume. And as noted in our earnings release and representing the collective efforts of many people at Landstar, Matt Miller and I are very pleased to report that the number of trucks provided by BCO independent contractors increased during the 2025 third quarter, representing the first sequential growth quarter since the 2022 first quarter. Our focus continues to be on accelerating our business model and executing on our strategic growth initiatives. We are continuing to invest in the foundational work that will put Landstar in a great position to leverage the freight environment when it eventually turns our way. We are also focused on our commitment to continuous improvement in the level of service and support we provide to our customers, agents, BCOs and carriers each and every day. As I previously noted, in addition to the decision to sell Landstar Metro, our third quarter financial results reflected two other noncash, nonrecurring charges disclosed in our recent 8-K. These three discrete items, in the aggregate, resulted in impairment charges in the quarter of approximately $30.1 million or $0.66 per share. As a result, GAAP earnings per share were $0.56. Excluding the impact of these three items, adjusted earnings per share was $1.22. JT will cover these three impairment charges in greater detail during his prepared remarks. Turning to Slide 5. The freight environment in the 2025 third quarter was characterized by relatively soft demand from a seasonal perspective. The impact of accumulated inflation remains a drag on the amount of truckload freight generated in relation to consumer spending. Truck capacity continued to be readily available with small pockets of supply/demand equilibrium, and market conditions continue to favor the shipper amidst choppy conditions in the industrial economy, as evidenced by an ISM index below 50 for the entire 2025 third quarter. Considering that backdrop, Landstar's revenue performance was admirable in the 2025 third quarter, with both truck revenue per load and the number of loads hauled via truck essentially equal to the 2024 third quarter. Our balance sheet continues to be very strong, and our capital allocation priorities are unchanged. We will continue to patiently and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck, during the first 9 months of 2025, we deployed approximately $143 million of capital toward buybacks and repurchased approximately 995,000 shares of common stock. And yesterday afternoon, our Board declared a $0.40 dividend payable on December 9 to shareholders of record as of the close of business on November 18. We continue to invest through the cycle in leading technology solutions for the benefit of our network of independent business owners and have allocated a significant amount of capital this year towards refreshing our fleet of trailing equipment, with a particular focus on investment in unsided/platform equipment. Turning to Slide 6 and looking at our network. The scale, systems and support inherent in the Landstar model helped to drive the operating results generated during the 2025 third quarter. JT will get into the details on revenue, loadings and rate per load in a few moments. As noted during previous earnings calls, Landstar's safety first culture is a crucial component of our continued success. Our safety performance is a direct result of the professionalism of the thousands of Landstar BCOs operating safely every day and the agents and employees who work to reinforce the critical importance of safety at Landstar. I'm proud to report an accident frequency rate of 0.60 DOT reportable accidents per million miles during the first 9 months of 2025, well below the last available national average DOT reportable frequency released from the FMCSA for 2021 and slightly better than the company's trailing 5-year average of 0.61. This long run average is an impressive operating metric that speaks to the strength, skill, talent and dedication of our BCOs and provides a point of differentiation our agents are able to highlight in discussions with our freight customers. I'd also like to take a moment to recognize Landstar's nearly 500 million-dollar agents based on our 2024 fiscal year results. Importantly, retention within the million-dollar agent network continues to be extremely high. Turning to Slide 7 on the capacity side. On a year-over-year basis, BCO truck count decreased approximately 5% compared to the end of the 2024 third quarter. Importantly, as noted earlier in my remarks, BCO count increased by 7 trucks on a sequential basis, representing the first increase in sequential quarterly truck count since the 2022 first quarter. BCO turnover continues to be influenced by a persistent relatively low rate per load environment, combined with the significant increase in the cost to maintain and operate a truck today compared to before the pandemic. Directionally, we are pleased to see our trailing 12-month truck turnover rate drop from 34.5% as of the fiscal year-end 2024 to 31.5% at the end of the 2025 third quarter. Through the first 4 weeks of the 2025 fourth fiscal quarter, the number of trucks provided by BCO independent contractors is down fractionally versus the ending truck count of Q3. We were encouraged, however, by a recent visit we had with U.S. Secretary of Transportation Sean Duffy. During our meeting, Matt Miller and I discussed several federal regulatory initiatives and administrative -- administration priorities with the Secretary, with a real focus on issues facing truck drivers and the truck capacity marketplace. We were proud to confirm to Secretary Duffy that Landstar BCOs have had 0 violations of the English language proficiency regulation and no reported issues with nondomiciled CDLs. We do not believe we have thus far experienced significant impact to our business from the federal regulatory agenda, but believe there is a potential longer-term positive impact for our BCO business, in particular. I will now pass the call back to JT to walk you through the 2025 third quarter financials in more detail. James Todd: Thanks, Frank. Turning to Slide 9. As Frank mentioned earlier, overall truck revenue per load was essentially flat in the 2025 third quarter compared to the 2024 third quarter, primarily attributable to a 0.1% increase in revenue per load on both loads hauled by van equipment and unsided/platform equipment, offset by a 5% decrease in LTL revenue per load and a 2.2% decrease in revenue per load on other truck transportation loadings. On a sequential basis, truck revenue per load increased 0.5% in the 2025 third quarter versus the 2025 second quarter, slightly softer than the typical pre-pandemic normal seasonality increase of approximately 1.5%. In comparison to overall truck revenue per load, we consider revenue per mile on loads hauled by BCO trucks a pure reflection of market pricing as it excludes fuel surcharges billed to customers that are paid 100% to the BCO. In the 2025 third quarter, revenue per mile on unsided/platform equipment hauled by BCOs was 6% above the 2024 third quarter, and revenue per mile on van equipment hauled by BCOs was 2% above 2024 third quarter. Delving deeper into seasonal trends, revenue per mile on loads hauled by BCOs on unsided/platform equipment declined 3% from June to July, declined 2% from July to August and increased 3% from August to September. The June to July decline and the July to August decline both underperformed pre-pandemic seasonal trends, while the August to September increase outperformed pre-pandemic historical trends. With respect to loads hauled by BCOs on van equipment, revenue per mile was more stable. Revenue per mile on van equipment hauled by BCOs increased 1% from June to July, underperforming these trends; decreased 1% from July to August, outperforming these trends; and was flat from August to September, underperforming pre-pandemic August to September historical trends. It should be noted that month-to-month seasonal trends on unsided/platform equipment are generally more volatile compared to that of van equipment. This relative volatility is often due to the mix between heavy specialized loads and standard flatbed volume. As Frank alluded to, we've been pleased with the recent performance in our heavy haul service offering. Heavy haul revenue was up an impressive 17% year-over-year in the third quarter, significantly outperforming core truckload revenue. Heavy haul loadings were up approximately 8% year-over-year, and revenue per heavy haul load increased 9% year-over-year. This represented a mixed tailwind to our unsided/platform revenue per load as heavy haul revenue as a percentage of the category increased from approximately 34% during the 2024 third quarter to approximately 38% in the 2025 third quarter. Non-truck transportation service revenue in the 2025 third quarter was 1% or $1 million below the 2024 third quarter. Excluding approximately $15 million in revenue reported during the 2024 third quarter that was associated with the previously disclosed agent fraud matter, non-truck transportation service revenue in the 2025 third quarter increased by approximately $13 million or 16% compared to the 2024 third quarter. Turning to Slide 10. We've provided revenue share by commodity and year-over-year change in revenue by commodity. Transportation Logistics segment revenue was down 0.6% year-over-year on a slight decrease in both loadings and revenue per load compared to the 2024 third quarter. Within our largest commodity category, consumer durables revenue decreased approximately 4% year-over-year on a 3% decrease in volume and a 1% decrease in revenue per load. Aggregate revenue across our top 5 commodity categories, which collectively make up about 69% of our transportation revenue, increased approximately 1% compared to the 2024 third quarter. While Slide 10 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top 5 commodity categories. From the 2024 third quarter to the 2025 third quarter, total loadings of machinery increased 4%, automotive equipment and parts decreased 4%, building products decreased 10% and electrical increased 23%. Additionally, Substitute Line Haul loadings, one of the strongest performers for us during the pandemic and one which varies significantly based on consumer demand, increased 12% from the 2024 third quarter. We experienced strong demand related to AI infrastructure projects, which is reflected in part in both our electrical and machinery commodity categories, while strong demand for our services and support of wind energy projects drove the strength in our energy commodity grouping. As we've mentioned many times before, Landstar is a truck capacity provider to other trucking companies, 3PLs and truck brokers. During periods of tight truck capacity, those other freight transportation providers reach out to Landstar to provide truck capacity more often than during times of more readily available truck capacity. The amount of freight hauled by Landstar on behalf of other truck transportation companies is reflected in almost all of our commodity groupings, including our Substitute Line Haul service offering. Overall, revenue hauled on behalf of other truck transportation companies in the 2025 third quarter was 17% below the 2024 third quarter, a clear indicator that capacity is readily accessible in the marketplace. Revenue hauled on behalf of other truck transportation companies was 10% and 12% of transportation revenue in the 2025 and 2024 third quarters, respectively. Even with the ups and downs in various customer categories, our business remains highly diversified with over 23,000 customers, none of which contributed over 8% of our revenue in the first 9 months of 2025. Turning to Slide 11. In the 2025 third quarter, gross profit was $111.1 million compared to gross profit of $112.7 million in the 2024 third quarter. Gross profit margin was 9.2% of revenue in the 2025 third quarter as compared to gross profit margin of 9.3% in the corresponding period of 2024. In the 2025 third quarter, variable contribution was $170.2 million compared to $171.4 million in the 2024 third quarter. Variable contribution margin was 14.1% of revenue in both the 2025 and 2024 third quarters. Turning to Slide 12. Operating income declined as a percentage of both gross profit and variable contribution, primarily due to the impact of the noncash, nonrecurring impairment charges included in the 2025 third quarter and the impact of the company's fixed cost infrastructure, principally certain components of selling, general and administrative costs in comparison to slightly smaller gross profit and variable contribution basis. The decline in adjusted operating income as a percentage of both gross profit and variable contribution was significantly less pronounced given the size of the noncash impairment charges and was attributable to the impact of increased costs negatively impacting operating income, while both gross profit and variable contribution were approximately 1% below the 2024 period. Other operating costs were $15.6 million in the 2025 third quarter compared to $15.1 million in 2024. This increase was primarily due to increased trailing equipment maintenance costs, partially offset by the favorable resolution of a value-added sales tax matter and a decreased provision for contractor bad debt. Insurance and claims costs were $33 million in the 2025 third quarter compared to $30.4 million in 2024. Total insurance and claims costs were 7.2% of BCO revenue in the 2025 third quarter as compared to 6.7% in the 2024 third quarter. The increase in insurance and claims cost as compared to 2024 was primarily attributable to net unfavorable development of prior year claim estimates and increased severity of both current period auto and cargo claims, partially offset by a decreased frequency of both auto and cargo claims during the 2025 period. During the 2025 and 2024 third quarters, insurance and claims costs included $9.2 million and $4.6 million of net unfavorable adjustment to prior year claim estimates, respectively. Selling, general and administrative costs were $57 million in the 2025 third quarter compared to $51.3 million in the 2024 third quarter. The increase in selling, general and administrative costs were primarily attributable to increased stock-based compensation expense, increased information technology costs and increased employee benefit costs. Stock-based compensation expense was approximately $1.6 million during the 2025 third quarter as compared to a $43,000 reversal of previously recorded stock-based compensation costs during the 2024 third quarter. We continue to manage SG&A in part by closely managing headcount at Landstar. Our total number of employees based in the U.S. and Canada is down approximately 40 since the beginning of 2025 and down approximately 80 since peak headcount. We also continue to focus on driving efficiencies and productivity gains throughout our network. Landstar is actively engaged in rolling out an AI-enabled customer service solution throughout the corporate organization. We also continue to invest in and develop multiple in-flight AI-enabled products within our portfolio of digital tools in support of our network of agents, capacity providers and employees. Depreciation and amortization was $11.5 million in the 2025 third quarter compared to $15.4 million in 2024. This decrease was primarily due to decreased depreciation on software applications. As Frank referenced earlier during this call and as previously disclosed in the current report on Form 8-K filed with the U.S. Securities and Exchange Commission on August 13, 2025, the company conducted a strategic review of our operations during the 2025 third quarter focused on efforts to streamline our core operations and position the company for future growth. In connection with that strategic review, the company recorded noncash, nonrecurring charges in the aggregate for 3 discrete items of approximately $30.1 million or $0.66 per basic and diluted share. First, in connection with the decision to actively market Landstar Metro for sale, the company recorded noncash impairment charges of approximately $16.1 million or $0.35 per basic and diluted share on the company's 2025 third quarter balance sheet based on the estimated fair value less cost to sell this business. The second charge noted in the earnings release related to the decision to select the Landstar TMS as the company's primary system for truckload brokerage services. And in conjunction with that decision, wind down the Blue TMS, an alternative transportation management system in use by one of the company's operating subsidiaries focused on the truckload brokerage contract services business. The resulting impairment charge representing the remaining net book value of the Blue TMS was $9 million or $0.20 per basic and diluted share. Third and finally, the company recorded a $5 million impairment charge relating to a noncontrolling equity investment in a privately held technology startup company. This charge represented the total carrying value of this investment on the company's second quarter 2025 balance sheet date. The effective income tax rate was 25.8% in the 2025 third quarter compared to an effective income tax rate of 22.2% in the 2024 third quarter. The increase in the effective income tax rate was primarily due to: one, the favorable impact of certain federal tax credits during the 2024 period; and two, the deleveraging effect of lower pretax profits, mostly due to the just discussed 3 noncash impairment items during the 2025 period with a similar population of permanent items in both the 2025 and 2024 periods. Turning to Slide 13 and looking at our balance sheet. We ended the quarter with cash and short-term investments of $434 million. Cash flow from operations for the first 9 months of 2025 was $152 million, and cash capital expenditures were $8 million. The company continues to return significant amounts of capital back to stockholders, with $111 million of dividends paid and approximately $143 million of share repurchases during the first 9 months of 2025. The strength of our balance sheet is a testament to the cash-generating capabilities of the Landstar model. Back to you, Frank. Frank Lonegro: Thanks, JT. Given the highly fluid freight transportation backdrop and an uncertain political and macroeconomic environment, as well as challenging industry trends with respect to insurance and claims costs, the company will be providing fourth quarter revenue commentary rather than formal guidance. Turning to Slide 15. The number of loads hauled via truck in October was approximately 3% below October 2024 on a dispatch basis, and revenue per load in October was approximately equal to 2024 on a process basis. As a result, we view October's truck volumes as modestly below normal seasonality and truck revenue per load as lagging slightly behind normal seasonality. Looking at historical seasonality from Q3 to Q4, pre-pandemic patterns would normally yield both a 1% increase in the number of loads hauled via truck and truck revenue per load yielding a slightly higher top line sequentially. As noted above, both fiscal October truck volumes and revenue per truck trended slightly below normal seasonality. With respect to variable contribution margin, the company typically experiences a 20 to 30 basis point compression in variable contribution margin from the third quarter to the fourth quarter, typically driven by a combination of decreased BCO utilization and compressing net revenue spreads on our truck brokerage business associated with peak season. As noted in our 10-Q, which we'll file a little later this afternoon, a BCO independent contractor with a subsidiary of the company was involved in a tragic vehicular accident earlier this month during the 2025 fourth quarter. Importantly, Landstar was not involved in the initial collision of this multistage incident. This incident is still in the process of being investigated, but could have a material adverse impact on insurance and claims cost in the 2025 fourth quarter. With that, operator, we'd like to open the line for questions. Operator: [Operator Instructions] Our first question is from Reed Seay from Stephens Incorporated. Reed Seay: I want to start off with what you're seeing in the broader truckload market. There's been a lot of noise on some of the temporary tightening we've seen and maybe some subsequent softening. So any commentary you have on the broader market would be greatly appreciated on the capacity exits in particular, if you have any insights there? Frank Lonegro: Yes. I mean, I think we're pleased with what we're seeing on the BCO side. Again, given the first sequential increase in our BCO count since the beginning of 2022, that feels pretty good. We've been trending relatively flat there, pretty close to even keel, but actually seeing a positive sign there was really, really helpful for us, if for nothing else other than just morale, I mean just getting 7 additional trucks. I know Matt and his team are fighting every day to keep the folks that we have and to continue to look for ways to onboard high-quality drivers. I think there is a fair amount of conversation that's happening about the regulatory landscape. And obviously, you're seeing headlines of upwards of 200,000 nondomiciled CDL holders out there. We're seeing ELP getting enforced from time to time in various states. So I would tell you that the impact on the capacity has got to be more than 0, but I also think it's going to come out over a little bit longer period of time than just a matter of weeks or months. Reed Seay: Got it. Makes a lot of sense. And touching on kind of the BCO count decline slowing here in 3Q. It is encouraging to see kind of the truck count increase a little bit, but do you have any visibility to when you can return to BCO count growth here maybe in the fourth quarter or in 2026? Frank Lonegro: Yes. So again, on the third quarter relative to the end of the second quarter, we actually did increase the count ever so slightly at 7 BCOs positive, so we were happy to see that. We're down just a little bit here in the October to date in the fourth quarter. I'll let Matt give you some commentary around what we normally experience this time of the year. But what I can tell you is that the things that Matt and his team are working on are 100% geared toward making structural changes within what we're doing every day to both maintain the existing BCOs that we have and to onboard new folks. Matt? Matt Dannegger: Thanks, Frank, and thanks for the question. So given the rate backdrop, we're pleased with having the best gross truck adds [ over ] in 8 quarters. During the third quarter, we saw gross truck adds up more than 15% compared to the third quarter of 2024. And one of those things -- we can't control rate, but the team is focused on what we can control, which is how we recruit, how we qualify, how we onboard, driving efficiencies and improving that conversion rate of those expressing interest in coming on to Landstar. Likewise, there's two sides of the coin on the retention side. We saw the seventh consecutive quarter of turnover improvement. High watermark was 41%, that was the fourth quarter of 2023. And we just got down to 31.5% as of the end of the third quarter, really approaching our long-term average of 29%. All that being said, this really hinges on rate, right? If we saw an inflection in rate and rate ticking higher, I could see us finishing the fourth quarter higher than where we finished the third quarter, but that's going to be rate dependent. Reed Seay: Got it. And then if I could squeeze in just a real quick one here. The approved and active carriers that declined from 2Q to 3Q, is that -- could that impact your ability to affect -- to more favorably buy freight, just as you have a smaller pool to choose from? Matt Dannegger: No. We don't really see that impacting our ability to source and satisfy demand. We're really being selective here. And we talked about that a little bit in the second quarter comments. We're choosing to be a little bit more selective on who we choose to partner with, a pretty big backdrop as it relates to fraud out there in the space. And so throughout the course of the year, those numbers have been coming down. Frank Lonegro: And it was a -- Reed, if we're all skeptical around the capacity provider or there's something in the background that we can't verify, we're erring on the side of caution given the fraud backdrop. James Todd: And Reed, I would just only add on to that, some of the pruning that took place in the third quarter around that carrier base during that -- during the third quarter, we saw our net revenue margin on brokerage business actually widen out 78 basis points. So nothing from a capacity procurement side that gives us any concern where we sit today. Operator: Thank you. Next one is from Jonathan Chappell from Evercore. Jonathan Chappell: Thank you. Good afternoon, everyone. So Jim or Frank, you guys can handle this. So I want to go back to the first question. Jim said in his prepared remarks, revenue hauled for other transportation companies down 17%, a clear indicator of spare capacity. Then your revenue per load, October flat year-over-year, slightly below typical seasonal trends. Can you help us align both of those comments with some of the sources out there that have been talking about truckload spot rates spiking basically throughout the month of October? And are you just not seeing that in your particular routes? Or is maybe that a narrative that's kind of more broadly off base? James Todd: Jon, so I'll tell you the observations in the third quarter, and all three kind of move the same way. So we talked about how our revenue per load increased 50 basis points and typically goes up 150 basis points. So we saw sub-seasonal pricing. We saw our net revenue margin on brokerage business widen out sequentially, and we saw tender rejections actually dropped down a little bit in the third quarter when we saw an uptick, 1Q to 2Q. As we sit here today, it's day 2 of October close, I anticipate our October pricing is going to be about flat to September. And if you go back 15 years, historically, we get about a 60 basis point uptick, September to October. So it's not that it's significantly lagging, but we are not seeing -- if you're seeing public board data flash that spot rates are ticking up in October, we are not seeing that in our data thus far. Perhaps a bit of a Landstar lag that we've talked about in the past with agent behavior, not wanting to be the first one into their customers with the rate increase, but nothing we see in the numbers so far. Jonathan Chappell: Okay. And then also just -- anything you'd call out? I know you're not giving guidance, but just anything for the fourth quarter that would be important to note on the expense side? And also, how do we think about the bridge to incentive comp in '26 versus '25? James Todd: Yes, Jon. So on the expense side, insurance is always noisy and a difficult line to predict in a 90-day period. You heard Frank's prepared remarks about an early accident in October. We just went through an actuary review on the third quarter balance sheet date and had to true-up some prior year reserve estimates. So that one is a little noisy. On the other operating cost line, we held a BCO appreciation event. It's a little over $1 million. That will be a tailwind, 3Q to 4Q. And then finally, on the incentive comp and stock comp, we're accruing to about a $10 million charge, full fiscal year 2025. And if that kind of resets in a onetime number, Jon, in '26, that'd be about $11 million headwind. Operator: Next one is from Scott Group with Wolfe Research. Scott Group: So I want to understand maybe some of the October volume trends. Do you have any way of isolating sort of what -- how government-related volumes are doing? I guess, what I'm trying to figure out is, I think everyone is talking about sort of sub-seasonal volume in October. Is this a government shutdown phenomenon that you can see it pronounced in this one part of your business? Or is it broader? Frank Lonegro: It's a little bit of both, Scott. So I'll start and let Jim Applegate chime in. I mean, it's a combination of the government shutdown, which, as you know, we're a fairly significant hauler for various federal agencies. So we're certain that there's some there. The automotive business continues to be in a tough spot. Interest rates aren't helping the housing business either. You heard Matt Dannegger on the prior call talk about our peak expectations, and he can certainly chime in as well. So I mean, I think we're seeing what we have been seeing in the past couple of quarters. Perhaps adding to that is the government shutdown. James Applegate: Yes. And just around the government shutdown, we're not seeing it in our actual numbers yet just because billings are kind of catching up, but we are noticing in the dispatch loads, we are down over 30% so far within October from a dispatch standpoint as it relates to government loads, and we expect that to continue to trend down. However, it's temporary. You'll see it trend down. When the government does pop back up, you'll see a bump back up, and we'll gain a lot of that back. And actually, from a disruption standpoint, we probably stand long term to make out a little bit better than some of the other traditional asset-based providers just based on the flexibility of our network. So we're watching it closely. We do see it as something that's going to be a temporary blip, but we do see opportunity on the back end to catch up. Frank Lonegro: Matt, do you want to comment at all on the peak season? Matthew Miller: Sure. Thanks, Frank. JT talked a little bit ago about our Substitute Line Haul numbers being down this quarter. When we talk at peak at Landstar, we're really talking about a handful of customers in that Sub Line Haul sector. And then going back the last couple of years, we've just not seen that, coming off of those post-pandemic highs. So the last couple of years has been a little bit muted. A lot of the transition and people going back to the stores has made a change. Retailers and these e-commerce finding different ways to manage their transportation. You got the tariffs this year, which -- maybe there's a little pull forward there, maybe some disruption on the back end here. So just not seeing the amount of volume that we saw from our traditional partners in the past, just because they're not getting the same amount of volumes that they've had in the past. So again, I expect a muted peak season this year, probably similar to what we saw last year and maybe even down a little bit from that. Frank Lonegro: Yes, Scott, you saw UPS' print. So that will give you some indication of where they are on their peak business anyway to the quarter. And then I look at our numbers in October relative to the backdrop, and I'd say we've performed pretty well in the grand scheme of things. Scott Group: Yes. Okay. And then on the driver side with all these regulations -- so I get what you're saying, you don't have any BCO exposure here. But how about on the brokerage side of your business? Do you have a sense of what percentage of the broker carriers you're working with have exposure here? Frank Lonegro: It's hard to get a precise type of exposure. I do know -- and Matt can chime in here in a second. I do know that our vetting criteria are pretty significant. So we also have agents that are always directly conversing with those carriers. So they have to be able to do business with us. So we have a, I'd say, kind of a high probability that there's not going to be significant impact there. What's interesting is the BCO population should stay relatively stable and increase in that type of an environment and could actually see some improved utilization there as loads present themselves that maybe in the past, were handled by third-party broker carriers who might get impacted by either ELP or nondomiciled CDL. Matt Dannegger: Yes. And I appreciate the question. The FMCSA on the nondomiciled, they're probably the best place to go for data at this point because it's so recent. That emergency action just happened in September. So we're a little bit more than a month beyond, but they put out 200,000 as the potential estimated number of those impacted on the nondomiciled. And then since June 25, when ELP enforcement started to ramp, it started slow. We've seen more states adopt, even 2 in the past 2 weeks have begun training law enforcement on it. So far since June, 5,900 unique out-of-service violations. So a ramp is still taking place there, but I don't expect a pop. Frank Lonegro: And Scott, I have not heard -- and I think I would. I have not heard any agents say I had to either give a load back or I got a load that was stopped because I had a third-party broker carrier that was taken out of service. So it's an anecdotal sample size, but we haven't heard anything certainly around this table of that. Scott Group: And then ultimately, what I'm trying to get at is like, you guys tend to be pretty straight shooters and not like overly promotional. Like, do you think this is a big deal or not? Like, is this going to be -- is this like the big sort of catalyst for the cycle we've been waiting for? Or ultimately, do we just need demand, and that's going to be the key? Like, what are you -- how are you thinking about just the catalyst to get us going? Frank Lonegro: So the point that I would make here is, if -- and I'll put a big if on it -- if DOT is correct, and we're talking about 194,000 owner operators over the next year or 2, that would be a pretty big deal relative to that population. And I'd like to think that our BCO population is going to be stable and grow in the backdrop of a tighter supply side environment there. So I can certainly paint you a nice picture there, but a lot of that's just going to depend on the enforcement. And the enforcement doesn't really happen at the federal level. It happens at the state level, and you can see the politics around there and some of the banter back and forth between, for example, DOT in the State of California. So like a lot of that's got to happen on the ground in the states. It's not federal law enforcement that's involved in it. It's all the states. Operator: Next one is with Ravi Shanker from Morgan Stanley. Unknown Analyst: This is Madison on for Ravi. Just one quick one on the back of Scott's question. I know you mentioned some impact on the dispatch loads for the government shutdown. I was just wondering if you could talk a bit about how quickly that business can ramp back up once the government reopens? And if -- I know you talked about a catch-up coming there if that comes probably within fourth quarter or if it gets pushed out more into 2026? James Applegate: Yes. No, good question. Really, it's about timing and how long this goes on for. And it's just a matter of the government is getting the money to go ahead and ship. And it's going to be very quickly after the government reopens where you see that pipeline open back up again as well, too. So again, we're not looking at it as something that's kind of detrimental to what we're going to see from a volume standpoint. Long term, we're seeing it as something that's kind of a short-term blip that we're going to get through, and I think there will be some opportunity on the back end. Frank Lonegro: I think it's going to be measured in days and weeks, not months or quarters. Unknown Analyst: Got it. Okay. That's helpful. And then a little bit more of a bigger picture one. I know there's been a lot of talk in the market about AI usage and brokerage. I was just wondering if you guys can give a little bit of color about what Landstar is doing there and how you kind of think you differentiate versus peers? Frank Lonegro: Yes. So the model is obviously a differentiator in and of itself. We've got three different areas that we're focused on. We're focused on AI to assist our agents. So in the agency office, suggested pricing would be an example of that. We're also working on BCO retention. So how do we make sure that we know when a BCO might be sort of sending us the quiet signals that they're maybe not long for the company. So it could be reduced number of loads. It could be a change in the type of freight. It should be the agents that they're dealing with, et cetera. So we're looking at things in that space. And then we're obviously looking at it inside the building. We are a service provider in many respects, where our corporate support people are designed to serve the BCOs in the agent community. And if they're able to do that more effectively and more efficiently in how they are able to acquire knowledge in a particular question set. So we're working on a whole call center technology and suite of AI tools there that are going to help us be more efficient and effective when we deal with both BCOs and agents. Operator: Thank you. Next question is from Bruce Chan with Stifel. J. Bruce Chan: Yes. Thanks, operator, and good afternoon, gents. Maybe just a follow-up question on the technology side. You mentioned synthesizing the TMS onto 1 platform. Wondering if there are any identifiable cost savings that come out of that project or program? And then similarly, on the AI side, any margin impact that you expect or that you're targeting internally from the rollout of these tools? Frank Lonegro: Yes. I think on the first one -- and I'll let sort of JT chime in on the exact. But obviously, we're not going to have 2 TMSs that we're continuing to develop either under capital or operating expense, and he can walk you through the depreciation impacts on that one. But really just getting onto 1 platform was the important thing there. It will also give our folks within -- which is a very small area, but within our Blue organization to be working off of the exact same TMS that our agents are working off of, which I think is going to be helpful on both sides of that equation. On AI, we have not discussed any or disclosed any specific targets. But the increase in service levels is going to be our first area of focus, and then we'll look for opportunities on the efficiency side. JT? James Todd: Yes. Thanks, Frank. Bruce, on the Blue TMS, it was about a $750,000 depreciation tailwind already captured in the third quarter. So 3Q to 4Q, I expect no impact. Operator: Next question is from Brandon Oglenski with Barclays. Brandon Oglenski: I'll keep this a little bit longer term. And I know you don't really want to provide guidance here, but net income margins here -- sorry, net operating margins pretty much near the low, and I think that's very understandable, just given where the market is. But how do you think about the ability to get back to maybe the pre-pandemic range, where you were pretty consistently, 40% to 50% on net operating margin? Frank Lonegro: Yes, Brandon, good to hear your voice. Haven't spoken to you in a while. But look, I think the combination of increased revenue, which allows us to spread our fixed cost, the more that we can get in rate, obviously, that's going to be our friend on OM. We've certainly got to turn the corner on insurance and claims and things of that nature. And then we've got to get the efficiencies out of the technology. Whether those happen inside our building or they happen in the agency offices and therefore translate into higher sales productivity within the agent community, that's the right outcome. And then from a BCO perspective, the more loads that are hauled via BCOs is better from a BC perspective for us as well. So we're looking forward to touching all of those things through the tools and the AI that we're putting out there. James Todd: Yes. Thanks, Frank. And Brandon, I would certainly piggyback to Frank's comment on insurance. I would point you in 2019, we had about 10,500 BCOs leased on with this, and we had an $80 million insurance line that fiscal year. You take a look at where we were in the first 9 months of 2025 and run rate, and we've got about 8,600 BCOs in the fleet. We are safer today or as safe today as we were in 2019. It's this persistent claim cost inflation that's not only impacting Landstar, it's impacting all the truckers. I think you're starting to see some chunkier exits in the trucking space. And eventually, the folks are going to have to recapture that in the top line in the form of higher rates. We are clearly doing what we can, as I referenced in the prepared remarks around our headcount is down 80 from the peak. It's down 40 since the beginning of the year. We were talking about a company that's got less than 1,300 heads supporting 8,600 owner operators and 1,000 agents and taking care of 23,000-plus customers. So we'll continue to work on the controllables. Operator: Next one is from Jason Seidl from TD Cowen. Elliot Alper: This is Elliot Alper on for Jason Seidl. How are you guys thinking about capacity planning over the next, call it, a year as these nondomiciled CDLs continue to roll off? Or is it just too early to plan for? And then on the same note, are there conversations with your insurers or underwriting partners taking place on any changes to risk or risk premiums associated with any of these nondomiciled regulations? Frank Lonegro: Yes. Good question. In terms of the nondomiciled, as I mentioned to you a moment ago, we don't have it. Our business model where we -- or has not certified across our entire BCO fleet. Or Jim Applegate talked about the government business that we have. I mean, there certainly are lots of gates or rigor that we put people through to make sure that we're able to support the customers that we have in the way that they need to be supported. So our insurers are going to ask us those questions, as they should. And our answer is going to be we don't have any exposure there. In terms of capacity planning, I mean, our job is to qualify and onboard as many BCOs as possible and to try to retain all of the BCOs that are currently leased on to us. So you're going to see us continue to focus really, really hard on growing the BCO fleet. In terms of capacity itself, we have a lot of different ways that we go about recruiting and retaining appropriate third-party capacity providers. Again, as I mentioned earlier, it's really important that they can support our customers with the appropriate level of safety, security and service that our BCOs do. And so we're going to err on the side of caution when it comes to those three things. And so if we have any thought that they're not going to be able to converse in English or they're holding a nondomiciled CDL, then we're going to -- honestly, we're going to vet those out. The quality is what we is what we sell here. We don't transact in price. You can see that just based on our rate relative to where the DAT board rates are. We're at a different premium level, and we want to maintain that quality. Elliot Alper: Okay. Great. And then just following up. So I understand October is trending below seasonality, and helpful commentary around peak expectations. But can you discuss how the load and revenue per load comparisons stack up as we move through the quarter? Just trying to gauge if comps get tougher off October. James Todd: Yes. From my recollection, I don't have 4Qs last year. Bear with me 1 second. So it looks like last year, fourth quarter volumes dropped off 190 basis points sequentially, and it looks like rate was up 100 basis points sequential. So rate was basically right in line with normal seasonality. It looks like we're starting out of the gate here in October flattish, and October rates typically gap up about 60 basis points. So I would tell you, we're -- achieving that 100 will take a strong lift here in fiscal November and fiscal December. From an October standpoint, you heard Applegate talk about government and Frank talked about some of the parcel carriers and some of the automotive. We're running, I think, down 4.5% loads per workday in October, and we typically drop off about 2% loads per workday, October versus September. So we'll need a little catch-up baseball there as well. Operator: Our last question is from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: Maybe circling back to the part of Scott's question on the supply and demand environment, but focusing on the demand environment. Clearly, it's been very weak for some time, and we can all look at the data, including PMIs and the likes. What -- but I guess overall, still a relatively healthy macro depending on what you look at it. So what do you believe we need to see in terms of the demand environment ultimately improving? Are you hearing any early optimism about this in 2026? And then maybe also, anything you can call out from an end market exposure where you're seeing maybe some underlying strength or maybe weaknesses too? Frank Lonegro: Stephanie, so let me try to take a stab at it. What would we need to see in order for the demand environment to improve? I think first and foremost, you need to have stable trade policy and have some of the relations between U.S., China, U.S., Canada, U.S., Mexico. The more normalization we can see there, I think the better for people deploying capital, which is ultimately what it comes down to. I also think the consumer, if they were to shift a little bit more back to goods rather than services, that would certainly be helpful. I think the Big Beautiful Bill and the unlocked potential there, which is certainly going to create the possibility of additional cash flow in companies so they're certainly going to have the capital to deploy. But again, I think you need normalization of trade relations to get to a better spot to allow people to do that. In terms of interest rates and Fed policy, we'll all be ears open tomorrow to see what the Fed is going to do. And ultimately, what's the impact on medium- and longer-term rates because that would help out on the automotive side and on the housing side. In terms of bright spots, we clearly have seen a significant uptick in our unsided business and in our heavy haul business. And so continuing to see that play out over time would certainly be helpful from a Landstar perspective. The AI data center, commercial AC associated with that, the power gen, like all of the things that are in that AI ecosystem, we have seen the benefit of. And then I think we've seen a little bit of an uptick in the quarter relative to prior quarters in the U.S./Mexico cross-border business, which has been down for us for several quarters, and we're actually seeing it improve. So that feels pretty good. So I can paint you a good picture for next year, but we just haven't seen it. Right now, it's on paper. I haven't been able to see anything that would tell you that those are actually what's going to transpire when we flip the calendar to January 1. Operator: Thank you. At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks. Frank Lonegro: Thank you, Elmer. In closing, while the freight environment remains challenging, we believe we have seen some positive signals. We were encouraged by the modest sequential pricing improvement we experienced during the third quarter. And with a choppy industrial economic backdrop, we were extremely pleased with the 17% year-over-year revenue increase in our heavy haul service offering. We also believe the potential impact of various federal regulatory developments could provide some positive lift for our BCO business, in particular. And regardless of the economic environment, the resiliency of the Landstar variable cost business model continues to generate significant free cash flow. Landstar has always been a cyclical growth company, and we are well positioned to navigate the coming months as we continue to look forward to higher highs when the freight market turns our way. Thank you for joining us this afternoon. We look forward to speaking with you again on our 2025 fourth quarter earnings conference call in late January. Thank you. Operator: Thank you for joining the conference call today. Have a good evening. Please disconnect your lines at this time. Thank you very much.
