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Operator: Good evening. We welcome you to The Navigator Company Third Quarter 2025 Results Presentation. [Operator Instructions] I'll now hand the conference over to Ana Canha. Please go ahead, madam. Ana Canha: Ladies and gentlemen, welcome to The Navigator Company conference call and webcast for the third quarter and nine-months results. Joining us today are the following directors, Antonio Redondo, Fernando de Araujo, Nuno Santos, and Antonio Quirino Soares. As usual, we will start with a brief presentation, and we will have Q&A session at the end. The presentation can be accessed through the links available on the website, and questions may also be submitted using the webcast platform. Antonio will start by commenting on the main highlights of the quarter. I will now hand over to Antonio. Antonio Redondo: Good afternoon, and thank you for joining us today. I'm pleased to share the results for our third quarter and first nine months of 2025. As you will see in today's presentation, Navigator once again demonstrated its ability to adapt swiftly to very challenging market conditions while maintaining its strong competitive position in Europe. We continue to focus on creating value and protecting margins while investing in diversification and reinforcing the foundations for sustainable growth. I will begin with Slide 4 with an overview of the key highlights. The first nine months of 2025 were marked by very significant volatility driven by geopolitical tensions and rising protectionism, adding to macroeconomic risks. Like others in global trade, Navigator felt the impact of slower demand in key markets. The pulp and paper sector has faced severe pressure visible in the sharp downturn in pulp prices in China since April, which also significantly impact Europe. As anticipated, the third quarter marked the lowest point in this downward cycle. Faced with falling prices across its markets, Navigator succeeded in positioning itself competitively. We are firmly established around the globe, which enabled us to seize opportunities, grow our sales volumes in all paper segments and increase our market shares. Focused on operational excellence, the company implemented initiatives to optimize its variable costs and streamline its operations. The downward course of production costs is already visible despite the temporary impact of cost categories such as energy and chemicals, the effect of which has tended to be diluted as the nine-months period progressed. Pulp and tissue cash costs dropped to near the lowest since mid-2021, with while paper cash cost reached a two-year low. As a result, the pulp and tissue cash costs fell at the end of third quarter to the second lowest level since mid-2021. The paper cash costs were the lowest of the last two years. Despite significant market volatility across all segments, our packaging and tissue businesses delivered solid year-on-year growth and already account for 32% of the EBITDA and 29% of the turnover. In tissue, we are successfully scaling up operations and following recent acquisitions, namely Navigator Tissue U.K. In packaging, our sales continues to show positive momentum with growth in volume, value and strategic positioning in lower basis points. We maintained a strong financial position after dividends and strong CapEx, keeping our net debt-to-EBITDA ratio at 1.85x. Now turning to Slide 5, please, with the main financial figures. Turnover totaled EUR 1,489 million. EBITDA stood at EUR 300 million with an EBITDA margin of 20.2%. Fernando will highlight the main impact on the period. The successful execution of our diversification strategy has strength resilience amid market volatility with tissue and packaging segments helping to offset the impact of subdued pulp and paper prices. In an uncertain macroeconomic environment, our EBITDA margin remains among the strongest in the industry, namely amongst those exposed to pulp, although below our historical average. I will now hand over to my colleagues, who will walk you through the results in more detail and share some insights on how our different business areas have been doing. Fernando will start by the main impacts on EBITDA. Fernando, please go ahead. Jose de Araujo: Thank you, Antonio. Turning to Slide 6. We can take a closer look at the main impacts on EBITDA in the year-on-year comparison. As already mentioned, EBITDA stood at EUR 300 million, down 30% year-on-year with an EBITDA margin of 20%. Year-to-date results were below last year's due to lower sales price and rising cash costs, mainly for energy and chemicals in the beginning of the year, which, as I mentioned, has since started to reduce. The downward trend in uncoated woodfree and pulp sales price were pressured by falling benchmark index. Change in our product mix also influenced our average sales price. Apart from pulp sales, all paper and tissue products saw a significant increase in sales volume over the nine months period. Turning to Slide 7 with a quarter-on-quarter EBITDA analysis. In this quarter, EBITDA stood at EUR 84 million, down 17% quarter-on-quarter, reflecting EBITDA margin of 18%. Quarter-on-quarter, the EBITDA decreased mainly due to the sharp price reductions, partially offset by strong volumes and variable and fixed cost savings. Navigator sales price fell across all segments quarter-on-quarter, following the drop in key benchmark index. We witnessed a strong rebound in pulp sales versus Q2, plus 31,000 tonnes, driven by the market recovery in Europe and overseas despite our selective sales strategy amid sharp price drops. In uncoated woodfree and packaging, we sustained volumes, offsetting the typical seasonality of the third quarter. We saw a good trend regarding production costs. Wood costs were down due to lower prices and lower extra Iberian purchase. Energy and chemical costs also decreased due to lower prices. External fibers were also down as a result of lower market prices. As Antonio already mentioned, pulp and tissue cash cost dropped this quarter to near their lowest since mid-2021, while paper cash costs reached a two-year low. Turning to Slide 8 with debt maturity and liquidity. During the first nine months, we repaid close to EUR 400 million in debt, including EUR 275 million early repayment, strengthening our debt profile and increasing the share of sustainability linked instruments. We also secured EUR 365 million in long-term facilities with EUR 140 million still available, including an European Investment Bank loan, EUR 40 million to support the decarbonization projects with no significant payments due in the next five years. We raised EUR 225 million new debt with a seven-year maturity, extending our average debt maturity to 5.2 years from 3.5 years in December. We also raised the weight of sustainability-linked debt to 79%. After this debt renegotiation cycle, Navigator reduced its debt repayment commitments to very low volumes over the next five years, hence ensuring the reduction of its average credit spreads and increasing the weight of the debt raise and the ESG requirements. At the end of the period, 78% of our debt was on a fixed rate basis. It should be noted that despite the rising interest rates in relation to our last financing cycle, our average cost of financing at the end of September remained low at around 2.6%. The unused long-term credit facilities currently totaled EUR 140 million. Turning to Slide 9 with an overview on CapEx. The high strategic CapEx cycle start in 2023, boosted by the NextGenerationEU and innovation funds is coming to an end and expect to be phased by mid-2026. In the first nine months of 2025, CapEx totaled EUR 160 million, of which approximately 61% of total corresponds to value creating environmental or sustainable investments. NextGenerationEU projects advancing on schedule, reflecting our strategic discipline and focus on delivering results with 77% is secured by the end of September in time within the PRR calendar and in budget. Moving to Slide 10, which presents key performance indicators. Let me highlight our ongoing commitment to operational excellence and long-term value creation with a strong focus on decarbonizing our industrial process and investing in innovative technologies that improve resource circularity and cost efficiency. This quarter, we achieved a significant milestone in our decarbonization road map, namely with two biomass power lime kilns in the operation at our Aveiro and Setúbal sites and the third biomass power kiln at Figueira da Foz is now in the start-up phase. These projects are designed to reduce both greenhouse gas emissions from pulp mills and the dependence on fossil fuels. Notably, the new lime kiln in Figueira da Foz will also make a very significant contribution to simpler use of resource by enabling reclamation of carbonate sludge, reducing the quantity of this waste sent to landfill by around 90%. Thanks to this investment, the Aveiro and Figueira da Foz mill will operate in 2026, producing around 9% renewable energy. The conversion of lime kilns from fossil fuels to sustainable biomass will open the door to the innovative use of Eucalyptus globulus, a byproduct from wood preparation operation as a renewable fuel. At the Setúbal mill, the conversion of lime kiln to biomass as this energy source will lead to a reduction in carbon emissions of around 17,000 tonnes CO2 emission license per year. In Aveiro and in Figueira da Foz, the project will allow a reduction of approximately 10,000 tonnes CO2 per year in each site. In Setúbal, this groundbreaking project has attracted support from the Innovation Fund, the European Union Fund for climate policy, geared especially to energy and industry and working to bring to the market solutions for decarbonizing the European industry and helping it make the transition to climate neutrality. The Aveiro project and the new lime kiln in Figueira da Foz have been partially financed by the NextGenerationEU funds. Together, these three projects represent a total investment of approximately EUR 60 million. This innovation substitution of fossil fuels will improve the cost base of the pulp production process. It once again demonstrates Navigator commitment to operational efficiency and underlines how its actions are aligned with the principles of sustainability in transforming waste into value and taking real steps to consolidate the group's circular economy strategy. Antonio Quirino will now comment on pulp and paper price. António Soares: Thank you, Fernando. Turning to Slide 12 with pulp and paper prices. Between April and August this year, the hardwood kraft pulp price index in China sharply decreased, strongly influenced by overcapacity in the pulp and paper sector in view of the current situation of severe tensions in international trade and the reduction in demand in several paper segments in Western markets. The price dropping cycle bottomed out at a price of $493 per tonne, which is down by 18%, the lowest since 2021. Although this downward cycle has been shorter than previous cycles, it started from a significantly lower peak, reflecting a structurally weaker base than in preceding cycles. In Europe, the benchmark index for hardwood pulp, the peaks hardwood kraft pulp in dollars rallied to $1,218 per tonne in April, up 22%, only to lose ground again in the months that followed, returning to $1,000 per tonne in August, down by 18% as well and remaining at that level until the end of September. In both regions, China and Europe, prices ended the third quarter on an upward trajectory. Moving to paper. The benchmark index of office paper in Europe, PIX A4 B-copy stood at an average of EUR 1,023 per tonne in the first nine months, which is 8% down on the same period last year, but 21% above the pre-pandemic average of EUR 847 per tonne in the period of 2015 to 2019, but below 25% from the 2022 peak. As we review Navigator's performance in Europe, I would like to highlight our approach to sales pricing, which closely track the evolution of benchmark indices. We pursued two different strategies. First, we placed greater emphasis on economy products. So this allowed us to increase our sales volumes, though it did have some impact on our overall product mix. This strategy enabled us to offset the decline in imports into Europe by offering products with superior quality and stronger environmental credentials compared to typically typical imported papers into Europe, particularly those from Asia, while maintaining a price point above imports, but below our premium and standard ranges. At the same time, it allowed us to continue supporting our most loyal premium customers with this economy offerings. Second, we maintained price premiums on our value-added product. This strategy ensured that our pricing on premium and standard products remained favorable compared to the market index and specifically for A4 B-copy PIX. It's important to note that in international markets, our prices were affected by two other factors, namely the weaker dollar and the decline in the pulp markets in China. This dual approach has helped us remain competitive and responsive to market dynamics, balancing volume growth with value retention. Moving to Slide 13 on printing and writing paper market, we see that the global apparent demand for these papers fell by 2.7% until August. Specifically, uncoated woodfree paper remained the most resilient, falling 1.6% this year, which is aligned with historical average market decline, and this compares with 5.1% decrease in coated woodfree papers and 4.2% decrease in mechanical fibers papers. In Europe, the apparent demand for uncoated woodfree paper fell by 6.4% until August, driven specifically by a reduction in imports that were 11% below the same period of last year. In the United States, demand slipped by just 1%, while the closure of a major mill drove import reliance at 31% year-on-year, leveraged by tariff expectations. With capacity cuts and duties adding pressure, prices have climbed and are likely to remain strong with more increases forecast through 2026. In the first nine months of 2025, Navigator grew its share of total deliveries from European mills by 1.2 percentage points year-on-year, reaching about 26%. This was driven by strong gains in international markets at 6 percentage points, while our European share remained steady at over 18%. Navigator's operating rate rose to 87% in the first nine months of the year, 7 percentage points above the same period last year. Meanwhile, the industry rate as a whole recovered slightly from 80% to 81%. These developments enabled Navigator to strengthen its order intake market share by 3 percentage points globally to 27% and by 2 percentage points in the European market to reach 19% year-on-year. Now moving to Slide 14 to discuss pulp market. As Antonio mentioned previously, from April through August, there was a steep downward adjustment in pulp prices. In terms of demand, global demand for hardwood pulp grew by 8% year-on-year until August. China remaining the main engine of growth with an impressive increase of 12% due to the continuous in new paper capacities in several grades followed by the rest of the world with a 9% increase. In contrast, demand in Europe continued to fall following the shrinking consumption of printing paper, as mentioned before, edging down by 1%. In the U.S., demand dropped by 1% as well after heavy restocking over the same period last year. The strongest global growth was for eucalyptus pulp, which was up by more than 10% in the first eight months of the year, with China growing impressive 14% and Europe in line with the same period of last year. This performance has consistently boosted Eucalyptus share in the hardwood reach segment on the chemical pulps. On the supply side, the ramp-up of projects on the pulp side that were brought online in 2024 increased the availability of market pulp in 2025, exerting pressure on operating rates. Even so, factors such as growing consumption, maintenance shutdowns and recently announced cuts in production helped to balance the market and sustain the activity of hardwood producers in the first nine months of the year. The global pulp market will continue to be influenced by China, where growth in domestic consumption and projects for new tissue, paper and board capacity have shaped the market balance. However, a significant proportion of these new lines are still at the initial start-up stage, which could mitigate the impact in the short term. Doubts also mounting as to the region's ability to supply wood sustainably for the new capacity. In Europe, stock levels remained relatively stable. In China, although stocks at ports have been building up since January, analysis of paper production suggests that this growth is proportional to the expansion of their industrial operations and not an anomalous accumulation. The ratio of stock of days of production has been stable in recent months, pointing to a balance between supply and demand. Our sustained competitive advantage is anchored in the uniqueness of Eucalyptus Globulus, eco-efficiency and fiber quality. On a positive note, as Antonio mentioned, our pulp cash costs ended Q3 at the second lowest level since mid-'21, down 20% from January to September and 19% quarter-on-quarter. Moving to Slide 15, covering the tissue market. We see that after a substantial growth of 6.3% in 2024, Western European demand for tissue was up year-on-year by 0.6%. Navigator's tissue sales volume, finished products and mills grew to 177,000 tonnes, a 14% increase compared with the same period of last year, with sales up 17%, boosted by the integration of Navigator Tissue U.K. in May last year. The recent acquisitions in Spain, '23 and the U.K., '24 have enabled us to balance our geographical mix and creating greater resilience in our tissue business. Finished products accounted for 98% of total sales, while wheels accounted for the remaining 2%. The at home or consumer retail segment has grown in importance and currently accounts for around 83% of sales. The away-from-home segment, wholesalers, the Horeca channel and offices accounts for the remaining 17%. The highlight of the quarter in the Tissue segment was the business in Iberia, which recorded its best ever quarter in sales of finished products. We continued with the integration of the U.K. operation with increased collaboration between local and Iberian teams, aiming to boost cross-selling opportunities between markets, optimize the portfolio and identify and implement further cost cutting and efficient opportunities. Navigator also launched a strategic plan to consolidate its U.K. tissue rolled operations, building on an already efficient model to achieve even greater competitiveness and alignment with best practices. Moving to Slide 16 on the Packaging segment, we see that the global market for machine glazed and machine finished kraft papers grew by approximately 11% year-to-date August, reflecting its strong performance. In this segment, Navigator sales were up 7% year-on-year in volume compared to last year, thanks to a rise of 1% in price and a 7% increase in volume with a 10% growth in the area of paper sold due to an increased penetration in low grammage segments according to the strategy. Navigator has been developing and investing in the gKRAFT sustainable packaging segment, offering alternatives to fossil-based plastics and supporting the transition to renewable low-carbon products. gKRAFT brand has won market recognition, achieving a 15% growth in new customers opened during the period of year-to-date September with a presence now in more than 40 countries worldwide. The top performance in the period was the release liner products, together with solutions for food and nonfood packaging, which are strategic priority areas for our business. These segments benefit more significantly from the use of lightweight papers, where the Eucalyptus Globulus offer significant competitive advantages, both economically and technically. MG and MF kraft papers or machine glazed and machine finished kraft papers are used in similar applications such as bags, sachets and several flexible packaging items. Traditionally, machine finished is a slightly lower cost alternative with inferior surface quality in comparison with machine glazed. However, with the conversion of PM3 in Setúbal, production of machine-finished kraft papers in the gKRAFT range will be able to compete with machine glazed on quality. In Europe, machine finished kraft paper for packaging purposes is produced by paper suppliers who typically can only ensure products above 60 grams. The overwhelming majority of the paper machines able to produce below 40 grams are old, small and nonintegrated machines and aimed at the machine-glazed kraft papers. The rebuild of the PM3 machine in Setúbal takes advantage of Navigator's vertical integration and the cost efficiency of the Eucalyptus Globulus fiber for production of distinct top quality kraft papers. As a result of this project, Navigator will move up to fourth place in the European league table of low-grammage flexible packaging manufacturers, strategically consolidating its presence in the segment where demand is surging. In order to ensure that the asset maintains its flexibility and it is adaptable, the project has been designed to allow, if necessary, the production of different grades of uncoated wood-free paper, guaranteeing our capacity to respond to market dynamics and preparing us for future scenarios. I will now hand over to Antonio. Antonio Redondo: Thank you, Quirino. Let's please turn to Slide 17 with a wrap-up of the Q3 and nine months results. Our diversification strategy is paying off. The diversification to higher growth and less cyclical markets such as tissue and packaging, although more dependent on end user consumption, reinforces the company's long-term value creation and resilience. In tissue, we are successfully scaling our operations, expanding into new markets and positioning ourselves to further unlock long-term synergies that will drive sustained growth. In packaging, increased penetration in low-grammage segments confirmed the strong appeal of Eucalyptus Globulus fiber for the same, leading to a 10% increase in paper area sold compared to a 7% increase in sales volume in tonnes. By focusing on efficiency and cost management, we achieved a significant reduction in cash costs across all pulp and paper segment. We kept our focus on core operations, business transformation and innovation. We carried out value-added CapEx of EUR 160 million aimed at sustainable long-term cost efficiency, while keeping consistent conservative financial policies after high level of CapEx and EUR 175 million dividend payout. Let's turn to Slide 19 with a few words about the outlook. Let me now share our perspective on the current market environment and our outlook for the coming months. Globally, we are seeing a reduction in overall uncertainty and still moderate growth prospects. It's important to recognize the continued presence of risks, protectionism, economic fragmentation and financial vulnerabilities in major economies remain a concern. While a recession does not appear imminent, growth is still relatively subdued and ongoing uncertainty continues to weigh on investments and international trade. Despite the challenges and limited visibility, we are cautiously optimistic about short-term market development. We anticipate that conditions will improve, particularly in the pulp, tissue and packaging segments, where the printing and writing paper segment demand is expected to remain under pressure, although with uncoated woodfree presenting most likely again better perspective than other printing and writing papers. Regarding the pulp market, China continues to play a decisive role. Growth in domestic consumption and new capacity projects have shifted the market focus. That said, many of these new lines are still in the early stages, which should moderate the immediate impact. There is also increasing uncertainty regarding the region's ability to source wood sustainably for the expansions. As a result, we have seen pressure on global prices and a change in trade flows with China in growing. Notably, the third quarter of 2025 was the weakest since 2021 with prices averaging USD 500 per tonne in China. We believe this marks the bottom of the current price cycle as both China and Europe saw prices start to recover towards the end of the last quarter. In the printing and writing paper, the overall global outlook remains challenging and need a structural consumption downturn. Europe with strong uncoated woodfree demand contraction, while U.S. and remaining overseas markets with a more moderate fall. Global uncoated woodfree demand with minus 1.6% so far this year is in line with the last 10 years yearly rate. On the supply side, Europe has seen significant capacity reductions with recent closures removing around 430,000 tonnes annually, about 7% of the region's capacity. Another major European player is also facing financial difficulties, which could lead to further capacity cuts. European imports remain stable with no upward pressure. EUDR discussions continue and its implementation is expected to reinforce European pulp and paper market. Meanwhile, the U.S. market has shown great resilience. The closure of the country's largest mill accounting for 8% of total capacity has deepened the market shortfall with North American production estimated to lag 800,000 to 1.1 million tonnes versus North American demand. Another closure announced this quarter will remove 320,000 tonnes of uncoated woodfree capacity by Q3 next year, further increasing U.S. import requirements. Meeting this demand will depend on a select group of countries able to supply products meeting U.S. market stringent specifications, primarily manufacturers in Europe and Latin America. Latin American suppliers, however, are facing the prospect of higher tariffs, both antidumping duties and custom service than those currently imposed on European imports. In response, U.S. producers may focus on their domestic market, potentially creating opportunities for competitors in their existing export market. Despite this complexity, new opportunities are arising in the uncoated woodfree market. For example, Mexico's customs tariffs on Asian imports and Colombian tariffs on imports from Brazil are providing competitive advantage for Navigator in these countries, supporting sales and expanding our footprint. In tissue, demand has increased by an estimated 0.4% so far in 2025, with annual growth expected to hold steady at around 1% through to 2029. The integration of Navigator Tissue U.K. is progressing with stronger collaboration between the local and Nigerian teams, unlocking cross-selling, optimizing the portfolio for higher-margin products. To strengthen our market position and operational resilience, we have launched a strategic plan to consolidate our U.K. tissue roll operations in two sites, Leyland and Leicester, reducing sites from five to two, integrating production and storage for greater efficiency, scalability and cost competitiveness, building on an already efficient model to achieve even greater competitiveness and alignment with best practice. Regarding a new tissue machine, the final investment decision is anticipated by year-end 2025. Packaging continues to perform strongly with growth in sales and price. Our project to convert the PM3 paper machine at Setúbal is progressing as planned. This will elevate Navigator to fourth place among European manufacturers of low-grammage flexible paints, consolidating our presence in a segment with robust demand. Navigator's integrated management, sound financial position and our ability to respond flexibly to market demand from forest to finished products are enabling us to face these challenges and prepare confidently for the future. Continued development and diversification of our business base will further reinforce the resilience and sustainability of our business model. The next slide provides a quick update on our operational excellence initiatives. Amid the ongoing global uncertainty, Navigator is proactively strengthening its resilience through several targeted initiatives under a program called Operational Excellence Initiatives 2025, 2026 as already announced last quarter. Keeping its focus on high operational standards, the company has launched internal programs designed to act on different fronts to protect results. These involve programs for the optimization and reduction of variable costs by streamlining specific consumption of raw and subsidiary materials, seeking strategic negotiation with suppliers as well as logistic cost reductions. The company will also step up its commitment to Iberian wood, promoting local and sustainable fossil fuel. in this first quarter is already visible the impact of some of the measures implemented. As mentioned in our previous call, Navigator is advancing its operational excellence through a robust investment in AI, namely advanced process control solutions aimed at enhancing process stability, efficiency and product quality. The company has successfully deployed third-party APC systems, two in classification processes and value of breaching with two more in the pipeline, while it is also developing proprietary machine learning algorithm solutions internally. These include optimization of precipitated calcium carbonate incorporation and reduction of variability in tissue grammage control and integrated control of thickness, grammage and reference in uncoated woodfree paper production. This multipronged approach reflects Navigator's commitment to innovation and continuous improvement and across its industrial operations. We're also focusing on improving efficiency by cutting fixed costs, mainly freezing headcount and optimizing running costs. We continue to invest in reliability by speeding up implementation of the asset performance management, APM system and executing specific action plans to build up teams and improve systems for asset management, maintenance and reliability. Along CapEx -- alongside this CapEx plans will be subject to careful review, especially as regards to scheduling, seeking to reduce projects in 2025 by approximately EUR 40 million, prioritizing those under the resilience and recovery program and those offering higher rates of return. Lastly, we will address our commercial strategy and market diversification by relaunching economic products, being more aggressive with low-end products in the face of the current economic situation, while protecting the margins and volumes of premium products. With a positive perspective following the decisions of the European Commission on 24th of April 2025, the ERSE, the energy regulator in Portugal on 22nd of July, a revised third-party access tariff for less intensive customers has been set. Navigator installations in high and medium voltage will benefit from rant discussion on those tariffs between May and December '25. In addition, with approval of increased support for indirect CO2 costs in Portugal through the environmental fund. This support, we must say, has been both delayed and very modest, especially when compared to the more substantial measures provided to our competitors in several other European countries, notably in Spain, in France, in Germany, and in Finland. Business diversification and innovation in products remain at the heart of Navigator strategy, especially in the tissue and packaging segment, where there is still great potential for growth. Thank you. Ana Canha: Thank you, Antonio. This ends our presentation. We are now open for the Q&A session. Operator: [Operator Instructions] Our first question comes from Cole Hathorn from Jefferies. Cole Hathorn: I'd just like to follow up on your office paper business. In a challenging demand environment, you've done exceptionally well. So I'm just wondering on your commercial strategy, how did you maintain the stronger operating rates of kind of 87% versus the industry? Was this a real focus on the economic products to keep your operating rate elevated. I'm just wondering commercially how you drove the better operating rates in uncoated woodfree. And then I'm also just wondering, sticking to Europe, was there also something around one of your competitors or some of your competitors dropping the ball commercially? Just wondering if it's a bit of both. Antonio Redondo: Okay. Thank you for your question. And I'm trying to rephrase it just to make sure we fully understand them. I will give some elements to the answer, and then I'll ask Quirino to follow up. Your first question is focused on office papers. And you realize that our results are quite resilient under the present situation, and you would like to understand how this resilience can be explained vis-a-vis our European competitors. Is this right? Cole Hathorn: That's correct. Antonio Redondo: Okay? And the second question is if you believe that some of our European competitors have dropped the ball under the same context, I understand. Cole Hathorn: Yes. Antonio Redondo: Okay. I will give you some elements of answer and then Quirino will follow up with more details. For the first question, I think there is not a silver bullet. We didn't perform one single action that allow us to be significantly more resilient than our competitors. First and probably foremost, we have a unique product quality that is second to none to anybody else in the world. And we have very, very strong brands. And I think, again, this quarter, our quality has proven to be very differentiated from our competitors. And in an environment where people consume less products, they probably can afford to choose better products. At the same time, our brands have a very large recognition in the world, but particularly in the markets where we are in. The second element, I think, is related with our sustainability practices and our sustainability reputation. We didn't saw and we are not seeing any drawback any decrease on sustainability when choosing papers, namely office papers and filling and writing papers. And we have the sustainability credentials that we show, we prove, we