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Operator: Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kerry Group Third Quarter 2025 Results Webcast. [Operator Instructions] I would now like to turn the conference over to William Lynch, Head of Investor Relations. Please go ahead. William Lynch: Thank you, operator. Good morning, and welcome to our Q3 2025 trading update call. I'm joined on the call by our CEO, Edmond Scanlon; and our CFO, Marguerite Larkin. As usual, Edmond and Marguerite will take you through our presentation, and we will then open the lines up for your questions. Before we begin, please note the usual disclaimer on our presentation regarding forward-looking statements. I will now hand over to Edmond. Edmond Scanlon: Thanks, William, and good morning, everyone, and thank you for joining our call. So moving first to Slide 4 and my overview comments. We delivered a good performance across the first 9 months of the year with volume growth well ahead of our markets, combined with strong EBITDA margin expansion. Beginning with revenue, volume growth for Q3 and year-to-date was 3%, which represented a strong end market outperformance. Looking at this firstly by region, we achieved good growth in the Americas, supported by new product launch activity with both Europe and APMEA delivering sequential volume growth improvements in the third quarter. From a channel perspective, foodservice growth of 4.1% was driven by good innovation activity across new menu items, seasonal launches and LTOs. Growth in the retail channel was supported by increased retailer brand innovation and nutritional enhancement renovation. And by technology, we had strong performances across savory taste and Tastesense Salt and sugar reduction technologies as well as enzymes, natural extracts and proactive health technologies. Moving to margins. We delivered strong EBITDA margin expansion of 90 basis points in the period, primarily driven by Accelerate Operational Excellence, and we continue to see good margin expansion opportunity in front of us. On guidance, we remain on track to deliver our full year guidance. And finally, before we move to the performance review, I'd just like to update you on a few key strategic developments during the period. In recent weeks, we opened our new state-of-the-art Biotechnology Centre in Leipzig, Germany, which will play an important role in supporting future, fermentation and biotransformation innovation for the food and beverage industry. In the period, we initiated our Accelerate 2.0 program, which will focus on footprint optimization and enabling digital excellence across the organization. And we also continued to invest and develop our footprints, capacity and capabilities across our regions through the period. I'll now hand you over to Marguerite for the business review. Marguerite Larkin: Thanks, Edmond, and good morning, everyone. Moving to Slide 5 and the business review. Firstly, volume growth in the period of 3% represented continued strong end market outperformance, as Edmond mentioned. Pricing of 0.2% reflected overall input cost inflation. On the EBITDA margins, we delivered strong margin progression of 90 basis points in the period and 80 basis points in the quarter, primarily driven by cost efficiency, operating leverage and product mix, along with the contribution from acquisitions and disposals. Growth in our end-use markets was led by the Bakery, Snacks and Dairy end markets. Foodservice delivered growth of 4.1% despite soft traffic in places. Retail performed well overall, given increased customer focus on improving the nutritional profiles of their products. And volumes in emerging markets increased by 5.3% in the period, led by a strong performance in Southeast Asia. Turning to Slide 6 now and our performance by region. Firstly, in the Americas, where we had good performance across the region with volume growth of 3.6% year-to-date and 3.5% in the third quarter. Within North America, growth was led by snacks through Kerry's range of savory taste profiles and Tastesense Salt reduction technology. Growth in the retail channel was supported by renovation activity across global, regional and retailer brands with growth in foodservice led by good innovation activity with quick service and fast casual restaurants. And in LatAm, we had strong growth in Brazil and Central America, led by snacks. In Europe, volume growth was 0.7% in the third quarter, 0.4% year-to-date. This included a good performance in foodservice through seasonal and new launch activity with retail volumes reflecting soft market dynamics in Western Europe. Growth in the region was led by beverage through Kerry's integrated taste technologies and proactive health ingredients. Turning to APMEA, where our volume growth was 4.1% in the third quarter. This was primarily driven by strong growth in Southeast Asia with solid growth in the Middle East and Africa and volumes in China remaining challenged. Foodservice delivered strong volume growth with coffee chains and quick service restaurants and retail channel volume growth was driven by Kerry's authentic savory taste profile. Growth in our end market was led by bakery through food protection and preservation systems as well as reformulation activity in areas, including cocoa. Turning to the components of our reported year-to-date revenue bridge on Slide 7. Volume growth, as I mentioned, was 3%, with pricing up 0.2%. Transaction currency was favorable 0.2%. Translation currency was adverse 3.6% given the movements in the U.S. dollar and emerging market currencies versus the euro. And the acquisitions net of disposals was a net decrease of 0.8% in the period. Finally, to cover off a number of other matters on Slide 8. Net debt at the end of the period was EUR 2.2 billion, reflecting cash generation, capital investments and the share buyback program. We initiated Accelerate 2.0 as planned during the period, and we are pleased with the progress made. Firstly, in executing the footprint optimization strategy across Europe and North America, including the commencement of some site closures and the disposal of some associated business activities. And secondly, we have started the rollout of a number of digital initiatives we have been piloting over the last 18 months within our manufacturing operations and commercial activities. On input costs, while there is overall variation within our input cost basket, we are currently looking at limited input cost inflation for the full year. On currency, our outlook remains unchanged for a 4% to 5% translation currency headwind in the full year. To summarize, we delivered a good overall financial performance in the period with volume growth combined with strong margin expansion. And with that, I'll pass you back to Edmond. Edmond Scanlon: Thanks, Marguerite. So moving to our full year outlook on Slide 9. Our strong end market volume outperformance in the period demonstrates the strength of our strategic positioning across our markets, channels and customer base. And looking to the remainder of the year, while recognizing a heightened level of market uncertainty, we remain well positioned for volume growth and strong margin expansion as we continue to support our customers as an innovation and renovation partner. As I noted earlier, we're maintaining our full year adjusted earnings per share guidance of 7% to 11% constant currency growth. And with that, I'll now hand you back to the operator, and we look forward to taking your questions. Operator: [Operator Instructions] Your first question comes from the line of Patrick Higgins with Goodbody. Patrick Higgins: A couple of questions, if that's okay. Firstly, just in terms of, I guess, guidance, obviously, you reiterated the 7% to 11% on EPS. But just in terms of volumes, I think at H1, you said around 3%. Is that kind of reiterated as well? And I guess following on from that, at the H1 point, you noted end markets were broadly expected to be broadly flat this year. How has that developed since then? Could you maybe talk through the moving parts by region? And then my next question is just around the innovation pipeline. Obviously, you've been pretty consistent about the strength of that through this year. How has that developed since H1? Have you seen any delays or kind of smaller-than-expected launches just given the challenging kind of consumer backdrop? I'll leave it there. Edmond Scanlon: Thanks, Patrick. Firstly, on the volume outlook for the remaining of the year, no change to what we said at the half year. So we're expecting volume growth to be circa 3% in the full year. In terms of, let's say, market kind of, let's say, conditions or kind of what we're seeing by region maybe. The reality is there is a lot of variability out there at the moment. North America, the consumer backdrop has remained challenging. And I think we can all see that from different kind of market data out there or traffic data on the foodservice channel being slightly back year-on-year. In LatAm, the market in Brazil has improved versus last year, but we've seen the opposite in Mexico. And in the APMEA region, market demand in Southeast Asia has been healthy for us. I think it's fair to say Indonesia has been the standout performer for us. But when we look right across Southeast Asia, it's been quite strong, maybe the only exception being Vietnam. And I think what's really important for us is our ability to be able to pivot resources at pace and at scale. Then in terms of innovation, I guess, look, we called out a year ago that penetration opportunity and the scale of that penetration opportunity is quite significant. And as we look at the progression of our project pipeline between then and now, we've seen the impact of that penetration opportunity really, I suppose, contributing to our pipeline and contributing to the increase in scale in our pipeline over the course of the last 12 months. There has been quite a bit of launch activity in Q3, that will continue into Q4. Some of the performance of that launch activity in the market has been mixed in places. But overall, I would say the level of innovation that we have seen come through both on the retail channel and the foodservice channel is quite strong overall. The main driver being the penetration opportunity, but we've also seen customers, let's say, for instance in foodservice, be it the larger players or the smaller players step up the level of innovation with the larger players more focused on protecting market share and securing market share and bringing innovation to the menu to do that, whereas the smaller players have been, let's say, more into the zone of scaling their businesses and expanding their businesses through store openings. And on the retail side, we've seen significant step-up in activity on private label, which drives, I guess, the local and regional customer segment within our customer segmentation overall. Operator: Your next question comes from the line of Alex Sloane with Barclays. Alexander Sloane: Two questions from me, if that's okay. Clearly, it's too early to talk about '26 precisely. But relative to where we are today, would it be fair to assume that APMEA growth next year can be closer to the medium-term target if China improves? And perhaps you could give a bit more color on the trends and outlook that you're seeing in China, obviously, still challenged in quarter 3. The second one, in quarter 3, you had sort of more balanced growth between foodservice, which obviously slowed a touch on the traffic, but improved growth in retail. Would you expect that sort of balance to remain the case for the remainder of the year and into '26? Or should we expect foodservice to resume its historical outperformance? Edmond Scanlon: Maybe taking the second part of your question first. As you say, let's say, the performance across foodservice and retail has been, let's say, foodservice is slightly ahead of retail as we sit here at the moment. But as we look out, we would feel that foodservice will still continue to outperform retail like it has in the past. I guess the headlines that we're seeing maybe coming from the larger players or the traffic doesn't reflect the level of activity that's going on within the channel. I would say, from an innovation perspective, whether it's LTO, seasonal offerings, whether it's new taste profiles being launched onto the menus, a lot of innovation around chicken and pork, let's say, the whole poultry category, beverage continuing to be quite strong. Yes, the message really on foodservice is the headlines probably doesn't just capture the level of activity that's going on right across the channel. Then maybe on APMEA for a minute. Look, our expectations here going forward over the coming, let's say, quarters and over the medium term is that the APMEA region will continue -- our expectation is that the APMEA region will continue to be in that high single-digit volume growth zone. Obviously, we're not there at the moment but we do remain very positive on the region. We have developed our business significantly there in recent years, particularly in the Middle East and Africa. We continue to invest in that region with new capacity coming on in Jeddah. We brought new ground in the manufacturing facility in Turkey. We're opening a new state-of-the-art technology and innovation center in Dubai. And that's really our expected standout performer here going out into the future in the Middle East and Africa. China has been more challenging in recent times. Absolutely no doubt about that. We have, let's say, slightly adjusted our strategy in China in that we have seen some of our customer base in China look more to regions outside of China to grow their business. So we have made a slight pivot there from a personnel perspective and from a strategic customer engagement perspective, bringing them proactive concepts whereby they can target regions outside of China to grow their business and specifically develop products for, let's say, Southeast Asia and the Middle East and Africa, albeit these products will be produced in China. So a slight pivot there. We're not sitting back waiting for the market to change in China. We're being very proactive really to try and drive our business forward there and to get as proactive as we possibly can with our customer base. Operator: [Operator Instructions] Our next question comes from the line of Ed Hockin with JPMorgan. Edward Hockin: I've got 2, please. My first one is on Europe. So you saw a bit of an improvement in volumes growth in Q3, whether you could outline what drove that uptick and how durable it is as we think about Q4 and next year? And also with the appointment of Marcelo as the Head of that region, what is it do you think needs to be changed or developed or fixed within the region to get it on a more sustainable growth footing, after a couple of years that have been close to flat? And my second question, at the group level, as we think about 2026, and obviously, it's early days to be talking about. But in the absence of an end market improvement, supposing end markets remain flat, what kind of levers do you see or what kind of areas to draw our attention to that could drive growth improvement versus this year? Or is it your view that in a flat market then a circa 3% is the right level for 2026 volumes as well? Edmond Scanlon: Yes. Maybe first on the Europe question. I would say, look, our expectations for Europe and bear in mind, when we talk about Europe, we're talking about the developed Europe situation. Basically, our expectation is to be in that 1% to 2% volume growth range. And we are -- and we will progress towards that range in the, let's say, upcoming quarters. It's going to be a slow burn in Europe, though, nonetheless. I mean the market is, let's say, fairly challenged. It is a market that we're expecting to have a more proactive approach in that market. We've always been proactive in Europe, but we're expecting Marcelo to bring that level of pro-activity that we would typically have in emerging markets into Europe and to build on the good work that's already been going on in Europe. We're not calling out any change in strategy in Europe. It's a continuation of the strategy. We believe we have absolutely the right strategy for our customer base in Europe and to grow our business in Europe. It's about, let's say, doing a refresh in terms of our approach to the market, bringing that emerging market mindset of intense productivity to the customer base. Then in terms of maybe the outlook, I would go back to the point, Ed of, let's say, the market is going to do what the market is going to do. I guess we're really focused on driving our business forward. When I look at the scale of our pipeline versus where it was a year ago, it is significantly ahead of where it was a year ago. And I would call out maybe 3 big areas. The penetration opportunity that I've talked about many times in the past, that reformulation from a nutrition perspective, from a cost perspective and even from a sustainability perspective, these are all factors that are driving our business forward. There are challenges around availability of raw materials, et cetera, et cetera. All these things are driving our business forward, driving penetration, contributing to the growth that we're getting in the business. And the major, I suppose, reformulation opportunities, specifically in North America are in front of us. The entire discussion around, I would say, the [ maha ] or the potential front-to-pack labeling or let's see how things play out in North America. But that's still very much in front of us. States are doing their own things, but there hasn't been a federal intervention yet in North America in terms of exactly the direction of travel. If and when that happens, we feel that's a further underpin of growth and a further underpin of opportunity for us going forward into the future. Foodservice, there's -- we've seen a significant step-up in the level of value offerings and value meals and just our customer base being hyper focused and they're doing that through the lens of new launches, be it LTOs or seasonal offerings, but they've also stepped up their value offerings. And we expect that to continue over the coming quarters, and we're extremely well positioned as it relates to that channel. And the third area I'd call out is, let's say, that private label opportunity, whereby retailers are being quite aggressive in terms of trying to bring new products to the market that are not just national brand equivalents. They are trying to bring high-quality products to the market to grow categories. So I guess as we look out into the future, we feel that despite the challenging market, there are several factors there that we feel quite good about as we look out into the quarters in front of us. Operator: Your next question comes from the line of Fulvio Cazzol with Berenberg. Fulvio Cazzol: My question is really on the EBITDA margin, which is up 90 basis points in the first 9 months, up 80 basis points for the third quarter. So my question around that is, well clearly, it's developing probably better than what you would have anticipated at the start of the year, whether you can confirm that? And if that's the case, could you maybe just highlight for us what's driving this? Is it that you're seeing incremental cost-saving opportunities that you're unlocking? Or are you just executing faster some of the efficiencies? In other words, the 19% to 20% target that you've got for 2028, are you likely to achieve that earlier? Or is there going to be a bigger potential upside on the EBITDA margins? Marguerite Larkin: Maybe I'll take that question. So firstly, we are pleased with the strong margin expansion of 80 basis points in the quarter. In terms of the stronger performance in the quarter, it's mainly due to the phasing of benefits from Accelerate Operational Excellence and portfolio developments, so slightly ahead of our expectation. I would say, though, there is no change to the full year expectation for margin expansion of 70 basis points or greater. We are well on track to deliver that margin expansion in the current year. And then in terms of the -- looking forward to the margin expansion over the next number of years, we are happy that we have outlined a clear margin target of 19% to 20% by 2028. We have a clear pathway in terms of delivery of that target, and we're pleased with the progress that we've made in terms of commencing the Accelerate 2.0 program, which will be a strong underpin of delivery of that margin expansion over the next couple of years as well as continued expansion from mix and operating leverage. Operator: Our final question comes from the line of Cathal Kenny with Davy, Research. Cathal Kenny: Two questions from my side. Firstly, just going back to private label, Edmond. Just want to delve into that a little bit more. Which region are you seeing most activity on innovation? And which region are you best placed to execute on that opportunity? And then the second one is just on enzymes. I see it comes up in the press release a couple of times. Just wondering in terms of the end market applications you're focused on in terms of bringing that technology to bear. Edmond Scanlon: Maybe talking about enzymes first. I mean I think the 2 end-use markets that we are seeing, I would say, performance that is maybe even slightly ahead of expectations is on dairy and bakery. Firstly, on dairy, we have quite a strong offering into the dairy channel, let's say, historically, but lactose intolerance is a growing kind of need out there in the market, and we are extremely well positioned to be able to take advantage of that opportunity, and that opportunity is quite global. The second area is in bakery, whereby enzymes and our enzyme capability is a key tool to the toolbox, in our toolbox in terms of freshness and food protection and preservation. And again, that is a demand from our customer base across both foodservice and retail channels. And that is about basically bringing freshness and food protection and preservation in a clean label way to the bakery end-use market. And yes, we recently announced a new Biotechnology Centre in Leipzig, Germany, and we're expanding our footprint in Ireland as it relates to manufacturing enzymes, both on the fermentation side and on the packaging side. Then on private label. Private label is not new to us here in Europe or, let's say, in Ireland and the U.K. We have, let's say, a strong track record in private label, let's say, emanating from this region. And we have, I suppose, with that level of experience we have and expertise that we have in private label, we've deployed those capabilities into North America. It is in North America that we have seen a step change in terms of engagement with retailers around targeting certain categories where actually they want to take a leadership position in certain categories where they feel there's been a lack of innovation in recent years and they feel that there's, let's say, plenty of scope from a pricing perspective to bring really high-quality clean label, more nutritious food and beverage products into categories that they want to lead, and we're very well positioned to be able to actually enable them. From an overall, I suppose, business model perspective, it is quite similar in terms of approach as we take for foodservice. So we feel well positioned to be able to take advantage of this opportunity and expect that private label performance and private label, I suppose, market expansion will continue in North America. And yes, we feel good about that as we look forward into the coming quarters. Operator: And that concludes the question-and-answer session. I would like to turn the call back over to Kerry for closing remarks. William Lynch: Thank you, everyone, for joining us on the call today. If you do have any follow-ups, please do reach out, and we just want to wish you a good day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International First Quarter Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference call over to George Price, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir. George Price: Thanks, Tina, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning. We are providing presentation slides, so let's move to Slide 2. There will be statements in this call that do not address historical fact and as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night's press release and are described in the company's SEC filings. Our safe harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's turn to Slide 3, please. To open our discussion this morning, here is John Mengucci, President and Chief Executive Officer of CACI International. John? John Mengucci: Thanks, George, and good morning, everyone. Thank you for joining us to discuss our first quarter fiscal year '26 results. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Slide 4, please. CACI's strong first quarter results are a great start to our fiscal year 2026. We delivered free cash flow of $143 million, driven by revenue growth of 11% and an EBITDA margin of 11.7%. We also won $5 billion of contract awards, which represents a book-to-bill of 2.2x for the quarter and 1.3x on a trailing 12-month basis. Over half of our awards were for new business to CACI, and we also continued our excellent track record of winning recompetes and securing sole-source extensions. Our first quarter performance gives us increased confidence in achieving both our full year guidance, which we are reaffirming and our 3-year financial targets. Jeff will provide additional details shortly. Slide 5, please. Turning to the macro environment. The federal government continues limited operations under a shutdown. However, our business remains resilient given our national security focus with most of our work funded and deemed essential. Looking beyond the shutdown, we continue to see enduring needs, good demand signals from our customers and prospects for a healthy funding environment for national security priorities. In addition, we are starting to see early indications of how reconciliation funds available to DoD and DHS may be used. For DHS, the focus is likely to include modernization and border security, which we expect will benefit programs like BEAGLE and drive demand for our Counter-UAS technology. For DoD, in addition to areas we have previously discussed, we also expect reconciliation funds, including those for Golden Dome, will benefit some of our intelligence programs as we focus on left-of-launch situational awareness. Our ability to reaffirm our guidance and deliver on our commitments even in the face of a government shutdown demonstrates the resilience of our business and as a result of deliberate choices and investments we have made over many years. Our actions have positioned CACI for success in any environment, including this one. Slide 6, please. Let me discuss some examples of awards, program performance and investments that highlight our competitive differentiation in several areas. First, in Counter-UAS escalating drone threats and increasing incursions globally are driving strong demand for our capabilities, including from our international partners. In fact, during the first quarter, we received a follow-on order from the Canadian government for additional manpack software-defined Counter-UAS systems. This follows the initial order we received in fiscal '24 as well as in order for vehicle-mounted Counter-UAS systems were received from Canada last quarter. But the threat is no longer just abroad, it is here at home as well, and the administration has made it clear that the defense of the homeland is the top national security priority. That's why CACI has been investing ahead of need to develop Merlin, our latest Counter-UAS detect and defeat system. Merlin's Counter-UAS capabilities are extremely differentiated and particularly well suited for defending the homeland for many reasons. It is based on technology that has been operationally proven across the globe for years, focused on real missions, real threats and delivering real kills with non-kinetic capabilities that include low to no collateral damage defeat modes with a detection range of up to 75 kilometers and providing industry-leading wireless capabilities that address Counter-UAS threats utilizing cellular networks. Our Merlin system has outperformed competitors in several government-sponsored demonstrations against a wide range of UAS systems utilizing our software-defined technology, tipping and queuing a third-party kinetic system to defeat a drone and also integrating with [indiscernible] platform, which was recently selected as the Army's Counter UAS fire control system. These results are what is driving strong customer interest, both in the U.S. and abroad. A second area is Counter-Space. Modernizing our nation's capabilities is crucial to address peer threats in the increasingly contested space domain. We are seeing increasing customer interest and demand for CACI's capabilities. This includes a $240 million award in the first quarter to sustain and modernize the Tactical Integrated Ground Suite (sic) [ Support ] or TIGS Counter-Space program for the Army. Additionally, a few days after quarter end, we received an initial production order from the U.S. Space Force for a Remote Modular Terminal or RMT. RMT is a broadband counter satellite electronic warfare system that leverages our existing Counter-UAS software to provide our customers with enhanced counter space capabilities. Both TIGS and RMT are great examples of how we can leverage our differentiated software-defined technology and our strong past performance to help war fighters execute critical missions across the entire electromagnetic spectrum. Slide 7, please. Third is network modernization, a foundational dependency for many critical national security priorities. Without modernized networks, DoD priorities like NGC2 and [ Gen C2 ] either won't be as effective or just won't be possible. Given this reality and the administration's focus on modernization across the government, we continue to see good demand and a strong pipeline of network modernization opportunities. For example, Air Force recently awarded CACI task orders #2 and #3, on the base infrastructure modernization program, previously known as EITaaS Wave 2. CACI will modernize networks for the U.S. Indo-Pacific Command and the U.S. Space Force, ensuring more efficient and more secure network operations. Together, these task orders represent approximately $400 million of awards this quarter. Additionally, we continue to execute on our existing network modernization programs. On our SIPRMOD program, we received NSA authorization for use of our software-defined CSfC technology, allowing for the processing to classify data through our framework. This accelerates our ability to test and field devices on the network and positions us to make the network operational in 2026. The final area is digital application modernization. Our customers were seeking greater efficiency, effectiveness and speed of delivery as they modernize software applications. CACI continues to lead the industry with our use of commercial agile software development processes and DevSecOps. For example, our BEAGEL program for Customs and Border Protection is one of the largest agile software development programs in the federal government. Our exceptional performance on this program recently yielded us our second 1-year contract expansion, a strong indication of the value we deliver to CBP and a further indication of how well positioned CACI is with our customer base. The combination of our leading agile development capabilities and strong past performance has enabled us to win the $1.6 billion JTMS award this quarter. The Joint Transportation Management System is [ TransCom's ] enterprise modernization initiative to unify end-to-end transportation and financial processes across the DoD on a commercial software platform. CACI will leverage our agile software development and AI capabilities, combined with SAP's S/4HANA off-the-shelf commercial platform to significantly improve visibility, collaboration and [ auditability ] for the command. It's yet another example of the federal government selecting CACI to modernize at scale to enable mission success, while generating long-term value for the government and taxpayers. It is also important to note that as we continue to win in the marketplace, we also continue to invest ahead of customer need and our industry-leading agile capabilities to ensure that CACI remains well positioned to win and execute these critical modernization initiatives. We are now expanding our use of AI tools to increase the speed, efficiency and scalability of our agile software development processes and continuing to innovate to stay at the forefront of utilizing commercial software development