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Cody McAlester of ICR. Cody McAlester: Thank you, and thanks to everyone joining us today. Before we begin, please note that today's session, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to today's press release and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2024. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason Brooks: Thank you, Cody. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks, we'll take your questions. Overall, we are pleased with our third quarter results in light of what remains a difficult and dynamic operating environment. Sales for the quarter increased 7%. Gross margins were up 210 basis points, and we delivered adjusted diluted EPS of $1.03, a 34% increases versus our Q3 last year. Our teams have done a great job at navigating higher tariffs imposed by the U.S. on most trade partners, especially countries that account for the majority of global footwear production. We've moved quickly to diversify our sourcing base, including adding new Asian-based manufacturing partners outside of China and Vietnam as well as leveraging our own facilities in the Dominican Republic and Puerto Rico. These actions, along with price increases and strong demand for our brands should help mitigate the impact of the higher tariffs as they start to hit our P&L more meaningfully in the fourth quarter and next year. We are still ramping up production with our new partners, which has resulted in some delayed shipments. However, we are confident that we'll start 2026 with our supply chain in a position of full capture demand. Tom will share more about our sourcing structure later in the call, but at first, I'll review the drivers of our third quarter performance by brand. Starting with XTRATUF. The brand continued its exceptional momentum, delivering strong growth that significantly outpaced last year. U.S. wholesale stood out in the quarter, increasing double digits, while xtratuf.com also posted double-digit growth compared with Q3 last year. From a product standpoint, our legacy 6-inch ankle deck boot, particularly the duck camo version was once again the top performer and within the category, ADB Sports was the best-performing collection. Camo continues to be in high demand across our men's, women's and kids offerings, demonstrating strong consumer performance for these designs. We were encouraged that the strong sell-through was broad-based with notable gains coming from big box sporting goods stores, traditional coastal retailers, pure-play e-commerce retailers and online marketplace. We are excited about the XTRATUF prospects for the fourth quarter and with the launch of our cold weather collection, a Sesame Street collaboration for holiday at retail and online, plus several exciting xtratuf.com exclusives. Turning to Muck. Coming off one of the strongest Q2 in years, the brand continued its positive trajectory in Q3 despite less favorable weather compared with the year ago period. Improved inventory positions, particularly in best-selling chore styles, combined with initial deliveries of our successful Bone Collector collaboration in the hunting channel fueled double-digit growth in our U.S. wholesale business and meaningfully higher in our marketplace volumes. Also adding Mucks performance and brand awareness was a highly successful feature on Good Morning America's Deals & Steals event over Labor Day weekend. Our women's business continues to be strong performance, led by the Muckster II Chicken Print series, while men's also had notable success in several regions. In terms of the channels, new product expansion fueled growth in the hardware stores, while our Farm and Ranch segment saw solid growth with multiple key retailers. As we anticipated, Durango sales were down year-over-year in Q3 as some key accounts pulled forward orders into Q2 ahead of the planned price increase we took to help offset higher tariffs. This was particularly offset by the consistent and steady growth Durango has experienced throughout this year in our Farm and Ranch accounts. Product highlights include Durango Shyloh series, which continues to gain traction with consumers, thanks to the great styling, great quality and attractive price points. Our Legacy [indiscernible] series continue to sell through well at retail and our on-trend women fashion collection have proven extremely popular leading into increased placement for these series. Georgia Boot delivered solid growth in the quarter, led by double-digit gains with major accounts and strong results in our field account business. This strength was driven by our largest Farm and Ranch accounts and e-commerce-only partners, supporting by successful new product launches and legacy bestsellers. New product launches were led by our Carbon Flex Wedge, a technology wedge with improved flexibility that books so successfully, we are launching a version in November featuring the BOA lace and closure system. Field business followed similar patterns with new products, driving increases across most regions, compensation for mixed retail conditions in some areas. Rocky Work, Outdoor and Western in total was up versus last year, led by gains in the work and outdoor categories. Work was driven by new or expanding distribution across the country, including a new work program with a large Farm and Ranch retailer across the mountain and Northwest region, led by several styles with the BOA lacing and closure system. Rocky Work also continued to sell well in key national safety footwear distributors plus multiple digital platforms. In Outdoor, it was improved distribution nationwide with new and larger programs at key Farm and Ranch retailers and sporting good partners that fueled the year-over-year improvement. Within these channels, our new Wildcat series of hunting outdoor boots delivered great value at core price points, while premium BearClaw outdoor boots reinforced Rocky's leadership in performance footwear. While Rocky Western sales declined year-over-year, our heightened focus on Work Western products, particularly our Iron Skull Safety Toe Western pull-on is driving gains with several regional and national brick-and-mortars and online. Rocky commercial military and duty posted its second consecutive quarter of improved results. Commercial military sales were up versus last year and exceeded plan as our strategic inventory management enabled us to maintain higher fill rates throughout the quarter. Duty also outperformed expectations, driven by strong gains with our largest U.S. Postal Service customer and continued double-digit growth in our Fire Boot program. In retail, our BI B2B business grew high single digits versus Q3 last year. We continue making operational improvements to our custom fit website and launched our new partnership with [indiscernible] Eyewear for prescription safety eyewear through our managed PPE program. Customer spending remained consistent with good subsidy utilization and new customer acquisition remains strong, more than offsetting impacts from supply chain and tariff uncertainty. Looking ahead, our view in the remainder of the year is based on the momentum we are currently experiencing with our brands, especially XTRATUF, balanced with the operate level of cautious about the broader consumer environment and the anticipated impact on the fourth quarter gross margins from the higher tariffs. While there is still uncertainty with respect to the outcome of certain trade negotiations, we feel good about the changes we've made to our supply chain, in particular, the increased flexibility we have to shift sourcing and production if needed. And therefore, we are anticipating that the headwinds from higher tariffs implemented this year will abate midway through 2026. With that, I will turn the call over to Tom. Tom? Thomas Robertson: Thank you, Jason. We are pleased with the improvement in results we delivered year-over-year, especially given the changes in our sourcing structure we've undertaken recently to help mitigate the impact of higher tariffs combined with what continues to be a choppy consumer environment. For the third quarter, reported net sales increased 7% to $122.5 million. By segment, wholesale net sales increased 6.1% to $89.1 million. Retail net sales increased 10.3% to $29.5 million and contract manufacturing net sales increased 4.1% to $3.9 million. Turning to gross profit. For the third quarter, gross profit was $49.3 million or 40.2% of net sales compared to $43.6 million or 38.1% of net sales in the same period last year. The 210 basis point improvement in gross margin was driven by higher wholesale and retail margins, which were fueled by brand mix and select price increases and higher percentage of retail sales, which carry higher gross margins than the wholesale and contract manufacturing segments. These gains were partially offset by 160 basis points of pressure from higher tariffs as product brought into the U.S. post Liberation Day in April has begun flowing through the P&L. Reported gross margins by segment were as follows: wholesale, up 200 basis points to 39.5%. Retail, up 320 basis points to 46.8% and contract manufacturing margins were 6.9%. Operating expenses were $37.6 million or 30.6% of net sales compared to $33.6 million or 29.3% of net sales last year. Excluding $700,000 of acquisition-related amortization in both periods, adjusted operating expenses were $36.8 million and $32.9 million for the third quarter of 2025 and 2024, respectively. As a percentage of net sales, adjusted operating expenses were 30.1% in the third quarter of 2025 compared with 28.7% in the year ago period. The increase in operating expenses was driven primarily by higher outbound logistics costs and selling costs associated with the increase in our direct-to-consumer business as well as an increase in our marketing investments compared with the year ago period. Income from operations increased 16.5% to $11.7 million or 9.6% of net sales compared to 10.1% [Technical Difficulty] of sales last year. On an adjusted basis, income from operations was $12.4 million or 10.1% of net sales compared to $10.8 million or 9.4% of net sales a year ago. For the third quarter of this year, interest expense was $2.6 million compared with $3.3 million last year. The decrease in interest expense was driven by lower debt levels as well as lower interest rates. On a GAAP basis, net income was $7.2 million or $0.96 per diluted share compared to net income of $5.3 million or $0.70 per diluted share in the third quarter of 2024. Adjusted net income was $7.8 million or $1.03 per diluted share compared with $5.8 million or $0.77 per diluted share a year ago. Turning to our balance sheet. At the end of the third quarter, cash and cash equivalents were $3.3 million and our total debt net of unamortized debt issuance costs totaled $139 million, a decrease of 7.5% since September 30 of last year. Inventories at the end of the third quarter were $193.6 million, up $21.8 million or 12.7% compared to $171.8 million a year ago. Of the approximate $22 million increase in inventories year-over-year, about $17 million or nearly 80% is attributable to higher tariffs, a small increase in pairs on hand and the remainder in raw materials as we are now producing more footwear in-house. Of the approximate $17 million from incremental tariffs on our balance sheet, roughly $10 million will flow through our P&L in the fourth quarter with the rest hitting in the first half of 2026. As we've touched on, we have taken actions this year to mitigate the impact of higher tariffs that started to pressure margins in Q3 and will intensify for the next few quarters, offset by price increases. We are also -- we also made significant changes to our sourcing model. These include shifting more production to our own facilities in the Dominican Republic and Puerto Rico and diversifying the geographic footprint of our third-party manufacturing to reduce our exposure in China. For 2026, we project that we'll manufacture approximately 50% of our inventory needs in-house, up from approximately 30% in 2025. Approximately 20% will be produced in China. However, only half of that or 10% of the total will be imported into the United States. The other 30% will be split between partners in Vietnam, Cambodia, Dominican Republic and India. We anticipate our actions will allow us to return gross margins to the recent run rate in the high-30s, low-40s percent range in the second half of next year as we move through the incremental tariffs currently on the balance sheet. With respect to our outlook, based on the third quarter performance and current view of the remainder of this year, we are reiterating our prior guidance for 2025. We still expect revenue to increase between 4% to 5% compared to 2024 levels with full year gross margins down approximately 70 basis points to between 38% and 39%, consistent with our previous outlook. SG&A is still expected to be up in dollars from an increase in our marketing spend to support growth, especially during the key holiday season and higher logistics costs from the projected increase in retail sales with modest expense leverage versus last year on higher sales. Finally, we still expect 2025 EPS to increase approximately 10% over last year's $2.54. That concludes the prepared remarks. Operator, we are now ready for questions. Operator: [Operator Instructions] Our first question is from Janine Stichter with BTIG. Janine Hoffman Stichter: I just want to start out with the consumer. You continue to mention a challenging environment and a dynamic environment. I'm just wondering if you could just offer your thoughts on how you're thinking about the consumer now maybe versus 3 months ago and what that -- how that's embedded into your forecast? Jason Brooks: Yes. Thanks, Janine. Great question. This has been probably one of the most dynamic years in my career with trying to understand the consumer. We get reports back from many of our retail partners and our products are still selling well. But I think there is still some cautious -- people being cautious about when and where they're going to spend those dollars and what they're going to spend those dollars on. So I think we are just trying to navigate it the best we can, try to provide the best inventory positions we can without being too crazy to support our retail partners and our own websites. But I think there's just -- it's just a little unsettling out there. And if we could have a consistent consumer report, I think it would be better, but it just -- it kind of goes up and down right now. So we're just being a little bit cautious. Janine Hoffman Stichter: Totally fair. All right. And then a couple more for me. Just you mentioned some delayed sales due to supply chain. Is there any way to quantify how much that was? And then as you think about tariffs and offsetting, it sounds like all of it from a gross margin rate perspective in the back half of next year. Maybe just walk us through what that embeds. Is there any additional pricing that you feel like you need to take to get there? Or is that all just diversification of sourcing? Thomas Robertson: Yes. I'll take this one, Janine. I think, look, at the end of every quarter, we always have a little bit of missing inventory and a little bit we left on the table, as we're chasing certain styles. This quarter, with all the sourcing changes, particularly with moving products to India, Cambodia and Vietnam, we saw anywhere from a 3-week to 30-day delay getting those products. And so that number was a little bit larger than usual, probably a few million dollars being transparent. And then I think as we look to next year, I think the second part of the question from a margin perspective, diversifying is certainly going to help. But I think the biggest driver in helping margins next year is going to be us bringing more and more product in-house. And so that will help leverage our margins as we go into 2026. Operator: Our next question is from Jonathan Komp with Baird. Jonathan Komp: Can I just ask when you look at the third quarter results, how things played out generally versus what you expected since I know you don't guide quarterly, necessarily. And when you look at the indicators you watch for your business, could you maybe remind us what visibility you have on sell-throughs in the marketplace, either your or your partners' business? And just what you've observed more recently in terms of some of the trends you've seen? Thomas Robertson: Yes, I can start here, and then Jason can certainly weigh in. I mean we have visibility into some of our larger national accounts. And there's been nothing that's been real concerning from a sell-through and retail perspective. I think Jason was touching on a little bit of just retailer behavior maybe earlier. But to that point, our marketplace business continues to be very strong compared to last year, up strong double digits. Our e-commerce business, which I kind of use as our closest pulse, was a little sluggish in the end of July and early August when we were transitioning over to our new platform. But we saw that recover nicely at the end of August and then September was the strongest month for the quarter from an e-commerce perspective. So we're not seeing anything too troubling out there from a consumer standpoint. Jason Brooks: Jon, I would just add, I think at the beginning of the question, you asked about our expectations about how Q3 came in. And I think we are pretty pleased with where we're at. I obviously would have loved to hit that top line number, but I think because of the transitions of the factories and what we had to do there, it made things a little bit more complicated for us. But I think we're really pleased with what Q3 was, and we're looking forward to Q4 and think it can be a good quarter as well. But just want to be cautious about it. Like I said, it seems to be an ever-ending story. One week, it's really positive in the consumers' mind and then the next week, it seems to change. So we're just trying to take it kind of one week at a time and navigate that. Jonathan Komp: Understood. And maybe as a follow-up, are there any pockets of weakness that you're seeing that you're paying close attention to across your business? And when we think about the fourth quarter, you're reiterating the guidance for the year. It implies a wider range for the fourth quarter by nature. So any color on what might cause you to be closer to the high end or the low end as you think about the implied fourth quarter? Jason Brooks: Yes. So from a branding standpoint, the only brand that is kind of funky right now is Durango. But as I said in the script, we had quite a few key accounts pull some business ahead there before the price increase. So our fill-in business wasn't quite as good in Q3. So I would say Western Durango is maybe the only brand that we're just maybe watching a little bit closer. Muck and XTRATUF, like I said, are doing really well. I was really pleased to see Rocky in a better place in Q3 and then also Georgia really had a nice quarter. So I think that's kind of where we're at. And then obviously, Lehigh is still doing very well for us. Thomas Robertson: Yes. Just to touch on the Durango piece a little bit. I think in the middle of the summer and dragging into a little bit of fall here, we've seen a little bit of softness in kind of our independent Hispanic retail accounts. And so we've been keeping an eye on that. That appears to have recovered a little bit here in September. So we'll continue to monitor that. And then to the sourcing comment and the missing inventory from a minute ago, Durango was detrimented the most here as the vast majority of that product historically was made in China. And so that's where you've seen a lot of the sourcing changes, particularly in Cambodia and India. And so there was a couple of million dollars there that just didn't get here as we had originally hoped. Jonathan Komp: Great. One follow-up then, if I could, Tom, on the implied profit guidance in the fourth quarter. I know you still are expecting earnings growth around 10% for the year after a good third quarter, that implies a pretty steep decline in the fourth quarter and some pretty steep falloff in gross margins. So I guess, are you assuming that pricing doesn't offset the tariff impact as it looks like it has started to? Or just any further color on what you're embedding there? Thomas Robertson: Yes. So the pricing certainly will be an effect. And every month that's gone by since the price increase, we've realized more and more of that. And so we'll continue to recognize that. The reason the margins will be more depressed in the fourth quarter is, one, because of the $10 million that I noted before. But if you think about how the timing of all this played out, when the tariffs came out, they were initially really higher, particularly out of China. And so as inventory was still flowing to us, we're paying kind of larger than -- higher reciprocal tariffs than we're currently paying today. And we weren't able to make all those sourcing changes that we've been able to execute on. Those will continue -- those sourcing changes are getting better every day, but that will -- the results of those changes will lag into the P&L. And so Q4, in my opinion, Q4 of '25 will be the worst quarter from a tariff perspective and will only start improving from there. It certainly will be a headwind in Q1 and in Q2 of 2026. Jonathan Komp: Okay. Great. And then last one for me, just bigger picture as we look forward into 2026. Any thoughts that you have just knowing your business and your brands whether or not stimulus could be something you can take advantage of or that might benefit? Any thoughts there? And then when you think of the momentum for XTRATUF, could you maybe just frame up what you're planning for that business? And any updated thoughts on what the potential might be as we look forward? Jason Brooks: Jon, can you elaborate more on the stimulus? I'm not sure what the question is. Jonathan Komp: Yes. I just -- I wonder if early 2026 stimulus to the consumer from the tax bill is something you're looking forward to as a potential driver or not for the consumer or for businesses on the tax side, if that's something that you've considered for your business? Jason Brooks: Got you. Yes, I'm sorry. Yes, I think any time the consumer is going to get any kind of stimulus, I think we all saw this during COVID. And then obviously, this is a very different tax bill and stuff. But I think any time our consumer gets a little kick, they are willing to spend some more. So I think we will be prepared if it happens, we'll have the inventory, and we'll be able to take advantage of it. But it's not something that is a huge focus of ours, but we'll be prepared if it does come for sure. Thomas Robertson: Yes. And then as we look to 2026, Jon, we can look at our order book and our bookings are up year-over-year, which is positive. It's up in dollars and in pairs, which shows you it's not just the price increase. And if you look at our spring 2026 product, it is -- it looks exceptionally well and very -- kudos to our product development team for everything they've done there. As it relates to the XTRATUF comment, it feels like XTRATUF is starting to accelerate a little bit. It's been running up low mid-double digits throughout the year, and it's accelerated a little bit in the third quarter here. We're very, very interested to see how this new cold weather line that we've really invested in, how that plays out as inventory is starting to arrive every day now here at the warehouse. And so we'll see how that plays out in 2026 as well. Jason Brooks: And we're continuing to see that product come more inland, Jon. So obviously, the coastlines, the fishing, the boating was really where that product was killing it, and we're starting to see that come a little bit more inland rather -- not real fast, but we're definitely seeing it happen. So we're pretty excited about that. I would tell you that 2026 is going to be a fun ride with XTRATUF. Operator: There are no further questions at this time. I'd like to hand the floor back over to Jason Brooks for any closing comments. Jason Brooks: Great. Thank you. I'd like to thank the entire Rocky team for all their efforts this year. It has been a real challenge, particularly in our sourcing department, and that team has just done an amazing job to try to navigate what we've had to do. So thank you, Rocky team, and thank you to our investors, and thank you to the Board. We look forward to finishing 2025 and kicking some b*** in 2026. Thank you. Operator: This concludes today's conference. We thank you again for your participation. You may disconnect your lines at this time.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 CoStar Group Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Rich Simonelli, Head of Investor Relations. Richard Simonelli: Thank you very much, operator, and hello, and thank you all for joining us to discuss the third quarter 2025 results of CoStar Group. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Chris Lown, our Chief Financial Officer, I'd like to review our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the company's outlook and expectations for the fourth quarter and the rest of 2025 based on current beliefs and assumptions. Forward-looking statements involve many risk, uncertainties, assumptions, estimates and other factors that can cause actual results to differ materially from such statements. Important factors that could cause actual results to differ include, but are not limited to, those stated in CoStar Group's press release issued earlier today and in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q included under the heading Risk Factors in these filings as well as other filings with the SEC available on the SEC's website. All forward-looking statements are based on the information available to CoStar on the date of this call. CoStar assumes no obligation to update these statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Reconciliation to the most directly comparable GAAP measure of any non-GAAP financial measure discussed on this call are shown in detail in our press release issued today, along with the definitions for these terms. Press release is available on our website located at costargroup.com under Press Room. So please refer to today's press release on how to access the replay of this call. And remember one question during the Q&A session, so make it a good one. And with that, I'd like to turn the call over to our Founder and CEO, Andy Florance. Andy? Andrew Florance: Thank you for joining CoStar Group's Third Quarter 2025 Earnings Call. We achieved another excellent quarter for CoStar Group with third quarter 2025 revenue reaching $834 million, a 20% year-over-year increase. This is our 58th consecutive quarter of double-digit revenue growth and we're 1 quarter closer to potentially 100 sequential quarters of revenue, double-digit revenue growth. Stay tuned. Adjusted EBITDA in the third quarter rose to $115 million, up 51% over Q3 '24. Profit margin in our Commercial Information and Marketplace businesses increased to 47% for Q3 2025. Net new bookings totaled $84 million, up 92% year-over-year. CoStar Group's residential real estate portals include Apartments.com, Homes.com, OnTheMarket and Domain. These are all sites that help people find or market a residence. Assuming we own Domain for the full third quarter, the revenue for the residential portals would now be $411 million in the quarter or $1.644 billion annualized. Our residential portals revenues grew 22.7% quarter-over-quarter and 31.3% year-over-year. We expect synergies across these residential portals will continue to drive improvement in our margin profile and believe that long-term margins can operate at more than 40% adjusted EBITDA margins. Apartments.com delivered another strong quarter, surpassing $1.2 billion in annual run rate revenue and generating $303 million in Q3 revenue, an 11% increase year-over-year. Apartments.com remains the preferred source for property managers and owners as reflected by a 99% monthly renewal rate, 99% monthly renewal rate and a 93 NPS score. Our high-quality proprietary content remains central to attracting consumers. Net new bookings rose 37% year-over-year in Q3. We added 4,200 new apartment communities in Q3. Our sales force has now grown to over 500 representatives, achieving our 2025 sales hiring target ahead of schedule. In Q3, the team conducted 200,000 client and prospect interactions, with nearly half of them occurring in-person, a 66% year-over-year increase in Q3. Our total multifamily property count now exceeds 87,000, an increase of 12,000 in 2025. Apartments.com network site visits totaled 223 million for the quarter, leads for specific models and units increased 64%, and our highest converting apply now leads rose 70% year-over-year in Q3. In the single-family rental segment, we had 1.4 million availabilities and 260,000 paid rentals, up 51% year-over-year. Homes.com rental traffic grew 55%, underscoring the synergy between Apartments.com and Homes.com. Advertisers benefit from increased exposure across both platforms at no additional cost. Turning to Homes.com. Homes.com is showing steadily accelerating revenue growth from an increasing number of revenue streams. Annualized net new bookings of Homes.com subscriptions rose to $16 million in the third quarter, up 53% year-over-year from $10 million in the second quarter of '25. That's actually quarter-over-quarter, up 53% quarter-over-quarter from $10 million in the second quarter of 2025, not year-over-year. Much more impressive when it's Q-over-Q. The net new annualized bookings in the third quarter represent 1,225% year-over-year increase. Revenue in Q3 increased 20% year-over-year. The number of net new subscribers added in the third quarter was 7,035, up 12% over the 6,280 net new subscribers added in the second quarter. In Q3, net new subscriber growth was 1,000% year-over-year. We now have over 26,000 subscribing agents. Just one of the many ways in which our business model is superior to competing portals is our ability to provide service to a much larger number of agents than they can. Competing portals in the United States business models of lead diversion limits them to selling to about roughly 5% of agents because they need to take leads from the other 95% of agents who are not clients so that they have something to sell to the 5% that are clients. In contrast, we can sell to well more than 50% of agents because we're not taking away leads from any agent. With LoopNet, CoStar and Apartments, we have shown that in many markets we're selling to well more than half of the players in that market. This is the advantage of creating a bigger TAM, but also creating more goodwill among agents. In competing portal models, 95% of the agents are losing business because of the portal and 5% are gaining business. In our model, almost every agent can gain business because of our portal and that creates goodwill. Alignment with your clients build stronger and more durable brands. Sales of our Homes.com Boost product rose 136% quarter-over-quarter to $617,000 in the third quarter. Homeowners are the primary buyers of Boost, paying on average $386 on a onetime basis to give their home for sale more exposure. At this point -- at this price point, the U.S. TAM for Boost sold to homeowners alone is already approximately $2 billion. When agents do buy a Boost for one of their listings, we see 25% of those agents convert to full Homes.com membership subscriptions. We began selling enhanced exposure on Homes.com to new homebuilders on August 25. In the month of September alone, we sold net new annualized bookings for new homes of 498,000. In total, we've already sold 743,000 annualized buildings since August 25. As Homes.com approaches our seventh quarter since launch, it is now the fastest-growing revenue product we've ever launched. So Apartments.com and CoStar now have more than $1 billion in revenue. They grew revenue at a much slower pace than Homes has in their first 7 quarters. Homes.com has now grown 50% more incremental revenue in its first 7 quarters than did Apartments.com in the same time period. We're continuing to increase the size of our Homes.com sales team. We now have 500 sales reps in production with another 150 in preproduction. We've now added field sales, new home sales specialists and major accounts reps. We believe the highest and best function of a portal is to market real estate and that, that is the future of the industry. I do not believe that future revenue models for successful real estate portals will be based on either iBuying or lead diversion to buyer agents. Currently, as I mentioned, we have 26,000 subscribing agents and Boost clients, promoting 130,000 active listings on Homes.com, representing 6% of the active 2.2 million properties for sale in the U.S. A recent analyst report from Citi say that they believe that a core product for Zillow going forward will be its showcase listing product and estimated in September '25 that Zillow had only 24,500 listings or approximately 1.1% of the active market. So we have 5x the number of listings marketed or boosted on our site. Citi further estimated that Zillow will have $13 million of revenue in the third quarter for showcase listings. So Homes.com is well ahead of Zillow in both revenue and listing count, in what we believe is the primary sustainable revenue driver for successful residential real estate portals around the world. Our strategy is to grow the share of real estate agents and homeowners relying on us to bring more exposure to their homes for sale, and these numbers show that we're on the way to achieving that goal. Our marketing campaign continues to build out audience and brand awareness. In August, unaided awareness was 42% and unaided intent was 28% that unaided awareness is up from about 4% we started. And as we -- and we are showing continued long-term upward trend in both categories. In the third quarter, the Homes.com network achieved 115 million unique monthly visitors. This led to 560 million total visits to the Homes.com network in Q3, up 7% compared to Q2. According to comScore, unique visitor traffic to Homes.com rose 8.3% compared to a 6.5% decline at Zillow and a 0.7% decline at Realtor.com. I'll just call that last part flat. comScore continues to rank the unique monthly visitors to the Homes.com network above either Realtor or Redfin. Our organic traffic in Q3 climbed 87% year-over-year. We continue to improve the quality and engagement of traffic to Homes.com achieving a low 24% bounce rate in Q3, which is a 64% year-over-year reduction in bounce rate. Our average session duration increased to 4 minutes and 29 seconds in Q3, which is a 93% year-over-year increase. I believe that our efforts to put more than 70,000 Matterports on the sites is driving this deeper home, shopper engagement on our site. We are optimizing for quality of traffic from our SEM generating $112 million listing detailed page views from SEM in Q3 for a 374% year-over-year improvement. We achieved this improvement with essentially the same but a more efficient SEM spend. I believe we are about to see our products hyper accelerated by some of the most exciting facilitating AI technologies I could have ever imagined. While we're already using AI throughout our organization, I am excited about the launch of AI Smart Search on Homes.com and the future innovations it foreshadows. Consumers can ask Homes.com precisely what they're looking for in their own words. This allows for reasonably complex queries such as long conversational phrases with multiple geographies such as show me waterfront properties with a pool, with a balcony and a great view in Miami Beach and Fort Lauderdale starting at $1 million. This does away with having to deal with traditional filters and forms that are limiting. If you're a coder, this is like giving people with no coding skills access to the power of full deep [boolean nested] queries against 10x the number of fields with just simple plain English questions. As a result, Smart Search is highly customizable, intuitive, fun and easy and more powerful. This is our own artificial intelligence capability we're engineering in, and we're doing it in partnership with Microsoft. In the third quarter, AI Smart Search has produced improved user engagement. So this new AI Smart Search is producing significant improvement in user engagement. Users of AI Smart Search use 69% more search filters, viewed 37% more listing pages per session, were 5x more likely return to the site within the following week. That's amazing and submitted 51% more leads after viewing a listing page. It's a more effective way to look -- find what you're looking for. We are now investing 50% of our Homes.com software development efforts in the fourth quarter and beyond towards building a range of AI-empowered features into Homes.com. This is our single biggest commitment by far to any software development effort. This is an incredibly exciting time for Homes.com. All of our products have boundless new opportunities opened up by the enormous potential of Generative AI. In the 4 decades that I've led CoStar product vision, a core principle of our success is leaning into new facilitating technologies to unlock their value for real estate. We were among the first to digitize real estate information, put real estate on a digital map, present digital real estate photos. We're the first to incorporate digital twins in a scale. And we were actually the first to leverage the Internet for real estate. In fact, we actually bought CBRE, Cushman & Wakefield, JLL, their first Internet accounts before there was even a Netscape or a Google around. AI offers transformative opportunities to unlock tremendous value in real estate. I believe few products are better positioned to cohesively capitalize on this opportunity than is Homes.com, Apartments.com, LoopNet and CoStar. We have massive and proprietary real estate data resources. We have unmatched expertise in organizing and quality control in that information. We have leading expertise in how to make that information useful and relevant to real estate industry participants. We believe that it will bring tremendous dislocation generally and open up huge new value opportunities, which we plan to exploit. While Homes.com is our initial priority for AI enhancement, we will apply the lessons learned to Apartments.com and all of our other products as quickly as possible. AI will impact top-of-funnel traffic acquisition. Real estate portals built on SEO foundations need to build strategies to acquire traffic from AEO, answer engine optimization and GEO generative engine optimization. SEO remains the foundation of AEO and GEO, though, a portal's brand content context remain the key building blocks for success. Today, GEO is sub-1% of top-of-funnel acquisition. For example, one large U.S. real estate portal in the U.S. only draws 0.45% of its top-of-funnel traffic from ChatGPT. And another large portal in Australia only captures 0.15% of its top of funnel from ChatGPT. So brand traffic -- brand, direct traffic, SEM display, social, e-mail, SEO and AEO remain 99.5% of top-of-funnel source. These traffic sources remain important in Generative AI future for sure and likely the majority, but GEO will become much bigger top of funnel traffic feed, and we will position our portals to capture that traffic. Many believe that traffic from GEO may be monetized the way Google monetized SEO with SEM. There's some huge AI GPU and energy bills to pay out there. I just spent a few days at the online marketplace conference in Madrid with dozens of real estate portal CEOs and digital real estate experts. All felt the competitive urgency to integrate the range of capabilities of Generative AI into their portals. But I did not find one person who thought that Generative AI solutions would effectively meet the specialized needs of the real estate world. To be successful, there's a need to build specialized AI models around buyer personalization and profiles, data capture listing evaluation, computer vision, digital twin, searching, area valuation, lead management, advertising optimization, valuation and many other algorithms. That is exactly the exciting work we are leaning into and embracing. There was a time when AOL, Yahoo! or eBay were ascendant and uniquely dominant and Microsoft and Google are still dominant though, perhaps, passed their zenith of dominance. All of these impressive general-purpose transformative technology innovations enthusiastically built real estate portals and tried to dominate digital real estate, all failed. All failed. They've now exited the space. Only eBay has anything left, and it's not much, which is a very [visible] thing. Specialized solutions often leveraging these companies' capabilities repeatedly ultimately dominate the real estate vertical. I believe the past is prologue here. There are a number of incredible Generative AI companies that are building invaluable tools. Those tools will be leveraged by specialized digital real estate companies to create specialized value. A specialized digital real estate company that does it best among them will unlock huge value for its investors. CoStar Group is the largest digital real estate company in the world by market cap is well positioned to win in an AI future. It's just a brief comment on AI. The Homes.com subscriber Net Promoter Score rose to 36 in the third quarter, rising 84% over Q2 '25. October to date, that NPS score continues to rise and is now at an outstanding 43. We're not done there. We'd like to get it up to Apartments 93, but the progress is amazing. It took less than 2 years for Homes.com to reach an NPS level that took CoStar about a decade or so to reach. As our NPS increases, so does our subscriber retention rate. In Q3 '25, our retention rate of subscribers we sold 6 months prior from Q1 to 2025 rose to 86%. The Q3 retention rate rose 7.5% from 81% retention in Q2 '25 and rose 39% year-over-year from 62% retention in Q3 '24. We are offering Homes.com subscribers the benefits of Matterports for their listings and agents tell us some focused groups that they really value that benefit. Member listings with Matterports captured nearly 40x listing detailed views of nonmember listings without Matterports. That should be the objective of any real estate agent selling a home, get 40x as many people to inspect that home. In the quarter, subscribers who had a Matterport on a listing had a 37% higher renewal rate than those that did not. It's working. We are enhancing our Matterport benefit to subscribers by offering a photorealistic 3D view of the exterior of the house to complement the digital twin of the interior. This exciting new technology is called Gaussian Splatt and we capture it with a short drone flight around the house where legal. I would encourage you to view one live by looking up a home for sale at 5471 Country Club Parkway in San Jose, California, on Homes.com and view that Matterport 3D exterior. Eventually, the house will sell, and it won't be there anymore. In recent focused groups, we are seeing success in raising real estate agent awareness that Homes.com is the only Your Listing, Your Lead portal. 