demonstrate, again, second to none in the group. The third element is probably related with our geographic spread. We are very much present in the corners of the world, if you will, with a strong presence in Europe and a growing presence outside Europe, which I think also Quirino demonstrated. I will stop here on the first question. I will ask Quirino to complement what I've mentioned. And then we can also explain how economic products has helped us to support the high end. António Soares: Absolutely. Thanks for the question. So I think Antonio mentioned the key points. So we see a strong resilience on our premium and branded offering products in the market. And this is related with the fiber and the quality of the products, which is very appreciated in the market. So I think this is really, as Antonio mentioned, a strong element to the answer. The other one is in geography. Actually, our coverage of around 130 countries in the world provide contrary to some of our smaller competitors in Europe provide an insurance, let's say, because we're covering several regions, we take profit from local regional growth. We did see the Americas, both in North America and Latin America quite positive for us as well. Don't forget that we saw this year also a decrease in imports into Europe, which was also helping the European industry to find some space. But your question relates to our comparison to Europeans. So imports is not an element to answer this, but it helps everyone, I would say. And I would just comment on what I mentioned before on the dual pricing strategy where we continue to protect more the price -- decreasing less the prices on the premium and branded products. But we went more strongly into the economy market with our partners, supporting them on their needs of economy products now that imports are reduced. And so this increased penetration in economy products also boosted our operating rates compared to European mills. Antonio Redondo: Regarding your second question, I think we can -- sorry, regarding your second question, I think we can concur with you. What we have seen so far is exactly in a market where demand is shrinking in some regions more than others. We see a significant amount of competitors leaving this market, either leaving to other markets or just, as you said, dropping the ball. This was the case clearly in the States, as we mentioned, with one large mill announced for this year, actually already stopped and another one preannounced for next year. We had a sale towards the end of last year and early this year in Europe. And without naming competitors, I think we can keep on seeing the same pattern. If you just look to the results and keeping the geography around if you just look to the results of our European competitors in Q2 and Q1 this year, I think it's easy to understand that some of these companies will never be viable. So in a market that is going down in terms of demand and lacking strong elements of competitiveness, I think it's a question of time before we see others keep on reducing capacity. Cole Hathorn: And maybe just as a follow-up, your cash costs, you have on Slide 14, your cash cost going down 19% quarter-on-quarter. That's a very big reduction in cash costs. We've seen some of the Nordic players talk about lower wood costs. We've seen some easing of wood costs after a rally in wood costs, but most people are talking about an easing of costs into 2026. So I was just surprised to see cash costs coming down so much for Navigator. So I'm just wondering if you could give a little bit more color of what drove the lower cash cost. Is it wood? Is it just better operating rates? Is it your own self-help initiatives to reduce chemical energy consumption? Any color would be helpful. Antonio Redondo: Okay. So if I understand correctly, you'd like us to give a bit more color on the cash cost reduction, correct? Cole Hathorn: Yes, please. Antonio Redondo: So the cash cost decreased in all different segments. They have decreased in pulp, they have decreased in uncoated woodfree and packaging and they have decreased in tissue. The ones that you mentioned that are in our Slide 14 are specifically referring to pulp. And let me add the following. I think probably we have a couple of elements here. One, as we have seen, our cash costs are on top at the level of 2021. So it's a significant reduction on 2021. Having said that, we had an increase of cash costs in Q1. So we are comparing Q3 with the Q1 where we had higher cash costs. At the time we explained, this was mainly related with energy and chemicals. So the different elements that we have mentioned, they all play a part here in the reduction. I think we can also say that in between September and January this year, our total cash cost dropped 20%. So you see the big impact that we are trying to have on cash cost control. What are the main elements? For sure, energy and chemicals that have a bigger impact on the first quarter of the year. Also, wood is mainly by managing wood origins by managing the sources of wood. And also, we have managed to keep in control fixed costs. Of course, when your operating rates are improving, you have also an efficiency element on it. I will pass to Fernando if he wants to add something. Jose de Araujo: No. Perhaps on the fixed cost that is on the payroll side, at the beginning of the year, the expectations for the year were higher than the ones that we have now. And part of our payroll expenses are related with the performance of the company. This means it's also some justification for the declining in the cash costs in the period. Related to direct costs, it's like Antonio said, the energy, chemicals and the wood. Part of it is price and part of that is management, the proportion of wood available from different sources and trying to be more efficient on the operational side. Antonio Redondo: Following up the comments from Fernando,, let me just add one thing about HR, which is we took the decision on -- already on the second quarter. We announced it when we present second quarter results as a freeze in recruitment. So we are managing our operations with, I would say, a more limited number of people, which is a challenge because in some areas, we are building new equipment, we are building operations, we are growing. In some other areas, we are not. So we are balancing people between different operations to keep costs under control. Operator: Our next question comes from Bruno Bessa from Caixa Bank BPI. Bruno Bessa: I have three, if I may. The first one, you mentioned an improvement in terms of your backlog for the Q4. Just wondering whether this is a pure seasonal effect or if there is an upturn in terms of demand that is above the usual pattern in Q4. This will be the first question. The second question regarding paper prices. In the last cycle trough, you control quite well the price level because you reduced you and your competitors reduced the average capacity utilization rate. My question is why aren't you doing the same this time around? What has changed in the market for you not to follow the same strategy this time? And the third question, we saw a relatively weak quarter on volumes in the tissue business following on a year-on-year basis. Just trying to understand what is behind this effect, if there is any kind of one-off impact in terms of production? And what are your expectations for the upcoming quarters? Antonio Redondo: Okay. Thank you. Again, for sake of clarity, I'm going to try to rephrase the questions and I will give some elements of answer. I will ask my colleagues to help on replying. So your first question is about the improvement of backlog. I think you are referring to uncoated woodfree and you'd like to understand if this is demand or purely a seasonal effect. Bruno Bessa: Correct. Antonio Redondo: Okay. Thank you. Your second question is that you believe that previously this industry a better discipline on pricing and we try to understand what is happening right now. Bruno Bessa: That's correct. Antonio Redondo: And the third question is about tissue. You saw coming to what you were expecting weaker volumes on Q3. And would like to understand if this is one-off impact or any issue regarding our mills. Bruno Bessa: That's it. Antonio Redondo: Okay. I will give elements over three questions. For the first two, I would then ask Quirino to follow up. And for the third, I will ask Nuno also to comment. So starting with backlog improvement. A very quick comment, and Quirino will detail much more than myself. This is much more than seasonal effects. We are actually conquering, if you will, market share. I think we have shown that in one of the slides. We are conquering market share in order intake. Quirino can elaborate a bit more why we are doing that, but some elements of that have already been given, namely by enlarging our product offer with adding new -- not new, adding products that we didn't have before. On paper prices, I think we agree with you. We see the same. We see that the discipline of the market this time was not at the level that was before. We, as a market leader, try to keep prices and provide actually an umbrella for prices where the majority of our competitors could protect themselves, but they choose not to do. They choose to -- in spite of that to lower prices and, of course, we are also reacting namely with low-end products. Look, I'm not sure if I mentioned this in one of these calls, but I mentioned this very often. There is a very famous sentence from Robert Crandall. Robert Crandall was the CEO of American Airlines after the liberalization. And he said the airline industry was run by the dumbest competitor. And I think this applies also to pulp and paper. I mean no matter the effort that we, as a market leader, do to protect prices, some of our competitors, I guess, out of the aspiration, I go back to the first question that was raised by our colleague from Jefferies. Out of the aspiration, they just give up drop wall, I think was the expression and decreased prices. Nuno, do you want to follow up, please? Nuno de Araújo Dos Santos: Yes. So on the backlog on Q4 is a bit seasonal, but more than seasonal. So we see -- first, we are getting our market share in deliveries, in sales. But what you see in backlog is actually our ability more recently to progress more in market share in order intake, which is a bit more forward-looking because these are orders to be delivered in the next few months. So we are progressing on that. Again, in the Americas, a bit in Europe as well. And in what we call the overseas markets, the North African and Turkish market, which also are picking up a little bit due to the opening of the upward trend on the pulp prices that we mentioned. So this is bringing more activity to the paper market as well. On the prices, only to agree with what Antonio said, I mean, with low pulp prices in -- during the number of months in a row with a portion less now than in the past, but with a portion of players which are nonintegrated, operating on average. Our competitors were, on average, at a lower level. You listened for sure that on average, including us, the uncoated woodfree industry in Europe was operating at 81%, so slightly up from 80% last year, but we increased much more than the market. So our competitors are under severe pressure. So probably that's the explanation over there. Jose de Araujo: Regarding your third question on tissue, also an introductory comment and I'll pass to Nuno. First of all, no, we don't have any issue in our mills, so no operational issue, no one-off impact. The economic situation across Europe is not across the world, but particularly across Europe, and this affects tissue, obviously, that affects other brands, less tissue than other brands that also affects tissue. But also, we have been working on improving profitability and we have decided to net down some sales that we believe are not profitable for our objectives. Nuno, do you want to follow up, please? Nuno de Araújo Dos Santos: Okay. Can you hear me? I hope so. Antonio Redondo: Yes. Nuno de Araújo Dos Santos: Okay. No, basically, you said it all already. The market in tissue this year is slightly slower in terms of growth. I think we've said it versus last year, we were -- we have a 3%, 4% growth rate in the market. This year, European market, Western market has been growing at around 0.3%, 0.4% growth rate, which is relatively small, reflects the economy, some tendency for some consumers to trade a bit on specs. So instead of buying three or four ply products, they might choose a similar product, but with two plies or reduce a bit the kitchen rolls used at homes. But I mean, this reflects the overall economic sentiment on one side. And the second reason that Antonio also mentioned, we want to have sustainable and healthy relationships for both sides, always with our partners and clients and protect the long-term sustainability of the relationship. In some situations, it's better to drop a bit some volumes, but to protect the way we are able to serve those clients, and this is what we've been doing. But nothing that is concerning for others. Bruno Bessa: Okay. If I may, just a follow-up on the first question about the demand for -- and the backlog that you have. From what I understand, the improvement you are seeing is mostly driven by your market share gains more than an effective healthier end demand market at this stage, right? Antonio Redondo: Yes. The market in Europe in the latter part of the nine months is not significantly better than what it was in the beginning of the year. Of course, there is one positive impact is that imports are significantly increasing. And this, of course, also open space for long-term strategic suppliers to our customers. Operator: [Operator Instructions] Our next question comes from António Seladas from A|S Independent Research. António Seladas: I have three. First one is related with the different dynamics between Europe and U.S. regarding the printing and write paper. So U.S. is coming down by 1% and Europe about 6%. So what are the difference why the difference is so large, taking consideration that, I guess, the digitalization and all that stuff is more or less similar. Second question is related with saving costs at your U.K. tissue operation. If you can provide some color on it and when we should start to see the results on the profit and loss account. And last question is related with -- there were some provisions on the third quarter figures that you released last week. So I don't know if you can provide also some insight or explain why were these provisions. Antonio Redondo: António, sorry, I'm so sorry, but I think I can summarize the first two. I didn't at all got the third one. Can you please be so kind to say it again? António Seladas: Sure. There were some provisions on your profit and loss on your third quarter figures in your third quarter results release last week. So if you provide -- if you can explain why were -- what was the reason for the provisions? Antonio Redondo: Okay. I'm going to rephrase the questions just to make sure that we fully understand them. First one, you'd like to understand the different dynamics between U.S. and Europe in terms of the downturn so far this year? António Seladas: Yes, exactly. What explains the difference, so big, so large. Antonio Redondo: Okay. Okay? The second one, if I understood correctly, is about our tissue U.K. operation. And by saving costs, I'm not sure if you were referring about synergies or if you're referring about our project to consolidate into a smaller number of installations. António Seladas: It's the second one, in fact. Antonio Redondo: Second one. And the third one are provisions on the third quarter results. Correct? António Seladas: Correct. Antonio Redondo: I will give a quick comment on the first one and the second one, I'll pass then to Quirino or Nuno and the third one, Fernando will answer you. So the different dynamics. I think most likely, we cannot justify what is happening in the uncoated woodfree market no longer by digitalization because I agree with you, if it was purely digitalization, the conversion will be more or less the same, and it is quite significant. Having said that, let's not forget that the market downturn started in U.S. prior to Europe, a couple of years, three or four years prior to Europe. And in U.S. for probably quite some time, we see more an asymptotic behavior of demand. So I think the main explanation for the difference is the economic dynamics on -- between U.S.A. and Europe. But I will leave to Antonio to comment further. António Soares: I think just the same, if you think on the data between '19 and '25, if you compare 2019 with 25% and you average the average percent will increase in the market, the annual -- the compound annual growth rate is actually quite the same. It's 5.5% in North America per year from '19 to '25 with COVID in the middle and all of that and Europe as well, 5.5%. So as you mentioned, Antonio, there is a matter of timing where U.S. started to decline much before and now it's more an asymptotic with 1% decrease. Antonio Redondo: Regarding the cost savings in tissue by consolidating the operation, and before passing to Nuno, just to remember, we are doing this with an ongoing operation in five sites. and we are not buying new machines. So this process is a process that is relatively slow because we need to make sure that we do not let our customers down. So we can only migrate the machines when we are able to reach production in such a way that we keep on supplying our customers in a continuous way. Also, this implies a reduction of number of people and in some cases, a reduction, which is the most expensive. In some other cases, people moving from one side to the other. So if this takes people into consideration, you have from one side, our concerns with people like a company that is very much concerned with its HR. And also we have consultation processes with the employee representatives. So the process already started. It started around August to take significantly more than one year. Nuno? Nuno de Araújo Dos Santos: Yes. I think it might be worth stating even though that's not exactly the objective of your question, but we are addressing both fixed costs and structural costs, but also variable costs in the U.K. operation. So we have -- since we acquired the company last year, we have been performing a revision and the redesign of all cost items. So our paper costs are going down significantly, but also, let's say, the packaging materials, logistics, et cetera. So that's one big element that we are working on. Second, as Antonio mentioned, we are working on the fixed costs. First, of course, Accrol, as you know, as you remember, was floated in the market. We took out a lot of PLC costs and cost -- excess costs that a company that was independent and directly floating in the U.K. market required. Now we have started as it was announced in the process of restructuring and consolidation of our sites. We've just started. It's planned to last until last year. We will again optimize the cost structure of the company, and we will do this in order to have one of the most competitive and most efficient operations in the U.K. In addition to that, something that we are working also in parallel, let's call it the third element of it is increasing productivity of our lines and our plants for you to have an idea, efficiency when we started and we -- the company joined Navigator one year ago, 1.5 years ago was around the OE of the operation was around 30%, 35%. And since then, we have already improved it to 45%. So this is a technical industrial measure KPI, but it's worth mentioning that productivity on the lines, the production lines has also increased significantly over the last 16 months. So overall, we're working on all of these elements. Jose de Araujo: About the provision, the provision has two elements. One element is the fact that we will dismiss some people at the U.K. and that represents more or less 30% of the value. The remaining value regards different with a supplier in our investment phase that is asking works and things like that, and it starts with process. And despite the fact if you lose this will increase only the amount of investment, we have accounted a provision because we have some tax benefits on that. António Seladas: Okay. Just a follow-up question regarding the different dynamics between U.S. and Europe. Should we expect -- what kind of demand should we expect in Europe for next year? So I don't know if you can share with us your ideas. Antonio Redondo: This is the hundred million dollar question. Again, First of all, we cannot share what we have, but this is competitive information. But I think some of the elements that we gave you as an answer can provide you -- before I can provide you an answer now. If we believe this is very much linked to the economic situation across Europe, if we are positive that the economy next year is going to be significantly better, I think we will see a significantly lower decrease. If we believe that the economy is going to be more or less at the same level, we will probably see more or less the same type of decrease. Operator: Ladies and gentlemen, there are no further questions from the conference call at this time. We will now proceed to read the first question from the webcast. The question comes from Jaume Rey Miró from GVC Gaesco. And the question is, do you expect CapEx linked to ESG projects to keep these high levels we have seen in the last three years until you achieve these CO2 targets in 2035? Can we have a forecast in absolute terms for CapEx in general next year? Antonio Redondo: Okay. I'm going to give an introduction and then Fernando will follow up. ESG is not only decarbonization, but I understand that the main concern and of course, also the main CapEx so far has been decarbonization. If you probably remember the slide in our presentation, Slide #10, and you see that the emissions will be stable from 2026 to 2030. So we will drop vis-a-vis the reference here, which is 2018. In '26, we expect to drop 55% out of 86%, and in 2030, 58% out of 86%. So I'd say the large majority of the emission reduction is done. So purely decarbonization, the large majority of the projects are behind us. is why we are able to keep this level of emissions in the next four to five years. Of course, we are always willing to look to opportunities to speed up the decarbonization provided we find that the projects are value added and they are value added by themselves or Europe makes available funds to increase decarbonization and we increase the value added by using those sites. So, in short, a large majority of the ESG investments dedicated to decarbonization, which is the largest part, I would say that will be concluded by 2026 when we conclude the PRR, the EU Next Generation funds. Jose de Araujo: This means 2026 despite lower than the amount that we are expected to spend in 2025, it's still above our average investment. Antonio Redondo: Our average CapEx is around EUR 100 million and EUR 120 million. This means from 2027 onwards is what we would expect. Of course, without expansion CapEx. So the PM3 expansion, which will mainly in 2026 and using again grants from next-generation funds will be concluded by September 2026, and we hope to be able to take the final investment decision on the tissue machine by the end of this year and also the impact of '26 and '27. Fernando was referring this ballpark EUR 120 million is outside the normal maintenance CapEx without expansion CapEx. Ana Canha: This ends our session. Thank you all for your time. As always, we are available for any additional clarification through our usual contact. Have a great evening.
Operator: Good afternoon, ladies and gentlemen, and welcome to Global Industrial's Third Quarter 2025 Earnings Call. Please note, this event is being recorded. At this time, I would like to turn the call over to Mike Smargiassi of The Plunkett Group. Please go ahead. Mike Smargiassi: Thank you, and welcome to the Global Industrial Third Quarter 2025 Earnings Call. Today's call will include formal remarks from Anesa Chaibi, Chief Executive Officer; and Tex Clark, Senior Vice President and Chief Financial Officer. Formal remarks will be followed by a question-and-answer session. Today's discussion may include certain forward-looking statements. It should be understood that actual results could differ materially from those projected due to a number of factors, including those described under the forward-looking statements caption and under Risk Factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. I would like to remind everyone that in Q4 this year, our quarter will close on Saturday, January 3, 2026, representing 1 additional week in our quarter compared to the prior year. While we are adding 4 working days to our quarter, this is the period between the Christmas and New Year's holiday, which historically represents the lowest sales week of any given year. The press release is available on the company's website and has been filed with the SEC on a Form 8-K. This call is the property of Global Industrial Company. I will now turn the call over to Anesa. Anesa Chaibi: Thank you, Mike. Good afternoon, everyone, and thank you for joining us. Overall, we were pleased with our performance in the period as we delivered our second consecutive quarter of revenue growth, along with strong year-over-year profitability. We continue to manage the business proactively and have executed well. In the quarter, revenue increased 3.3% to $353.6 million. We grew the top line each month during the period and growth has continued into the early parts of the fourth quarter. Performance was once again driven by our largest strategic accounts, where good momentum and sales progress continues. This was partially offset by a reduction in our smallest and more transactional customers, which is in line with efforts to be more intentional and focused in how we go to market. In addition, I'd like to highlight the results of our Canadian operations. Canada generated a second consecutive quarter of strong top line expansion, which resulted in substantial operating leverage improvements in the local market. Investments made in recent years are delivering upon our expectations. We expanded our distribution capacity, improved supply chain and procurement processes and invested in our people and culture, all strategic steps that bring us closer to our customers and enable us to deliver the enhanced value they've been looking for. Gross margin was 35.6% for the third quarter, an increase of 160 basis points over the third quarter of 2024. Operating income improved over 18% to $26.3 million, and we had strong cash flow generation in the quarter. We continue to advance the transformation of our business model and the placement of the customer at the center of everything that we do. We are reframing our go-to-market strategy to take a more intentional approach to attracting customers, renewing our focus on identifying and targeting key accounts while aligning the organization to better meet and serve our customers' needs. We are working to expand the solutions and products we offer so that we are better positioned to deepen existing relationships and gain greater share of wallet over time. We are also enhancing our ability to serve customers more effectively and with increased efficiency through implementation of our new CRM and reworking our processes, procedures and technology to better serve our customers. We are leaning into these efforts and making steady progress against our strategy. My interactions with national vendor partners and customers at the Global Industrial Trade Show in September reinforced my belief that we are on the right track. The show provided me with the opportunity to meet with a broad cross-section of partners representing national brands as well as specialty products. I also met with customers in both structured meetings and breakouts and more importantly, through spontaneous discussions on the show floor. These interactions highlighted a clear opportunity to become a more meaningful channel partner for our vendors and to broaden the relationships and the support we provide customers. By better showcasing our capabilities and telling our story with greater clarity, we will be well positioned for even greater success with a tremendous runway ahead of us and a unique platform to scale organically. Now I will turn the call over to Tex. Thomas Clark: Thank you, Anesa. Third quarter revenue was $353.6 million, up 3.3% over Q3 of last year. U.S. revenue was up 2.9% and Canada revenue improved 12.3% in local currency. Price was positive mid-single digits in the quarter. This was partially offset by a slight decline in total volume, which was a result of some intentional actions. While we saw order count growth in our largest and most strategic customers, we continue to see volume declines primarily in onetime lower order value transactions. We believe the volume decline headwinds in this transactional segment will begin to wane in the fourth quarter as we start to anniversary prior actions taken near the end of 2024. These new actions include efforts to be more focused in how we go to market and emphasize our highest value potential customers. The quarter also saw some decline in federal government spending due to the timing of awards and budget uncertainty. As of today, we have seen growth continue into October. Gross profit for the quarter was $126 million. Gross margin was 35.6%, up 160 basis points from the third quarter last year. We were very pleased with this margin performance, which reflects price capture and diminishing favorability of pre-tariff inventory that flows through the cost of sales on a FIFO basis. On a sequential basis, as expected, gross margin pulled back from the record level generated in the second quarter of this year. The tariff environment remains highly fluid and the cumulative impact of incremental tariffs remains potentially significant. Since our second quarter earnings report, additional tariffs were both announced and went into effect in early August including reciprocal tariffs and a doubling of duties on steel and aluminum. As a result, we took an additional pricing action in late August, which supported margins to the end of the quarter. We continue to actively monitor the situation and are focused on supplier diversification, price management and strategic cost negotiations. We maintain a healthy inventory position and continue to prioritize availability for our customers. Management of our margin profile remains a key area of focus. As we move through the current cycle, our goal is to manage to price/cost neutral. In addition to tariff uncertainty, I would note that historically, Q4 generates softer margins in part due to product mix and peak season freight surcharges. In the fourth quarter, we expect to see continued year-over-year margin expansion. On a sequential quarter basis, there may be some margin pullback in line with historical performance. Selling, general and administrative spending for the quarter was $99.7 million, an increase of 6% from last year and essentially flat on a sequential quarter basis. As a percentage of net sales, SG&A was 28.2%, up 70 basis points from last year. SG&A reflects strong general and discretionary cost control. This was offset by a year-over-year increase in variable compensation expenses related to performance within both selling commissions and our bonus pool accrual increasing compared to last year. Operating income from continuing operations was $26.3 million, an increase of 18.5% in the third quarter, and operating margin was 7.4%. Operating cash flow from continuing operations was $22.6 million. Total depreciation and amortization expense in the quarter was $2 million, including $0.8 million associated with the amortization of intangible assets, while capital expenditures were $0.7 million. We continue to expect 2025 capital expenditures of approximately $3 million, which primarily reflects maintenance-related investments and equipment within our distribution network. The company's tax rate in 2025 is 26.4% versus 23.7% in 2024. The increased rate in 2025 results from an increase in nondeductible executive compensation. Let me now turn to our balance sheet. We have a strong and liquid balance sheet with a current ratio of 2.2:1. As of September 30, we had $67.2 million in cash, no debt and over $120 million of excess availability under the credit facility. We continue to fund our quarterly dividend, and our Board of Directors declared a quarterly dividend of $0.26 per share of common stock. I will now turn it back to Anesa for some closing remarks. Anesa Chaibi: Thank you, Tex. The team has done a great job executing our strategy throughout the company. We are effectively navigating the market disruption and uncertainty from the current tariff environment through a focus on what we can control. We are taking actions to better position Global Industrial to grow and believe we can open the aperture of the total addressable market that we pursue. We remain well positioned to continue investing in our growth initiatives and to also evaluate strategic M&A. I'm encouraged by the progress we're making throughout the company and look forward to finishing 2025 in a strong position that will set us up for a successful start to 2026. Thank you for your interest in Global Industrial. Operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from Ryan Merkel with William Blair. Ryan Merkel: I wanted to start off on price. Could you give us a sense for how much price impacted the quarter? And then I think you mentioned an August price increase. Can you give us a sense of what you think price will be in 4Q? Thomas Clark: Ryan, yes, I'll go ahead and take that one. So pricing, as you know, costing environment is fluid. And while we are working to diversify our supply chain and making sure our first goal is inventory availability for our supply chain partners and our customers. Obviously, the cost increases due to the tariffs primarily is a real cost that we're incurring right now. So