tools and processes to address critical national security priorities faster and more efficiently. These are just a few examples of the many successes we are seeing at CACI, thanks to our focus on critical national security priorities, software-defined technology, commitment to investing ahead of customer need and unwavering focus on superior execution. With that, I'll turn the call over to Jeff. Jeffrey MacLauchlan: Thank You, John. Good morning, everyone. Please turn to Slide 8. As John mentioned, we're very pleased with our first quarter performance. The continued strong performance once again underscores the deliberate positioning of the portfolio and the differentiation of our business. In the first quarter, we generated revenue of nearly $2.3 billion, representing 11.2% year-over-year growth, of which 5.5% was organic. I'd also like to call your attention to the revenue by customer disclosure in our earnings release, where we are now breaking out revenue from intelligence community customers. This additional transparency aligns our revenue disclosure with the national security focus that is a foundational element of our strategy. EBITDA margin of 11.7% in the quarter represents a year-over-year increase of 120 basis points, driven primarily by strong program execution, timing of some higher-margin software-defined technology deliveries and overall mix. First quarter adjusted diluted earnings per share of $6.85 were 16% higher than a year ago, greater operating income along with a lower share count more than offset higher interest expense and a higher income tax provision. Finally, free cash flow was $143 million for the quarter, driven by our strong profitability and increasing cash generation from working capital management. Days sales outstanding, or DSO, were 56 days. Slide 9, please. A healthy long-term cash flow characteristics of our business are modest leverage of 2.6x net debt to trailing 12-month EBITDA, and our demonstrated access to capital continued to provide us with significant optionality. We remain well positioned to continue to deploy capital in a flexible and opportunistic manner to drive long-term growth in free cash flow per share and shareholder value. Slide 10, please. We're reaffirming our fiscal '26 guidance. We continue to expect revenue between $9.2 billion and $9.4 billion, EBITDA margin in the mid-11% range adjusted net income between $605 million and $625 million; and finally, free cash flow of at least $710 million. One item I'll note is that our strong Q1 performance has helped us derisk the EBITDA margin step-up from the first half to the second half that we discussed last quarter. To help with modeling, we expect EBITDA margin in the second quarter to be about 11%. Slide 11, please. Turning to forward indicators, all metrics provide good long-term visibility into the strength of our business. Our first quarter book-to-bill of 2.2x, and our trailing 12 months book-to-bill of 1.3x reflect strong performance in the marketplace. The weighted average duration of our awards in Q1 was over 6 years. Our record backlog of $34 billion increased 4% from a year ago and represents nearly 4 years of annual revenue. And finally, our funded backlog grew nearly 26% year-over-year, some of which was likely driven by our customers preparing essential programs for the government shutdown. For fiscal year '26, we now expect more than 92% of our revenue to come from existing programs with less than 4% coming from recompetes and 4% from new business. Progress on these metrics, specifically on recompete revenue, which was 11% just last quarter, reflects our successful business development and operational performance and yields increased confidence in our expectations for the year. In fact, I'd like to point out that in the past 10 years, this is the second highest amount of revenue from existing programs that we've had at this point in the year. In terms of our pipeline, we have $6 billion of bids under evaluation, around 80% of which are for new business to CACI. We expect to submit another $13 billion in bids over the next 2 quarters with about 75% of that being for new business. In summary, we delivered outstanding first quarter results, derisked fiscal year '26 and continued to demonstrate our differentiated position in the marketplace. We are winning and executing high-value enduring work that supports long-term growth increased free cash flow per share and additional shareholder value. With that, I'll turn the call back over to John. John Mengucci: Thank you, Jeff. Let's go to Slide 12, please. CACI delivers distinctive and differentiated expertise and technology to address our nation's critical national security priorities. We help customers address their biggest challenges and their most important priorities. We help them succeed in their missions. And because of that, our customers increasingly rely on us. We are the company that consistently gets things -- gets the hardest things done when our customers need it most. Because of this, our business continues to perform well, and we continue to meet our financial commitments even in this dynamic and somewhat uncertain near-term environment. The strength of our strategy, our differentiation and our execution is borne out by our consistent performance. Our outstanding first quarter results represent a great start to fiscal year '26. We are successfully executing our strategy winning and ramping significant new work, capturing our recompetes and driving additional on-contract growth from our large contract portfolio. As a result, we are pleased to reaffirm our fiscal '26 guidance and we remain confident in achieving our 3-year financial targets. We are well positioned in the right markets with the right capabilities, and we are confident in our ability to drive long-term growth in free cash flow per share and shareholder value. As is always the case, our success is driven by our 25,000 employees who are ever vigilant and expanding the limits of national security. To everyone on the CACI team, I am proud of what you do each and every day for our company and our nation. And to our shareholders, I want to thank you for your continued support of CACI. With that, Tina, let's open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Colin Canfield with Cantor Fitzgerald. Colin Canfield: Perhaps we could shed some light on early expectations for the FY '27 request. I think we have kind of 2 camps forming up in terms of buy-side sentiment, one being that the step down from kind of reconciliation plus base implies -- it implies a step down year-on-year. And then another camp is that it's pretty insane to think that Congress would kind of imply a cut on defense budgets into a rising national security environment. So if you can shed some light on kind of where you expect kind of high-level budgets to go. John Mengucci: Yes, Colin, thanks. That's a meaty first question. Look, we're very, very focused strategically on critical national security priorities and we've always talked about those priorities have deep and enduring funding streams, and we have great bipartisan support. That bipartisan support is why we vectored this portfolio over the last decade to be 90% focused on national security. But we've also said before that we're really focused on the top line budget, budget growing. But at the end of the day, we're a $9.3 billion company in a $280 billion total addressable market. So we look at that tone as we have plenty of room to grow. And then where is the money going? So if you look across the areas like electromagnetic spectrum, software-defined tech space, Counter-UAS, border security, that's where current budget dollars and reconciliation dollars go. So I think we're in the right spot. We continue to have a great book-to-bill greater than 1 and our software-defined tech continues to deliver growth for us. So there's a lot of what-ifs as we get into '26 and into '27. But the fact is we're winning a lot of long-term business that really draws across a number of year budgets. So with the level of backlog we have with the duration of contracts, we just put into backlog right around 6 years. It does allow our company to endure and allows us to continue to grow regardless of what some of those top line numbers are. Colin Canfield: Got it. And then in terms of like Counter-UAS cyber electronic warfare contracts, I think investors have traditionally been conditioned to kind of large multiyear vehicles, but it seems like contracting officers are taking a more agile approach. So maybe if you can kind of talk about how you expect those contracts to be awarded as well as kind of the level of agility that is rewarding within folks like yourselves, [ Epirus ], AeroVironment, folks that kind of have commercially developed solutions in that domain. John Mengucci: Yes, thanks. So look, I think it's safe to say that the U.S. government has been buying capabilities in very different ways as of late. It was about 3 years back, we started to hear about OTAs. It's within the last year, we heard about how advantageous is to be a commercial company. And look, we've double the amount of OTA work that we've done in the last 2 years from the last 5. We're a company that is both [ cash ] compliant, which means we have a rate-based business like traditional government vendors, but we also have a portion of our business that's truly commercial as commercial accounting and commercial practices. So that sort of lays that groundwork that should tell everybody. CACI is a unique company within our space and that we're very well positioned to address how the government buys. Most of our software-defined technology work has actually been purchased over the last few years in a very different manner. So it is true that some of our technology is funded by large multiyear programs, but it's also more the norm that we receive our awards on purchase orders in a very commercial-like manner. You can now buy from CACI just about anything across the electromagnetic spectrum whether it's SIGINT or it's EW, and it allows us to provide an item number, a part number and a price. And so we're very used to supporting those types of ordering vehicles. At the end of the day, it's also what moves our financials around, right? I mean if we're sitting here getting purchase orders that come in, in quarter, quarter 1, and we turned that around in the first quarter, that's going to move our financials around. So true that the government is buying different. I love the fact that the government is buying different. I love the fact that we saw that coming 7, 8 years back, we positioned this company very well. And then I'll sort of end, Colin, with TLS Manpack is a perfect example. That went from an OTA to a program of record where that customer continues to buy 250, 300, 500 units. So better for us to put a program in place and that allow our customers to buy in a manner that supports their budgets. Operator: And your next question comes from the line of Scott Mikus with Melius Research. Scott Mikus: Very nice result. John, CACI was ahead of the game when it came to investing in Counter-UAS solutions, but we've seen in Ukraine, both sides are now using fiberoptic cables to prevent their drones from being jammed. So how are you thinking about that challenge when it comes to developing more Counter-UAS offerings? Is it an opportunity for you? Just wanted to get your thoughts on that. John Mengucci: Yes. Thanks a lot, Scott. Look, I'm going to sort of step back on this whole Counter-UAS story. I guess, first of all, we've been doing it for a really long time, a couple of decades. And I've covered a lot of the basis in some of my prepared remarks with the creation of Merlin that frankly allows us to quickly bring different phenomenology in, so we can better find drones. The drone threat is really unique in some ways but very much the same in other ways. Time is going to be the differentiator for this threat. Most other solutions that are out there, look at simple drones within 1 to 3-kilometer range, Merlin and other of our systems detect up to 75 kilometers away. And what that does is it gives the operator time. So in some instances, up to 15 minutes of time versus about 8 seconds of time by those who were looking at Group 1 or maybe Group 2 drones within a 1 to 3 kilometers space. We're already in the U.S. government inventory. We're already pushing at the scale, already battle hardened with hundreds of confirmed kills. So it's true that there are drones that are trailing fiber. There are drones that are operating in the cellular infrastructure. So if you look at what the homeland fight is going to be, we may have drones from people who are not our friends, flying their drones on our networks. So at the end of the day, I think we have an outstanding solution. I know we have an outstanding solution. But I'm also going to end with to most companies, Counter-UAS is like the new AI, right? Everybody does it now that it's popular and the difference between the AI stock-pop hype and the Counter-UAS stock-pop hype is if you have a Counter-UAS solution, you say it does and it does so much and it doesn't, at the end of the day, somebody dies. If you've only deployed your kit at demos around the AUSA floor, it's very telling. We've been on this market for a couple of decades with a great installed base, hundreds of systems, thousands of sensors. I would expect this threat to continually change and that's why our solutions are software-based. That's why our Merlin system brings different phenomenology in. So we're able to more than adequately not only defend this nation, but other nations out there. Scott Mikus: Okay. And then I have one for Jeff. I mean, Jeff, what really surprised me was your Fed civilian agency sales were up 17% year-over-year. So I was just wondering if you could maybe parse that out between organic versus inorganic? And then perhaps what was DHS up versus non-DHS? Jeffrey MacLauchlan: Yes. So about 10 points of that percentage basis of content is DHS. So the growth there, Scott, is in DHS and it's in the ramping on NASA NCAP, which is ramping up nicely and moving with our plan. It's really all organic. I don't think there's no inorganic in there. As I think about Azure and Applied Insight, none of those are going to be offensive. Operator: Our next question comes from the line of Gavin Parsons with UBS. Gavin Parsons: John, I know you always remind us, bookings are super lumpy, but obviously, a pretty strong booking quarter here. So I guess a 2-part question. The submitted pipeline is down, but obviously [indiscernible] those strong bookings. So as part of the question, does the simple math imply a very strong win rate on that conversion? And then second question, should we expect bookings to maybe take a breather over the next few quarters given the submitted pipeline is down a bit? John Mengucci: Yes, and potentially. Look, we -- I'm actually quite happy that the transparent information that we share is exactly what should lead to questions like this. Look, we really pride ourselves in giving you all the information we have as we run this company. We do our best to talk about bids that are going to be awarded at some time. We look at what our pipeline of submittals are and we talk about what we end up winning. So yes, there's going to be different movement of numbers out there. Very proud of our first quarter win rate. Of course, I look at where we are at the end of the year, but winning $5 billion in the first quarter, which is half of the total we won last year, it really does position us well. Jeffrey MacLauchlan: I think you also have to look, Gavin, at the whole data set because we obviously had a really good awards quarter you would expect that to probably result in a dip in the awaiting decisions number, but you also have to look at the expected to submit piece, which is up. So this -- the adequacy of the pipeline is really a little bit like a balloon. I mean any one time one piece of it may dip down and another piece dips up. I mean that's inherent in the lumpiness, right? John Mengucci: And I think your second question was around with everything going on, how could it potentially impact the second quarter. Look, I think it's unrealistic to believe that the pace of awards given we're in a shutdown mode is going to continue to the level that we have. What that number ends up being is whatever that number ends up being, I'm sure we'll talk about what the book-to-bill was at the end of the second quarter. I'm more excited about what the book-to-bill is at the end of the year and even more excited by having a trailing 12-month book-to-bill of 1.3x. So we put a lot of awards in our $34 billion backlog, funded backlog is up 26%. I think it really bodes well regardless of what gets thrown at us. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: The government shutdown. It appears some awards, especially funded were accelerated ahead of the shutdown. So should that mitigate some of the near-term impact? And is there some sort of length of the shutdown that presents a risk to guidance? Jeffrey MacLauchlan: Yes. Certainly, it leaves us better positioned. I think it's important in the sense that it leaves us better positioned in terms of programs being funded, obviously, but I think it also is sort of an expression of confidence and support by customers to position us to have minimal disruption from this. So certainly, that's true. One of the reasons that we affirmed our guidance despite the fact that you can kind of see some growing momentum in the business is our approach to the guidance, which we've talked about with you before, and this left goal post, right goal post approach, really encompasses sort of a range of outcomes. And we really, at this point, don't see reasonable outcome that isn't encompassed in the guidance range we've given you. Not only is there minimal disruption, the nature of much of the work is that we would expect to make it up within the year. And we really don't see it as being a disruptive factor. I don't know if John adds here. John Mengucci: Yes. Seth, I'd also just add to Jeff's comments. Given our significant intentional exposure to national security work and as Jeff said, the level of technology work and a large level of funding backlog. And the fact that a lot of our work is essential and that -- which is not there, says that we're able to make that work up. You may not see that null any Q2 impact in quarter 2, but you'll definitely see that null any short-term impact over the full year because we have the full year to make that -- those times up. So I think we're in a really good position. Clearly, if it continues to linger for months and months, I think Jeff already covered that. It's well covered within our guidance that we have out there today. Seth Seifman: Great. And then how does the hiring environment look over the last few months? And do shutdowns tend to impact the pool of applicants, whether there's more people coming from, say, like a federal agency that are applying or people are kind of scared off from the industry? John Mengucci: Yes, [ Rocco ]. Look, we're actually seeing applicant value -- or volume, sorry, at an all-time high. Believe it or not, we had 0.5 million applicants in fiscal year 2025, and we have quite a large number of folks applying for jobs to date. It does help that we're more a technology company if we were purely a pure play government services company, when you see shutdowns that go on for 15, 20, 25, 30 days, that gives folks pause if they want to go do national security work on the expertise side. But we've got -- we're still running -- 40% of our hires are coming from referrals. We've got about -- we have well over 300-person intern program that will be kicking off here shortly. So we haven't seen any slowdown in number of applicants, and we certainly haven't stopped hiring given the level of wins we had in the first quarter. Operator: And our next question comes from the line of Tobey Sommer with Truist Securities. Henry Roberts: It's Henry on for Tobey here. Maybe just to start, I thought I go back to Counter-UAS for a second, but I'm just curious if you could roughly quantify the full opportunity set for that space over the next 12 months, let's say? And then how much of that could be related to Golden Dome on the non-kinetic C-UAS side? John Mengucci: Yes, Henry, thanks. Look, I think that the government, given the different funding buckets is still sorting through that. I'm not going to give you a direct answer on amount of Counter-UAS sales we expect in the next 12 months. But I will share that our portfolio of EW technologies, it includes Counter-UAS, and it includes a number of systems. Because if you remember, the hardware form factor is different for us, but the software baseline is the same, okay? So as we build systems, whether they're manpack, whether they're handheld, whether they're mobile, whether they're fixed, the beauty, not by accident of our solution is that software-based allows us to continually modify these with a common software baseline. Our portfolio of EW technology generates about $2 billion of revenue, each and everywhere, and we expect with newer requirements on Counter-UAS, it will experience continued growth. Some of that growth you all see on a quarterly basis when we talk about where our technology portfolio is growing in relationship to our expertise one. But administration priorities are very much focused on defense of the homeland, board security, world events, use of drones in modern warfare. European and allies are all up and we're going to have additional funding through reconciliation. Some of that growth is planned in our current FY '26 plan, and we gave you a low and a high end to our guidance range. We are very well positioned for other upcoming Counter-UAS opportunities, which do include Golden Dome. Henry Roberts: I appreciate the color there. And maybe just to follow up. The contract awarded in this past quarter. How much if any of those were due to reconciliation bill funding at this point? And a broader question, looking ahead, is [ reconciliation ] bill funding kind of one of the key difference makers that you're seeing in terms of funding priorities as the shutdown moves along, that differentiates you all from competitors? John Mengucci: Yes, I'll try to take the last comment first, and I'm sure Jeff will have some comments here as well. The Golden Dome funding and the reconciliation funding, we haven't seen that begin to be spent. So that's sort of gives us a backstop to what we're going through and we're experiencing now perhaps. Jeffrey MacLauchlan: Yes, that's right. It's -- we're seeing it in a planning sense. We're starting to see opportunities, meetings about developing alternatives, things like that. So we're starting to be able to see a little bit of where it's going to land, we believe. And of course, the heavy DHS content, along with the portions of the DoD reconciliation funding that are focused on the areas that are in our sweet spot give us some confidence about that. But none of the performance in the first quarter or the funded backlog that we talked about, we'd identified directly to reconciliation funding. Operator: Our next question comes from the line of Jonathan Siegmann with Stifel. Jonathan Siegmann: The margins were really impressive, especially in the context of your earlier outlook of lower margins to start the year. The incremental sales year-over-year were all technology, which implies the incremental margin year-over-year was over 20%. Can you comment a bit about the mix or any onetime benefits this quarter? It suggests the margins and technology maybe are trending higher than at least we were modeling. Jeffrey MacLauchlan: Yes. Thank you, Jon. Yes, I mean, I'm not going to quibble with your math. The technology margins were strong in the quarter. I would remind you that the segment is not monolithic. There are pieces of the technology portfolio that have margins north of what you mentioned, and there obviously are some that are obviously less. So when we talk about mix, it's both mix of technology and expertise but it's also a mix within the technology sector. So I would also note that it did not change our view of the year. So I would encourage you to think about that as sort of de-risking what you see -- what you've seen historically is our customary first half, second half margin step-up. We now see that increase in the second half as being a little smaller than it has been in some recent years. But you've done the math the right way. Jonathan Siegmann: That's great. And maybe just a follow-up on what John said about loving the fact the government is buying differently. Is it more the impact of these changes the more customers are embracing some of these more progressive ways to buy software, an agile software? Or is it the same customers just buying more? Jeffrey MacLauchlan: It's a little bit of both. John will want to add to this. But if -- certainly, there's been a tremendous increase in OTAs, both in their use by people that have been using them, but also customers that haven't used them before. I think also I would go back and underscore the answer to one of the first or second questions where John talked about the fact that we really are positioned deliberately by design to be able to sell commercially, to be able to sell in a traditional far [ cast ] disclosed environment. I mean we -- literally, there is no way that customers buy that we don't sell. So I think that can't be overemphasized. John Mengucci: Yes, Jon, I'll also add. Look, what customers want is a Far Part 12, Far Part 15. They want to be able to use those when they believe that one of those supports their needs over the other. The days of large development programs where you write your requirements in 2025 and you get your first case of the system in 2035 are not going to support how fast the threats are moving. So as Jeff mentioned, about a decade ago, we positioned this company to be very agile in both, right? So -- and it's why when we invest ahead of customer need, what the government is asking everybody to do is, hey, how about invest ahead of need more on your dollar than on ours, okay? Explain to us how that fits into part of our solve and then allow us to buy that as I answered earlier, from a commercial price sheet that says if you want a mobile Counter-UAS system or a handheld EW gadget then give me the part number and let me start buying that. Our software wrapper around these things is that when you buy that, you're going to find different uses for it. So there should be a quick upgrade path either from a licensing yearly fee that gets that customer additional upgrades and updates to it. Again, at the end of the day, I've been saying this for a decade. This is not the old way, where if you want a new capability, buy the new device. So you're continuously throwing devices away. So they're looking for agility, and what they're saying is they want to be able to buy in the way commercial companies buy and not be locked to long-term development contracts. And as Jeff said, we can support either and both in any other ways. Operator: Our next question comes from the line of Guatam Khanna with TD Cohen. Gautam Khanna: Great results, guys. Wanted to ask 2 questions to follow up on some earlier ones. First, has there been any impact to the business from the shutdown with respect to either revenue, cash or unusually soft awards in the first of the quarter? And then I have a follow-up. Jeffrey MacLauchlan: Yes, I can start with some of that. John will want to add to this, I'm certain. But there's been a slight amount of cash collections disruption that's primarily related to staff that's available for invoice approval and things like that. So we're feeling a little bit of administrative sluggishness, I'll call it, related to that. It's not tremendous. It's -- collections may be 10% or 15% off, it's small but noticeable. And similarly, I would say in terms of revenue, we have pockets of places where we have attenuated levels of activity. It's really de minimis. I'm going to say it's kind of single-digit millions revenue, it's activities that we expect to recover during the year. So it doesn't really affect our view of the year. But yes, it's detectable, but small and manageable. Gautam Khanna: Okay. And just wanted to ask, given the environment maybe tougher for some of the "peers" in the space relative to CACI, have you seen any intensifying price competition. Maybe talk about the bids that you didn't prevail on, is that typically a price shootout? Or anything you've changed -- you've seen in terms of competitor behavior, if any? John Mengucci: Yes. Gautum, it's John. I can answer for everybody else out there. I can tell you that if we've ever lost on price, it's not because we're in a price shootout because we gave up that part of the ecosystem about 7 to 8 years back. But I would imagine people are going to do whatever they need to do to continue to win business. I mean, we've seen a little uptick in the number of protests, which are out there. That, to me, being in this marketplace for a few decades, is usually that early sign is if you win, you win. If you don't, you protest. So I think we'll continue to watch the level of protests which are out there. But for us, I haven't seen pricing be an issue. We believe that we are fairly priced and where we invest ahead of customer need where we've gone out on risk to spend the company's money to help defend this nation in a better, better manner. We would expect to see higher margins. And thus far, that plan and that mode of running this business has served us very, very well. Operator: Next question comes from the line of Conor Walters with Jefferies. Conor Walters: Congrats on a great start to the year. Maybe just to start, it seems like the unchanged top line growth of 7% to 9% embeds stronger organic and perhaps around $40 million in lower acquired revenue. So curious, first, if I'm reading that correctly, but also if you could provide an update on the acquisition integration process. Jeffrey MacLauchlan: Yes. The acquisitions of Azure and AI are largely complete. And in fact, we're finding what we've always found, which is when it's done well, it's increasingly difficult to tell them apart. There is some Azure timing. John may want to comment some more on this related to some of the activities between the Azure legacy programs and Spectral. But they're very definitely meeting expectations and we remain convinced of their strategic and financial value where they're terrific fits, both of them. John Mengucci: I don't have anything else to add. Conor Walters: That's helpful. And then maybe just one follow-up. You guys discussed the upside you're seeing from reconciliation funding for Golden Dome. You mentioned the EW potential there. Curious if any other areas you would call out as considerable opportunities in your portfolio tied to that? And then how you're thinking about the bid process and time line now that you're starting to see that money actually being spent? John Mengucci: Yes. Talk a little bit about Golden Dome. Out in the public domain, you're going to hear a lot about sensors and effectors in command and control. But it's not just a ballistic threat, it's also threat from unmanned systems as well. So we're making it very clear that the Golden Dome concept is going to be completely reliant on early indications and warnings, meaning, as I mentioned earlier, knowing far in advance, when a threat is imminent and then giving folks who have to defend against those minutes and hours of time. We've actually coined that as left-of-launch. It's sort of our contribution to the entire Golden Dome effort. There has not been money spent on this yet. General Guetlein is taking our [ key ] responses. We've submitted our credentials on a few related proposals, but we're really looking at taking all of our sensitive activities work and all of our worldwide set of embedded sensors, which are in the thousands to give a common operating picture. And from there, let's go work on that non-kinetic low collateral defeat of those threats. Because clearly, taking a hypersonic missile on and using that to knock down the drone or other missiles over the Continental U.S. has a high collateral issue. So we're looking at non-kinetic low ones. So we would expect funding to begin to ramp up. I think we'll know better as we get to the end of the second quarter, early third, and we're very excited to be looking at that $150 billion potential spend purely focused on defending this country. Operator: Our next question comes from the line of Louie DiPalma with William Blair. Louie Dipalma: Following the positive TLS Manpack developments, is CACI also well positioned for the U.S. Army's modular mission payload plan for small drones with your Spectral Sieve and KickFlip? And related to