51% of agents surveyed recognize "Your Listing, Your Lead" and overwhelmingly connected to the Homes.com brand. Agents dislike lead diversion expressed a strong preference for portal operating with "Your Listing, Your Lead" principle. As we continue to build that awareness, we believe that Homes.com will become the portal agents trust and most recommend to their clients. Now I need to turn to an uncomfortable but important matter. Zillow is under siege facing an unprecedented wave of lawsuits. I'm not sure that the market grasps the sheer magnitude of the risk bearing down on Zillow from all sides. These lawsuits are not isolated instance. They collectively target the heart of Zillow's operations exposing alleged antitrust violations, widespread copyright theft and blatant consumer deception. With private plaintiffs and government regulators now alert to Zillow's misconduct, I predict even more aggressive legal and regulatory action in the months ahead. There are 5 federal lawsuits filed against Zillow since June of 2025. First, Zillow threatened to permanently banning listing that was publicly marketed but not put on the MLS within 24 hours. So if you put a sign for sale -- for sale sign in front yard and didn't put it on Zillow, within 24 hours, you're banned. You have a Facebook post, and don't put it in the Zillow in 24 hours, you're banned, pretty aggressive. It appeared that Zillow was targeting Compass. Zillow followed through and banned Compass listings that were not put on Zillow in 24 hours. On June 23, 2025, Compass sued Zillow exposing Zillow's so-called 'Zillow ban' for what it truly is a ruthless scheme to strangle competition, trap home sellers inside of Zillow's walled garden. If Compass prevails and home sellers choose to -- where to list -- where and when to list their homes, Zillow could lose massive swaths of its inventory calling into question lead diversion model. I believe that Zillow's actions pushed Compass in a defensively merging with Anywhere. When the Compass-Anywhere merger is completed, the combined company will be, by far, the largest real estate brokerage in the U.S. as I understand, as many as 300,000 plus agents. I'm pretty sure that Zillow just picked a fight it cannot win. Compass will have the most important listing content in real estate, and Zillow will need them a lot more than Compass need Zillow. We filed our lawsuit against Zillow on July 30, 2025 to put an end to Zillow's brazen theft and monetization of CoStar's intellectual property. Zillow undoubtedly has used content stolen from Apartments.com to unfairly build their rental business. The scale of this infringement is staggering. For context, in 2019, Xceligent was caught with 38,489 CoStar copy-righted photographs and the Federal Court awarded $0.5 billion in damages to us. Zillow's conduct is even more egregious and we're determined to hold them fully accountable. Then in September, the Zillow was sued in a class-action suit by a group of plaintiffs who alleged that they were being deceived into overpaying hidden fees through Zillow's notorious Contact Agent button, don't push it. This case tears straight to the heart of Zillow's business model, laying bare a system built on deception. The complaint exposes Zillow's tactics saying, Zillow actually directs the buyer away from listing agent and directs the buyer to an unrelated buyer agent who lacks any specialized knowledge about the subject property. And the fallout isn't just limited to duped buyers, Zillow's lead diversion racket is bleeding home sellers by diverting their potential homebuyers to agents that may compete with their listing. Most recently -- we're not done, hang with me. Most recently, September 30, 2025, the United States Federal Trade Commission filed suit against Zillow Group and Redfin over an illegal agreement to suppress competition. They stated that the illegal deal stuns multifamily rental advertising competition harming American renters and property managers. The FTC went on to say that the Zillow partnership with Redfin was, 'nothing more than an end run around competition that insulates Zillow from head-to-head competition on the merits with Redfin for customers advertising multifamily buildings'. The FTC is seeking injunctive relief, meaning a potential unwinding of the deal. The lawsuit was followed up the next day by another lawsuit on behalf of bipartisan coalition of Attorney Generals from Virginia, Arizona, Connecticut, New York and Washington State. You might assume that CoStar Group sees deals like this when they come up like the Redfin deal. My immediate and clear reaction would have been that, obviously, the FTC would not allow such an illegal deal in any effort to end run the FTC regulatory process would necessarily bring unnecessarily excruciating pain and damage to anyone foolish enough to try it. So we never would have pursued it. If Zillow is ordered by Federal Courts, the FTC or Attorney Generals of states [disgorge] their allegedly illegally gained apartment revenue and content, I believe, will seriously damage Zillow's reputation in the apartment industry. These lawsuits will take years to resolve. The full extent of Zillow's contact as alleged in these complaints and the various remedies from these lawsuits is yet to be seen. Moving to the United Kingdom. It was a strong quarter for our, OnTheMarket, our U.K. residential marketplace, with leads up 21% year-over-year. In Q3 '25, we delivered significant ROI to our 16,000 subscribing customers there. Bringing some Homes.com inspired features to OnTheMarket has resulted in positive changes to the site that are generating more consumer engagement. We are building an audience of serious property seekers with total page views up 24% year-over-year in Q3. Average time on site per active user is up 79% year-over-year and lead to conversion -- lead to visit conversions are up 31% year-over-year. Net new bookings increased for the 17 months in a row and has delivered nearly $11 million of annualized net new bookings since its acquisition. We closed the acquisition of Domain in August. I'm excited to work with the Domain team and their customers to bring Homes.com, CoStar and LoopNet platforms to Australia. Domain's residential marketplace and commercial marketplace -- well, Domain's residential marketplace is very successful and generates more than 50% direct contribution margin. Its commercial marketplace generates a 40% direct margin. Both marketplaces have long-term growth potential under the CoStar umbrella. The Domain brand is very well known in Australia, and there's significant potential to expand market share there, where homeowners invest significantly in digital real estate advertising. Domain has an excellent management team led by Jason Pellegrino, who knows the Australian market well. He used to be the MD for Google there. And his vision for the business aligns with ours. We have made fast progress since taking ownership of the Domain business on August 20, delivering 7.4 million unique users in September on Domain's residential platforms which was the largest number of unique users on Domain's owned platforms in its history. The quality of this increased audience was retained, delivering the highest consumer reviews per listing in Domain's history. We're on track to significantly beat those records in October. We have already delivered a 24% year-over-year increase in audiences on our commercial real estate platforms in Australia. These strong audience results were driven by a mix of greater marketing investments supported by an improved mix of marketing investment across every step of the consumer journey, and rapid product improvement supported by a refocused product team and access to CoStar platforms, relationships and talent. Examples of product improvements already executed and planned within the first 60 days of ownership include improvements in platform speeds and latency, removal of all advertising interrupting the consumer experience and improvements in image quality. A key highlight was the growth achieved in our audience metrics, where we saw Domain apps average 138% increase year-over-year in downloads across iOS and Android, allowing us to successfully overtake our main competitor in App Store rankings. Domain was previously constrained under its former media company owner. It received limited management focus, limited expertise and scarce resources, limited expertise in real estate marketplaces. It was operated with short-term EBITDA strategy, keeping it from competing effectively with a market leader, REA. We believe that with CoStar Group's technology and resources, Domain will compete more effectively and will achieve stronger, long-term profitability. A dozen members of my management team and I recently spent 2 weeks in Sydney for a deep dive into the Domain business and believe there are clear opportunities to make changes that will create value for our shareholders. Most of the significant software resources and products we offer, we believe, are compatible with the Australian market, and we can integrate Domain into them to create competitive advantage and cost efficiencies. We hope to improve Domain's focus and profitability by rationalizing some of its product portfolio. Under prior ownership, Domain allocates significant resources to about 10 noncore initiatives at the expense of the highly profitable residential and commercial portals. I believe that most of the software development resources were allocated to products generating less than 20% of its revenue. We will refocus Domain's resources towards its successful scalable core and competing against its main competitor. We expect to offer LoopNet Homes and CoStar in Australia within 18 months. There's currently, we believe, no equivalent to CoStar in Australia, while Domain and REA Group offers products similar to LoopNet, I do not believe that they're on par with what LoopNet offers. This presents a significant opportunity for us to quickly establish a leading presence. The more I live with Matterport, the more impressed I am with this technology, how well it works and how useful it is to real estate. Matterport creates a strategic advantage in both our residential and commercial product portfolios. Matterport digital twins unlock value by bringing a new and important dimension of digitizing real estate in every product we offer. As part of CoStar Group, we see Matterport set on 2 pillars. On one pillar, Matterport is a stand-alone solution for industries such as insurance, construction, public safety, facilities management and similar, which we believe is by itself a multibillion-dollar revenue opportunity. In the second pillar, Matterport is brought to market as an integrated solution within our marketplaces and information solutions through our existing sales forces of 2,000-some people. We believe that in the second pillar, Matterport can help CoStar compete and achieve more than $1 billion in incremental value. Integration of Matterport and the second pillar is well underway, and you can see deeper than ever integration of Matterport within our products. I believe that prior to merging with CoStar, Matterport was a world-class transformative technology held back by lack of focus on go-to-market strategy with an underscaled sales and marketing effort. Matterport had fewer than 30 sales representatives globally, leaving many huge revenue opportunities untapped. We plan to expand the sales force by 200 by the end of '26 and drive accelerated revenue growth. Matterport's Q3 revenue was 12% higher than our expectations, $44 million versus $40 million and our Q3 '25 net bookings were up 194% over Q3 last year. We emphasize new customer acquisition, which resulted in a 94% increase year-over-year in incremental new customer logos. Our Matterport Max rollout for Apartments.com began at the NAA conference in June of this year. We've already sold over 530 Matterport Max subscriptions, which are adding upwards of $5,000 per year in annual subscription revenue per unit. We just completed a successful developer Summit and Hackathon with the Matterport team. Coming out of that, I'm very confident that we have an outstanding and innovative product road map that will delight our customers and for you all, more importantly, our shareholders. Turning to CoStar, CoStar generated $277 million in Q3 of '25 revenue, reflecting 8% year-over-year growth. Revenue growth has slightly improved in '25 as net new bookings remain strong. Per rep productivity in Q3 was at its highest since Q3 '23. Cancellation rates have declined over the past 2 quarters, and our renewal rate reached 93.3%, the highest since '23. Our subscriber count rose to 284,000 in the third quarter, up 20% year-over-year. Our lender business achieved a record quarter, closing $4.3 million annual net new bookings, with nearly almost just there $100 million in revenue and over 450 clients, including banks, credit unions, private lenders, regulators, insurers, CoStar for lenders has demonstrated strong success and has significant potential. CoStar Lender has already uploaded over $1 trillion of loans into CoStar. Clients' loan portfolios are securely uploaded to our SOC 2 compliant platform, unavailable to any AI scraper and integrated with CoStar's proprietary data analytics and credit modeling informed by our research and marketplace solutions. This comprehensive ecosystem delivers unmatched value for regulatory examines, asset examinations, asset allocation and responsible growth. In '26, we plan to launch our benchmarking product and have begun developing a loan origination system, expanding our total addressable market. One of our core goals for all of our emerging businesses is to cross that also important $100 million revenue milestone. So congratulations to John Vecchione, Xiaojing and the entire Lender team, well done and dinner is on me. LoopNet remains the world's largest and most active real estate marketplace, capturing 8.5x more searches than our nearest competitor. In the third quarter of '25, LoopNet achieved 10% revenue growth. Based on net new bookings from the last 3 quarters of '25, we expect the platform to deliver low double-digit growth next year. I firmly believe that LoopNet should and can return to 20%-plus growth -- annual growth rate soon. Our strategic focus has been on offering LoopNet advertising packages that enable clients to promote their entire property portfolios rather than just select assets. The silver ads, their portfolio comprehensive design are designed to drive higher renewal rates, deliver strong ROI for clients, expand listing coverage and enhance both the consumer and customer experience. We are also continuing to roll out asset-based pricing for renewals aligning our service pricing with the value delivered to clients. International expansion remains a key pillar of LoopNet's growth. Many of the largest multinational companies in the world are heavy users of LoopNet, and we could provide them even more value if we are carried listings in more countries. In August of '25, we integrated all French listings from BureauxLocaux into LoopNet, bringing the total number of European listings to 100,000 across France, Spain and the U.K. We could see major tenants like Amazon and many others, searching LoopNet for commercial real estate, not only in the U.S. but also in Canada, France, the U.K. and Spain. So they -- wherever we're going, they're searching. We will soon add Australia, as I mentioned, through our Domain acquisition, further growing our global reach. We believe that LoopNet can deliver more value to local advertisers if we're delivering a unique and valuable global audience with high buying power. Our data consistently shows that properties listed on LoopNet sell and lease faster. For properties listed in January '24, 30% of those on LoopNet transacted, while only 22% of those not listed on LoopNet transacted. For firms listing 90% to 100% of their listings on LoopNet, their 24-month close rate was 36%, while those not listed on LoopNet only had a 20% close rate. If a few hundred dollars invested in the LoopNet could increase your chance of transacting a commercial property by 80%, I believe that's a no-brainer. Turning to CoStar Real Estate Manager and Visual Lease now support real estate lease management accounting, project management needs for 2,000 corporate clients, including more than half of the Fortune 500. Third quarter '25 revenue climbed 63% year-over-year to $30.6 million. The business is very profitable with growing margins. We are making good progress integrating CoStar Real Estate Manager, Visual Lease and CoStar into one extremely valuable corporate real estate solution. We expect to launch lease benchmarking capabilities in mid-'26 creating a new level of transparency, helping investors, brokers, corporates and lenders gain a more accurate and timely understanding of CRE rents and potential income. We expect to release an integrated product with real estate management CoStar Suite in '26, late '26. Clients will be able to access comprehensive market data and gain visibility into previously unseen opportunities to optimize their real estate portfolios. This will allow them for detailed analysis to make the most informed decisions that we believe will significantly drive significant ROI and cost savings for these clients. We shared our new product road map in our recent customer advisory meeting with major clients, which include real estate finance and accounting leaders, and we received very extremely positive feedback on the new product direction. CoStar Group's European business continues to deliver record net new bookings reaching $5.7 million in Q3 '25 and $16.9 million year-to-date, representing a 51% year-over-year growth. The U.K. business achieved another record quarter with year-to-date net new bookings up 125% and revenue up 17% year-over-year. In France, our research team has curated over 260,000 buildings, 50,000 availabilities, 140,000 tenants and 60,000 sale and lease comps. Business Immo, now fully integrated to CoStar News reaches over 100,000 French CRE professionals monthly, and we're confident that CoStar will soon become the leading source for CRE data in France, connecting global and French investors. In closing, I believe that our results this quarter demonstrate that my colleagues here at CoStar Group are making great progress, continuing to successfully grow our existing businesses, while effectively investing into new real estate segments and new global markets. With $350 trillion of real estate in the world, we believe we are creating value digitizing it with leading marketplaces and information solutions that can result in a $1 trillion addressable market with a deep moat, and we're busy building it one brick at a time. At this point, I'll turn the call over to our CFO, Chris. Christian Lown: Thank you, Andy. Good evening. I'm happy to report that CoStar has now posted its 58th consecutive quarter of double-digit revenue growth coming in at 20%. We achieved an impressive commercial information and marketplaces brand margin of 47% in the third quarter versus 43% in 3Q '24. Net new bookings for the third quarter were $84 million representing a 92% increase year-over-year. Every major product contributed to this record as our growing dedicated sales force of over 2,000 people is delivering for CoStar. Revenue for the third quarter was $834 million, which included a $25 million contribution from the Domain acquisition. Revenue, excluding Domain of $808 million exceeded the high end of our guidance. Third quarter adjusted EBITDA came in at $115 million, also exceeding the high end of our guidance at a 14% margin. The outperformance in adjusted EBITDA was a result of continued expense discipline and better-than-expected revenue. Our CoStar products saw revenue grew 8% in the third quarter, ahead of our guidance. We are excited about this product's renewed growth, especially given continued volatility in the commercial real estate sector. Net new bookings have steadily increased throughout 2025 and are now at the highest level seen since 2022. With this increasing momentum, we expect to see the CoStar product grow between 8% and 9% in the fourth quarter with full year growth firmly in the 7% range from our original guidance of 6% to 7%. Residential revenue was $55 million in the third quarter with $23 million coming from the Domain acquisition. The $32 million in organic revenue was consistent with last quarter's guidance. With the addition of revenue from Domain, we now expect fourth quarter revenue of $100 million to $105 million with Domain contributing around $67 million. For full year 2025, we expect residential revenue to more than double to $210 million to $215 million from $101 million in 2024. Apartments.com's third quarter revenue growth came in at 11% year-over-year. Our Apartments.com sales reps are consistently the most productive of our large brands, and we have increased the size of this team by 20% year-to-date. We now have more than 500 Apartments.com sales reps for the first time in its history. These reps will take time to ramp up their productivity but this investment puts us in a great position for longer-term growth. For 4Q '25, we expect 11% to 12% revenue growth, resulting in full year 2025 revenue growth of 11% to 12%. LoopNet revenue grew 12% in the third quarter with a 2 percentage point lift from the Domain acquisition. LoopNet's organic performance was in line with last quarter's guidance. Our sales team is consistently outperforming prior productivity levels. And in conjunction with the demand contribution, we now expect 4Q revenue growth of between 15% to 17% and full year revenue growth of 10% to 11%. On an organic basis, 4Q revenue growth is expected to be 11%, its highest growth rate since 2023. This acceleration throughout 2025 sets us up nicely for 2026. Revenue from information services was $41 million in the third quarter. We expect fourth quarter revenue to be consistent with the third quarter and full year revenue growth of between 18% to 20%. We are excited about launching our new rent analytics product in the first half of 2026 and our new lease platform in the fourth quarter of 2026. Other revenue was $78 million in the third quarter with Matterport contributing $44 million. For the fourth quarter, we expect other revenue to range between $70 million and $72 million. The fourth quarter is expected to be slightly impacted by revenue recognition timing for 10x and lower camera sales at Matterport as we sunset the Pro 2 camera. As previously stated, adjusted EBITDA for the third quarter was $115 million, meaningfully above the high end of our $75 million to $85 million guidance. The favorable performance came from higher-than-projected revenue, higher-than-anticipated professional service -- I'm sorry, lower than anticipated professional service costs and greater-than-expected headcount savings as we remain laser focused on expenses. Our contract renewal rate was 89% for the third quarter, with a renewal rate for customers who have been subscribers for 5 years or longer holding steady at 94%. Subscription revenue on annual contracts was 75% for the third quarter, the acquisitions of Matterport and Domain are the driving factors for the change in our subscription revenue metric. Our September 30 balance sheet included $2 billion in cash, which earned net interest income of $26 million in the third quarter, a 4% rate of return. We repurchased 576,000 shares in the third quarter for $51 million, bringing our year-to-date total to 1.4 million shares repurchased for $115 million. We expect to purchase approximately $50 million of additional shares in the fourth quarter, bringing our 2025 total to approximately $165 million of the $500 million share repurchase authorization. We closed on the Domain Group acquisition on August 27. The total consideration was USD 1.9 billion. Domain contributed $25 million of revenue for the stub period from August 28 to September 30. For context, around 90% of Domain's revenues is residential, while the remaining 10% is split between commercial marketplaces and information services. With 9 months of 2025 in the books and with the closing of Domain, we now expect full year revenue of between $3.23 billion to $3.24 billion, broadly in line with our guidance, excluding Domain. Fourth quarter revenue is now expected to be between $885 million and $895 million. Full year adjusted EBITDA is now expected to range between $415 million and $425 million, with Domain contributing approximately $15 million. This $25 million increase in our guidance, excluding the impact from Domain is indicative of our strong third quarter performance. Fourth quarter adjusted EBITDA is expected to range between $150 million and $160 million. And with that, I will now turn the call back to our call operator to open the lines for questions. Operator: [Operator Instructions] Our first question comes from Pete Christiansen with Citi. Peter Christiansen: Nice results, guys. Good trends here. Andy, It's interesting. I was looking across the last 8 years and sequential change in bookings excluding COVID, so 2020 was roughly 15%. This quarter sequential change in bookings was 10% down. So clearly, the new sales force capacity is contributing and other things also contributing to some of that growth being above seasonality. But just curious if you could point out any seasonal behaviors that you noticed and maybe a special attention on the residential side. Are agents canceling now, planned to come back later? Are you seeing the same type of seasonality that you normally see in the apartments business? Just any deeper thoughts there would be helpful. Andrew Florance: Sure. And I guess you got the first question because we source Citi during our script. So -- but the Apartments.com does have seasonality. And as you know, the prior quarter, you have usually unusually large sales because of the NAA event where people, major property managers do their annual purchasing for the year to come. And we would expect some limited seasonality from residential agents as they get to year-end holidays and the like. Their peak season is the spring selling season. But what we're seeing right now, if I look at a line of our sales production at Homes.com, it is a very linear line and the only seasonality in that sales line is Saturday and Sunday. So it's a very smooth progression up right now, and we're not yet seeing seasonality. And maybe in the Christmas holidays that you might get something but not yet. Operator: Our next question comes from Stephen Sheldon with William Blair. Stephen Sheldon: Just wanted to follow up on that question. I guess, can you just give more detail on the sequential booking trends in the third quarter as we look at the core businesses. So looking at Suite, Apartments.com and LoopNet. And then just how are things shaping up in the seasonally important fourth quarter around bookings, especially with a bigger sales force and the ramping productivity. So yes, just what are you -- how are you thinking about the bookings trajectory into 4Q? Andrew Florance: Chris? Christian Lown: Yes. So I think as you see... Andrew Florance: Didn't like [indiscernible] Christian Lown: I think what you see is, you see our full year guidance, you see our sequential trends. We're very pleased with the bookings. And I think we're just getting started from the sales force expansion, all those sales force came in at the end of the first quarter, second quarter, et cetera. So productivity takes time to ramp. But seasonality and what we're modeling is pretty much in line with what we're expecting. And therefore, you saw the increase in our full year guidance and our expectations. And so I think we're on track from what we're expecting. Andrew Florance: Yes. And I do want to point out that from -- remind everyone that from the bookings at Homes.com from Q2 to Q3 was up 53%. So as we're going into the third quarter, we're seeing a significant uptick in bookings at Homes.com. And again, because of the number of people, a very smooth upward growth trajectory. Christian Lown: Yes. And just to expand a little further, at CoStar's trends is very positive. We're seeing reacceleration there, which we're very excited about. We talked about LoopNet, Andy talked about LoopNet and what's going on there. And on Apartments, as I said, the trends are as expected as modeled. So I think we feel really good on the underlying trends and resulting in our change in guidance. Operator: Our next question comes from Ryan Tomasello with KBW. Ryan Tomasello: At Apartments.com, in terms of bookings, can you say how those performed sequentially versus, I think, $45 million in the second quarter? And looking at the guidance for the fourth quarter, Chris, I think you're calling for 11% to 12% on multifamily, which would be pretty unchanged growth from the third -- I'm sorry, from the -- yes, from the third quarter. Just curious what's driving that despite the ramp in the sales force and just generally how you're thinking about demand trends at Apartments.com heading into the end of the year? Christian Lown: What's important is what you saw across a number of funds. One, we continue to see rooftop expansion in Apartments.com. We're expanding the sales force. We've talked historically about the seasonality or -- have the contributions on a quarterly basis as we look at back historically, with the second quarter being the largest quarter, the third and fourth quarter as being relatively similar, although there can be an uptick in the fourth quarter. So I think we feel generally good about the trends, which has resulted in our numbers and our forecast. But obviously, solid growth, increased rooftop expansion. And then that's actually across all segments, 1 to 49, obviously had a pretty significant increase year-over-year and then both 50 to 99 and 100-plus also showing growth at or higher than what we've seen over the last 4 or 5 quarters. Andrew Florance: And Ryan, did I mention that the FTC was suing our competitor? Ryan Tomasello: Yes, I think I caught that Andy. Andrew Florance: Okay. Just want to make sure. Operator: Our next question comes from Curtis Nagle with Bank of America. Curtis Nagle: I guess, Andy, I just wanted to go back to the point. So you're investing 50% of your software costs now into AI. I guess where are you redirecting those expenses from? And I guess, any thoughts you could give on how to think about total expenses for '26 for Homes.com? Andrew Florance: I thought you'd never ask. The -- those -- the 50% of our software development going into AI features in Homes.com is an allocation of the existing resources. It does not reflect an increase in total spend. So as we go into any particular quarter or season, we're always looking at what are the headline investment initiatives going to be. We are most excited about the potential of these AI features and functions, which are just remarkable and awesome. And then we look at 2026, we anticipate, I would say, same or lower spend on Homes.com investment in '26. Do you agree with that, Chris? Are you going to go... Christian Lown: You're the CEO. I agree with whatever you say, Andy. Andrew Florance: Okay. Great. Yes. But we don't see any -- other than the increased sales force size that we've already baked in that roll over to '25, the costs are not materially going up in any way I see. Operator: Our next question comes from Brett Huff with Stephens. Brett Huff: Can you detail a little bit, unpack a little bit the bookings number that you gave us for Homes.com which we appreciate. Just in terms of rep productivity, are the newer folks getting more up to speed? Do we still have more of those folks get up to speed, pricing? Sort of any of the numbers that go into that bookings number would be super helpful as we try and tweak our model. Andrew Florance: Sure. So we are in a period of remarkable headcount growth at Homes.com. We've never seen anything like it, where you have classes of 100-and-some coming in at any given point. That is difficult to manage, you would fully expect you'd see a drop off in per person productivity as you bring that many people in. But we are seeing that consistent -- we're seeing consistent growth in those bookings. And what was the second part of the question? Christian Lown: Productivity. Andrew Florance: Yes. So the productivity is still -- we're seeing a very positive ROI at each incremental salesperson added, but you are seeing the effects of so many people coming in. And we are slowing the growth or I believe sort of have capped the growth of salespeople to allow for training and onboarding to catch up. Christian Lown: Right. And you have made adjustments to pricing to improve penetration.... Andrew Florance: Slight increase in pricing in this quarter over prior quarter, but we're focusing on penetration, as you can see. Operator: Our next question comes from Faiza Alwy with Deutsche Bank. Faiza Alwy: Yes. Andy, you mentioned in your opening remarks that you think that you can get to 40% profitability or margins on the residential business. I'm curious how you think about the time frame on that? And sort of what needs to happen for you to get there? Andrew Florance: Yes. So the residential business, obviously, you have Domain in there, you have OnTheMarket, you have Homes in there, you have Apartments.com, and past is prologue. You see us adding components to it through time. But when you look at our business model, it's uniform across all 4 of those platforms. It is around marketing the real estate. If I look around the world at all of the precedent models that use marketing real estate as their core business, it will be a Rightmove, or Idealista or SeLoger or REA Group and the like. They all operate up at margins that are typically around 50%, in some cases, high as 75%. So it's really continued blocking and tackling over the next number of years. I don't have a specific date for that. But when I look at our -- when I look at the margin numbers for the combined residential businesses, I like the progression of EBITDA margin that I see in that group of companies. You can combine all these things together this way or that way. But when you look at them, I think they're making good progress towards our intermediate to long-term margin goals. Operator: I would now like to turn the call back over to Andy Florance for any closing remarks. Andrew Florance: Well, I think I think our participants on the call today have probably modeled good behavior in keeping it brief. I'll try to be brief in my next set of comments. But thank you guys for joining us. We're very excited about what's happening here at CoStar Group. And we look forward to updating you in 2026 for our next earnings call. Thank you. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the OrthoPediatrics Corporation Third Quarter 2025 Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Trip Taylor from the Gilmartin Group for a few introductory comments. Philip Taylor: Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer; and Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the Company's remarks include forward-looking statements within the meaning of federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the Company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the Company's most recent annual report on Form 10-K, which was filed with the SEC on March 5, 2025, and its subsequent quarterly reports on Form 10-Q. During the call today, management will also discuss certain non-GAAP financial measures, which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the Company has included a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure in the third quarter earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, October 28, 2025. Except as required by law, the Company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer. David Bailey: Thanks, Trip. Good afternoon, everyone, and thank you for joining us today. We are proud to start this call with our typical and most meaningful performance metric. In the third quarter, we supported the treatment of more than 37,100 children, increasing our total impact to approximately 1.3 million kids health. With too few solutions designed specifically for children and the clinicians who care for them, pediatric health care has long faced critical gaps. At OP, we are committed to addressing these unmet needs, and our mission to close those gaps and reshape the future of pediatric care remains clearer than ever. We have made tremendous progress in this market, but there is still a substantial market opportunity ahead. In the third quarter, we saw strength in all areas of our business, excluding 7D capital sales and LatAm international stocking and set sales. In fact, we saw total third quarter global revenue growth, excluding 7D capital sales of 17% and domestic revenue growth, excluding 7D capital sales of 19%. Both T&D and scoliosis implant sales were strong as we saw a very normal summer selling season and OPSB growth continues to be extremely robust with growth in excess of 20%. As a reminder, OPSB sales are approximately 80% T&D and 20% scoliosis, and we saw strong growth in both areas. As we highlighted in our preliminary announcement, our revenue results fell short of our expectations, driven by 2 isolated factors: 7D capital sales that were expected in the quarter did not close prior to the quarter end; and headwinds from stocking and set sales in Latin and South America have continued longer than expected. Although these 2 areas did not produce the results we wanted, these are 2 of our lower-margin segments. And because the rest of the business remains strong, we still delivered high gross margins and profitability in line with our expectations. Looking beyond the top-line for the third quarter, we are pleased to see a significant 56% improvement in adjusted EBITDA, growing to $6.2 million. In addition, we also saw huge progress with our free cash flow usage, which was dramatically lower in the third quarter, decreasing $8.2 million. Both of these metrics have been a focal point of our strategy, and we are succeeding in delivering our goals. Touching briefly on our outlook. As announced previously, for the full year, we now expect revenue to range from $233.5 million to $234.5 million. Adjusted EBITDA is still expected to be $15 million to $17 million, and we are on track to deploy $15 million in sets and generate positive free cash flow in Q4. Even though our top-line expectations have been adjusted, we are maintaining our profitability and free cash flow outlook. As we drive toward our profitability goals, our core business, consisting of trauma and deformity and scoliosis implants, specialty bracing and our international agencies generate higher margins and better free cash flow than the capital sales and LatAm stocking and set sales. Our core businesses are positioned to remain the key engines of revenue growth, adjusted EBITDA and free cash flow, and we are confident in our forecast of generating positive free cash flow in Q4 and breakeven in 2026. Turning to our segments. In the third quarter of 2025, the T&D business grew by 17% in the quarter, driven by continued strong market share gains across several product lines. More specifically, growth was led by strong performances in trauma implants and a return to normal scheduling in the elective limb deformity business. Extremely strong exfix growth and the continued high growth of OPSB were the highlights in the quarter. Taking a closer look at Trauma, we saw particularly strong revenue gains driven by continued rapid adoption of PNP Femur, PNP Tibia, ORTHEX and the Bioretec ActivaScrew. Looking closer at the 3P platform, following the FDA approval of the 3P Pediatric Plating Platform Hip system and its first surgical cases, we are seeing consistent case growth, which we expect to continue through the remainder of the year and to ramp aggressively as we begin the full launch of this product in 2026. Additionally, we are pleased to have recently accomplished another milestone for this platform as we have just announced the next 3P system in the series, 3P Small and Mini has been approved by the FDA. This approval comes ahead of schedule, and we now expect to complete the first cases in the beginning of next year. With the 3P platform, we expect to launch new systems each year for the next several years, bolstering both Trauma and Limb Deformity revenue. T&D remains a core growth engine for our business, powered by our expanding scale, ongoing market share gains and a steady cadence of innovation focused on unmet clinical needs. We have established ourselves as a market leader in T&D, and we are executing with confidence, especially as we see more competitors exiting the space by removing pediatric-specific product lines. Our OPSB specialty bracing strategy continues to build momentum. And with continued execution of our operational goals, our confidence in this long-term opportunity only strengthens. This segment represents a high potential capital-efficient growth avenue and is an integral part of our company strategy. We will continue our efforts to drive targeted territory expansion, accelerate R&D efforts and continue scaling our sales force. As a reminder, when we acquired Boston O&P in January of 2024, there were 26 operational clinics. As previously reported, since then, we have expanded to more than 40 clinics, entered into 8 new territories and launched several new products. Our preliminary expectations for new clinic return on investments of 25% for new clinic acquisitions and 40% for new greenfield clinics are being realized. During the quarter, we expanded our footprint into 2 very large markets, New York City and California. We expanded Denver and Ohio. And for the first time, we expanded internationally with a clinic in Ireland. These latest additions continue to reinforce the importance and need for OPSB clinics, and we anticipate that the strong wave of clinic expansion opportunities driven by high customer demand and a robust pipeline will continue. In addition to expansion opportunities, same-store sales growth has been increasing and generating positive momentum. Our OPSB strategy is delivering strong results and has proven to be a highly efficient expansion path for OrthoPediatrics. Our presence outside the operating room allows us to create deeper partnerships with our customers. This powerful strategy is extending our leadership position in pediatric orthopedics. We remain focused on executing our strategy with precision as we work towards securing a leading share in this growing market. Moving to the Scoliosis business. Our growth of 4% seen in Scoliosis this quarter was led by strong U.S. Scoliosis implant and Scoliosis OPSB growth, offset by $2.3 million lower 7D capital sales. U.S. Scoliosis growth continues to be led by new users adopting OrthoPediatrics technology, including RESPONSE as well as pull-through from past 7D placements. As mentioned, the underlying OUS business grew nicely, but was negatively affected by reduced stocking and set sales in LatAm, primarily Brazil. We expect this will continue for the next several quarters, but are working on an improvement plan to implement in the near future. 7D sales in the quarter were impacted by increased variability in the timing of unit placements that caused delayed capital sales and the corresponding revenue from those placements had a significant impact on quarterly sales and overall growth. Typically, there are a few 7D unit sales within the quarter. But for the third quarter 2025, there were 0 unit sales. This compares to our strongest 7D unit sales results in the third quarter of 2024. We still expect 7D to be a revenue driver for us, but we cannot predict how much and which quarter sales will fall in. To minimize the impact of lumpy 7D unit sales, we have adjusted our outlook, so there is minimal impact on our expectations, which does result in negative growth assumptions from this segment. Looking at our EOS product portfolio. We are pleased to see that our portfolio expansion strategy continues to be effective. In particular, we are seeing positive trends with our recently launched VerteGlide Spinal Growth Guidance System skeletally immature patients. Following the first completed cases in August, we are seeing solid adoption of VerteGlide through the limited release, and we remain on target for the full market release in the coming months. We are excited about the progress made within this portfolio and look forward to progressing the remainder of our EOS products. Moving to international. International underlying sales were solid in the quarter due to extremely strong demand in surgical volume in EMEA and APAC, offset by unfavorable growth from LatAm. The underlying revenue largely comes through our sales agencies and represents a good reflection of high surgeon usage and higher-margin replenishment revenue. We are particularly excited to see our EMEA Scoliosis launch going so well and are eagerly awaiting the EU MDR approval of our 4.5 Scoliosis System, along with multiple other approvals expected before the end of the year. On the other hand, the headwinds in LatAm have persisted longer than we anticipated. In an effort to focus on improved cash metrics, we have made the conscious decision to limit new stocking and set sales to South America. This dynamic continues to play out and negatively impacts our growth, particularly in Brazil. We believe that at this point, our LatAm business would be in a more stable position and that we would see the benefit of growth in Latin and South America again. However, we experienced continued disruption in sales, largely related to timing of large stocking and set orders. We're working towards solutions but expect there to be some variability here moving forward, which we have reflected in our outlook. In summary, we are proud of the way the business performed, excluding 7D and LatAm. OrthoPediatrics continues to lead the pediatric orthopedic market and provide comprehensive solutions to support the care of children. We remain focused on execution across the business, including scaling of OPSB, leveraging previous set deployments and launching innovative new products. This strategy will support revenue growth, increase adjusted EBITDA while meaningfully reducing cash burn as we work towards achieving free cash flow break-even in 2026. Lastly, we believe our strategy positions OrthoPediatrics to help more children than ever before. With that, I'd like to turn the call over to Fred to provide more details on our financial results. Fred? Fred Hite: Thanks, Dave. Taking a closer look at the P&L. Our third quarter of 2025 worldwide revenue of $61.2 million increased 12% compared to the third quarter of 2024. Growth in the quarter was driven primarily by strong performance across Trauma and Deformity, Scoliosis and OPSB, offset by a decline in 7D unit sales and LatAm stocking and set sales. U.S. revenue was $48.7 million, a 14% increase from the third quarter of 2024, representing 80% of total revenue. Growth in the quarter was primarily driven by Trauma and Deformity, Scoliosis and OPSB, offset by a decline in 7D unit sales. We generated total international revenue of $12.5 million, representing growth of 6% compared to the third quarter of 2024 and representing 20% of our total revenue. Growth in the quarter was primarily led by increased procedure volumes, partially offset by lower stocking and set sales to LatAm. In the third quarter of 2025, Trauma and Deformity global revenue of $44.1 million increased 17% compared to the prior year period. Growth was primarily driven by strong growth across multiple product lines, specifically our cannulated screws, PNP Femur, PNP Tibia, DF2 and OPSB. In the third quarter of 2025, Scoliosis global revenue of $16.3 million increased 4% compared to the prior year period. Growth was primarily driven by increased sales of RESPONSE 5560 and revenue generated from FIREFLY, offset by a decline in 7D unit sales. Finally, Sports Medicine/Other revenue in the third quarter of 2025 was $0.9 million (sic) [$0.8 million ] compared to $1.3 million in the prior year period. Touching briefly on a few key metrics. For the third quarter of 2025, gross profit margin was 74% compared to 73% for the third quarter of 2024. The increase in gross margin was primarily driven by favorable product sales mix as a result of lower 7D unit sales and lower stocking and set sales to LatAm, which generate lower gross margin profit. Total operating expenses increased $9.0 million or 19% compared to the prior year period to $54.7 million in the third quarter of 2025. The increase was mainly driven by $2.3 million of restructuring charges, $2.3 million of impairment charges, increased noncash stock compensation as well as the ongoing growth of the OPSB clinics. Sales and marketing expenses increased $1.9 million or 11% compared to the prior year period to $18.7 million in the third quarter of 2025. The increase was mainly driven by increased sales commission expense and an overall increase in volume of units sold. General and administrative expenses increased $2.9 million or 11% year-over-year to $29.2 million in the third quarter of 2025. The third quarter increase was driven primarily by increased noncash stock compensation as well as the ongoing growth of the OPSB clinics. Intangible asset impairment recorded during the third quarter of 2025 was $2.3 million related to our annual impairment test, where we determined the fair value of ApiFix, Telos and Medtech trademark assets and Telos customer relationship assets were below the carrying value. We recorded an impairment charge to reduce the carrying amount of the intangible assets to their estimated fair value. Restructuring charges recorded during the third quarter of 2025 was $2.3 million related to the company's global restructuring plan started in the fourth quarter of 2024, aimed at improving operational efficiency, reducing operating costs as well as reducing staffing. For the third quarter, we recorded additional restructuring expense as we continue to review structural changes required to drive down costs. We saw savings in the third quarter, but anticipate greater impact in the fourth quarter and in 2026. Research and development expense decreased $0.2 million in the third quarter of 2025 due to timing of product development third-party invoices. Total other expense was $2.5 million for the third quarter of 2025 compared to $3.6 million of other expense for the same period last year. GAAP net loss per share for the period was $0.50 per basic and diluted share compared to $0.34 per basic and diluted share for the same period last year. Non-GAAP net loss per share for the period was $0.24 per basic and diluted share compared to $0.18 per basic and diluted share for the same period last year. Adjusted EBITDA was $6.2 million in the third quarter of 2025, a 56% improvement when compared to $4.0 million in the third quarter of 2024. We ended the third quarter with $59.8 million in cash, short-term investments and restricted cash. In the third quarter, we saw a significant improvement in free cash flow performance. For the third quarter, free cash flow usage was $3.4 million compared to $11.7 million of free cash flow usage for the third quarter of 2024. Set deployment was $4.1 million in the third quarter of 2025 compared to $5.3 million in the third quarter of 2024. Turning to guidance. As Dave mentioned, we adjusted our expectation for full year 2025 revenue to be in the range of $233.5 million to $234.5 million, representing year-over-year growth of 14% to 15%. We are reiterating the guidance that our full year gross margin will be within the range of 72% to 73%. We also continue to expect to generate between $15 million to $17 million of adjusted EBITDA in 2025. Additionally, we continue to expect approximately $15 million of new set deployed in 2025. This represents our continued focus on driving the business to free cash flow break-even by 2026, and we anticipate delivering our first quarter of free cash flow positivity in the fourth quarter of 2025. Operator, let's open the call for Q&A. Operator: [Operator Instructions] Our first question comes from David Turkaly with Citizens Bank. David Turkaly: Dave, you made a comment, I thought I heard you make it, so I just wanted to clarify it, something about competitors exiting the space. I was wondering like specifically, what were you referring to there? David Bailey: Yes. Good question, Dave. Listen, we see some of the big OEMs that are -- have notified customers that they're pulling products that historically have been used in pediatric patient population. So we've seen that from J&J. We've seen that from Smith & Nephew in the last 6 months, more recently, J&J with a Hip product that would be a competitor to 3P. And so we have really nice timing that we're coming out with a new Hip system. And just, I think, seeing a continued defocus of these pediatrics in some of the large OEMs, which I think is not necessarily great overall for patients, but certainly good for us from a competitive standpoint. David Turkaly: And I know that you talked about sort of 12% being, I think, the new LRP limit or down, I guess, lower limit of growth. And it seems like you're doing a pretty good job with these clinics. But as we look ahead to the next couple of years, do you think there's an ability to possibly accelerate either the expansions or openings on the OPSB side, maybe to accelerate that number? David Bailey: Yes. I think there is no question that there is extremely high demand for clinics. And this year, I would say we've gotten a lot of experience in terms of the timing of accelerating those clinics and the timing of getting those clinics started. We're pleased with what we've seen so far. And you can bet that if we have the opportunity to do more and do more faster, we would certainly want to do that. Certainly, trying to balance also that against the P&L requirements of trying to drive to increase profitability. But I think the demand is there. And yes, you could assume that if we have the opportunity to open more clinics, we would certainly want to do that. Operator: Our next question comes from Ben Haynor with Lake Street Capital Markets. Benjamin Haynor: First off for me, on OPSB and the 25% and 40% realized returns that you're seeing, is that something that includes any sort of halo effects that you see for other products on either the -- or I guess, on the QD and Scoliosis side? Fred Hite: No, it does not. We -- yes, it would be difficult, I think, to try to quantify that. So that's not included. Benjamin Haynor: Okay. Got it. And then just thinking about the revenue range, the $1 million difference between the top end and the bottom end there with the $2 million difference between the top end and the bottom end of the EBITDA range. Is there anything that folks should read into there? Any additional color on what might drive that EBITDA range to the top or bottom end? Fred Hite: No, it's really product mix is probably the single biggest item that drives the change on the bottom line. That's where it was to start with, and we didn't feel like narrowing that gap on the last update. Benjamin Haynor: Okay. That's fair enough. And then lastly for me, just on the competitors that notified customers that are exiting the market. Do you have a sense of where their shares stand at -- market share stands at for the likes of them? David Bailey: Yes. I certainly don't know their market shares in each one of those individual product lines. No question that our largest competitors historically have been legacy products from those 2 large OEMs. And more of their product sales probably are in the commoditized small plate, small screws types of things like that. But certainly, when there are less options available in the market and we have the best products there, it certainly bodes well for us taking all the share we would credibly want to take in areas like hip deformity correction, for example. Operator: Our next question comes from Ryan Zimmerman with BTIG. Unknown Analyst: This is Izzy on for Ryan. So I heard the comments about accelerating off of 12% for the long-term plan with new clinics opening. But I was just curious if you guys could talk a little bit about what's giving you the confidence in 12% as being the correct base to grow from. David Bailey: Yes. I mean, I guess when we look at implant sales across the board and what we see adoption rates of all our products, the way the Scoliosis business has grown and then we strip out some of the uncertainty that we've seen from Latin America, and strip out the majority of the 7D, which inevitably is going to happen. But