as you mentioned, in August, we did take some additional pricing actions as we saw that inventory mix change as our cost of goods was mixing into more tariff inventory. As we looked at that cost of goods flow, we saw more of that move in. So again, it was in that mid-single digits range, just over 5% of price in the period that we saw. That would include obviously anything that we took in that mid-August price increase. We would expect that to be pretty consistent or slightly higher in the fourth quarter, just given that timing of that second move. Now we know things are fluid. There are obviously threats in the marketplace of some additional tariffs, but there's also some potential green shoots or bright spots where maybe there's going to be some relaxing of tariffs, and we've seen some of that out there. So we're going to continue to monitor that, and we'll be ready for those actions, and that's what the team is focused upon. Ryan Merkel: Okay. Got it. And then you mentioned the large strategic accounts, there was growth and I guess, the smaller customers with a little bit of a decline. What -- how much did the large strategic customers grow? And do you expect to continue to accelerate that part of the business as we think about the next couple of quarters, just given the initiatives and the focus there? Anesa Chaibi: Yes. I guess -- thanks, Ryan, for the question. Our strategic accounts had continued momentum. We're leaning into those, gaining greater share of wallet and doing more to figure out what their needs are and adding assortment, SKUs, things along those lines so that we can serve that need. As we look at -- we shared that we intentionally pulled back in certain areas, and it was for kind of the long tail, more transactional customers. And I think we're now eclipsing that. But we're also focused on as we look to reposition ourselves and go to market in 2026 and beyond is realigning the org to then serve customers along specific industries and sectors. And we're piloting that right now, but it's just in the very early innings so that we're positioning ourselves for '26 in a positive way. So we've still got some more work to do, but we are seeing some progress there on all fronts. Ryan Merkel: Okay. Perfect. And then just to clean up, you mentioned October, there's continued growth. Should I take that to mean it's at that 3% level? Or you mentioned the government is a little weaker as perhaps the government slowed down the business a little bit in October? Anesa Chaibi: We've seen state and local actually be positive. We've also seen some bounce back recovery on the federal side just based on timing of when some things flow through and actually were booked and billed, if you will. So we're seeing some good momentum, and we're in the process of close to closing the books for the month of October, but we've seen higher growth rates than what we're reporting today. I don't know, Tex, if you'd like to add anything or not. Ryan Merkel: No, I think you covered it perfectly. Operator: And the next question comes from Anthony Lebiedzinski with Sidoti & Company. Anthony Lebiedzinski: So certainly realize that you are being more intentional with your go-to-market strategy and seeing less of the transactional customer. But just wondering if we were to adjust for those transactional customers, what are you seeing from your -- from the rest of your core SMB customers? Just wondering if you could speak to the health of that customer group, what you're seeing there? Anesa Chaibi: Yes, do you want to jump in? Go ahead and take the lead. Go ahead. Thomas Clark: Yes. Thanks, Anesa. So yes, as we talk about -- if you think about some of the -- go back a year ago and when we had a CEO transition, some of the first things that Richard Leeds highlighted in his first public remarks were that we had gotten into some of the activities that may have been a little bit more on the promotional end that they were driving value. They were driving orders, they were driving revenue. But when we look at the lifetime value of those customers, it wasn't the type of customer that fit right for what we were trying to accomplish and who we could best serve in the long run. So those are some of those key changes that we've made. When we look at our broader portfolio of customers and that recurring revenue, the retention within our core business, not only small, medium business, but the public sector and the larger enterprise customers, we believe it's very healthy. We still see good retention rates in that area. And it's an area that -- that's the area that we're continuing to focus on the intentionality on how we service those businesses. So I think we're fairly bullish on the health of that core customer, and it's really been that more transactional customer that we've seen some slowdown. And like we said, we think some of that -- some of those changes we made were about a year ago. They were in the early parts of Q4. So you'll have less headwinds from a year-over-year perspective than we've had so far this year. So that should be a benefit into the fourth quarter. Anthony Lebiedzinski: Got you. Okay. That definitely helps. And then just in terms of your comments about expanding solutions and products, how do we think about your TAM opportunity? I don't know if there's a specific number. I don't know if you're ready to share that. But as we think about next year and beyond that, I mean, how do we think about just the opportunity for Global Industrial to participate from a higher product offering that you guys are planning to have? Anesa Chaibi: Yes, Anthony, that's a great question. I don't have a specific number right off to share with you or communicate today. We -- I have requested that the team look at kind of -- as we look at the go-to-market and the industries that we're going to serve, I think that will help frame up for us, respectively, across each one of those verticals, if you will. And then what we'll do is we'll share what we think that full opportunity is. But as you're well aware, in the industrial space, especially in distribution, industrial distribution, it's double-digit TAMs across different dimensions. And it's -- we're going to be very intentional, and we're going to make some investments across certain industries and lean into others. So I don't have a number today, but my hope is that I'll be in a better position to share with you once we wrap up the full year and what we're positioning and looking to move forward in '26 with. Anthony Lebiedzinski: Understood. Okay. And then my last question, just thinking about your SG&A expenses, is the growth mostly incentive comp accrual. And so as I look at the first quarter, you guys were essentially flat in terms of your expense growth from the prior year. Second quarter, you were up 3.5% and then up 6% in the third quarter. So maybe just help us better understand your expense growth and how do we think about that going forward? Thomas Clark: Yes, Anthony, I'll jump in on that one. So if you think about it, last year, when we reported our third quarter, we were in a position where we're seeing revenue decline and some softness on the bottom line. As you can imagine, that directly correlates to kind of how variable comp is earned both at the selling level of the individual contributor, but also to management and executives kind of how we earn variable compensation and non-equity incentive compensation. So last year, we were in a period where that was actually coming down or being reversed in the third quarter. This year, we're really booking to our plan and thinking about how that's being accomplished. So there is a big year-over-year differential just simply because we're in a point where we're growing our profit this year. Last year, we were seeing some pullback. So just -- it's really the timing of that impact. That is really the almost exclusive driver of the year-over-year change in our SG&A portfolio. Operator: This concludes our question-and-answer session and also concludes our call today. Thank you for joining, and have a nice evening. You may now disconnect.
Operator: Greetings. Welcome to Ecolab's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. At this time, it is now my pleasure to introduce your host, Andy Hedberg, Vice President, Investor Relations for Ecolab. Thank you, Andy. You may now begin. Andy Hedberg: Thank you, and hello, everyone. Welcome to Ecolab's third quarter conference call. With me today are Christophe Beck, Ecolab's Chairman and CEO; and Scott Kirkland, our CFO. A discussion of our results along with our earnings release and the slides referencing the quarter's results are available on Ecolab's website at ecolab.com/investor. Please take a moment to read the cautionary statements in these materials, which state that this teleconference and the associated supplement materials include estimates of future performance. These are forward-looking statements, and actual results could differ materially from those projected. Factors that could cause actual results to differ are described under the Risk Factors section in our most recent Form 10-K and our posted materials. We also refer you to the supplemental diluted earnings per share information in the release. With that, I'd like to turn the call over to Christophe Beck for his comments. Christophe Beck: Thank you, Andy, and welcome to everyone joining us today. And I'd like to start by recognizing the strength and the resilience of Ecolab's team. Because in a year defined by a persistent macro uncertainty that we've all lived through and shifting global dynamics, our team continues to deliver consistent double-digit earnings growth. And they focus on what matters most, our customers, our strategy and our long-term goals, is what enables us to perform at a very high level quarter after quarter. And we've seen that in the third quarter where sales growth improved fueled by accelerating pricing, up to 3% from 2% last quarter, while volumes increased 1%. This momentum was driven by double-digit organic growth in our growth engines, which is remarkable and which includes Pest Elimination, Life Sciences, Global High-Tech and Ecolab Digital. Our core businesses, Institutional & Specialty and the rest of Global Water, delivered solid growth. All of this supported by exceptional total value delivery through best-in-class breakthrough innovation and disciplined execution of our One Ecolab enterprise growth strategy. In total, our growth engines and core businesses represent about 85% of our total sales, and they delivered 4% organic sales growth and mid-teens organic operating income growth. This strong performance more than offset ongoing market softness in our underperforming businesses, Basic Industries and Paper, which together represent the remaining 50% of our global sales. And these 2 businesses declined 3% and had an impact of 1 percentage point of volume in the quarter. So let me briefly expand on each of these drivers before sharing how we're thinking about the remainder of the year and how we're positioned to deliver another strong year of double-digit EPS growth in 2026. Pricing accelerated to 3% this quarter, driven by the full implementation of our trade surcharge and continued value pricing that's working really well. As always, the total value we deliver to customers continue to outpace and by far our total pricing, as our technologies and services help to deliver enhanced business outcomes, operational performance and environmental impact for our customers. Our breakthrough innovation is the strongest it's ever been, delivering significant value for customers and growth for Ecolab. In Institutional & Specialty, breakthrough innovations like the ones you've seen at Investor Day, like DishIQ, AquaIQ and ReadyDose, are growing double digits as these solutions help our customers improve operational performance, optimize the scarce labor resources and reduce total cost. In our Pest Intelligence platform, we've now installed over 400,000 intelligent devices, formerly called mousetraps, on our way to deploying over 1 million devices. With this leading technology, we aim to deliver 99% pest-free outcomes as we harness the power of our ECOLAB3D digital infrastructure and our expert service capabilities. Within Global Water, we recently launched 3D TRASAR for direct-to-chip liquid cooling for next-generation AI data centers, which uniquely monitors and optimizes coolant performance in real time. And when combined with our full portfolio of data center cooling technologies, we're helping to reduce up to 10% of the power used to cool data centers, which can now be utilized for compute power. And this is just the beginning as we build our leadership position in data center cooling and water circularity [ in microelectronics ]. And finally, within Global Life Sciences, we've launched a series of cutting-edge drug purification resins for the bioprocessing industry, which drives the improved product quality and significant operational efficiencies for our customers. When Ecolab focuses its breakthrough innovation on solving critical customer challenges like these, everyone wins. One Ecolab is helping us unlock significant cross-sell opportunities across our customer base. In total, this represents a $65 billion growth opportunity, with $3.5 billion of this sitting with our largest customers. And we're seeing early successes in businesses like Institutional & Specialty and Food & Beverage that are growing very nicely. Talking about that, in Institutional & Specialty where organic sales grew by 4%, outpacing end market trends, and this good performance is being fueled by the exceptional value we are delivering to customers, which we capture through value pricing and growth from One Ecolab. With this, we're working to deliver best-in-class operating performance for customers as they utilize more of our breakthrough technologies across more of their locations. In Food & Beverage, growth continued to accelerate with organic sales up 4% this quarter, once again ahead of market trends. This strong acceleration is being driven by One Ecolab where we bring together our industry-leading cleaning and sanitizing water treatment and digital technologies. This comprehensive offering delivers significant customer value to improve food safety, lower operating cost and optimize water usage, which was always our promise. And of course, our growth engine delivered another quarter of double-digit sales growth. These businesses are gaining momentum and Ecolab is well positioned to capitalize on the strong secular tailwinds driving these markets. So let me unpack them one by one. Pest Elimination delivered 6% organic sales growth. And as mentioned earlier, the Pest Intelligence rollout is going extremely well. Our Pest team has just won another very large retailer here in the U.S., which has thousands of locations which we will be deploying in the coming months. This innovation is transforming our Pest Elimination model as we shift from spending 95% of our time physically checking every device to 95% of our time solving critical customer problems and selling new solutions. Even with ongoing investment in Pest Intelligence, operating income margins improved to nearly 21%, driven by our strong sales growth and the leverage we're generating from Pest Intelligence. Life Sciences sales growth also improved to 6%, led by double-digit growth in biopharma and pharma and personal care. This very strong performance overcame capacity constraints within our water purification business. Looking at the fourth quarter, we expect Life Sciences year-on-year sales growth to moderate a little bit from third quarter's 6% growth as we compare against nearly 70% growth in our bioprocessing business last year, but underlying same trends. Despite this strong comparison, we expect bioprocessing to still grow double digits in the fourth quarter as we continue to gain share in this super-attractive market. Global High-Tech continues to grow rapidly, with sales up 25%. We've built an incredible growth platform where we're uniquely positioned to serve the high-growth data center and microelectronics industries. And the pending acquisition of Ovivo electronics will more than double the size of Ecolab's Global High-Tech business to nearly $900 million, further strengthening this growth engine by bringing together Ovivo's very unique, attractive water technologies with Ecolab's leading water solutions, digital technologies and global service capabilities. The combined technology platform will enable Ecolab to expand our offerings to provide circular water solutions for microelectronics, helping to maximize chip production and quality for this booming industry. Ecolab Digital maintained its strong momentum, delivering 25% sales growth this quarter. Ecolab Digital now has annualized sales of more than $380 million, driven by rapid growth in subscription revenue and digital hardware. Overall, Digital is a $13 billion growth opportunity for Ecolab, with $3 billion of this sitting within our existing customer base. So we remain focused on capturing this high-margin opportunity as we leverage our leading digital technologies and monetize our large and expanding installed base. We're not only leveraging AI to build new fast-growing capabilities in Global High-Tech and Ecolab Digital; we're rapidly leveraging it in our own operations to dramatically improve our customer experience and enterprise performance. With this, I'm very proud to share that Ecolab has ranked #9 on the Fortune AIQ 50 List recognizing the companies most prepared for the age of AI. Our global teams are quickly scaling AI to drive innovation, deliver customer impact through our best-in-class model and deliver significant cost savings. Finally, we remain confident in our team's ability to get our 2 underperforming businesses, Basic Industries and Paper, back to growth. And they're already making meaningful progress. We've shifted resources to support emerging opportunities, like in power and precious metals where they're supporting AI-driven power build-outs. For end markets still facing near-term demand headwinds, like Paper, we're focusing on innovation that can drive significant operational savings for customers. We're also leveraging our One Ecolab growth strategy in these businesses to expand relationships with existing customers. These actions are working as evidenced by our share gains and relative outperformance in these end markets. But we're not satisfied. While we expect these markets to remain soft in the near term with actions well underway, we anticipate these businesses to return to growth during 2026. One of the greatest strengths of Ecolab for decades has been the breadth and diversity of our portfolio. While not every business delivers strong performance at all times, our diverse portfolio is the key reason Ecolab collectively delivers double-digit EPS growth in nearly any environment. With our strong performance, we drove a 110 basis point increase in our organic operating income margin, which reached a record 18.7% this quarter. We continue to expect our operating income margin to expand at steady levels due to growth in high-margin businesses, value price, share gains and productivity improvements reaching a strong 18% for the full year '25. Importantly, our margin expansion also includes significant and ongoing investments in our business. We continue to make these growth investments as they fuel high performance in the quarters and years ahead. As a result, we're increasing our '25 full year adjusted diluted EPS midpoint to $7.53, with a range of $7.48 to $7.58. Beyond this year, we remain firmly on track to achieve a 20% OI margin by '27. And as mentioned during our Investor Day last month, we expect to continue our momentum with 100 to 150 basis points of annual OI margin expansion to 2030. This positions us extremely well to continue to deliver steady 12% to 15% earnings growth in '26 and beyond. In closing, our third quarter results reflect the strength of our business and the power of our strategy. Our pricing discipline, breakthrough innovation and One Ecolab execution continue to drive share gains and margin expansion across our core business. Our growth engines are scaling rapidly and positioned to benefit from long-term secular tailwinds. All of this is enabling us to deliver consistent earnings growth even in a complex and complicated macro environment. With strong and resilient free cash flow and an extremely strong balance sheet, we're very well positioned to capitalize on both organic and inorganic growth opportunities to create significant value for our customers and drive attractive returns for our shareholders. I remain very confident in our ability to deliver sustained strong performance in Q4 this year and beyond. Thanks again for your continued trust and your investment in Ecolab. I look forward to your questions. Andy Hedberg: Thanks, Christophe. That concludes our formal remarks. Operator, would you please begin the question-and-answer period? Operator: [Operator Instructions] And the first question is from the line of Tim Mulrooney with William Blair. Benjamin Luke McFadden: This is Luke McFadden on for Tim. I wanted to ask about the Global High-Tech business. We noticed the slides mentioned some recent market share wins in data centers. Can you talk a bit more about how you're achieving and measuring the gains here? And I know you haven't closed the deal yet, but curious to hear any updated thoughts on the Ovivo acquisition and how you would characterize the growth opportunity in microelectronics post deal close relative to your already strong performance in this end market today. Christophe Beck: Thank you, Luke. Love that field, as you know. So let me step back a bit because it's important. So for all of us to understand, so High-Tech for us is a combination of data centers and microelectronic plants, many call it fabs, which at some point will be 2 businesses focused on different technologies, obviously. But for now, it's really High-Tech, combining data centers and microelectronics. And it's a field that attracts most of the global investments, as we know. And we expect these global investments to continue to drive that growth trend. Even though we don't expect it to be a straight line to heaven, there will be, obviously, some more difficult and some better times ahead, but generally, it's going to be the growth of our times. When we think about some of the facts, talking about metrics, Luke, so 1 data center opens in the world every 1 to 2 weeks, with an investment ranging from $500 million to $3 billion. And there are 10,000 data centers in the world today. So it's showing a hard -- a strong base that's getting even bigger as we speak. On the other hand, you have 1 fab, 1 microelectronics plant, that's opening up roughly every month or so with average investments in the billions. There are 500 fabs today and expected to be 100 more, getting to 600, in the next 10 years. So we can see the pace at which those data centers and fabs are opening up, and our objective is ultimately to be in and hopefully own each of them around the world. So the key thing is that all of this will require way more power and way more water, which is where our role comes into it. Because as mentioned as well, by 2030, we expect that this industry, powering AI with fabs and data centers, will need the incremental power of the whole of India in the next 4 years and the drinking water needs of the whole of the United States as well at the same time, because data centers will need to be cooled and fabs require vast amounts of ultrapure water. And the cool news is that those are technologies that we master, we've been mastering for a very long time. Nobody understands water better than Ecolab. We've been in the cooling business for a very long time and we've been in the water business, obviously, for a very long time as well. So we're building offerings that are helping data centers to be cooled in more efficient way by reducing the amount of water and moving towards direct-to-chip technologies. That helps cooling faster, this means more compute power, and this means less power for cooling and more power for compute, which is exactly what the tech industry is looking for. On the other hand, we're providing circular water solutions for microelectronics manufacturers because 1 fab requires roughly the drinking water needs of 17 million people. And the pace at which it's being built, well, that's not going to work for the communities, obviously. So the tech industries, the famous ones, especially in Asia, but in the U.S. as well, well, are looking for solutions to reuse and recycle water. But here is the key point, that water that's being used in those fabs needs to be ultrapure water, which means roughly 1,000 times more pure than the water that you would use in drugs, that you inject in your bloodstream, which is exactly what Ovivo is doing. So by bringing what Ecolab has always done in water circularity plus the capabilities of Ovivo in ultrapure water, we help microelectronics, ultimately, reuse and recycle water at ultrapure water level. So at the end, '26 for Global High-Tech, assuming we close, obviously, on Ovivo, will be roughly a $900 million business, growing double digits, with very strong margins. And it's important to keep in mind that, for us, it's a new step, a further step on our high-tech journey and one that will change over time the growth profile of our company. So a very good new chapter for our company. Operator: Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: I just wanted to focus on the Basic Industries and Paper returning back to growth in 2026. I was wondering if you could drill down further about on shifting resources, innovation as well as share gains, how that can help offset some of the end market weakness? Christophe Beck: Yes. Thank you, Ashish. I really like the underlying performance of that business. It's a good margin business, just that you know as well, it's slightly below our company average. But it's still a good business, good margin and good underlying performance. The biggest issue we have in that industry is it's consolidating, which means that they are closing mills. And mills are very big. And those mills, obviously, when they close are impacting our growth and there's not much we can do. We lose very little to competition; we gain share in the existing and new mills. But when a mill is closing, well, we lose those sales. And that's what's happened over the last 18 months. We see that process of consolidation slowing down. We see our underlying performance driven by what you were saying, innovation, improving as well. And I think the combination of both ultimately will be positive for Paper. So I think that we are reaching the bottom of that cycle in Paper. And I think in the next, I don't know, 1, 2, 3 quarters, Paper is going to get back to a growth trajectory, and the sooner the better, obviously. And on the Basic Industries, we have regrouped our resources, we're driving critical mass as well, driving efficiencies. But it's really making sure that we capture as much market share as we can right now as the market recovers as well. And similar to Paper but for different reasons, we see as well kind of the bottom come in the next couple of quarters, and then we should get back to a good place. So in both businesses here, 50% of our company, we need to keep that in mind, and there will always be a few businesses that are having subpar performance. I like the underlying performance. The market trends have been hard in the past. This is changing. So that's why I'm quite optimistic we will like where those 2 businesses are going to go. But at the end of the day, let's keep in mind that 85% of the company is growing very well with mid-teens operating income growth. So in a very healthy place. Operator: Our next question comes from the line of John McNulty with BMO Capital Markets. John McNulty: So I had a question on pricing. I guess if you can take the tariff surcharge out of the equation, I guess would you say that pricing is getting easier to push through just because the value proposition is becoming more evident? Or would you say -- or would you characterize it as maybe getting tougher just because there may be price fatigue, inflation may be moderating a little bit? I guess, how would you characterize it? Christophe Beck: Thank you, John. I would say the same. It's hard to put a metric obviously on that. But generally, the fact that pricing is getting stronger -- our total value delivered, by the way, is getting much stronger too. And we're always trying to get 2% to 3% -- sorry, more total value delivered than pricing that's being captured. So it's a good deal for customers. I feel that we're in a pretty good place. And our retention is very high, in the 90s, as you know, and it's remaining very stable as well at the same time. So a good story of customer for life with good retention, sharing the savings that they get in their operations, that translates into value pricing. And you're right, on top of it, so the tariff surcharge, or trade surcharge as we called it, is helping as well. But that's why I feel that 2% to 3% value price for the long run seems to be the sweet spot for our company. Operator: Our next question is from the line of Andrew Wittmann with Baird. Andrew J. Wittmann: Great. I had 2 questions. I guess, Christophe, just talking about the Water business as well here, you discussed the top line impact, the quarter, very detailed. Just wondering if you could just help us understand a little bit about how that top line is affecting that segment's margin performance? So maybe if you could bifurcate that as well. And then just quickly, kind of a technical question here, you mentioned a large new Pest customer. I was just wondering, was that referencing to an entirely new customer that is not a customer today? Or were you saying that's just a conversion to the new technology? Christophe Beck: Thank you, Andy. So 2 different questions, obviously. I think the easiest way to talk about Water top line and margin, if you exclude Basic Industries and Paper, which I know is a bit of a challenging accounting approach here to make sure I remain in GAAP. But generally, Water would be having a 4% top line growth and a 15% operating income growth excluding those 2 businesses. So it's pretty clear where our work is focused on, and that's why we're focusing on these 2 businesses, to make sure that we enjoy all the good side of the Water business that we really love and that keeps getting better. Now on the Pest question, so we never mentioned which customer that is just to respect, obviously, their own confidentiality. But it's a new one, which has been really interested by that new technology. The fact that we focused early on, on the biggest out there helps, obviously. So everyone else see that it's good, the leading companies are embarking on that journey and that it's really working. So that's going to be, I think, helping us for the future as well because the more of those great retailers we have onboard, the more others will join as well. It's an ideal proposition for them, 99% pest-free. A good deal for their own operations, it's good for us. It's exactly the model that we want to build in the future. We're early on that journey, as mentioned, 400,000 devices today, but we will be at 1 million first half of next year. So it's showing how quick we're moving here, and we're clearly leading the industry, which is helping customers come to us. Operator: Our next question is from the line of Vincent Andrews from Morgan Stanley. Vincent Andrews: Christophe, if I could ask you for an update on One Ecolab. In particular, I know the focus initially was the top 35 customers, so as we get to year-end 2025, where will you be in terms of sort of the work you wanted to do with that top 35? And as we get into '26, will you be rolling it out more aggressively to the next 25 or 50 or what-have-you? Or how should we think about the layering in of incremental One Ecolab efforts from '25 to '26? Christophe Beck: Thank you, Vincent. So the way we approach it -- and I don't remember how public I was with it. So we launched One Ecolab a year plus ago, as you remember, mid of last year. And we said we will start with 3 customers in 3 major industries of the company, to move towards, we called it internally the Mag 7. They're not exactly the same as the ones you would have in mind, but some are, obviously, in '25. And then to move towards the top 20 E15 in 2026, to really make sure we can demonstrate that customer after customer and learn as an organization as well without boiling the ocean. It's progressing very well. Customers are very receptive. And the best example is really Food & Beverage United, where we brought Hygiene and Water together in North America, which you see the results in Food & Beverage, how the growth trends have shifted towards higher growth. It's exactly driven by One Ecolab, focused on some of those critical customers. It's where the whole idea came from when we acquired Nalco, by the way, in 2011. So it's an old idea that's coming to life, very well received by customers, working in terms of growth, and we will expand as we move forward in 2026. Operator: The next question is from the line of Patrick Cunningham with Citigroup. Patrick Cunningham: How should we think about SG&A leverage, particularly in Pest and Life Sciences, next year as you start to lap some of the growth investments you've made across both businesses? Is it a relatively linear path to your 2027 targets? Or is there sort of a continued step-up in growth investments embedded next year? Christophe Beck: Thank you, Patrick. Scott was looking for a question, so this is a perfect segue. And I would suggest we start with SG&A in general as well and then focusing on these 2. Scott Kirkland: Yes. Thanks, Patrick. As we've talked about, SG&A productivity has been a great story over the last several years. Since 2019, our SG&A leverage has improved 150 basis points, and we're expecting to improve another 20 to 30 basis points this year for full year 2025. As we talked about at