this, how does the modular mission payload differ from how the Army is currently using Spectral Sieve on Puma or C100 drones? John Mengucci: Yes. Louie, thanks. So look, our entire -- I shouldn't say our entire, a large portion of our EW portfolio really is modular mission payloads, right? And for the rest of the audience. That's really taking common software capabilities and putting that on different form factors. It can be looking for wireless signals. It could be looking for a land-based signal, it could be looking at missile signals. There's a plethora of RF out there around the globe. The program that Louie mentioned is we already deliver a number of modular mission payloads to [indiscernible], folks who build drones and they're looking for an overall package. They have a drone that's size X that can carry weight Y. What kind of features do we have, what type of devices can we put into those unmanned systems. So we have delivered those. We have delivered to the Puma and a number of other ones, either directly to United States Army and other DoD agencies will be gone directly to a drone builder. So I believe that market will only continue to grow. It's the reason why we got into this market a number of years back. It's the reason why we positioned this company to be able to deliver either under a Far Part 12 or Far Part 15 and allows not only the U.S. government but OEMs of drones and the like to easily be able to buy our systems and have them ready and also allow us to modify those as the threat changes. So that's what we've been up to. Louie Dipalma: Makes sense. How has the Navy Spectral program been progressing? John Mengucci: Navy Spectral program is going very well. Jeff talked about Azure. Azure has the precursor program. We worked very closely with the Navy to make certain that we could time some of the Azure deliveries in a manner that then support the Spectral delivery. So on the Azure front, there were some deliveries that have been pushed out, so that can be more closely integrated with the Spectral ones. The next phase for spectral is a January, February time frame where that program will get through its [ milestone sea ] and that will freeze the design. We'll be able to begin deliveries as we've always mentioned during calendar year 2026. Operator: Our next question comes from the line of Jan Engelbrecht with Baird. Jan-Frans Engelbrecht: Congrats on the strong set of results. I wanted to talk a little bit about just the international opportunity. I think it's not something that you maybe highlight a lot. But just given where NATO budgets are going, now about the 3.5% of GDP and then there's the additional 1.5% bonus on top of that. Just sort of -- there's clearly capability gaps in the EU and in Europe and NATO as a whole. And is there anything you can highlight where maybe areas you guys are targeting in the next couple of years? John Mengucci: Yes, Jan, thanks. Look, I've said many times that the world is a dangerous, dangerous place, and I think that the Ukraine was a real wake-up call. It definitely raised the urgency level around defense and national security globally. And I would say mostly in the electronic warfare area, a war in the end market not by accident, but by a very, very, very solid planning. So as you mentioned, there's many allies they're going to be expanding their defense budgets. We deliver technology to a number of [ 5 NATO ] countries today. And I've been on this slow reveal of what we're doing in the international front solely because we want to be very cautious and very, very careful because you can spend a lot of money on the international front very, very quickly. Since we last talked, we've expanded our sales to 15 NATO countries, and we continue to assess demand signal in 7 other countries. Eastern Europe, allies are increasingly interested in our SIGINT, in our EW, in our Counter-UAS tech. I will tell you that our initial focus was on technologies with existing U.S. government and DoD sales following the FMS path. The number of countries that we have added have now gone to direct commercial sales. And I'm only tempering that -- I should say, I'm tempering that only by the fact that it's true, a lot of European nations are going to be spending far more money, but those same European nations are going to look to spend that money within their borders. So our next step is to understand what relationships do we need. So we either license or we coproduce some of our tech here and then add the applicable software baseline to those products. So still a long way to go there, but it's a market that over the last 90 days since we've last spoken, it has truly opened up to us. Jan-Frans Engelbrecht: And just a quick follow-up. If you could just comment on the slide deck talks about the M&A pipeline expanding. Just any areas that you think that would sort of be a niche capability that you could fill? Just any comments on M&A just in the environment. Jeffrey MacLauchlan: Jan-Frans, as you know, we've talked many times before, and there's no departure from this. Our process and approach is very much GAAP-driven. The opportunities that we see in the pipeline are generally a little bit more technology than they are expertise. A little bit more focused on sensors as well as, not surprisingly, software applications that go around those sensors and things that kind of fit nicely into our sweet spot. So we are seeing a little bit of life in the pipeline, and we look forward to developing a few of these ideas, very early stage at this point, but we'll -- it's an active area of interest for us. George Price: Operator, we have time for one more question. Operator: Our final question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: John, you spoke about -- or you alluded to kind of everyone at AUSA having counter UAS and it was like if you did 15 meetings, 12 had it and 10 led with it, which is pretty unusual. Is the funding coming down the pipeline that significant and can it move the needle for companies much larger than yours? And I know that you didn't want to quantify the forward on that, but can you give us the baseline of how much of the current revenue base is counter drone? John Mengucci: Yes. I'm going to stick with about $2 billion of our entire portfolio is in the EW place, which does include counter drone. And we deliver to both DoD and the intelligence community. And as I shared, a large number of NATO countries. Back to the first part, yes, I think it's a burgeoning market. I think you have to look at 2 different streams of funding, Noah, right? One is the $150 billion on Golden Dome, some portion of that. And I would tell you, it's multiples of billions that will be spent on a layered defense that's going to have to defend against unmanned systems. And frankly, uncrewed systems are a very different beast. Traditional radar is not going to find that. It's going to look like a bird, okay? So it takes new technology. And then on top of that, we're not in a war time in somebody else's zone where the U.S. is assisting. We'll be defending this nation, right? We're also going to have events like the World Cup. We're going to have the Olympics. We're going to have so many more things. And that threat vector, Noah, is up materially. And you can look at common new sources that the threat vector for other countries, potentially drug cartels and others using drones. So I think there's a market growth that we're all watching. It will be billions of dollars worth of Golden Dome funding. And then if you look at the DHS additional funding, that's going to work on the border security side. And today, there's 1 kilometer systems that find group 1 drones. Tomorrow's threats are going to be we need 75 or 100 kilometers to give us minutes of time to go defeat against that. That's going to be Class 1 through Class 5 drones. So yes, I think that the rest of the industry is waking up to this market. My only earlier comment around this hype is we went through 1.5 years period of AI hype and I feel as though we're going to go through another 1.5 years of Counter-UAS hype. So at the end of the day, the government is going to go with systems that have been deployed, where combatant commanders swear by the fact that they want one of what we have. And it's just really allowing funding to catch up to that. And then, of course, you do well know, Noah, government shutdown is going to sort of slow that down as well. So I think it's an emerging market. We've been in it for a couple of decades. I think we understand it very, very well. We have the right partnerships. And we're always looking for additional capabilities that we can add to our system. I'll end with, and we build our latest system on our own nickel, right? So we're not dependent on U.S. government IRAD dollars to advance what we have because I do think that the threat is that real and the government is asking us to look at this as harder. So very large... Noah Poponak: I Appreciate the detail there. If I could just ask one more question. Just hoping to better understand a little bit shutdown impact and shape of the year. Can you shed a little more light on how the government goes through deeming what is essential. The comments you made there at the beginning of the call are interesting. I thought it would have been more missed work in your 2Q that's just made up before the end of the year, but it sounds like that's not the case. And I think historically, you've had a 2Q that's pretty often flat sequentially versus 1Q, and then a back half that's up mid- to high single versus the first half. Is that still the shape of your '26? Jeffrey MacLauchlan: Yes, broadly -- this is Jeff. No, probably, it is with the caveat that I mentioned earlier about that step-up will be between first half and second half. We expect to be less pronounced this year than it has been in prior years given the strong first quarter, which largely was comprised of items that did not change our view of the year. So that's kind of a qualitative way to say quantitatively, the first half, second half step-up will not be as pronounced as it has been in the past. John Mengucci: Noah, I'll also throw in there. If you look at the last shutdown, right, it was '18, '19. If I remember right, some of that was December to January, right? So you had a lower level of folks because you were around with Christmas time. What's different from our company between the '18-'19 shutdown and where we are now is, and we've got far more long-term tech programs that are being developed. We have far more programs that we're investing ahead of customer need and putting enhancements into that software baseline. We're selling them on a purchase order. So that has a very different buying schedule to it. It doesn't take folks to sit around and do a down and select, they can buy these things off of a GSA-approved price list. So there are a lot of differences at least to this sort of de minimis impact. And then you also closed up with -- we can make a lot of these hours up. If we're at a help desk and nobody needs help now, they're not going to be more help later. So clearly, that doesn't get made up. That's your traditional government services work. But the vast amount of this are work that will have to be done. And every agency -- back to your initial comment, every agency is going through their own process. I wish I had that rubric that told us what was mission essential and not. But frankly, I'm sitting on the government side, that sort of changes too, right, whether we defense of the homeland different than other things that are out there going. But all in all, a really good book of business right now as Jeff and I look at the impacts how we can get those covered and we believe we're right at quarter 1 point to having an outstanding year. Operator: And at this time, I will turn the call back over to John Mengucci for closing remarks. John Mengucci: Well, thanks, Tina, and thank you for your help on today's call. I'd like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you will have follow-up questions. So Jeff MacLauchlan, George Price and Jim Sullivan are available after today's call. Please stay healthy and my best to you and your families. This concludes our call. Thank you, and have a great day.
Operator: Good morning, ladies and gentlemen, and welcome to the Third Quarter of 2025 CVB Financial Corporation and its Subsidiary Citizens Business Bank Earnings Conference Call. My name is Sherry, and I am your operator for today. [Operator Instructions] Please note this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed. E. Nicholson: Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 2025. Joining me this morning is Dave Brager, President and Chief Executive Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2024, and in particular the information set forth in Item 1A, Risk Factors, therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I will now turn the call over to Dave Brager. David Brager: Thank you, Allen. Good morning, everyone. For the third quarter of 2025, we reported net earnings of $52.6 million, or $0.38 per share, representing our 194th consecutive quarter of profitability, which equates to more than 48 years of consecutive quarters of profitability. We previously declared a $0.20 per share dividend for the third quarter of 2025, representing our 144th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.11% and a return on average assets of 1.35% for the third quarter of 2025. Our net earnings of $52.6 million, or $0.38 per share, compares with $50.6 million for the second quarter of 2025, or $0.37 per share, and $51.2 million, or $0.37 per share for the prior year quarter. The $2 million quarter-over-quarter increase in net income was primarily the result of growth in net interest income of $4 million that was partially offset by a $1.5 million increase in provision for credit losses and unfunded loan commitments. Pretax, preprovision income in the third quarter of 2025 was $70 million, an increase of $1.2 million, or 2% compared to the second quarter of 2025 and $2.4 million, or 3.5% higher compared to the third quarter of 2024. During the third quarter of 2025 we received a $6 million legal settlement which was more than offset by an $8.2 million loss on the sale of $65 million of low-yielding AFS securities that were reinvested at yields of approximately 5%. The growth in PPNR over the third quarter of last year was the net result of a $2 million increase in net interest income and a $1.5 million decrease in operating expenses that were partially offset by a $1.25 million increase in provision for unfunded commitments. Net interest income for the third quarter of 2025 was $4 million higher than the prior quarter and $2 million higher than the third quarter of 2024. Our average earning assets grew by $315 million between the second and third quarters of 2025, and our net interest margin increased from 3.31% to 3.33%. As a result of our deleveraging strategy that was executed during the second half of 2024, our earning assets declined by $1.1 billion from the prior-year quarter while our net interest margin increased by 28 basis points from 3.05% in the third quarter of 2024. Noninterest income was $13 million in the third quarter, which was $1.7 million lower than the second quarter. Excluding the legal settlement and loss of sale -- loss on sale of AFS, third quarter noninterest income increased by $260,000 from the prior quarter, driven primarily by higher trust and investment service fee income. Noninterest expense was $58.6 million in the third quarter, which was $1 million higher than the second quarter of 2025. Our efficiency ratio remained at 45.6% in the third quarter. At September 30, 2025, our total deposits and customer repurchase agreements totaled $12.6 billion, a $170 million increase from June 30, 2025, and $108 million higher than September 30, 2024. The quarter-over-quarters growth was driven by growth in money market and customer repurchase balances. The year-over-year growth was net $100 million decrease in time deposits. Our noninterest-bearing deposits grew by $108 million compared to the third quarter of 2024, while interest-bearing nonmaturity deposits and customer repos grew by an additional $100 million. On average, noninterest-bearing deposits were 59.8% of total deposits for the third quarter of 2025 compared to 59.1% for the third quarter of 2024. Our cost of deposits and repos was 90 basis points for the third quarter compared to 87 basis points in the second quarter of 2025 and 101 basis points for the year ago quarter. Now let's discuss loans. Total loans at September 30, 2025, were $8.47 billion, a $112 million, or 5% annualized increase from the end of the second quarter of 2025. The quarter-over-quarter increase in total loans was due to growth in nearly all loan categories. Loan growth was positively impacted by increases in line utilization for C&I and dairy and livestock lines of credit. A quarter-over-quarter increase of $27 million in C&I loans reflects an increase in line utilization from 26% at June 30, 2025, to 28% at September 30. In addition, dairy and livestock loans also grew by $47 million compared to the second quarter driven by higher line utilization from 62% at the end of the second quarter to 64% at the end of the third quarter. Agribusiness loans grew by $12 million, while commercial real estate and construction loans grew by $18 million and $12 million, respectively, from the end of the second quarter. Total loans decreased by $66 million from the end of 2024, driven by dairy and livestock loans declining by $139 million as these lines experienced their seasonal high utilization at calendar year end. Excluding small declines in SBA and municipal loans as well as decreases in dairy and livestock loans, our loans grew by $85 million from the end of 2024. We have experienced an increase in loan originations, and our loan pipelines remain strong, although rate competition for the quality of loans we focus on has continued to be intense. Loan originations in the third quarter of 2025 were approximately 55% higher than the third quarter of 2024, and year-to-date loan originations have been 57% higher than the same period in 2024. We had average yields of approximately 6.5% on new loan originations during 2025, but the third quarter average was lower at about 6.25%. We experienced $333,000 of net recoveries for the third quarter of 2025 compared to $249,000 in net charge-offs in the second quarter. Total nonperforming and delinquent loans decreased by $1.5 million to $28.5 million at September 30, 2025. Nonperforming and delinquent loans were $24.8 million lower than the $53.3 million at the end of the third quarter of 2024. Subsequent to the close of the third quarter, a $20 million nonperforming loan was paid off in full. The sale of the building collateralizing this loan resulted in the bank receiving all principal and approximately $3 million of interest which will be included in interest income in the fourth quarter of 2025. Classified loans were $78.2 million at September 30, 2025, compared to $73.4 million at June 30, 2025, and $89.5 million at December 31, 2024. Classified loans as a percentage of total loans was 0.9% at September 30, 2025. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and our net interest income -- sorry, net interest income. E. Nicholson: Thanks, Dave. Net interest income was $115.6 million in the third quarter of 2025. This compares to $111.6 million in the second quarter of 2025 and $113.6 million in the third quarter Of 2024. Interest income was $150.1 million in the third quarter of 2025 compared to $144.2 million in the second quarter and $165.8 million in the third quarter of last year. Average earning assets increased by $315 million in the third quarter when compared to the second quarter and the earning asset yield increased from 4.28% to 4.32%. Compared to the third quarter of 2024, earning assets decreased by $1.1 billion and the earning asset yield declined by 11 basis points. Interest expense was $34.5 million in the third quarter and $32.6 million in the second quarter of 2025. Our cost of funds increased from 1.03% for the second quarter of 2025 to 1.05% in third quarter of '25. The average balances of interest-bearing deposits and repos increased by $217 million over the prior quarter. Interest expense decreased from the third quarter of 2024 by $17.6 million, primarily due to $1.23 billion decline in average borrowings that resulted in approximately a $15 million decline in interest expense. Interest-bearing deposits and customer repos increased by $53 million over the third quarter of 2024, while the total cost of deposits and repos decreased by 11 basis points. With this reduction in borrowings and lower cost of deposits, our cost of funds decreased by 41 basis points from the third quarter of last year. Our allowance for credit loss was $79 million at September 30, 2025, or 0.94% of gross loans. In comparison, our allowance for credit losses at June 30, 2025, was $78 million, or 0.93% of gross loans. The increase in the ACL resulted from $1 million provision for credit loss and net recoveries of $333,000. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast at September 30, 2025, was modestly different from our forecast at the end of the second quarter of 2025. The comparative change from the previous economic forecast reflects lower GDP growth, a slightly lower unemployment rate, and lower commercial real estate prices. Real GDP is forecasted to stay below 1.5% until the end of 2027 and not reach 2% until 2028. The unemployment rate is forecasted to reach 5% by the beginning of 2026 and remain above 5% through 2028. Commercial real estate prices are forecasted to continue to decline through the second quarter of 2026 before experiencing growth through 2028. Switching to our investment portfolio. Available for sale, or AFS, investment securities were $2.58 billion at September 30, 2025. During the third quarter we sold $65 million of securities with an average book yield of 1.3%, realizing an $8.2 million loss, and purchased $214 million of new securities at an average book yield of 5%. The unrealized loss on AFS securities decreased by $31.6 million from $364 million at June 30, 2025, to $334 million on September 30, 2025. The net after tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $20 million increase in other comprehensive income for the third quarter. Our held-to-maturity investments totaled $2.3 billion at September 30, 2025, which is $82 million lower than the balance at December 31, 2024. Now turning to the capital position. At September 30, 2025, our shareholders equity was $2.28 billion, a $42 million increase from the end of June 2025, including the $20 million increase in other comprehensive income. There were 290,000 shares repurchased during the third quarter of 2025 at an average price of $20.30. Year to date we have repurchased 2.4 million shares at an average share price of $18.43. The company's tangible common equity ratio was 10.1% at September 30, 2025, while our common equity Tier 1 capital ratio was 16.3% and our total risk-based capital ratio was 17.1%. I'll now turn the call back to Dave for further discussion of our expenses. David Brager: Thank you, Allen. Noninterest expense for the third quarter of 2025 was $58.6 million compared to $57.6 million in the second quarter of 2025 and $58.8 million in the third quarter of 2024. The third quarter of 2025 included a $500,000 provision for off balance sheet reserves. Excluding this $500,000 provision, operating expenses grew by $500,000 over the second quarter of 2025. This growth in operating expense was due to an $877,000 increase in salary and benefits from our annual midyear salary increases. Noninterest expense, including the provision for unfunded loan commitments, decreased from the third quarter of 2024 by approximately $1.5 million. Almost all expense categories declined, led by a $770,000 decrease in salary and benefit expense. We also experienced a $430,000 decrease in legal expense, and a $380,000 decline in occupancy and equipment expense. One area of expense growth is our continued investment in technology, infrastructure, and automation, which resulted in $440,000, or 11% growth, in software expense from the third quarter of 2024. Noninterest expense totaled 1.5% as a percentage of average assets in the third quarter of 2025 compared to 1.52% for the second quarter of 2025 and 1.40% for the third quarter of 2024. This concludes today's presentation. Now Allen and I will be happy to take any questions that you might have. Operator: [Operator Instructions] And our first question will come from the line of Matthew Clark with Piper Sandler. Matthew Clark: On your interest-bearing deposit costs up a few basis points this quarter caused your beta cycle to date to slow a little bit to, I think, 28%. How should we think about the beta through the cycle from here and maybe remind us what portion of your deposit base do you feel like you can be more aggressive with? David Brager: Yes. So obviously that last rate cut was towards the end of the third quarter. So we didn't get the benefit of -- the big benefit of what we did and had a little bit to do with some of the mix of individual accounts. And in our repurchase agreement sweep, one of our largest depositors had built his deposits pretty good. But we did reduce every rate -- every money market rate and repo rate over 1.25% -- we reduced by a full 25 basis points the day after the Fed moved. So we're just trying to match that off. Obviously it depends a little bit on the mix between some of the higher paying ones and the lower paying ones that still got reduced. But at the end of the day, our plan is to continue to match whatever the Fed funds decreases with decreases in money market rates over 1%. Do you have anything to add to that, Allen? E. Nicholson: No, I think, there's a small portion obviously of our deposit base that has higher yields and there was a little bit of an increase relative to the rest of the deposits in the quarter. But as Dave said, we'll be reducing all of them as the market -- as the Fed goes down. Matthew Clark: Since we're limited to 2, I'm just going to jump to M&A. Any increase in dialog there on the M&A front? I guess where do we stand? David Brager: Yes. A lot of dialogs. Not a lot has happened yet. I feel a little bit like Allen Iverson on the practice thing. We just keep practicing, but we're continuing conversations. I still believe that the dam is going to break here, but at this point, there's not anything imminent, and we're still having conversations. I will say one thing we did in the third quarter, and it was in our investor presentation -- excuse me, subsequent to the third quarter, we did hire a team of 4 bankers from City National Bank and are opening a de novo office in the Temecula, Murrieta area. They actually started yesterday. So we're excited about that. We feel like we got 4 really great bankers, and they all came from sort of different parts of City National, but they all live in that area. And so we're going to open a presence there. So we're excited about that. And we'll see how they do as we go forward. But at the end of the day, we're going to keep looking to bring the right bankers and/or the right opportunities from an M&A perspective. Operator: One moment for our next question, and that will come from the line of Andrew Terrell with Stephens. Andrew Terrell: I wanted to start just on loan growth. You guys had a really good quarter. Dave, it sounded like in your prepared remarks, obviously, originations are up a lot this year. It sounds like the pipeline is still pretty strong. I just wanted to get -- I know you've got a seasonal benefit in the fourth quarter, but just expectations on loan growth over the near term. Do you think you can continue at this mid-single-digit pace? David Brager: Yes. At the beginning of the year and pretty much for as long as I've been CEO, I've said kind of that low single-digit growth. And I think we can still hit that for the year. The pipelines are still strong. I feel pretty confident over the next quarter that, that should continue. We'll see how it plays out. I mean, excluding the dairy, obviously, because the dairy is the seasonal aspect of it. But we're still not back to our normal utilization rate. We still have a lot in the pipeline. We're seeing many opportunities and some larger opportunities as well. So I do feel confident. The mid-single digits might be a little aggressive for the annualized. But I do think that we're in a good spot from that perspective. And we'll see how it plays out, but I'm sticking to my low single-digit growth rate for the year. Andrew Terrell: Very good. I appreciate it. And I did want to ask about -- you referenced just pricing competition in the market. And it sounds like your new origination yields came down a little bit this quarter relative to the first half of the year and rates have obviously come down, so that will influence it. But I'm curious, are you willing to be a little more competitive on the pricing front now, just given where the market is at today? Or has your approach to new loan pricing not really changed much? David Brager: Yes. I mean, look, we're always willing to compete on price for the right relationship. So that's something we've had to do. And I think that's part of the reason why we've continued to see opportunities on the loan front. But yes, it is aggressive. I mean, I just saw a deal -- this was a pretty large equipment deal, but it had a 4 handle that we were competing with a large bank on. So people are out there pretty aggressively and we're trying to hold the line as best we can, but we are definitely willing to compete on price as long as the credit quality is where we want it to be. Operator: One moment for our next question, and that will come from the line of Gary Tenner with D.A. Davidson. Gary Tenner: I wanted to ask on the loan side, it looks like you had a little earlier than typical increase in dairy and livestock line utilization. So just as we're thinking about the fourth quarter and what's usually a pretty large spike there, is that spike muted a bit because you had some drawdown here in the third quarter? David Brager: No. We actually brought on 2 new dairy relationships in the third quarter, so that impacted it as well. It's interesting at the beginning of the year, they were doing really well. Milk prices have come down a little bit. So they're still doing okay, but not as well as they were doing in the first couple of quarters. So I think we'll still see some of that, but I wouldn't necessarily say it's going to be muted. That growth -- that small increase in utilization probably had a little bit more to do with the new relationships than just people doing things early. So we still should see kind of a normal increase in that line item in the fourth quarter. Gary Tenner: Great. And then just a question about the $700 million of interest rate swaps that you kind of updated back in May. I think the kind of outlook for short-term rates is probably points to more lowering over the next 12 months or so than maybe what was contemplated back in May. So any thoughts about that swap arrangement and making any changes there? David Brager: So Gary, you're correct. If the market and the Fed's forecast is true, it will probably become a negative drag on our net interest income next year. But we put those on and continue to look to them as a true fair value hedge and hedging really our equity, our tangible common equity ratio and our large AFS portfolio. So I don't think we have any plans on changing that. We extended them last quarter out for that same reason to be better aligned with the duration of the AFS portfolio. Operator: One moment for our next question, and that will come from the line of Liam Coohill with Raymond James. Liam Coohill: It's Liam on for David. You guys have highlighted the intense rate competition on the lending side. You called out that one regional competitor offering the 4 handle on the equipment loan. Is that who you're seeing the most competition from on both the loan and deposit side today? And how difficult is deposit gathering given this intense loan growth? David Brager: Yes. So the deposit gathering has still been relatively strong. It's not as strong as it was towards the end of -- I'd say, all of '24 and the beginning of the year. It slowed a little bit. But we're going after operating companies and it is a little more competitive, I think. But I don't think it's changed much from the perspective. We're not looking for high-rate CDs or high-rate money market accounts. It has to be a full relationship. So that hasn't changed. But I will say the loan pricing is generally coming from the larger banks and the larger regional banks. It's not as much from the banks that are our size or smaller per se. So I do think that, that will continue. And look, there's a lot of market disruption with some of the acquisitions that have been done. There's a lot of market disruption from the perspective of Wells Fargo's asset cap is removed. I mean, all these things are sort of influencing that. So there are some probably more aggressive competitors in the market. But we're really focused on the operating company and most of our new deposits -- I'd say most of the new deposit gathering, relationship gathering that includes deposits is coming on at a little bit higher percentage of noninterest-bearing than our overall portfolio. So we feel pretty good about it. This last quarter on the deposit side, like Allen and I said, it was more related to just one large customer in the bank that had a little greater mix at a higher rate. But we should start to see the benefit of that deposit cost going down as the Fed continues to lower. So there's competition on both sides, but we we're willing to compete, but we want to do it for the right relationships. Liam Coohill: I appreciate the color there. And I'm excited to hear about the team lift out. What lending verticals do you expect them to focus on? And what are some of the opportunities that you see in that particular market? David Brager: So they've been focused on more operating companies and high net worth individuals. They did not have the opportunity to do investor commercial real estate. So that's an area that they can -- instead of having to refer out or give to somebody else that they'll be able to do here within their group. They all live in that area, and they covered different parts of Southern California from Orange County to Riverside County. So they'll be able to cast a wide net in those markets. And for us, it fills in a little bit of the geography from our San Diego region to our Riverside region. So that's a good thing. And Temecula, Murrieta is really a growing market. So we're excited about the opportunities there, and they're all experienced bankers, and they've been doing it for a long time. So we're excited to see what they can do. Operator: [Operator Instructions] And one moment for our next question, that will come from the line of Charlie Driscoll with KBW. Charles Driscoll: This is Charlie on for Kelly. You guys continue to build cash balances again this quarter. Just wondering if there's any updated message there regarding any potential areas to deploy that? Are you kind of viewing it as dry powder for a seasonally strong Q4? Just any color on how you're thinking of utilizing it? E. Nicholson: A couple of quick things. One, you're right. In the fourth quarter, we'll see a fairly large increase in the dairy. We also see end of the quarter more year-end versus quarterly average impact, but we do see deposit outflows for tax reasons and bonuses, et cetera. So we prepare for that. But we will -- especially if the Fed continues to cut, we do evaluate where bond yields are. They're down from where we were buying early in the quarter. But we may put some of that to work depending on how we look at the bond market in the quarter. Charles Driscoll: Okay. And then if you guys could just touch on expenses, they've been really well controlled. Just looking forward here, if we do get a little bit of growth and with the team lift out, how are you thinking about expense management heading into 2026? E. Nicholson: Not really any change there. I mean, we continue to manage it very closely, low single-digit type of growth is our expectation. Third quarter is always when we do our annual increases. So of course, quarter-over-quarter, that it impact. But year-over-year, actually, salary expense by itself was essentially flat. The one area we'll continue to invest in, as we noted in the prepared remarks, is technology. That includes automation as well as just sort of the standard stuff to keep us safe from cyber and all the other stuff. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Brager for any closing remarks. David Brager: Thank you, Sherry. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 194 consecutive quarters or more than 48 years of profitability and 144 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small- to medium-sized businesses and their owners through all economic cycles. I'd like to thank our customers and our associates for their commitment and loyalty and would like to thank all of you for joining us this quarter. We appreciate your interest and look forward to speaking with you in January for our fourth quarter 2025 earnings call. Please let Allen or I know if you have any questions. Have a great day. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Hello, everybody, and welcome to the Popular, Inc. Third Quarter 2025 Earnings Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Paul Cardillo, Senior Vice President, Investor Relations Officer. Please go ahead. Paul Cardillo: Good morning, and thank you for joining us. With us on the call today is our President and CEO, Javier Ferrer; our CFO, Jorge García; and our CRO, Lidio Soriano. They will review our results for the third quarter and then answer your questions. Other members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that during today's call, we may make forward-looking statements regarding Popular, such as projections of revenue, earnings, credit quality, expenses, taxes and capital structure as well as statements regarding Popular's plans and objectives. These statements are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings release and our SEC filings. You may find today's press release and our SEC filings on our web page at popular.com. I now turn the call over to our President and CEO, Javier Ferrer. Javier Ferrer-Fernández: Thank you, Paul, and good morning, everyone. Starting on Slide 3, we share a few highlights that reflect our strong operating performance in the third quarter. We reported net income of $211 million and EPS of $3.15, an increase of $1 million and $0.06 per share, respectively. Our results were driven by higher revenues and expanding net interest margin, strong loan growth and importantly, stable customer deposit balances. Our credit metrics were impacted by 2 large commercial loans, which were related to isolated circumstances that do not reflect broader credit quality concerns. As Lidio will discuss in more detail in his remarks, I'd note that excluding these 2 relationships, credit metrics remained stable. For the second quarter in a row, we have demonstrated progress from our efforts to achieve sustainable returns above 12% this year and towards our longer-term 14% objective. Please turn to Slide 4. As of the end of the third quarter, business activity in Puerto Rico continued to be solid as reflected by favorable trends in total employment, consumer spending, tourism and other key economic data. The unemployment rate of 5.6% continues to hover around all-time lows. Consumer spending has been resilient and remains healthy. Combined credit and debit card sales for Banco Popular customers increased by approximately 5% compared to the third quarter of 2024. Home purchase activity continues to be strong as demonstrated by the $129 million increase in mortgage balances at Banco Popular during the quarter. Momentum in the construction sector has been solid with both public and private investment fueling higher employment levels and cement sales. We are optimistic that these trends will persist given the backlog of obligated federal disaster recovery funds, announced real estate and tourism development projects as well as the renewed focus on reshoring by global manufacturing companies. One example of this is Amgen's recently announced $650 million manufacturing network expansion, which is expected to create roughly 750 direct new jobs in Puerto Rico. Puerto Rico is also well positioned given its strategic geographic location considering current geopolitical focus in the Caribbean region. The tourism and hospitality sector continues to be a source of strength for the local economy. This summer, the sector benefited from Bad Bunny's 31-night concert residency at the Coliseum in San Juan, right next to our Popular center complex. This was more than just a series of concerts. The event also featured Puerto Rico as a destination, highlighting our music, natural beauties and culinary offerings. The celebration of our culture generated significant media exposure for the island globally and led to a substantial increase in tourism activity during what is normally a seasonally slow period of the year. Please turn to Slide 5. I would like to comment on our new strategic framework and transformation progress. Our strategy centers on 3 objectives: First, Be The #1 Bank For Our Customers by deepening relationships, earning trust, delivering value across all channels and providing exceptional service. Leveraging our very strong primacy and satisfaction scores in Puerto Rico, we are focused on advancing digital and payment solutions to further grow engagement. Second, Be Simple and Efficient by working collaboratively, streamlining operations and reducing costs. We are committed to making our processes simpler and more effective to deliver superior solutions for our customers. And finally, Be a Top Performing Bank by attracting and retaining top talent and converting customer and operational success into shareholder value with a commitment to generating a sustainable 14% ROTCE over the long term. This framework, simple, yet powerful, guides our transformation, which continues to show steady and notable progress. We are investing in seamless, secure banking solutions, expanding service channels and modernizing branches and digital platforms to provide our customers with the flexibility to connect with Popular through the channel that best fits their needs. We plan to extend these digital capabilities to more products to further improve online and mobile experiences and support future growth. Recent initiatives include the launch of a fully online personal and credit card loan origination process in Puerto Rico and the Virgin Islands and the expansion of digital deposit products in the U.S. Mainland. On the commercial side, we are improving cash management and credit delivery for small and midsized businesses. We are pleased with the progress we have made so far in our transformation and are convinced that these efforts will continue to unlock growth opportunities and efficiencies to drive sustained financial performance. I will now turn the call over to Jorge for more details on our financial results. Jorge? Jorge Garcia: Thank you, Javier. Good morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $1 million to $211 million. Our EPS improved by $0.06 to $3.15 per share. These results were driven by better NII and noninterest income and a lower effective tax rate, offset somewhat by a higher provision for credit losses. As we have mentioned before, our objective is to deliver sustainable financial performance. While there is some noise in the current quarter's results, we're very pleased to have once again exceeded a 13% ROTCE for the period. We continue to expect to achieve at least a 12% ROTCE in Q4 as well as for the full year. Longer term, we remain focused on achieving a sustainable 14% return on tangible common equity. Please turn to Slide 7. Our net interest income of $647 million increased by $15 million and was driven by higher average deposit balances, fixed rate asset repricing in our investment portfolio and deposit pricing discipline in both of our banks. Our net interest margin expanded by 2 basis points on a GAAP basis and by 5 basis points on a tax equivalent basis, driven by a larger balance of loans and tax-exempt investment securities. Loan growth of $502 million in the quarter was strong with both banks contributing to the increase. At BPPR, we saw loan growth of $357 million reflected across most portfolios, but driven primarily by commercial and construction lending. At Popular Bank, we saw loan growth of $145 million, also driven by the commercial and construction lending segments. Given that the underlying economic activity and demand for credit in both of our markets remain solid, we now expect consolidated loan growth in 2025 to be between 4% and 5% as compared to the original 3% to 5% guidance for the year despite the expected headwinds in our U.S. construction balances due to paydowns expected during the fourth quarter. In our investment portfolio, we continue to reinvest proceeds from bond maturities into U.S. treasury notes and bills. During the quarter, we purchased approximately $2.5 billion of treasury notes with a duration of 1.4 years and an average yield of around 3.65%. We funded the purchases by reinvesting roughly $1 billion of bond maturities, along with redeploying $1.5 billion of cash reserves. We expect to continue to invest in treasury notes to lessen our NII sensitivity to lower rates while maintaining an overall duration of 2 to 3 years in the investment portfolio. Ending deposit balances decreased by $704 million, while average balances grew by $793 million. Puerto Rico public deposits ended the quarter at $20.1 billion, a decrease of $842 million when compared to Q2. We continue to expect public deposits to be in the range of $18 billion to $20 billion. At BPPR, excluding Puerto Rico public deposits, ending deposit balances decreased by $162 million and on an average deposits decreased by $44 million, demonstrating the impact of our continued focus on deposit retention strategies. At Popular Bank, ending deposit balances increased by approximately $216 million, net of intercompany deposits. Total deposit costs increased by 1 basis point at both banks. At BPPR, the increase was mostly due to a higher average balance of public deposits. Given the results year-to-date, along with the anticipated NIM expansion in Q4 from repricing of our fixed rate earning assets, we continue to expect to see NII growth of 10% to 11% in 2025. Please turn to Slide 8. Noninterest income was $171 million, an increase of $3 million compared to Q2 and above the high end of our 2025 quarterly guidance. We continue to see solid performance across most of our fee-generating segments, including robust customer transaction activity. This quarter, we also benefited from a $5 million retroactive payment from a tenant related to an amended lease contract. Given the trends year-to-date and particularly the stability in customer transaction activity, we now expect Q4 noninterest income to be in the range of $160 million to $165 million. This will result in total noninterest income between $650 million and $655 million for the year. Please turn to Slide 9. Total operating expenses were $495 million, an increase of $3 million when compared to last quarter. The largest variance was related to a $13 million noncash goodwill impairment in our U.S.-based equipment leasing subsidiary due to lower projected earnings. Offsetting this was a $13.5 million quarter-over-quarter reduction in other operating expenses, driven by the effect of a reversal this quarter of a $5 million claims accrual recorded in Q2 and a similar reduction in operational reserves. We also saw a $3.6 million increase in personnel costs, mainly due to annual salary and merit increases effective in July, along with the impact of employee termination benefits related to cost efficiency initiatives at Popular Bank. Specifically, as part of our ongoing efforts to improve profitability, we decided to exit the U.S. residential mortgage origination business and to close 4 underperforming branches in the New York Metro area. We will remain focused on areas where we feel we can invest to achieve improved operating leverage. We continue to expect the increase in 2025 expenses to be between 4% and 5% when compared to last year. Our effective tax rate in the third quarter was 14.5% compared to 18.5% in Q2, driven by a higher proportion of exempt income. This higher exempt income, along with the impact of changes to Puerto Rico's tax code, will result in an effective tax rate for Q4 in the range of 14% to 16%, and for the year, we now expect the effective tax rate to be between 16% and 18%. Please turn to Slide 10. Regulatory capital levels remain strong. Our CET1 ratio of 15.8% decreased by 12 basis points, mainly due to loan growth and the effect of capital actions, net of our quarterly net income. Tangible book value per share at the end of the quarter was $79.12, an increase of $3.71 per share, driven by our net income and lower unrealized losses in our MBS portfolio, offset in part by our capital return activity in the quarter. During the third quarter, we declared a quarterly common stock dividend of $0.75 per share, an increase of $0.05 from Q2. Finally, we repurchased approximately $119 million in shares during Q3. And as of September 30, still have $429 million remaining on our active share repurchase authorization. With that, I turn the call over to Lidio. Lidio Soriano: Thank you, Jorge. Good morning, and thank you for joining the call. Turning to Slide #11. The ratio of NPLs to total loans held in portfolio increased to 1.3% compared to 82 basis points in the prior quarter. Credit quality metrics were impacted by 2 unrelated commercial exposures in BPPR, resulting in an increase in NPLs and net charge-offs. This impact relate to borrower-specific circumstances and do not reflect broader credit quality concerns. The first loan is a commercial and industrial facility extended to a telecommunication company in Puerto Rico, experiencing reduced revenue due to operational challenges and client attrition following the business acquisition. As of September 30, we classified this loan as nonaccrual with a carrying value of approximately $158 million and drove the increase in provision expenses in the quarter. The second loan is a commercial real estate facility secured by hotel property in Florida. This loan has also been placed on nonaccrual status and carries a value of $30 million as of September 30, which includes a $14 million charge-off recognized during the quarter. Excluding these 2 cases, credit quality metrics were stable. We continue to closely monitor the economic environment and borrower performance as economic uncertainty remains a key consideration. We are confident that the risk profile of our loan portfolios positions Popular to operate successfully under the current environment. Turning to Slide #12. Net charge-off amounted to $58 million or annualized 60 basis points compared to $42 million or 45 basis points in the prior quarter. Net charge-off in BPPR increased by $16 million, mostly due to the $4 million charge-off related to the $30 million commercial NPL inflow mentioned earlier. Consumer net charge-off increased by $4 million, mostly due to higher auto loans net charge-off by $6 million, partially offset by a $2 million reduction in credit card net charge-offs. Given our credit performance year-to-date and NPL inflows this quarter, we expect net charge-offs to be between 50 to 65 basis points for the full year. The allowance for credit losses increased by $17 million to $786 million, while the provision for credit losses increased by $29 million to $75 million. Both increases were driven by the impact of the 2 commercial exposures, offset in part by improvements in the credit quality of the consumer portfolio. The Corporation's ratio of ACL to loans held in portfolio remained stable at 2.03%, while the ratio of ACL to NPLs was 157% compared to 247% in the previous quarter. With that, I would like to turn the call over to Mr. Ferrer for his concluding remarks. [Foreign Language] Javier Ferrer-Fernández: Well, thank you, Lidio, and Jorge for your updates. We are very pleased with our financial performance in the third quarter. We increased revenues, maintain expense discipline, generated strong loan growth and benefited from stable customer deposit trends. We are determined to close out 2025 on a high note as we continue to execute on our strategy, and I am urging our teams to remain focused on deposit retention, loan generation and particularly on our expense discipline. We will continue to generate value for our shareholders and deliver our ROTCE objectives. We will achieve this by concentrating on our strategic framework, Be The #1 Bank For Our Customers, Be Simple and Efficient, and Be a Top Performing Bank. I want to give a shout out to our colleagues and recognize their hard work. I see what they do every day in our branches, call centers and centralized offices. We are pushing ourselves to deliver more for our clients every day, and I am incredibly grateful for their commitment. We are now ready to answer your questions. Operator: [Operator Instructions] First question comes from Jared Shaw with Barclays. Jared David Shaw: Maybe starting just on the margin and on asset yields. With the securities yields -- I'm sorry, with the securities purchases this quarter, should we assume that, that trend continues? And I guess, where are the new purchase yields? It looks like maybe we won't be able to see net yield expansion much more from here if we see the rate cuts? Lidio Soriano: No. I mean let me first answer the yield expansion. We do believe that we still have strong tailwinds. You can see in our appendix we provide to you kind of the upcoming maturities in the investment portfolio, those are still coming off at 1 and change, and we expect to be able to continue to get a significant spread pickup on those maturities. So while they may be priced lower as rates are coming down, remember that a large portion of our portfolio is also being financed, let's call it, money fungible, but still being financed by public deposits. And we would expect those public deposits to also benefit from the lower rate environment, giving us the opportunity to create that spread. So we do continue to expect our NIM to expand in the fourth quarter and beyond. Jared David Shaw: Okay. And then on the loan side, what about new loan yields this quarter -- sorry, go ahead. Jorge Garcia: Yes. On the -- okay, on new loan yields during the quarter, we still saw kind of the condition that we have been seeing for the last year where particularly in personal loans and auto lending, we still see some yield pickup quarter-over-quarter. I would expect, Jared, that maybe that would slow down a little bit, particularly in the auto volumes or new car sales activity is slowing down, and it's possible that it wouldn't be unreasonable to believe that, that will result in more competitive pricing to maintain demand for auto sales. But as we said in the past, there's a lot of front and back book in that auto loan portfolio in particular. And when you look back, given the average life of those loans, assuming the same type of risk profile, we still see opportunities of repricing given the current rate environment. Jared David Shaw: All right. And then maybe just shifting on the credit side, especially on the auto. There was an increase in delinquency, but it's still lower, I guess, year-over-year. How are you looking at the credit trends over the next few quarters within auto and consumer, I guess, more broadly? Lidio Soriano: I mean I would say the variation that you saw this quarter is within the seasonality of the portfolio. We continue to be very optimistic about the consumer, given the trends in Puerto Rico, given the trends in employment, liquidity of our client base. We see losses are about -- in the auto portfolio about 45 basis points below last year. So we're comfortable with our position and the outlook for the portfolio. Operator: We now turn to Timur Braziler with Wells Fargo. Timur Braziler: Sticking with the credit commentary, the large C&I loan, I guess, what are the specific reserves that you set aside for that, the timing of resolution as you see it? And I'm just wondering why it moved into nonperformers right away instead of kind of up the risk migration chain. Did they stop making payments? Or is that still accruing at this point? Maybe start there. Lidio Soriano: Okay. I mean thank you for the question. They continue to make payments. So the loans are current from a payment standpoint. So that's that. In terms of our decision to -- I mean, it has -- actually situation has been deteriorated over time, and we have been downgrading the loan over time. For us, it is a business that carries a significant amount of debt and management has indicated their intent to rightsize its capital structure, including liability management, liability structure. So that drove our decision to place it in nonaccrual status. Timur Braziler: Okay. And then I guess, in terms of specific reserve and any kind of time line around planned resolution? Lidio Soriano: I think planned resolution most likely is next year. In terms of specific reserves, we are not -- we have not provided that information at this time. So... Jorge Garcia: Yes, Timur, you can assume that the driver of the variance in the quarter in provision was related to these loans. Timur Braziler: Okay. And I mean this is a little bit of a larger credit, just maybe stack ranking the loan book. Is this one of the larger credits that you guys carry? Is this kind of typical size just given your place in the Puerto Rico economy? And maybe just talk a little bit more broadly as to the health of the economy from a business standpoint versus a consumer standpoint? And if there are any kind of signs that might be flashing yellow or any other kind of degradation? Lidio Soriano: If you look at our portfolio over the years, we shifted our portfolio from being more of an SME portfolio to a corporate credit type of portfolio. And we have seen strong trends over the last few years. And we -- actually, if you look, I think the last time we had one issue with a large bank -- a large group was in 2019. I think we will continue to focus in that segment. We think there are significant opportunities in Puerto Rico. They have done -- performed very well over the years. And that is the nature of our portfolio. Every now and then, you might see a situation. I think the important is we stick to our underwriting discipline. The performance of the portfolio has been very strong, and we feel comfortable with the exposures that we have today. Javier Ferrer-Fernández: Yes. And if I may add to that, I mean, to your question about the macro, I think in our commentary, we are clear that we are not seeing any sort of yellows or red or any insects in Puerto Rico referencing something that somebody said in the United States. It's -- we are seeing a strong economy. But as Lidio just said, it so happens that we continue to focus on large commercial opportunities. And from time to time, as happened this quarter and it hasn't happened in a long time, there may be an isolated credit event that occurs due to idiosyncratic by specific issues that are unrelated to the underlying economic backdrop. And that's exactly how we feel. So I can't really point to anything in the Puerto Rico economy that gives us any pause or worry, or contrary, as they say, across the ocean. We feel that the economy is performing well and our big customers are investing and continue to move on with their projects. Timur Braziler: That's great color. And then just lastly for me, encouraging to hear that margin expansion is going to continue here. I'm just wondering from an NII standpoint, you guys reiterated the guidance. It is a little bit wide in terms of the range just as it implies to 4Q. Should we assume that margin expansion portends to NII kind of flat to up here as we go through these rate cuts? Or just given some of the lags, maybe NII growth stalls here over the next couple of quarters? Jorge Garcia: Yes. I think first, I want to reiterate that we continue to see the benefits of fixed asset repricing, loan growth, all those things should continue to contribute to improving NII and the expansion of the margin. As you mentioned, the guidance for NII, we left it where it was. Part of that has to do with our perspective on public deposit balances in the fourth quarter. We still expect to be within the range, but maybe not at the high end of the range where we are at when we closed out Q3. We also mentioned the lag in pricing of these deposits. We continue to be slightly asset sensitive, particularly in the early stages of moves of Fed funds rate. But as we stated before, the cost of public deposits are linked to short-term market rates. And in general, they reprice on a quarterly lag. Because the -- we've never given the index, but we're going to do call a favor, and it's tied to 3-month treasuries, obviously minus a spread. And so they are in a lag. So over time, we would expect to see the effects of changes in rates be reflected in the cost of public deposits with a beta of near 1, and that pricing structure will continue to support our fixed asset repricing and the investment portfolio, making sure that we generate that improving spread on that investment. But any time there's movement in the Fed, maybe there is a little bit of a lag, not always, right? We talked about that in the past that if the market and treasuries get ahead in anticipation of Fed moves, we might be able to benefit a little quicker. But we've kind of incorporated all that into our NII guidance for the fourth quarter, but we have a high level of confidence that as that stabilizes and the passage of time into 2026 and beyond will continue our previous growth trends. Operator: Our next question comes from Ben Gerlinger with Citi. Benjamin Gerlinger: Not to belabor the point on credit because it's pretty clear that you guys are -- you're doing phenomenal relative to like the last 10 years. But I found it interesting that your guide, you kind of fine-tuned a lot, whereas the charge-off outlook, you just brought up the low end. So when you think about the 65 bps on the high end on a full year basis, that would imply something pretty draconian for the fourth quarter. I mean, is that a possibility? Or how should we think about that considering the other guidance portions were fine-tuned? Lidio Soriano: I will say as we mentioned in the remarks, we took a reserve and a provision for some of the exposure. We charge off 1 of the 2 related exposure. There is a possibility that we may have to take charge-offs in the exposure that we reserve this quarter, which did not charge off, and that is driving the results. Overall, I mean, if you exclude that, we continue to expect a very solid performance out of the rest of our book. So that's the only thing that we are caveat in terms of the range that we provided to you. Jorge Garcia: Yes. Ben, in similar word, we talked about this in the past where when we provide that spread in the guidance of net charge-off, we are trying to put in for idiosyncratic events that could happen in our portfolio at any given time. Certainly, the activity that we have seen year-to-date, as you say, don't reflect necessarily a lot of opportunities to get to the high end without it being a commercial loan. Benjamin Gerlinger: Got it. Okay. That's helpful. And I know you guys have gone through quite a bit of initiatives on the expense front. Is there anything -- I know you're not going to give me a '26 guide, but is there anything in '26 that we could potentially prepare for outside of just kind of normal cost inflation? Jorge Garcia: Yes, you're right. We're not going to give you anything '26... Lidio Soriano: Good try, good try, good try... Jorge Garcia: We're very happy with the cost discipline and a lot of initiatives that are ongoing. We talked about it last -- in the last quarter's call. There's a lot of efforts around really just focusing on execution and really what Javier says, focus on excellence. And there's a lot of efforts that are ongoing that are maybe a lot of singles and bunts, but they add up. They add up. And this quarter, we saw some of those. We saw some of the actions, we talked about the activity in the U.S. It's not easy impacting our colleagues, but we did make a decision to terminate our mortgage origination business in the U.S. We don't believe, given our funding profile and deposit franchise in the U.S., that's a business that we really want to be in at this time. And there are other things across the organization. I would say the important part is that those efforts are sustainable. They're not one-offs. And we do expect to see those benefits that would allow us to reinvest in other things. We talked to you in the past about slowing down our expense growth rate. These are all the things that allow us to do that while continuing to invest in areas that we think will add value and get us closer to that 14% ROTCE. Unknown Executive: [indiscernible] Operator: We now turn to Kelly Motta with KBW. Kelly Motta: I will pick up on that 14% ROTCE you mentioned. You've been above 13% in the next 2 quarters -- the last 2 quarters. It seems