as we've said, it's very difficult for us to determine quarter-to-quarter. When you strip some of those things out and look at the momentum we have in all of those other areas of our business, it gives us a lot of confidence that a 12% kind of baseline is a good one for us. And you're right, I mean, I think there's the opportunity for acceleration when you look at the speed with which we're -- the rate with which we're growing the OPSB franchise. I mean there's just a lot of demand for clinics. We're seeing same-store sales within our existing clinics go up. And I don't even think that we have seen the impact yet from the R&D initiatives that we've got going. We launched a number of products on the OPSB side. I think DF2 is the primary one that we talk about because it's growing so rapidly. But I think in the next few quarters, we'll be talking a lot more about a number of new R&D projects that are coming out of the OPSB franchise. And I think when you add all that up, we feel very confident in kind of a baseline growth rate of 12% going forward. Unknown Analyst: Got it. And I heard you call out strength in other international regions outside of Brazil and LatAm. I was curious if you guys are taking any steps to kind of derisk international revenue volatility as we move into 2026. Are any of the other regions where you're seeing strength growing fast enough or strong enough to offset any of the headwinds that you've seen this year? David Bailey: Yes. It certainly, as the international business grows, the dependence on revenue from Latin America, South America, particularly Brazil, becomes less impactful. And we are seeing really nice growth, particularly in Asia Pac as well as EMEA and particularly -- well, really across all of our implant businesses. I'd like to particularly call out the Scoliosis growth that we're seeing in both of those areas, which is new. We haven't really had a Scoliosis business, particularly in EMEA over the last few years. And here in the last 12 months, have really grown it from 0 to -- it's still small, but something nice and it's growing rapidly. And so all of that certainly offsets the volatility that we have from stocking distributors in Latin and South America. And I think Fred and I are going to work hard to determine if there are better structures that we could put in place with our stocking distributors in Latin America as well that could potentially mitigate some of the choppiness or lumpiness that we see in revenue. And so a number of things that we can do. But yes, I think you're on a good track here thinking that as we grow these businesses in our agencies, as our agencies become a larger percentage of our revenue, particularly in EMEA, that will mitigate some of this. Last thing I would comment on is the progress we're making on the EU MDR. So we have a number of files right now before our notified body, and we do expect by year-end, as we talked about earlier in the year to have a number of MDR approvals. I'd say the majority or the main one that we are excited about is the approvals for our small stature scoliosis system, the 45-50 system. Right now, we're growing the EMEA Scoliosis business rapidly, but really feel like we're doing it with one arm tied behind our back. We don't have half of the product portfolio there. And so to see customers so readily adopting RESPONSE when they really only have access to one embodiment of RESPONSE, is really encouraging, particularly knowing that we're on the dawn of getting approval for our small stature system. Operator: Our next question comes from Matthew O'Brien with Piper Sandler. Unknown Analyst: This is Anna on for Matt. I guess I just wanted to ask a bit on the T&D franchise. You've got a bunch of good and new products there, but I guess we were maybe expecting a bit stronger growth. So how much room is left in the market? And maybe how much of that is low-hanging fruit versus penetrating the next layer of docs? David Bailey: So we're really pleased right now with the kind of growth we see, I think, 17% for T&D global. And you could assume that we also see some T&D disruption in LatAm. So I think the underlying growth rate of T&D, our largest business is -- we feel really good about. There's a lot of growth remaining opportunities on the 7D -- a lot of growth remaining on the T&D side. Outside of the United States, as we've talked about, there's a number of EU MDR approvals that are going to help us continue to grow outside of the U.S. And then as you've heard, 3P Small-Mini, 3P Hip, these are product lines that are just now coming out. And again, we see the exiting of some of our competitors, I suppose, of the incumbent providers of products in that market. So I think one of the things that we need to consider or we're considering on the T&D side is just the pace with which we want to grow that business given the volume of sets deployed. You see our set deployment number this year come down from nearly 25 last year to 15 this year. A big portion of those sets are on the T&D side. And so without a direct competitor there, we don't have anybody trying to steal our lunch money, so to speak, in that business. And we can flex our growth rate a little bit. And when we won't want to put as much capital out and driving hard to generate free cash here, we'll deploy fewer sets, and that can impact the growth rate negatively if we deploy fewer sets maybe by a few points or positively if we, in the future, decide to ramp up set deployment and grow the T&D business a little faster. So a lot of low-hanging fruit, I think, still available to us. It's a question more of how we want to either throttle up the growth or throttle back the growth based on the cash usage we want to use in the future. Unknown Analyst: Got it. That's super helpful. And then on 7D placements, there tends to be a strong implant pull-through effect in the next few years following placement. So I was just wondering how the lowered outlook on 7D, how that has any impact on the growth of the core spine business going forward? David Bailey: Yes. That's a great question. I think this is less about our outlook and more about timing. We -- obviously, the unit placements that we anticipated happening in Q3 certainly haven't gone away. you could assume that they're likely to close at some point in time in the future, whether that's a number of them in Q4 or a bunch in Q1 or vice versa, it's hard for us to determine. But I don't think that the delays in the placements of those types of units are something that is significant enough for us to impact the long-term growth rate of the implant business on the Scoliosis side. And so not particularly concerned about that. I think we have more in the top of our funnel on the 7D side than we've ever had. And so I think there's a bright future in terms of set deployments for placements of 7D units. It's just -- again, it's hard to determine which quarter it will happen and pretty unlikely to affect implant sales. Unknown Analyst: Okay. Great. That's great to hear. And then if I can just squeeze in one last one on the profitability improvements we saw in OpEx, what was cut and how durable because you guys did a good job this quarter. Fred Hite: Yes. We're very pleased with the results we saw in the third quarter. Nice improvement both this third quarter compared to the same time last year as well as improvement over the second quarter. As mentioned, the restructuring actions we started in the fourth quarter of last year, took some more smaller actions earlier this year and then some bigger actions here in the third quarter. A little bit of those savings showed up in the third quarter, but more of those savings will show up here in the fourth quarter as well as all of 2026. So despite the softness in revenue, gross margins are strong. Profits are right where we expected them to be even with higher revenue. And that all means improved free cash flow for the business, which is obviously a key goal as well. So definitely taking steps in the right direction here. Operator: Our next question comes from Mike Matson with Needham & Company. Unknown Analyst: This is Joseph on for Mike. So I guess maybe just to start off the EU MDR, the approvals or expected approvals you guys called out. Does that get you to half or above half of the Scoliosis portfolio available over there in Europe? And then just the reduced staffing that you guys called out, I was just wondering, maybe you did mention it where that's coming from. Is that like demand driven? Is it location dependent? Is this just kind of bloat, I guess, just kind of trimming the fat for staff that necessarily wasn't needed? David Bailey: Yes. So from an EU MDR approval standpoint, yes, on our Fusion platform, having the 45-50 would really give us a full complement on the Fusion side. Certainly, the newer products on the EOS, the early onset scoliosis products are not approved in Europe. That said, there are a number of hospitals and physicians in Europe that operate in locations where they can get those types of products through a critical access type of device or emergency use type of device. So we do expect some sales on the EOS side. But yes, we'd have a pretty -- we would have a full complement of product on the RESPONSE side once we get the RESPONSE 45-50 approved. I think on the staffing side, a lot of staffing as we announced last year, we shut down the majority of the facility in Israel, and so we're starting to see some savings there. We have historically used our Telos business, both internally for R&D efforts related to clinical and regulatory efforts related to EU MDR as well as have the Telos business working with a few outside companies. I think as we have gotten to a point where EU MDR or at least the technical files have been submitted on the EU MDR side, we can start to throttle back some of those expenses we had with Telos. And so there was head count associated with that. And I would just say, generally, we're just tightening things up here and recognizing that the business is going to be solidly profitable, and we're going to generate some cash here in the near future and making some changes around the edges that ultimately will help us drive profitability. Unknown Analyst: Okay. Great. Yes, that makes a lot of sense. And then I guess maybe just the, the next-gen or the new spinal fusion system. I guess, is that still expected this year? Or is that more of a 2026 launch? I don't know if that has to do anything with how much momentum you guys are getting with RESPONSE, if that's changing your thinking around the launch there. But yes, any color there would be helpful. David Bailey: Yes. Certainly, Nextgen will be a 2026 initiative, probably not a full-blown launch in 2026, but our hope is to start doing some cases probably in the back part of 2026. you're fairly accurate in saying that while from an R&D perspective, we're heads down on making sure we got the best system. It's not critically imperative that, that product gets launched right away when we see RESPONSE growth as high as it is. So we're certainly not throttling anything back, but it's good to see that when Nextgen comes, we think we'll have an absolutely elite system there, and it will be building on the strength of RESPONSE and an already growing product line in RESPONSE. And so probably 2026, to answer your question, back part of 2026, probably a big launch in 2027, 2028 but not factored into our revenue here this year or really much revenue in 2026. Operator: Our next question comes from Richard Newitter with Truist Securities. Ravi Misra: This is Ravi in for Rich. I have 2 questions. So just the first one on 3P, a number of kind of, I don't know, line extensions or kind of new innovation and how to characterize that new innovation in the space. But just around that, can you help us understand how that gets you into -- I believe you talked about a $450 million or LatAm in that opportunity? Like how does that allow you to penetrate that? And then presumably, should we be thinking of this longer-term as kind of a leverage driver, both SG&A as well as gross margins, given that you have kind of a unified platform of products for production and kind of sale? And I have a follow-up. David Bailey: Yes. So there are -- as we mentioned, the 3P, there is a number of different implant systems in the 3P that will be more targeted to anatomic areas or specific deformity correction opportunities. I would say that the -- I would say that we are opening a lot of new opportunities with 3P because of our existing plating system doesn't have all of the indications covered. And I would say is a little bit antiquated. And so I think 3P being kind of the flagship for our trauma and limb deformity product portfolio on a go-forward basis has a big impact on our capacity to grow the T&D business. I think that it probably gets us deeper, Ravi, into existing accounts. As you know, we're present in every major children's hospital. But I think what we struggle sometimes with is that when there's shelf space and shelf presence for things that are more commoditized and small plates and screws that have been there for a long time. It's going to take some more disruptive technology to get those systems off the shelf and get newer, more modern systems in. And so I do think that as we do the full launch of 3P over the next few years, you're going to see the opportunity for substantial displacement of more of the commoditized product and replace that with some pretty high-technology products that also have very specific plates and screws, shapes and sizes, instruments that ultimately allow surgeons to do the procedures easier. And so it's a big deal for us, and I do think it allows us to get deeper and deeper in the children's hospitals where we're already present. Fred Hite: Yes. And to the leverage question, that's a great call out. I mean it's called a platform for a reason. That's the design from the very beginning is to try to leverage this stuff and to really drive what we've been working on for the last really 3 to 5 years with all of our new product introductions, which is improved return on all of our assets that we're deploying. And by combining this into a platform, we can then leverage similar drivers, similar screws, a lot of the similar items across multiple platforms, which gives us tremendous improved return on investment on these new sets coming out. So more leverage there, leverage with the suppliers than really on the SG&A side. So you'll probably see it show up more in improved gross margin. But absolutely, improved gross margin and better return on investment from a cash perspective is absolutely multiple benefits from that type of a system launch. David Bailey: Yes. And just sorry to amplify Fred's point on the asset utilization metrics here. I mean we've talked to the investment community for a long time about how our legacy products probably where some of those products that are in the market still growing, but they've been out there for 10 and 15 years. And when we developed those products 15 -- nearly 20 years ago, asset utilization metrics were not top of our list when we were a tiny company 20 years ago or 18 years ago. And since the IPO and really over the last 5 years, I mean, new product development is not only focused on meeting major unmet clinical needs in pediatric healthcare, but also being able to do that where we're getting better asset utilization metrics, so either high ASP against -- or less inventory. And I can say with confidence after seeing what we're getting on 3P Hip and what we're getting both from an ASP standpoint as well as just the inventory required to do those elective procedures that the 3P -- first iteration of the 3P platform is doing exactly as we want. It's allowing surgeons to do procedures on kids they would really struggle otherwise and really high demand types of patients, but it's also doing it at a really nice price point for us, a really nice margin for us. And I'm pretty excited to see the return on assets meeting our needs, meaning a substantial improvement over some of our legacy products. Unknown Analyst: Great. And then just maybe one last one. No, no I mean, it's an important product driver, right? So -- and then just on the last -- just kind of a question on the Q&A kind of just struck me around how you're thinking about Latin American growth right now and kind of Brazil as you kind of work your way through the dynamics there. And when you're looking at kind of the long-term 12% outlook that you're putting out there for '26, '27 and beyond, how should we kind of think about -- if you're looking to restart growth, obviously, in that area of the world with a new business model potentially coming in, should we think about maybe trading some profitability for revenue there? Or any kind of comments that you can kind of give us as you work through your new strategy there, given the changes you've seen in the last couple of months would be very helpful into '26. Fred Hite: Yes. What I would say is I think you should expect more of the same in that revenue is important, but improving profitability and improving free cash flow is as important. And so it's not revenue at all cost. It's revenue that's profitable and it's revenue that generates free cash flow for us. And any change that we do, I think, in the business, you could assume is going to follow those same principles. So it's not necessarily going to maximize revenue growth, but more importantly, improve the profitability of sales down there as well as improve the -- dramatically improve the cash flow of that operation. Operator: I'm not showing any further questions at this time. I'd like to turn the call back over to Dave for any further remarks. David Bailey: Well, thank you for everybody for your good questions. Thank you for your time. And I'd just like to thank all of my associates and partners in pediatric health care and our investors for continuing to share in the mission to help 1 million kids a year. Have a great day, and we look forward to talking to you soon. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.
Operator: Good day, and welcome to the Alexandria Real Estate Equities' Third Quarter 2025 Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Paula Schwartz from Investor Relations. Please go ahead. Paula Schwartz: Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now I would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel. Joel Marcus: Thank you, Paula, and welcome, everybody, to Alexandria's third quarter earnings call. With me today are Hallie Kuhn, Peter Moglia and Marc Binda. Let me start off as I usually do with a quote. My friend and mentor, Jim Collins, who wrote his well-known book, Built to Last, noted that, the secret to an enduring great company is its ability to manage continuity and change simultaneously, a discipline that must be consciously practiced, keeping clearly focused on which should never change and what should be open to change. And clearly, our development pipeline is front and center in that. Jim's visionary wisdom and advice is a great frame for Alexandria at this moment in time as the gold standard and leader of our niche. We invented and pioneered life science real estate, a whole new asset class and category 31 years ago during the early years of the biotechnology revolution. Our North Star was and remains our focus on innovation clusters and ecosystems unique to the life science industry different than almost every other property type. We're blessed with best assets, best tenants, best Megacampus and best team. Our relentless mission is driven by building the future of life-changing innovation and enabling the world's leading innovators to advance and better human health. The biotechnology revolution started almost 50 years ago. And in those 50 years, we've only been able to therapeutically address less than 10% of the more than 10,000 diseases known to human kind. No one lives in a family, community, which has not been struck by the wrath of disease and illness devastating in so many ways. We now find ourselves on the precipice of an entirely new age of discovery and innovation at the intersection of biology and technology 50 years later. Biology, it's important to remember, is inherently slow and complex. The life science industry, and particularly the innovation engine of the biotech sector, is mission-critical for a strong, safe, healthier country and planet as well as for America's global leadership, future economic growth and security. As opposed to most property types, office, industrial and resi, we operate in a highly regulated industry that takes extraordinary time and cost to bring life-changing medicines to patients. To get a life-saving product on the market, you only can sell that product for a handful of years in a regime of pricing oversight sometimes control different than other property types. I wonder what Microsoft would say if they were told you could only license window for a decade and then you lose the right to retain revenue or develop revenue from that innovation. If it matters fundamentally if the government is shut down or not operating effectively or efficiently. The four pillars of the life science industry are critical and a critical bedrock to what I've just said about this country's health. We must preserve, protect and grow the strong and basic translational research. It is a critical bedrock of new discoveries, and we must deal, hopefully quickly, with the current limitation on indirect overhead cost, which is timing demand out of the institutional sector. We must preserve, protect and grow the robust entrepreneurial ecosystem with access to affordable capital. Cost of capital today is high for discovery research engines, from the venture capital to the IPO to the M&A, we are in a continuing difficult environment, getting better, but difficult nonetheless. That's the second bedrock. The third one is providing a reliable and efficient and time-sensitive regulatory science framework and pathways. Once again, the FDA must compress timeframes and cost of R&D development. We met with Commissioner McGarry at the end of September, and he is super focused on this issue. Important to note that total development time frame for molecules in the Western world, U.S. and the EU ranges in the neighborhood of about 10 to 12 years versus China, which is about 1/3 of that time frame in their early stage of development in this industry. Approximate cost to bring products to market in the Western world is somewhere in the range of about $1.5 billion. And in China, it's about 50% to 90% below that. So we're faced with a very different circumstance today that the industry must face. And the fourth pillar is providing reasonable reimbursement for innovative medicines, which are costly and time consuming to bring to market. We at Alexandria successfully navigated the dot-com bust in circa 2000, the great financial crisis circa 2008, 2009, both when we were unrated, non-investment grade. And during the GFC, we had 30% of our gross assets in non-income producing land at Mission Bay and Cambridge. But this time, the navigation is once again different than before. We've seen the unprecedented bull market -- the unprecedented bold biotech market post GFC 2014 to '21 capped off by the rocket ship of COVID rate funding and demand, a very low interest rate environment went along with that, which incentivized really foolish speculation by financially motivated real estate companies and they're even more foolish capital partners. This brought an unwanted and unnecessary oversupply to many of the innovation submarkets. This has never happened in this niche before. But they're learning painful lessons that this real estate niche is unique and different from all others. This was followed by a biotech bear market, we're now in the fifth year, which is starting to turn the corner, and we're now witnessing the bottom and early signs of a recovery and strengthening as we predicted at NAREIT in June. The industry is now enduring a government shutdown and the impact to the FDA is pretty serious. This brings us to the third quarter, a critical juncture and time for this industry. On the one hand, the greatest prospect ever for innovation in our time, and coupled with the relentless change in government shutdown. Quite a juxtaposition. Huge congrats to our first-in-class team who are navigating this difficult environment with relentless grit and determination and unparalleled experience and expertise. While declines in FFO per share, occupancy and guidance are tough at any point in time, Alexandria remains strong, tough, resilient and continuing beacon of life for our life science industry. One of our North Stars has been our balance sheet, working out of the GFC when we are unrated to today. We're now one of the top 15 of all REITs. It's strong, flexible and we have the longest weighted average remaining debt of all S&P 500 REITs at 11.6 years, over $4 billion of liquidity, strong fixed coverage ratio 96% -- almost 97% of our fixed rate debt is at [ 3.7% ] blended interest rate and one area of laser focus for us will be to continue to reduce our current non-income-producing assets on the balance sheet from the current 20% as we diagram for you in the supplement and press release, to about 10% to 15%. As opposed to the great financial crisis where we had 30% non-income producing assets as a percentage of gross assets with an unrated balance sheet there was pent-up demand and no supply coming out of the GFC year. So we kept our land at Mission Bay and Cambridge for future development, which provided a decade of unprecedented growth. Alexandria has and will continue in this environment to accelerate its transition from substantial development to a build-to-suit on Megacampus only development model. We intend to continue to decreased construction spend, preserve capital and not create further supply. And then finally, let me make a couple of comments before I turn it over to Marc for an in-depth review of the quarter and kind of factors impacting 2026. Let me make a couple of comments about leasing. The lifeblood of Alexandria's sector, a leading platform with the largest number of clients and strongest tenant base is our leasing. And our tenant base, of course, 53% of our leases are to investment grade or big cap, tenants with an average almost 9.5 years weighted average lease term for our top 20 tenants, and 18 of the top 20 pharmas are our tenants, a best example of our brand being the most trusted in the industry. And congrats to our team for the historic lease executed in this third quarter for 16 years with a credit -- existing credit tenant for almost 500,000 square feet at our Campus Point Megacampus in San Diego. We're proud to say that our ARR from Megacampus is 77% and is continuing to approach 80%. We continue to benefit from stellar operating margins and a very disciplined G&A run rate. 3Q was a solid quarter of leasing. However, institutional demand is still stuck due to the NIH issues and particularly the reimbursement of indirect costs. Coupled with we need to see more green shoots from early-stage, venture-backed companies as well as the larger cadre of public biotech companies which have yet to recover in a meaningful way. We're starting to see green shoots on that, but that will be a critical litmus test going forward. And finally, before I turn it over to Marc for comments, let me just say we intend to continue to meet the market for our tenants and continue to successfully lease and dominate our space. And with that, Marc? Marc Binda: Thanks, Joel. This is Marc Binda, Chief Financial Officer. Good afternoon. I plan to cover the performance for the third quarter as well as some key emerging trends expected to impact 2026. Our team continues to navigate a challenging environment given macro industry and policy factors beyond our control. Please refer to our earnings release for our EPS results. FFO per share diluted as adjusted was $2.22 for 3Q '25 and included the following three key impacts compared with the prior quarter. First, occupancy was effectively down 1.1% for the quarter after considering the benefit from the exclusion of assets with vacancy, which were sold or designated for held-for-sale during the quarter, and was driven by a challenging life science supply and demand dynamic. Second, there was a $0.03 reduction in rental income associated with one tenant in our Seattle market to adjust rental income to cash basis. Importantly, that tenant remains in occupancy and is current on rent pending future critical milestones in the first half of 2026. And third, other income was down $8.7 million or about $0.05 compared to the prior quarter. Current quarter other income of $16 million remains consistent with the prior 8 quarter average. And as we discussed in our prior call, 2Q '25 did have some lumpy fees in there. Leasing volume for the quarter remained solid at 1.2 million square feet, in line with the 5 quarter average. This includes the previously announced 467,000 square foot build-to-suit lease with a multinational pharma tenant that was executed in July. We continue to benefit from our scale, high-quality tenant roster and brand loyalty with 82% of our leasing activity in the quarter coming from our existing deep well of approximately 700 tenant relationships. Rental rate growth for lease renewals and re-leasing the space for the quarter was solid at 15.2% and 6.1% on a cash basis, which is at the high end of our guidance range for the year. We've reduced our guidance for 2025 rental rate increases on renewals and re-leasing the space by 2%, primarily due to one short-term renewal in Canada that was executed in October as well as some higher free rent. Lease terms on leasing continue to be long at 14.6 years for the quarter, which is well above our historical average, and tenant improvement leasing costs on renewals and re-leasing the space for the quarter are relatively consistent with the prior year and down from the first half of the year. Occupancy at the end of the quarter was 90.6%, which was down 20 basis points from the prior quarter. As of September 30, certain assets with vacancy were designated for held-for-sale and were removed from our operating occupancy metric, which benefited occupancy at September 30 by 90 basis points. As a result, the decline in occupancy for our operating properties on an apples-to-apples basis declined by 110 basis points during the quarter. While occupancy declined due to oversupply in certain of our submarkets, it's important to highlight that our Megacampus platform, which represents 77% of our annual rental revenue as of 3Q '25 outperformed overall market occupancy in our three largest markets by 18%. Our outlook for year-end occupancy was reduced by 90 basis points to a range of 90% to 91.6%. Our outlook assumes up to a 1% benefit from assets with vacancy, which could potentially be sold or designated as held-for-sale by December 31, which implies an 80 basis point decline in occupancy by the end of 2025, based upon the midpoint of our guidance. Our team continues to execute with 617,458 square feet of leasing completed to date for spaces that are vacant today and expected to deliver upon the completion of construction in May of next year on average. Looking ahead to next year, we have 1.2 million square feet of lease expirations through the end of 2026, and which are in great assets in AAA locations but are expected to go vacant, and we expect downtime on those assets. Same-property NOI was down 6% and 3.1% on a cash basis for the quarter. The decline in same-property was primarily driven by lower occupancy. In addition, we provided an alternative same-property presentation, which recasts the first and second quarter results based upon the third quarter same-property pool to provide a consistent quarterly trend view given several assets that were removed from the third quarter same-property pool as they were either sold or designated as held-for-sale. It's important to note that this alternative presentation shows higher same-property performance in the first half of 2025, which means there will be a tougher benchmark in the first half of 2026. We reduced our outlook for same-property performance for 2025 by 1%, primarily due to slower-than-anticipated leasing caused by a slower realization of demand. Despite this change, we continue to benefit from a very high-quality tenant base with 53% of our ARR coming from investment-grade or publicly-traded large cap tenants, long remaining average lease terms of 7.5 years, average rent steps approaching 3% on 97% of our leases, solid rental rate increases of renewed and re-leasing space during the quarter, and our adjusted EBITDA margins remained strong at 71% for the most recent quarter, consistent with our 5-year average. On G&A, we continue to make great progress towards our goal of annual savings for 2025 of approximately $49 million compared to 2024 through a number of prudent and strategic cost savings initiatives. Our trailing 12 months G&A cost as a percentage of NOI was 5.7%, which represents approximately half the average of other S&P 500 REITs. We expect that around half of the 2025 savings will continue into 2026, given the temporary nature of some of the 2025 savings. With projects under construction and expected to generate significant NOI over the next few years, and other earlier-stage projects undergoing important entitlement design and site work necessary to be ready for future ground-up development, we are required to capitalize a portion of our gross interest cost. We have and will continue to curtail our large development pipeline coming off a decade bull run for the industry fueled by the rocket ship demand of COVID. Given the lack of clarity on near-term demand as well as significant availability in some of our submarkets, we are carefully evaluating on a project-by-project basis the $4.2 billion of land subject to capitalization during the first 9 months of the year. With preconstruction milestones in April 2026, on average, we continue to evaluate whether to progress preconstruction or construction efforts beyond the current milestones and in various cases will likely pause or curtail activity. If we decide to pause on a project as it reaches the next milestone, capitalization of interest, payroll and other required costs would cease on that project. While these ultimate decisions have not yet been made, we would like our funding program for next year to include a significant component of land dispositions which help us achieve one of our strategic objectives over the near to intermediate term to significantly reduce the size of our land bank. Sales of land could result in a significant reduction in capitalized interest and potential impairment charges. We expect steady to slightly lower capitalized interest in 4Q '25 and lower capitalized interest beginning in the first quarter of 2026. Despite positive recent activity for the biotech XBI Index, private and public biotech companies continue to remain challenged given the 5-year bear market for the sector. Given these and other factors unique to our venture investments, we did revise our guidance down to a range of $100 million to $120 million. It's important to point out that for the first 9 months of 2025, we realized $95 million of gains from our venture investments, which were included in FFO per share as adjusted or about $32 million per quarter. Based upon the midpoint of our revised guidance for realized investment gains of $110 million, this implies $15 million for the fourth quarter, or a $17 million decline over the average quarterly run rate for the last 3 quarters. We continue to stand out as our corporate credit ratings rank in the top 15% of all publicly traded U.S. REITs. We have the longest average remaining debt maturity among all S&P 500 REITs at 11.6 years and tremendous liquidity of $4.2 billion. We updated our guidance for year-end leverage to 5.5 to 6.0x for 4Q '25 net debt to annualized adjusted EBITDA. The increase from our prior target of 5.2x was primarily due to two factors: first, a reduction in our disposition guidance to a midpoint of $1.5 billion related to $450 million of potential dispositions expected to be delayed into 2026; and second, a projected reduction in annualized EBITDA in the fourth quarter from lower same-property net operating income and lower realized investment gains. We've completed $508 million of dispositions to date, which leaves $1 billion to complete in the fourth quarter, all of which are subject to non-fundable deposits signed NOIs or purchase and sale negotiations. In connection with our disposition program, we recognized impairments of real estate of $323.9 million during the quarter, with approximately 2/3 of that coming from an investment in our Long Island City redevelopment property. Three items to highlight here. First, we acquired the site in 2018. That submarket suffered a substantial setback when Amazon abandoned its plan for new HQ in that location in 2019 and it never recovered. Second, despite the lower rental rate price point and our dominance in that submarket, it has been challenging to get a critical mass of life science tenants to go to this location. And ultimately, we don't view it as a life science destination that can scale. And third, this location has become more of an industrial flex and cinema submarket rather than life science. Ultimately, at the end of September, we decided future capital needs and the sale proceeds related to this project would be better recycled into our Megacampuses where we have greater conviction long term. Looking forward, we have a number of assets under consideration for sale either by the end of this year or sometime in 2026 that have estimated values below our carrying values ranging from $0 to $685 million. Although these potential impairments have not been triggered and final decisions to proceed have not been made, we updated our guidance range for 2025 to reflect these potential additional impairments in the fourth quarter. We anticipate an end to the large-scale non-core asset program by the end of 2026 or early 2027. We also expect dispositions to provide the vast majority of our capital needs for next year. Turning to capital allocation, two points here. First, we are continuing to evaluate some of our development and redevelopment projects expected to stabilize in 2027 and 2028 for opportunities to pivot. Second, we estimate our 2026 construction spending to be similar to slightly higher than the midpoint of construction spending for 2025 of $1.75 billion, which includes the recently announced build-to-suit in San Diego and higher CapEx and repositioning costs necessary to lease vacant space related to our operating properties. But the goal is to continue to reduce non-income-producing assets and other development pipeline -- and our development pipeline over time. Next, on dividend policy. The Board's approach has been to share cash flows from operating activities with investors as well as to retain a meaningful amount for reinvestment which has allowed us to retain $475 million at the midpoint of our guidance range for 2025. In addition, the cumulative growth in dividends and FFO has been highly correlated since 2013. Given the factors that we described in our press release that are expected to impact 2026 earnings and cash flows, we anticipate that our Board of Directors will carefully evaluate future dividend levels accordingly. We provided updated guidance for FFO per share diluted as adjusted for 2025, which was reduced by $0.25, or about 2.7% to a midpoint of $9.01 per share. This change was primarily due to lower investment gains and lower same-property performance driven by lower occupancy. Looking ahead to 2026, as is our long-standing practice, we will provide detailed guidance at our Investor Day on December 3. And in advance of that, we've shared five important trends that will impact earnings for 2026, including core operations and occupancy, capitalized interest, realized gains on non-real estate investments, G&A and our disposition program. Please refer to Page 6 of our supplemental package for more information. Given the various factors impacting 2026 earnings, it's important to recognize the tremendous intrinsic value of our highly differentiated Megacampus assets included in consensus NAV, which is significantly above our current trading price today with that consensus NAV coming in at around $117 per share. To be clear, we continue to be the dominant leader for life science real estate with the best assets in the best locations and the best tenants. Our focus in irreplaceable world-class Megacampuses will continue to set us apart and give us an opportunity to capture premium economics for the long term as the demand and supply picture improves over time. Now I'll turn it back to Joel. Joel Marcus: Operator, please start questions. Operator: [Operator Instructions] Today's first question comes from Farrell Granath with BofA. Farrell Granath: I first just want to touch on, I know last quarter, you had some commentary about potential benefits to occupancy, about $600,000 or 1.7%. I was curious on the update and your expectations or line of sight that you're seeing now? Joel Marcus: Yes. That's a really good question. Marc, do you want to comment on those assets? Marc Binda: Sure. Yes. So we did provide an update, it's in Page 2 of the press release, that number is about 617,000 feet as of September 30. It's primarily at properties located in Greater Boston, San Francisco, San Diego and Seattle. And it's about $46 million of -- potential annual rental revenue of $46 million. And we expect it to deliver on average. There's a lot of spaces in there, as you can imagine, but on average, around May 1 of next year. Farrell Granath: Okay. And also, I guess, a broader question. In previous calls, we've heard that there was early positivity around leading indicators in the biotech market. And you made a few comments around that. But it generally still feels like you're very much seeing the impacts of supply and demand. And I'm curious, what would turn your perspective or optimism a little bit higher, either if that's greater IPOs or different capital market movements? Joel Marcus: Yes. That's also a really important question. I think the two -- well, there are three missing links, as I mentioned in my opening comments to demand today and Hallie, can give you chapter and verse on the green shoots that we're seeing, which are substantial from the capital market side to M&A, et cetera. But one is the FDA, the government shutdown has to stop and the FDA has to open. Number two, venture, earlier-stage venture-backed companies have to start making commitments for space as opposed to kind of holding, waiting for cost of capital issues with the Fed and broadly in the industry. And I think, three, the public biotech sector, which has been, to a large extent, the mainstay of this industry as far as space and demand has to be reignited. And even though the XBI is up substantially, that has not yet translated into action. So I think those are the key things we're looking for. And institutional demand, if the NIH can get its act together on the issues we talked about, one, making sure they're fully funded and disbursing funds and that there's an unlocking of the current bar to the 15% indirect cost limitation. Operator: Thank you. And our next question today comes from Seth Bergey with Citi. Nicholas Joseph: It's Nick here with Seth. Just as we think about the sources of capital, you mentioned equity-like capital. Could you elaborate on that and kind of either the pricing or what exactly you mean by that? Joel Marcus: Yes. I mean we've used that for the last, I don't know, 15-or-so years. That really is just capital that comes into the company through one form or another, it could be savings on dividend like we've done. It could be other sources, joint sales of joint ventures. But primarily, I think Marc stated it pretty clearly, and let me just repeat for everybody, the vast majority of capital for next year's plan, which will unveil on December 3 at Investor Day will be asset sales. And we gave you a pie chart in the press release regarding, at least, this year's proportion of those, so a big chunk from land, a very big chunk from other than fully stabilized assets and then a chunk from stabilized assets. So I don't think that's going to vary much from this year. Nicholas Joseph: That's helpful. And then in your opening comments, you said the bear market is starting to turn the corner. Are you seen that in the transaction market as well for -- on the stabilized asset side? Is there a change in buyer demand given the underlying fundamentals and what you're seeing? Joel Marcus: Yes, Peter? Peter M. Moglia: Yes. I would say that there is strong demand for our assets, especially ones that investors consider to be opportunistic, that's really the sweet spot right now. But yes, we have no shortage of interest in everything that we're bringing to the table, that's life science and things that are alternative uses where we're finding a lot of interest from residential developer. Operator: And our next question today comes from Rich Anderson at Cantor Fitzgerald. Richard Anderson: So can you talk a little bit about -- a little bit more detail on the development sort of process going forward? I think it's a matter of -- maybe it comes down in order of magnitude over the coming years just in dollars in terms of development spend, but also type of development. Joel, did I hear you right that the focus going forward will be more on build-to-suits than anything else, not that you haven't been focused on that. But I mean, I wonder what the development picture is going to look like kind of post-2026, when you top off what's left and then you consider the $4.2 billion that's sort of kind of still early stage in terms of the process. Just if you could sort of give us a line of sight into what this will all look like eventually? Joel Marcus: Yes. And I mean you can look at, we've been at this now for a multiyear period. It obviously is a lot of pick and shovel work. This year is a good example. And again, the chart or the pie chart I referred to just a moment ago, this year's land sales as estimated, both what we've accomplished and what we have left to do, will be an important part of reducing that land bank. And if you look at Page 46 of the press release and supp, you can see the pie chart. Marc has tried to enhance this in as clear a fashion as possible. And you can look just your eyes kind of go to 2 particular places right away. One is the 15% bucket critical milestones coming up, non-Megacampus projects. We clearly want to bring -- to try to, through entitlement, design and sometimes design, but entitlement in particular, trying to create as much value for alternative uses. We mentioned resi and we've been very successful there. So this is a bucket that will clearly not be there over the coming years. The one at its immediate left, 26%, where we have both -- well, stable near-term projects that are not yet fully stabilized, of course, '27 and beyond, we have a smaller amount of leasing. Those are projects that we are going to look at very carefully and make some pretty big determinations as soon as we can get to points in time where we think we've tried to maximize the current value. And my guess is a bunch of those projects will be sold, which will further reduce the land bank. And we'll see on the Megacampus projects, what happens to those. We're clearly unable to do all Megacampuses. And so it's certainly possible we bring one or more. There's a chart of, I think, or pictures of 4 big Megacampuses, one in Seattle, one in near South San Francisco, in San Bruno, another one in San Carlos and then the final one at Campus Point. It's pretty clear that, for example, the San Bruno is one that we're thinking about very carefully. We're working through a very complex project with both entitlements and existing tenants. And we'll see what happens there. But that's the kind of project that we could see potentially exiting at some point as well. So we're trying to be as both as aggressive as we can time-wise, cost-wise, but also very thoughtful. Richard Anderson: Okay. And so do you think that there will be like at Investor Day some sort of run rate development exposure that Alexandria will sort of commit to at the other side of all this? Is that sort of the messaging that you expect to provide, if not right now, but... Joel Marcus: When you say development run rate specifically as to what time? Richard Anderson: Well, as a percentage of assets or however you want to look at. Joel Marcus: Well, I think I actually said it on the call in my opening, we're at 20% today. We were at 30% break GFC, but for different reasons, we decided to hold those, Mission Bay and Cambridge, and those turned out to be the lifeblood of our decade bull run with the biotech industry. I think it's different this time because there's a lot of stupid space that was built by others. And so we don't want to build into that kind of a market. So 20% should come down to 10% to 15% over the coming years, and we're certainly looking at trying to accelerate that as fast as possible because the less we have on balance sheet and the less dollars going into that or the less construction dollars and funding dollars we have