Investor Day, beyond 2025, with the benefit of the One Ecolab savings that we're driving and net of investments, we will continue to invest in the business. And that leverage, I expect it to be pretty broad-based. Certainly, we are investing in the growth businesses, the growth engines, but expect going forward to deliver 25 to 50 basis points of SG&A leverage, benefiting from the One Ecolab program and the technology we're deploying. Christophe Beck: And what I really love on that whole journey, it's not becoming cheap and saving money left and right. It's leveraging digital technology, agents. We have many now in our organization. That's why being recognized as one of the leading AI companies in the world was a really cool news for us. It's really leveraging technology to do more with less. And we are still early on that journey, so I think it's going to keep getting better. So really good work here that's feeding ultimately the growth story that we want to capture. Operator: The next question is from the line of Manav Patnaik with Barclays. Manav Patnaik: I just had a question. The 85% of your business, core, I guess, you said was growing 4%. Assuming the macro stay the same, I guess, it sounds like it's the growth engines that could take that higher. And so I'm just trying to understand from your perspective, how long do you think before that mix is big enough to start moving the needle? Because you've obviously delivered well on the margins and EPS, and I think we're all looking to see if revenue growth can be better. Christophe Beck: That's a great question. As I was sharing at the Investor Day and with the team, the beauty of the company is our broad exposure to end markets, which means that we won't have all end markets in the red at the same time, but which means that we won't have all end markets in the green at the same time as well. So focusing on this 15% a little bit of our time to make sure that those ones are becoming less of a drag and, ultimately, a positive driver. But when we look at this 85% growing 4% and mid-teens, the growth engines are growing 12%, and even more on operating income. So which is a very good story. Ovivo is going to add to it as mentioned earlier, obviously, so High-Tech is going to get bigger. Since that group of growth engines is growing double digit, obviously, the mix is going to shift towards them over time. And I think that in the next few years, growth engines are going to become a really relevant part of our company. It's roughly 20% today at $3 billion. I would not be surprised if it becomes 30% to 40% in a few years down the road. Operator: The next question is from the line of David Begleiter with Deutsche Bank. David Begleiter: Christophe, on the price surcharge, how much did you realize? And with the surcharge now fully in place, should we think about this 3% pricing continuing for the next perhaps 2, 3 quarters? Christophe Beck: It's hard to know exactly because some businesses, like institutional, for instance, decided to bring -- and that was the same in '22, so nothing here to have it directly, so within the structural price. So we don't have a perfect tracking of that. And obviously, I don't really care because, anyway, also converging towards structural price. So with the surcharge, we're closer to 3%, obviously. That's why I'm saying 2% to 3% is the sweet spot. And since we round those numbers, sometimes you might be rounding down to 2% and sometimes to 3%, but I feel pretty good with where we are now. Our objective is to stay closer to 3%, but it depends what's happening with the tariffs as well. We're looking as well as what's happening with China, this week, we will know that in the next few days as well. The good news is that we know exactly how to manage that if we need to, and it leads to very good margin performance. So for me, 2% to 3% is the sweet spot, and our objective is to be as close to 3% as we can. Operator: The next question is from the line of Chris Parkinson with Wolfe Research. Christopher Parkinson: Could we just dig in a little bit more into the Life Sciences segment? Understanding it's been volatile over the last few years, however, it seems like there's a decent recovery pending in bioprocessing and pharma, so on and so forth. So if you could hit on the top line first, that would be helpful. And then if we could move into just the capacity additions, where we stand there and your ultimate progress towards '27 goals and how you feel about them. Christophe Beck: Thank you, Chris. It's a business and an industry that I love. And as hard as it's been the last few years, I would do it again, and we will love where this business is heading. Great team, focused exactly on the right innovations that the pharma industry is looking for to produce faster, high-quality, lower-cost drugs at a lower environmental impact. So really converging with an Ecolab model. When I look at the 3 elements that you mentioned, so top line, capacity and margins, let me take them one by one. So the top line, we've been growing low to mid-single the last few years. That was less than what we had planned for when we acquired Purolite. Well, that was during a time when the market went down, most of our competitors went down in terms of growth. Doesn't make it great for us, but at least it's adding some perspective. When I look at the growth trajectory that we have now, it's clearly accelerating. I mentioned this Q4 is going to be a bit softer because it compares to a huge growth in Q4 last year. But underlying, it's clearly accelerating. The new business is very strong. We're getting more commercial drugs as well in our pipeline, which makes a big difference, obviously. And the team keeps getting stronger and better as well. We're one of the only few companies having as well capacities in various places around the world. That adds to the resilience as well to it. And we add the whole water components and environmental hygiene that the other ones do not as well. So top line, finally, so getting from good to much better, and it's going to keep accelerating. With one caveat, is this capacity challenge that we have in our purification business, just because we have max capacity of what we can manufacture. But our plant in China in mid-2026 is going to open and it's going to enable us to unleash that growth in that part as well as the business, which is going to be great for the local market and as well for some international markets. And last point, on the margin, as we've shared as well at Investor Day, we are kind of in this mid-teens today, but underlying, it's more mid-20s because of the investments that we are making in that business as we build that franchise. So from the mid-20s to the 30, we see a clear path. But our focus is really to drive growth in that phase of the investment and then start to drive margins once we get enough growth that we can leverage the critical mass that we've built. Operator: Our next question is from the line of John Roberts with Mizuho Securities. John Ezekiel Roberts: In hospitality, you use a metric called seats in the seats. Could you give us an update on that? It seems like we have a lot of mix trends going on in the full-service restaurant market. Christophe Beck: So thank you, John. So I'm using the terms of food traffic for our business here. As you know, it's been very different versus than 2019, so before COVID, so people going and sitting in restaurants. So down 30% versus 2019. And that hasn't changed. Unfortunately, or fortunately, depending on how we want to look at it, 1/3 of the people are just going for takeaway, for delivery or for drive-thru, the famous 3D. So we see a stabilization of the food traffic, which is kind of a good news. But we've gotten used to that new model. And ultimately, with all the digital solutions that we have offered to that industry to manage this different way of selling products with less people as well, it's been a very good story, because we could grow very nicely because what we did was even more important to the hospitality industry. And it was sold at a high margin. as well. So less volume, better margins, very good growth. And I think for us, it's been exactly what we needed and it's made Institutional or the hospitality business even much better than what it used to be, and you can see it in the margin that's north of 20% today. And it's going to keep moving up with very nice top line growth as well. So far, so good. And the last point I'd say as well is our Specialty business is doing extremely well, doing even better than full-service restaurants. So the QSR, the fast food businesses growing in the high single. It's a very good story as well there, which helps us capture wherever people go depending on the economic times that we're facing. So overall, net-net, a very good story in a very new market. Operator: The next question is from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: In the Water business this quarter, did volume grow? And in Basic Industries and Paper, was volume growth negative high single digits? And did that represent a deceleration from the numbers you would experience in the previous quarters? Christophe Beck: So thank you, Jeff. As you know, so we don't disclose volumes by business, for obvious reasons. But as mentioned, every segment had positive growth, that we reported. So that's a good news. So there was no segment that was going down. And for me, it's really important that all businesses maintain positive growth, whether you're in High-Tech where it's much more obvious because the flow of the river is very strong, or you're in more challenged businesses, like hospitality, as we talked about before and seen there. So our teams are doing really well. So Water was positive with that perspective, obviously. Paper within Water was not, and it's in the low to mid-single. But it's improving. So that's why I feel quite optimistic with the next few quarters with our so-called underperforming businesses of Paper and Basic Industries. They're not where they should be. They do exactly the right things. So the underperformance -- underlying performance of underperforming businesses is strong, markets are not. But net-net, we're going to get to a good place in the next few quarters. So we're doing all the right things here. Operator: The next question is from the line of Matthew DeYoe with Bank of America. Matthew DeYoe: Just follow up on Vincent's question earlier on cross-selling in One Ecolab. Do you have any idea how much that contributed to organic growth in the quarter, or an expectation you can kind of give us for this year as it relates to just overall revenue generation? Christophe Beck: Well, Matt, it's very good actually. So we are a corporate account, as call it, driven organization, enterprise customers, to use a different term as well. And the top 20, E15 focus is contributing over average to the growth of the company. So this is exactly the right place to focus. It's always been true as a company. But to get the whole One Ecolab within an enterprise is harder to make it work very well. And that's why we've chosen to go with all our innovation, all our technology, bringing One Ecolab digital services together towards those Mag 7, as mentioned before, then the T20, E15, so the top 20 customers and emerging 15, so for next year as well. But they're doing better than the average of the company as well. So it's clearly a strategy that's working. And as we expand the focus beyond those 35 customers, it's going to help drive as well better performance for the overall company at higher margin because it's helping customers drive even more efficiencies within their own operations. And the best example is Food & Beverage, Food & Beverage United as we call it within our own company, where we brought Hygiene and Water together. And you can see the performance of Food & Beverage has been remarkable in the third quarter, and it's going to keep getting better. It's only North America that we've done it, by the way, and it's a very global business, serving global customers, with global quality standards, as you would imagine. And this one is going really well. It's a great team, with customer feedback, also because no one else can do it as well, which is a great way for us to strengthen our moat. So generally, this One Ecolab approach, our enterprise customers, is really working, and it's going to be a growth driver for the years to come. Operator: The next question is from the line of Mike Harrison with Seaport Research Partners. Michael Harrison: Christophe, just kind of following up on what you were just talking about with Food & Beverage. The performance this quarter was, I think, the best organic growth that you've shown in several quarters. You mentioned that there is some momentum from One Ecolab and from pricing. But I was hoping you could help us understand a little bit more about what's going on with underlying market dynamics that you're seeing there. And to the extent that you are winning new business, is that mostly share of wallet and One Ecolab opportunities with existing customers, or are you seeing some new wins in that business in Food & Beverage as well? Christophe Beck: Good question, Mike. It's -- 4% organic growth in Food & Beverage is strong, so for sure. It's much better than the market. Consumer goods are not exactly growing fast. When you look at the companies out there or the, obviously, saw famous names out there are closer to flat than to mid-single type of growth. So really pleased with the performance that we're driving. And we're doing it while increasing our margins as well at the same time. So it's almost a perfect play what's happening in Food & Beverage here, with this unification of Hygiene and Water. And again, it's only North America that we've done it so far, which is less than half our global business, but it's showing how well it's working, that whole approach. And to your point on the share of wallet and white spaces, it's a combination of both. We're getting, gaining definitely some new customers, new plants as well within existing customers as well. Because by bringing Water and Hygiene together, we help them not only produce higher-quality, safer food, but reduce a lot of costs as well at the same time. So in a slow growth industry, that's exactly what they're looking for. So what we're doing for them is exactly what they're expecting. But at the same time, we're adding digital technology that we monetize, charge for, using a different term. And we get as well the value share, so our share of the savings we're generating for them in terms of value pricing, that's also incremental. So it's a combination of white spaces and share gains. Overall an awesome story for probably one of our best global businesses that we have. Operator: Our next question is from the line of Laurence Alexander with Jefferies. Laurence Alexander: It looks like your operating results are running -- I mean, your organic growth is running pretty much in line or better than what you thought earlier in the year. FX looks like it's basically double the tailwind of what it was last year. Can you talk a little bit about the gives and takes and what levers you have to pull if currency moves the other way next year? Christophe Beck: Yes. Good question, Laurence. Let me pass it to Scott because it's an FX, DPC question. Scott Kirkland: Yes. Thanks, Laurence. Hey, as we've talked about, the underlying performance remains really strong. So even with FX, I mean the underlying EPS, the OI is growing double digits. And as you think about just in Q3 itself, while FX is in line with what we expected and as we guided, you also have the impact of year-over-year SG&A comp that is offsetting that FX in benefit of the nonoperating. So that underlying growth is really very strong. We previewed the year-over-year comp in SG&A during the Q2 call, and expect that Q2 -- our Q4 performance to continue as the SG&A normalizes. But we also are seeing commodity costs growing low to mid-single digits, and overcoming that as well. Operator: The next question is from the line of Jason Haas with Wells Fargo. Jason Haas: I'm curious if you could talk about the Pest business, if you've seen any increasing costs for leads or any increased competition in that space recently? Christophe Beck: If I understood well your question, so on Pest, Jason, so the SG&A versus competition? Is that what you asked? Jason Haas: Sorry, just to be more clear, I'm asking if the customer acquisition costs have gone up at all, if you've seen any step-up in competition from one of the major players out there? Christophe Beck: Customer acquisition costs. Okay. I wanted to make sure I got it right, Jason. Actually, it's become easier because -- and we're early on that journey, as mentioned. So we got 1 major retailer in the U.S. We're getting the second as we speak. We wanted to do it large customer by large customer. It's not a geographic play. It's a customer play because, ultimately, one brand wants to be safe and not have any issue in social media or whatever, really to concentrate on guest satisfaction and quality of the experience and the food, obviously, here. But what we offer here with all the digital technology, all the AI that we've developed within the company for many years now, well, is serving the needs of our Pest Intelligence business. No one else can provide as much technology as we can and have such a backbone like ECOLAB3D as well at the same time. So it's a leading offering. It's ahead of the competition. Customers are very open to it. And what I really like as well with it is that the whole industry, even if not moving all at the same pace, is trying to add value to customers and get paid for it as well at the same time. So very healthy competition. And it's a good thing for customers and for the guests, called the ultimate consumers of the thing, whatever those locations are, ultimately. And in terms of operating costs, well, when 95% a few time was spent in the past checking devices that were empty and you spend 5% of your time doing it tomorrow within your system, your operating costs are getting better and you can spend much more time acquiring new customers and serving them even better, which is why our margins is improving as well at the same time. We love that business. It's going to keep -- it's on a strong base of performance right now. It's going to keep improving as we move forward. And margin is going to improve as well. But I want to make sure that we keep investing as well in there because until we are 100% with the Pest Intelligence model around the world, well, we will not slow down our investments that has real impact on the operating margin, but it's still improving, as you could see since we're north of 20% now. Operator: Our next question is from the line of Josh Spector with UBS. Joshua Spector: I wanted to ask from a general context. You talked about '26 confident in the low to mid-teens EPS growth. I think around this time a year ago, you made comments around you don't really need strong volumes to get there. You're really confident in the price/cost equation. I guess when you sit here today and look out a year, do you feel the same way that you can kind of get there with 0% to 1% volumes and, if you start to see an acceleration, that's upside? Or would you frame it differently? Christophe Beck: I see exactly the same way the way that you described it. With the only caveat, we don't know how the environment is going to be in '26. We had some very firm plans for '25 with very strong FX headwinds and delivered product cost that would be really helping. Well, it was exactly the other way around that it happened in 2025. And still we delivered what we had promised in terms of top line, but most importantly, in terms of bottom line. So when I think about '26, for me, it's going to be a strong year, very similar to '25 with 3% to 4% top line, positive volume, 2% to 3% price, to drive this 12% to 15% EPS, and at least 100 basis points in terms of operating income margins, to get to 19% plus, which is bringing us closer to the 20% that we committed to for '27. FX are going to be a help. Inflation might be a little bit of a headwind in '26, and everything else that we don't know. But I feel really good on that trajectory. And to your point, if things improve, if our end markets are even more open to what we do, well, that's going to be upside. That's why I feel really good with where we're heading in 2026 one more time, like it's been in the past few years. Operator: Our final question is from the line of Kevin McCarthy with Vertical Research Partners. Matthew Hettwer: This is Matt Hettwer on for Kevin McCarthy. Thanks for all the color on data centers that you gave earlier. Just following up on that conversation, I wanted to get your thoughts on how Ecolab is positioned with regards to next-generation cooling technologies such as direct-to-chip cooling. Do you have everything you need to compete and win there? Or should we expect additional bolt-on deals in that arena? Christophe Beck: Love that question, Matt. No one has everything they need for direct-to-chip cooling. This is leading-edge, obviously, technology. It's 5% of the data centers; those are the newest. But interestingly enough, when you say direct-to-chip cooling, liquid cooling, this is fluid management. This is exactly what we've done for a very long time, so managing fluids in a bunch of different industries, obviously. So in a way, it's coming closer to our own mastery of science and technology. So when I think direct-to-chip cooling, well, we've talked about our cooling distribution units that we call coolant intelligence unit, because they integrate 3D TRASAR technology that we've been obviously developing for many, many years. So we have that technology in the middle of a data center integrating 3D TRASAR. We've developed as well connected coolant, so the liquid itself, so to make sure that you have the best thermal performance to cool the chips as well. We have coolant monitoring systems as well to make sure that you don't have leaks, you don't have fouling, you don't have anything bad that's happening as well, to maximize as well the performance of the data center. And you have everything else obviously that's going up the chain, in chillers and towers, on the roof. The latest data centers that we're serving have no cooling towers on the roof and have no water in there as well. So we have many pieces that we need and we're developing and exploring the new pieces that we will need as well in the future. And that's why I think we're just at the beginning of that journey, but that's a field that's exactly what Ecolab should be focused on. We should become the owner of cooling technology for data centers in the world. And that's refocusing all our efforts, all our resources and all our investments as well in Global High-Tech. And on top of it, we do similar, obviously, with microelectronics, different technology. As mentioned before, it's reuse and recycle of ultrapure water, and that's where Ovivo is playing exactly, in that field. So it's really serving our dual strategy in high tech, to be the owner of circular water -- ultrapure water standards in microelectronics, and cooling technologies in data centers. And that's why I'm so bullish about what we've done, where we are today, but most importantly, where we're going. And that's why I'm saying, it's going to change over time the growth profile of this company because it's a huge growth wave and we're very well positioned on that wave. So we like where we are. The competitive set is strong out there, but no one understands cooling and water better than we do. So I would clearly bet on the Ecolab team. Operator: Thank you. At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to management for closing comments. Andy Hedberg: Thank you. That wraps up our third quarter conference call. This conference call and the associated discussion slides will be available for replay on our website. Thank you for your time and participation. I hope everyone has a great rest of your day. Operator: Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Have a wonderful day.
Operator: Ladies and gentlemen, and welcome to UCT Q3 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that this call is being recorded on Tuesday, October 28, 2025. I will now turn the call over to our first speaker today, Rhonda Bennetto, Investor Relations. Please go ahead. Rhonda Bennetto: Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Clarence Granger, Chairman; James Xiao, CEO; Sheri Savage, CFO; and Cheryl Knepfler, VP Marketing. Clarence will begin with some prepared remarks about the quarter, and James will share his thoughts on the industry and the opportunities ahead for UCT. Sheri will follow with a financial review, and then we'll open up the call for questions. Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the Risk Factors section in our SEC filings. All forward-looking statements are based on estimates, projections and assumptions as of today, and we assume no obligation to update them after this call. Discussion of our financial results will be presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website. And with that, I would like to turn the call over to Clarence. Clarence? Clarence Granger: Thank you, Rhonda, and good afternoon, everyone. We appreciate you joining our third quarter 2025 conference call. I'll start with a brief review of our Q3 results, followed by an update on our 3 areas of focus, including new product introduction, flattening the organization and business structure and processes. After that, I'll turn the call over to James Xiao, UCT's new CEO, for a few observations from his first 60 days and insight into UCT's next phase of growth. And then Sheri will provide a more detailed financial review. First of all, we are very pleased with our third quarter results, which reflect continued progress on the priorities we've set for the year. This quarter, we realized a notable improvement in our gross margin, demonstrating some early benefits of the structural and operational improvements we've been implementing across UCT as well as some tariff-related cost recovery. These results speak to the resilience of our business model, the discipline of our global teams and our continued focus on execution in a complex and uncertain business environment. Throughout the quarter, we remain focused on strengthening our operational foundation through the 3 key initiatives I highlighted last quarter. First, we continue to drive new product introductions and component qualifications with our customers, ensuring we are positioned early in their technology development cycle. Second, we substantially completed the work to flatten our organizational structure. A key milestone that's improving our decision-making speed, increasing efficiency and better connecting our global teams. Part of this process includes driving factory-level efficiencies and consolidating select sites to further enhance productivity and optimize our cost structure. A third major area of focus, streamlining our business systems and the optimization of our prior acquisitions, including Fluid Solutions, Services and HIS into UCT's core systems and processes is on track. We installed our company-wide SAP business system into our Fluid Solutions Group at the beginning of July, and we have completed the strategic alignment between our Products Group and Fluid Solutions on qualification priorities with our customers. This alignment strengthens our position for new business opportunities and will support improved margins over time. These combined efforts represent a comprehensive transformation that positions UCT for greater agility, efficiency and long-term profitability. While it will take time for all the benefits to be fully realized, these actions are foundational to building a stronger and more competitive company for the years ahead. We all recognize that the current macro landscape remains dynamic with near-term volatility and reduced visibility. Yet the underlying fundamentals of our industry remain exceptionally strong. AI-enabled high-performance computing continues to drive a powerful new wave of semiconductor innovation, fueling demand for advanced manufacturing technologies, new architectures and next-generation processes. These structural growth drivers play directly into UCT's strength, our deep technical expertise, our manufacturing expertise and the ability to respond with speed and precision as our customers' needs evolve. With that, I'll turn the call over to James to share more about our operational progress, customer engagement and the opportunities we see ahead. James? James Xiao: Thank you, Clarence. My first [ 60 ] days as CEO has been inspiring. The talent and their drive across UCT give me full confidence in our ability to take the company to the next level. Our industry is entering a new era fueled by AI and rapid technology change. That is what I call UCT 3.0, evolving from a trusted partner into a trusted strategic partner and co-innovator deeply integrated into our customers' technology road maps. By harnessing our operation agility and innovation velocity, we will unlock new levels of growth with our world-class facilities while supporting our global customers with speed, scale, automated infrastructure and innovation. To build a little more on what Clarence already highlighted, my immediate focus remains on strengthening the profitability, optimizing our global footprint and positioning UCT for long-term growth. Operationally, we are driving measurable improvement in quality, cost efficiency and on-time delivery performance. Through lean and quality initiatives, we are streamlining our process across sites and sharing best practices, including broadening our vertical integration and optimizing the organization and our accountability. Automation and digitalization, including the integration of AI-based inspection and robotics are also accelerating factory throughput and quality consistency. With that, UCT will have more robust infrastructure and processes to better capture emerging growth opportunities during the next ramp. Our optimized footprint strategy ensures the capacity is aligned with regional wafer fab equipment demand growth. We are establishing a cluster-based manufacturing network to improve global innovation, speed and cost efficiency through regionalized centers of excellence with new product engineering and mass production transfer. To build long-term value creation, we will accelerate the design to production cycle, capitalize on high-value new product introduction at a leading-edge node and further strengthening our strategic partnerships with semi-cap customers through technology integration and execution discipline. We are aligned with our peers, customers and industry sentiment that the long-term outlook for the semiconductor market is very much intact. We see powerful sustained demand driven by AI, high-performance computing, data center expansion and advanced packaging technologies. We view these structural technology inflections as the foundation for a decade of growth across the semiconductor ecosystem. In the short term, while downstream fundamentals and sentiments are improving, it could take several quarters to see a meaningful acceleration in wafer fab equipment spending. This does not change the fact that I'm very excited about UCT's future and the opportunity to lead this company into the next AI era of semiconductor advancement. Back over to you, Clarence. Thank you. Clarence Granger: Thanks, James. I know that with your leadership, UCT will be in good hands. Since this is my last conference call, I wanted to thank all our investors, our customers and especially our employees for the trust they placed in me during this transition period. It was my honor to step in and reconnect with everyone, and I am very confident that James will take us to the next level. With that, I'll turn the call over to Sheri for a review of our financial performance. Sheri? Sheri Brumm: Thanks, Clarence and James, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As Clarence and James noted, our third quarter results highlight meaningful progress on our key initiatives for the year. These achievements demonstrate the effectiveness of our strategy and the resilience of our organization as we continue to position UCT for long-term profitable growth. For the third quarter, total revenue came in at $510 million compared to $518.8 million in the prior quarter. Revenue from products was $445 million compared to $454.9 million last quarter. Services revenue came in at $65 million in Q3 compared to $63.9 million in Q2. Total gross margin for the third quarter was 17% compared to 16.3% last quarter. Products gross margin was 15.1% compared to 14.4% in Q2 and services was 30% compared to 29.9% last quarter. Gross margin gains were supported by improved site utilization, a higher value product mix, cost and efficiency initiatives and tariff recoveries. Margins continue to be influenced by fluctuations in volume, mix, manufacturing region and related tariffs as well as material and transportation costs, so there will be variances quarter-to-quarter. Operating expense for the quarter was $57.7 million compared with $56.1 million in Q2. As a percentage of revenue, operating expenses were 11.3% versus 10.8% last quarter. As mentioned in the previous call, this increase in OpEx was mainly due to incremental SAP go-live costs. Total operating margin for the quarter came in at 5.7% compared to 5.5% last quarter. Margin from our Products division was 4.9% compared to 4.8% and services margin was 11.1% compared to 10.5% in the prior quarter. Our third quarter tax rate came in at 22.7% as we have revised our full year estimated tax rate to approximately 21%. Our mix of earnings between higher and lower tax jurisdictions can cause our rate to fluctuate throughout the year. For 2025, we continue to expect the tax rate to be in the low to mid-20s. Based on 45.6 million shares outstanding, earnings per share for the quarter were $0.28 on net income of $12.9 million compared to $0.27 on net income of $12.1 million in