like we have 14% in sight. I appreciate the guidance around at least 12% for the year, which seems very doable. Wondering if you have any update on the timing of the 14%, one? And then two, given what you've laid out with your NII trajectory, has there been any discussion in terms of whether 14% is the right place to stop as a sustainable ROTCE or should we see that a bit higher. Jorge Garcia: I would say that of course -- yes, Kelly, for certain, we're not going to stop at 14%. It is a guiding principle, and we want to get there, but we're not going to stop there. And having said that, what we want to make sure is that sustainable performance, we said that in the past. I agree with you, we're a lot closer today than we were a year ago when we pulled back that guide for this year. A lot of effort from a lot of people, a lot of things going right, and we just want to make sure that we continue to execute, and more to come in terms of guidance and when and how we get there. But the important part is we continue to believe strongly that we get there through improving our net income performance and our operating leverage. And whatever we do on the capital side just adds to the opportunity to get there and surpass it. Kelly Motta: Okay. Got it. That's really helpful. And then on the tax rate, the reduction in guide, you called out a higher proportion of tax-exempt income as well as some changes in the tax rate. And there is some noise and appreciating you're not giving 2026 guidance. I'm just hoping if you could kind of help us out with what -- is this full year 2025 a good core run rate ahead? Or can you expand upon the Puerto Rico tax rate change and how that kind of impacts the go forward? Just any kind of color on that would be helpful given that there is a lot of moving parts here. Jorge Garcia: Yes. So I would ground on 2 things. One, this quarter, there were not any like real discrete events that impacted the effective tax rate this quarter. It was lower given the mix of taxable income and tax-exempt income. We did benefit the $5 million other operating income number, does have a tax -- preferred tax treatment. So that helped. But I say that it is a good basis to start off. And then when you look at the guidance for the fourth quarter, what we're talking about is saying we're reversing this change in the tax law in Puerto Rico will allow us to reverse the related tax expense during the year. I tell you this whole long story to say that the guide for 2025 of 16% to 18% really ends up being a fairly clean number for us for this year. That guide does not really have a lot of noise of discrete events that are not part of our normal tax strategy. You can infer from that whatever you'd like, we can confirm it in January when we give you the '26 guidance. Kelly Motta: Fair enough. Last question if I can sneak it in. Some of your competitors have noted increased competition on the deposit side. One was on government deposits. The other was some of the initiatives they're doing. Wondering if you could just expand upon the market competition you're seeing in Puerto Rico, one? And two, like has there been any news of any new entrants to the island, specifically on the depository side? Javier Ferrer-Fernández: Well, I'll take that. I'll start by saying not that we're aware of no new entrants on the depository side, Puerto Rico. Competition, yes, I mean, it's a vibrant market, and there is competition every day. We compete every day for our piece of the business and for customers. So -- but we're going to be rational while we're doing that. Yet, we won't lose any good clients on pricing and on terms. So we're seeing competition. It's normal. We have -- now you see how some of our esteemed bank competitors in Puerto Rico are sort of positioning themselves as challenger banks or whatever banks. But frankly, we like where we're at, and we like the fact that the franchise has -- it's certainly being reenergized. And we're not behaving like 132-year bank and more to come on that, quite frankly. So we -- I don't know what else to say other than we like where we're at. Operator: Our next question comes from Gerard Cassidy with RBC. Thomas Leddy: This is Thomas Leddy standing in for Gerard. Loan growth in the quarter was strong, as you mentioned. And just on the back of the increased competition on the deposit side. I'm curious, in booking new C&I and CRE loans, have you seen a similar increase in competition, maybe resulting in less rigorous underwriting standards? In other words, anything you can tell us about changes in underwriting standards on loans you're originating now versus, say, a year ago? Javier Ferrer-Fernández: I mean, I guess each one of us can answer that. But no, the answer is no. And we have a very strong credit underwriting process and Lidio leads the risk side and then our business side as well, we are not going to do anything that doesn't make any sense, frankly. We tend to be a bit conservative by nature, quite frankly. But I'm not seeing anything in originations that points to that concern. Jorge Garcia: Yes. From talking to our bankers and listening to the teams, the pushback we gather in competition is more pricing. And we're seeing maybe particularly you're hearing in some entrants in the New York market and maybe South Florida, where people being a little more aggressive in pricing. And frankly, we -- if those loans are not true relationships and they're not coming with deposits, we're not going to pursue that, particularly in the U.S. In Puerto Rico, we might have a different strategy, echoing what Javier previously said in his comments. Operator: We now turn to Arren Cyganovich with Truist Securities. Arren Cyganovich: Javier, you. Jorge Garcia: Thank you for picking up Puerto Rico Bank. Arren Cyganovich: Good to be back. Maybe we could just talk a little bit about, Javier, your commentary around investment initiatives that you have in your transformation plan or the second leg of your transformation plan. How are you thinking about all of the items that you kind of mentioned in your prepared remarks with regard to the cost in -- and would that be a step-up in cost? Or do you see some efficiencies that you'll be gaining that will help offset some of the further investment as you continue down that path? Jorge Garcia: Great. Arren, I mean, the one thing I'll reiterate, our goal here is to be able to continue to invest and generating opportunities and efficiencies to be able to then continue to reinvest at a level slowing down the overall level of expense growth. Javier Ferrer-Fernández: Yes. So there's going to be at the beginning and in certain periods, right, a disconnect, right, between initial investments and then results from those investments, which is what Jorge is referring to. And we think that's okay as long as the actual investment makes sense to us. We're not going to do something dramatic or irrational. But we have to invest in our technology to continue to compete, not only in Puerto Rico, but we compete with folks that come from the United States, you may imagine, the big players are already here, and they have the best technology. So we -- our program is rational in that way, and I think our expense base shows it. I don't perceive that we're going to go above and beyond a particular sort of threshold. Jorge Garcia: Yes. And what happens is right now, we've got over 80 projects that are ongoing. Some of them have higher levels of current investments, some are in capitalizing mode, but a lot of them are in dual expense mode. As you're developing, particularly with SaaS licensing agreements, you're paying for your new system and you're paying for your old system. So over time, as you start generating the cost avoidances and turning off old system, that allows us buffers to continue to reinvest following a business case and value-add analysis. But when we talk about being able to slow down the rate of growth, that's the kind of thing that we're talking about is how do we shift and reallocate expenses and savings to continue to improve the business and add value to our shareholders. Javier Ferrer-Fernández: So -- and then I say this and show up, that's a very important point that Jorge just made. We're not looking at this on a siloed view, right? So we're saying -- so if we are going -- if we are investing in the transformation, we want to make sure that if we can generate some savings in other parts of the bank, which will, of course, kind of fund that transformation. That's the mindset. And in many cases, we've been able to do that. And that minimizes the impact of the actual investment. So again, I mean, it's a broad-based program. We're very excited about it, and we're starting to see results. And we'll continue because, as I said, it's -- we're also creating a transformation mindset in our teams, right? It's -- we need to continue moving forward. So... Operator: This concludes our Q&A. I'll now hand back to Javier Ferrer, CEO, for any final remarks. Javier Ferrer-Fernández: Well, thank you. Thanks again, everybody, for joining us and for your questions. Really appreciate that. We look forward to updating you on our fourth quarter results in January. Thank you. Operator: Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
Operator: Welcome to XVIVO Q3 Report for 2025. [Operator Instructions] Now I will hand the conference over to CEO, Christoffer Rosenblad; and CFO, Kristoffer Nordstrom. Please go ahead. Christoffer Rosenblad: Thank you so much, and good morning and good afternoon, everyone, and especially welcome to XVIVO's earnings call for the third quarter of 2025. First, a quick introduction of today's presenters. This is me, Christoffer Rosenblad, CEO, calling in from Gothenburg, Sweden. And we also have Kristoffer Nordstrom, CFO, calling in from Philadelphia in the United States. And with that we go to the third slide, which shows Q3 financials at a glance. The Q3 shows a plus 6% top line organic growth if adjusted for the U.S. heart trial revenue compared to the same quarter last year. We can note that there was no destocking during Q3 and hence the EBITDA recovered to expected levels during the quarter. In terms of segment growth, the Thoracic sales were affected by lower heart study revenue in the U.S. and a softer Q3 lung market. The Abdominal segment shows great progress for both liver and kidney. Looking a little bit into the future. In the beginning of October, the 3 out of the 4 clinics that acquired an XPS in the United States during H1 or half year 1 are up and running now in the beginning of October, and we also held a Lung Masterclass. I will come back to that later. Yesterday, where it was noted that, that October at least started better than Q3 in terms of lung transplant and in terms of EVLPs to support for the lung transplant if you compare to what we saw in Q3. Going into our Abdominal segment, liver in Europe are now entering the majority market segments with penetrations above 15% in many European countries. The main task for us are now to support with resources for perfusion and data for improved reimbursement. Sales growth is improved in many countries by improved reimbursement, which is based on the carpet of excellent clinical data with better patient survival and more livers used, as well as hospital economic data and health economic data. Kidney, on the other hand, is still below 15% penetration in many countries, including the U.S., and the main task for us is to win account by account. What is good to note is that the feedback we get from kidney customers is that they are very pleased with the product and see that the kidneys are in better condition after being perfused with the Kidney Assist Transport compared to the available alternatives on the market today. And if we go over to Services, we have stated earlier, and we are not pleased with the progress of the U.S. service business. And we reported in the last Q2 report that the analysis was finalized for an action plan and that we see an increased interest for combined procurement and NRP service model. This would fit very well into the heart launch. During the summer it was decided to execute on this plan and invest into service segment, and I will come back later in this presentation with the actions we have taken and how we will execute during the next 5 quarters to become a preferred partner to the transplant teams in the United States. And I also want to again state, as we have said earlier that the service initiative is very strategic and the purpose is to support the future heart business in the U.S. During the year, a cost and cash reduction initiative was initiated to enable better resource allocation going forward. The CFO will come back to that during the financial part of the presentation. And to end this slide, Q3 shows again that XVIVO has a scalable business model in terms of EBITDA. We can see that the recovery of sales in Q3 versus Q2 also improved the EBITDA as a percentage if you compare to Q2 of this year. And with that, we go over to Slide #4, which is the first 9 months at a glance. And it shows a similar picture to the Q3 slide. A good and stable gross margin. We continued investing into field force and scalable production structures. We saw that sales came in at SEK 586 million with again a 6% growth if we adjust for the U.S. heart trial revenue. In terms of gross margins, I said before that we plan to improve Abdominal gross margin to 70% at the latest in '27 or when we reach economies of scale in production. You will hear more about gross margin or EBITDA levels later in the presentation. For heart the main hurdle is regulatory approval. Once the Heart Assist is used the feedback is overwhelmingly positive. We continue to build evidence and more than 500 patients have now been transplanted successfully with Heart Assist. The CAP in the U.S. is now up and running, and we have 6 patients included as of yesterday. I will come into later a little bit more on heart, but we can also see that in Australia, the heart penetration rate last year was approximately 30% and we now see that this year it has increased to 40% for DBD heart, which shows again that the need for this product in the market. We have also stated in early calls that we're running a DCD direct procurement study in the Benelux to show that we -- it's also a great product for DCD hearts. And I think with that results coming out, hopefully next year and the Australian experience, we see a great potential to truly shift the paradigm of heart transplantation. Lastly, and also important to mention is that the projects are progressing according to plan. Regulatory time lines are hard to predict, which we saw this summer for the EU heart approval. But in terms of clinical trials and development projects, they are progressing according to time lines agreed. The production capacity projects, for example, where we invest to scale up volumes 10x of the day volumes for disposables are running in line with communicated time lines. The full-scale production of disposables for heart, liver and kidney will be extremely important to capture future growth potential for all 3 products. And with that, we can go to Slide 5. And I want to remind everybody why we are here. It's a picture in front of us reminds us that Alex is one of the 500 patients that got opportunity to get a heart transplant, thanks to the innovative XVIVO heart technology. And that's why what we work on every day to make sure that those patients actually survive. If we can go into Slide 6 to the Q3 highlights and important information. If we start with the U.S. federal review, so HHS has launched a review of the organ transplant system in the United States and started to take actions towards at this stage, one, underperforming OPO, listening to the conference. And I think it was best summarized by the quote from the FDA Director, Marty Makary, that you see in the middle of the page here. I want to state that XVIVO is aware that many organs go to waste because of bad communication, underutilization of technology that improves organ utilization, patient outcome, et cetera. And this is why we work day and night to improve the situation for both transplant teams and OPOs. Our products and services correctly used will enable more organs to be used and less stress on the transplant system, which we do acknowledge there is a high level of stress right now. But we hope with longer transportation times, more evaluation opportunities and a better service model, we hope that we see us as part of the solution to release that stress and less mistakes will be made. And we can stay in the U.S. and go to Slide #7 and just have a brief view of the U.S. lung market. And as we said earlier, and you can see it also in the slide, we have gotten used to very high growth in the U.S. lung market '22 to '24, double-digit market growth. And it has been driven by improved allocation and EVLP at the ambitious programs who could safely grow their number of lung transplant using lungs that were rejected by other centers. In 2025, we still see growth, but at a lower pace than we are used to. The reasons for the slower market growth are manyfold. But at least we start to see waitlist coming back at a few of the ambitious clinics I talked to. And we have also acknowledged that the lack of resources has impacted growth rate this year compared to earlier. And I will also come back to how we want to improve our service strategy to reduce stress and lack of resources at both clinics and OPOs. And with that, we can go -- continue to stay in the U.S., but go to Slide 8 to paint the picture of what we will do specifically for lungs. As stated earlier, we have seen fantastic results from ambitious lung transplant programs that safely increased the numbers of lung transplant using EVLP with XPS system solution. For Q3, we can start to conclude that we didn't identify any destocking. We continued to see an increasing interest to start EVLP programs with XPS. And as stated earlier, 3 out of 4 of the new accounts that bought an XPS in the first half of the year is now up and running, unfortunately, not in Q3, but in early October, at least. To improve our service to lung transplant clinic and we acknowledge that there is a resource constraint, we entered into a partnership during quarter 3 with a prestigious perfusionist company. By doing so, we've got access to 175 perfusionists and we can together with our organ recovery business and communication system FlowHawk, give our customers an improved experience and support them also during shortage of resources. During the summer, we have also developed an EVLP product service model to better fit the OPO system. We will run the first pilot during Q4. And lastly, we have also recognized that we need to reorganize the commercial organization, and we have done so during the summer to have a greater footprint in the south of the country and on the West Coast of the United States. Our estimation is that the action taken during the summer will show gradual impact during the next 5 quarters. The interest for starting an EVLP program with XPS is extremely high by the most successful lung transplant clinics in the U.S., has proved that that's the way to safely increase lung transplant volumes. And we believe by increasing our support level, we will be able to better realize this interest from customers. And with that we can go over to -- I came home yesterday still running, but I came home yesterday from the -- our Lung Masterclass 2025. And it was a great pleasure for us to welcome the best of the best in lung transplantation to the 2025 edition. So we have got 100 clinicians from 19 countries that could exchange ideas through collaboration, how we can improve lung transplant practices and improve both usage of lungs and patient outcome. The key takeaway for me was that many clinics has experienced a -- or had experienced a tough 2025 with the lack of resources and in some cases lower waiting list, making matching of donor organ patients a lot harder. We see that we need to support our clinicians better. And so far, what I could -- in the conversations I had, we could see that at least the waitlist looks a lot better going into Q4 than they did up until Q3. And with that we go over to Slide 10, sorry, and just have a snapshot of the U.S. CAP study and the PRESERVE study status. We have the first patient enrolled into the study during Q3. At the end of the Q3, we had four patients enrolled still at one clinic. As of yesterday, we actually had nine patients enrolled into the continuous (sic) [ Continued ] Access Protocol still at one clinic. At the end of Q3, we activated five centers that are able to enroll patients. And the focus for Q4 will be to activate more clinics. There is a need for the product, and also support them as much as we can so they can restart enrolling patients into the continuous access protocol so we can strengthen our regulatory file that we aim to hand in to the FDA during the next year. We can also just briefly state on the PRESERVE status that we had last patient in the original trial, so not the continuous access protocol as November last year. We will have the -- go through the data analysis Q1 in 2026, and the study result is expected to be announced in Q2 2026. And with that we can go over to Slide #11 that I said earlier we should deep dive a little bit into the actions taken during the summer. Besides the footprint of our commercial team in the United States we have also taken action on the service side. To start, we've taken mainly 3 actions. One, we have doubled the surgical capacity both in terms of number of surgeons and in terms of active locations. So we've gone from end of Q2 3 to end of -- 6 end of Q3. And we expect that end of Q4 will be 7 active hubs in the -- on the East Coast or east of the Mississippi. As I stated earlier, we closed a partnership with a great partner not only to improve our EVLP capabilities with perfusionist, but also to support clinics with NRP services, which is nowadays in the United States a must to grow our service business that has been asked for and now we can finally deliver on it. At number 3, we have partnership with numerous both aviation and ground transport partners to enable a full-service offering if the clinics want that offering. Some have their own transportation partnering, and we're happy with that. But if they don't, we can offer a great network of transportation to simplify for the transplant teams. So with those actions we will improve our services. We had already best-in-class service in terms of quality, but now we can offer service tailored to customer needs as well. So we hope that we have laid the foundation for growth within this segment, and -- especially then east of the Mississippi. We are aware of the fact that we need to also grow our hubs and service offering west of the Mississippi, and we will come back to that both the progress on the actions taken and the future plan in the next quarters to come. And with that, we can go over to Slide 12, and we leave the United States and we go over to Europe, which we have concluded into one slide. And the reason is that it's slightly shorter is that the business is progressing very well. We have a stable field force. We have very good clinical data, long and strong customer relations and great interactions. But what we've seen so far in Q3 is a continued strong growth for liver in Europe. Q3 it was similar to previous quarter by plus 31%. And we continue to add new accounts every quarter. We continue to work on reimbursement, et cetera. The main hurdle for growth in liver is mainly human resources and reimbursement, which we're working on. And country-by-country, we now see that reimbursement is coming into place. And with an increasing customer-facing organization, we now have the ability to support clinics better with also resources, and especially human resources that support with perfusion services. Kidney is showing growth, 54% in Q3, and that is great. What we can note, as I said earlier, customers that are using the products are pleased with both the performance of the product and -- but especially how the kidney performed after transplant. So we -- but we have a lower market penetration rate, and we are -- it's more account-by-account base where we have to, let's say, fight a fight to increase penetration rates, and we have to convince clinic-by-clinic. But once they had tried the Kidney Assist Transport, they are very convinced of the product and actually increased usage over time. The lung business in Europe grew mainly with EVLP adoption in the U.K. and higher PERFADEX usage per case as -- the last one as a result of evidence that if you flush more with PERFADEX, you actually improve the lungs before transplantation, which potentially improve outcome after lung transplantation. And if we look going into next year and strategic areas for our European business, we are, as we stated earlier, of course, awaiting the regulatory approval for heart. If we benchmark Australia, it's clear that XVIVO Heart Assist has a very good position in the transplant system. And we expect European heart penetration to over time mimic what we have seen in Australia. We're also awaiting the -- as I said earlier, the DCD to have a full coverage in Europe once we launch. We have also acknowledged that in the U.S. as well as in Europe, there is a constraint on resources. So we have a very successful model in Italy, and we will launch that model into a few test markets where rules and legislation allows for that. And with that, we can move over to our regulatory, clinical update. It's a little bit longer than normal this time, but we can start with just the standard slide of Slide 14, which shows an overview of regulatory approval we have. So our lung and kidney portfolio has obtained regulatory approval in all key market, and liver is approved in all key markets. For heart, we are awaiting, as we know, approval for all core markets. And the time line has -- there are some shifts, and I'll come back to those later in the presentation. But the main time line has not changed besides the pending CE-mark in Europe, which we press released during the quarter. And in U.S., we are working very hard to make sure that the file is approval ready as soon as possible. For the liver, we have now obtained everything we need, but I will come back later to the decision we have taken during the quarter regarding the liver U.S. trial. And we can turn to 16, which is a little bit of a repetition, but it's good to clarify here the heart and the strong evidence we see in heart. The heart trial in Europe is not the -- not only the first trial to aiming for showing superiority, it's also the first trial to show superiority for heart. But more importantly, it's also the first trial ever to show a direct link between perfusion of a heart and patient outcome. And we can see that by using XVIVO Heart Assist, we can reduce severe PGD, which is the leading cause of early and late mortality with 76%. And what we know from before and what we've seen in the trial is that, if you get the diagnosis of severe PGD, you have approximately 40% mortality risk within 1 year. If you compare that to -- if you don't have severe PGD, you have only 5% mortality risk during the first year. So -- and this was in our trial directly translated to 6 patients more safe or life saved during -- up to 1 year, which is the first time we can see those direct links between actually perfusion of an organ and better outcome within 1 year. And if we would extrapolate this to the transplants we are doing on standard criteria heart today in the world, it will translate into more than 400 lives saved every year only for the standard criteria heart. And then we're not counting all the extra hearts that we can actually get available for heart transplant using the XVIVO Heart Assist, either if it's long distances or extended criteria heart, et cetera. And with those great results, we go over to Slide 17, where we are looking into more how we want to change the paradigm of heart preservation. And as I stated, we know that we now can increase both patient outcome and we can increase transportation time for heart. To strengthen the evidence and simplify the DCD process, we have, as I said, the Benelux DCD direct procurement study that we are now under inclusion of patients, and it's progressing fine. The study aim to include 40 patients, and it is estimated to be fully included end of this year 2025. And we are really looking forward to the result of this study. With a positive outcome of this study, the XVIVO Heart Assist would fully transform the process for DCD heart, making it safer, easier, less resource-intensive and with improved patient outcome. So then we cannot only, as we have seen in Australia, change the paradigm for DBD heart with a successful outcome, here we would also change the paradigm for DCD hearts and hence the full heart transplant process. And with that, we go over to the last slide of the clinical and regulatory update on Slide 11 or Page 11 (sic) [ Slide 18 or Page 18 ]. And as you know, we previously reported that the Liver Assist has been granted Breakthrough Device Designation by the FDA. We have an approved ID and can start the trial. We have CMS funding approved, et cetera, and we could have started the trial in Q3. However, the company has decided to temporarily pause the activities for the liver PMA process to investigate if an alternative regulatory route is possible. We hope to, as soon as possible, come back with the result from that investigation. The aim of the investigation is to see if we can get a faster route and hence enable patients in the U.S. a better product than what is currently available on the U.S. market, approved faster. And hence, we can see the fantastic results we have seen in Europe also in the U.S. And with that, I go to Slide 19 and hand over to our CFO, Kristoffer Nordstrom, who will present the financial performance of the year and the quarter. Kristoffer Nordstrom: Thank you, Christoffer. Yes. So net sales in Q3 were SEK 189 million, which represents a gradual improvement from Q2. Organic growth, minus 1%. But in reality, organic growth was plus 6% if we set aside heart trial revenue. Besides heart trial revenue, organic growth was again impacted by soft market conditions in the U.S. and lower EVLP activity among a few larger customers. As our CEO has mentioned before in this call, we do see signs of EVLP activity recovery as we have entered into the fourth quarter. Year-to-date, net sales are SEK 586 million, representing also 6% in organic growth, excluding heart trial revenue. And in the following quarters, we will continue to emphasize the impact of this trial related revenue to provide a clearer picture of the progress of our current business for you all. Total gross margin in Q3 and year-to-date were in line with last year, 75% and 74%, respectively, which we are pleased with given the unfavorable currency effect on sales in 2025 from the weakened U.S. dollar. Throughout '25, we have maintained a strong focus on operating expenses, although the organization has grown with new talent and further recruitment, the associated costs were offset by disciplined cost management. And as a result, OpEx was in Q3 this year, 2% less than last year, as an example. Adjusted EBIT in Q3 was 9% and adjusted EBITDA was 19%. Moving over to the respective business areas, starting off with Thoracic. So sales were SEK 115 million. Organic growth was negative, minus 12%, and excluding heart trial revenue, the organic growth was minus 4%. There are two main reasons for the drop in organic growth this quarter. So first of all, less machine sales, XPS sales versus last year and also lower EVLP activity, as I've mentioned, at a few higher volume customers. We have started to see signs of increased EVLP activity in September-October, and we believe in a gradual ramp-up at current customers over the next 5 quarters. Gross margin in Q3 was phenomenal, 89%, positively impacted by product mix. As an example, our global PERFADEX sales grew 17%, and this is the product with our highest margin. And we also have the positive effect of not having any XPS machine sales this year. When it comes to heart, sales were SEK 10 million in Q3 versus SEK 19 million last year. Worth repeating, last year included significant trial revenue, which makes the comparable numbers irrelevant. We will start to see more and more revenue from the CAP study as patient enrollment continues. In Q3, 4 patients were transplanted by one center, and the majority of Q3 heart sales came from Australia, very strong, SEK 8 million. I get some reports, operator, that there are some issues with the sound, especially if you are viewing this conference from the webcast. So could you please look into that? And I will continue in the meantime. Abdominal. So Abdominal