to require. So the 2 go hand-in-hand. But 10% to 15% is the number. Richard Anderson: Yes. Okay, you did say that, my apologies. And then lastly for me, on the dividend, you're running at a $5.28 annual dividend and talking about the Board taking a look at it next year. What's your comfort level from a payout ratio sort of when you kind of think about resetting the dividend? I'm just curious where -- what the sort of the policy is -- the dividend policy... Joel Marcus: Yes. Well, the Board will look at that in the fourth quarter and declare a fourth quarter dividend. I think what we want to do is try to be able to frame 2026, I think, very, very clearly, and we'll try to do that to the Street as quickly as we can. But I think that frame then impacts how the Board will think about the metrics of dividend. But remember, that's our cheapest form of capital, so we are focused on that. But Marc, you could give any broad parameters you want. Marc Binda: Well, I would -- the only thing I would add to that is we do have room in our taxable income. So the Board will obviously make the final decision, but there's room potentially up to 40 -- 30%, 40%, but they'll be looking at a variety of factors, including the amount of retained cash flows or capital needs for next year, AFFO coverage as well as a few other stats there. Operator: And our next question today comes from Anthony Paolone with JPMorgan. Anthony Paolone: Just on that last point on the dividend, Marc, do you all have taxable net? Like do you need to pay a dividend? Or do you have the ability to just keep cash? Marc Binda: No, we do need to pay a dividend. That's right. I mean... Joel Marcus: And we intend to. Anthony Paolone: Okay. Just wondering, because also it seems like even after a day like today with the stock down the way it is, and you had brought up kind of where some of the Street numbers are for NAV, like does this bring back the prospect of using capital just for your stock here? Or are the development needs just going to be great enough that you got to keep going down that path? Marc Binda: Yes. Look, I think we believe the price is attractive to buy back, but we're certainly focused on making sure that we have enough capital to finish out the construction commitments that we have, and that's kind of our first priority. Anthony Paolone: Okay. And then just another question. Just in the -- you called out the 1.2 million square feet that are sort of the key leases or move-outs we should be thinking about. But the remaining like 1.3 million square feet expiring next year, are those likely to stay and so you kind of have kept them in a separate bucket? Or should we assume there's still some normal retention to move out in that grouping as well? Marc Binda: Yes. Look, those -- what's left over is -- are things in the normal course of leasing. So what we've called out are items that we are -- we know are going to go vacant. The rest of it are things that are just too early to tell. Anthony Paolone: Okay. If I could just sneak one more in. Just, Marc, you mentioned the $15 million in venture gains for the fourth quarter. I know you'll give details on other income in December, but should we think of $15 million as the new $32 million or any guidepost there at this point? Marc Binda: Look, the $15 million as the number for the fourth quarter is really a reflection of where we think the market is and the unique factors specific to our portfolio of investments. We'll be able to give a clear picture on what we think next year looks like at our Investor Day come December. Operator: And our next question comes from Wes Golladay of Baird. Wesley Golladay: I was just looking at the future pipeline, the $3 billion and the $1.2 billion, how much of the potential residential land plays will come out of that bucket? And then when you also look at the potential for $685 million of impairments, would that mostly fall in that bucket as well? Marc Binda: Yes. It's Marc. I can definitely take the second question on the $685 million. Just to be clear, the $685 million is -- relates to a variety of assets that are under consideration. So there's a variety of ways that, that could go. It just depends on what happens with the buyer, if we can get a price that we like, et cetera, some of these assets we could end up holding if we decide to pivot. But the $685 million, I would say the bigger chunk there has to do with land-type assets. Wesley Golladay: Okay. And then for the -- go ahead. sorry. Joel Marcus: No, please. Wesley Golladay: No, go ahead, go ahead. Yes. Joel Marcus: Well, I was going to say, if you just look at the 4 Megacampuses that are pictured in the press release and supp, each one of those are intended to have a component and some substantial component of resi. So you can make that judgment based on that commentary. Wesley Golladay: Okay. Got that. And then for the leases that are going to commence in, I guess, the first half of next year, was there any -- it looks like there might have been a small delay on that. Was that anything like permitting-wise or just the tenant looking to move in a little bit later? Marc Binda: Yes. No, I don't know that there was necessarily a delay. It's just a -- that bucket continues to evolve, right, as some of it gets delivered and then we're obviously adding new stuff there, right? We're leasing space that then extends that. So that will be an evolution just because that bucket changes from quarter-to-quarter. Operator: And our next question comes from Michael Carroll at RBC Capital Markets. Michael Carroll: Can you provide some color on the type of tenant activity that the company is tracking right now? I mean it sounds like in the prepared remarks that you're seeing activity being kind of flat despite the XBI uptick. But are there certain tenants looking for different types of spaces? I mean, how many tenants are looking for like the Class A space versus the Class B space? I mean is there different price points that tenants are looking at just given them trying to extend their cash burn rates given the current uncertainty? Joel Marcus: Well, yes, that's almost an impossible question to answer because if you look at the press release and supp, we put a pie chart of our -- the tenant sectors in there, and there is certainly demand from almost all of those. There's no government demand. And at the moment, there's muted institutional demand, although we're working on one big deal as we speak. But aside from that, I think what we said is, and it varies submarket by submarket, each submarket has its own particular dynamics. Some are pretty well in balance with supply and demand. Others are imbalanced. And so that is a little bit different. But I think across the board, there is demand. I think what the commentary really is, is that given the recovery in the XBI, we're a little surprised that demand hasn't followed as much. It's not as obvious than maybe in past times, but the reason for that is clear, cost of capital and federal interest rates are being stubbornly high. The government has shut down. The FDA is closed by and large, and there's a lot of log jams out there that are preventing a -- and the IPO market is shut by and large. There's a little bit of activity, but it really isn't an opening. I think those are the factors. But there's demand from a variety of sectors. But again, it's very case specific. And it also depends on, when you say Class A, you tend to have revenue-producing companies looking for Class A space or companies that are extremely well capitalized. Others are looking for either moved out space or second -- true second-generation space after a 5-, 7-, 10-year lease, so it varies all over the marketplace. Michael Carroll: All right. That's helpful. And then just following up on Anthony's question related to the 1.3 million square feet of 2026 lease expirations that are still outstanding that you guys need to address. Is that mostly lab tenants that are looking at that space? Or I guess, what's the mix between lab tenants or maybe covered land plays that those assets were holding? I mean, can you provide any details on what type of tenants are included in that bucket? Marc Binda: Yes. Yes. I mean we try to give some framework for kind of the key drivers there. I think it was on Page 23, footnote 4. If you go kind of line by line through the call out of those properties, most of those are going to be lab related, with the exception of the first one that we called out, which is about in 137,000 in Greater Stanford, that one is probably more likely to be targeted to an advanced technology use, but the other ones that we called out there in San Diego and then also in Cambridge are all lab. Michael Carroll: Okay. Is this the 1.3 million remaining square feet? Or is that footnote talking about the 1.1 million square feet that is expected to move out? Marc Binda: That's related to the -- sorry, I was referring to the 1.2 million square feet of lease expirations that are known vacates. Michael Carroll: And then the 1.3 million that is remaining that is yet to be addressed. Is that mostly lab? Marc Binda: It's a mix. I would say, mostly lab, but it's a mix. Peter M. Moglia: Yes, Marc, it's Peter. I can confirm it's mostly lab. There is also a little bit more tech space in there, just like in the 1.2 million, but it's mostly lab. Operator: And our next question today comes from John Kim with BMO Capital Markets. John Kim: I was wondering if you could provide a little bit more color on the quantum of capitalized interest that may be lowered in 2026. I know you mentioned a lot of this will be driven by land sales, but I'm trying to match that with the $1.75 billion of expected construction spend you'll have next year, which would suggest that the majority of capitalized interest will continue? Marc Binda: Yes, I can take that. So 2 things driving next year in terms of construction numbers, one is the development costs and redevelopment costs to finish what's in the active pipeline, right? We still have a decent amount that's going to deliver next year that is 80% leased. And then we've also got higher, I would say, CapEx or repositioning type costs next year than we had in 2025, and that has a lot to do with the fact that there are some known vacates and it's going to cost -- we're going to have higher maintenance costs just given how much vacancy we have to lease in this market. So those are really the 2 biggest drivers. I think in terms of your fundamental question of how much cap interest rolls off, I would just refer you to the commentary that Joel had earlier about really thinking through that pie chart on Page 46 of the supplemental, the way we're thinking about the various buckets. The Megacampuses, obviously, we'd love to do. They're very valuable, but we can't do them all. You've got the non-Megacampus future land assets, which would be ripe if there are opportunities to sell. And then the 2027 and beyond projects, which we may look at opportunities to pivot there in some fashion. John Kim: Okay. And then going back to the known move-outs for next year, the 1.2 million square feet, can you provide some commentary on why those tenants are not renewing? Whether they're going to new product or they're shrinking footprint or there was some kind of event within the company? Marc Binda: Yes, sure. I can rattle through those. So maybe I'll just go through the 4 that we mentioned there. The first basket was really, I would say, a non-lab tenant. They were a software company that was in there when we acquired those assets in Greater Stanford. That's 138,000 feet. That was a known vacate. The original business plan there was to redevelop it when we bought that a number of years ago. But things are obviously different, and we may choose to do something different there in terms of targeting more advanced type technology users. So that... Joel Marcus: Yes. And there's a lot of tech activity on that location. Actually, it's a very, very unique campus, mini campus. Marc Binda: Yes. And then in San Diego, I would just point to the one asset in Torrey Pines, the 118,000, that was a project that had been occupied by a subsidiary of a big pharma. That big pharma ended up consolidating on our campus at Campus Point and they ended up coming out of that space, but they did expand with us. And I think that project delivers next year. So that was kind of lead behind space. The 84,000 or 83,000 square foot space in Sorrento Mesa, a similar story. That was a subsidiary of a big pharma that also expanded with us on our SD Tech campus, and that was the lead behind space, very good quality spaces in both of those instances, but they're bigger spaces, so it may take some time if we end up either targeting a larger user or smaller-type users since they were big kind of single tenant spaces. And then the last bucket in Cambridge, some of that was -- it's just a variety of different spaces. Those spaces, as we mentioned there were older product that we really hadn't -- at least most of it hadn't really touched since we bought that campus in 2016. So it's a variety of factors. Joel Marcus: Yes. And then you should note that of the 3 noted vacancies on Page 23, footnote 4, we have an LOI signed for 83,000 square feet of that known vacate, and we have an LOI signed of about 40% of the 118,000 feet at the moment. So stay tuned. Operator: And our next question today comes from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess, Joel, bigger picture, you're now in a macro, you sort of called the bottom, but things are uncertain. Obviously, you don't have control over that. It seems like the sales process is also -- it really depends on buyer timing, so perhaps less control and you're trying to solve for leverage and capital needs. So I'm wondering like as you get through this in the next year or 2, to be in a better position to maybe take advantage of distress, why not consider just outright equity to fix the balance sheet, fix your capital needs, rather than having to rely on the asset sale process, which I know is important, but I'm just trying to... Joel Marcus: Well, yes, that's a really good question. But I think, number one, the balance sheet is actually in great shape. Leverage ticked up a little bit, but I think we're pretty comfortable given the sales we have in line. I think what we really want to do is to bring our balance sheet down to a much healthier non-income-producing asset weighting, if you will, now at 20%, down to 10% to 15%, and I think we'll make pretty huge strides on that through the end of next year and early '27. We've got a couple of big sales where we are close to pretty big entitlements and that will help us on valuations. But we feel like we can manage the balance sheet and provide the capital we need through the assets that we would like to shed. And also, we have been selling a lot of non-core assets, some stabilized and some non-stabilized and that's part of our goal to move our Megacampus ARR up to about the 80% level. So I think we feel pretty good about that without the need to go through a common equity raise. Vikram Malhotra: Okay. And then just on this -- the Investor Day, like, there's a bit of a departure, you're giving a lot of tea leaves on '26. I'm just wondering sort of why not so-called rip the Band-Aid just give a high-level number of where you think next year is going to shake out. Just -- it seems like a 2-step process, which I don't know... Joel Marcus: Yes, we get that. Unfortunately -- well, let me just say this, we wouldn't have preferred to plan third quarter earnings so close in time to Investor Day. But I think Marc and his team may very well give a range for FFO kind of a framework for that here shortly to the Street. So keep your eye out for that. We're likely to probably try to do that, so that we don't keep people in a mystery box for 3 or 4 weeks, which we never intended to do. But frankly, the industry is -- as I said, it's a regulated industry. And it is in a tough time because the government shutdown essentially puts almost everything you can't file for, you can't submit to the FDA for new INDs. There are some things coming out the back end, but the wheels are substantially stopped. And then on the other hand, the President has chosen, I think, better than the former administration, who is trying to get much broader price controls. This administration is really negotiating with each big pharma in a sense to get his version of MFN. So far, it's been limited to Medicaid, which I think has been great, but going through 20 big pharmas is tough. So there's a lot of -- kind of a lot of slow-moving wheels out there that we really need to see kind of the wheel put back on the cart so that the industry moves forward. And as I said, the industry has tremendous prospects. Any of us who have seen or in their disease know that there's a lot of wood to chop. We know of a whole number of people who've just been diagnosed with Parkinson's. We still don't have any addressable therapy. We got to get moving on these. So we will try to give the Street guidance here pretty shortly. So there's not a 3-, 4-, 5-week delay in trying to at least frame it. Marc did a -- I thought tried to do a good job giving factors, but we realized with cap interest rolling the way it's going to roll as we reduce the development pipeline, that leaves an unknown numbers out there that we'll try to fill in, broadly speaking. Vikram Malhotra: Great. We look forward to the update and definitely ARE on the other side. Joel Marcus: Yes. And thank you for the thought on that. Operator: And our next question today comes from Dylan Burzinski with Green Street. Dylan Burzinski: I guess just -- maybe going back to some of your comments, Joel, it seems like the only thing that's necessarily changed this quarter versus last quarter is really related to the government shutdown, right? Because if you think about the supply pipeline that sort of continues to dwindle, albeit it's still at high levels. There's obviously been a huge challenging capital markets environment for a lot of tenants. So I guess you mentioned that the government shutdown is having a huge impact in terms of kind of demand, it seems like. So is it the idea that we should think that once the government comes back, that demand start to pick up off of this level or... Joel Marcus: I don't think that's necessarily the issue, but that's a prerequisite for the industry kind of getting on its feet because, again, it's a regulated industry, both from submissions, clinical trials and then approvals. And if the government doesn't open, you can't get any of those really effectively done. Some of -- I think there was one approval to AstraZeneca that kind of came out recently. But I mean the wheels are stopped. That isn't going to -- that isn't directly tied to demand, but it's hugely tied to the health of the industry, which then in turn is tied to demand. I think if you go back to the second quarter, I think people still -- I remember, second quarter call, and then at Nareit, it wasn't clear when the industry would kind of hit this bottom, but it kind of has been bottoming but at a time when the government is shut. I think what we really need to see is lower cost of capital and a clear and condensed regulatory path. I mean I think if you think about a couple of things, what's needed for this industry, there are 3 things I could tell you. One is we must reduce the drug development costs. And that's really in the hands of the FDA and our meeting with Makary confirmed he's hyper-focused on that. We've got to increase the probability of success of drug development. I think AI and other tools will help that. But the FDA, again, is front and center there. And then we've got to lower the regulatory barriers to help streamline a lot of these programs. And I think that's what's needed to bring health back to this industry in a really robust fashion. We need venture to kind of open their pocket book and cost of capital is a big issue there, and we need the IPO market to open and the secondary market to become even more fulsome, not just doing offerings on data per se. If those things happen, then you've got a very healthy industry. Dylan Burzinski: I guess as a sort of follow-up to that, I mean -- and maybe it was asked, sorry if I missed it, I joined late. But I mean I get the sense that reading some -- or listening to the call today, reading some of the tea leaves and the 2026 consideration settlement that demand may have worsened since the second quarter, but it felt like looking back at my note and stuff and your commentary on that, that things are set to improve, and we're hearing out of peers of yours that the demand -- the overall touring pipeline is improving. So just trying to see if maybe I'm misreading into some of the comments made today as well as the 2026 considerations. Joel Marcus: Well, I don't -- again, I don't think you can look at -- this isn't like office where you can look at certain data and be fairly certain that office is going to rebound or data for mini storage or data for resi or something. This industry is far more complex. It's highly regulated, both at the front end and the back end. So I know everybody struggles. They want indicators and factors that point to demand and quarter-to-quarter, it doesn't really work that way. And I think we've had 2 reasonable quarters of leasing, but that doesn't reflect the health -- the underlying health of the industry, which I've tried to articulate, is still in need of a number of pieces to be put in place for that to happen. And then I think you've got a fulsome rebound. So that's the best I can articulate it. Hallie Kuhn: Maybe -- this is Hallie here. Maybe just to add to Joel's comments, when you think about tour activity where we're certainly seeing really great companies looking for new space, thinking about expansion. But as we've mentioned before, decisions are taking longer. We're very conservative in how they think about when to pull the trigger. And given all of the factors Joel mentioned, there's still a lot of uncertainty. And so we do feel confident that there are some fantastic companies, really high quality in this market that are going to need space. The question is, when are they going to get comfort around making those decisions. And to date, there's just still a lot up in the air, especially on the regulatory front. Joel Marcus: Yes... Dylan Burzinski: Yes. Really appreciate that. And maybe just one more, if I can. I know you guys kind of alluded to equity-type capital, and Joel, you mentioned partial interest sales dividends, stuff like that. But I know most of your guys is focused on the dispositions of sort of the non-core assets. I guess is there any desire to sell a partial interest in any of the Megacampuses given it still seems like there'd be a strong bid or depth of demand for that type of product today? Joel Marcus: Well, I don't think that is our game plan because I think over time, our goal is actually to own more of the Megacampus rather than less. But I think there are a variety of campuses. Some are at the absolute upper end, some are in the medium to high end. So it's a matter of selection there and some we already have partners on. But I don't think that's necessarily the key game plan. Our key game plan is to rid the balance sheet of a whole lot of non-income-producing property and reduce our exposure to non-core assets to as minimal as we can. I think that's the core strategy here. Operator: And our next question today comes from Jim Kammert with Evercore. James Kammert: You've given a lot of great color regarding the '26 expirations and potential move-outs. Is it -- given the environment, is it like too early to even start thinking about 2027 type expirations? And how those tenants are looking in terms of their burn rates and their intentions? I'm just curious, as you go into the Investor Day, et cetera, perhaps as much clarity on that would be helpful. Joel Marcus: Yes. Well, we -- it's a good question, Jim, and we're pretty laser focused, not only on next year's roles, but the year after's roles. And in fact, we just had one I think renewal extension we just did, which was a company that I think had a role in 2031. We just extended for a decade. So we're all over every single tenant that we want to keep in our markets about what we can do to preserve them, protect our core and to create future growth, so that clearly is also front and center for us, yes. James Kammert: Okay, great. And quickly second one, there was some press discussion that in Mission Bay, you had been potentially looking to reallocate, I think, is the term they use, some of the lab space there, your 4 assets in Mission Bay to office use, particularly targeting AI? I mean, one, is that a valid report? And if there is validity to it, how would that sort of work? What would you do with your existing tenants? Joel Marcus: Yes. I'll have Peter comment, but we did go in for Prop M allocation for, I think, most of our buildings there. We have them in a partnership, but we're the managing partner, and we got 100% approval on that. And the reason is because, one, we want to be able to offer office to the extent that it makes sense for our existing tenants as they need it. UCSF is a big tenant on campus and sometimes their needs flex between lab and office. Clearly, OpenAI has made that the center of the universe for their needs and campuses buildings around a campus, and that's a very valuable use of space. So it makes good sense to be able to have that flexibility. But Peter, do you want to comment? Peter M. Moglia: Yes. So we already had a couple of properties in Mission Bay, the Illinois properties already had 100% allocation for Prop M. When we developed the Owens properties, 1450, 1500, 1700 Owens and then 455 Mission Bay Boulevard, they only had a partial allocation for about 1/3 of the building area. That would be for pure office users only. Office that houses the researchers is not included in that. We don't have to have Prop M for that. But as Joel alluded to, we're seeing more and more users from our tenant base, both traditional tenant base and otherwise in that area that would like to have all office type of space. And it just makes a lot of sense to have that flexibility. In addition to just the pure office users, though, our lab users are more and more looking for additional office area for computational workflows as they integrate AI and other technologies into their research. So all of the -- we've been thinking about this for a while. We finally had an ability to act on it, and so we did. But I wouldn't read into anything as far as like are we not going to be doing lab there. Of course, that's the primary use. But to the extent that our lab tenants need more office area or there's other alternative tech in the area that is complementary to the innovation economy there, we want to be able to serve it and the counselors agreed with us and allocated the Prop M. Operator: And our final question today comes from Jamie Feldman at Wells Fargo. James Feldman: Joel, I was hoping you can just look into your crystal ball a little bit. You guys are clearly thinking about the balance sheet, making some changes to get capital in line, shrinking construction pipeline. You're probably the league leader in this space. How should we think about what's to come from the competitive set or just the industry overall in terms of finding a bottom and working through other pain in this industry? And I'm thinking specifically about your comment about meeting the market, I assume you meant on rents. Like you think there's a lot more downside on rents across the sectors, across the markets as this all plays out? Just how should we think about what's to come across the industry? Joel Marcus: Yes. So maybe I'll make a couple of comments and ask Peter to come in, in depth. Yes, we don't feel like there is any real competitor out there, probably the next biggest company, which is maybe, I don't know, 1/4 of our size or something like that, 1/3 of our size is, Blackstone, and they're private, obviously, and they have a very different mindset about how they run their business in the sense of they don't -- I mean we view clusters in ecosystems in a different way than, say, a purely financial investor would view it, and that's a pretty important thing. And to a large extent, that's why we ended up with this big lease that we signed in San Diego that was not generated by an RFP. So another company would not have had a chance to really kind of come and bid on that. So we view ourselves very differently. There's nobody who is a public pure play. The one other company that's out there has got a big presence in South San Francisco and heavily weighted medical office. So I don't think that really counts as a comparable, and then there's a whole lot of private guys out there. But I think the point of what I said was, I think that 0 -- very low interest rates coupled with almost a decade-long bull market and this COVID run up. Remember, our demand went up 4x due to COVID. I mean we'd never see anything like that. And you try to meet the demand of your clients, but real estate takes time, and that's unfortunate that you can't meet it instantly. And so I think many, many of those folks that decided to hop into in the circa '20, '21, '22 era built foolishly. There's a lot of building standing empty. Peter and others call them zombie buildings. I just think they're just of a different ilk than buildings in the heart of clusters and wrapped into ecosystems just different. But if we're one-on-one with any other developer and we have space that fits the clients' needs, we're going to win. We almost never lose. And the reason is because we have the best team. We have the best space generally. You can rely on us. We have the highest level of trust and we do what we say and we say what we do. And we've got street cred in the industry that nobody else has anything like that. Peter? Peter M. Moglia: Yes. Look, economics are very important, especially in an uncertain time when you don't know when the next dollar or where the next dollar is coming from, but you need space, you need to renew what have you. There's other choices out there, as Joel alluded to, some dumb space decisions made by others. And what that has caused is a deterioration in fundamentals. We've talked a lot about the TI allowances that are in the market, the free rent that's in the market. By and large, the market has held the rents fairly high. I mean I think we're still above pre-COVID rents in the big markets and especially in the tertiary markets where there's been less competition. But even our tenants, who are used to our great service, they know what's out there, they want to stay with us and they increasingly come to us and say, "Guys, we want to renew. We want to stay with you. We want to make a long-term commitment, but the reality of the market are this." And we just want to assure people that we understand that, and we're going to meet the market. Now are we going to have to go to the bottom in order to make the play? No. Like what Joel said as far as why people come to us, our platform, our service, our Megacampuses, I mean they still value that. But at the same time, they need a deal. And we're out there understanding where we need to be, and we are going to get a premium, but it's not going to be where it was in the old -- in the previous cycle. So we just want to assure everybody that the tenants that are the best tenants in the market that we want to retain, we're going to retain. And if that means more TIs than traditionally we had to get or a roll down in rent, then we'll do it. We're going to get through this time. It's going to take a while, but a lot of these zombie buildings will go and become different uses. The market will get tight, and we'll be in a better position the next time around. But we're going to continue to prioritize occupancy. And that's why Joel mentioned meeting the market. James Feldman: Super helpful. So as you think about -- I mean, your Slide 19, you still have a positive mark-to-market. I mean is it -- could you sense when markets are bottoming or leases are bottoming? Or it's just too early to tell? Can you maintain positive spread? Joel Marcus: I think it varies by submarket, Jamie, because some are very oversupplied and others are within some reasonable balance. But Peter, you can kind of... Peter M. Moglia: Yes. It's a guess, right? But as I see that the majority of supply left to be delivered, which I think right now that we consider competitive is somewhere in the neighborhood of 3.3 million in our 3 big submarkets. Out of that 3.3 million, the majority of it is already pre-leased. So I'd say roughly about maybe 30% of that 3.3 million is going to be delivered vacant and increased availability. But then after that, we don't see anything in -- and that's inclusive of things delivering in '26 by the way. We don't see anything coming in '27. So the availability numbers are going to peak. And maybe it's a little bit into '26 when they peak. And so you're only going to go up from there. So I don't see fundamentals deteriorating further, given that there's just -- we're going to start recovering soon but you never know. Hallie Kuhn: Just to add here, Hallie here, and to summarize that, given all the work myself and the team on the ground are seeing, as we continue to out lease competitors, which we are doing across all of our markets, we do see the early stages and acceleration of conversion of what were targeted as life science spaces going to other uses. And so back to your original question on competition, the more that we continue to out lease and dominate, the more we'll see that balance of supply coming into picture. Peter M. Moglia: Yes. In other words, people are going to be capitulating and pivoting. James Feldman: Yes, that makes sense. And if I could just throw in one more. I mean it seems like a big strategic moment for the company. I mean we've seen some of your office peers talk about asset-light models. Is that something -- I think your answer to one of the prior questions is no, you just want to continue to own your best Megacampuses, but have you thought about that at all? I mean you have such a good operating platform, is there a way to monetize the platform without tying up so much capital? Joel Marcus: Peter, you can speculate on that. Peter M. Moglia: Yes. I mean it's an interesting concept, Jamie, that we actually have discussed a number of times. At this point in time, though, it really doesn't make sense to have so many different players. It's going to consolidate down to where it was before, meaning experienced developers that have their own platforms and a lot of these projects that have deteriorated the fundamentals are just going to -- they're going to be something else and those operators are going to go away. So I don't know if it's really an opportunity to where you're managing other people's projects because those projects aren't going to be lab. That would be my take. Joel Marcus: Yes. And I think, remember, Jamie, that I kind of emphasized a number of times, this is just very different than almost any other property type due to the intense regulation of all aspects of this industry -- the underlying industry. And demand is just different as well. It isn't just about what's the cheapest space or what's just simply available. It's -- I've got mission-critical both assets and processes in that space, and I don't want somebody to screw it up and lose me a whole lot of money. So that matters. Whereas if you're just going in for Wells Fargo office, whether you're in this building or that building, generally isn't going to make a huge difference. But for lab, it actually makes a giant difference. So it's just different. Operator: And this concludes our question-and-answer session. I'd like to turn the conference back over to Joel Marcus for closing remarks. Joel Marcus: Just simply say thank you, everybody, be safe, be well. Thank you. Operator: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Liliana Juárez González: Good morning, and welcome to our third quarter 2025 earnings call. Joining us today are our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our CFO, Jaime Pous. They will be discussing the company's results followed by a Q&A session. This call is for investors and analysts only. Please note that this call may include forward-looking statements under applicable securities laws. These are subject to several factors that could cause the company's results to differ materially, as described in our filings with the U.S. SEC and Mexico CMBB. These statements speak only as of the date they are made, and Volaris undertakes no obligation to update or modify them. All figures are in U.S. dollars compared to the third quarter of 2024, unless otherwise noted. And with that, I'll turn the call over to Enrique. Enrique Javier Beltranena Mejicano: Good morning, everyone. This quarter once again demonstrated that Volaris' agility and discipline continue to set us apart in a complex environment, driving tangible results. We acted nimbly and with focus, fine-tuning our network and capturing sequential improvement in demand across our core markets. Our results this quarter confirm that our commercial and operational strategies are delivering according to our flight plan. In our last earnings call, we noted that demand momentum was starting to build, and this quarter validated that trend. The recovery we anticipated for the second half is unfolding day by day as we projected. We observed stable domestic demand in a rational supply environment. Additionally, travel sentiment improved in the cross-border market, notwithstanding the geopolitical disruptions observed throughout the year. We executed where it mattered most, taking deliberate actions to strengthen profitability. The third quarter's performance in terms of unit revenue was fully in line with our expectations. The year-over-year variation in TRASM has narrowed each month, confirming that demand recovery continues to strengthen across our network. The sequential improvement is the proof statement that our strategy is delivering consistent momentum, and we believe that improved booking curves for the fourth quarter should position Volaris for a stronger 2026. In the domestic market, supply rationalization across all players continues to create a healthier balance between capacity and demand. Our load factor in the Mexican market reached 89.8%, consistent with last year's levels and reflecting a stable demand under a more rational supply environment, which supports healthier yields going forward. In the international market, we are seeing a steady recovery in cross-border demand with traffic improving month-over-month and holiday bookings already trending ahead of last year. Our 77% load factor reflects our tactical focus on optimizing yields to maximize TRASM. We remain focused on what is within our control, maintaining cost efficiency, adapting quickly, and executing with discipline. As a result, TRASM, CASM, ex-fuel, and EBITDAR margin all came slightly better than our guidance, reaffirming our ability to deliver consistent execution. Building confidence from this solid performance, we're maintaining our full-year 2025 capacity growth outlook of approximately 7% with prudent growth, unparalleled cost control, and improving demand trends towards year-end, we are reiterating an EBITDAR margin in the range of 32% to 33% for 2025. Looking ahead to 2026, we are embedding flexibility into our fleet plan and targeting ASM growth in the range of 6% to 8%, while retaining the ability to adjust a few percentage points in response to demand trends or OEM developments. This level of growth would bring us back to year-end 2023 capacity levels, underscoring that our growth remains prudent and aligned with market conditions. Our capacity decisions remain firmly anchored on customer demand and sustained profitability. I want to make it very clear to our investors. Volaris will continue to control growth with discipline fully aligned with market demand. Taking all necessary actions to efficiently reintegrate aircraft returning from engine inspections to ensure we meet this commitment. Having said that, as demand continues to recover, we are also seeing healthy supply dynamics, particularly in Mexico's domestic market. Volaris continues advancing from a position of strength with leadership in core domestic markets and a world-leading cost structure that will further improve as we reduce fleet ownership costs and gradually narrow the gap between our productive and nonproductive fleet. Sustaining differentiation requires constant evolution. We're not standing still. We're constantly adapting our ultra-low-cost carrier model to Mexico's unique dynamics, lowering barriers to traveling, enhancing service and maintaining our unwavering commitments to low costs and low fares. Leveraging Volaris' scale as Mexico's largest airline, we've built meaningful customer loyalty and driven strong repeat flying across our network. A strong example of this evolution is Guadalajara. A decade ago, this market handled a modest passenger base with limited international connectivity. Today, thanks to Volaris' expansion and market development, Volaris Guadalajara boosts nearly 100 daily departures, connecting travelers to 26 domestic and 22 international destinations. Over our 19 years of history, Volaris has proudly transported more than 90 million passengers to and from this market. Similar to what we've seen in Guadalajara, this trend is emerging across other markets that are rapidly evolving and opening new opportunities for growth, a typical emerging market phenomenon that underscores our role as a catalyst for national mobility and economic development. As our network matures, so has our customer base. We began as an airline built predominantly around VFR traffic, and we have since evolved into a more diversified customer mix. Today, roughly 40% of our passengers remain VFR, while the remainder represent a broader range of travel motivations from business to leisure to other niche segments. This evolution positions us to further strengthen our network through better frequencies, attractive schedules, and varied destinations, reinforcing Volaris as the airline of choice for both our VFR base and all passenger segments traveling from our core markets. Building on this momentum, the next phase of our model focuses on capitalizing on repeat travel and driving incremental TRASM growth across all revenue streams. As Holger will discuss, we continue launching new ancillary products and advancing network and commercial initiatives to better serve a broader customer base, all while maintaining the low-cost DNA that defines Volaris. This evolution builds on our core bus switching strategy, which remains foundational to our growth. As a result, we remain committed to serving this segment by consistently offering low fares. Leveraging our ultra-low-cost carrier model, Volaris is strategically positioned to continue improving TRASM by expanding our product suite and optimizing distribution channels. We're enhancing the customer experience across multiple fronts, refining our network strategy, streamlining boarding processes and offering enhanced seat selection options that continue to strengthen revenue diversification while preserving the cost efficiency that underpins our long-term profitability. Sequential PRASM improvement and a resilient cost structure highlight our disciplined execution. We're closing 2025 and entering into 2026 stronger, more efficient and better positioned to continue delivering value to our customers, capturing opportunities and driving sustained profitability. Volaris has proven its resilience time and again and will continue to do so. I'll now turn the call over to Holger to continue to discuss our third quarter commercial and operational performance as well as the evolution of our broader product offering in more detail. Thank you very much. Holger Blankenstein: Thank you, Enrique, and good morning, everyone. Operationally, our team delivered another quarter of strong disciplined execution. Volaris PRASM performance reflects our ability to anticipate market shifts and respond decisively, managing capacity to protect yield and maximize profitability. Volaris maintained network stability and operational flexibility throughout the quarter, effectively managing delays in aircraft deliveries and ongoing engine constraints. As a result, ASM growth reached 4.6%, coming in slightly below our guidance of approximately 6%. Overall, total third quarter load factor stood at 84.4%. The domestic load factor reached 89.8%, supported by steady demand through the summer season in a balanced supply environment. August performed particularly well, benefiting from an extended public school vacation period. Looking forward, current booking curves for the holiday season look solid. International load factor was at 77% as we actively prioritize yields overloads to optimize profitability. For the fourth quarter, as we head into the holiday high season, international traffic is tracking stronger with historical seasonality, setting the stage for improved profitability as we close the year. And as Enrique mentioned, VFR cross-border demand has been recovering sequentially. We believe we have reached an inflection point in the U.S.