the prior quarter. Turning to the balance sheet. Our cash and cash equivalents were $314.1 million compared to $327.4 million at the end of last quarter. Cash flow from operations was breakeven compared to $29.2 million last quarter, mainly due to timing of cash collections and payments. Reducing our overall interest expense remains a key priority. During the quarter, we took advantage of favorable conditions in the credit markets to reprice our Term B loan, lowering our interest rate margin by 50 basis points. This proactive step further optimizes our capital structure and reduces our long-term borrowing costs. Another development includes the renewal of our share repurchase program for an additional 3-year term, authorizing up to $150 million of repurchases with a maximum of $50 million per year. Although we are not anticipating near-term repurchases, we view this program as a valuable component of our disciplined capital allocation framework. The tariff environment for the semiconductor market remains dynamic, and we continue to see the effects across the supply chain. During the third quarter, we achieved some tariff recovery, and we will continue to closely monitor developments, leverage our global footprint and localized supply chain to help mitigate the impact, maximize efficiency and protect our profitability. As stated earlier, this quarter was very favorable for product mix and factory utilization. We see Q4 returning to similar levels as the first half of the year. As a result, we project total revenue for the fourth quarter of 2025 to be between $480 million and $530 million. We expect EPS in the range of $0.11 to $0.31. And with that, I'd like to turn the call over to the operator for questions. Operator: [Operator Instructions] Your first question comes from Charles Shi of Needham & Company. Yu Shi: Maybe the first question on the near-term industry demand outlook. It sounds -- it looks like you guys are seeing maybe we won't really see a pickup over the next several quarters before an actual pickup start to happen. And I wonder what your view right now on first half next year? Should we still kind of assume that the $500 million per quarter level? And what's the early view on the second half next year? That's the first question. James Xiao: Yes. Okay. So Charles, thanks for the question. And I look forward to work with you and your firm as a long-term partner. I think that our view on this, as you already heard from some of our customers, right? They really see a kind of mid- to high range of year-over-year growth in next year's WFE in general. I think that some customers see that a little bit of a flattish outlook in first half, and they see a kind of step function increase in the second half. Others see differently. So I think that I really do not want to give you a specific because the controversial outlook we have from different customers. So I would say that we will see a mid- to high range and year-over-year growth and the timing of that to be seen. Charles, you want [indiscernible]. Rhonda Bennetto: Go ahead, Charles. Yu Shi: Yes. Maybe a second question on Q4. It looks like you're guiding Q4 slightly below the September level. I believe one quarter ago, you were expecting some pickup tied to some of the opportunities you saw in Europe. And I wonder why the guide is a little bit lighter than the expectation a quarter ago. Was that the timing of that program in Europe or something else has probably weakened a little bit? Sheri Brumm: Charles, this is Sheri. Yes, we did -- we have seen that demand and continuing to see that, but we are seeing some different forecast from other customers. So it's just causing a little bit difference in Q4 than what we initially said last quarter. But we are seeing strength in that specific revenue that we talked about in Q3. As you know, we have a large bell curve of margins that we produce for our customers. And in Q3, just happened to be a little bit better mix than what we've seen previously. And Q4 is kind of going back to the mix that we've seen in the first half of '25. But that's generally why our Q4 is slightly down from the Q3 time frame. Clarence Granger: But Charles, this is Clarence. So as we said, we were going to capture some new business in Europe in Q4. We did capture that business. It's just, as Sheri said, some other businesses slowing down and offsetting that. But overall, we are very confident in our position in capturing new business, and we feel we're well on our way to have a much stronger year in 2026, albeit maybe in the second half. Yu Shi: Got it. If I may, I have one last question. what's the -- is there anything changed -- anything that's different in terms of your view about your China for China business? We knew that at the beginning of the year, there was some technical challenges that your Chinese OEM customers saw and that kind of led to quite a bit of a decline in that part of the business. Is that on track to recover? And is it on track into the, let's say, into the fourth quarter, where do you see that China for China business in terms of maybe revenue run rate where it's going to be at? Clarence Granger: Charles, yes, we knew this question was coming from you. We were kind of flipping a coin to see who got to answer it. I got the short straw. So I guess it's my turn. So just to make sure we clarify on our China situation. Literally, a little less than 7% of our total revenue is to our Chinese customers. So it's not a huge portion of our revenue. But obviously, I understand why everybody is interested in China with all the talk going on. So -- but in terms of the revenue, our revenue this quarter and next quarter will be about the same percentage for China. So it's relatively flat right now. And frankly, because of all the political turmoil, we are migrating all of our non-Chinese customer manufacturing out of China. So as you know, we've called that China for China, but we're probably going to quit using that terminology. But essentially, all of the products manufactured in China as of the end of the fourth quarter will be manufactured in China and all of the products for our non-Chinese customers will be manufactured outside of China. So that's an important strategic direction for us, and we've accomplished what we said we would. So from a long time -- long-term perspective, we're very comfortable with our position in China. We think the Chinese market is going to be one of significant growth over the next few years, and we fully intend to participate in that market going forward, albeit on a slightly different footing where we have essentially 2 separate manufacturing organizations. Operator: Your next question comes from Krish Sankar of TD. Robert Mertens: This is Robert Mertens on the line on behalf of Krish. First, congrats, James, on the new role. We look forward to working closely with you in the future. Just my first question, could you walk us through some of the remaining synergies with these recent acquisitions you've done? I believe last quarter, maybe you had mentioned integrating the Fluid Solutions Group systems into existing products. Are those targets still on track? And then I have one follow-up. Clarence Granger: Sure. So yes. So obviously, we've talked about the acquisitions. We had Fluid Solutions, Services and HIS. And so the Fluid Solutions is the one where we've made the most significant progress right away. We have completed the inclusion or update to the SAP business system in our Fluid Solutions site. This will -- this will give us consistency between our traditional UCT manufacturing and our Fluid Solutions. We've also completed the strategic alignment between the Products group and the Fluid Solutions on qualification priorities with our customers. So we've made very good progress there. What that means, though, is the reason we need strategic alignment is the Fluid Solutions products will be utilized in the subsystems that our product systems that our products groups build. So we won't actually see -- as Fluid Solutions gets more and more qualified, we won't actually see an increase in revenue. What we'll see is an increase in margins because the Fluid Solutions products will be replacing other products that we've had to buy from other suppliers. And so that will result in improved margins for us. And so we're very pleased with the progress that we've made there. The other 2 sites are the services side, and we've made some good progress on the integration of the services side. We had previously had the business unit separated from the manufacturing arm of the services group, and we've now combined that to improve our overall efficiencies. That's been accomplished. And the HIS group, we are considering various options relative to locations and possible levels of increased utilization for new product introduction and possible site consolidation. So we have not finalized all the activities that we're doing in those major areas, but we do think that we've made significant progress, and we expect significantly more progress in 2026. Robert Mertens: Great. That's helpful. And then just for the tariff recovery benefit in the quarter, was that meaningful to the overall margin growth in the September quarter? And was this sort of a onetime benefit catch-up from suppliers? Or should we expect a bit of a tailwind in the December quarter as well? Sheri Brumm: Yes. Well -- this is Sheri, Robert. We will continue to collect surrounding our tariffs going forward. We did collect slightly more than what we anticipated in the original forecast. So that did help with our overall EPS. But we anticipate -- we have put a really good process in place and for go forward now, and that basically will assist us with that collection as we move forward. Clarence Granger: I guess the other point I'd like to make on that, we're now to the point where we're very -- first of all, this was not a onetime hit. This is ongoing. But we are very confident that we are now to the point where we are able to recover approximately maybe a little over 90% of the tariffs that we get charged. So this should be less of a factor to us on a go-forward basis. Operator: The next question comes from Christian Schwab of Craig-Hallum Capital. Christian Schwab: Congrats, James, on the new role. As far as WFE outlook for calendar 2026, I understand you're seeing conflicting data points and third-party research is kind of all over the place as well. But that being said, do you think the company is positioned to outgrow WFE growth in calendar '26 regardless of what that number is? Historically, kind of in an upturn, you've kind of done 10% or more growth on top of WFE. Is that what we should expect? Or would you expect the business to kind of follow whatever WFE looks like? James Xiao: Christian, this is James. Nice to meet you virtually. So I think that, as I mentioned, the 26% is really a kind of 5% to 8% of year-over-year growth, depending on which analyst you're looking at. And from the UCT perspective, it's hard for us really to give you a concrete forecast on how much is our year-over-year growth. For the following reasons because number one is that we still see some of the customers still have inventory. So the consumption of inventory actually kind of delay the revenue from UCT perspective, right? So we're not synchronized because of that, number one. Number two is also, if you look at the NPI cycle of our customers, it takes quite a long time for them to really ramp up their NPIs and really kind of qualify UCT, especially for the NPI products. So therefore, you probably see them to have this incremental revenue while the UCT revenue growth from the NPI product will be a few quarters behind. So therefore, we cannot fully capture the NPI growth. But -- and then the third is really the product mix. If you look at the leading-edge spending, right, you can see that the litho is more than 40% of the spending. UCT historically is really edge and that intensive. But with that said, we're working very closely with our third customer, which is a litho company and grow our revenue with them. So I think that longer term, you will see that we're more kind of matching the double-digit growth when we grow that litho business. And finally, I think that this also goes to the China factor, right? So I think the domestic OEMs in China depending on the analyst report, you kind of follow, there could be an increasing percentage of the worldwide WFE growth. And [indiscernible] not necessarily have the same market share as we have the rest of the world. With all that factors, I cannot give you the exact number, but we're pretty confident we will outgrow the WFE. Operator: Your last question comes from Edward Yang of Oppenheimer. Edward Yang: Welcome aboard, James. Can we just close the loop on your comments about reduced visibility? It just seems a bit discordant from the rest of the industry so far, where I think the tone seems to be a bit more positive. So what are you seeing specifically in your order book? Just want to better understand the offsets. Is it China? Is it memory? I saw that your memory revenue was down. Or is it specific customers that give you some caution? Cheryl Knepfler: Ed, this is Cheryl. I'll start sort of with the industry view and then let James talk a little bit more in terms of some of the products. So when we look at the industry, we do have a number of the companies and third parties who are indicating second half should be positive. There's a lot of things that are going in on that. But we also have some of our large growth customers who are indicating some level of concern, whether it translates to them saying their revenue is looking to be flat or others. So there are at least 2 of our customers who are looking at flat revenue, flat to up, others who are still forecasting significant gains opportunities, but all on the second half. So -- and we've had 2 or 3 or 4 years of saying second half growth. So I think we are just looking at remaining prudent in how we're looking at things since we are getting some level of conflicting information. However, I do think we have a lot of programs going on that James will reference that indicate that we do expect to see a level of growth through that, but we just want to remain cautious about how we're looking at it and how we structure things. James Xiao: Well said, Cheryl, I think that the only thing I want to add is that it's really the business nature. I leave in both words at semi-cap OEMs and now with a subsystem company like UCT. I see the visibility is a little bit different. The other side is about 6 to 9 months, if you will. Here, it's really a quarter plus, I'd say. So therefore, there is a visibility kind of difference. Therefore, I think we want to stay very, very precise on what we know and what we can really kind of share with you and the rest. Edward Yang: Okay. That's helpful. And James, I mean, you spoke a lot about efficiency and optimization, but I would love to get your thoughts also on your plans for restarting the growth engine at UCT. Where do you think the best opportunities are? Is it in leading edge, AI? Is it M&A, China? Would love to get your thoughts there. James Xiao: I think that those are all relevant. I would love to do all of them, but I think that we're also constrained by the resource, and I want the team really focused on the fundamental first, right? So as a subsystem partners to our OEM customers, we want to make sure we really deliver on time. We really have the least quality excursion. And also, we continue to drive the cost efficiency, right? So that's really my first priority. Then I think that the growth really -- it's always follow that Horizon 1, 2, 3 cadence. I always want to focus on Horizon 1, which is really expand the business with our partners in the OEM space. The top 3 customers is definitely our focus. And then we can look at the diversification in that space means that some of the other semi-cap OEMs. I really want to continue the vertical integration that Jim and Clarence already did in the past 5 years. And integration is part of that, that we can further expand the engineered product as long as it fit our core competency and also fit in the vertical integration strategy we have. And finally, as Horizon 2 or 3, we can look at all the areas you mentioned. So -- but I think that we'll have an upcoming investor conference, and we can share more of my growth strategy with you and the other folks. Operator: There are no further questions at this time. I will now turn the call over to James Xiao for the closing remarks. Please continue. James Xiao: Thank you for joining us for this earnings call. I look forward to further chat with you at the follow-up call. Rhonda Bennetto: Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, good morning. My name is Abby, and I would like to welcome everyone to the JetBlue Airways Third Quarter 2025 Earnings Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the call over to JetBlue's Director of Investor Relations, Koosh Patel. Please go ahead, sir. Koosh Patel: Thanks, Abby. Good morning, everyone, and thanks for joining us for our third quarter 2025 earnings call. This morning, we issued our earnings release and a presentation that we will reference during this call. All of those documents are available on our website at investor.jetblue.com and on the SEC's website at www.sec.gov. In New York to discuss our results are Joanna Geraghty, our Chief Executive Officer; Martin St. George, our President; and Ursula Hurley, our Chief Financial Officer. During today's call, we'll make forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding our fourth quarter and full year 2025 financial outlook and our future results of operations and financial position, including long-term financial targets, industry and market trends, expectations with respect to tailwinds and headwinds, our ability to achieve operational and financial targets, our business strategy and our plans for future operations and the associated impacts on our business. All such forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in these statements. Please refer to our most recent earnings release as well as our fiscal year 2024 10-K and other filings for a more detailed discussion of the risks and uncertainties that could cause the actual results to differ materially from those contained in our forward-looking statements. The statements made during this call are made only as of the date of the call, and other than as may be required by law, we undertake no obligation to update this information. Investors should not place undue reliance on these forward-looking statements. Also, during the course of our call, we may discuss certain non-GAAP financial measures. For an explanation of these non-GAAP measures and a reconciliation to the corresponding GAAP measures, please refer to our earnings release, a copy of which is available on our website at www.sec.gov. And now I'd like to turn the call over to Joanna Geraghty, JetBlue's CEO. Joanna Geraghty: Thank you, Koosh. Good morning, and thank you for joining JetBlue's Third Quarter 2025 Earnings Call. As Hurricane Melissa makes landfall today, I'd like to begin by extending my thoughts to our JetBlue crew members, their families and the communities that we serve in Jamaica. As the largest airline in Jamaica, we are focused on caring for our crew members and resuming operations when we can safely do so. Our crew members are at the heart of providing the reliable and caring service that makes the JetBlue experience so special and I'd like to thank them for their dedication throughout the challenging summer travel season. Thanks to your hard work, we are continuing to make meaningful progress on our JetForward plan while taking care of our customers and each other. Throughout the year, our team has worked with urgency to adapt to the evolving demand environment, adjusting supply, implementing new revenue initiatives and pursuing self-help measures to continue reducing costs. Our results this quarter are an outcome of these efforts. We ended the period at the better end of our guidance ranges across all metrics, including unit revenues and costs, realizing meaningful margin improvement compared to initial expectations. The whole industry took a step back this year. But despite these challenges, we are gaining momentum from JetForward and making progress on our plan, operating a stronger airline every day and delivering on or beating our commitments. Building on the progress since we've announced JetForward 5 quarters ago, our operational metrics and customer satisfaction scores continued to improve in the quarter. We improved completion factor and on-time performance versus last year with A14 up 2 points, successfully navigating a challenging July in which air traffic control programs impacted operations nearly every day. As a result, customers are more satisfied with their JetBlue experience as demonstrated by improvements in our Net Promoter Scores, both in the quarter and throughout the year, and I'm proud of the team for achieving double-digit NPS gains year-to-date. Even though our operation has consistently been challenged by external factors, our results demonstrate that the investments we've made in reliability are working. This fall, airfield construction at both Boston Logan and JFK is negatively impacting on-time performance, but we expect that to improve in November when this phase of construction wraps up. Regarding the government shutdown, we have not yet seen any material impact to demand or our operation. From TSA and air traffic control to Customs and Border Protection, it's truly a team effort. We are grateful for their dedication in keeping us safely moving, and we also thank Secretary Duffy for being a strong partner as we navigate this situation. By delivering a reliable operation and improving customer satisfaction as part of JetForward, we are building a greater customer loyalty and generating more repeat customers. Last quarter, for example, our TrueBlue attachment rate was up 7 percentage points year-over-year and our loyalty members are increasingly choosing JetBlue for multiple trips per year. At the same time, we continue to modernize our fleet to drive efficiencies across our operation and enhance the customer experience on board. During the third quarter, we retired our remaining Embraer E190 aircraft, marking nearly 2 decades of service. We want to thank Embraer and GE for their partnership over the years. This completes our transition to a more customer-friendly onboard product and cost-efficient all-Airbus fleet, allowing us to take full advantage of additional network opportunities from our East Coast focused cities. Along those lines, in support of building the best East Coast leisure network, we are taking deliberate steps to deepen our presence in Fort Lauderdale. This expansion, which mostly launches in the fourth quarter, enables us to further strengthen our position in this highly valuable focus city, adding more leisure destinations for our South Florida customers and increasing connectivity to the Caribbean and Latin America. JetBlue has deep roots in Fort Lauderdale. It's where our first revenue flight landed from New York, New York's JFK, on February 11, 2000. And now, 25 years later, the opportunity is ripe to reaffirm our leadership position there. With our far better customer experience and competitive low fares and now more destinations, we are pleased to bring even more value and choice to customers in Fort Lauderdale and across South Florida. Looking ahead to the fourth quarter, we remain optimistic that the environment will continue to improve. And as Marty will discuss further, we are pleased by the overall health of bookings. Demand for peak period travel remains strong, led by the resilience of the premium leisure segment, which aligns well with our new premier card, our plans to open our first lounge this quarter as well as domestic first class launching next year. We've built a strong foundation with JetForward and we are on track to generate a cumulative $290 million of incremental EBIT this year. Our efforts to boost reliability, recalibrate our network, enhance our products and services, supercharge our loyalty program and execute on costs have fueled transformational change, delivering double-digit NPS gains and industry-leading operational improvements. Blue Sky implementation is on track with last week's loyalty launch, marking the first major milestone of our collaboration, and domestic first class is scheduled to launch next year, both expected to be meaningful drivers of incremental earnings in 2026 and beyond. We are encouraged by the progress so far and we are confident we are on the right path to restore profitability, building a stronger JetBlue for our customers, crew members and our owners. Over to you, Marty. Martin St. George: Thank you, Joanna, and thank you to our crew members for a strong summer. We continue to make meaningful strides on JetForward to refresh our commercial strategy and drive incremental revenue by refining our network, expanding our reach through partnerships, increasing the value and utility of our loyalty program and enhancing our products and perks. Turning to Slide 6 in the presentation. As Joanna mentioned, we have reestablished our position as the largest carrier in Fort Lauderdale, a market where our differentiated product and robust network resonate well with customers. As previously announced, we plan to launch 17 new routes and increase frequency on 12 high-demand markets, with our schedule now representing a 35% year-over-year increase for the IATA winter season. Our schedule also features over 25 daily flights touching Fort Lauderdale with our award-winning Mint service, offering more transcontinental lie-flat seats from South Florida than any other carrier. To support continued growth in premium flying, we also announced our intent to establish a Mint base for in-flight crew members in Fort Lauderdale, alongside growing the size of our overall crew base, bringing more jobs to the region. These investments reaffirm our leadership in Fort Lauderdale and leverage our caring service, differentiated product, premium Mint experience and robust network. Turning to Slide 7. Implementation of Blue Sky, our collaboration with United Airlines, is progressing as planned and has already begun delivering value to our customers. Last week, we enabled point accrual and redemption across our loyalty ecosystems, enhancing the utility of each program. We are already seeing significant customer interest. And since announcing Blue Sky at the end of May, we've seen a sustained double-digit increase in average daily card acquisition growth across geographies, particularly in non-focus city markets. We expect to continue the momentum into the first quarter as we begin cross-selling each other's flights on all digital channels. This industry standard interline agreement is expected to expand distribution reach for both airlines and provide customers with more choices to travel across the globe on our complementary networks. Loyalty reciprocity and cross-selling are 2 of the largest drivers of value from Blue Sky, and we expect the successful implementation of both to generate significant earnings momentum for JetForward. Later, in 2026, we plan to launch reciprocal loyalty benefits and Paisly integration, driving high-margin growth and additional value for the partnership. As we improve our customers' network options, we are also enhancing the customer experience on board and at the airport. In September, we became the first airline to partner with Amazon's Project Kuiper to provide faster and more reliable connectivity to our onboard Wi-Fi, furthering our leadership in onboard connectivity. JetBlue launched Fly-Fi in 2013 to become the first and still only major U.S. airline to offer free high-speed Wi-Fi on every aircraft in its fleet. The rollout is expected to begin in 2027. We continue to build on our decade-long commitment to premium and are progressing our plans to further capitalize on the demonstrated industry shift to the segment. This month, we enhanced merchandising EvenMore, and now customers can book on a single transaction through the GDS and online travel agencies. Previously, purchasing the product required 2 separate transactions on our third-party channels, and the simplicity and increased visibility is expected to support buy-ups and higher yields. In addition to EvenMore, preferred seating continues to outperform expectations. Finally, we remain on track to launch domestic first class in 2026, with the first equipped aircraft expected to begin flying in the second half of the year. The domestic first fleet modification is planned to include our entire non-Mint fleet. By the end of '26, we anticipate having approximately 25% of the retrofit complete, with the vast majority of the fleet expected to be completed by the end of 2027, over which time we expect to see meaningful EBIT contribution. On the ground, we are on track to open our first airport lounge at JFK by the end of this year, while our Boston lounge is set to open in 2026. The lounges will offer complementary access to transatlantic Mint customers, premium credit card holders, where signups have already exceeded 2025 targets, and TrueBlue Mosaic members. Passes will also be available for purchase on days where space allows. Alongside our construction of the JFK lounge, we are in the middle of a total refresh of Terminal 5, which is set to bring more than 40 new concessions and a redesigned center concourse. Moving to third quarter results. Over the summer, the demand environment continued to show signs of recovery characterized by strong close-in bookings, healthy demand for peak travel and the sustained strength in premium. As a result, unit revenues ended the quarter down 2.7% year-over-year, just above the midpoint of our revised guidance range and more than a point better than our initial guidance midpoint. Premium continued to outperform core, and year-over-year, premium RASM growth was up 6 points relative to core. Our managed corporate yields also showed strength, with yields up high single digits. And while our domestic flying saw the most sequential RASM improvement quarter-over-quarter, its relative margin performance still lagged international. We continued our string of double-digit loyalty growth in the quarter with co-brand remuneration up 16% and TrueBlue revenue up 12%. The card and TrueBlue trends are evidence of our improved customer satisfaction scores, recalibrated network of product as well as the strong benefit we are already seeing from the Blue Sky collaboration announcement. For the fourth quarter, we expect unit revenues to be between flat and down 4% year-over-year on capacity of up to 3/4 of the midpoint. Third quarter demand trends are forecasted to largely continue into the fourth with continued robust demand for premium products. Peaks are expected to remain healthy, while troughs continue to see challenges, which we have and will continue to actively manage through capacity adjustments. We are seeing the booking curve normalize, and we expect the same trend to continue throughout the fourth quarter. We expect continued macro-related tailwinds going forward in addition to the ramp of our JetForward commercial initiatives. On the network side, our capacity investment in Fort Lauderdale will be in its early stages of ramp after launching in November, December. And coupled with the step-up in domestic competitor capacity are expected to be just over a point of headwind to RASM for the quarter. Lastly, it's too early to size the impact of Hurricane Melissa on our operations in Jamaica, so our guidance does not contemplate any impact. Jamaica represents about 2.6% of our capacity in the fourth quarter. As we look ahead, we know there's still more work to do, but JetForward is the right plan. The initiatives we outline today from our Fort Lauderdale growth to Blue Sky and enhancing our premium products will be key to getting us back to sustained profitability. I'll now turn it over to Ursula to provide more detail on our cost and financial performance. Ursula Hurley: Thank you, Marty. We ended the quarter with an operating margin 3 points better than what was implied by our July guidance ranges, supported by a more reliable operation, greater close-in demand for our products and our team effectively controlling costs. Despite a tough air traffic control and weather environment in July, completed capacity growth of 0.9% was above the midpoint of our revised guidance. This, coupled with strong execution, helped to deliver excellent cost performance for the quarter. We ended the quarter with CASM ex fuel up 3.7% year-over-year, beating the midpoint of our initial guidance by over 1 point, marking yet another quarter of cost execution. It is clear the investments we are making in our operation are increasing efficiencies across the business. Over the year, the team has demonstrated solid cost execution, and we are improving our full year CASM ex-fuel guidance from up 5% to 7% to up 5% to 6% year-over-year, lowering the midpoint by half a point despite less capacity than initially planned. For the fourth quarter, we expect CASM ex fuel growth of up 3% to 5%. For the third quarter, fuel price came in at $2.49 in the lower half of our revised guidance range. We expect fourth quarter fuel to be between $2.33 and $2.48. Our fuel guidance is based on the forward curve as of October 10. As we work through our budgeting process for 2026, we expect our unit cost next year to be low single digits, underpinned by low to mid-single-digit capacity growth. We plan to grow capacity through new aircraft deliveries as well as the return of a sizable number of parked aircraft to service. As we get back to growing once again, we're doing so with our balance sheet in mind by adding capacity despite reducing CapEx. We expect our capital expenditures to be at or below $1 billion next year and each year through the end of the decade, supporting our balance sheet and our return to positive free cash flow over time. We ended the quarter with a healthy liquidity level of $2.9 billion in cash and marketable investments, excluding our $600 million revolver, representing 32% of trailing 12 months revenue. At the end of 2025, we expect to carry liquidity in excess of our 20% liquidity target. Looking forward to 2026, we expect to raise a modest amount of capital to maintain our liquidity target, driven by the maturity of $325 million of our 2021 convertible notes and new aircraft deliveries. I believe our healthy unencumbered asset base of over $5 billion will provide us flexibility to meet our funding needs. Finally, JetForward remains on track to hit its target of $290 million of incremental EBIT by year-end, and I am confident we are also on the path to meet our $850 million to $950 million 2027 commitment. The exciting commercial initiatives Marty detailed, including Blue Sky, domestic first and lounges are expected to drive significant earnings momentum for JetForward in 2026 and into 2027. And alongside these efforts, we plan to remain focused on cost discipline and managing our fleet to preserve liquidity and drive capital-light growth. Taken together, we are confident we have the right initiatives in place to drive meaningful profitability improvement in 2026. And while we are still in the early innings of our budget process, it is our intention to build a plan that gets us to breakeven or better operating margin for 2026. We look forward to sharing more details during our January call. We will now open it up to your questions. Back over to you, Abby. Operator: [Operator Instructions] And our first question comes from the line of Dan McKenzie with Seaport Global. Daniel McKenzie: Thanks for the preliminary outlook for 2026. But backing up, JetForward didn't factor in the Chapter 11 filing of one of your toughest competitors. And so I'm wondering if you can talk about what that means to the Fort Lauderdale operation and what that means to revenue upside to the JetForward plan? Martin St. George: Dan, it's Marty. Well, I'm not going to go into detail about our competitor's action, but most important thing is our reaction. And frankly, we have been hamstrung in Fort Lauderdale because of our lack of access to international gates in the middle of the day. And it's a relatively constrained customs facility at the airport and we have multiple carriers haul trying to fly at the same time. What's worked out very well for us is that as our competitor has done some pretty significant pull-downs in Fort Lauderdale, we have seen a lot of opportunity to move flights into that custom facility at a time when it's actually good for our local customers and also very good for generating connections to markets to the north. So if you look at the growth that we have put into Fort Lauderdale, it is notwithstanding our reputation as being a Northeast airline, the growth is very much focused to markets in the Southeast and south of Fort Lauderdale. I'm actually very optimistic about the opportunity this creates. I mean I use the word generational about this. I mean our ability to get such significant growth for international services in such an important market for us is something we're absolutely going to take advantage of at the time. As I mentioned in the script, in the very short term, it's going to create a bit of a headwind in the fourth quarter, but we perform very well in Fort Lauderdale today as is shown by the fact that we have such a big Mint operation there. We compete very well against our competitor, which is probably one of the reasons why they are going through the restructuring they're going through. And we are very bullish on Fort Lauderdale. So thanks for the question. And I think it's actually one of the good parts of the story. With respect to the impact of JetForward, there are an awful lot of puts and takes in there. There was a big chunk of network rebuild in there. We have made the commitment to investors that we'll update every 6 months on JetForward. And I don't want to give an update now, but that's something we'll probably talk about at the end of the year. Daniel McKenzie: Yes. Very good. And then if I can just kind of go back to the end of the year and kind of how we're closing out the year. It looks like the government shutdown probably cost JetBlue maybe $500 million in lost revenue. And please correct me on that. But is it right to think that this is lost revenue that comes back in 2026? And then on top of this, all of the JetForward initiatives that you've outlined? And I'm really just going back to -- well, the first quote in the release from Joanna just about the momentum into 2026, if you can just help flesh that part out a little bit more. Joanna Geraghty: Yes. I think first I just want to emphasize, we hit every guidance metric since April and improved 3Q margins versus internal expectations. And that was against an industry-wide setback due to volatility involving customer confidence in the airline space. And so really proud of the work the team has done to make up for some of that lost ground. JetForward, it's a multiyear plan. We remain on track to hit the $290 million of EBIT this year. We launched it 5 quarters ago. We are making excellent progress. I think when you read through the numbers, what you see is a 4-point impact to full year operating margin relative to our initial full year guidance. And our analysis shows that is squarely tied to our premium mix versus other carriers' premium mix. We've done an analysis that shows those who have more premium exposure have actually been less impacted. And when you look at JetForward, it is all about leaning into premium, and we are well on the way, whether it's the Premier Card this year, whether it's the lounges opening up, whether it's preferred seating. You pivot to next year and you look at more lounges. You've got our launch of the domestic first class. So we are squarely in the middle of execution and ramp, and I could not be more excited about the trajectory as we move into 2026. Our NPS score -- you can't have a premium customer if you don't have strong NPS scores. We're back at the top of the industry. So as we look forward to 2026, we do need to continue to see an improving macro environment, but that, coupled with JetForward and the momentum we have, that gives me a lot of confidence that we're going to build a plan, breakeven or better, get us back on track and regain that which we lost this year. Operator: And our next question comes from the line of Savi Syth with Raymond James. Savanthi Syth: I wonder if I could ask Dan's question in a slightly different manner. Just I was wondering if you could kind of give us an understanding of like the incremental contribution in '26, '27 from JetForward. And then what type of headwinds -- you talked about some of the tailwinds like macro that will kind of come on top of that. Just trying to understand like how to think about an EBIT bridge as you kind of look out to kind of '27 and kind of get to solidly profitable footing there? Ursula Hurley: Yes. So we've always said that in terms of the JetForward breakout at $850 million to $950 million, it's really coming through 1/3, 1/3, 1/3 pretty equally. And that just happens to be -- I mean, there's 200-plus initiatives, but the way that they level up, it's 1/3 per year. As Joanna mentioned and what I said in my prepared remarks is next year we have a goal of building a 2026 plan with op margin breakeven or better. So we are going to make up some ground that clearly we lost this year given the macro step back. The puts and takes, I'm pleased with the progress that we're making in general across all JetForward initiatives. Obviously, the premium initiatives are performing well year-to-date. But we're also -- we have a lot more to come between lounges, the premium credit card and also domestic first next year. And I would say I'm also really excited about domestic first. I think this is going to allow us to better compete compared to where we are today. I would say at a macro level, we need the macro backdrop to continue to improve. So we do have that assumption baked into our 2026 guide. But all in all, we feel like we have a lot of good momentum and JetForward is tracking exactly where we thought it was and we look forward on delivering further details on our 2026 plan next year. Savanthi Syth: That's helpful. And may I just –- another question for you is just kind of how are you thinking about liquidity and leverage and kind of what type of financing needs you kind of anticipate over the next 12 to 18 months? Ursula Hurley: Yes. Listen, we did the strategic capital raise back in August of 2024. So that's really provided a strong liquidity runway for us through the end of 2025. We're projected to end the year above our 20% liquidity target. We are going to need a modest amount of capital next year just to support the new aircraft deliveries that we have coming as well as we do have a convertible debt maturity of $325 million in the April time frame. By no means will the capital raise be anywhere near the size that we did in August of 2024. In terms of what assets will we use, I mean, we're in a pretty powerful position in terms of having over $5 billion of unencumbered assets, about 40% of that $5 billion is aircraft and engines, and then the remainder includes our slots, gates and routes as well as our brand. I would say we'll look at all markets. I mean we're clearly focused on the level of interest expense and obviously the debt level that we have currently on the balance sheet. So we're going to try to be super thoughtful and strategic just given market availability with all the different types of unencumbered assets that we have. Operator: And our next question comes from the line of Michael Linenberg with Deutsche Bank. Shannon Doherty: This is Shannon Doherty on for Mike. Just for start, I apologize if I missed this, but can you quantify any impact that you're seeing today from the government shutdown since we're about a month in? I wouldn't typically think of JetBlue as having much government exposure, but since you called it out in the release, it's probably worth asking. Joanna Geraghty: Sorry, I missed a little bit at the tail end of your question, but we haven't seen any meaningful impact with regard to the government shutdown. We obviously are monitoring it closely. And the longer it goes on, obviously, for the industry, I'd say there's more acute concerns. But we have not seen anything and are just really appreciative of all of the government workers showing up, doing their job and keeping the national airspace and our industry running safely. Shannon Doherty: That's great. And maybe one for Marty. With domestic seemingly improving, do you expect domestic RASM to outperform international this quarter? Maybe you can just give us an update on demand by region? Martin St. George: So we don't do a lot of color as far as demand by region. And what we said in general is that international is better than domestic and premium is better than the back of the airplane. And that continues to stand. I'd say if you look at our overall RASM performance and recognize that -- I mean, this is a math issue of weighted average. If international is better and domestic is worse, domestic has some ways to go. I would say, in general, the thing that gets me most excited about improving our domestic RASM is the continued introduction of premium products. As we do a competitive look at our RASM, sort of coach-to-coach, we actually do fine on RASM. The challenge is that we're missing that whole front of the airplane, which is a pretty good revenue kick to our competitors. So we do extremely well against the ULCCs of the world who have premium products that are not really premium, but we see a lot of upside for the premium products that we're adding as far as getting us up to where the legacies are -- close to where the legacies are. So it's not something I'm predicting in the fourth quarter. And again, when we go to '26, we can probably talk in more detail about that. Operator: And our next question comes from the line of Jamie Baker with JPMorgan. Jamie Baker: So Ursula, building on Savi's question earlier, modest cash raises next year. Can you -- where do you think the incremental cost of debt is today? And if we do accept that aircraft debt is typically the lowest, are you leaning more towards sale leasebacks or just borrowing against aircraft? Ursula Hurley: Yes. Listen, I think the benefit of the assets that we have unencumbered is that we can look at all markets and hone in on what is, quite frankly, most cost effective. I think the other priority we look at is building in prepayment flexibility. I mean our #1 priority is getting the business back to consistent operating margin positive. Then it's delivering free cash flow so that we can start to delever. Clearly, the most cost-effective money you can raise right now is with aircraft. So given we are focused on the level of interest expense, that could be a likely path. So how we do the aircraft, it will be what's the most attractive market. Is it bilateral bank loans? Is it capital markets? Is it sale leaseback? We'll look at everything. Jamie Baker: Okay. Fair enough. And following up on that, if memory serves, it was this call last year that I remember first hearing you reference approaching breakeven from a forward year operating margin basis. And look, 2025 kind of went off the rails. I'm not going to hold that against you. But here we are a year later and you're reintroducing that narrative. So I guess the question is for you or -- Marty's color would be appreciated as well. But compared to how you were thinking this time last year, do you think that industry fundamentals are more or less aligned with getting JetBlue back on track? After all, given what you shared on capacity and cost for next year, it's a really high RASM hurdle to get you to breakeven or better. Joanna Geraghty: Jamie, let me take that. So we think industry fundamentals are more aligned with where we're headed. And I fully recognize that it feels a little bit like Groundhog Day and that we were sitting in this room last year around this time with the same commitment. Thanks for recognizing the industry took a step back, and we're all now trying to recover out of that. But leaning into the premium customer is absolutely the right strategy. We've been doing this for 10 years with Mint. We see it in our Mint performance. And we're a year later and we've actually launched a number of initiatives already that support that. And so the progress we made since last year is actually execution on JetForward and continuing to make sure we remain laser-focused on delivering the initiatives we laid out so that as the economy recovers we can take full advantage of those in a later stage of ramp, whether it's the preferred seating, whether it's the even more space changes, launching the JFK lounge this December. We've got Boston next year. We're that much closer to launching the domestic first class. And then as I mentioned in the first question, our analysis this year showed that carriers who have greater exposure to premium had less of a margin impact from the step back. And so that reconfirms that JetForward is the right path. And we're excited about getting closer to profitability and continuing this momentum. And so that's -- from my perspective, the industry fundamentals actually support where we're going and excited to see that come to fruition this year. Operator: And our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just on the GTF impacts, do you have any update on the grounded aircraft and the forecast for next year embedded in your preliminary '26 comments? And can you remind us, is there any compensation that's actually baked into the results this year? Ursula Hurley: Sure. So the GTF challenges has improved. So if you recall, back in January, we thought we would have mid to high teens number of aircraft on the ground. The average for 2025 is going to be 9. We currently have 6 on the ground today. 2025 is the peak in terms of AOG. So that number will come down next year. So the projected AOG that we'll have on the ground in 2026 is low- to mid-single digits. So this is going to position us to actually be able to grow again, which we mentioned in our prepared remarks. In regards to our 2025 full year controllable cost guidance, it does not assume any Pratt & Whitney compensation. We continue to be in constructive conversations with Pratt. And just given the magnitude of impact it's had on our business, we will settle when we get to the right place. I would say the other last comment from me is this is putting us in a position where we're growing in a capital-light way. So obviously, we've previously paid for these aircraft with the GTF engines, and having them return to service is great. This is definitely a tailwind for us and we're happy with where we're at in terms of getting these aircraft back up in the air. Duane Pfennigwerth: And then maybe just for the follow-up, can you remind us for your domestic business class or first class -- or I forget what you're calling it. Can you just remind us of the implementation timing of that? Like where will you be from a kind of year-end '26 and when you expect to complete that? Ursula Hurley: Sure. So just to give you some context. So we are outfitting all of the non-Mint aircraft that we have. So it's about 250 airplanes. Marty mentioned in his prepared remarks that by the end of 2026, we'll have about 25% of the fleet complete. And then by the end of 2027, we'll have the overwhelming majority complete. So very much looking forward to rolling out the first aircraft in the back half of next year. Operator: And our next question comes from the line of Atul Maheswari with UBS. Atul Maheswari: We are getting pushback that profit decline ex JetForward is accelerating just based on the fourth quarter guidance. So why do you think that is the case? And what needs to happen for the portion of profits not touched by JetForward to start improving again such that JetForward can truly be all incremental? Ursula Hurley: Yes. Listen, as we look at the fourth quarter, we do see an improvement in fuel year-over-year. But you have to remember, we're still operating from a much lower base in terms of the overarching demand environment. While it's improving, and we've seen that along with the rest of the industry, we're still operating way below where we had anticipated this year. We are showing RASM progression from Q3 to Q4. Our JetForward initiatives continue to ramp up. And you've heard us in our prepared remarks as well as in the Q&A highlight all of these premium initiatives that are coming to market. So we are seeing progress. I will remind you yet again, like if it were not for the macro setback earlier this year, which was 4-point impact to JetBlue, we would have hit our full year breakeven or better operating margin. So we believe we're on track and we've got solid momentum as we head into 2026. Joanna Geraghty: Atul, if I can also mention, we've announced very close-in capacity and launch for Fort Lauderdale in Q4. So that's pressuring RASM a bit. Hence, the 1-point step forward in RASM. But that's a really great opportunity for JetBlue and absolutely the right long-term decision for this company because of the opportunity to really reclaim Fort Lauderdale as the third leg of our stool. Atul Maheswari: Right. That makes sense. And just as my quick follow-up on the fourth quarter guidance, can you share some color on booked yields quarter-to-date or some color on what portion of fourth quarter is booked and what's your yield assumption for the portion that is unbooked? Martin St. George: So as far as booking levels, we're about 90% booked for our forecast in October, 55-ish or so for November and I think 35%, 38%, something like that for December. So very, very focused around peaks for November, December. We don't really guide specifically the difference between yield and load factor, but I think the guidance we laid out is based on what we're seeing right now. I think that to give you some more color, if you look at the demand environment as it exists right now, the booking curve is not fully back to sort of 2024 distribution as far as advanced purchase dates, but it's very, very close. And the trend of peak versus trough has really continued. We have very good strength in the peaks and still challenges in the trough. So to me, that is the last piece of the puzzle. That I think when that comes back, we'll be in a much better spot to recover sort of the 2024 demand levels. But again, the line we use is people are still taking that one vacation at Thanksgiving and Christmas. They're not all taking the second vacation. They may take. And I think that's sort of what we're seeing in general. Atul Maheswari: Good luck for the rest of the fourth quarter. Operator: And our next question comes from the line of Catherine O'Brien with Goldman Sachs. Catherine O'Brien: So I realize it's still early, but can you speak to how the impact of Fort Lauderdale adds is shaping up for 1Q? Guessing since you add that capacity so close into year-end should be less of a drag in the first quarter. And then maybe a bigger picture, a bit of a follow-up to Savi's question earlier. Could you just walk us through high level what the biggest tailwind from JetForward to be in '26? Blue Sky kicks in a more meaningful way, domestic first on 25% of the fleet by year-end. Just trying to get a sense of what the unique JetBlue revenue tailwinds are into next year, like as you see them in the biggest buckets. Martin St. George: Okay. First of all, with respect to the Fort Lauderdale, if you look at a lot of the capacity we added, it is going to be good first quarter capacity. I mean a lot of beach destinations. I think seasonality is our friend. Again, we'd like to have the full 300 days booking window, but we're going to be more at that point more like 130, 140 booking day window for that period. So I don't think the sort of headwind will be gone, but I think we're -- certainly seasonality is our friend at this point. I will also say that the -- again, with the ability to add more international arrivals in the peak in Fort Lauderdale, we are going to have a lot of opportunities for customers to connect from the north into the Caribbean and Latin America. And actually, we're really excited about that because I think -- again, we're a low-cost airline, we don't really build hubs, true hub-and-spoke networks, but we certainly carry internal connections. And I think based on the sort of the local timing of when flights are good for Fort Lauderdale and then when they've been good for the beach markets, we're actually getting a lot of good connectivity opportunities. So we're actually very bullish about this. I know historically we talked about a 3-year ramp. We are not in any way forecasting anything close to a 3-year ramp. Joanna Geraghty: And maybe I'll take the second part of your question, Catie. So there are several key and big initiatives ramping into next year. I'd say Blue Sky is probably one of the biggest, all the significant drivers. So we just announced, obviously, earn and burn, so reciprocity loyalty for JetBlue and United last week. We've got Interline sales launching next year, Paisly launching next year and then recognition of loyalty launching next year. So that's -- all of those will be delivered -- implemented and delivering value in 2026. The network continues to ramp. I mean we've moved 20% of the network around. Most of those changes went in about a year ago. And so given the ramp time frame, those will continue to ramp into 2026. We're returning to growth next year. So that's going to be, I think, a nice tailwind for JetBlue, buttressing our cost control. And then when you think about operational reliability, lounges, domestic first, we're really trying to create this flywheel for that premium customer where they want to come back to JetBlue because we have the full product offering that they would like. And that's underpinned by this fantastic improvement in our operations, specifically around Net Promoter Score and winning the hearts and minds of customers again. Marty touched on Fort Lauderdale and that ramping into '26. But those are the big buckets. Catherine O'Brien: That's really helpful. May I just ask one quick follow-up on Mint? You're adding the new Mint crew base in Fort Lauderdale and some new flights to the West Coast. Can you talk about where you think there are further opportunities to add more Mint flying, if any, just given the focus on adding premium products? And can you just remind us the margin uplift of the Mint versus non-Mint flight or RASM, however you want to talk about it? Martin St. George: Okay. So first of all, we are coming to the end of the line of Mint delivered –- of airplanes with Mint on them. I think '26 and '27 really focus on domestic first class. We have a few more Mint airplanes coming. But in general, we're out of the Airbus 321 business until 2030 or 2031. So we're going to reach a plateau for Mint flying. I think what's been the most exciting for us about Fort Lauderdale is how incredibly helpful it is as far as being counter seasonal. We have very good results across the Atlantic in the summer. Frankly, we could probably use some more lift in the summertime if we can get it. But obviously, you need to fly the airplane 12 months a year. And where Fort Lauderdale has really come into its own is with fantastic demand in the winter. So having airplanes in markets like Dublin and Edinburgh, which are great summer markets, maybe not so great in the winter, and having those airplanes move to Fort Lauderdale is a major, major win for us. And frankly, I don't think any of us expected to see that good -– the demand that strong in Mint out of Fort Lauderdale, but it's been a very happy surprise for us. And then obviously, the demand goes down in the summertime because it's hot down there, and that's a very good time for the planes to move across the Atlantic. So we love the ability to swing these airplanes back and forth. And frankly, we will get a nice little cost benefit by having a Mint base down there as far as having -- not having to have Boston and New York crews fly the Fort Lauderdale West Coast services. So we're really bullish about that. With respect to Mint overall, it continues to be extremely successful. And I think the combination of quality, fantastic service delivery by our crews and really good prices has been a great winning formula for us. The 321 has proven to be a very good low-cost airplane platform for us. So I think it's worked out extremely well for us. We haven't really gotten into individual profitability numbers, but certainly the Mint network is the best of our domestic network right now. I think I'll leave it at that. Operator: And our next question comes from the line of Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: I was just wondering if you could speak to what you're seeing in terms of reliability and time on wing on your A220 fleet and how you're thinking about that as you go into 2026 planning? Ursula Hurley: Yes. So starting high level, we provided capacity indications for 2026 being in the low to mid-single digits next year. I would say that's really driven by 2 things. Number one, the number of new deliveries that we have coming next year in terms of the 220. And then the second driver is really all of these aircraft returning from AOG. So I mentioned going from an average of 9 this year to low to mid-single digits next year. We do have some reliability challenges on the A220 that we're working collaboratively with Airbus Canada on. But it is impacting us. It's just the materiality when you look at the capacity growth next year isn't as large. It's really the new deliveries and the return from AOGs. Thomas Fitzgerald: Okay. That's really helpful. And then -- so I'm kind of curious how you're thinking about -- I know the technology was a big part of how you -- the operational and reliability improvements. I'm just wondering how you're thinking about that on the distribution side and any levers to drive more direct channel sales? Martin St. George: First I'll start by saying we are 3/4 direct booked right now. So we've got very, very strong penetration in direct channels. And we have -- we've taken a different strategy with OTAs than some of our competitors. We do not work with all the OTAs. We work with a very select number, and we've got very preferential distribution relationships with them. So I think the benefit of some of the technology solutions is not quite the same for us as it is for others. That being the case, we are in the process of adding NDC as a technology for JetBlue and we expect to -- I don't think we've given a date for it, but the team is working on that right now. And frankly, I think the thing that I'm most excited about is the potential it has for continuous pricing. It's very clear that airlines pricing 26 letters or 26 buckets or 26 booking codes is a technology of the 70s. And I think with what we have seen elsewhere in the world as far as the benefits of continuous pricing, I think is a great opportunity for us, and you really need NDC to make that happen. So nothing to report yet, but hopefully when we have some more firm dates, we'll come back and talk about it a little bit. And frankly, I'm having -- used continuous pricing in my previous place. I think it's going to be a great opportunity for our customers. I think there's a stereotype that continuous pricing is a trick to have price increases. When I did this before, half the prices were price cuts and half the prices were price increases. All you're really doing is trying to benefit the demand curve. And it will absolutely include lower prices as much as it could include higher prices. So we're very bullish on it. No date to report yet, but it's very much on our radar. Operator: And our next question comes from the line of Scott Group with Wolfe Research. Scott Group: So we've got lower CapEx starting next year. Any other puts and takes to be thinking about with free cash flow? I guess if we're getting back to operating income breakeven, do you think we can get back to positive free cash flow in '27? Is that the right way to think about it? Ursula Hurley: Yes, it is. As you recall, we did a $3 billion aircraft deferral last year. Really we did that in order to give us the runway to deliver free cash flow. Priority #1 is positive op margin. Priority #2 is free cash flow. And I still believe that there is a path to achieve that at the culmination of this JetForward program in 2027. We're making good progress. I'm pleased with the momentum across the initiatives. And once we hit free cash flow, priority #1 is going to be improving the balance sheet and delevering where we can because we still want to get our metrics, quite frankly, back down to pre-COVID like levels. Like that is a priority of this leadership team. And so I feel good about the path that we're on. Scott Group: Okay. And then, Marty, maybe it's way too early to ask, but any –- and we're just getting launched with Blue Sky, but what are you seeing so far, if anything? Anything different than you would have thought? Just any kind of color. Martin St. George: First of all, I'd say it's pretty much acting the way we expected it to. We've seen redemptions go both directions as far as JetBlue customers redeeming on United, United customers redeeming on us. If you look at the Os and Ds where they're doing it, I'd say, in general, it is more or less what we had expected. I will say our first redemption on United was Denver-Las Vegas from Mosaic in Denver. So that was a bit of a surprise. But to me, that's actually a good thing. And I'm happy that our customer in Denver, who's in Mosaic, is now getting utility of United. And to me, that is the fundamental goal for this, which is making sure that customers who align with TrueBlue have a full assortment of places where they can earn and burn. So as much as -- nobody had Denver-Vegas on the bingo card. I think I was really happy that that's who it was, because you have a customer who has raised his or her hand in Denver, has flown up till Mosaic, who now is getting some great utility. So to me, it's a big win. And I actually love this and this is exactly why we did this program. Operator: And our next question comes from the line of Brandon Oglenski with Barclays. Brandon Oglenski: And I don't mean to be too critical here, Ursula, but when you said modest capital next year and then in relation to the way you answered Scott's question there, maybe breakeven free cash flow by '27, I don't know -- I mean, is modest like maybe $1 billion, $1.5 billion ballpark, like the incremental capital you need to get there? Ursula Hurley: No, the number is not going to be that large. I mean I think I mentioned in one of the Q&A responses, we're not anywhere in the realm of the raise that we did in 2024 in terms of quantum. I think what I highlighted in my prepared remarks is we do have 10-plus deliveries next year, then we do have a convertible debt paydown of $325 million. So modest is much lower than what you foreshadowed. I will call out, clearly, we've seen fuel spike in the last 5 days. It's just something to be aware of. We are watching that closely, as well as the more general like macro like demand environment. But I still believe that we have a path, and we're trying to be very thoughtful about when and how we raise any level of debt just given where the balance sheet is today. Brandon Oglenski: Okay. I appreciate that clarity. And then on the outlook for growth next year, I get it, like you're getting AOGs back in the air. But is the cost structure already in place, meaning you've just been inefficient for the past 18 months and you're putting that back to good use? Or do you need to incrementally scale up crews and other infrastructure? Ursula Hurley: No, I would say that the capacity growth next year is going to be efficient for us. We've done a great job managing the cost structure as we've navigated this year, but we're not going to find ourselves in a position where we need to hire excessively to support next year's growth trajectory. So