performed a record quarter. It was the best quarter in history for us, showing strong performance both in liver and kidney. Net sales, SEK 55 million, translating to an organic growth of 47%. Year-to-date, the organic growth is 31%. Liver sales grew 34% in local currencies, and we're pleased to see that throughout the year, we have successfully expanded and grown our business in larger markets such as Italy, DACH and U.K., which are big markets and will be very important for us in the future. Kidney sales increased 79% versus last year and 49% excluding machine sales, and we saw double-digit growth in both Europe and the U.S. So once again, a very strong quarter for Abdominal. Services. I think most importantly, Christoffer has already shared what we have done, what actions we have taken in the quarter that will lead us to growth in 2026. But from a financial perspective, the quarter was soft. We see good contribution from FlowHawk, our latest acquisition, who added 17% of growth in the quarter. But in terms of the recovery business, we expect to see improvements starting next year. So let's switch to focus to EBITDA and cash flow. EBITDA came in at 19% in Q3 and rolling 12 months we're currently at 19% as well. As mentioned, throughout 2025 we maintained a strong focus on operating expenses. And in the following quarters, we will continue to manage our operating expenses with discipline, ensuring resources are directed towards initiatives that drive clear commercial returns in the short term. Our operations, R&D and administrative functions are well scaled for current ambitions, allowing us to invest selectively. We are a growth company. We're built on a scalable business model and strong gross margins. And as we grow, increased profitability will follow. And my final slide, cash flow, so we ended the third quarter with SEK 280 million in cash and an additional SEK 120 million available under our credit facility, bringing total available funds to SEK 400 million. Operating cash flow was positive SEK 21 million, which is encouraging given the ongoing buildup of inventory during the transition of our new Sweden-based supply chain. While our revolving credit facility remains in place to support working capital needs, our positive operating cash flow meant no additional drawdowns were needed in Q3. Cash flow from investments amounted to minus SEK 61 million, resulting in a total cash flow of SEK 44 million for the quarter. As Christoffer alluded to, during the summer, we implemented strict cost discipline in response to the temporary slowdown in lung sales and the delayed heart regulatory approval. Combined with the completion of important CapEx investments made in 2025, we now approach '26 with a cost base well in line with both our financial resources and our growth outlook. And with those final remarks on cash flow, I will hand back over to you again, Christoffer. Thank you. Christoffer Rosenblad: Thank you so much. I don't know if people hear me. I will try to continue to talk on outlook, and we turn to Page 27. So that's the outlook for this and next year. To start with, we continue to work close to competent authorities in Europe with the aim to obtain a CE-mark for heart, that is priority number one. We will also have a clear priority on -- with the recent reorganization and new partnerships in the United States, we will focus on increasing EVLP adoption through a combination of service models and staying close to customers. In parallel, we will increase our service offering to better tail customer needs, especially offering NRP procurement from an increased footprint in the United States. Liver Assist in Europe saves hundreds of lives every quarter. We will support clinicians to increase that number through this year and next year. And lastly, in the U.S., we will prepare the heart regulatory file for submission to the FDA. And in parallel, we will strengthen the U.S. field force to enable a successful heart launch and enable a strong lung and kidney business until we see that heart launch. And going over to Slide 28, which is the long-term outlook, and it's a repetition from all the quarterly calls. But we have seen a demand of 10x of today's supply. We also see a sales value of machine perfusion that is approximately 10x versus static cold perfusion. Machine perfusion and service model have proven to increase the number of organs to be used for transplantation, especially in the fast-growing DCD pool; and the main growth driver of superior clinical result for machine perfusion. And the fact that service model reduce complexity and time for the transplant clinics. Hence, machine perfusion and service models on normal and DCD growth will drive growth in the near future. And so in conclusion, we see a long-term case that is intact. XVIVO has a unique and proven product platform. We are committed to execute our strategy to one day accomplish that no one will die waiting for an organ. And with that, we turn to Page 29. We hope that you still hear us and that we can hear your question. Thank you for listening. And with that, we open up the lines for questions. Operator: [Operator Instructions] The next question comes from Simon Larsson from Danske Bank. Simon Larsson: First question from my end on the lung business and the sequential dynamic that you're describing here. If I'm understand you correctly, there was no destocking in the quarter. Should we view that as customers having fully burned through their stock at this point? That's the first question. And then the second one relates sort of to the communication around your confidence in a stronger Q4. Is this growth coming predominantly from the 3 new accounts that just went live here? Or is it something else that you're seeing for Q4 lung particularly? Christoffer Rosenblad: Thank you so much for your questions, Simon. To start with, I would say, normalized stock level is probably a better word regarding what we know is that we saw no signs of destocking this quarter. So -- and what from we heard, it's normalized stock levels that's -- that all we can conclude. In terms of going into Q4, it's anecdotal, but we -- and it's not the full picture, but what we have seen is that waitlists have started to build up and those high-performing clinics, which we've seen a higher activity in the first 3 weeks in October in some clinics than we have seen in all of September. So it's anecdotal. But we feel that it's talking to larger clinics in the U.S., we feel that they are more positive now than we have seen at the beginning or especially Q3-Q4. But we don't know where the market growth will go to be truly honest, that's something we have to see at the end of Q4. Simon Larsson: Makes sense. Maybe staying on lung for one more question. Do you expect any type of impact on the U.S. EVLP business from TransMedics and their next-generation OCS lung trial? From what I understand, the recruitment will potentially start here in Q4, and it's a pretty big scope of lungs enroll that they are aiming for anyways. So what do you hear from your customers in the U.S., are they going to participate, et cetera? And what do you hear? Christoffer Rosenblad: To be truly honest, we heard very little from customers regarding the trial. We heard more on the heart side, to be truly honest. It might have an impact. It is to be seen. We don't know that yet. Typically, what we have seen earlier is that an increased interest in machine perfusion will hopefully also lead or has historically at least led to an increased activity as well. So the market has grown further. So it's to be seen. It would be speculative. But we haven't heard -- I haven't heard from one lung customer that they will participate at this stage. Simon Larsson: Okay. Sounds reassuring. The final one from my end on liver. Obviously, you're taking sort of a strategic review here of the go-to sort of pathway forward for the liver trial in the U.S. Maybe sort of provide -- and, of course, you can't really maybe comment at this point, but maybe a 510(k) pathway could be sort of, something that you're looking into. Is that correct way of thinking about this? Christoffer Rosenblad: Yes. I mean there are three main pathways to enter the U.S. market is 510(k) -- 510(k), de novo, PMA and -- typically. So we will investigate and have a dialogue together with the FDA what is the best pathway forward, also talking to our customers what is the most preferred. If we will find that a faster process is possible, we would, in dialogue with customers, decide on way forward. We'll have to come back later when we know more. So we decided today that we owe it to ourselves, we owe it to our patients and our customers to at least investigate this before we walk ahead. Simon Larsson: Yes. So it's not possible at this point to say anything about how this could affect sort of time to market or potential pricing? It's too early, I assume. Christoffer Rosenblad: Correct. It's too early at this stage to know that. Operator: The next question comes from Ulrik Trattner from DNB Carnegie. Ulrik Trattner: And a few questions on my end and potentially starting off where we ended last question there on liver. And just assuming -- now just assuming a 510(k) route, which would be faster, obviously, for you going to market. This is a similar route of you in kidney. But are you seeing a pitfall of going down such a route with not having a sort of U.S. clinical data on the product given sort of the anecdotal evidence that patients or clinics have been reluctant to adopt your device prior to having real U.S. data? Christoffer Rosenblad: Yes. I mean the straight answer to that question is yes. I mean, we learned through experience that we need U.S. data either way. So no another pathway. We need solid U.S. data to be able to convince U.S. clinicians and OPOs. So that's correct. Ulrik Trattner: And if we were to move to the next regulatory filing of heart study results could be announced Q2 '26. And I assume you then aim to file directly and then a 90-day sort of filing process for 510 -- for approval. So that would assume the heart product on the U.S. market by Q4 of next year. Is that a fair assumption? Christoffer Rosenblad: No. And the reason is I expect there to be an expert panel meeting that would add at least 180 days because they have to call for the panel, et cetera. That is our expectation. But this is what I expect. So we don't know for sure. But I would expect this being first of kind and the groundbreaking technology we are putting into our regulatory timelines that there will be expert the panel review from -- for the heart technology. So there will probably be a longer time line than you said due to this reason. Ulrik Trattner: So similar to that of the XPS system, sort of. Christoffer Rosenblad: Yes. Which is also groundbreaking and changed the paradigm of lung transplantation and now we aim to change the paradigm of heart. So then we assume that the FDA want the second opinion. But we'll come back when we know more, Ulrik. Ulrik Trattner: And just on the Continued Access Program updates where you have activated a few centers. Just to clarify, you have approval for 60 transplantations to be performed and then you can renew that. Is your estimation that you will do 60 transplants over -- like including Q3, the next 3 quarters? Or how should we view that? Or is there some misinterpretation on my end there? Christoffer Rosenblad: We see that, that once they get started they get easily used and addicted to the heart technology. So that estimation would depend, of course, how many we get from activated to actually including patients, and we saw that we have one clinic now doing 9 in a very short time frame. But our estimation is that we will get more clinics in to be active in the continuous access protocol, and that will hence lead to a fairly fast inclusion. We knew from the original PRESERVE study that it took 9 months for the study to be up and running and fully up and running, so to say. So we don't know. And also to be clear, it's always up to the FDA if they want to prolong a continuous access protocol. But seeing the interest from our clinicians, I hope that the FDA want to accommodate, but I want to be clear that it's their choice and not our choice. Ulrik Trattner: Sure. And on TransMedics running another sort of U.S. clinical heart trial, is there any sort of competition among patients or this potentially would slow down number of patients that are actually running your heart device? Christoffer Rosenblad: The estimation we see now is no. I mean, 60 patients and hopefully prolonged are very few patients considering the potential of the XVIVO heart technology. So I would say that the cap on the number of patients will be the defining factor on how many we can include into the continuous access protocol and not so much what competition are doing or anything else. Ulrik Trattner: And just to clarify as well, are you allowed under the CAP program to combine your heart device with NRP? Christoffer Rosenblad: Yes, we were allowed also in the original PRESERVE study, including 141 patients, we were allowed to include any extended criteria heart, which is the DCD heart. So we included direct procurement, we included NRP from DCD and long preservation time and other reasons for any heart to be extended criteria. Ulrik Trattner: And last question on my end and potentially the most exciting one, at least what I think. These perfusion technicians, 170-plus, can you give us some more granularity on what this means? Where are they located? Is this a replication of what Lung Bioengineering is doing? How will you support clinics? And we've also heard comments here in the last few quarters on a lot of transplantation clinics taking the XPS program in-house and kind of builds to your comment on high interest of starting up new EVLP programs. But if you can provide us some more granularity on this, that would be great. Christoffer Rosenblad: Yes. Great. Great. No, it's not really Lung Bioengineering having a fantastic service, is not a replication of that just to be clear. But 2 things have happened this year. One is the reduction of NIH grants in the beginning of the year, which has -- there is a resource -- lack of resources in many clinics, especially academic larger hospitals. That has happened. The other thing is that TA-NRP has grown significantly this year compared to previous year, which has damaged a lot of lungs. So this has led to 2 things. One, the interest for clinicians or bigger clinics to start their own EVLP program to actually take care of those lungs that are coming from TNRP or otherwise being marginal or extended criteria. And we also see an increasing interest from OPOs that they have got the contact from their -- yes, nearby clinics and said, can you perform EVLP on all those lungs. Now we are really happy with the hearts when we do TA-NRP, but the lungs are potentially destroyed that we don't know. So those things have happened. In parallel, we have got more and more questions from our organ recovery service that we like you, but can you please include NRP into your service model? So for that reason, we scanned the market and wanted to find a great partner. And I think we found the best of the best with -- they have 175 perfusionists on the roster strategically placed, very much in line with what you saw on one of the slides when we increased our footprint from our organ recovery service. And they saw the same need as we did, but from the other side that they saw an increasing need for EVLP, they saw an increased need for NRP. But they were lacking products and surgeons. So it's really a great marriage if we get this to work. It's a perfect match where we can fulfill our customer needs with a high level of quality and a high level of customized service. So we can support both OPOs who are in need of improving their program and improving the number of allocated lungs, and we can support clinicians with NRP going out, so they don't have to take their really, really good surgeons that should actually do transplants. They don't need to send them out in the middle of the night to do NRP, et cetera. So we hope that this will be -- this is the start of something that can become great, and we hope that it will become as good as it promise right now to be over time. Ulrik Trattner: And just one follow-up there. Are these 175 perfusionists, are they lung specialized? Or are these agnostic to both Thoracic and Abdominal? Because I know sort of the most sort of pressing service here going forward will most likely be in heart in order to expand your footprint in the U.S. Christoffer Rosenblad: True. No, they are typically agnostic to organ. I mean, they are specialized in perfusion and very good in perfusion of all organs, so to say. It should be mentioned that today out of 175, I think it's 75 are fully trained on NRP. And we are, as we speaking, training as many as possible on EVLP. So we have -- so everyone should also be trained on EVLP. Operator: The next question comes from Jakob Lembke from SEB. Jakob Lembke: Yes. First question on heart and the process to get it approved in Europe. If you can give an update sort of is the file at review anywhere right now or is the ball in your court or what can you say? Christoffer Rosenblad: Right now, we are in, let's call it dialogue phase to fully understand what needs to be amended/improved in terms of evidence. So we are trying to fully understand together with regulatory authorities in Europe. So that's where we are right now. Jakob Lembke: But you still feel fine about the previously communicated time line? Christoffer Rosenblad: Yes. That has not changed. Until further knowledge it has not changed. Jakob Lembke: And then if you can also give some more details about the U.S. approval process for heart, sort of what are the milestones or sort of key dates where you need to submit to the FDA and so on in order to sort of assume the time line where you are approved in the beginning of 2027? Christoffer Rosenblad: I think we -- to start with, we need to finalize the clinical file, which will be important. In parallel, we are preparing the animal file and product file to hand in aiming in Q2 next year. Then the time line will be harder to predict from our side, and we need to come back with an update on more expected time lines after that because it depends very much on the route forward that the FDA chooses. So it's partly out of our hands. But they need to review the documents and make sure that they are on par for calling to an expert panel meeting, then they need to call for expert panel meeting and it has to go through that, et cetera. So we estimate from handing in the file that there are at least 12 months process, but that is an estimate from our side, and we need to come back with more granular data when we hear more back from the expectation on process forward from the FDA. But at this stage, it is our estimation and not something the FDA has told us. I want to be clear with that. Jakob Lembke: But you will hand everything in to them by Q2 2026? Christoffer Rosenblad: Yes. That is our aim. And I will come back if there's any change to that time line, but I will come back with more guidance if we change that. But that's our internal time line at this moment. Jakob Lembke: And then just a final question on lung and the EVLP sales in the quarter. If you just could elaborate sort of the trends across the different parts of the business, speaking of the large U.S. customer, other U.S. customers and rest of world? Christoffer Rosenblad: Especially for Q3 or more overall? Jakob Lembke: Yes. What you saw here in Q3? Christoffer Rosenblad: In Q3, we saw, in general, a quite weak quarter. We saw a few customers who had lower EVLP activities, very few of them, so to say. I think it's only 2 that dragged down the overall number. As I said earlier, going forward, we see more customers coming on board with especially the new ones from the first half of the year are now trained and at least 3 out of 4 are fully trained and up and running. So we see -- and we see that from a few that were a little bit lower in Q3, we can see that they have come back now in early October. So that's the picture we see right now at least. I see we are 1 minute past 3:00, so I don't know how many questions we have. Operator: The next question comes from Maria Vara from Stifel. Maria Vara Fernandez: I'll be very quick considering, yes, it's already a long call. All right, so maybe just a quick follow-up on the rate of enrollment and activation of the centers within the CAP program. You mentioned that it took 9 months to get up and running all the centers involved in the pivotal study. But I was wondering why it's taking in a way some time to activate the centers from the CAP? My feeling is like some of them should be part of the PRESERVE study. Could you maybe clarify if that's not the case? And if there is any hurdles that you're seeing in terms of the activation, whether these centers already have, for example, TransMedics technology? And what is the overall demand there? What's happening? Christoffer Rosenblad: Thank you. Great question. I mean many of them, yes, they were part of the PRESERVE trial. So that is correct. I think, unfortunately, the continuous access protocol is viewed as a completely new trial. And what has taken time is mainly after reduction of resources, especially going into research at the beginning of the year, it has taken longer time than we earlier anticipated to get through the red tape in each and every clinic. And everybody has been -- when I talk to surgeons, they are really eager to start. But, let's say, hospital system behind them has had a challenging time adjusting to the new level of resources, especially when it comes to research, which has hampered the uptakes, so to say. But we do expect that -- we do feel there is a great interest, and we do expect that, that will translate over time into -- everybody has to be retrained and recertified, et cetera. But over time that will translate into more and more clinics coming up and running also into the continuous access protocol. Maria Vara Fernandez: Okay. That makes sense. And in terms of the clinical data, do you plan to use this data from the CAP program into the filing of the FDA? Or that's something that is not on your mind at this moment? Christoffer Rosenblad: Yes. I mean, as far as continuous access protocol, let's say, the 1-year follow-up will not be that easy to accommodate to the FDA, but the data will absolutely be used from a safety data point. So it will be used as confirming what we saw in the original trial PRESERVE. Maria Vara Fernandez: All right, that's clear. And maybe just a last question on the liver and redesigning the regulatory pathway. I'm aware that there hasn't been any specific guidance on time to market, but obviously, this will shift things. And based on my estimates, we could have expected some kind of launch maybe in '27. However, that might seem unlikely, even though you could have another route, which could be quicker. Any thoughts here that you could share on time to market for liver? Christoffer Rosenblad: I think to start with, yes, that sounds ambitious. I agree with that. At this stage we don't know, to be very clear and honest. But as soon as we do know, we will communicate with everyone, preferably during one of those calls. And hopefully, we can conclude with the FDA or at least get some guidance from the FDA before the Q4 report in end of January when we release that one. Of course, with the U.S. administration being in shutdown mode, it's hard to predict if we can accommodate that time line, but we will do our best from our side at least. Operator: I hand the conference back to the speakers for any closing comments. Christoffer Rosenblad: Thank you so much for listening in to us today during the Q3 report, and I will just quickly go through to the last page, yes. And I hope to see you for the year-end report 2025 that we will have the conference call on January 27, 2026, and you also see the other interim reports for next year on your screen in front of you. But thank you very much for listening in. Thank you for good questions, and see you in approximately 3 months.
Operator: Good morning, and welcome to Brunswick Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's meeting will be recorded. If you have any objections you may disconnect at this time. I would now like to introduce Stephen Weiland, Senior Vice President and Deputy CFO, Brunswick Corporation. Stephen Weiland: Good morning, and thank you for joining us. With me on the call this morning is David Foulkes, Brunswick's Chairman and CEO; and Ryan Gwillim, Brunswick's CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today's results. I will now turn the call over to Dave. David Foulkes: Thanks, Steve. Brunswick delivered strong third quarter results, with each reporting segment generating revenue growth over the prior year quarter and overall financial performance exceeding expectations and guidance for the quarter. The sales growth reflected strength across all our businesses despite a challenging, albeit improving macro environment and industry backdrop. Our market-leading propulsion and boat portfolios outperformed their respective markets, and our recurring revenue, parts and accessories and other aftermarket focused businesses, along with Freedom Boat Club, continued to benefit from healthy boating activity. Brunswick's third quarter boat retail sales were flat year-over-year, a notable relative improvement from the first half of the year driven by resilience in our premium and core categories. We continue to drive forward with financial and operational efficiencies through the announced margin-accretive footprint actions in our boat business, continued enterprise-wide tariff mitigation initiatives, prudent pipeline management and excellent capital strategy execution. Our third quarter sales of $1.4 billion were up 7% versus prior year. Our adjusted earnings per share of $0.97 were impacted by the reinstatement of variable compensation and tariffs, but were up year-over-year, excluding those items, and we had another quarter of outstanding free cash flow generation, providing us with the flexibility to simultaneously invest in our business, return capital to shareholders and strengthen our balance sheet. With $111 million of free cash flow in the third quarter, we have generated $355 million year-to-date, an exceptional $348 million improvement over the first 3 quarters of last year. For the first time since the first quarter of 2022, revenue grew in all our segments. The Propulsion business delivered significant sales growth, with revenues in each of its three businesses: outboard, sterndrive and controls, rigging and propellers, up over prior year as OEM order strength continued later into the boating season. Mercury continues to be the clear U.S. outboard market share leader, with 49.4% share of outboard engines sold in the quarter. Given the volume of Mercury competitor engines shipped into the U.S. in advance of the tariffs on Japanese imports, we have not yet seen the full potential impacts of those tariffs on competitive product pricing, but we continue to be well positioned. Strong boater participation in our core markets continues to benefit our high-margin annuity Engine Parts and Accessories business, which posted strong sales growth over the prior year with sales in both the products and distribution businesses up solidly and segment operating margin also up sequentially from the second quarter, reflecting the strong operating leverage in the business. In the U.S., our market-leading distribution business gained 140 basis points of market share year-to-date over the same period last year. Navico Group reported modest sales growth and steady adjusted operating margin over prior year. Growth was led by strong performance in marine electronics product lines, but continued to benefit from investments in technology and new product introductions. While strong boating participation drove aftermarket sales that represents 60% of Navico revenue. Continued restructuring actions, a leaner, more focused organization and new product investments are bearing fruit. And Navico Group's strategic importance to the Brunswick portfolio was recently reinforced by the introduction of the Simrad AutoCaptain autonomous boating system, developed by Navico Group in collaboration with Mercury Marine and Brunswick Boat Group. Lastly, GAAP operating earnings were impacted by $323 million of noncash intangible asset charges for Navico Group. These impairment charges reflect the impact of the current trade and economic environment despite our plans for continued growth and margin improvement in this important part of our portfolio that is an increasing source of integrated solutions and differentiated innovation. Our Boat business grew both revenue and adjusted operating margin over prior year as our premium brands continue to perform well, and our aluminum boat businesses delivered a very strong quarter. Dealer inventory remains historically low, and coupled with flat retail, allowed for steady wholesale shipments. In September, we announced the strategic rationalization of our fiberglass boat manufacturing footprint, exiting our facilities in Reynosa, Mexico and Flagler Beach, Florida by the middle of 2026 and consolidating production from these facilities into existing U.S. facilities. Moving on to external factors. The U.S. Fed cut the Fed funds rate by 25 basis points in September, with expectations for several additional cuts through the balance of 2025 and/or in early 2026. Lower interest rates have a compound benefit in reducing the cost of both dealer floor plan financing and consumer retail financing, which will be a tailwind for both wholesale stocking and the 2026 main selling season. Additionally, while we're still analyzing how best to take advantage of the tax provisions of the One Big Beautiful Bill Act, the cash flow benefits will most likely be realized in 2026. We continue to actively manage our tariff exposure in what is still a dynamic situation and are slightly increasing our estimate to approximately $75 million of net tariff impact for the year, mainly as a result of the expanded scope of Section 232 tariffs. I will again highlight that because of our primarily U.S.