-Mexico transborder market with booking trends showing sustained improvement compared to last year. While we remain disciplined in our capacity deployment, this strengthening demand backdrop provides greater visibility heading into 2026. Moreover, we continue to drive robust ancillary adoption. Our average ancillary revenue per passenger for the third quarter reached $56, marking the eighth consecutive quarter above the $50 threshold. Ancillaries now consistently account for over half of total revenue, remaining a standout driver of resilience and profitability across all market conditions. This performance highlights the structural strength of our ULCC model in our markets and the sustainability of our revenue mix. The sequential TRASM improvement we anticipated last quarter materialized fully in line with our expectations. with third quarter TRASM reaching $0.0865, just ahead of our guidance and down 7.7% year-over-year, improving from the 17% and 12% declines recorded in the first and second quarters, respectively. These results confirm that the actions we took earlier in the year are delivering tangible progress. We have good momentum heading into the year-end with forward bookings showing sequential improvement and providing visibility into sustained strength and healthy demand through 2026. As these results demonstrate, Volaris has built a business model and network that allow us to flexibly and decisively capture demand where it is strongest across our markets. As our customer base becomes increasingly diversified, we continue to refine our ULCC model, lowering barriers to travel, encouraging repeat flying and broadening our customer mix while continuing to offer low base fare in our core traffic. A key pillar of this evolution is our ancillary and affinity ecosystem, which continues to grow in both scale and contribution. Our affinity portfolio, including v.club membership, v.pass monthly subscription, the annual pass and the IVex co-branded credit card together represent an increasingly relevant share of our business. Today, v.club represents a growing share of total revenues, while 1/3 of all sales through Volaris direct channels are made using our co-branded credit card. The index card is the largest co-branded credit card for any industry in Mexico. In July, we seized the growing affinity for the Volaris brand by launching our in-house loyalty program, Altitude. We are encouraged by a strong early response with membership enrollments tracking above our expectations. We see significant potential for this franchise, particularly as we integrate our co-branded credit card early next year into Altitude, allowing all card transactions to earn Altitude points. The ultimate goal is to position Volaris as the airline of choice, not only for our core VFR base, but for all customer segments traveling from our core cities across our network in Mexico's domestic market. We already serve a broad mix of travelers from small business to leisure to multipurpose passengers, alongside our loyal VFR base. Guadalajara, which Enrique mentioned, has become a strong market for the multi-reason customers, such as those who travel for leisure on some occasions and for business on others. The growing mix of repeat travelers on the flights we operate represents a structural tailwind to our average fare, ancillary sales and ultimately, margin. This evolution of demand is also unlocking new profitable opportunities for our network, capacity allocation exemplified by the addition of our Mexico City to New York route and increased route breadth from Guadalajara. We are enhancing our product and service offering to better capture the full value of these segments. Simultaneously, as the AOG situation with Pratt & Whitney stabilizes and the political and economic environment improves, we have been able to refocus our efforts on strengthening our network and ensuring industry-leading breadth and depth across our core cities, particularly in Tijuana and Guadalajara. We are also optimizing itineraries and schedules to better serve each segment, for instance, shifting certain red eye flights to more convenient time slots for business and leisure travelers. We expect the financial benefits from these adjustments to begin materializing in our TRASM results next year. In addition to our recent launched Altitude loyalty program and code shares, we continue to introduce new products and partnerships in a cost-efficient, low-complexity way that strengthens our revenue diversification. We are proud to announce recent initiatives that include expanding our presence in GDS through Sabre's new distribution capability or NDC standard. Volaris will expand its reach to Sabre's broad network of corporate and leisure travel agencies across North America and beyond. We are also ramping up marketing for Premium Plus, our blocked middle seat product for the first 2 roles. We are implementing these new revenue initiatives with a focus on the latest technology and minimizing costs and complexity. With this, we are broadening our customer base while remaining true to our ULCC DNA. Overall, we continue to prioritize low cost, operational efficiency and superior customer service. To this end, one recent innovation has been the introduction of AI agents that can immediately assist customers across multiple languages and channels, boosting our speed and efficacy and volume of interaction. Today, 79% of Volaris customer service is handled through digital channels, up from zero before the launch of our AI agent. This allows us to manage 3x more call volume while cutting service cost per interaction by nearly 70%, a clear example of how technology supports both our customer focus and cost leadership. At the same time, our NPS remains strong in the 40s, reflecting how our customers continue to recognize the total value we deliver across our flights, products and services. Looking into next year, we will continue to manage capacity with discipline, adding growth selectively across our network and leveraging our flexibility on lease extensions, redeliveries and network development to support our 6% to 8% capacity growth outlook. At the same time, the foundation we've built this year positions Volaris to continue strengthening into 2026. Supply rationalization in the domestic market is expected to support a healthier yield environment while cross-border demand continues to recover. Our initiatives to expand the customer base and grow ancillary revenues should drive higher revenue per passenger, positioning Volaris for continued profitable growth into 2026. Now I will turn the call over to Jaime to cover our third quarter 2025 financial results and full year 2025 guidance. Jaime Esteban Pous Fernandez: Thank you, Holger. Our third quarter financial results reflect our adjustments to prioritize profitability as cross-border traffic conditions gradually improved throughout the summer. Despite external headwinds, we succeeded in controlling what we can control, and we delivered on each line of guidance. Let me first turn to our P&L for the third quarter compared with the same period last year. Total operating revenues were $784 million, a 4% decrease. On the cost side, CASM was $0.079, virtually flat versus the third quarter of 2024 with an average economic fuel cost down 1% to $2.61 per gallon. CASM ex-fuel was $0.0548, aligned with our guidance and up just 2%. This result reinforces the success of our variable cost model and our effective cost management as we achieve our CASM ex-fuel guidance despite flying fewer-than-expected ASMs and encountering a peso that appreciated more than planned versus the second quarter. While a stronger peso is a benefit to Volaris' overall results, it adversely impacts our cost lines. As a reminder, fleet-related expenses such as depreciation and amortization, depreciation of right-of-use assets and maintenance continue to reflect the full fleet included grounded aircraft. In addition, as we approach a higher number of lease returns in 2026, the P&L line for aircraft and engine variable lease expenses captures the effect of the delivery accruals, which means this line item includes related maintenance for aircraft returns scheduled in the future. Current market conditions have created opportunities to acquire aircraft coming up for redelivery on attractive terms, helping reduce future redelivery expenses and extend time on the assets. Leveraging these opportunities, during the quarter, we acquired two of our formerly leased Cos, acting selectively and only where it made strategic sense. During the quarter, this also represented a benefit to the aircraft and engine variable lease expense line as it involved the cancellation of redelivery accrual related to these aircraft. Moreover, on the other operating income line, we booked sale and leaseback gains of $6.6 million related to the Airbus deliveries of three new aircraft. This line also includes our aircraft grounding compensation from Pratt & Whitney. EBITDA reached $264 million with a margin of 33.6%, aligned with the guidance provided for the quarter. EBIT was $68 million, resulting in a margin of 8.6%. The sequential tighter spread between our EBIT and EBITDA margins reflects our efforts to mitigate the impact on our P&L from engine-related AOGs. Finally, we generated a net profit of $6 million, translated into an earnings per ADS of $0.05. Moving briefly to our P&L for the first nine months of 2025. Total operating revenues were $2.2 billion. EBITDAR totaled $659 million with an EBITDA margin of 30.6%. EBIT was $35 million, representing an EBIT margin of 1.6% and net loss was $108 million. Turning now to cash flow and balance sheet data. The cash flow generated by operating activities in the third quarter was $205 million. The cash outflows used in investing and financing activities were $69 million and $130 million, respectively. Third quarter CapEx, excluding fleet predelivery payments, totaled $106 million and year-to-date stood at $195 million in line with the $250 million we guided for the full year. Volaris ended the quarter with a total liquidity position of $794 million, representing 27% of the last 12 months total operating revenues, sustaining our disciplined and conservative approach to cash management. At quarter end, our net debt-to-EBITDA ratio stood at 3.1x. And going forward, our focus remains to deleverage. Importantly, we have no planned near-term need for additional debt and have already financed all predelivery payments for aircraft scheduled for delivery through mid-2028. Our strong flexible balance sheet remains a key pillar of business. Looking ahead, we will continue to explore financing alternatives beyond traditional sale and leasebacks for a means to structurally reduce fleet ownership costs and further strengthen our capital structure, potentially switching operating for finance leases where appropriate. Looking back, the first nine months of 2025 tested our resilience amid volatility in demand. Yet we remain disciplined and focused on our core priorities. Cost control, profitability and conservative cash management, actions that preserve the strength and value of our business. I want to highlight that we originally had an ASM growth plan for around 15% during the year as guided in October 2024. We have since adjusted our plan to nearly half that level due to external circumstances while keeping CASM ex-fuel in line with our original plan. This demonstrates not only how much control we have over our cost base, but also the strength and adaptability of our ULCC model. With approximately 70% of our costs being variable or semi-fixed, we maintain a uniquely flexible structure that allow us to efficiently navigate operational headwinds and protect profitability. Now turning to engine availability and our fleet plan. As of the end of the quarter, our fleet consisted of 152 aircraft with an average age of 6.6 years and 2/3 being new models. On average, during the quarter, we had 36 engine-related aircraft groundings. Regarding our future fleet plan, we are in a favorable position of having an order book of 122 aircraft, 84% of which are A321neos with competitive economics from the group order. As mentioned, capacity growth is anchor on customer demand and sustained profitability. We have multiple levers to control growth and optimize the deployment. First, we have the option to realign our delivery schedule as we did last year through our rescheduling agreement with Airbus, supporting disciplined single-digit annual growth over the next few years. Importantly, this plan already factors in the aircraft returning to operation at the engine shop visits. Second, we have the flexibility to either extend leases on aircraft due for redelivery or when conditions and terms are favorable, acquire aircraft approaching lease expiration, enabling us to make the decision that best balance cost efficiency and strategic value. Finally, more than half of our upcoming deliveries are intended for fleet replacement. Together, our order book and staggered lease returns represent a meaningful competitive advantage, allowing us to plan growth with precision, sustain structural cost leadership and preserve the agility to adapt to market conditions. We will continue to manage our fleet plan effectively, maintaining flexibility to optimize value and support a strong cash position. Our fleet strategy continues to evolve. To this end, last month, we phased out the last A319 from operations, an aircraft type that at the time of the IPO comprised over half of our fleet. Over the past 10 years, we have continuously adapted transition and became more efficient, and we are committed to continue doing so in the decade ahead. Turning now to guidance. As Enrique and Holger explained, we continue to see demand gradually improve as we head into the holiday season. For the fourth quarter of 2025, we expect ASM growth of approximately 8% year-over-year, TRASM of around $0.093, CASM ex-fuel of approximately $0.0575 with the sequential increase reflecting the timing of heavy maintenance events and a seasonally higher proportion of international operations. And finally, an EBITDA margin of around 36%. This outlook assumes an average foreign exchange rate of around MXN 18.6 per U.S. dollar and an average U.S. Gulf Coast jet fuel price of $2.2 per gallon in the quarter. These quarterly figures are aligned with our full year 2025 outlook, which we reaffirm as follows: ASM growth of 7% year-over-year, EBITDA margin in the range of 32% to 33% and CapEx net of predelivery payments of approximately $250 million, unchanged from our prior outlook. The macros in our quarterly guidance led us to a full year average foreign exchange rate of around MXN 19.3 per dollar and average U.S. Gulf Coast jet fuel price of approximately $2.15 per gallon. Now I will turn the call over to Enrique for closing remarks. Enrique Javier Beltranena Mejicano: Thank you, Jaime. I'd like to conclude our remarks with several reminders. First and foremost, Volaris continues to prove the strength and adaptability of our ultra-low-cost carrier model. We have shown once again that we can respond to market dynamics with discipline. Throughout 2025, we have adjusted our capacity growth from around 15% to nearly half that level while keeping our CASM ex-fuel fully in line with our original plan. Currently, travel sentiment, especially in the cross-border market is improving, a clear validation that our strategy is working. These trends position Volaris well for 2026 and beyond. Regardless of external conditions, our cost leadership, flexibility and expanding product suite are enabling us to address customer needs, capture profitable growth and continue creating value. At the same time, Volaris remains focused on offering low-cost, high-value service that makes air travel more accessible to our broader set of customers, including our core bus switching VFR segment. We are also optimizing itineraries, strengthening distribution and expanding our commercial offerings to drive higher TRAS among a diversified passenger set. We believe our markets are evolving. How European low-cost air travel developed 2 decades ago with strong growth potential, expanding passenger segmentation and a clear preference for affordable high-value travel. Volaris is advancing from a position of strength, leading in our core markets with one of the most efficient cost structures in the world, one that will further improve as we reduce fleet ownership costs and close the gap between productive and nonproductive aircraft. Finally, let me be clear, we are not changing our DNA. Our proven low-cost, low complexity model continues to evolve with enhanced ancillary and loyalty offerings that attract a broader customer base, improve fare mix and strengthen long-term profitability. In short, we are disciplined. We're evolving, and we are well positioned to continue delivering sustainable value for our shareholders. Operator: [Operator Instructions] Our first question is going to come from the line of Duane Pfennigwerth with Evercore ISI Institutional Equities. Duane Pfennigwerth: You mentioned a couple of interesting things in the prepared remarks. One, international is tracking stronger than normal seasonality. And then two, that you believe we're at an inflection point in U.S. transborder. Can you just elaborate on both of those? Holger Blankenstein: Duane, this is Holger. So yes, let me talk a little bit more in detail about the U.S.-Mexico market. We're talking about an inflection point because since mid-August, our sales in the U.S.-Mexico transborder market are above last year's level. And that clearly demonstrates our ability to fine-tune our capacity, manage demand and capture the market momentum that we're seeing. If we look into the fourth quarter, the U.S.-Mexico transborder booking trends are also showing a sustained improvement compared to last year. And that's why we are quite optimistic about the fourth quarter traffic evolution, both in the domestic, but also in the transborder market. Duane Pfennigwerth: Okay. And then maybe you probably covered this and maybe I missed it, but can you tell us the number of lease returns that you expect next year, how many aircraft will go back? How does that compare to this year? And I don't know if there's any good way to kind of net that expense relative to the reimbursement that you're getting from Pratt? Like how do we think about the net of lease return expense and reimbursement in '25 and '26? Jaime Esteban Pous Fernandez: Duane, this is Jaime. In terms of redeliveries of plan, next year, we're budgeting 17 redeliveries versus 7 that happened this year. So, it's a high number of deliveries. I would like you to focus there are many pieces related to aircraft deliveries, engine returns and redeliveries. So rather than focusing on just focus on our full year growth it is important that our priority, as Enrique mentioned, is to narrow the gap between productive and nonproductive fleet while ensuring that we deploy capacity to a market that is consistent with customer demand, all while maintaining the flexibility to adjust capacity up or down as well. Operator: [Operator Instructions] Our next question will be from the line of Thomas Fitzgerald with TD Cowen. Thomas Fitzgerald: A lot of good stuff in the deck. I was wondering if you could dig into Slide 8 a little bit more and how we should think about the potential RASM uplift over the coming years as those initiatives ramp Holger Blankenstein: So, Thomas Fitzgerald, this is Holger again. So, we've quantified the potential for each of the products that we saw on Slide 8, and we expect a positive year-over-year impact on TRASM of these products in 2026. We expect that our commercial initiatives that you saw will begin contributing financially in 2026, and we will communicate the specific targets on all of those products as the adoption of those products scale. These initiatives that you saw there are going to be incorporated in our TRASM guidance for the next year for 2026 when we provide guidance in the next earnings call. Thomas Fitzgerald: And then I'm just kind of curious, as your customer mix diversifies and you take on more SME traffic, is there any investment or maybe it's immaterial, but just that you have to do for your cabin crew just on the soft product and maybe people who especially as you take in volume from some of your interline partners? Holger Blankenstein: So Tom, it is very important to mention that we are implementing the broadening of our customer base and target customers while maintaining a low cost, low complexity model. So you should not see any meaningful impact in our costs and in our complexity of the onboard product, for example, as we implement these products. We are broadening our target customer base, for example, through implementing different distribution channels like the GE, for example. We're going to diversify our revenue base, but we will maintain our low-cost, low complexity model. Operator: Our next question will come from the line of Michael Linenberg with Deutsche Bank. Shannon Doherty: This is Shannon Doherty on for Mike. Thanks for taking my question. Enrique, you alluded to some growth trends or the growth trends, I should say, that you saw out of Guadalajara emerging in other markets. Can you provide us with some more examples? Enrique Javier Beltranena Mejicano: Sure. I think when you look at our bus fare customer base, I mean, that's a segment that grows by far much more rapidly and much more different than any other business traffic that we can see, for example, in the U.S., okay? You can also see how our capacity to penetrate the market has improved our number of passengers that are using the airlines, okay? In the last years, we have developed more than 10 million passengers that have become first-time flyers, and that's really important. So that makes a dramatic difference versus a mature market. Shannon Doherty: And maybe more generally, what do you guys think is driving like the improved travel sentiment in the cross-border market? Like and how is demand in other Central American markets to the U.S.? Holger Blankenstein: This is Holger. So we actually did a survey of our customers, both in the U.S. and Mexico, and they target two main factors for not increasing travel more quickly in the first half of the year. We did it entering the summer season. The first was economic uncertainty, which is about 50% of the responses. And that economic uncertainty is improving significantly as macro conditions in both countries are strengthening in the second half of the year. So that's the reason for not traveling has evaporated and is improving significantly. The second concern was related to migration policies. People were worried about traveling and leaving the U.S. or going to the U.S. And in the public discourse, we are noting that, that has evolved from a broad concern about all immigrants to a more focused conversation around individual and legal violations of immigration policies in the U.S. and that really has reduced the perceived apprehensions among our customer base. So we're seeing more willingness to travel in the transborder market in the second half of the year and specifically in the fourth quarter, where we're seeing solid booking curves in the transborder market. And that brings us to the guided TRASM, which is basically at the levels of last year 2024. Just to maybe close this point off, travel in the transporter market was delayed in our opinion at the beginning of the year and is now catching up as people want to visit their friends and family in Mexico or in the U.S. Operator: Our next question comes from the line of Rogério Araújo with Bank of America. Rogério Araújo: Congratulations on the results. I have a couple here on fleet. First, you said 17, one seven aircraft returned. Is that correct? And how many you expect to be delivered by '26? Also on that matter, what is the number of expected grounded aircraft throughout 2026? I understand you have 36 now. And lastly, how to think the net CapEx for '26 compared to this $250 million in '25? Jaime Esteban Pous Fernandez: This is Jaime. And Jose back into our fleet plan. And let me try to be really on a summary. Our goal next year is to reduce significantly the gap between productive and nonproductive fleet. And it has many moving pieces. I want to start with the AOGs. We see an improvement in AOGs. Remember, this year, we expect and year-to-date, we have 36 average planes. We expect that, that will improve to around 32, 33 next year with the highest point of the AOGs initially in January and significantly going down by year-end. The second [indiscernible] is, is deliver strong Airbus, we’re expecting around 12 to 13 deliveries of new aircraft from Airbus still we need to confirm that with Airbus and we will give detailed guidance in the next earnings call. And finally, with delivery, we are budgeting 17 aircraft to be redeliver. All of those details, we are planning, you should think about ASM growth next year, as Enrique mentioned and reiterated in the range of 6% to 8%, which factors all of the above that I mentioned. Compensation [indiscernible] multiyear agreement remains to 2028, but we are seeing an improvement and we are planning with the flexibility to adapt our demand to customer demand and market condition with the capitalization of flexibility in our market. And the last question was with respect to CapEx. This year guidance is still the same $250 million. Expect that next year is going to be higher than this year because we are investing in the maintenance related to engines returns and the delivery of aircraft. Enrique Javier Beltranena Mejicano: I just want to say again, I mean, our numbers of growth for next year are all inclusive. They include the returns of the engines from Pratt, the deliveries from Airbus, replacement of aircraft from the actual fleet. They include the deliveries, they include everything, all of the above. It's included in the number. So please think about that number as a total number of growth and not the conflict with capacity into the market. Operator: Our next question will come from the line of Filipe Nielsen with Citi. Filipe Ferreira Nielsen: Congrats on the results. My question is regarding CASM ex-fuel. You guided $0.0575 [ph]. You mentioned about the timing of having maintenance putting this a little bit higher than expected. I just wanted to understand how this should evolve? Is it a one-off in fourth quarter related to maintenance? Or is it something that will continue throughout 2026? How are you looking at this trend and not only at the quarter? Just trying to understand the cost impact here. Jaime Esteban Pous Fernandez: This is Jaime. I'm going to start with the 4Q. The sequential increase reflects the normal seasonality in specific cost lines that higher in the 4Q happened last year. It represents higher landing and navigation expenses due to the increased mix of international operations in the 4Q. We also have addition related to deliver maintenance events, which temporarily elevated unit cost are not structural impact aligned with our planned maintenance schedule. And as I mentioned, we will provide full guidance for 2026 in the next earnings calls. You are going to see a higher CAS than this year related to the investment in maintenance and delivery to have the fleet aligned with our growth plans. Operator: Our next question comes from the line of Jens Spiess with Morgan Stanley. Jens Spiess: So on the point of groundings and being the peak at the beginning of next year and then gradually improving, by year-end, how many aircraft do you expect to be grounded? And then when do you expect groundings to reach 0? Is it by mid-'27, by the end of '27? Like what's your visibility on that? Enrique Javier Beltranena Mejicano: Sorry, I'm going to repeat it. We expect that by year-end of 2026, the average number of AOGs will be around 25 to 27. And we believe that we are going to be with no material impact on AOGs related to engines by the end of 2027. End of 2020. Jens Spiess: Okay. Perfect. And if I may, just one additional one. Obviously, you already gave a lot of details on ASM growth for next year and all the variables. But clearly, you have a lot of flexibility given the redeliveries, the 17 redeliveries you have next year. So if demand is much better than expected, by how much could you potentially increase ASM growth? And conversely, if demand is weak by how much could you reduce it potentially? Enrique Javier Beltranena Mejicano: By around 2 percentage points, either up or down. Operator: Our next question will come from the line of Guilherme Mendez with JPMorgan. Guilherme Mendes: Just a quick follow-up. Holger, you mentioned about an overall rational supply on the market, so meaning rational competition. Just wanted to hear your thoughts on how should we think about competition in '26. There's additional capacity coming online from you and from some of your peers, if you do expect the current rational and disciplined competitive environment to remain in 2026? Holger Blankenstein: Sure. This is Holger. So we have some visibility on the domestic market. For us, in the Mexican domestic market, we are budgeting low to mid-single-digit growth for 2026. And we will provide more granularity on our growth rate in the domestic market when we provide the full year guidance in our next earnings call. If we look at the competition, we have visibility on the published schedules of our domestic competitors and industry growth is likely to remain rational from what we can see right now. And that obviously supports a higher and healthier fare environment for us. We are seeing now that competitors have been following a meaningful capacity rationalization to bring capacity in line with domestic demand. And we see that trend continuing into 2026, which will lead to a more balanced and healthy domestic supply-demand environment. Operator: Our next question comes from the line of Alberto Valerio with UBS. Alberto Valerio: Just a follow-up about the groundings. So you expect to normalize it in the end of 2027, 2028. Am I right about this? And about cycles, how have been the cycle of engines and also the deliveries of Airbus, when we should see some normalization on this? And if I may, another one is about one line on the results that is the variable leases come a little bit below what we were expecting, what we were estimating. Should we keep that for the future? This is more related to engines. Is that correct? If you can give some color on that? Enrique Javier Beltranena Mejicano: As mentioned, we expect a positive trend on engines from the shops. We rescheduled with Airbus. So this year, the deliveries are quite aligned on what we plan some minor delays or not material delays. We expect that to continue next year. We have not because we schedule year-end. And we are planning accordingly with that with a lot of flexibility with the different levers that we have in our fleet plan between the deliveries of planes coming back from the shop. We are optimistic and planning around that. If you're right, we should be out of the material impact by 2027 with some minor in terms of absolute 2028. And compensation over[Indiscernible] 2028 in contrast. Operator: Our next question comes from the line of Abraham Fuentes Salinas with Banco Santander. Abraham Fuentes Salinas: During this quarter, we see an improvement in the aircraft and engine rent expense. So I wonder if you can give us a little more color what you expect during 2026 in terms of ASM. Enrique Javier Beltranena Mejicano: Can you repeat the question was too low. Abraham Fuentes Salinas: Yes, of course. We saw an improvement during this quarter in aircraft and engine rent expense. So I wonder if you can give us a little more color what to expect for 2026 measure as ASM. Enrique Javier Beltranena Mejicano: I think the benefit in this quarter is related to the conversion of operating leases into finance leases. So that was the viable aircraft and lease line has the benefit in this quarter. As we continue next year and make decisions in the deliveries, we may explore, as we mentioned during the call in order to lower the total ownership cost of the fleet. And next year, we think that, that number should be a little below what we had this year and more aligned to 2024. Operator: This concludes today's question-and-answer session and I would like to invite management to proceed with his closing remarks. Please go ahead, sir. Enrique Javier Beltranena Mejicano: This is Enrique. I would like to finish the call saying that we continue to demonstrate the strength and adaptability of our ultra-low-cost carrier model and our command over our markets and cost structure. I want also to say again that regardless of the external environment, our cost leadership flexibility and the capacity to expand our product suite ensures that we address customer preference. I also want to say again that we'll continue to control growth with discipline, and that includes everything. It includes all the pieces of the question and it's fully aligned with market demand. It is also important that we will continue prioritizing low cost with high-value service to increase access to air travel for a broader set of customers, and it is important to say that we will continue with leadership in core domestic markets and a world-leading cost structure. Having said that, I would like to thank you, everybody, for being in the call, and thank you to our family of ambassadors as well as our Board of Directors, investors, partners, lessors and suppliers for their support. I look forward to speaking to you all again next year. Thank you very much. Operator: This concludes the Volaris conference call today. Thank you very much for your participation, and have a nice day.
Operator: 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: 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.
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: 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 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: 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: 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: 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 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: Welcome to Booking Holdings Third Quarter 2025 Conference Call. Booking Holdings would like to remind everyone that this call may contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guaranteed of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements. Expressions of future goals or expectations and similar expressions reflecting something other than historical fact are intended to identify forward-looking statements. For a list of factors that could cause Booking Holdings' actual results to differ materially from those described in the forward-looking statements please refer to the safe harbor statements in Booking Holdings' earnings press release as well as Booking Holdings' most recent filings with the Securities and Exchange Commission. Unless required by law, Booking Holdings undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. A copy of Booking Holdings' earnings press release is available in the For investors Section of Booking Holdings' website, www.bookingholdings.com. And now I'd like to introduce Booking Holdings speakers for this afternoon, Glenn Fogel and Ewout Steenbergen. Please go ahead, gentlemen. Glenn Fogel: Thank you, and welcome to our third quarter conference call. I'm joined this afternoon by Ewout, our CFO. I'm pleased to report another strong quarter that underscores the power of our platform, the discipline of our execution and momentum we're building for the future. Our room nights gross bookings and revenue all exceeded our prior expectations. Beyond the financial results, I am very encouraged by the progress we've made on our strategic priorities. We are at a moment where advances in AI are just beginning to create new ways that people plan and experience travel. With our history of innovation, scale and data that helps us understand what customers want and when they want it, we are well positioned to harness these developments to drive more value for both our travelers and partners. I'll share specific examples from the quarter shortly. But before diving into those, let's review our third quarter financial highlights. We delivered double-digit gross bookings and revenue growth, reflecting robust demand across our globally diversified business. Our third quarter room nights reached 323 million, an 8% year-over-year increase. This exceeded the high end of our prior expectations, driven by healthy demand across 4 of our major regions. Of particular note was the U.S., where growth accelerated to high single digits, supported primarily by stronger outbound travel and momentum in our B2B business. The better-than-expected room night growth helped drive third quarter gross bookings up 14% and revenue grew up 13%. Adjusted EBITDA reached $4.2 billion, up 15% from the prior year quarter. All 3 metrics were above the high end of our prior guidance ranges. Finally, adjusted earnings per share in the quarter grew 19% year-over-year. Consistent with our prior earnings guidance, I want to note that FX benefited our growth rates by approximately 400 to 500 basis points. As we enter the fourth quarter, we continue to observe stable levels of global leisure travel demand. Ewout will provide more detailed financial insights shortly, including our outlook for this quarter and for the full year. Beyond the headline numbers, I'm excited about the meaningful progress we're making on key initiatives. We're advancing our Connected Trip vision, strengthening our loyalty programs and building AI capabilities that create more value for both travelers and suppliers. Asia and alternative accommodations continue to remain growth drivers Together, these efforts are reshaping how people, plan, book and experience travel and how we are unlocking greater value for our partners. Let me start with the Connected Trip. We continue to advance on our long-term vision to make the planning, booking and traveling journey simpler, more personalized and with less friction while providing new opportunities for our partners through data-driven insights. Today, Booking.com, travelers can already book accommodations, flight, rental cars, pre-book rides and attractions on our platforms, and we continue to invest to expand these verticals and to deliver a more seamless experience. For example, we enhanced our home screen to adapt dynamically to each traveler's most recent search, making it easier to move across verticals and transition smoothly from planning into booking. And we continue to broaden our flight supply, most recently adding new partnerships with Ryanair in Europe and Southwest in the U.S., giving travelers even more choice. These efforts are resonating Connected Trip transactions, meaning a trip that includes more than one travel vertical grew mid-20% year-over-year in the third quarter and now represent a low double-digit percentage of Booking.com's total transactions. Our other verticals also continue to deliver strong growth with flight tickets up 32% year-over-year and attractions up close to 90%, albeit from a relatively smaller base. Most importantly, travelers who choose to book multi-vertical trips with us also choose to come back to us for future bookings more often, which reinforces the long-term value proposition of a Connected Trip vision. Now I'd like to spend some time on Booking.com's Genius loyalty program, which plays an ever more important role in attracting and engaging travelers and stands out as one of our core differentiators. The purpose of Genius is straightforward, reward our most loyal customers with extra value while delivering real benefits for our partners. Genius members book more often, convert at higher rates, book further in advance, cancel less and choose to come back more consistently than non-Genius customers. In fact, in the third quarter, travelers in Genius Levels 2 and 3 made up over 30% of our active base and accounted for a mid-50% range of our room nights over the last 4 quarters, increasing from last year's levels. Today, Genius is available at over 200 countries and territories. The program spans our range of supply from large global hotel chains to independent properties and increasingly alternative accommodations and our other verticals. What sets Genius apart is that travelers get immediate tangible benefits such as tiered discounts or perks like free breakfast or room upgrades. We're continuing to invest to make these benefits more personalized, data-driven and relevant to each traveler's journey. On the partner side, we carefully designed Genius so that it provides incremental value rather than simply shifting existing demand. Our data shows that Genius members submit reviews more often, driving higher property visibility and increasing occupancy rates for participating properties, particularly during off peak periods. That helps partners optimize their revenue management. At the end of the third quarter, over 850,000 partners had chosen to participate in Genius. Looking ahead, we see several opportunities to continue strengthening our Genius offering. We're already expanding our offering across verticals and exploring ways to provide additional benefits. Loyalty programs remain a core pillar across our brands, not just at Booking.com. Most recently, OpenTable enhanced its program, which is now called OpenTable Regulars. The updated program offers new ways for diners to redeem points on experiences and introduces a new loyalty tier that provides enhanced benefits such as one named priority Notify Me which will alert diners to last-minute tables earlier than others with additional benefit launches planned over coming quarters. For restaurants, it helps encourage more repeat visits from high-value guests. Let me now turn to Gen AI, which we continue to believe represents a major opportunity to enhance the traveler and partner experience. While there is certainly a lot of excitement in the industry, our approach has been disciplined and focused on where AI can make a real difference for our customers, our partners and our business. On the customer side, we saw encouraging developments this past quarter. At Agoda, for example, we launched an AI-powered chatbot that provides travelers with prompt hotel-specific answers. By cutting through complexity and delivering precise information quickly, it helps travelers make timely and more confident booking decisions, reducing uncertainty and improving the overall experience. Another example is KAYAK's AI Mode, a natural language search experience that combines KAYAK and large language model data to deliver smarter contextual results right from the home page. At Booking.com, we've begun integrating new features into our app to assist travelers earlier in their planning process. These include natural language search capabilities that offer more inspiration such as destination highlights. As we further develop our agentic capabilities, combine them with our data-driven insights on when to offer relevant suggestions and advance our Connected Trip vision, we believe travelers will increasingly recognize the value proposition of our platform. We also see important opportunities for AI to create more benefits for our partners by driving better personalization and conversion, AI helps generate incremental demand across our verticals. Just as importantly, we are applying AI to make partner to guest communication faster, more streamlined and more intuitive. A core strength of our business has always been the unique value we bring to our supply partners and AI is enhancing these capabilities. As an example, Booking.com continued to add to its robust suite of Gen AI tools for partners, including Smart Messenger and Auto-Reply. Smart Messenger uses intelligent response generation and automated workflows to bring together relevant partner, property and reservation information, knowing when and what to suggest to support accommodation partners in their communications to guests. Auto-Reply takes this further allowing partners to set custom reply topics that deliver instant personalized responses to both common and unique guest questions. Early results have shown an increase in partner satisfaction compared with our prior messaging tools, underscoring how AI can provide tangible, differentiated value to our partners. Beyond our internal efforts, we're also building relationships with leading AI organizations reflecting our ambition to remain at the forefront of this rapidly developing field and to broaden our potential sources of customer traffic. We recognize that Gen AI is transforming how travelers research and find inspiration for their trips, and we are committed to continue to expand, evolve and meet them wherever they choose to search. Most recently, we were one of the first wave of apps available in OpenAI's ChatGPT App Store after being one of the launch partners for their operator platform earlier this year. Our strong relationship with companies such as OpenAI, Google, Amazon and Salesforce combined with our disciplined approach, give us confidence that Gen AI will be an important driver of long-term value for our travelers as well as our partners. On alternative combinations, we are continuing to strengthen our offering. In the most recent quarter, listings grew to over 8.6 million up approximately 10% year-over-year with double-digit room night growth. Travelers value choice and the breadth of supply across hotels, homes and unique properties differentiates us as a platform. Alternative accommodations remain a long-term growth opportunity. Customer demand for alternative accommodations is healthy across every region and our ability to combine that breadth of supply with our marketing reach and payments capabilities makes us well positioned in this segment. Finally, I want to touch on Asia, which remains a driver of growth for us and is one of our most exciting long-term opportunities. It is the fastest-growing major travel market in the world with industry growth expected to remain in the high single digits over the next several years, and our ambition is to grow even faster than the market. Our offering in the region is built on the complementary strengths of Agoda and Booking.com. Agoda is a strong local player with consumer trust across Asia while Booking.com brings global reach and brand recognition together. They create a combination that allows us to serve both local and outbound travelers across the region. As we look forward, we know we are operating in a period of rapid change, driven by geopolitical developments, macroeconomic uncertainty and accelerating technological innovation. What gives us confidence and makes me optimistic about the future is the strength of our value proposition through the Connected Trip, our Genius loyalty program and our relationships and innovations in Gen AI, we are building products that engage travelers, generate incremental demand and value for our partners and create differentiators. With that, I'll turn it over to Ewout to walk through the financial results in more detail. Ewout? Ewout Steenbergen: Thank you, Glenn, and good afternoon, everyone. I'm pleased to walk you through our results for the third quarter and share our current outlook for the fourth quarter and full year. All growth rates are on a year-over-year basis and the reconciliation of non-GAAP to GAAP financials can be found in our earnings release. Now let's turn to our third quarter performance. Our room nights in the third quarter grew 8% a positive result versus a strong prior year comparison and exceeded the high end of our guidance by nearly 3 percentage points. This outperformance was helped by an expansion of the booking window beyond our prior expectation and what we experienced in the second quarter, resulting in more room nights being pulled forward into the third quarter. We saw broad-based strength in room night growth across all major regions, and each region exceeded our expectations. Europe and U.S. were up high single digits, and Asia and Rest of World each delivered low double-digit growth. Our globally diversified portfolio proved its value once again as we continue to see robust growth in certain travel corridors, including Canada to Mexico and Europe to Asia, which effectively offset softer demand in certain inbound corridors to the U.S. Notably, our U.S. booker room night growth accelerated meaningfully from the second quarter driven by solid improvements in domestic and outbound growth, and we believe our growth once again outpaced the broader U.S. accommodations industry in a meaningful way. We're also encouraged by the growth in our direct channel in the U.S. We saw the booking window in the U.S. normalize in the third quarter, which is also an encouraging improvement from the second quarter. That said, in the U.S., we continue to see slightly lower ADRs and a shorter length of stay versus the prior year which may indicate that some U.S. consumers are continuing to be thoughtful on their discretionary spending. More broadly, global ADRs on a constant currency basis were up about 1% year-over-year, which was an improvement from the second quarter, and the global average length of stay remained similar to last year. While we are pleased with our third quarter results, we remain focused on accelerating our long-term earnings potential and are energized by the progress we are making across many key strategic initiatives. We continue to strengthen our direct relationship with our travelers and see tangible progress with increases in our direct mix, mobile app mix and loyalty mix. Over the last 4 quarters, our B2C direct mix was in the mid-60% range, which was up versus the low 60% range 1 year ago. The mobile app mix of our room nights was in the mid-50% range over the last 4 quarters, which was up from the low 50% range 1 year ago. We find that the significant majority of bookings received from our mobile apps come through the direct channel. We continue to drive engagement in our Genius loyalty program that delivers value to both our travelers and partners. The mix of Booking.com room nights booked by travelers in the higher Genius tiers of Levels 2 and 3 was in the mid-50% range over the last 4 quarters, and this mix increased year-over-year. These Genius Level 2 and 3 travelers have a meaningfully higher direct booking rate than our other travelers, which demonstrates the strength of the program's value proposition. We also see continued momentum in diversifying and expanding our business into growth areas such as alternative accommodations, payments, flights and attractions. For our alternative accommodations at Booking.com, our room night growth was about 10% and growth outpaced our overall business in each of our major regions. The global mix of alternative accommodation room nights was 36%, which was up 1 percentage point from the third quarter of 2024. Our total merchant gross bookings increased 26% year-over-year in the third quarter. Over the last 4 quarters, merchant gross bookings surpassed $123 billion in total transaction value representing about 68% of total gross bookings, an increase from about 61% 1 year ago. Our merchant payments business is foundational to the Connected Trip, offers more flexibility for our travelers and partners and generate incremental revenue and contribution margin dollars for our business. We marked another quarter of solid growth in our other travel verticals, reaffirming our strategic focus on building on our Connected Trip vision. During the third quarter, over 17 million airline tickets were booked across our platforms, representing an increase of 32% year-over-year, driven by the continued growth of our flight offerings at Booking.com and Agoda. We also delivered another quarter of meaningful expansion of our attractions vertical with tickets booked on our platforms growing nearly 90% year-over-year from a relatively smaller base. As Glenn mentioned before, we're seeing healthy growth in Connected Trip transactions, and our data shows that travelers who book more than one travel vertical with us more frequently choose to book directly with us in the future. The progress across all these initiatives is interrelated and the combined effect is helping us expand the number of customers who choose to come to us directly and book with higher frequency. Before turning back to our third quarter results, it's important to note that the third quarter has historically been our seasonally highest absolute quarter in terms of revenue and earnings. Gross bookings of $50 billion increased 14% year-over-year or about 10% on a constant currency basis. The constant currency growth rate was approximately 2 percentage points higher than room night growth due to about 1 percentage point from higher bookings growth from flights and other travel verticals as well as an increase in constant currency accommodation ADRs of about 1%. The increase in gross bookings exceeded the high end of our guidance by about 4 percentage points, driven by the room night outperformance as well as about 2% higher accommodation ADRs versus our expectations. The impact from changes in FX was about in line with our expectations. Third quarter revenue of $9 billion grew 13% year-over-year, which exceeded the high end of our