I think this is -- from a unit cost perspective, the growth next year is definitely a tailwind for us. Joanna Geraghty: And I'll just add maybe. I mean, our crew members have been great over the last year taking voluntary programs, agreeing to reduce hours. So we've really done a good job trying to reduce the costs we've had because of the grounded fleet as much as possible. And when we think about growth in general, it's really about making sure we grow responsibly. We will continue to manage the peaks and the troughs. As Ursula has mentioned, it's focused on capital preservation and capital-light growth. We're managing for returns and then obviously ensuring our unit costs remain in check. And so at the end of the day, I think we've navigated a very challenging period with these aircraft on the ground and we've navigated it as well as one can and our crew members have been a hugely important part of that. And we're looking forward to growing next year because that's ultimately going to get us back on the right path to sustained profitability. Operator: And our next question comes from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker: Marty, you said that troughs continue to be challenging. Obviously, that's very understandable given the macro. But do you feel like that's cyclical or structural? And if it is more structural, then how are you thinking about 2026 capacity planning especially in 1Q, which tends to have more trough periods? And do you think you need to be more aggressive on taking out capacity there? Martin St. George: Ravi, a good question. I mean, here's what I would say. Troughs are always challenging as a leisure-focused airline. This is not new. I would say that having looked at previous economic slowdowns or I'm not sure what you want to call the 2025 situation, but previous times where revenue has gone down, this is a very, very common change and nothing that we were unprepared for when the time came. I think that we'll sort of be able to finally call this change in demand done when we see troughs get back to a little bit more normal level. But they will always be a challenge for us and that's just the status of being a leisure airline in general. Ravi Shanker: Understood. That's helpful color. And maybe a quick follow-up. Can you just expand on your corporate comments? I think you said that yield was pretty strong. What are you seeing in the East Coast in particular? I think there's some optimism about a pickup in activity clearly in that? Martin St. George: So just to be clear, Delta corporate business is a very small part of our business, I think very much given our network. And year-over-year -- Joanna talked about the changes we made to the network in 2024 and very early '25. That really pretty significantly reduced our presence in corporate markets. I mean, at a point in time, we had 50-something flights to LaGuardia. We're now in the teens. So a lot of our corporate supply has actually gone away. And frankly, I've been very, very happy with what we've seen on yields. I mean, yields up double digits in our Delta corporate markets. I think it's very clear to say, just to scale this, our total sales team, I can count on 2 hands. We don't have the incredible breadth of corporate contracts. And it's basically -- it's really based on our network. In New York, LaGuardia is the preferred airport. We have some good corporate customers in Boston and Fort Lauderdale. I'd say, by far, our biggest attractiveness for corporate has been Mint and our pricing. And I think overall, it will always be a part of our network, but leisure will still be the bread and butter for us. Operator: And our final question comes from the line of Conor Cunningham with Melius Research. Conor Cunningham: Just 2, if I may. Just on the RASM outlook for 4Q. Can you maybe parse out the -- what you're seeing on the U.S. domestic side versus Latin and transatlantic? And then I'll just squeeze my second question in. On maintenance next year, it seems like you have –- your maintenance is up 30-something percent this year. The E190s are gone. I think that there's a huge tailwind into 2026. Just trying to understand how that all flows through. Martin St. George: All right. Conor, I'll take the first half on the RASM. In general what we're seeing in RASM is -- from a regional perspective is more -- it is pretty consistent is what we're seeing overall, which is better numbers in international than domestic. So I don't think there's anything -- there's sort of no dramatic news there as far as any significant change in trend. And frankly, I think that what we're seeing as far as changes in capacity from the ULCCs will ultimately help that. It's very clear that as capacity has come out overall, that should put less pressure on the back of the airplane. But I think it's a little bit early to call that trend right now. And I'll leave the maintenance comment to... Ursula Hurley: Yes. Just on maintenance, Conor, I would say when you look across all the P&L cost line items, maintenance is still going to be a headwind next year. I mean, about half of our fleet is the A320. And that fleet is aging. It's not on a flight hour agreement. It's on a time and material agreement. So it is still going to be a headwind. Obviously, that's going to be offset by all of the JetForward cost initiatives, I think technology, I think productivity. So maintenance will be the one headwind. But as I mentioned in my prepared remarks, we are targeting a low single-digit CASM ex fuel next year. So I'm pleased with the overarching like trajectory and the team's ability as we navigated through this year to execute to the cost performance. We improved the midpoint of our full year guide, and that's really attributable to the teams. And that's despite a 1 point pull in capacity. So super pleased with the execution, and that's going to continue as we navigate through 2026. Operator: And ladies and gentlemen, that will conclude today's conference and we thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Caesars Entertainment, Inc. 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, Brian Agnew, Senior Vice President of Corporate Finance, Treasury and Investor Relations. Please go ahead. Brian Agnew: Thank you, Shannon, and good afternoon to everyone on the call. Welcome to our conference call to discuss our third quarter 2025 earnings. This afternoon, we issued a press release announcing our financial results for the period ended September 30, 2025. A copy of the press release is available in the Investor Relations section of our website at investor.caesars.com. As usual, joining me on the call today are Tom Reeg, our CEO; Anthony Carano, our President and Chief Operating Officer; Bret Yunker, our CFO; Eric Hession, President, Caesars Sports and Online; and Charise Crumbley, Investor Relations. Before I turn the call over to Anthony, I would like to remind you that during today's conference call, we may make certain forward-looking statements under safe harbor federal securities laws, and these statements may or may not come true. Also, during today's call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G. Please visit our press releases located on our Investor Relations website for a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure. Our Q3 investor presentation has been posted to our website, and our Form 10-Q has also been issued as well. We experienced hold volatility in our reported results. Management will discuss hold normalized results in our call today, and a full reconciliation can be found in our earnings presentation posted on our website on Slide 21. I will now turn the call over to Anthony. Anthony Carano: Thank you, Brian, and good afternoon to everyone on the call. Our diversified portfolio delivered third quarter consolidated net revenues of $2.9 billion and adjusted EBITDA of $884 million. On a hold normalized basis, the company reported $927 million in consolidated EBITDA. During the third quarter, our Digital segment delivered strong volume growth in both sports and iCasino. Adjusted EBITDA in our Digital segment was negatively impacted by NFL hold in September and faced a difficult comparison to last year, which included WSOP results. Our Las Vegas segment posted solid results in the face of softer market-wide visitation and adjusted for poor table games hold. We are seeing sequential improvement in operating trends in Las Vegas as we enter the fourth quarter. Regional revenues were up year-over-year, driven by strong returns in Danville and New Orleans and same-store net revenue growth, resulting from continued strategic reinvestment in our Caesars Rewards customer database. Regional EBITDA grew 4% on a hold normalized basis during the quarter. Starting in our Las Vegas segment, we reported same-store adjusted EBITDA of $379 million and hold normalized EBITDA of $398 million. Segment results were driven by 92% occupancy versus 97% last year and ADR decreased 5% as a result of citywide visitation weakness during the quarter. As we progress through the quarter, trends improved sequentially with September delivering the strongest results of the quarter. During the quarter, the group room night mix was 13%, and the segment is on track to deliver a record EBITDA year in 2025 due to our strong Q4 booking pace, where group mix should increase to 17%. Recent CapEx investments at the Flamingo in Las Vegas, including a brand-new pool experience, Pinky's by Lisa Vanderpump, Gordon Ramsay Burger and Havana 57 continue to exceed return expectations. We are excited about upcoming CapEx projects in Las Vegas, including a new Omnia Day Club by Tao at Caesars Palace, the rebrand of the Cromwell to the Vanderpump Hotel and the recently announced Project 10 by Luke Combs that will transform the vacant Margaritaville space at the Flamingo. These exciting projects continue our commitment to reinvest in our assets while elevating our guest experiences. As we look to the fourth quarter in Las Vegas, we see trends improving sequentially, driven by positive leisure trends and a strong group and convention calendar. In our regional segment, we reported adjusted EBITDA of $506 million and hold normalized EBITDA of $517 million, driven by 6% net revenue growth. Early results from our strategic customer reinvestments are promising, driven by strong rated play trends in the quarter. We will continue to refine our marketing approach as we remain focused on delivering strong returns on these investments. Margins improved sequentially this quarter, driven by better flow-through on these investments. New projects in Danville and New Orleans continue to generate strong returns, and we look forward to completing Phase 2 of the master plan currently underway at Caesars Republic Lake Tahoe in mid-2026. I want to thank all of our team members for their hard work through the first 3 quarters of 2025. Their dedication to exceptional guest service has been the driving force behind our accomplishments this year. With that, I will now turn the call over to Eric for some insights into the third quarter for our Digital segment. Eric Hession: Thanks, Anthony. During the third quarter, Caesars Digital delivered net revenue of $311 million, adjusted EBITDA of $28 million and hold normalized adjusted EBITDA of $40 million. Recall that last year, in Q3 2024, we benefited from approximately $8 million of net revenue and EBITDA contribution from the World Series of Poker. The World Series of Poker was sold in Q3 of last year, and so now we fully annualize the impact of the sale on our EBITDA comparisons. In addition to the effect of the poor hold and the loss of the World Series of Poker revenues impact on flow-through, we had a number of other headwinds this quarter that included incremental state taxes, higher acquisition marketing spend and some bad debt. As we previously noted, there will be volatility across quarters, but we're on track to exceed our 50% target flow-through for the year. Our core KPIs remained strong during the quarter. Specifically in sports, total parlay mix improved approximately 210 basis points year-over-year, and we saw growth in average legs per parlay and a higher cash out mix versus the prior year period. In addition, we realized volume growth of 6%, a notable sequential improvement, which was unfortunately more than offset by the negative sports outcomes our industry experienced in September. In iCasino, we delivered 29% net revenue growth, driven by continued strength in volume and average monthly active users. We continue to evaluate or elevate our product offering during the 2 quarters to include new in-house games, improved bonusing capabilities and elevated live dealer product. We look forward to a redesigned Horseshoe Online casino update in Q4. Overall, in Q3, our total monthly unique payers increased 15% to 460,000. From a tech perspective, we continue to convert new jurisdictions to our universal digital wallet and proprietary player account management system, which is now live in 22 states. The enhancement gives our customers a significant upgrade to their wagering experience. Pending regulatory approval, we plan for the Missouri State sports betting launch in December of this year to be the first state where we offer a shared wallet experience to our customers from day 1. We continue to expect a complete rollout of our universal wallet product on our proprietary TAM by early 2026. As we head into Q4 and 2026, I'm pleased with the significant progress on the technology side of the business that's driving strong volumes in both sports and iCasino. The continued progress in all areas is showing up in our top line results, and our focus on spending efficiency will drive solid flow-through to EBITDA. We continue to see a business capable of driving 20% top line growth with 50% flow-through to EBITDA, which keeps us on track to achieve our long-term goals. I'll now pass the call over to Bret for comments on the balance sheet. Bret Yunker: Thanks, Eric. In addition to redeeming $546 million of senior notes during the quarter, we repurchased $100 million of stock, including October activity. We've now repurchased close to $400 million of stock since mid-'24, shrinking our share base by 6%. Our balance sheet remains in great shape with our nearest maturity in 2028 and a floating rate debt mix that will continue to benefit from interest rate cuts. Our weighted average cost of debt currently sits at just over 6%. We expect to continue using our strong and growing free cash flow to both reduce debt and opportunistically repurchase stock. Turning it over to Tom. Thomas Reeg: Thanks, Bret. To jump into a little more detail, we told you on the last call that Vegas was going to be a soft summer. It was a soft summer. Our ADR was down a little over 6%. Occupancy percentage -- occupancy was down about 5 percentage points. So that's about 90,000 room nights for us that flows through all of the non-gaming pieces of the business. On the gaming side, volumes held in pretty well. Slot handle was down only 2%, even though we had 90,000 less room nights. I hate talking about hold, but this is a quarter where you can't get away without talking about hold. Hold was down almost 600 basis points in Vegas in the quarter. On a year-over-year basis, it impacted us a little over $30 million. And it's -- and there were another -- a little over $10 million of onetime items that benefited us last year that don't repeat, the largest of those being cancellation of the sponsorship contract on the Planet Hollywood Live theater in Vegas. The quarter got better throughout. So July was the worst month of the quarter. August got better. September got better. What we told you when we talked to you in the beginning of the quarter was it would be soft. We would expect recovery in the fourth quarter. That is what we are seeing. Our cash room revenue forecast for the quarter is down just slightly. Cash room revenues in the third quarter were down a little over 11%. So that's considerable improvement. A lot of that is the group calendar that Anthony referenced. We have some Caesars-specific groups that benefit us, not necessarily the entire market. We had the Oracle conference that was in 3Q last year and was in early October this year. And then we have BravoCon coming up as the quarter continues. F1 for us is looking considerably better than it did last year -- than it performed last year, not as good as year 1, but up from last year. The headwind for the remainder of the year is New Year's Eve is middle of the week this year, which is not particularly helpful calendar-wise. But other than that, we see Vegas coming back strongly. I know that's a big question -- has been a big question. Again, what we laid out in July of soft summer recovery in the fourth quarter, continued recovery in the first quarter is still what we see today. Group should be, as Anthony said, a record in '25 versus '24. That's largely on the strength of the fourth quarter. And then first quarter should be a new all-time record ahead of '25 -- I'm sorry, '26 should be a full-time -- a new record for the full year ahead of '25, largely on strength in the first quarter of the year. So it was a difficult summer. There is definitely -- has been softness in leisure demand for Las Vegas in the summer months, particularly in properties that I would view as priced takers, those that are as you go down the customer spectrum or you move out from the center of the strip, demand for those were soft. Premium has held up better, but it's the return of group business in the fourth quarter and first quarter that allows rate compression that brings us back to a much healthier looking market as we look at this quarter and into '26. For regionals, we talked about how last quarter we'd embarked on increase in marketing reinvestment, starting in properties that were competitively impacted and moving beyond that as we saw what was working. As the quarters go by, I think I've said this to you a number of times, you'll see us refine that, take out what's not working, expand what is to more markets. We have a lot of test and control out all of the time. And you could see better flow-through. You would have seen even better flow-through if we had held both brick-and-mortar and Vegas hold percentage was the lowest that it's been in over 3 years, and that's particularly unusual in regional, regional pretty is pretty stable. But what we're seeing in regional is the flow-through of the marketing is improving. You should expect that to continue to grow -- to continue going forward and demand in regional is pretty solid. Like we have no complaints about what we're seeing in regional. In digital, obviously, we've got the sports outcomes that have been -- there's been a lot of conversation about those both here and elsewhere. So I won't belabor those. We're happy with where we are. Margin-wise, happy to see us growing handle. iGaming continues to perform quite well. So all of our goals remain in front of us in terms of what we've laid out for digital and fully expect that we'll get there. So we feel good about that story as well. And then in terms of free cash flow, you should expect that we'll remain balanced in using our free cash flow between paying down debt and repurchasing our stock. At current levels, our stock is attractive to us. You should expect us to be active as we go through the remainder of the year. And with that, I'll open it up to questions. Operator: [Operator Instructions]. Our first question comes from the line of Brandt Montour with Barclays. Brandt Montour: So Tom and team, I want to start with Las Vegas. And I want to just sort of dig into some of the comments that you made, Tom, specifically around leisure demand. And I heard positive leisure recovery, but I also heard that the group fill-in is most of the sequential improvement that you are looking for or seeing into the fourth quarter. And so maybe you could highlight some other metrics in terms of how we should think about the sort of very near-term sequential leisure recovery, whether that's bookings 4 weeks out, occupancy, et cetera, or anything else that might be helpful there? Thomas Reeg: Yes. So when we talked to you last quarter, we're looking at the same forward booking calendar that we can see. Now looking at that point, it looked particularly soft, which is why we told you we were expecting a soft summer. That came in when you adjust for hold about where we anticipated it would be as we sit -- and if you think about sequentially and the quarter that you're in, because it's the third quarter, it's a leisure-dominated quarter. There's not a lot of group business in Vegas when the weather is particularly hot relative to other quarters. And that leisure customer continued to get better during the quarter. July was the worst. August built on that and then September, October has continued, but that leisure customer is still softer on a year-over-year basis. The difference is what you get in group activity allows us to compress rate much better than we were able to in the third quarter, and you don't have nearly the amount of miss in occupied rooms. We had 90,000 in the third quarter, about 500 basis points of occupancy. Our occupancy looks better and our rate looks better than it did third quarter. Brandt Montour: Great. And then maybe moving over to regionals. You guys put up a hold adjusted regional number that did show growth, and you had told the market that you were promoting more last quarter and perhaps rolling out promos to less or more impacted -- more non-supply impacted markets. But it looks like either that hasn't started yet or you're getting pretty good returns on those tactics. And so I guess the question is, are you -- is this the type of flow-through that we can expect from this program, whether it's supply impacted or nonsupply impacted markets as you sort of move through the evolution of those new programs? Thomas Reeg: Yes, Brandt, that's a great question. And we would expect as the quarters go by, we become more efficient in that marketing, you're dialing back more that's not working and expanding what does. And I want to be clear, there was a sense that we were getting into some sort of promo war. I heard that from a lot of investors. The way we look at it in most of our -- in all of our markets, Caesars Rewards is the most impactful customer program that there is among any operator. In many of our markets, we have a property as well that is better than others. So that's higher quality. So if you think about the way marketing works, you may lean on those advantages a little bit and say, I'm not going to be as generous in my giveback as others, and you're still going to perform quite well. I think that, that gap got to be a little larger than we needed it to be in properties that were not competitively impacted. So I would think of what we're doing is kind of taking up that slack, not entering into a promotional war. And we're not seeing significant response from competitors that suggest that this is going to keep going higher. What I'd expect you'd see going forward is what you saw this quarter where the flow-through from that revenue growth continues to look better as the quarters move on. Operator: Our next question comes from the line of Dan Politzer with JPMorgan. Daniel Politzer: I just wanted to go back to Vegas and that leisure customer. I mean it sounds like things are getting a little bit better. Just group is obviously helping in terms of compression. But I mean, how do you kind of look to stimulate that leisure customer? Do you think that there are structural issues in Las Vegas that need to be addressed in terms of pricing? And then it sounds like in terms of fourth quarter, things have gotten better. So I don't know if there's any way to kind of frame kind of that bouncing off of third quarter in terms of some kind of broad estimates. Thomas Reeg: Yes. So on the pricing question, we price hundreds, thousands of items across Vegas every day from obviously, rooms and restaurants to ATM fees to everything that you purchase in Vegas, and we're constantly adjusting them. What was interesting -- there's a few things that are interesting to me in that conversation. And I don't discount that there are areas in our business and in Las Vegas that got -- might have gotten over their skis pricing-wise. But to put it in context, we're in a quarter where while we're talking about pricing and degradation to demand, our occupancy percentage was over 90% in the quarter. It's stronger as we move into the fourth quarter. But most interestingly, while those stories were out there, most days that you read those stories, you could have gotten a room in Vegas for $29 plus a resort fee on the strip. So there's a value trade in -- what's great about Vegas is there's something for everybody. Sean McBurney, our Regional President out here who does such a fantastic job using the example of, you can come see Paul McCartney and pay $500 plus a ticket at the same weekend that you're going to see -- you can see Donny Osmond for $60. So there's something at every price point. And keep in mind, in a quarter where we're -- it was undeniably soft versus last year, and we're glad to see it coming back in the fourth quarter. It doesn't take a lot to turn that back the other way. You're talking about 5 percentage points of occupancy got us to a 10% decline in adjusted EBITDA. You don't need much to swing back the other way to where you're right back to where you were before. So -- and one more point, we're talking about a quarter where we did about $400 million of adjusted EBITDA in the third quarter, so the summer in Vegas. That quarter typically premerger was $300 million to $320 million of EBITDA. So this is still a very strong market. It offers something for every price point. And sure when you're pricing thousands of things every day as we are and our peers are, it's going to be easy to find things where you say, look at how much this bottle of water costs. But the value proposition in Vegas stacks up versus just about anywhere that you could want to travel. And what you can do while you're in town is the breadth of what's available, you cannot -- I line that up with any city in the world. So we feel fantastic about Vegas fundamentally. And we think it won't be very long until that's a story where we'll be talking about -- remember when -- remember the summer when we talked about $25 bottle of water, and that's not what was driving activity. Daniel Politzer: Right. Okay. No, that's really helpful detail. Just pivoting to regionals, this is more of a high-level one. But obviously, in terms of that more promotional strategy, and I get it's kind of more short-term oriented. But how did you kind of think through that versus maybe the puts and takes of putting more capital into the ground at some of these properties to improve the amenities if there would have been a return on that as opposed to just being more promotional? Thomas Reeg: Yes. I mean we -- since the merger, we have invested $3.1 billion in just our regional assets. $2.8 billion of that is in the 16 properties that generate 75% of our regional EBITDA. So the properties that have been less touched by capital and all of them have been touched are those that are pretty small, may not have hotel. I think the -- if you look at the regional capital investment across us and our peers, we've outpaced everybody in the last 5 years. And we're really in -- let's harvest those investments and let's give people a reason to come and see them. You spend the capital. Keep in mind, these are properties that are in somebody's neighborhood. They pass it or they pass a billboard every day for 10, 15, 25 years, if you put the money that we put into these properties over the past 5 years, the customer is not going to automatically know it unless you stimulate a visit, get them into the property. And that's what we see is as we reactivate customers that didn't know the money that was put in, New Orleans being a great example of, you start to see organic momentum build because you're showing customers a property that's different than they remember. And so that investment has been made. This is the message of, hey, come and see us and see what we've done. And what we see out of that is organic follow-through. And like I said, this doesn't happen neatly in 90-day periods. This stuff happens over a longer period of time. But we are particularly encouraged by the trends that we're seeing that suggests that what we're doing is working and driving more aggregate cash flow, which is the goal of this whole enterprise. Brian Agnew: Shannon, for Q&A, we've got a lot of people in the queue. Can we just have everybody ask one question and then circle back if possible? Operator: Our next question comes from the line of Steve Pizzella with Deutsche Bank. Steven Pizzella: Just wanted to ask on the regional performance. From the state level data, it looked like trends deceled a little bit in September from July and August levels. Did you see that in your business? And then how do you think about the fourth quarter from a comps perspective for regionals given we saw an acceleration in the data starting October of last year? Thomas Reeg: So the September question, recall that last year, Labor Day Sunday was in September, and this year, it was in August. So that's a -- that's one of the biggest weekends of the summer, and that's a significant calendar shift. So I would look at August numbers and September numbers together. The only market I can think of that saw a significant shift in demand in September was Atlantic City. The rest of the countries performed kind of as you'd expect. Cost side, I don't have anything in particular to call out on the regional side. What -- in terms of driving incremental margin, that will be a function of -- as we refine our marketing as we move through the quarters, you should expect flow-through and margin to increase. Operator: Our next question comes from the line of Lizzie Dove with Goldman Sachs. Elizabeth Dove: I guess big picture, longer term or for next year, specifically for Vegas, it's a lot of moving pieces. You've got the capital investments you mentioned, some good guys from conferences, but also maybe 1 or 2 conferences leaving the system, macro TBD. High level, I know it's early, but just curious how you're thinking about how those kind of puts and takes play out to Vegas next year. Thomas Reeg: Yes. The big question, Lizzie, is the consumer. Is this leisure demand -- are we going to see it continue to improve and recover? Or do we stall at some point that's shy of where we were before. That's a difficult question to answer. That's a macroeconomic question. I know that the mix will be better for us, in particular, recall that we have the State Farm conference early in the second quarter, which is a particularly large conference for us that drives significant EBITDA. And then you've got the market-wide stuff that's well understood. But the -- we're now, what, 4 months into this stepdown in leisure demand for Vegas. And we -- while we're better than we were in July, we're still not back to where we were on a year-over-year basis. So that will be the question in '26 in my mind is how quick does that recover. Operator: Our next question comes from the line of David Katz with Jefferies. David Katz: I just wanted to double back on digital, if I may, for the fourth quarter. I know that the sequential cadence can be tricky where there is some preseason spending in 3Q. I recall a comment, Tom, that indicated the fourth quarter should be super strong. We're still focused on kind of that run rate of $500 million by the fourth quarter. If you could just update us there, please? Thomas Reeg: Yes. The big swing factor there, David, is game outcomes. Obviously, we had a fourth quarter -- a third quarter that wasn't great. We're 4 of 13 weekends into the fourth quarter, those outcomes have not gotten substantially better. So we are hold for the first 4 weekends was above last year's hold, but below our budgeted hold. So that will have an impact on where the fourth quarter comes in. But the -- as you have seen, sports outcomes are particularly volatile. So I wouldn't take 4 of 13, whether it's positive or negative as determinative at this point, but that's where we stand as we sit here today. Operator: Our next question comes from the line of John DeCree with CBRE. John DeCree: Maybe, Eric, I wanted to circle back to your prepared remarks. I think you were kind of dissecting the quarter a little bit and had mentioned, if I heard correctly, some higher acquisition marketing spend in the quarter. If I heard that correctly, I'm wondering if you could elaborate a little bit. Was that kind of expected or unexpected? And was that more customers than you thought getting on board? Just curious if you could give us a little bit more color there. Eric Hession: Sure. Yes, it wasn't kind of unexpected. It was spend that as we went through the quarter, we steadily increased heading into football and heading into a strong acquisition period for the iCasino side. We acquired a lot more customers during the period as a result of that spend. We believe that over time, those -- that spend will come to fruition with the lifetime values of the customers. However, in the period in which we spent it, it shows up as a drag. And so because on a year-over-year basis, we did increase the spending, I wanted to call that out as one of the reasons why the flow-through was challenged in the quarter. Operator: Our next question comes from the line of Steven Wieczynski with Stifel. Steven Wieczynski: So Tom, I want to go back to the regional reinvestment and ask that question maybe a little bit differently. But it's one of the questions we get a lot from investors is the fact that when you were at Eldorado and you were out buying things like Isle of Capri, I mean, you were kind of known as the kind of the king of cutting promotions and basically getting your peers to kind of do the same thing and understand that was kind of a smart business decision. Now you're somewhat kind of pivoting away from that, and you mentioned a lot of that decision is tied to Total Rewards and