-based vertically integrated engine and boat manufacturing base and predominantly domestic supply chain and the fact that we manufacture almost all our boats for international markets within those markets, we remain competitively well positioned in an environment of persistent tariffs. We also stand to potentially benefit from the tariffs of our engine competitors who import their engines from Japan, now subject to a 15% tariff. Dealer sentiment remained stable with historically low and fresh dealer inventory, and boating participation has increased considerably during the third quarter, benefiting our aftermarket businesses and driving Freedom Boat Club trips up 2.5% year-to-date versus prior year. OEM build rates have remained solid, and in combination with lower inventories, have supported strong wholesale engine shipments. Retail incentives remain elevated compared to historic levels, but are lower than in the same period last year. Looking now at industry retail performance, which has steadily improved in recent months after the macroeconomic shocks from early spring. As of the latest SSI reporting for August, U.S. main powerboat industry retail was down a little more than 9% year-to-date, with Brunswick boat brands continuing to outperform the industry and Brunswick's internal retail performing better than SSI. Despite the U.S. outboard engine industry that is down slightly year-to-date, Mercury market share remained stable with a 49.4% share in the third quarter, even in the face of significant competitive promotional activity. Internationally, Mercury drove strong share gains in the majority of its markets. From a global boat retail perspective, our core and premium brands outperformed the market during the quarter, and our value brands performed steadily. Overall, Brunswick's boat retail was down mid-single digits in the first half of this year compared to prior year, while this quarter, overall, we came in flat to prior year, a significant relative improvement. While still down, we saw notable strengthening in our value segment as we took actions to streamline our model lineup and improve profitability through manufacturing consolidation, which we'll discuss on the next slide. Lastly, we continue to drive healthy and very lean dealer inventory pipeline levels. Global pipelines are down over 2,200 units compared to the third quarter of 2024 and down over 1,500 units sequentially from the last quarter. In the U.S., pipelines are down over 1,200 units compared to the third quarter of 2024 and down over 700 units sequentially from the last quarter. While the performance of our fiberglass value brands improved in the third quarter, this has remained our most challenged category. Last quarter, we reported that we streamlined our value fiberglass model lineup by 25% for the 2026 model year, which began in July. And in September, we announced a strategic consolidation of our Reynosa, Mexico and Flagler Beach, Florida facilities into existing U.S. locations. This consolidation will reduce fixed costs, drive improved profitability in our Boat segment and generate a strong return on investment. The transition is expected to be complete in mid-2026, with some inefficiencies during the transition but with anticipated run rate savings of over $10 million a year after completion, even at current volumes, and with the benefits increasing when the industry rebounds and production volumes increase. This quarter, Brunswick has again delivered outstanding free cash flow. With $355 million year-to-date, we have delivered $1.6 billion of free cash flow since 2021 and a record $635 million over the last 12 months in very dynamic and challenging market conditions with a significant contribution from the recurring revenue components of our portfolio, but also with diligent focus on working capital reduction, and we expect this strong performance to continue into the fourth quarter and next year. Our investment-grade balance sheet remains very healthy, with no debt maturities until 2029 and attractive cost of debt and maturity profile and net leverage that continues to improve. We are, therefore, again, increasing our debt reduction guidance for 2025 by $25 million to $200 million for the year, up $75 million since the beginning of the year. By year-end, we are on track to retire approximately $375 million of debt since the beginning of 2023 and are committed to achieving our long-term net leverage target of below 2x EBITDA. We are accomplishing this while maintaining significant financial flexibility. And at quarter end, we have $1.3 billion in liquidity, including full access to our undrawn revolving credit facility. We also anticipate retiring $200 million or more of debt next year while continuing to return capital to shareholders. I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook. Ryan Gwillim: Thank you, Dave, and good morning, everyone. Brunswick's third quarter performance came in ahead of expectations, with sales growth in each of our segments versus the third quarter of 2024. On a consolidated basis, sales were up almost 7%, reflecting strong orders from OEMs and dealers, pricing actions taken in recent periods and steady boating participation, driving P&A and other aftermarket business strength, which was helped by favorable late season weather in many regions. Adjusted operating earnings and EPS also exceeded expectations, but were down versus the prior year due to the enterprise-wide impacts of tariffs and the reinstatement of variable compensation, which were partially offset by the positive earnings generated by the increased sales. Lastly, as Dave highlighted, we continue to drive robust free cash flow, up 166% from the prior year. On a year-to-date basis, sales are down 1%, primarily due to planned lower first half production levels in our Propulsion and Boat businesses, mostly offset by P&A and aftermarket stability throughout the year and third quarter sales growth in all of our businesses. Year-to-date adjusted operating earnings and EPS are also ahead of expectations, but remained below the prior year as expected due to the previously mentioned enterprise factors and lower first half production. Year-to-date free cash flow of $355 million remains a continued strength of the entire enterprise, reflecting the overall steady performance of our higher-margin aftermarket businesses and our focused inventory and other working capital initiatives. As noted, while sales were up 7% this quarter versus the prior year, adjusted EPS was down $0.20. However, outside the impacts of tariffs and the variable compensation reinstatement, we would have shown strong adjusted earnings growth in the quarter. The aggregate third quarter EPS impact of reinstating variable compensation back to target levels and incremental tariffs was approximately $0.70. These costs were partially offset by the earnings benefits from the higher sales and positive absorption, primarily in our Propulsion business, along with lower discounts in our Boat business. Now we'll look at each reporting segment, starting with our Propulsion business, which grew sales by 10% in the quarter, reflecting increases for each of its product categories of outboards, sterndrive and controls, rigging and props. Mercury saw strong OEM orders in a low field inventory environment, together with continued robust market share, resulting in their second straight quarter of strong sales improvement. Operating margin was down compared to prior year due to tariffs and the variable compensation reset, but benefited from improved absorption driven by higher production in the quarter. Healthy boater participation continues to drive strength in our Engine Parts and Accessories segment, with sales up 8% overall compared to the prior year. Sales were up solidly for both products and distribution, benefiting from favorable late season weather in many regions, helping to make up for a slower start earlier in the year, and market share gains in our distribution business. Operating earnings were down slightly compared to the prior year solely due to the enterprise impacts already discussed. I'm delighted to share that the Navico Group sales increased by 2% in the quarter, led by growth in its electronics portfolio, with adjusted operating margins decreasing only slightly as compared to the prior year. As Dave mentioned earlier, GAAP operating earnings were impacted by a $323 million noncash intangible asset impairment charge for the Navico Group. As we have previously discussed, driving improved performance in this segment is a key focus for management and the entire Navico team. And while we still have more work to do, we are starting to see the benefits from these efforts and our investments in new products, as reflected in Navico's consistent sales and earnings performance throughout the year. As compared to the third quarter of last year, gross margins improved significantly as we took out almost $5 million of cost from Navico facilities and continue to execute a multiyear initiative to consolidate and optimize our global network of warehouses and distribution centers. This strategic program is designed to deliver meaningful improvements across customer experience, operational performance and financial outcomes. We also continue to improve the balance sheet with lower inventory and increased turns. Lastly, our Boat segment reported sales growth of 4% over prior year, with growth in both boat sales and the business acceleration portfolio. Our aluminum boat brands, led by our premium fishing brand, Lund, had an especially strong quarter and drove strong top line and earnings performance. And Freedom Boat Club continued its growth journey, contributing approximately 13% of the segment sales. With low dealer pipelines, flat third quarter retail pulled through steady wholesale performance as we ended the quarter with lower pipeline inventories, as Dave discussed earlier. Segment adjusted operating earnings benefited from the increased sales, a lower discount environment and focused cost actions, which resulted in greatly improved segment gross margin, which more than offset the enterprise factors and flowed through into a 65% increase in adjusted operating earnings compared to the prior year. My last slide shows our full year guidance, which remains unchanged for revenue of approximately $5.2 billion, adjusted operating margins of approximately 7% and adjusted EPS of approximately $3.25. We remain comfortable with our full year EPS guidance despite the slightly increased estimated net tariff impact, as we believe we can carry forward our slight third quarter beat and continue to drive sales and earnings growth as we close out the year. Given our exceptional free cash flow generation year-to-date, we are increasing our full year free cash flow estimate to in excess of $425 million and our debt reduction target to $200 million, which will continue to progress our goal of lowering our debt leverage to under 2x. I will now pass the call back to Dave for concluding remarks. David Foulkes: Thanks, Ryan. I always like to highlight some of our exciting product launches, Freedom expansions and awards. During the quarter, we enjoyed strong momentum at the European fall boat shows, which provides positive indicators for next year's retail season and reflect the strong market position of many of our brands. In addition to Mercury's strong showing at the Cannes and Genoa Boat Shows, two of our most recently launched boats earned notable awards, with the Bayliner C21 named the 2025 MoteurBoat of the Year in the very competitive under 7 meters category and the Sea Ray SDX270 Surf collecting the MoteurBoat Magazine Innovation Award. These two prestigious new accolades add to many previous product awards this year. Amongst the many new boat models introduced this year, during the quarter, Lund introduced its all-new Explorer model lineup, which combines Lund's legendary fishability with smart functional features. Powered by Mercury and equipped with Lowrance technology, the Explorer lineup is another embodiment of the power of Brunswick synergies. Lund continues to be the leader in the premium aluminum fishing market. Navico Group's integrated and connected solutions continue to drive OEM penetration, and the team worked with several large OEMs to introduce a full turnkey cloud and mobile app solution designed to enhance the boating experience. This end-to-end platform unlocks powerful information for OEMs and their dealers by using real-time telematic data to gather valuable insights to serve their customers. In addition, Lowrance launched the all-new Ghost X Trolling Motor in September as the next evolution in the Ghost lineup. Ghost X delivers 20% more thrust with ultra-quiet operations, GPS anchoring and seamless sonar integration. FLITE debuted the FLITELab brand, which leverages the same innovative FLITE product design and technology to provide foilers with unmatched versatility to customize their ride. And finally, Freedom Boat Club recently reached 440 global locations and announced a new franchise location in Christchurch, New Zealand. Freedom continues to be a key contributor to Brunswick's growth, allowing more people to get on the water through its unique, convenient subscription-based boating model. This quarter, though, we took a genuine step forward into the future of boating with the official commercial launch of the Simrad AutoCaptain autonomous boating system. We have showcased development versions of this technology at some previous events, but formally launched the production system at the International Boat Builders' Exhibition and Conference in Tampa a few weeks ago and conducted demo rides for the media and 9 OEMs. We have scheduled additional OEM demo rides at the Fort Lauderdale Boat Show next week. At launch, AutoCaptain offers fully autonomous and dynamic docking, undocking and close quarter maneuvering, delivered with precision and reliability. The integrated sensor suite counters wind, waves and currents, and with 360-degree awareness, recognizes and reacts to its surroundings, avoiding obstacles and hazards such as passing boats to safely execute maneuvers. Post launch, we are working on expanding the capabilities and features offered by AutoCaptain, with the intention that these additional features will be delivered via software upgrades. AutoCaptain reflects innovation only possible through the combined power and capabilities of our Navico Group, Mercury Marine and Boat Group divisions working together to deliver this seamless integrated solution. It's also a milestone in representing the first commercialized solution under the Autonomy pillar of our ACES strategy, and the final pillar of ACES to be commercialized. Docking is routinely cited as one of the most stressful aspects of boating, and our comprehensive, capable and intuitive system was reported by the media and OEMs who experienced it to be clearly the most advanced and capable system available. Before wrapping up, I'd like to share some preliminary thoughts on guidance for 2026, which I know is top of mind for many investors, especially given the multiple headwinds and tailwinds. While the trade and economic environment remains extremely dynamic, we believe that we are well positioned to benefit from any industry recovery due to the operating leverage inherent in our businesses. Our tariff mitigation strategies are working to reduce our net exposure, and we believe that our substantial vertically integrated U.S. manufacturing base positions us relatively well in an environment of persistent tariffs. Interest rates are coming down, with further cuts expected, reducing the cost of financing for both end consumers and dealers as we approach the fall boat show season and the restocking cycle for what we anticipate at the moment to be a modestly stronger 2026. This is a very early look subject to change. Embedded in these initial thoughts is the assumption of a U.S. retail boat market that is flat to slightly up versus 2025, driven by relative macroeconomic stability, no material negative changes in the tariff environment and continued interest rate improvement. In this scenario, we believe that we can grow revenue by mid- to high single-digit percent, resulting in more than 25% growth in adjusted EPS, with continued significant free cash flow generation. That is the end of our prepared remarks. We'll now turn it back over to the operator for questions. Operator: [Operator Instructions] And the first question comes from the line of James Hardiman with Citi. James Hardiman: So I don't have to tell you guys that sort of over the course of the quarter, a big topic of debate was sort of how you're thinking about retail and what's showing up in the SSI numbers. I don't really care to go down that rabbit hole, I feel like we've been there before. But maybe if you could give us an indication of where you think we are now in sort of a -- from a run rate perspective, most notably as we think about how you're thinking about 2026? If the expectation is that 2026 is going to be flat to up, where are we today relative to that? And how do you see sort of the building blocks to us getting to that positive inflection? David Foulkes: James, yes, thank you for the question. Yes. We obviously had the kind of shocks in early Q2. The tariff announcements and the subsequent kind of capital market impacts that have progressively stabilized, that significantly affected early Q2, particularly. And then towards the end of Q2, we began to see some recovery and stabilization. Through this whole process, as we've noted, the kind of premium and core parts of our product lines have performed better than the value parts of our product lines. And that continues to be the case. In Q3, we're essentially flat year-over-year, with premium and core still outperforming and value catching up a bit, but still underperforming. We're obviously now in a part of the season where we're talking about hundreds of units and not multiple thousands of units, but that strength has continued through the first couple of weeks of October was slightly up through the first couple of weeks of October. So I think last year -- at the end of last year, we were commenting that we thought the shape of the year would be slightly weaker in the first half, strengthening in the back half. We did not know about tariffs at that time, but that has turned out to be the shape of the year. And with interest rates improving and impacting positively both end consumers and our dealers and obviously, their willingness to take stock, we don't see any reason why that can't -- that momentum can't continue into next season. So that's really the background. Obviously, if there are currently a noble exogenous issues, that may change. But just based on a feeling that we're kind of a bit of an inflection point at the moment in a positive way and that we do have a retail momentum, we're feeling that next season should be at least flat and most likely, at least slightly up. James Hardiman: Got it. But just to clarify, as we think about sort of flattish for 3Q, that you guys, it seems like the more relevant number might be the industry. Do you think the industry is flattening out for 3Q? And then, I think just a quick follow-up. Yes, I'm sorry, go ahead. David Foulkes: Yes, I think is the answer. SSI -- you appropriately like -- I think probably, we always have this process of reconciliation with SSI. SSI typically comes up. It typically underreports the Upper Midwest states early on, where we have strength typically because of brands like our Lund brand, which is very strong in the Upper Midwest. . So there is a process of just reconciliation because of partial reporting. I do get a sense though, since we have a broad range of brands that participate in pretty much every sector, that we should be -- our performance is probably representative of a generally improving market. Ryan Gwillim: And I would say, in some of our premium areas, including Lund, James, we are probably taking a little share as well. So you may see at the end of the year where the industry -- we may outperform the industry by a point or 2 in certain places where our share continues to be good for us. James Hardiman: Got it. And then just the inventory question. It seems like you guys are encouraged with where you are. How do we think about sort of the wholesale to retail ratio into 2026? A lot of other industry participants not only talking about maybe weaker trends, retail trends than what we're hearing today, but elevated retail level. How do you think about that heading into next year? Ryan Gwillim: Yes, James, I mean, we have the benefit of having our joint venture with Wells Fargo, our BAC venture. And we get to see a lot of good inventory debt, and we're seeing pretty much what we're reporting, which is people being thoughtful about inventory levels not increasing. And certainly, as Brunswick inventory is about as low as it's been in any non-COVID year since the GFC. So we're going to end the year somewhere about 18,000 global units and probably below 12,000 in the U.S. And again, that is when you look at kind of on a per rooftop basis, that is about as low as we want to be to make sure we have representative samples of our products in the places we need to sell retail. So we're really comfortable with our own inventory. And frankly, I'm not seeing any heavy pockets outside of ours either. David Foulkes: Yes. Inventory freshness continues to be really good. More than 80% of our inventory is less than a year old, which is a very fresh and healthy level. And just on the outboard engine side, we are -- we have been undershipping retail for a long time now and feel like our outboard pipelines are in an extremely good shape. Operator: Our next question is from the line of Craig Kennison with Baird. Craig Kennison: I just wanted to unpack the impact of U.S. tariffs on your competitors in Japan, especially on your engine franchise, of course. Have those competitors attempted to offset those tariffs with price increases? And have you heard from any boat OEMs that are interested in sourcing engines domestically? David Foulkes: Yes. I think yes to both. Yes, we are beginning to hear about some price increases, but we hear these things secondhand at the moment. So I think that's the developing situation. We'll probably hear more. If anybody intends to implement pricing at the beginning of next year, any of our competitors, then we'll likely hear about it in some way over the next few weeks or certainly, a month. I think probably with the challenge to the IEEPA tariffs in -- at the Supreme Court at the moment, there may be some of our competitors kind of wait to see what happens with that, I'm not really sure, before implementing pricing. But yes, we continue to gain share and convert OEMs, in fact. Probably in the last 6 months, we converted to European OEMs. So yes, I think Mercury continues to have very strong momentum. I would say that the Mercury product pipeline is continuing to churn, and there are going to be some really exciting new and very differentiated products coming up from Mercury over the next couple of years, which will only drive forward that momentum. We really are moving very quickly, all Mercury product development, just as we have in the past. I do think as well -- and maybe we'll talk about things like AutoCaptain later though. But that features set, which is genuinely innovative and adds a lot of value, is only available with Mercury propulsion. So we have not just on the propulsion side, but also on the integrated systems side, there are a lot of reasons to suggest that we should be converting more OEMs over time. Craig Kennison: And Ryan, you mentioned cash flow and other benefits from the new tax policy. I'm just wondering if you can help us frame or quantify some of those key drivers a little better? Ryan Gwillim: Yes. I mean, Craig, we have a lot of optionality under the new bill, obviously, in terms of bonus depreciation and some other things. And it's a bit of a P&L versus cash flow analysis that you have to take a look at as to when you take some of the goodness. I think for the end of the year, obviously, you've seen our free cash flow guidance. This year, it's extremely strong. It's guiding to the top, what, 2 or 3 years ever in Brunswick's history at 450 plus. Next year, you saw -- you've seen in our deck, that 125% free cash flow conversion would imply that we're getting some of that goodness next year, but we also have some headwinds that go along with that. So we'll see how we get there. I think we're not making any distinct decisions right now on how we're going to attack some of the benefits in the bill. A bit of it will depend on how we finish the year and the cash needs early in 2026. But it's clear that our ability to generate cash and to generate working capital has become a strength that really differentiates us really from any other company in our space. Operator: Our next question is from the line of Anna Glaessgen with B. Riley. Anna Glaessgen: I'd like to turn to Navico, shifting gears a little bit. Nice to see the top line inflection during the quarter. Understand operating earnings were impacted by tariffs and the variable comp. But could you confirm that excluding those items, you would have seen margin expansion? And if so, should we start to see more expansion as we roll over those or as we lap those headwinds towards mid next year? Ryan Gwillim: Yes. Yes, I can confirm that absent solely tariffs and variable comp reset, the Navico margins would have been up in the quarter. Anna Glaessgen: Got it. David Foulkes: Yes. And on the... Anna Glaessgen: Go ahead. David Foulkes: I just want to say that -- you go on. Anna Glaessgen: I was going to skip to the next question. So if you want to stay on this topic, please. David Foulkes: Yes. I just -- I wanted to say that we don't talk very much in these calls about technology. But over the last 3 years, we've invested a lot. But if you look at the Navico, I mean, we had the strongest gross margins in our business in the low 30s gross margin across the portfolio, but we're spending a lot on new product development. We just introduced AutoCaptain, which took us 3.5 years to develop. We introduced Fathom recently, we introduced a new connected platform that I just discussed. None of our competitors have anything like that out there at the moment. So our path here is to basically do what we did with Mercury, which is to invest in differentiated innovation in a way that other people can't follow or match. And it does take investment upfront, but we will begin to see the benefits of that as we move forward. So I just wanted to add that context. Anna Glaessgen: Got it. Thanks, Dave. Turning to both units, maybe asking the question in a different way. We've seen pretty notable outperformance year-to-date, industry running down high single digits. You guys are putting up a flat 3Q. Maybe expand upon the degree to which that outperformance is being driven by market share gains? And how we should expect you guys versus the market in 2026 and what's embedded in that guidance? Ryan Gwillim: Sure. I'll take this, Anna. Yes, I think there's some share in there. I do think that, as Dave mentioned earlier, as the end of the year comes, you'll see SSI probably get closer to where we think the end of the year will be, which is kind of down mid-single digits, but with us probably outperforming a bit in premium and in core. As we look to next year, I don't know if we believe any of those trends are changing. Our pipelines in all 3 of our segments are down. So premium, core and value pipelines are all down year-over-year as we enter 2026 with good, fresh inventory ready for the winter boat show season. I do think you could see some goodness on the value side, should we get a little interest rate help here in November, October 29, December and February. So we have an opportunity for 3 rate reductions here really before the key part of the season. That could help value, but our premium customer continues to be very strong. And I think certainly looking forward to Fort Lauderdale Boat Show next week, where we anticipate a really nice show where our premium buyer should be out and looking to get a boat for the end of the year. Operator: The next question is from the line of Xian Siew with BNP Paribas. Xian Siew Hew Sam: When you think about next year, I was wondering if you could expand a bit more about Propulsion. I think you kind of mentioned it like lapping, a bit of a destocking. So I'm just kind of curious how much do you think that could be a benefit? And how do we think about market share growth for Mercury over the next year? David Foulkes: Yes. I think a steady trajectory on market share growth. I think we are just seeing really -- we introduced the new 350 and 425-horsepower engines only in July, August, I think, something like that. So if you think about that, usually, people incorporate those things in -- at a model year changeover. So we would expect the -- some tailwinds from those new products coming through into next year and continued steady gains. We talked quite a bit, obviously, about U.S. market share, which is -- in the quarter, was very close to 50%. But the reality is the momentum for Mercury continues in pretty much all its markets. We've had a really strong year in Asia, a strong year in South America, a strong year in Europe. So we would continue to think about Mercury on a global basis, increasing share. Ryan Gwillim: And maybe, Xian, let me just order of magnitude, some of these pipeline numbers for engines. And these are U.S. numbers, which is where we have the best information. But versus the first day of 2024, so a 2-year stack. By the end of this year, under 175-horsepower pipeline is going to be down about 25%. And if you go same time period over 175 horsepower, our pipeline is going to be down 33% since January 1, 2024. So we've put ourselves in a really nice position with our dealers and our OEMs to capture the upside on growth to the market rebound like we believe it will. Xian Siew Hew Sam: Yes. That's super helpful. And maybe just on the 4Q guidance, I think it seems to imply there's a big -- a nice recovery on margins for both boats. At the same time, I think the revenue imply too much, maybe mid-single-digit growth. So I'm just trying to understand, I guess, how are you thinking about boat margins and the evolution in 4Q then maybe beyond? Ryan Gwillim: Yes. I think a bit of Q3, remember, is always saddled with some of the summer shutdowns and fewer production days. And so that often means Q3 is kind of the lowest margin quarter of the year. They're going to be producing kind of at a normal rate here in the fourth quarter. And if you remember, versus Q4 of last year, where they were really taking production days out to ensure a pipeline didn't inflate before the year, this year, they're simply just at a more steady state. So those are the two main drivers. Operator: [Operator Instructions] The next question comes from the line of Matthew Boss, JPMorgan. Amanda Douglas: It's Amanda Douglas on for Matt. So Dave, following the actions that you've taken to streamline the value boat segment, do you see the model lineup into 2026 as rightsized today? Or are there any further changes required ahead? And how would you assess dealer inventory levels across value and premium segments as we look ahead to the 2026 season? David Foulkes: Thank you for the question. Yes, I think the focus on value and kind of scaling back of the model lineup, I think we'll obviously evaluate through the balance of this season and early next season to see if we should take any additional actions. I think we still have a very comprehensive portfolio. But given volumes in that segment, we had too much complexity, and we need to take that down. I think we'll be very dynamic about it. I don't foresee a substantial additional change. At the moment, we've introduced new products, including the award-winning C21 from Bayliner this year, which is going to help us a lot, helps us focus our product development efforts to make sure that the model lineup that we do have is fresh. But of course, we could trim and make adjustments as we go forward. I don't see the same level of rationalization that I saw for this model year, though. And then in terms of inventory levels, I think we're healthy everywhere. Typically, our premium inventory levels in terms of weeks on hand are lower than kind of value. Typically, our premium inventory levels in terms of weeks on hand will be in the typically, mid-20s somewhere, and that's exactly where we are right now. So I really feel like our inventories are rightsized across all of our segments. And I believe that we're extremely well positioned for 2026. Operator: Our next question is from the line of Jaime Katz with Morningstar. Jaime Katz: I just wanted to go back to Navico. I think in the prepared remarks, it was noted that there was more work to do. And you guys have done a ton of work already. So maybe, can you elaborate if there's been maybe some new issues found that need to be remedied? And then what does the road map look like to a steady state in that segment? David Foulkes: No, thank you for the question. Yes, there are no new issues. There's just always more work to do, and we try to make sure that we prioritize our actions and make sure that we do the biggest, most impactful things as far as we can first, but there's a continued march forward in all aspects of the business. We do think about the fact that -- Navico Group is not just Navico. Navico that we acquired in 2021 was about half the business and still is about half the business. It really is the product of a lot of acquisitions over time. And so we're continuing to make sure that operationally, those previous acquisitions are all now working together on the same IT platforms, for example, making sure that we don't have excess distribution, we consolidate distribution. But we have the same systems that we can manage our SIOP processes. So yes, this is really a multiyear effort to kind of wring the last bit of operational efficiency out of the business. And we've done a lot of work, but we have more to go. There's still a good road map there of work that will help our operating margins, help revenue growth, and to be honest, free up some more cash because I think there are more turns in that business than we have right now, inventory turns in that business than we have right now. So the road map includes all of those things, and it's very detailed. Aine Denari, who runs that business now, is a very detailed and strong operator who is working extremely systematically through all of the aspects of the business, all of the processes, all of the systems and making sure that we continue to progress forward. So a lot of heavy lifting done, particularly on the product development side. It just takes a while to get that flywheel turning, but now, it really is turning with a lot of differentiated product. We have rationalized quite a few facilities. Even, I think, earlier this year, we moved European distribution to a 3PL. Those kind of actions individually might not move the needle, but collectively, can be multiple points of operating margin expansion. So yes, we're not in any way complacent on Navico now. It's great to see the business stabilized, but there is such a lot of potential in that business. We are anxious