guidance by about 4 percentage points, in line with the outperformance on gross bookings. Constant currency revenue growth was about 8%. Revenue as a percentage of gross bookings of 18.1% was lower by about 30 basis points year-over-year due to an increased mix of flight bookings as well as increased merchandising contra-revenue, some of which was tied to bookings made in prior quarters. This was partially offset by higher revenue from payments. Marketing expense, which is a highly variable expense line increased 9% year-over-year. Marketing expense as a percentage of gross bookings was a source of leverage, driven by changes in traffic mix and lower brand marketing expenses as a percentage of total gross bookings. We continue to make disciplined investments in social media channels at attractive ROIs. On a combined basis, marketing and merchandising as a percentage of gross bookings also had leverage in the quarter. As expected, third quarter sales and other expenses as a percentage of gross bookings was slightly higher compared to a year ago, driven by an increasing merchant mix, resulting in higher payments expenses partially offset by increased efficiencies in customer service. Adjusted fixed operating expenses increased 10% year-over-year or mid-single digits after normalizing for changes in FX. The year-over-year increase was also impacted by increased cloud costs. We continue to drive efficiencies in our fixed expenses through our ongoing cost optimization initiatives while, at the same time, reinvesting into the business to effectively drive long-term growth. Adjusted EBITDA of approximately $4.2 billion grew 15% year-over-year, which was about 6 percentage points faster than the high end of our guidance due primarily to stronger revenue growth. Adjusted EPS of $99.50 per share was up 19% year-over-year, faster than the growth in adjusted EBITDA, helped by the benefit of a 4% lower average share count. During the third quarter, we realized approximately $70 million of in-quarter savings from the Transformation Program, primarily in sales and other expenses and in personnel expenses. We also took further actions during the quarter to advance certain efficiency initiatives into the implementation phase. And as a result, we now estimate in-year savings for 2025 will exceed $225 million and we have enabled approximately $450 million in annual run rate savings, surpassing our prior expectations. For the full program, we now expect to deliver about $500 million to $550 million in run rate savings, and we estimate the aggregate transformation cost will be approximately 1x the run rate savings. In the third quarter, we incurred $105 million in transformation costs, which were excluded from our adjusted results. As a reminder, we're reinvesting approximately $170 million above our baseline investments in 2025 to support our strategic priorities for long-term value creation. This reinvestment is funded by the savings generated from the transformation program, combined with additional operational efficiencies in our ongoing operations. Now turning to our cash and liquidity position. Our third quarter ending cash and investments balance was $17.2 billion compared to our second quarter ending balance of $18.2 billion due to a reduction of $2.4 billion from deferred merchant bookings and other current liabilities. We generated $1.4 billion in free cash flow, offset by capital return activities, including about $700 million in share repurchases and about $300 million in dividends. Additionally, we paid $1.5 billion to redeem high coupon debt that was originally due in 2030. As we look ahead to the fourth quarter, while there remains some uncertainty in the macroeconomic and geopolitical backdrop, we're pleased to see continued momentum with steady travel demand trends in our business so far in the fourth quarter. As always, we will continue to closely monitor the travel environment for any changes. Our guidance for the fourth quarter assumes recent FX rates for the remainder of the quarter, including the euro-U.S. dollar at 1.17. We estimate changes in FX will positively impact our fourth quarter U.S. dollar reported growth rates by about 5 percentage points. We currently expect fourth quarter room night growth to be between 4% and 6% and we expect growth to moderate from the third quarter as we expect the booking window to be less expended in the fourth quarter. We currently expect fourth quarter gross bookings to increase between 11% and 13%, including about 2 percentage points of positive impact from higher flight ticket growth. We expect constant currency accommodation ADRs to be about in line with last year. We currently expect fourth quarter revenue growth to be between 10% and 12% lower than the increase in gross bookings due to a higher mix of flight bookings. We currently expect fourth quarter adjusted EBITDA to be between $2 billion and $2.1 billion or about 14% growth at the high end. We currently expect fourth quarter adjusted EBITDA margins to be slightly higher than last year, driven by leverage on adjusted fixed operating expenses. Turning to the full year 2025. With a strong third quarter on the books, steady trends to date, along with improved visibility for the fourth quarter, we're increasing our full year guidance. Assuming recent FX rates will remain steady for the remainder of the year, we estimate changes in FX will positively impact our full year reported growth rates by about 3 percentage points for gross bookings and revenue and by about 4 percentage points for adjusted EBITDA and adjusted EPS. On a constant currency basis, our latest expectations are above our long-term growth ambition of at least 8% growth bookings and revenue growth and 15% adjusted EPS growth. On a reported basis, for the full year, we now expect room nights to be up about 7%, gross bookings to be up about 11% to 12%, revenue to be up about 12%, adjusted EBITDA to be up about 17% to 18%, adjusted EBITDA margins to expand year-over-year by about 180 basis points higher than our prior expectation of about 125 basis points, revenue to grow faster than both marketing and adjusted fixed operating expenses, sales and other expenses to grow similar to revenue and adjusted EPS to be up slightly more than 20%. In conclusion, we're energized and highly motivated by the clear momentum in the business. Our continued progress reinforces our confidence that our loyal customers and global supply, along with our technology and data all powered by our people are industry-defining assets that will fuel our long-term success. Thank you to all of my colleagues across the company for their shared commitment and extraordinary work. With that, we'll now take your questions. Operator, will you please open the lines. Operator: [Operator Instructions] And our first question comes from the line of Kevin Kopelman with Cowen. Kevin Kopelman: I was hoping to dig in on your U.S. acceleration in Q3. Could you talk about your B2B initiatives in the U.S. that you mentioned and maybe globally? And then it sounds like B2C also accelerated in the U.S., so any additional color on what you saw as the key drivers there would be great. Glenn Fogel: Kevin, so obviously, we are very pleased about our U.S. acceleration. I haven't looked at the numbers. So I guess it's 3 quarters in a row that we have some acceleration, which is always good to see. And it is both B2B and B2C. And we are pleased about what we're doing in the B2B region. We haven't talked about it a lot in the past. We're not there beating our breast about how great our B2B is, but it's pretty darn good. And we've been winning some contracts. We don't make big announcements about them, but they are good, and we'll continue to advance. So we're very pleased with where we are. There's nothing really specific to talk about right now. We have talked a little bit about bringing together become more efficient. We have many different B2B units around the world because we have the different brands, have different B2B units. We're going to create things that are more efficient, really bring the best of old breeds together. So we really have something that's even better for our partners and our travelers. In regards to the B2C area, also, good numbers there. We're really pleased to see what we're doing. But this has been a very long-term process that we've been talking about for many, many years. about how improving the product will improve the results, and that's what we've been doing. There's nothing that's miracle. There's no magic bullet happening, et cetera. It's bringing the brand together, it's doing a product better. I mean, just to give you an example, I hope people watching the baseball have seen some of our branding there. I certainly have gotten some calls from people. And that's the thing, make people aware that we have a great product and then execute and do what's necessary. If anything goes wrong, provide that great customer service that really brings people back because they love using it. I don't know, if you have anything more to add to that? Ewout Steenbergen: Yes. Let me add a few other data points, Glenn. Kevin, clearly, we saw healthy growth domestically in terms of travel as well as outbound saw some healthy growth. So both were doing well from a U.S. perspective. Another important thing that I would like to point out, and I think we're really positive and really excited about this. This is the growth of our direct channel in the U.S. So what we are seeing is clearly a payoff of our brand awareness that is getting stronger in the U.S., more familiarity and therefore, more customers coming now direct to us in the U.S. So that is really something that has seen quite a step-up in the third quarter, and we see that as a really positive trend. And ultimately, that is all the result of all the investments we have been making over the last number of quarters and years. Investments in products, investments in supply, in marketing and in brand. So overall, indeed, thank you for pointing it out, we're very happy where the U.S. is this quarter. Operator: And our next question comes from the line of Doug Anmuth with JPMorgan. Douglas Anmuth: I know you were early in the test program with OpenAI as well, but can you talk about your thought process heading into the app integration and what you're seeing in the early days? And just how should we think about economic impact if bookings were to shift from direct traffic or from Google? Glenn Fogel: Doug, well, that's a question I would have expected. Of course, you sort of -- you gave the answer there about how early it is. So it's a little difficult to talk about anything besides and say, it's early. We're very happy to be in the first wave of apps with OpenAI. I think that says something about us and the value we bring to partners that they would do it with us to get it going. It's one of those areas that, obviously, we want to explore every area where a traveler may want to begin their discovery, their inspiration, et cetera, and then be able to provide that traveler with what they need in terms of actually executing what they want to accomplish in their travel needs. Your question is really what will the future be if more and more people started OpenAI, that obviously is the old -- I think it used to be called the $64,000 question, I think it's much bigger nowadays. It's something that a lot of people don't know, but what I am very confident of is that even though people may change over time, how they want to start their travel inspiration, discovery, I believe that we will always be there in the area to provide what is really necessary, which is going beyond that and executing and doing the actual transaction fulfillment. They're working to make sure they're getting the best value, the area of making sure you're doing the right types of payments. They're making sure you're following all the regulations, very complex. It's one of those things where people sometimes are a little naive about how incredibly complex this travel business is. And it's not so easy. You just throw some, oh, it's easy, you just put up a name and somebody is going to be able to book across and just intermediate somewhat, that's not the way the world works. And if it did work that way, we were anticipating a long time ago, Google would have taken this thing over a long time ago. Look, we're very proud of where we are right now, but we're even more proud of how we are building out even more value. And that goes into things like the Connected Trip. Being able to bring together all the different verticals in a way that the traveler really sees is the reason they want to come to us because they really are getting more benefit from users. And of course, the other side being able to use our Connected Trip in a way that the partner is able to get more incremental demand, and it's using science. It's using data. It's using our proprietary knowledge that we have, that we don't share with people. Those are some of the things that we have that we believe are key to keep us at the forefront of the travel industry. And I don't know, Ewout anything you want to add? Ewout Steenbergen: Yes, maybe a couple of points, Doug. Just you also asked about the economics and some of the data. So first of all, what we are seeing in terms of traditional search that we still see volume growth. So travel clicks that are coming to us from traditional search are still going up year-over-year. That, of course, might change over time, but I think that is an important data point. The other is the number of leads that we're receiving from large language models relatively small, but it is growing. And probably over time, these 2 worlds might become more hybrid because we are seeing, of course, more AI being built into browsers at this point in time. What are we measuring in terms of impact, ultimately, faster search, better conversion, lower cancellation rates and higher customer satisfaction, very early signals we're having around it. But overall, very encouraged we are with what we are seeing at this moment. Operator: And our next question comes from the line of Lee Horowitz with Deutsche Bank. Lee Horowitz: Maybe sticking with the AI topic. There's obviously a lot of noise in the market around some of your hotel partners looking to partner directly with some of the generative search players in order to perhaps increasing the bypass platforms like yourselves. I guess how do you contextualize this particular risk? And what tools do you think you have at your disposal to maybe mitigate this kind of disruption? Glenn Fogel: So for a very long time, Lee, as you know, hotels have found it a way that they can be shown for, let's say, Google. And some people will go to Google, and we'll go directly to a hotel. That happens. We would love for them to come to us first and we continue to try and create something that is a better reason for them to come to us or just want to go directly to one of our hotel partners. That will probably happen in LLM world too. Some people will do that, too. I wouldn't be surprised. But this idea that, that is going to cause this giant shift, I just think that that's not the way the world is going to work. And again, proof is that it hasn't happened in the old day of Google. And so far, we're seeing that I don't think it's going to happen in an LLM model. One of the things, again, comes into what do we bring to the table, why the customers still continue to come to us and they come to us direct. That's the point Ewout made about that mid-60% number of people into us direct in the B2C area, and it continues to grow. It continues to increase. Why is that happening? It's happening because we do a lot of things for the customer that they feel is the best way for them to execute their travel needs. And really, a lot of it comes down to trust is giving more value, is making sure that they get the best way to do it. And of course, having our Genius program, which Ewout also talked about and think about that. More than 30% of our active customers in Genius levels 2 and 3, mid 50% of the room nights at Booking.com. This is a program that really gives incredible value, which is why somebody instead of going direct, they come to us. And as we continue to build that out and are able to provide the exact perfect, perfect offer to that traveler, working with the partner to make sure it's going to be incremental to them. That's a win, win, win. Win for the traveler, win for the partner, win for us. Now think about trying to do that in OpenAI or any of the large language models, that didn't happen. So obviously, I don't disagree. Some people are going to go to a large language model. You'll see a hotel to go directly there. Sure. But I think that is an overblown threat at this time. Operator: And our next question comes from the line of Mark Mahaney with Evercore ISI. Mark Stephen Mahaney: I wanted to ask 2 topics, please. First is social media, I think you mentioned kind of leaning into social media marketing. I think you've been talking about this for a year and maybe to -- could you spend a little bit more time on that? Has that now become a material, let's say, a double-digit percent of your performance marketing coming from there? And do you find that the returns have been continually improving. And then Asia, you [ ripped ] on Asia in the opening comments. So could you peel that back a little bit? Are there particular parts within Asia that have really started to perform better for you. You've been -- I know that the region as a whole has got the world's highest travel growth rates. But do you feel like with the Agoda and Booking that you've been particularly able to penetrate certain markets better than others? Ewout Steenbergen: Mark, this is Ewout. First, on the social media. We continue to experiment and invest and with the social media channels whilst we also continue to stay very disciplined with respect to ROIs, which is really important because these channels, the ROIs can really fluctuate a lot. So we are very much focused on really being able to measure incremental ROIs in a very clear way. We see different stages of where the social media channels are. Some are more leaning in than others. So changes will happen there over time with all the different channels. I prefer not to go too much in detail which ones are really better working for us than others because, obviously, I don't want to make others smarter than they are at this point in time. But what we like is really diversifying our multiple social media platforms because expanding our performance marketing channels overall is a positive. In terms of spend, you should think about that it is a couple of hundreds of millions, which is meaningful, of course, a total number, but if you look at the total marketing spend for us, it's, of course, still a smaller percentage of the overall spend. In terms of Asia, very clearly, we are very happy with the growth we're seeing in Asia. We have 2 strong brands, 2 different strategies. Agoda is very much focused on localization and they really present themselves as a Korean company in Korea and a Japanese company in Japan. Booking has far more the global reach, the global model, the global optimization that they bring to the region. We're making a lot of investments in terms of our product, in terms of our marketing, in terms of our supply. And overall, we are happy with the growth we are seeing, and we're really -- despite, of course, always healthy competition we're having in Asia, we're really holding up very well in that overall environment. Asia is, of course, from a medium and long-term perspective, the most important market. That is where we will see over the next few decades, the largest growth in the world because the GDP growth is going to be the highest there. There will be very large parts of the population that will start to travel and travel more in the future. So the fact that we are already the market leader outside of Mainland China and being able to be focused to hold that position is going to be positioning us very well for the next couple of years. Operator: And our next question comes from the line of Ronald Josey with Citi. Ronald Josey: I have 2, please. Glenn, as entry points to the web and booking involved here given just newer tools and OpenAI being one of them, can you talk to us how maybe this evolves or changes your strategy to attract to call it 30%, 35% or so traffic that's not direct. So a question about how the front end is changing and sort of thoughts there. And then on the product side, look, seeing tons of innovation with AI Trip Planner, Penny, hotel search, AI Mode, concierge. I think you talked about the homepage is unique now per user. Talk to us about the impacts this might be having on either cancellation rates, conversion rates, things along those lines. Glenn Fogel: Ronald, I'll let Ewout talk your second question. Your first question, you want to hear -- and I make sure I understand your question right, you want to hear more about how are we going to deal with trying to get that last 35% to come direct. Is that kind of the question, will you give me a little more sense of what you're asking. Ronald Josey: That's exactly right. I guess I'm wondering how much -- how more important brands are going forward as OpenAI goes through the app strategy and has users front end of the web evolves. Glenn Fogel: Yes. So that's -- that is a good question. And of course, as we all know, you don't want to go to 100% direct because you may be missing a lot of customers who may come from a different channel. There is a -- there's some sort of optimization that we should be doing. And obviously, right now, we still enjoy getting a higher direct coming to us. And how do you do that? Again, it goes back to the simple things is all people who deal with retail type services should is giving more value to that customer. And it's not just having a better travel service is, as I said earlier, is you got to make people aware of it. And I know I just got some interesting advertising brand data recently. And in certain areas of the world, U.S., for example, our brand awareness is still not where I want it to be. And as I've talked many times in the past on these calls about how certainly in the homes area in the U.S., we are not where I'd like to be in terms of brand awareness. So it's not only improving the products, it's also making people aware of it. That is something that is not something that is impossible. It's actually very possible. It just requires us to continue to do what we've been doing, which is why we've been grinding it out and increasing albeit not as fast as I'd like but it hasn't happened. That's increasing the service and putting more brand power behind this. There's nothing really secret about this. There's nothing unique about this is just continue to do the work, so to speak. And that, we've been doing it for -- I've been here now 25 years, and that's how we've gone from nothing company to now many, many hundreds of millions of satisfied customers. That's basically all we can really say without giving away. Here's what we're going to do next quarter, and that's another thing. I don't want to tell my competitors what that's going to be, but we're going to keep on doing it, and I am pleased with the progress we've made. Ewout, you want to give on his second question. Ewout Steenbergen: Sure. Ron, we're seeing a couple of things. First, conversion, definitely with all the new tools that we're having, we're seeing that people have an opportunity to find easier what they are looking for can be more targeted, have a faster path to ultimately get to a booking and that is helping conversion levels. Then also what we are seeing at the same time is that cancellation rates are a bit lower. Every period, if you look at it, it's slightly lower than in the comparable period 1 year ago. And that's also a positive. And we believe that this is not a coincidence. This is also because people can find exactly what they are looking for. So they don't need to continue to search and ultimately cancel one booking and book somewhere else or book something else with us. So they are satisfied with what they have booked, so cancellation rates slowly coming down, also clearly a huge economic effect. And then if something goes wrong, what we're also seeing is that customer service is seeing a huge benefit in what we can deliver, reduced contact rates, faster handling time and higher customer satisfaction. I think it's actually remarkable. If you look at our results this quarter, our customer service costs are down year-over-year, are down year-over-year in absolute terms despite volume growth of close to 10%. So the average cost per booking is coming down very rapidly and the satisfaction scores are going up. So all of these things are interrelated. It's interrelated with all the elements that Glenn said, people come more direct to us, are booking more often with us, are booking more across multiple verticals, are canceling less, are having higher satisfaction and like to come back and book more direct. So all of these things are interrelated and really strengthening each other. Operator: And our next question comes from the line of Justin Post with Bank of America. Justin Post: Great. A couple. First, I'd like to dive into the U.S. It really seems like the OTA industry is maybe taking some share here. Just wondering if it's the loyalty program, leisure growing faster than business, what's helping the industry take share and you specifically take some share? And then on the algorithm, just wondering, there's a lot of stuff going on with Connected Trip. Obviously, payments and more air. Just could you help us think about how both bookings could grow relative to nights and also how you're thinking about revenue take rates over the next couple of years? Glenn Fogel: Sure, Justin. I'll talk about first of one, I'll let Ewout talk what kind of specifics he wants to give about the numbers regarding Connected Trip and et cetera, the questions you asked. So on the U.S., we talked a little bit about this already, how pleased we are with those numbers. And I did mention brand is obviously important, improving the service that's important. You asked about consumer versus business. Obviously, we get both, but we do tilt much more to consumer. So clearly, we are doing well in that area. Now as you know, there's a lot of debate about what's going on in the U.S. economy right now. People -- some people are saying, well, we have a 2-speed economy where the higher ends of the economic strata are doing very well, and they're spending a lot of money and the bottom part of the economic strata are suffering a little bit more, not being able to purchase as many services perhaps they wanted to, et cetera. It's interesting because we play the entire gamut of the economy. We are able to sell at the top, we sell more economy products and services, too. So clearly, for us, we are able to benefit whether it's a strong economy or not a strong economy, we're doing well. Look, I can't say anything that's more specific than the fact that we continue to execute well making sure the service is good, make sure all the things that we talked about are working well, making sure we're getting that brand in front of people, making sure if anything goes wrong, we fix it. That's how we do a good job. And it adds on itself and Ewout used that word flywheel. More people become aware of it, they've had a good experience. They come back. Yes, the awareness is not where I'd like it to be, but it is improving. This is the way we do it. And we -- I've been talking about this Justin, we talked about this for many, many years. I said I want to be bigger in the U.S. and that we're growing, here's how we're going to do it, and we're doing it. It's blocking and tackling, day by day, improving it. No, as I said already once, I said there are no silver bullets in this business. It's just continue to execute day after day after day. Ewout, talk about numbers you did on the Connected Trip stuff. Ewout Steenbergen: Justin, when we speak about Connected Trip, I would like to make a distinction between what we're seeing now and then really where we are heading to in the future. So what are we seeing now? We're seeing a lot of our other verticals growing in a very healthy way, flights 32%; traction 90%. We see our payment-related bookings going up in the mid-20%. We see our Connected Trip transaction, so where someone books more than 1 vertical for the same trip going up mid-20s. Of course, the direct element is a part of that. So all of these metrics look really in the direction that customers like to really bring those elements together because it's peace of mind, it's all-in-one platform, and we deliver a lot of value for them as a consequence. But if you think about generative AI this is really the opportunity for us. We can make the real Connected Trip come to life over the next couple of years. And what I mean with that is building an intelligence layer that all these elements of the trip naturally fit together are interrelated, all personalized based on what we know and what you like to do and how you like to travel and where you like to dine. If something happens, everything can automatically be updated. It means that people will be more frequently using our app, we can become more proactive in what we offer to you and more and more value can be created as a consequence. So actually, that is our big opportunity around generative AI. And I think the value we can generate in that way is really going to be even more than what we are seeing today. So that's why I am perfectly really excited about. Justin Post: Maybe one quick follow-up. Do you think the gap between bookings growth and room night growth can grow? Ewout Steenbergen: Yes. There's, of course, always a few things that go in the mix, take FX aside, what our ADR is doing. That is, of course, one element there. It's the growth in other verticals that is going in there. But generally, we would say, yes, because if we take room nights plus ADRs plus other verticals, we would like to, of course, to see that total gross bookings will grow faster than room nights on average over time. Operator: And our next question comes from the line of Trevor Young with Barclays. Trevor Young: Glenn, maybe a bigger picture one for you. From a competitive standpoint, do you foresee competitive intensity picking up over the next 2 to 3 years? It seems as though a major Asia player has aspirations in Europe while an accommodation competitor is making a big push into traditional hotels and adjacencies. Meanwhile, consumers will have a new channel via AI tools to make travel all that much more accessible. And if you do see competitive intensity picking up, how are you evolving your strategy to better position Booking for that environment? Glenn Fogel: Yes. It's a good question, Trevor. But I have to say that this business, this industry, and I take to the regulators all the time in Europe, has always been one of the most competitive of any industry than I've ever experienced. And sure, there are new things to look at now. And there are old competitors in the past, and they're no longer there. I remember once upon time everybody talked about, what about TripAdvisor? Well, where is TripAdvisor now? No offense to them, but they're not the threat they were at one point. Or what's going to happen with Meta? And I can go through over -- given things that we have had to face, incredible competition time after time after time. So sure, there's a lot of competition right now. And I know you're alluding to Trip.com, Ctrip in China. Yes, a very good competitor. And sure, now we have AI as a competitive threat, but also in that one a little different because that gives us incredible benefits too. Incredible power because of the incredible scale we have and the incredible engineering talent, et cetera, in AI, this is actually a competitive advantage I would say, a net, net situation. But in the long run, I believe it's the same way it's always been. We just have to keep on grinding out better things for our services. But there's a time there is no such thing as mobile. Mobile comes in, we had to immediately create a great mobile site for our customers, which we did. Well, now we have AI and lots of great things working there that can make even better. One of the really good things about being the scale that we are and the data we have, that proprietary data that we have and the incredible number of customers and partners and all these new things we've already begun to do in all the different verticals. And in addition to things that we don't talk about a lot of things like insurance, for example, we don't talk about that a lot. Where the things we're doing in terms of providing advertising opportunities for our partner. We don't talk about that one too. There are so many things that we are just beginning to really put together and putting it all together, using, as I said before, the data, the science, being able to build these things in a way that's much better that smaller players cannot constantly do. That's an advantage we have. So I see actually, yes, it's extremely competitive, but I said this I don't know which quarter recently, I said about, I find this is the most exciting time for us ever. I actually see us in a much better position than we were years ago, decades ago. I see this is an opportunity for us to create as Ewout was just talking about bringing it all together in a way that we could really accelerate the growth factor here if we do it right over, and you pointed out a 5-year type horizon. That's what we want to do. And I believe we can do it, and it's up to us to make sure it does happen. Operator: And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Mr. Glenn Fogel for closing remarks. Glenn Fogel: Thank you. I'm glad to end it on that. I think of the future, it's so great. So I want to express my gratitude to our partners, our customers, our dedicated employees and our stockholders. We truly appreciate your support as we continue advancing our long-term vision. Thank you, and good night. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to today's Clearwater Paper Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Sloan Bohlen, Investor Relations. Sloan? Sloan Bohlen: Thank you, Greg. Good afternoon, and thank you for joining Clearwater Paper's Third Quarter 2025 Earnings Conference Call. Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Sherri Baker, Senior Vice President and Chief Financial Officer. Financial results for the third quarter of 2025 were released shortly after today's market close. You will find a presentation of supplemental information, including a slide providing the company's current outlook posted on our Investor Relations page at our website at clearwaterpaper.com. Additionally, we will be providing certain non-GAAP financial information in this afternoon's discussion. A reconciliation of the non-GAAP financial information to comparable GAAP information is included in the press release and in the supplemental information provided on our website. Please note Slide 2 of our supplemental information covering forward-looking statements. Rather than reading this slide, we'll incorporate it by reference into our prepared remarks. And with that, let me turn the call over to Arsen. Arsen Kitch: Thank you, and good afternoon, everyone. Let me begin with a summary of our third quarter performance highlights. We delivered adjusted EBITDA of $18 million, which is towards the high end of our guidance range of $10 million to $20 million. Year-to-date adjusted EBITDA from continuing operations stands at $87 million, up from $26 million during the same period last year. This increase is driven mostly by our efforts to reduce fixed costs and 4 incremental months of Augusta results included in our P&L. Net sales grew by 2% versus the prior quarter, driven by a 6% increase in shipment volumes, partly offset by lower market-driven pricing. We successfully completed all 3 of our planned major maintenance outages for 2025. The Lewiston outage was completed in August at a direct cost of $24 million. The Augusta outage was completed in October at a direct cost of $16 million. I'm pleased to report that the execution of our planned major maintenance outages was significantly improved versus prior year. This confirms our belief that an annual cadence delivers generally more manageable and predictable outages. We've also largely captured the run rate benefits of our fixed cost reduction initiatives. These are now tracking to around $50 million in savings for the year, which would exceed our original estimate of $30 million to $40 million. These savings are helping us offset some of the margin pressure that we're facing during this industry down cycle. Let's now turn to some commentary on the industry and our key strategic initiatives. While the latest third quarter AF&PA report is not yet available, the trends that we saw in Q2 have largely persisted into Q3. We believe a competitor is continuing to ramp new SBS capacity, which may add up to 10% of additional supply to the industry. Without other changes, this level of new capacity would result in utilization rates in the low 80% range by year-end. This will be well below the normalized cross-cycle average of 90% to 95% and would result in supply exceeding demand by more than 500,000 tons. These low utilization rates have led to margin pressure, resulting in returns that can support investments into our capital-intensive industry. This is simply not a sustainable position to be in for the industry, which is why we believe that the industry will rebalance supply with demand in the medium to long term. As we previously discussed, there are several potential paths to this recovery. First, RISI is forecasting an approximately 350,000 ton net capacity reduction in the first half of 2026, which would drive utilization rates to above 90%. Second, tariffs and a weakening dollar may put pressure on the price of some of the more than 700,000 tons of imports into the U.S., encouraging customers to seek domestic suppliers. And lastly, industry participants may choose to swing capacity to other grades such as CUK, white top or other non-bleached applications. This could help absorb excess SBS capacity. Without a combination of these supply changes, we believe that it will take more than 5 years of demand growth to fully absorb the excess capacity that exists today. While the current industry oversupplies primarily limited to SBS, we believe that it is having an impact on the other 2 paperboard substrates. Each substrate has its own strengths and applications, but there's meaningful overlap between them, presenting substitution opportunities to customers. This is why we believe that pricing has been historically correlated between SBS, CUK and CRB. Today, CUK has priced $50 per ton higher than SBS according to RISI, which is not intuitive given SBS' superior print quality and higher bleaching costs. If you look at the 30-year history of this market, it is only in recent years that CUK pricing has exceeded SBS. CRB today is priced $120 per ton lower than SBS according to RISI, which is a narrower gap than we've seen historically. SBS has superior performance characteristics versus CRB with a higher production cost of more than $200 per ton due to the use of virgin fiber and bleaching. Buying decisions and packaging are driven by several factors, including performance, cost and sustainability. Most importantly, customers by paperboard by area or square feet and not tons. To match the strength performance characteristics of SBS, a customer would need to use a heavier weight of CRB, resulting in a price that we estimate to be equal to or higher on a per square foot basis than SBS in today's market. If these trends persist, we believe that CPG and retail customers will look closely at substitutions, which would support higher SBS demand, put a ceiling on CUK and CRB and return to historical pricing correlations between the 3 substrates. Let me now shift to some comments on potential CUK investment that we previously discussed. As a reminder, we're exploring adding CUK swing capability to one of our SBS machines. We have nearly completed the engineering work, and now I can share some additional details on the project. The estimated capital required for the investment is approximately $50 million with a 12- to 18-month lead time to complete. At today's prices, the project return is estimated to be more than 20%, largely based on trading up lower end SBS volume to CUK. The returns will be considerably higher if we assume that we're filling up open SBS capacity. Our mill in Cypress Bed, Arkansas is best positioned for this project, given its proximity to customers and access to low-cost softwood fiber required for CUK. We estimate that open market demand for CUK is around 300,000 to 400,000 tons with potential upside if independent converters had reliable domestic supply. Our goal will be to capture around 100,000 tons of this volume, utilizing about 1/3 of Cypress Bend's capacity. The remaining 2/3 of the capacity would remain in SBS. We see 2 upsides to this project. First, there is a strategic benefit to expanding our product portfolio to better serve our converter customers. Second, it would enable us to more fully utilize our network capacity during an SBS industry downturn. We may conclude in the future that this is a good investment, but we're putting a final decision on hold at this time. We remain focused on running all 3 of our SBS mills, vigorously defending our SBS market share and preserving the strength of our balance sheet. With that, I'll turn the call over to Sherri to discuss our Q3 financial results in more detail as well as provide an outlook for Q4 and some additional thought -- some initial thoughts on 2026. Sherri Baker: Thank you, Arsen. Let's start by reviewing our financial performance in the third quarter in more detail. Net sales were at $399 million, up 1% year-over-year, driven by a 3% increase in paperboard shipment volumes partially offset by lower market pricing. Net loss from continuing operations was $54 million or $3.34 per diluted share, primarily due to a $48 million noncash impairment of goodwill. This noncash impairment represents all of our remaining goodwill. Most of this goodwill was accumulated through the acquisition of Manchester Industries in 2016. The impairment was driven by the decline in our market capitalization as compared to the increase in our book value, which was driven by the gain from divestiture of our tissue business late last year. Adjusted EBITDA was at $18 million towards the higher end of our guidance range of $10 million to $20 million. We saw improved cost performance due to our fixed cost reduction initiative, which more than offset lower pricing and higher input costs. SG&A as a percent of sales was at 6.2% at the lower end of our targeted range of 6% to 7% of net sales. We believe that this is at the lower end of our industry benchmark, demonstrating our commitment to running a lean, cost-effective company. Let's now turn to our balance sheet and capital allocation. We generated $34 million in cash from operations during the quarter and approximately $3.5 million in free cash flows. Our net leverage ratio is at 2.7x, and we have ample available liquidity of $455 million. While our leverage ratio has increased due to the current industry down cycle, our aggregate debt level has remained stable as we continue our focus on maintaining a strong balance sheet. We also repurchased $2 million of shares, bringing our total to $20 million against our $100 million authorization. We will consider additional share repurchases when we have a line of sight to free cash flow generation in the near to medium term. Turning now to our outlook for the fourth quarter. We expect adjusted EBITDA of $13 million to $23 million. We expect slightly lower paperboard shipments versus the third quarter due to seasonality. We expect 3% to 4% lower production volume, driving less cost absorption than during the prior quarter. We have largely captured the benefits from our fixed cost reduction efforts in previous quarters. And while we will maintain those savings, we do not expect significant additional savings between the third and fourth quarters. We expect other input costs to remain relatively stable, and our guidance includes $16 million of major maintenance outage costs at our Augusta mill, which was completed in October. And lastly, let me provide you with some of our initial assumptions for 2026. We expect revenue of around $1.45 billion to $1.55 billion and a capacity utilization rate in the mid-80% range. We are also assuming that we'll see the carryover impact from 2025 market-driven price changes into 2026. We expect to generate enough productivity and cost reductions to offset 2% to 3% of cost inflation. We expect capital expenditures of $65 million to $75 million. To generate incremental cash flow, we will target more than $20 million in working capital improvements, primarily in inventory. And lastly, given newly enacted tax legislation, we do not expect to be a net cash taxpayer next year. The biggest variable that is difficult for us to predict is price changes in 2026. Currently, RISI is forecasting an increase in SBS folding carton price of $30 per ton and cup stock of $40 per ton in the first half of next year. This corresponds to their assumption that utilization rates will improve to over 90% with a net industry capacity reduction of approximately 350,000 tons. Regardless of industry conditions, we remain focused on operating effectively, reducing our costs and maintaining a strong balance sheet. I'll now turn the call back to Arsen for closing remarks. Arsen Kitch: Thank you, Sherri. While we're navigating a challenging industry environment, we remain confident in the long-term fundamentals of the paperboard market and our ability to generate strong returns. We have high-quality assets that are geographically well positioned to serve independent customers, and we intend to maintain our market share. We believe that paperboard packaging has strong demand fundamentals as consumers and customers continue to seek sustainable and renewable packaging solutions. We have a strong balance sheet with manageable debt levels and more than $450 million in liquidity, positioning us to weather this current downturn. In an environment where utilization rates returned to 90% to 95%, we expect to achieve cross-cycle adjusted EBITDA margins of 13% to 14%, resulting in free cash flow conversion of 40% to 50% or over $100 million in free cash flow per year, assuming $1.8 billion to $1.9 billion in net sales. Let me conclude my remarks by thanking our people for their efforts to remain focused on operating safely and providing excellent service to our customers. I would also like to thank our customers for putting their trust in us and our shareholders for their continued interest. With that, we'll open it up to your questions. Operator: [Operator Instructions] And it looks like our first question today comes from the line of Sean Steuart with TD Cowen. Sean Steuart: Arsen, I want to start with the decision to hold the CUK swing capacity project. I gather, given a pretty strong return profile for that project, this is more around wanting to hit balance sheet targets. Assuming that's correct, can you give us a sense of where you would like to see leverage ratios get to or free cash flow profile for the overall company improved to before you would greenlight that project? Arsen Kitch: Yes. Good question. So you're right. I think it's a good -- it's likely a good project but we're putting that decision on hold. It would take more than 2 years for us to deliver cash flow from this project, which means we'd have to finance it through debt. And right now, we need to prioritize maintaining a strong balance sheet and focusing on running our SBS mills and defending our market share. We said previously, we're targeting a leverage ratio in the 1% to 2% range. EBITDA margins cross cycle 13%, 14%. So we'll revisit this decision later. In today's market environment at today's prices, it is a very attractive return, but we have to revisit it in the future and see what those conditions look like and see if we need to update our assumptions. Sean Steuart: Okay. Understood on that front. And then with respect to your view on the market outlook for SBS, I gather a lot of this is based on what RISI is forecasting in terms of forthcoming capacity closures. According to their forecast, we would need to see those announcements soon. I guess I'm wondering on your perspective of industry willingness to make these -- to take these initiatives to rebalance the market and the extent to which you're seeing any import relief at this point as tariffs take hold and if that's helping at the margin at all? Arsen Kitch: Yes, listen, we're not going to comment on what our competitors may or may not do. You're right, RISI is forecasting a first half net capacity reduction of 350,000 tons. So they're assuming a turn in the market. We're certainly hoping for that, but we're planning for tomorrow looking like today. From an import perspective, it's still a bit early to tell. But as we look at European imports July year-to-date, they're down, I believe, approximately 10%. So I think you're starting to see some cracks in the import balance into North America between a 15% tariff and a weakening dollar, absorbing 20% or 30% of additional costs for an importer into North America, I think, is getting harder and harder. And for domestic customers, I think they're looking for more reliable, stable domestic supply. So we're optimistic that this will be a tailwind for us as we head into 2026. Sean Steuart: Okay. Just one last one, maybe for Sherri. You went through a bunch of 2026 metrics that you're targeting. Do you have an initial view on what the maintenance schedule is going to look like? And I appreciate you're smoothing this out now with a more regular schedule across the mill platform. Can you give us a perspective on the cadence of anticipated closures in 2026? And are we safe to assume that the overall expense that you're targeting would be similar to 2025 levels? Sherri Baker: Yes. So I'll answer the second part first. You should expect the cost to look very similar to what we see in '25. So I would start there. We're still finalizing the schedules for next year, so we'll be able to come out and tell you exactly which facilities and which quarters probably by our February call. And then we'll highlight if there's any overlap in consistencies if we change the quarters. Arsen Kitch: Sean, maybe one more comment on that. We had our Lewiston outage in late Q2. So it was in August with Augusta in October. Doing an outage in the middle of summer is pretty challenging from just a heat perspective. So we are looking at potentially moving out that outage into earlier in the summer, maybe late Q2 just to make it a safer, more manageable outage. So we're still finalizing those details, but that is the potential for us to have the Lewiston outage a bit earlier in the year, which would mean that we would have 2 Lewiston outages within a 12-month period potentially. But we'll share that with you in February. Operator: Our next question comes from the line of Matthew McKellar at RBC. Matthew McKellar: First, shipments in the quarter were solidly ahead of where you sort of guided to. It looks like food service sales are pretty healthy, but could you provide some maybe additional perspective on where you saw the incremental strength versus your expectations as of late July? And if you could provide any other broader commentary around relative strength or weakness you're seeing conditions across liquid packaging, folding carton, food service, that would be great. Arsen Kitch: I think summertime is normal seasonality uptick for food service. We certainly saw some nice strength in food service. And our team is doing a really nice job of competing vigorously in the market and filling out our capacity. I think we've had some optimism from some of our food service customers. I think you may be seeing some import relief helping on things like paper plates that is helping some of our paper plate customers see stronger demand. So I think those are some of the -- I think those are some of the variables that came into play in Q3. Matthew McKellar: Okay. That's great. And I guess just following up on the second part of that, any other comments around kind of weakness you're seeing into Q4 or strength relatively between those kind of product categories? Arsen Kitch: I think Q4 is seasonally a little weaker than Q3, and it's typically in food service. Just the seas of the summer season is over. So we're expecting A little bit of seasonality decline as we head into Q4. And I think, as Sherri mentioned, we'll also see a few percentage points less of production as we head into Q4 versus Q3 that we will have some absorption impact in that, as we stated in the last earnings call, absorption is a meaningful component of our P&L. And if you do the math, it could be upwards of $500 a ton of absorption with production changes. So I think that's part of the reason why Q4 is flat versus Q3 as I think it's -- we'll see some impact of absorption. Matthew McKellar: Okay. And just kind of pulling on that string. It's a fairly large range for guidance on EBITDA in Q4, considering you're through the maintenance. Is it mostly seasonality of demand and maybe energy costs that would take you to the top or the bottom of that range? Do you maybe even see any risks around I guess, the government shutdown and the supplemental nutrition assistance program? What else would you be watching for in terms of variability within that range? Arsen Kitch: I think energy is right. We did bake in some energy into Q4 versus Q3, but it's very much weather dependent. And some of our -- one of our mills at least is more susceptible to bigger swings in energy prices than the other mills just due to its location. So I think part of it is energy, part of it is just production. 1,000 tons of production is worth upwards of $500,000. And for those folks that spend time in paper mills know that 1,000 tons plus or minus in any given week or given month is a rounding error, but it has a pretty substantial impact on our earnings. So I think it's the nature of being a paperboard focused business with 3 mills. Matthew McKellar: Okay. Fair enough. And last for me. Just the working capital improvement of $20 million to $26 million. Can you just share a little bit more about how you plan to achieve that? It sounds like it's mostly inventory, but also the timing of when you'd expect to reach that target? Sherri Baker: Yes. It will be primarily in inventory. I think you'll see us start to work those pieces down in the second half of next year. So that would be the timing of when I would be looking to achieve those estimates. Arsen Kitch: And I think back to the production comment, this year, I think we probably built a little bit of inventory and we'll be reducing inventory next year to free up some working capital. So there will be a trade-off between fixed cost absorption and just cash coming off the balance sheet. So there'll be some trade-off as we head into next year. And we'll provide a bit more context on this in the coming quarters. Operator: [Operator Instructions] All right. Ladies and gentlemen, that does conclude today's call. Thank you so much for joining us today, and you may now disconnect.