the power of that platform. So I know you said that hasn't started a promotional war yet, but just trying to get a little more color as to what gives you the confidence that, that doesn't eventually happen. Thomas Reeg: Well, I mean, we can see -- we see it down to the granular customer level, what's the customer responding to, what are they not responding to. The point I was trying to make is in most markets, there's going to be a gap between what we're spending and what our peers are spending that we're going to be spending less. That gap in hindsight may have gotten too wide. And so what you're seeing is recovery in that, not one-upmanship. And when you change that, it's like when you make an investment, the customer notices that you're making an effort to win their business and all of the reasons that they came to the property before and into the rewards program are -- make them sticky when you get them back. So this is -- this evolves every day. You're competing in these markets all the time. I would say the level of discipline throughout the business is far better than it was before we started this, and we're not seeing anything that suggests that this needs to keep climbing higher and higher. And you should be able -- you should start to -- you can start to see that in the flow-through as we go through the quarters that this quarter was better than last quarter, and you'd expect -- I would expect that to continue. Operator: Our next question comes from the line of Barry Jonas with Truist. Barry Jonas: Some of your competitors are looking at the predictive markets. What's your view there for Caesars Digital? And have you seen any impact as these markets are starting to make inroads into sports? Eric Hession: Yes. To answer your second part first, so far, we haven't seen any impact. I suspect most of the volume that they're generating is coming from states that don't have legalized sports betting. And then there's probably some on the margin that is coming from the legalized states that we might not have been able to access anyway, like 18- to 21-year olds and that type of customer demographics. In terms of the overall plan, we're actively watching it. As we've said before, we can't be out on the lead on this one. We're going to monitor it, make sure that we're not left behind if there's regulatory clarity and that we have a good plan in place for -- should that outcome happen. But in terms of our current actions when there's still uncertainty, and I'm sure you've seen some of the letters from the regulatory agencies, our best approach at this point is to monitor it, put our plans in place, make sure that we're adequately resourced and be ready to move if there's a legalization definition in either direction. Thomas Reeg: Yes. We will not put any of our licenses at risk. We believe what's happening in prediction markets is sports gambling. If there is a -- if there's a path that develops where we can participate in a way that doesn't put licenses at risk, you should expect we would be -- we are preparing and would be prepared to go down that path, but we're watching it the same as you are. Operator: Our next question comes from the line of Shaun Kelley with Bank of America. Shaun Kelley: Tom or Eric, just wondering if we could get your thoughts or help on sort of both the seasonality of the digital segment as we kind of move into Q4 because it is a peak sports season. Obviously, you mentioned we appreciate there's some outcome headwinds, but just more broadly, how you'd expect that to trend? And then secondarily, if you could, Eric, given the lean in on marketing, this kind of -- in this period, your thoughts around customer acquisition as we move into next year, especially as digital wallet is kind of up and running and just you feel really good about the product. Thomas Reeg: So let me take the seasonality question. Obviously, fourth quarter is your highest volumes given that it's football season and football dominates sports betting. The way that we account for our partnerships is that those -- that spend hits during the season of play. So if you think about some of our large contracts that will roll off in '26, the bulk of that expense hits in the fourth quarter. So it makes volatility -- it makes volatility and hold -- sports hold outcomes more impactful because you're carrying a bigger fixed cost than we're carrying in any other quarter of the year, but then I'll let Eric take the rest. Eric Hession: Yes. And then in terms of the marketing spend, I would expect it to go back to normal levels for Q4 versus prior year. So nothing -- no incremental acquisition spend along those lines versus kind of where we were trending prior to that. But to your point about heading into next year, I would say the vast majority of our marketing spend has traditionally been earmarked towards the direct channels like Facebook, Google, Snap, those types of things and very more limited on the brand side. I think to your point, with the app in the shape that it is and with the shared wallet now being active in nearly every state and will be in the first quarter, there is an opportunity to do a little bit more of the top of funnel type advertising because the retention rates are going up and the customer response to the app is improving. So I would look at that mostly as a shift, though, not necessarily as an incremental spend, but we'll evaluate it as we go through. And if we're getting really short paybacks on certain spend, we might increase it slightly, but I wouldn't anticipate anything major next year. Thomas Reeg: And it's -- Shaun, that's similar to what I just talked about in regionals, right? I mean our -- we did our big brand campaign in '21 when sports betting kicked off and our app was not as competitive as it needed to be versus our peers, we've done a lot of work in getting the app up to par, culminating with share of wallet, as you pointed out, we need to give that customer a reason to take a look again. And so that's kind of the top of funnel that Eric is referring to. Operator: Our next question comes from the line of Stephen Grambling with Morgan Stanley. Stephen Grambling: Two quick follow-ups on digital. Just given you've seen a lot of moving parts in the regulatory environment across brick-and-mortar and digital, what do you see as the key milestones you're watching for to get comfort on the prediction markets? Is it really just waiting until we get maybe all the way to the Supreme Court? Are there other things that could happen between now and then? And then given the outsized wins on behalf of consumers, are you seeing any change in how much money is being kept in accounts that might be indicative of future wagers or strength further into the football season? Thomas Reeg: So I'll do the first one, have Eric do the second one. I wish there would be a point of clarity and certainty in the near term around prediction markets. It seems like the path this is going to go on will ultimately be decided at the court level, ultimately, the Supreme Court level. And I'd expect that there's going to be rulings that go in both directions along the way. And ultimately, if something gets appealed up to the Supreme Court, there is a state rights versus federal rights question here that's larger than just sports betting that might argue that the court takes it up relatively quickly. There's also the argument. There's a lot of stuff bubbling up to the Supreme Court and maybe this gets pushed back further than we'd like. But we -- I would expect we're going to be in this cloudy period for quite some time. Eric Hession: And then on the second part of the question, we -- after customers have a good weekend, we do see the balances higher. It doesn't necessarily persist all that much over time. They tend to either draw them down or recycle it throughout the week and into the next weekend. But there is definitely a loose correlation between the customer outcomes and the volume as you'd expect when the hold goes down. But I would say that the outcomes of the customers in Q3, while it was to their favor, our core volume growth was still much stronger than in prior periods. So that -- the entire result wasn't driven by the customer outcomes. Operator: Our next question comes from the line of Chad Beynon with Macquarie. Chad Beynon: During the quarter, I know the city ran a few ad campaigns. I'm not sure if that stimulated demand. So a, I wanted to ask about that. And then secondly, is this something that you think we could maybe continue -- could continue to see throughout 2026 to just help the perception of value for some of those customers that have fallen away? Thomas Reeg: Yes to both, Chad. So we participated in the sale that you're referring to. Our bookings picked up considerably during that sale. So it was effective. And we know that LVCVA intends this to be an ongoing campaign. So you should expect this not to be one shot in terms of the messaging around value in Las Vegas. Operator: Our next question comes from the line of Jordan Bender with Citizens. Jordan Bender: There's been some movement in the M&A market. As you think about your leverage and your footprint in Las Vegas, I just want to check your temperature around potential asset sales in Las Vegas and then also how you think about the Caesars Forum put call agreement outstanding. Thomas Reeg: The call option -- the put call option is -- you should expect that if that's exercised, it would be called by VICI. I'd anticipate that they'd be doing that toward the end of that period of time. And -- but I don't want to speak for them. We choose the rent, it would be -- we would choose the lowest rent that we're able to choose. In terms of M&A, we would -- we're never closed. So if there was something that made sense for us, I'd say we're open to talking about each and every asset, but we are not actively involved in marketing the Vegas asset. Operator: Our next question comes from the line of Daniel Guglielmo with Capital One Securities. Daniel Guglielmo: We've seen some OpEx pressure this quarter and last. And as you start budgeting for next year, are there certain expenses outside maybe the marketing that we've hit on that you all are going to spend more time thinking about for 2026? Thomas Reeg: I mean labor is always our biggest, and we're constantly looking to optimize labor across the enterprise. We're well into the union contracts in both Vegas and Atlantic City. So you're kind of at manageable increases as we move forward. There's nothing that stands out as you asked that question to me. Brian Agnew: But if you're looking at labor in the 10-Q, specifically in the regional segment, that's not exactly same-store because you've got Danville and New Orleans in there, and there were some onetime benefits in the prior year quarter. So it's not really a same-store number if you're looking at that labor line in the Q. Thomas Reeg: Yes. So Danville and New Orleans are both substantial integrated resorts that had -- Danville wasn't open, and New Orleans was much smaller last year. Operator: Thank you. And we've run out of time. I would now like to turn the call back over to Tom Reeg for closing remarks. Thomas Reeg: Thanks, everybody. We'll see you next time. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Good afternoon. Welcome to Tigo Energy's Fiscal Third Quarter 2025 Earnings Conference Call.[Operator Instructions] Joining us today from Tigo are Zvi Alon, CEO; and Bill Roeschlein, CFO. As a reminder, this call is being recorded. I would now like to turn the call over to Bill Roeschlein, Chief Financial Officer. You may begin. Bill Roeschlein: Thank you, operator, and it's a pleasure to join you today. Also with us is Zvi Alon, our CEO. I'd like to remind everyone that some of the matters we'll discuss on this call, including our expected business outlook, our ability to increase our revenues and become profitable and our overall long-term growth prospects; expectations regarding recovery in our industry, including the timing thereof, statements about our demand for our products, our competitive position and market share; the impact of tariffs and our current and future inventory levels, charges and reserves and their impact on future financial results; inventory supply and its impact on our customer shipments, statements about the recovery of the solar industry, statements about our revenue and adjusted EBITDA for the fourth quarter of fiscal 2025 and our revenue for the full fiscal year of 2025; as well as statements about our existing backlog and bookings; statements about the anticipated benefits of our manufacturing and marketing partnership with EG4; and our ability to realize such benefits, as well as our ability to expand market share in the U.S. through power market; our ability to refinance our convertible debt prior to maturity; our ability to obtain funding that's acceptable to fund our working capital needs; our ability to penetrate new markets and expand our market share, including expansion in international markets, investments in our product portfolio are all forward-looking and as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors described in today's press release and discussed in the Risk Factors section of our most recent annual report on Form 10-K, our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2025, and other reports we may file with the SEC from time to time. These risks and uncertainties may cause actual results to differ materially from those expressed on this call. These forward-looking statements are made only as of the date when made. During our call today, we will reference certain non-GAAP financial measures. We include non-GAAP to GAAP reconciliations in our press release furnished as an exhibit to our Form 8-K. The non-GAAP financial measures should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. Finally, I'd like to remind everyone that this conference call is being webcast, and a recording will be made available for replay on Tigo's Investor Relations website at investors.tigoenergy.com. And with that, I'd like to now turn the call over to our CEO, Zvi Alon. Zvi? Zvi Alon: Thank you, Bill. To begin today's discussion, I will highlight key areas in our recent financial and operational performance before turning the call over to our CFO, Bill Roeschlein. He will discuss our financial results for the third quarter in more depth as well as provide our guidance for the fourth quarter of 2025 and updated guidance for the full year of 2025. After that, I will share some closing remarks, tell you about our outlook and then open the call for questions from the analysts. I'm pleased to report that we ended the third quarter of 2025 with our seventh increase on sequential quarterly revenue growth. Quarter-to-quarter, we grew more than 27% -- and on a year-over-year basis, we grew 115%. We are pleased to see a return to growth similar to what we saw before the industry downturn and believe our top line growth and market share gains are evidence of the value that Tigo brings to the marketplace. Now to the numbers. In the third quarter of 2025, we reported total revenue of $30.6 million and shipped 795,000 units or 600 megawatts of MLPE. Importantly, we have also returned to GAAP operating profitability for the quarter, which we had guided towards the high end of our estimates on our last quarter call. And for the second time in a row, we are reporting positive adjusted EBITDA. I'm exceptionally proud of what our team here at Tigo has accomplished. To give some geographical color to our results, we saw strong growth in the EMEA and Americas region, which comprised 70% and 26% of our revenue. Noteworthy, we performed exceptionally well in the U.S. as sales grew by approximately 68% sequentially, making it our largest sales region this quarter on a country level. Contributing to this is our sustained effort in the U.S. repower market, where we continue to make significant inroads in these areas. During the third quarter, we also announced a domestic manufacturing marketing partnership with EG4 Electronics in the U.S. This partnership will allow Tigo and EG4 to offer an ITC and domestic content bonus tax credit Tigo-optimized inverters for the U.S. customers, along with the 45X tax credit for Tigo and EG4. Although analysts expect weakness in the U.S. market next year, we believe this partnership, combined with our repower initiative, may mitigate the macro headwinds in the U.S. market and potentially provide significant growth opportunities for us in 2026. And with that, I will turn it over to Bill. Bill? Bill Roeschlein: Thank you, Zvi. Turning now to our financial results for the third quarter ended September 30, 2025. Revenue for the third quarter of 2025 increased 115% to $30.6 million from $14.2 million in the prior year period. On a sequential basis, revenue increased 27.3% with improved results coming from many countries in the EMEA and Americas regions, including Italy, the United Kingdom, Czech Republic and the United States. By region, EMEA revenue was $21.6 million or 70.5% of total revenues, Americas revenue was $8 million or 26% of total revenues and APAC revenue was $1.1 million or 3.5% of total revenues. By product family, for the third quarter of 2025, MLPE revenue represented $26.8 million of revenue or 87.5% of total revenues, while GO ESS represented $3.1 million or 10.3% of total revenues and Predict+ and Licensing revenue represented $0.7 million or 2.2% of total revenues during the quarter. Gross profit for the third quarter of 2025 was $13.1 million or 42.7% of revenue compared to a gross profit of $1.8 million or 12.5% of revenue in the comparable year ago period. Sales of GO ESS, which included reserved inventories, had a positive 1.5% gross margin impact during the quarter. Operating expenses for the third quarter increased 1.8% to $12.4 million compared to $12.2 million in the prior year period. The increase was driven primarily by higher sales and marketing costs in the quarter. Operating income for the third quarter increased by 106.2% to $0.6 million compared to an operating loss of $10.4 million in the prior year period. GAAP net loss for the third quarter was $2.2 million compared to a net loss of $13.1 million for the prior year period. And adjusted EBITDA in the third quarter increased 134.3% to $2.9 million compared to adjusted EBITDA loss of $8.3 million in the prior year period. These results reflect both top line growth and operating expense management. As a reminder, adjusted EBITDA is a non-GAAP measure that represents net loss as adjusted for interest and other expenses, income tax expense, depreciation, amortization, stock-based compensation and M&A transaction expenses. Primary shares outstanding were 69.5 million at the end of the third quarter of 2025. During the quarter, we issued 6.5 million shares from our ATM program for gross proceeds of $10.9 million, representing an average purchase price of $1.69 per share. Subsequent to quarter end, we completed the ATM program with the issuance of 837,000 shares for gross proceeds of $2.2 million, representing an average purchase price of $2.61 per share. Now turning to the balance sheet. Accounts receivable net increased $5.4 million in the third quarter to $15.8 million compared to $10.4 million last quarter and $8.8 million in the year ago comparable period. Inventories net increased by $9.6 million or 50.8% to $28.5 million compared to $18.9 million last quarter and $46.8 million in the year ago comparable period. Our inventory buildup comes as a result of increased activity that we're seeing in our business. Cash, cash equivalents and short-term and long-term marketable securities totaled $40.3 million at September 30, 2025. Principal on our convertible debt due in early January 2026 is $50 million. We've been working diligently with certain financial parties regarding refinancing this debt. And while we have not entered into any binding agreements yet, we expect to complete this process in the fourth quarter. We further expect to utilize a combination of cash on hand and borrowing arrangements to complete the refinance and fund our working capital needs as we continue to grow the business in 2026. Turning now to our financial outlook for our fourth quarter of 2025 and full year 2025. As a reminder, Tigo provides quarterly guidance for revenue as well as adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business. For the fourth quarter of 2025, which traditionally is a seasonally slow quarter in our industry, we expect revenues and adjusted EBITDA to be in the following range. We expect revenues in the fourth quarter ended December 31, 2025, to range between $29 million and $31 million. We expect adjusted EBITDA in the fourth quarter ended December 31, 2025, to range between $2 million and $4 million. For the full year of 2025, we anticipate revenue to be between $102.5 million and $104.5 million. That completes my summary. I'd like to now turn the call back over to Zvi for final remarks. Zvi? Zvi Alon: Thanks, Bill. As we look ahead, I'm happy to say that even against the backdrop of the economic uncertainty, we believe that our track record of 7 consecutive quarters with top line growth and disciplined expense management builds a strong foundation for profitable future growth as we near the end of 2025 and look into 2026. We firmly believe in the growth prospects of our business and look forward to providing additional updates in the coming quarters. With that, operator, please open the call for Q&A. Operator: [Operator Instructions] And our first question is going to come from Eric Stine with Craig-Hallum Capital Group. Eric Stine: So I'm wondering maybe we could just dig in on the improvement that you are seeing in the U.S. since that obviously was a highlight in the quarter. And then just curious, you've got this new arrangement with EG4. What kind of -- I know it's early, but early impressions, what you think that potentially can become here as we get into fiscal '26? Zvi Alon: So let me start with the first question on the improvements in North America. We, in the last couple of quarters, highlighted that we have identified a segment which is not very well served, and it's not necessarily new installations, it's the repowering of existing ones, and it's a very large installed base and we targeted it. We are very happy to say that it has been very successful. So we have seen a major increase in our revenue as we've just reported for North America, and we see a major continuation in the future. We have a unique solution that really is aiming at solving this problem. In addition, we have seen a very nice inroad with the new installations and new storage to the point where we actually are getting close to the depletion of all the inventory we actually had before. So it's all very positive indications in at least being able to address the growth in North America, unlike the general market, which is actually down. In Europe, since we are diversified and needless to say, Germany is still a fairly big chunk of our business, but we see very good inroads in Italy, the U.K., Czech Republic, which -- that diversification helps us quite a bit to actually eliminate some of the downside of some of the countries. So in general, this strategy has been really working well for us in trying to avoid the biggest downfall or shortcoming of the market -- as the market is recovering. Now on the EG4 for North America relationship and partnership, EG4 is a very well-known supplier that started with the off-grid and expanded well beyond that. And we have had that relationship with them for quite some time in complementing their inverter and storage solutions with our MLPE. What we have announced is that together, what we will bring to the market is a domestic content applicable solution, which will be an optimized inverter solution that includes obviously the inverter and optimizers as well. And this progress is actually continuing as planned. And the early indication we provided when we just made the announcement that we foresee an opportunity to start shipments early in Q1 or sometimes mid-Q1, and that has not changed so far. I believe that it will provide a significant increase in our footprint to new installations with that partnership and really providing a very competitive solution in the optimized inverter market. Eric Stine: Got it. That is helpful. And then maybe just sticking with part of that answer, when you talk about repowering. I mean, I would assume the open architecture setup of your optimizer is important going after that market opportunity and just competitively, I mean, is that -- does that mean that -- or I'm curious what you think that means in terms of how you stack up events against others who may be looking at repowering as well? Zvi Alon: So you're absolutely 100% correct. The open architecture is really very well positioned to address any repowering capability. But in addition, we have a very strong inverter solution that is also an open system and can work with pretty much any old installation in the market and can be easily adjusted with the power requirements to whatever power needs of that one specific system is, and that's really very unique. So the combination of these 2 is what's really very unique in the market. Needless to say, it also benefits from the fact that it's very easy to install. It pretty much is 100% compatible with all the other components that you have in the system. So you don't need to replace the whole system and provides all those benefits to the installer and to the owners of those systems. Operator: And the next question will come from Philip Shen with ROTH Capital. Philip Shen: I wanted to get some more clarity on the EG4 partnership. Sorry if I missed it because I'm navigating a couple of calls at the same time. But when do you expect your initial output to be available? Zvi Alon: So as we've indicated before, and I just repeated it, Phil, it will be sometimes in Q1, middle to the second part, but we don't now have the specific date, but we are targeting Q1 shipments. And we have a fairly good indication as to the potential for us next year, and it is significant. Philip Shen: Great. So how much of your overall volume of production could come from EG4 for 2026? I mean could it be half? Or do you think it's maybe 1/3? Zvi Alon: So in the U.S., it's a brand-new production capacity for us. So it would initially be the majority for EG4, but we plan to actually utilize it also beyond the EG4 as well. And so the initial production capacity will be really dedicated to the EG4 relationship. But it's a brand-new line, which we are just in the final stages of getting it up and running. Philip Shen: Right. Okay. So... Zvi Alon: This is additional capacity, which we did not have before. It's not replacing any. We are adding capacity. Philip Shen: Right. And do you think you could use this U.S. EG4 facility to ship units to Europe or elsewhere in the world? Zvi Alon: Correct. You're absolutely 100% correct, yes. And we do plan to get the maximum utilization we can, as you can imagine. Philip Shen: Right. Okay. Great. Shifting over, I know you have not provided any guidance for 2026, but I wanted to see if we could get a sense for what you're looking for. From a seasonality standpoint, would you expect Q1 to be similar to a past Q1, maybe which one might be a useful comparison? And then what kind of growth could we see in '26 year-over-year or maybe sequential growth? However you think you can describe the '26 outlook in a way that makes you feel comfortable, but can give the market color would be fantastic? Zvi Alon: Thank you. So you're absolutely right. We did not provide the guidance for '26 yet. We will do it early in Q1 as we traditionally have been doing at the beginning of the year. But I was trying to communicate that as you can see in Q3 and some of the guidance we provided to Q4, which normally is a down quarter, we actually provided guidance to a flat quarter, not down. And we feel fairly strong about the outcome and where we are. I don't want to unveil too much specificity, but I can tell you, we are very comfortable with that guidance that we just provided, which gives us a very good indication as to how we get into 2026. So we do believe it's going to be a growth year for us, and we will provide a bit more guidance as to the specificity, as I said, in early Q1. And as far as seasonality, normally, as you know, Q4 and Q1 are a little bit more challenged, but Q2 and Q3 are actually on the upside, and we have been demonstrating it also this year. So we do believe that we will see a very similar behavior in the market. I will tell you that we are happy with the results of the repowering in the North America market, and that has no seasonality at all. And so that's a little bit more comforting, and it might actually provide some more stability for us in North America as we move through the year. Philip Shen: Right. Okay. Interesting. And from a margin standpoint, as we get through '26, do you also feel very comfortable with the current levels, call it, 40-plus percent to actually remain steady through '26? Zvi Alon: Absolutely, Phil. Yes. Philip Shen: Great. Great. So that's good. And then one last one, I'll pass it on. You just mentioned the repowering initiative. And can you share what percentage of the market might be repowering -- or what percentage of your revenue could be repowering for next year? Zvi Alon: I'm not sure we're ready to actually share this number in more specificity. But I can tell you, in Q3, the North America results have been substantially impacted by the repowering. And that has demonstrated for us the depth and strength. So obviously, as we move into 2026, we believe it's going to gain much more momentum and can be much more significant. Philip Shen: So the boost in the North America business really was substantially positively impacted by the repowering efforts? Zvi Alon: It was a very strong addition, yes, absolutely. Philip Shen: Great. Okay, so that momentum can continue through Q4 and through '26 as well? Zvi Alon: Correct. And I will tell you, it does not suffer from the problems of the new installations that the whole market is going through, including us. Because when you do the repowering, it's installations that you have and they don't quite work and operate and you really have no choice but to repower it. Operator: And the next question comes from Amit Dayal with H.C. Wainwright. Amit Dayal: Congrats on another strong quarter. Zvi, just touching on just your last comments. I'm just trying to get a better understanding of what's driving sort of this repowering trend here in the U.S. Is this more market-driven? Or is there any regulatory element that is also supporting some of this repowering-related sales improvements? Zvi Alon: Amit, thanks for the question. So to be very, very clear to the point and focus, there is no regulation or government or anything that is impacting it. It's purely financially driven. Customers who installed in systems that are aging and they don't perform anymore and they did benefit from the solar installations they did want to continue, and they have no choice, either to rip it apart, start from scratch, which is very expensive, or to repower. So it is just a ready-made a problem that is looking for a solution, and we've identified it and aimed at this market, and we have a solution which is superior and is not relying on any benefits from any local government or any changes at all. It's a purely financial decision by the owners of those systems. Amit Dayal: Understood. That's very helpful. And do you get similar efficiencies from the post-repowered setup that you might have had before? Or are there even more improvements? Zvi Alon: There are actually more improvements because most of those aging systems have been suffering from a reduction in performance before they actually broke or about to break. And so yes, there is an uptick in performance for those. And in some cases, this is not yet a big phenomenon, but in some cases, customers opt to also add storage too. So that's an additional source that potentially is available for us. Amit Dayal: Interesting. And then this could -- this repowering trend could begin in other geographies for you in the future also, it looks like? Zvi Alon: That is absolutely correct. We started focusing here in the U.S., and it seems to be working for us well. But this phenomenon is a global phenomenon. And many of the systems are aging. They are 7, 8, 9, 10 years old plus. And in many cases, you cannot get replacement parts. It's just you have no choice. So it's a problem that has been created over time and now it is coming to fruition, and it's a ready-made market basically. Amit Dayal: Understood. Just one last one for me. This -- you have the EG4 sort of manufacturing setup here in the U.S. now. What is happening on the business development side, Zvi, to sort of take advantage of this? Are you making any investments in like sales teams over here or any other partnerships you may be looking to capitalize on the manufacturing setup you have over here now? Zvi Alon: The beauty of this relationship is such that it is relying on the strengths of the 2 entities. EG4 is a very good brand in a specific market, which is doing well and growing nicely. And the Tigo-MLPE optimization has been growing and very well known in our space. And so the combination of them do not require any additional new sales or marketing activities. It's utilizing the existing channels we have, and that's the beauty of the relationship. Operator: At this time, this concludes our question-and-answer session. I would like to turn the call back over to Mr. Alon for closing remarks. Zvi Alon: Thanks again, everyone, for joining us today. I especially want to thank our dedicated employees for their ongoing contributions as well as our customers and partners for their continued hard work. I also want to thank our investors for their continued support. Operator? Operator: Thank you for joining us today for Tigo's Third Quarter 2025 Earnings Conference Call. 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.
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