Operator: Liliana Juárez González: Good morning, and welcome to our third quarter 2025 earnings call. Joining us today are our President and CEO, Enrique Beltranena; our Airline Executive Vice President, Holger Blankenstein; and our CFO, Jaime Pous. They will be discussing the company's results followed by a Q&A session. This call is for investors and analysts only. Please note that this call may include forward-looking statements under applicable securities laws. These are subject to several factors that could cause the company's results to differ materially, as described in our filings with the U.S. SEC and Mexico CMBB. These statements speak only as of the date they are made, and Volaris undertakes no obligation to update or modify them. All figures are in U.S. dollars compared to the third quarter of 2024, unless otherwise noted. And with that, I'll turn the call over to Enrique. Enrique Javier Beltranena Mejicano: Good morning, everyone. This quarter once again demonstrated that Volaris' agility and discipline continue to set us apart in a complex environment, driving tangible results. We acted nimbly and with focus, fine-tuning our network and capturing sequential improvement in demand across our core markets. Our results this quarter confirm that our commercial and operational strategies are delivering according to our flight plan. In our last earnings call, we noted that demand momentum was starting to build, and this quarter validated that trend. The recovery we anticipated for the second half is unfolding day by day as we projected. We observed stable domestic demand in a rational supply environment. Additionally, travel sentiment improved in the cross-border market, notwithstanding the geopolitical disruptions observed throughout the year. We executed where it mattered most, taking deliberate actions to strengthen profitability. The third quarter's performance in terms of unit revenue was fully in line with our expectations. The year-over-year variation in TRASM has narrowed each month, confirming that demand recovery continues to strengthen across our network. The sequential improvement is the proof statement that our strategy is delivering consistent momentum, and we believe that improved booking curves for the fourth quarter should position Volaris for a stronger 2026. In the domestic market, supply rationalization across all players continues to create a healthier balance between capacity and demand. Our load factor in the Mexican market reached 89.8%, consistent with last year's levels and reflecting a stable demand under a more rational supply environment, which supports healthier yields going forward. In the international market, we are seeing a steady recovery in cross-border demand with traffic improving month-over-month and holiday bookings already trending ahead of last year. Our 77% load factor reflects our tactical focus on optimizing yields to maximize TRASM. We remain focused on what is within our control, maintaining cost efficiency, adapting quickly, and executing with discipline. As a result, TRASM, CASM, ex-fuel, and EBITDAR margin all came slightly better than our guidance, reaffirming our ability to deliver consistent execution. Building confidence from this solid performance, we're maintaining our full-year 2025 capacity growth outlook of approximately 7% with prudent growth, unparalleled cost control, and improving demand trends towards year-end, we are reiterating an EBITDAR margin in the range of 32% to 33% for 2025. Looking ahead to 2026, we are embedding flexibility into our fleet plan and targeting ASM growth in the range of 6% to 8%, while retaining the ability to adjust a few percentage points in response to demand trends or OEM developments. This level of growth would bring us back to year-end 2023 capacity levels, underscoring that our growth remains prudent and aligned with market conditions. Our capacity decisions remain firmly anchored on customer demand and sustained profitability. I want to make it very clear to our investors. Volaris will continue to control growth with discipline fully aligned with market demand. Taking all necessary actions to efficiently reintegrate aircraft returning from engine inspections to ensure we meet this commitment. Having said that, as demand continues to recover, we are also seeing healthy supply dynamics, particularly in Mexico's domestic market. Volaris continues advancing from a position of strength with leadership in core domestic markets and a world-leading cost structure that will further improve as we reduce fleet ownership costs and gradually narrow the gap between our productive and nonproductive fleet. Sustaining differentiation requires constant evolution. We're not standing still. We're constantly adapting our ultra-low-cost carrier model to Mexico's unique dynamics, lowering barriers to traveling, enhancing service and maintaining our unwavering commitments to low costs and low fares. Leveraging Volaris' scale as Mexico's largest airline, we've built meaningful customer loyalty and driven strong repeat flying across our network. A strong example of this evolution is Guadalajara. A decade ago, this market handled a modest passenger base with limited international connectivity. Today, thanks to Volaris' expansion and market development, Volaris Guadalajara boosts nearly 100 daily departures, connecting travelers to 26 domestic and 22 international destinations. Over our 19 years of history, Volaris has proudly transported more than 90 million passengers to and from this market. Similar to what we've seen in Guadalajara, this trend is emerging across other markets that are rapidly evolving and opening new opportunities for growth, a typical emerging market phenomenon that underscores our role as a catalyst for national mobility and economic development. As our network matures, so has our customer base. We began as an airline built predominantly around VFR traffic, and we have since evolved into a more diversified customer mix. Today, roughly 40% of our passengers remain VFR, while the remainder represent a broader range of travel motivations from business to leisure to other niche segments. This evolution positions us to further strengthen our network through better frequencies, attractive schedules, and varied destinations, reinforcing Volaris as the airline of choice for both our VFR base and all passenger segments traveling from our core markets. Building on this momentum, the next phase of our model focuses on capitalizing on repeat travel and driving incremental TRASM growth across all revenue streams. As Holger will discuss, we continue launching new ancillary products and advancing network and commercial initiatives to better serve a broader customer base, all while maintaining the low-cost DNA that defines Volaris. This evolution builds on our core bus switching strategy, which remains foundational to our growth. As a result, we remain committed to serving this segment by consistently offering low fares. Leveraging our ultra-low-cost carrier model, Volaris is strategically positioned to continue improving TRASM by expanding our product suite and optimizing distribution channels. We're enhancing the customer experience across multiple fronts, refining our network strategy, streamlining boarding processes and offering enhanced seat selection options that continue to strengthen revenue diversification while preserving the cost efficiency that underpins our long-term profitability. Sequential PRASM improvement and a resilient cost structure highlight our disciplined execution. We're closing 2025 and entering into 2026 stronger, more efficient and better positioned to continue delivering value to our customers, capturing opportunities and driving sustained profitability. Volaris has proven its resilience time and again and will continue to do so. I'll now turn the call over to Holger to continue to discuss our third quarter commercial and operational performance as well as the evolution of our broader product offering in more detail. Thank you very much. Holger Blankenstein: Thank you, Enrique, and good morning, everyone. Operationally, our team delivered another quarter of strong disciplined execution. Volaris PRASM performance reflects our ability to anticipate market shifts and respond decisively, managing capacity to protect yield and maximize profitability. Volaris maintained network stability and operational flexibility throughout the quarter, effectively managing delays in aircraft deliveries and ongoing engine constraints. As a result, ASM growth reached 4.6%, coming in slightly below our guidance of approximately 6%. Overall, total third quarter load factor stood at 84.4%. The domestic load factor reached 89.8%, supported by steady demand through the summer season in a balanced supply environment. August performed particularly well, benefiting from an extended public school vacation period. Looking forward, current booking curves for the holiday season look solid. International load factor was at 77% as we actively prioritize yields overloads to optimize profitability. For the fourth quarter, as we head into the holiday high season, international traffic is tracking stronger with historical seasonality, setting the stage for improved profitability as we close the year. And as Enrique mentioned, VFR cross-border demand has been recovering sequentially. We believe we have reached an inflection point in the U.S.-Mexico transborder market with booking trends showing sustained improvement compared to last year. While we remain disciplined in our capacity deployment, this strengthening demand backdrop provides greater visibility heading into 2026. Moreover, we continue to drive robust ancillary adoption. Our average ancillary revenue per passenger for the third quarter reached $56, marking the eighth consecutive quarter above the $50 threshold. Ancillaries now consistently account for over half of total revenue, remaining a standout driver of resilience and profitability across all market conditions. This performance highlights the structural strength of our ULCC model in our markets and the sustainability of our revenue mix. The sequential TRASM improvement we anticipated last quarter materialized fully in line with our expectations. with third quarter TRASM reaching $0.0865, just ahead of our guidance and down 7.7% year-over-year, improving from the 17% and 12% declines recorded in the first and second quarters, respectively. These results confirm that the actions we took earlier in the year are delivering tangible progress. We have good momentum heading into the year-end with forward bookings showing sequential improvement and providing visibility into sustained strength and healthy demand through 2026. As these results demonstrate, Volaris has built a business model and network that allow us to flexibly and decisively capture demand where it is strongest across our markets. As our customer base becomes increasingly diversified, we continue to refine our ULCC model, lowering barriers to travel, encouraging repeat flying and broadening our customer mix while continuing to offer low base fare in our core traffic. A key pillar of this evolution is our ancillary and affinity ecosystem, which continues to grow in both scale and contribution. Our affinity portfolio, including v.club membership, v.pass monthly subscription, the annual pass and the IVex co-branded credit card together represent an increasingly relevant share of our business. Today, v.club represents a growing share of total revenues, while 1/3 of all sales through Volaris direct channels are made using our co-branded credit card. The index card is the largest co-branded credit card for any industry in Mexico. In July, we seized the growing affinity for the Volaris brand by launching our in-house loyalty program, Altitude. We are encouraged by a strong early response with membership enrollments tracking above our expectations. We see significant potential for this franchise, particularly as we integrate our co-branded credit card early next year into Altitude, allowing all card transactions to earn Altitude points. The ultimate goal is to position Volaris as the airline of choice, not only for our core VFR base, but for all customer segments traveling from our core cities across our network in Mexico's domestic market. We already serve a broad mix of travelers from small business to leisure to multipurpose passengers, alongside our loyal VFR base. Guadalajara, which Enrique mentioned, has become a strong market for the multi-reason customers, such as those who travel for leisure on some occasions and for business on others. The growing mix of repeat travelers on the flights we operate represents a structural tailwind to our average fare, ancillary sales and ultimately, margin. This evolution of demand is also unlocking new profitable opportunities for our network, capacity allocation exemplified by the addition of our Mexico City to New York route and increased route breadth from Guadalajara. We are enhancing our product and service offering to better capture the full value of these segments. Simultaneously, as the AOG situation with Pratt & Whitney stabilizes and the political and economic environment improves, we have been able to refocus our efforts on strengthening our network and ensuring industry-leading breadth and depth across our core cities, particularly in Tijuana and Guadalajara. We are also optimizing itineraries and schedules to better serve each segment, for instance, shifting certain red eye flights to more convenient time slots for business and leisure travelers. We expect the financial benefits from these adjustments to begin materializing in our TRASM results next year. In addition to our recent launched Altitude loyalty program and code shares, we continue to introduce new products and partnerships in a cost-efficient, low-complexity way that strengthens our revenue diversification. We are proud to announce recent initiatives that include expanding our presence in GDS through Sabre's new distribution capability or NDC standard. Volaris will expand its reach to Sabre's broad network of corporate and leisure travel agencies across North America and beyond. We are also ramping up marketing for Premium Plus, our blocked middle seat product for the first 2 roles. We are implementing these new revenue initiatives with a focus on the latest technology and minimizing costs and complexity. With this, we are broadening our customer base while remaining true to our ULCC DNA. Overall, we continue to prioritize low cost, operational efficiency and superior customer service. To this end, one recent innovation has been the introduction of AI agents that can immediately assist customers across multiple languages and channels, boosting our speed and efficacy and volume of interaction. Today, 79% of Volaris customer service is handled through digital channels, up from zero before the launch of our AI agent. This allows us to manage 3x more call volume while cutting service cost per interaction by nearly 70%, a clear example of how technology supports both our customer focus and cost leadership. At the same time, our NPS remains strong in the 40s, reflecting how our customers continue to recognize the total value we deliver across our flights, products and services. Looking into next year, we will continue to manage capacity with discipline, adding growth selectively across our network and leveraging our flexibility on lease extensions, redeliveries and network development to support our 6% to 8% capacity growth outlook. At the same time, the foundation we've built this year positions Volaris to continue strengthening into 2026. Supply rationalization in the domestic market is expected to support a healthier yield environment while cross-border demand continues to recover. Our initiatives to expand the customer base and grow ancillary revenues should drive higher revenue per passenger, positioning Volaris for continued profitable growth into 2026. Now I will turn the call over to Jaime to cover our third quarter 2025 financial results and full year 2025 guidance. Jaime Esteban Pous Fernandez: Thank you, Holger. Our third quarter financial results reflect our adjustments to prioritize profitability as cross-border traffic conditions gradually improved throughout the summer. Despite external headwinds, we succeeded in controlling what we can control, and we delivered on each line of guidance. Let me first turn to our P&L for the third quarter compared with the same period last year. Total operating revenues were $784 million, a 4% decrease. On the cost side, CASM was $0.079, virtually flat versus the third quarter of 2024 with an average economic fuel cost down 1% to $2.61 per gallon. CASM ex-fuel was $0.0548, aligned with our guidance and up just 2%. This result reinforces the success of our variable cost model and our effective cost management as we achieve our CASM ex-fuel guidance despite flying fewer-than-expected ASMs and encountering a peso that appreciated more than planned versus the second quarter. While a stronger peso is a benefit to Volaris' overall results, it adversely impacts our cost lines. As a reminder, fleet-related expenses such as depreciation and amortization, depreciation of right-of-use assets and maintenance continue to reflect the full fleet included grounded aircraft. In addition, as we approach a higher number of lease returns in 2026, the P&L line for aircraft and engine variable lease expenses captures the effect of the delivery accruals, which means this line item includes related maintenance for aircraft returns scheduled in the future. Current market conditions have created opportunities to acquire aircraft coming up for redelivery on attractive terms, helping reduce future redelivery expenses and extend time on the assets. Leveraging these opportunities, during the quarter, we acquired two of our formerly leased Cos, acting selectively and only where it made strategic sense. During the quarter, this also represented a benefit to the aircraft and engine variable lease expense line as it involved the cancellation of redelivery accrual related to these aircraft. Moreover, on the other operating income line, we booked sale and leaseback gains of $6.6 million related to the Airbus deliveries of three new aircraft. This line also includes our aircraft grounding compensation from Pratt & Whitney. EBITDA reached $264 million with a margin of 33.6%, aligned with the guidance provided for the quarter. EBIT was $68 million, resulting in a margin of 8.6%. The sequential tighter spread between our EBIT and EBITDA margins reflects our efforts to mitigate the impact on our P&L from engine-related AOGs. Finally, we generated a net profit of $6 million, translated into an earnings per ADS of $0.05. Moving briefly to our P&L for the first nine months of 2025. Total operating revenues were $2.2 billion. EBITDAR totaled $659 million with an EBITDA margin of 30.6%. EBIT was $35 million, representing an EBIT margin of 1.6% and net loss was $108 million. Turning now to cash flow and balance sheet data. The cash flow generated by operating activities in the third quarter was $205 million. The cash outflows used in investing and financing activities were $69 million and $130 million, respectively. Third quarter CapEx, excluding fleet predelivery payments, totaled $106 million and year-to-date stood at $195 million in line with the $250 million we guided for the full year. Volaris ended the quarter with a total liquidity position of $794 million, representing 27% of the last 12 months total operating revenues, sustaining our disciplined and conservative approach to cash management. At quarter end, our net debt-to-EBITDA ratio stood at 3.1x. And going forward, our focus remains to deleverage. Importantly, we have no planned near-term need for additional debt and have already financed all predelivery payments for aircraft scheduled for delivery through mid-2028. Our strong flexible balance sheet remains a key pillar of business. Looking ahead, we will continue to explore financing alternatives beyond traditional sale and leasebacks for a means to structurally reduce fleet ownership costs and further strengthen our capital structure, potentially switching operating for finance leases where appropriate. Looking back, the first nine months of 2025 tested our resilience amid volatility in demand. Yet we remain disciplined and focused on our core priorities. Cost control, profitability and conservative cash management, actions that preserve the strength and value of our business. I want to highlight that we originally had an ASM growth plan for around 15% during the year as guided in October 2024. We have since adjusted our plan to nearly half that level due to external circumstances while keeping CASM ex-fuel in line with our original plan. This demonstrates not only how much control we have over our cost base, but also the strength and adaptability of our ULCC model. With approximately 70% of our costs being variable or semi-fixed, we maintain a uniquely flexible structure that allow us to efficiently navigate operational headwinds and protect profitability. Now turning to engine availability and our fleet plan. As of the end of the quarter, our fleet consisted of 152 aircraft with an average age of 6.6 years and 2/3 being new models. On average, during the quarter, we had 36 engine-related aircraft groundings. Regarding our future fleet plan, we are in a favorable position of having an order book of 122 aircraft, 84% of which are A321neos with competitive economics from the group order. As mentioned, capacity growth is anchor on customer demand and sustained profitability. We have multiple levers to control growth and optimize the deployment. First, we have the option to realign our delivery schedule as we did last year through our rescheduling agreement with Airbus, supporting disciplined single-digit annual growth over the next few years. Importantly, this plan already factors in the aircraft returning to operation at the engine shop visits. Second, we have the flexibility to either extend leases on aircraft due for redelivery or when conditions and terms are favorable, acquire aircraft approaching lease expiration, enabling us to make the decision that best balance cost efficiency and strategic value. Finally, more than half of our upcoming deliveries are intended for fleet replacement. Together, our order book and staggered lease returns represent a meaningful competitive advantage, allowing us to plan growth with precision, sustain structural cost leadership and preserve the agility to adapt to market conditions. We will continue to manage our fleet plan effectively, maintaining flexibility to optimize value and support a strong cash position. Our fleet strategy continues to evolve. To this end, last month, we phased out the last A319 from operations, an aircraft type that at the time of the IPO comprised over half of our fleet. Over the past 10 years, we have continuously adapted transition and became more efficient, and we are committed to continue doing so in the decade ahead. Turning now to guidance. As Enrique and Holger explained, we continue to see demand gradually improve as we head into the holiday season. For the fourth quarter of 2025, we expect ASM growth of approximately 8% year-over-year, TRASM of around $0.093, CASM ex-fuel of approximately $0.0575 with the sequential increase reflecting the timing of heavy maintenance events and a seasonally higher proportion of international operations. And finally, an EBITDA margin of around 36%. This outlook assumes an average foreign exchange rate of around MXN 18.6 per U.S. dollar and an average U.S. Gulf Coast jet fuel price of $2.2 per gallon in the quarter. These quarterly figures are aligned with our full year 2025 outlook, which we reaffirm as follows: ASM growth of 7% year-over-year, EBITDA margin in the range of 32% to 33% and CapEx net of predelivery payments of approximately $250 million, unchanged from our prior outlook. The macros in our quarterly guidance led us to a full year average foreign exchange rate of around MXN 19.3 per dollar and average U.S. Gulf Coast jet fuel price of approximately $2.15 per gallon. Now I will turn the call over to Enrique for closing remarks. Enrique Javier Beltranena Mejicano: Thank you, Jaime. I'd like to conclude our remarks with several reminders. First and foremost, Volaris continues to prove the strength and adaptability of our ultra-low-cost carrier model. We have shown once again that we can respond to market dynamics with discipline. Throughout 2025, we have adjusted our capacity growth from around 15% to nearly half that level while keeping our CASM ex-fuel fully in line with our original plan. Currently, travel sentiment, especially in the cross-border market is improving, a clear validation that our strategy is working. These trends position Volaris well for 2026 and beyond. Regardless of external conditions, our cost leadership, flexibility and expanding product suite are enabling us to address customer needs, capture profitable growth and continue creating value. At the same time, Volaris remains focused on offering low-cost, high-value service that makes air travel more accessible to our broader set of customers, including our core bus switching VFR segment. We are also optimizing itineraries, strengthening distribution and expanding our commercial offerings to drive higher TRAS among a diversified passenger set. We believe our markets are evolving. How European low-cost air travel developed 2 decades ago with strong growth potential, expanding passenger segmentation and a clear preference for affordable high-value travel. Volaris is advancing from a position of strength, leading in our core markets with one of the most efficient cost structures in the world, one that will further improve as we reduce fleet ownership costs and close the gap between productive and nonproductive aircraft. Finally, let me be clear, we are not changing our DNA. Our proven low-cost, low complexity model continues to evolve with enhanced ancillary and loyalty offerings that attract a broader customer base, improve fare mix and strengthen long-term profitability. In short, we are disciplined. We're evolving, and we are well positioned to continue delivering sustainable value for our shareholders. Operator: [Operator Instructions] Our first question is going to come from the line of Duane Pfennigwerth with Evercore ISI Institutional Equities. Duane Pfennigwerth: You mentioned a couple of interesting things in the prepared remarks. One, international is tracking stronger than normal seasonality. And then two, that you believe we're at an inflection point in U.S. transborder. Can you just elaborate on both of those? Holger Blankenstein: Duane, this is Holger. So yes, let me talk a little bit more in detail about the U.S.-Mexico market. We're talking about an inflection point because since mid-August, our sales in the U.S.-Mexico transborder market are above last year's level. And that clearly demonstrates our ability to fine-tune our capacity, manage demand and capture the market momentum that we're seeing. If we look into the fourth quarter, the U.S.-Mexico transborder booking trends are also showing a sustained improvement compared to last year. And that's why we are quite optimistic about the fourth quarter traffic evolution, both in the domestic, but also in the transborder market. Duane Pfennigwerth: Okay. And then maybe you probably covered this and maybe I missed it, but can you tell us the number of lease returns that you expect next year, how many aircraft will go back? How does that compare to this year? And I don't know if there's any good way to kind of net that expense relative to the reimbursement that you're getting from Pratt? Like how do we think about the net of lease return expense and reimbursement in '25 and '26? Jaime Esteban Pous Fernandez: Duane, this is Jaime. In terms of redeliveries of plan, next year, we're budgeting 17 redeliveries versus 7 that happened this year. So, it's a high number of deliveries. I would like you to focus there are many pieces related to aircraft deliveries, engine returns and redeliveries. So rather than focusing on just focus on our full year growth it is important that our priority, as Enrique mentioned, is to narrow the gap between productive and nonproductive fleet while ensuring that we deploy capacity to a market that is consistent with customer demand, all while maintaining the flexibility to adjust capacity up or down as well. Operator: [Operator Instructions] Our next question will be from the line of Thomas Fitzgerald with TD Cowen. Thomas Fitzgerald: A lot of good stuff in the deck. I was wondering if you could dig into Slide 8 a little bit more and how we should think about the potential RASM uplift over the coming years as those initiatives ramp Holger Blankenstein: So, Thomas Fitzgerald, this is Holger again. So, we've quantified the potential for each of the products that we saw on Slide 8, and we expect a positive year-over-year impact on TRASM of these products in 2026. We expect that our commercial initiatives that you saw will begin contributing financially in 2026, and we will communicate the specific targets on all of those products as the adoption of those products scale. These initiatives that you saw there are going to be incorporated in our TRASM guidance for the next year for 2026 when we provide guidance in the next earnings call. Thomas Fitzgerald: And then I'm just kind of curious, as your customer mix diversifies and you take on more SME traffic, is there any investment or maybe it's immaterial, but just that you have to do for your cabin crew just on the soft product and maybe people who especially as you take in volume from some of your interline partners? Holger Blankenstein: So Tom, it is very important to mention that we are implementing the broadening of our customer base and target customers while maintaining a low cost, low complexity model. So you should not see any meaningful impact in our costs and in our complexity of the onboard product, for example, as we implement these products. We are broadening our target customer base, for example, through implementing different distribution channels like the GE, for example. We're going to diversify our revenue base, but we will maintain our low-cost, low complexity model. Operator: Our next question will come from the line of Michael Linenberg with Deutsche Bank. Shannon Doherty: This is Shannon Doherty on for Mike. Thanks for taking my question. Enrique, you alluded to some growth trends or the growth trends, I should say, that you saw out of Guadalajara emerging in other markets. Can you provide us with some more examples? Enrique Javier Beltranena Mejicano: Sure. I think when you look at our bus fare customer base, I mean, that's a segment that grows by far much more rapidly and much more different than any other business traffic that we can see, for example, in the U.S., okay? You can also see how our capacity to penetrate the market has improved our number of passengers that are using the airlines, okay? In the last years, we have developed more than 10 million passengers that have become first-time flyers, and that's really important. So that makes a dramatic difference versus a mature market. Shannon Doherty: And maybe more generally, what do you guys think is driving like the improved travel sentiment in the cross-border market? Like and how is demand in other Central American markets to the U.S.? Holger Blankenstein: This is Holger. So we actually did a survey of our customers, both in the U.S. and Mexico, and they target two main factors for not increasing travel more quickly in the first half of the year. We did it entering the summer season. The first was economic uncertainty, which is about 50% of the responses. And that economic uncertainty is improving significantly as macro conditions in both countries are strengthening in the second half of the year. So that's the reason for not traveling has evaporated and is improving significantly. The second concern was related to migration policies. People were worried about traveling and leaving the U.S. or going to the U.S. And in the public discourse, we are noting that, that has evolved from a broad concern about all immigrants to a more focused conversation around individual and legal violations of immigration policies in the U.S. and that really has reduced the perceived apprehensions among our customer base. So we're seeing more willingness to travel in the transborder market in the second half of the year and specifically in the fourth quarter, where we're seeing solid booking curves in the transborder market. And that brings us to the guided TRASM, which is basically at the levels of last year 2024. Just to maybe close this point off, travel in the transporter market was delayed in our opinion at the beginning of the year and is now catching up as people want to visit their friends and family in Mexico or in the U.S. Operator: Our next question comes from the line of Rogério Araújo with Bank of America. Rogério Araújo: Congratulations on the results. I have a couple here on fleet. First, you said 17, one seven aircraft returned. Is that correct? And how many you expect to be delivered by '26? Also on that matter, what is the number of expected grounded aircraft throughout 2026? I understand you have 36 now. And lastly, how to think the net CapEx for '26 compared to this $250 million in '25? Jaime Esteban Pous Fernandez: This is Jaime. And Jose back into our fleet plan. And let me try to be really on a summary. Our goal next year is to reduce significantly the gap between productive and nonproductive fleet. And it has many moving pieces. I want to start with the AOGs. We see an improvement in AOGs. Remember, this year, we expect and year-to-date, we have 36 average planes. We expect that, that will improve to around 32, 33 next year with the highest point of the AOGs initially in January and significantly going down by year-end. The second [indiscernible] is, is deliver strong Airbus, we’re expecting around 12 to 13 deliveries of new aircraft from Airbus still we need to confirm that with Airbus and we will give detailed guidance in the next earnings call. And finally, with delivery, we are budgeting 17 aircraft to be redeliver. All of those details, we are planning, you should think about ASM growth next year, as Enrique mentioned and reiterated in the range of 6% to 8%, which factors all of the above that I mentioned. Compensation [indiscernible] multiyear agreement remains to 2028, but we are seeing an improvement and we are planning with the flexibility to adapt our demand to customer demand and market condition with the capitalization of flexibility in our market. And the last question was with respect to CapEx. This year guidance is still the same $250 million. Expect that next year is going to be higher than this year because we are investing in the maintenance related to engines returns and the delivery of aircraft. Enrique Javier Beltranena Mejicano: I just want to say again, I mean, our numbers of growth for next year are all inclusive. They include the returns of the engines from Pratt, the deliveries from Airbus, replacement of aircraft from the actual fleet. They include the deliveries, they include everything, all of the above. It's included in the number. So please think about that number as a total number of growth and not the conflict with capacity into the market. Operator: Our next question will come from the line of Filipe Nielsen with Citi. Filipe Ferreira Nielsen: Congrats on the results. My question is regarding CASM ex-fuel. You guided $0.0575 [ph]. You mentioned about the timing of having maintenance putting this a little bit higher than expected. I just wanted to understand how this should evolve? Is it a one-off in fourth quarter related to maintenance? Or is it something that will continue throughout 2026? How are you looking at this trend and not only at the quarter? Just trying to understand the cost impact here. Jaime Esteban Pous Fernandez: This is Jaime. I'm going to start with the 4Q. The sequential increase reflects the normal seasonality in specific cost lines that higher in the 4Q happened last year. It represents higher landing and navigation expenses due to the increased mix of international operations in the 4Q. We also have addition related to deliver maintenance events, which temporarily elevated unit cost are not structural impact aligned with our planned maintenance schedule. And as I mentioned, we will provide full guidance for 2026 in the next earnings calls. You are going to see a higher CAS than this year related to the investment in maintenance and delivery to have the fleet aligned with our growth plans. Operator: Our next question comes from the line of Jens Spiess with Morgan Stanley. Jens Spiess: So on the point of groundings and being the peak at the beginning of next year and then gradually improving, by year-end, how many aircraft do you expect to be grounded? And then when do you expect groundings to reach 0? Is it by mid-'27, by the end of '27? Like what's your visibility on that? Enrique Javier Beltranena Mejicano: Sorry, I'm going to repeat it. We expect that by year-end of 2026, the average number of AOGs will be around 25 to 27. And we believe that we are going to be with no material impact on AOGs related to engines by the end of 2027. End of 2020. Jens Spiess: Okay. Perfect. And if I may, just one additional one. Obviously, you already gave a lot of details on ASM growth for next year and all the variables. But clearly, you have a lot of flexibility given the redeliveries, the 17 redeliveries you have next year. So if demand is much better than expected, by how much could you potentially increase ASM growth? And conversely, if demand is weak by how much could you reduce it potentially? Enrique Javier Beltranena Mejicano: By around 2 percentage points, either up or down. Operator: Our next question will come from the line of Guilherme Mendez with JPMorgan. Guilherme Mendes: Just a quick follow-up. Holger, you mentioned about an overall rational supply on the market, so meaning rational competition. Just wanted to hear your thoughts on how should we think about competition in '26. There's additional capacity coming online from you and from some of your peers, if you do expect the current rational and disciplined competitive environment to remain in 2026? Holger Blankenstein: Sure. This is Holger. So we have some visibility on the domestic market. For us, in the Mexican domestic market, we are budgeting low to mid-single-digit growth for 2026. And we will provide more granularity on our growth rate in the domestic market when we provide the full year guidance in our next earnings call. If we look at the competition, we have visibility on the published schedules of our domestic competitors and industry growth is likely to remain rational from what we can see right now. And that obviously supports a higher and healthier fare environment for us. We are seeing now that competitors have been following a meaningful capacity rationalization to bring capacity in line with domestic demand. And we see that trend continuing into 2026, which will lead to a more balanced and healthy domestic supply-demand environment. Operator: Our next question comes from the line of Alberto Valerio with UBS. Alberto Valerio: Just a follow-up about the groundings. So you expect to normalize it in the end of 2027, 2028. Am I right about this? And about cycles, how have been the cycle of engines and also the deliveries of Airbus, when we should see some normalization on this? And if I may, another one is about one line on the results that is the variable leases come a little bit below what we were expecting, what we were estimating. Should we keep that for the future? This is more related to engines. Is that correct? If you can give some color on that? Enrique Javier Beltranena Mejicano: As mentioned, we expect a positive trend on engines from the shops. We rescheduled with Airbus. So this year, the deliveries are quite aligned on what we plan some minor delays or not material delays. We expect that to continue next year. We have not because we schedule year-end. And we are planning accordingly with that with a lot of flexibility with the different levers that we have in our fleet plan between the deliveries of planes coming back from the shop. We are optimistic and planning around that. If you're right, we should be out of the material impact by 2027 with some minor in terms of absolute 2028. And compensation over[Indiscernible] 2028 in contrast. Operator: Our next question comes from the line of Abraham Fuentes Salinas with Banco Santander. Abraham Fuentes Salinas: During this quarter, we see an improvement in the aircraft and engine rent expense. So I wonder if you can give us a little more color what you expect during 2026 in terms of ASM. Enrique Javier Beltranena Mejicano: Can you repeat the question was too low. Abraham Fuentes Salinas: Yes, of course. We saw an improvement during this quarter in aircraft and engine rent expense. So I wonder if you can give us a little more color what to expect for 2026 measure as ASM. Enrique Javier Beltranena Mejicano: I think the benefit in this quarter is related to the conversion of operating leases into finance leases. So that was the viable aircraft and lease line has the benefit in this quarter. As we continue next year and make decisions in the deliveries, we may explore, as we mentioned during the call in order to lower the total ownership cost of the fleet. And next year, we think that, that number should be a little below what we had this year and more aligned to 2024. Operator: This concludes today's question-and-answer session and I would like to invite management to proceed with his closing remarks. Please go ahead, sir. Enrique Javier Beltranena Mejicano: This is Enrique. I would like to finish the call saying that we continue to demonstrate the strength and adaptability of our ultra-low-cost carrier model and our command over our markets and cost structure. I want also to say again that regardless of the external environment, our cost leadership flexibility and the capacity to expand our product suite ensures that we address customer preference. I also want to say again that we'll continue to control growth with discipline, and that includes everything. It includes all the pieces of the question and it's fully aligned with market demand. It is also important that we will continue prioritizing low cost with high-value service to increase access to air travel for a broader set of customers, and it is important to say that we will continue with leadership in core domestic markets and a world-leading cost structure. Having said that, I would like to thank you, everybody, for being in the call, and thank you to our family of ambassadors as well as our Board of Directors, investors, partners, lessors and suppliers for their support. I look forward to speaking to you all again next year. Thank you very much. Operator: This concludes the Volaris conference call today. Thank you very much for your participation, and have a nice day.