to make sure we move even further forward. Operator: The next question is from the line of Joe Altobello with Raymond James. Joseph Altobello: Just wanted to get some more clarification on 2026 and the initial outlook here. So obviously, as you mentioned, you guys have been undershipping demand significantly on the engine side and I think a little bit on the boat side as well. But as we think about the mid- to high single-digit potential revenue growth for next year, how much of that is simply lapping that destock, if you will? And how much of that is actually potentially coming from a restock? Ryan Gwillim: Joe, I'll take -- I'll go ahead and take this one. Yes, maybe there's a little bit in the first part of the year that is lapping a bit of a slower Q1, maybe half of Q2. But really, it's going to be a combination of a little bit of market, not much relying on the market, maybe a point or 2, some pricing throughout the various business units. Some share gains which continue, not only at Mercury, but in the Boat business and as Navico Group takes back share in some of their product lines. And also probably a bit of a betterment in discounting, right? The discounting environment, we've already seen come down here in the back half of the year, and we intend it's likely that, that will continue. With P&A obviously being a very stable part of the business that continues to trolley along. So you can get yourself, depending on what you assume there, from mid- to high pretty easily. But I would say the lapping of destocking is probably a small part and really just a kind of first quarter, maybe first 4, 5 months phenomenon. Operator: Our next question comes from the line of David MacGregor with Longbow Research. Joseph Nolan: This is Joe Nolan on for David. You talked about the plant consolidation and efficiencies during the transition. Just wondering if you could talk about the fourth quarter impact and maybe give us a sense of what the net impact might be for 2026 from that? David Foulkes: Yes. So fourth quarter, we're probably talking about a couple of million? Ryan Gwillim: That's right. David Foulkes: Yes, just checking with Ryan here to make sure I give you a couple of million. Essentially, we'll be operating 4 facilities and at least 2 at lower efficiency and productivity as we begin to exit them and we move towards fully consolidated by hopefully, a little bit earlier than the middle of 2026. So by the time we get the transition completed, we'll begin to see that kind of annualized run rate saving of $10 million-ish plus. So overall, I would say through next year, we'll see net positive, but it won't be the full $10 million of run rate savings. There are some elements of this transition that we can take ex items and some like just running at lower efficiency that we can and a little bit of a drag in the short term. But the price in the long term is well worth it. That $10 million or so run rate is just that current production rates. The benefit increases substantially as we move to higher production volumes. So we're anxious to get it done as fast as we can. We're very appreciative of the work of all the people who are transitioning and those who are working to help us with the transition. And yes, we'll be a much leaner production organization when we finish with a lot of benefits to the entire Boat Group. Operator: Our next question is from the line of Tristan Thomas with BMO Capital Markets. Tristan Thomas-Martin: I just wanted to look maybe a little bit past next year, just maybe get an update on how you guys are thinking about normalized boat industry retail demand and kind of how long and what's needed to get us there? David Foulkes: Normalized industry, we had -- when we think about the kind of normalized in a number of different ways, I would say -- we had a year this year that was heavily disrupted by the second quarter, which is unexpected, as -- prior to those announcements. I think otherwise, we would probably have had a year that was probably flattish. I'm not really sure. Q1 was a drag. I would say that elevated interest rates are -- have been a headwind in the past several years versus where we were before COVID when retail loan rates are in the 4% to 5%-ish, and we're currently in the 7.5% to 8% range. So that is a headwind that has been present for the last couple of years. And then we frequently also referred to replacement rates in our -- if you look at the boat park or the number of registered boats out there that are relevant to the product lines that we produce, it's in the kind of $7 million range. And if you look at a typical boat life, it implies annual replacements in the 200,000 to 250,000 range, which is obviously well above the 130 to 135 we're at the moment. So I would say a number of factors suggest that we will -- that there should be macro factors that increase both sales over time, and that's what we're anticipating. But we're obviously hesitant to take all of those things into our near-term forecast. So we think flat to slightly up is a prudent forecast at this point in time for next year. Operator: Our final question today is from the line of Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Maybe on the tariff front, I think the expectation ticked up a little bit to $75 million for this year. So just maybe any updates on how mitigation is going? And then any early thoughts on the expected impact embedded in kind of the initial thoughts around '26 would be helpful. Ryan Gwillim: Sure. Noah, thanks. Good question. Yes, listen, the real change from our July call to today was the 232 impact on aluminum and steel, really 3 parts. The rate went from 25% to 50%. The list of applicable ACS codes expanded significantly, which really now involves us looking at any metal contact that's contained in parts or goods that are coming in. And I think most people know it was applied retroactively, meaning it applied to inventory sitting in free trade zones or other bonded warehouses, if you would. So that was really the only change from the guidance. And in fact, I would say our mitigation efforts are -- continued to outpace our expectations. We continue to do better than we thought kind of month in and month out. And so that is good and that gives us good visibility into next year. It's a bit hard to say exactly what the impact is next year. I do think the incremental over this year would be much smaller than the incremental from '24 to '25. And certainly, as we continue to get smarter on mitigation techniques, we'll continue to work that number down. So yes, we're actually pretty happy that we're able to hold EPS for the year. Obviously, it's an extra about $10 million of tariff impact that we didn't anticipate that we're going to go ahead and cover -- that we believe we can cover in the quarter. And we look forward to then moving over to '26. Operator: At this time, I would like to turn the call back to Dave for some concluding remarks. David Foulkes: Yes. Thanks for your questions, everyone. Great questions. I think in a lot of ways, this is a very encouraging quarter. We have improving retail, revenue up across all our businesses, very solid earnings and continued exceptional free cash flow generation. We do -- as a team, we -- I think this just seemed like a bit of an inflection point. There's definitely more -- a positive shift in momentum at the moment. We continue to take bold structural cost reduction actions, though, and continue to do that, which will benefit our earnings in '26, independent of the market. Our major brands and businesses are beating the market. We continue to invest a lot in very well received and award-winning new products across the portfolio. AutoCaptain was a notable highlight though, really the first fully integrated autonomous boating system in the marketplace, a real differentiator, along with a number of other platforms that we've recently launched in a way that I think only Brunswick can produce. So it's very exciting. So as we said, while many things about 2026 are normal, I think late 2025, retail trends, very lean pipelines, further interest rate cuts all suggest the opportunity for top line growth and through our strong operating leverage, meaningful margin and EPS free expansion. All right. Thank you, everyone, very much. Have a great day. Operator: This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to SouthState Bank Corporation Q3 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Will Matthews. You may begin. William Matthews: Thank you. Good morning, and welcome to SouthState's Third Quarter 2025 Earnings Call. This is Will Matthews, and I'm here with John Corbett, Steve Young and Jeremy Lucas. As always, we'll make a few brief prepared remarks and then move into questions. I'll refer you to the earnings release and investor presentation under the Investor Relations tab of our website. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations. Any such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties that may affect us. Now I'll turn the call over to you, John. John Corbett: Thank you, Will. Good morning, everybody. Thanks for joining us. We're pleased to report a strong third quarter for SouthState. Earnings per share are up 30% in the last year, and the company generated a return on tangible equity of 20%. If you recall, we closed on the Independent Financial transaction in January. We converted the computer systems in May, and now we're beginning to realize the full earnings power of the combined company. Loan production was up a little in the third quarter to nearly $3.4 billion, and we saw moderate growth in both loans and deposits. Payoffs were about $100 million higher in the quarter. Loan production in Texas and Colorado is up 67% since the first quarter of the year. And loan pipelines across the company continue to grow, and we feel like net loan growth will accelerate over the next few quarters. Our charge-offs were 27 basis points for the quarter, primarily due to one larger C&I credit acquired with Atlantic Capital that has been in the bank a number of years. Stepping back, however, the credit metrics in the bank are stable. Payment performance is good. Nonaccruals are down slightly, and we've only experienced 12 basis points of charge-offs year-to-date. Our credit team is forecasting that we're going to land in the neighborhood of 10 basis points of charge-offs for the year. We're currently in the middle of strategic planning this time of the year and thinking about the banking landscape, deregulation and the opportunities in front of us. Over the last 15 years, we've built the company in the best markets with good scale and an entrepreneurial business model. And we've done the heavy lifting to build out the infrastructure of the bank. We're now in a perfect position to capitalize on the disruption occurring in our markets. We've calculated that there are about $90 billion of overlapping deposits with SouthState that are in the midst of consolidation in the Southeast, Texas and Colorado. Our regional presidents understand the opportunity, and they're laser-focused on recruiting great bankers and organically growing the bank in 2026. Will, I'll turn it back to you to provide additional color on the numbers. William Matthews: Thanks, John. I'll hit a few highlights focused on our operating performance and adjusted metrics and make some explanatory comments, and then we'll move into Q&A. We had another good quarter with PPNR of $347 million and $2.58 in EPS, driven by $34 million in revenue growth and solid expense control. Our 4.06% tax equivalent margin drove net interest income of $600 million, up $22 million over Q2. $19 million of that growth was due to higher accretion. Cost of deposits of 1.91% were up 7 basis points from the prior quarter and were in line with our expectations. In addition to the cost of deposit increase, overall cost of funds was impacted by the larger amount of sub debt outstanding for much of the quarter. We redeemed $405 million in sub debt late in the quarter. Going forward, that redemption will have a net positive impact on our NIM of approximately 4 basis points, all else equal. Our loan yields of 6.48% improved by 15 basis points from Q2 and were approximately 8 basis points below our new origination rate for the second quarter. And loan yields, excluding all accretion, were up 1 basis point from Q2. Steve will give updated margin guidance in our Q&A. Noninterest income of $99 million was up $12 million, driven by performance in our correspondent Capital Markets division and deposit fees. On the expense side, NIE of $351 million was unchanged from Q2 and was at the low end of our guidance. And our third quarter efficiency ratio of 46.9% brought the 9-month year-to-date ratio to 48.7%. Credit costs remained low with a $5 million provision expense. As John noted, though, we did experience one $21 million loan charge-off during the quarter, which is an abnormally large charge-off for us. This brings our year-to-date net charge-offs to 12 basis points. Absent that loss, net charge-offs would have been 9 basis points for the quarter. Asset quality remains stable and payment performance remains good. Our capital position continues to grow with CET1 at 11.5% and TBV per share growing nicely. As you'll recall, we closed the Independent Financial acquisition on January 1 of this year. Our TBV per share of $54.48 is now more than $3 above the year-end 2024 level, even with the dilutive impact of the Independent Financial merger. Our TCE ratio is also back to its year-end '24 level. As we've noted before, our strong capital levels and healthy capital formation rate provide us with good capital optionality. Operator, we'll now take questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Rose with Raymond James. Michael Rose: I guess I'll hit the margin question since you brought it up, Will. Steve, can you kind of walk us through the excess accretion this quarter? It looks like the core margin ex accretion was down kind of high single-digit basis points. Can you just give some puts and takes here as we think about the contemplation of a couple of rate cuts this quarter near term? And then if you can talk about some of the pricing dynamics, both on the loan and deposit side, new production yields, things like that. Just trying to better frame up the core versus the reported margin as we move forward. Stephen Young: Sure. Michael, yes, just maybe kind of give you some explanation of where -- where we think we're headed on margin, and maybe I can answer some of those questions in the middle of that. As you mentioned, we had higher accretion than we expected. And really, a couple of things around that. We saw the highest accretion in July and then August and September, it kind of tailed off a little bit and really due to some early payoffs of 2020 and 2021 vintage loans that had kind of 3 handle coupons with these big discounts that sold. So those are not economic decisions, but there -- I mean, there are economic decisions in the fact that they sold, but typically, you keep those coupons. Also, we had a 29% decline in PCD loans this quarter. And of course, those have larger marks. So anyway, all of that, we look at prepayments are really not outside of our scope of what we thought. It's just that some of the vintages were different than we thought and therefore, had bigger discounts. So having said all that, as we think about the guidance for NIM going forward, really not a lot of change, a little bit of change, but not a lot. We talk about the size, the assumptions of the interest-earning asset size. The second is our interest rate forecast. The third is loan accretion and the fourth is deposit beta in an environment where rates are going down. Interest-earning assets, we've been saying $59 billion for quarter 4 average. That's no change. For full year 2026, we're looking somewhere between $61 billion and $62 billion. So that's kind of a mid-single-digit growth. Rate forecast, last quarter, we had no rate cuts in our model. This quarter, we're thinking we get 3 rate cuts in '25 and quarterly rate cuts, 3 more in 2026, so that we would get 150 basis point cut in total and get the Fed funds at 3% by the end of '26. That seems to be somewhere where the market is. As it relates to the third assumption, loan accretion, based on our models, we expect loan accretion this quarter for the fourth quarter to be somewhere in the $40 million to $50 million as expected prepayments fall. Our October accretion so far is in line with these expectations. And as I mentioned, August and September came down pretty ratably. So I think -- I think that's a good run rate to use. For 2026, we did certainly pull some forward in 2025. So we expect instead of $150 million of accretion, we're looking at about $125 million based on our prepayment forecast. But of course, it can be lumpy based on these vintage loans. The last part is deposit beta. For the first 100 basis points of cuts, our deposit costs came down about 38 basis points from 2.29% to 1.91%, so 38% beta. In our 2019 to 2020 easing cycle, our deposit beta was around 27%. So our expectation is with the growth plans that our deposit beta would look a little similarly to 2019, 2020 to 27%. Maybe we get to 30% over time with a lag, but I don't think it will be as high as 38%. So based on all those assumptions, we'd expect NIM to continue to be in the 3.80% to 3.90% range with the step down in accretion this quarter in fourth quarter and for 2026 for to be in that range, 3.80% to 3.90% as we kind of move forward. But one of the questions you asked was our pricing dynamics. Our new loan production rate for the total company this quarter was 6.56%. If you look at Texas and Colorado, that new loan rate was 6.79%. So it's a little bit higher in Texas and Colorado, but it's in total, it is 6.56%.. So I know you have a few questions, a few puts and takes, but that's some guidance for you. Michael Rose: No, that's really helpful, Steve. I appreciate it. And then maybe just a broader one for John. I think you mentioned that loan production was up a little bit in the third quarter. I think there's clearly going to be some dislocation in some of your markets from some of the deals that have been announced. I know you guys are obviously leaning a little bit more into Texas and maybe Colorado as well with some of that. Can you just kind of walk us through the loan growth environment at this point, given the fact that I think a lot of banks are kind of upping the hiring plans for loan officers, the pricing dynamics and kind of maybe what we should expect as we move forward? Stephen Young: Yes. Sure, Michael. We kind of guided to mid-single-digit growth for the remainder of 2025. I think we came in at 3.4% for the quarter, so a little bit less than mid-single, but we still think mid-single-digit growth for the remainder of the year feels about right. As I said, we had about $100 million more in paydowns in the third quarter than we did in the second. If we move into 2026, it could move higher, maybe in the mid- to upper single digits, but we have a better feel for that in January. But most of the loan growth is coming in the area of C&I. For the quarter, we had 9% linked quarter annualized growth in C&I. Resi growth was about 6%. And then if you combine C&D and CRE, really, we were flat for the quarter. There was a migration of construction loans that just migrated into CRE upon completion of construction. Our biggest pipeline build is in Texas. We had an $800 million pipeline there in the second quarter. Now it's up to $1.2 billion. So we kind of got past the conversion there, and now we're starting to see the pipelines and the activity building. Florida has got a $1 billion pipeline. Atlanta has got a $900 million pipeline. So those are our 3 probably largest markets. And as I said on the call, with that dislocation in really all the states we're in, we are kind of leaning in on the hiring front, and we see opportunities to recruit bankers. Yesterday morning, I was interviewing one from another bank. So that is where a lot of our focus and effort is right now. Operator: Your next question comes from the line of Jared Shaw with Barclays. Jared David Shaw: Maybe just if we could hit on credit. You were listed as a creditor to First Brands. I'm guessing that's what the large charge was. Was there -- for that charge, was there a prior -- it looks like there was a prior reserve. Was there also a prior charge taken against that? And I guess, how do you feel about the rest of the portfolio apart from that? John Corbett: Yes, you're correct. That's what that charge was. There was not a prior reserve. I mean that news happened pretty fast. But that was our only supply chain finance credit. So as we examine the portfolio, we don't have any more of that type of lending. So unfortunate, we're going to use it as a learning lesson for our credit team and management associates. William Matthews: And I'd say, Jerry, on the reserve question, based on what John just said, we would have had a reserve release, but for that charge-off in the quarter, i.e., a negative provision just based on the underlying economic loss drivers. And just to be clear, we did charge off the full amount of that balance in the third quarter. Jared David Shaw: Okay. All right. And then I guess looking at capital, you just gave some great color on sort of really good growth opportunities over the coming years, but still seeing growth in capital and like you said, Will, just that improving backdrop on credit. Where do you feel like you would like to see CET1 optimally? And how should we think about the buyback and capital management in general from here? William Matthews: Yes, Jared, it's a good question. We're obviously 11.5% on CET1, about 10.8% if you were to incorporate AOCI. So very healthy capital ratio. Not to say we don't articulate a particular target out there, but we do like this 11% to 12% range we're in. And we do like the optionality we've got with the ratios being strong and with the formation rate being so good. So we are hopeful, as John said, to take advantage of some of the disruption in the market through growth, but we also have the ability to use some of that capital to repurchase our shares. It's sort of a quarter-to-quarter decision we'll be making. Operator: Your next question comes from the line of Catherine Mealor with KBW. Catherine Mealor: Just one follow-up back on the margin. It was helpful to have your guidance for next quarter. And is it fair to assume that -- actually, this is the way to ask the question. Is there a way to quantify how much of the accretion this quarter was just accelerated versus just helping us to kind of model what a normal kind of base level would be for accretion going forward versus how much is accelerated from paydowns? Stephen Young: Yes, Catherine, there's a couple of things that I don't want to overcomplicate your answer, but it's complicated. There's a few things that go into it. One is full payoffs. We talked about and there's partial prepayments. So based on our models, when we were looking at it and to give you that forecast in the last quarter, it was based on our expected prepayments. And our expected prepayments actually came in reasonably well. What we didn't get right was the vintage part of it as well as other partial prepayments. So the bottom line is what we saw in July and early August was a little bit outsized. What we saw in end of August, September is much more run rate type of thing. So I think this 40 to 50, that's kind of what we expected in the fourth quarter, the back half of the year. That's sort of what we're -- that's what we're seeing. So that sort of informs us going into 2026. Catherine Mealor: Okay. Got it. That's helpful. And then on fees, any outlook into how you're thinking about fees moving into the fourth quarter and then into next year, it was really nice to see another quarter of higher correspondent and service charges. Stephen Young: Sure. No, it was a really good quarter. Noninterest income was $99 million versus $87 million, so it's nice to pick up 50 basis points on average assets, a little bit higher than our guide of around 50, 55. 2/3 of that was capital markets. A couple of things happened in correspondent. Number one, we have changes in interest rates. And so when you have changes in interest rates, that business typically does a little bit better. It was sort of broad-based. A couple of million dollars was due to fixed income, maybe $3 million, $4 million with higher interest rate swaps, another $1.5 million in sort of other trading. So I think we had -- I don't see that -- that number was around $25 million. So that's a $100 million run rate. So to put it in context, our best year ever was $110 million in revenue. Last year was $70 million. So this quarter was a really good quarter. So I don't expect that to -- we'll see to continue to repeat. But clearly, we had a good quarter, we'll see with the run rate. I think we get a couple of quarters behind us, we'll have a better view. But clearly, it's higher than our run rate of $87 million. I'm not sure we're as high as $99 million. So I'd say it's probably as we kind of think about 2026, somewhere in that $370 million, $380 million run rate, that's probably not a bad place to start, and then we'll just see how it progresses is the way I would think about it. Operator: Your next question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: On a core basis, I believe from your second quarter earnings call, you talked about how every 25 basis point cut would be a 1 to 2 basis point improvement overall margin. Is there any change in thoughts on that? Or was that guidance? Or what was that guidance based on the core NIM? Or was that including any accretion? Stephen Young: No. Great question, and thanks for asking it. A couple of things there. So if we get back to 6 cuts and we get 1 to 2, that would be, call it, let's just take the midpoint, that would be 9 basis points. So I think our core NIM is somewhat -- as I think about core NIM somewhere in the mid-3.80s. So what's changed there? Number one is the loan accretion forecast. So if we -- next year, we are $125 million versus $150 million just because we pulled forward that that's about 4 basis points of decrease. And then the other is just on the deposit beta and the lag there of kind of where -- like I mentioned in our other question, our deposit beta so far to the first 100 was 38%. But on the other hand, we didn't grow deposits more than, call it, 2%, 2.5%. So as we contemplate the future and we look back at history at 2019 and '20 during that easing cycle, when we were growing a little bit faster, more mid-single digit-ish our deposit beta was more like 27%. So we're taking that model back down to 27%. We hope to outperform that, call it, there's a lag to CDs and pricing and all that. But by the beginning of '27, our hope would be we'd be in that 30% range. But for right now, what we're seeing in front of us we don't see that really -- we see that more of a lag and we're modeling 27% in our numbers. John Corbett: So Steve, when you translate what you're saying there, to Janet's question about 1 to 2 basis points with each cut may take that away if the deposit beta is not as good in a way down. Stephen Young: Right. And yes, to finish that thought to your point, John, to finish that thought, if our deposit beta -- so we're guiding sort of in the midrange of 3.80% to 3.90%. And so to the extent that the end of the year next year, we go through the cuts, and we start moving our deposit beta from 27% closer to 30%, 31%, that would get us in the high 3.80%, maybe 3.90% at the end of the year of 2026. That's how we're thinking about modeling it. Sun Young Lee: Got it. And just a follow-up. If I -- I'm not making this up, hopefully, I believe that the IBTX bankers that group will start adopting SouthState's business model and in a way, what would be the implication on -- or any implication on the expenses or their incentive to bringing like prioritized lower deposit cost or loans? Or is there any sort of change that could be coming or whether an implication on growth profile there? Could you explain -- could you give us any color on what that could mean for SouthState, that transition? John Corbett: Yes, sure. Janet, it's John. So we went through this transition year in '25 when we did the conversion, and we kind of kept the incentive system at IBTX the same as it had been in prior years. In 2026, it will move to the more of the SouthState approach where we allocate P&Ls to the regional presidents. So their incentive will be based on both loan growth but predominantly on their PPNR growth. One of the things that we're contemplating, making an adjustment for to incent additional recruiting and hiring is not to penalize those regional presidents for the first year compensation of new hires to encourage recruiting efforts into 2026, both with the existing SouthState plant and the IBTX plan. A good question. Hope that helps you. Is there another question? Operator: Yes, one moment please. Mr. McDonald, your line is open. John McDonald: Sorry, I didn't hear anything. Sorry, just one more follow-up, Steve, on the margin. I think your prior outlook was to be in the 3.80%, 3.90% and then drift higher in 2026. Just want to make sure that the '26 outlook 3.80%, 3.90% includes the rate cuts and about $125 million of accretion, if I heard that right. Anything has changed from prior? What are some of the puts and takes? Stephen Young: Yes. No, I think I was trying to answer that in the prior question. It's really the accretion number that from $150 million, it was what we thought in 2026 last quarter to $125 million. That's about 4 basis points of decrease. And then the rate and then on the deposit beta, we have 38%, 2019 was 27%, we were thinking -- we think ultimately, we'll get to somewhere in the low 30s but it just is probably a bit of a lag. So it's probably not going to -- we're going to be very diligent on growing for the loan growth we think is coming. And so we think we should, in 2026, model more in the 27% range. And then hopefully, as the CD's reprice, all those kind of things through 2027, we could see an uptick. So I think back to the guidepost to how this would work is you start out in the mid-380s and then move higher into 2020 -- the end of '26, early '27. William Matthews: And John, this is Will. I would add our margin position is as neutral as we've seen it in years, just based upon the actions we took in 2025, the number one, the merger and marketing that balance sheet properly. And then two, the portfolio restructuring we did in connection with the sale leaseback. So we have a relatively stable looking margin under most reasonable scenarios. John McDonald: Got it. And the delta between having a four handle this quarter and move into 380s next quarter is really accretion going from this quarter and cutting half to 40 next quarter in your outlook? Stephen Young: Yes, that's right, yes. . William Matthews: And that's what we're currently seeing. Yes. John McDonald: Okay. And then one just follow-up again on the next quarter's average earning assets in the 59. It seems like that's kind of where you were this quarter. Are there some kind of puts and takes of what you expect in terms of growth in the fourth quarter? Stephen Young: Yes. Typically, in the fourth quarter, we had some seasonal deposit growth and some of -- depending on how we manage it, we get some of the seasonal wholesale stuff out of the bank at the same time. So we sort of manage it towards that level. But kind of year-over-year, I'd call it mid-single-digit growth is kind of how we're thinking about it from an average earning asset. Operator: Your next question comes from the line of Ben Gerlinger with Citi. Benjamin Gerlinger: I was wondering if we -- kind of stepping back to correspondent banking, I understand that a rate card or rate movement kind of sparks it. But we're looking kind of -- I don't know 3 -- you said roughly 3 to 6 cuts over the next 12-ish months. How long is the tail for that kind of tailwind, I guess, you could say. So there's 2 cuts in December -- or excuse me, 2 cuts in the fourth quarter, would the first quarter also see a benefit? Or is it fairly short-lived? Stephen Young: Yes. I was trying to explain before, as you kind of think about that business that put the highs and lows of it, back in 2020 when things went crazy on rates. I think our best year was $110 million. I think we did that in 2020, 2021. And last year was our worst when rates were the highest and sort of out there. So that was about $70 million. As I kind of think about that business, you're going to have fixed income, we'll do better in rate cuts lower because, particularly for our bank clients, they'll want to take their excess cash and buy bonds because there'll be a yield curve on the interest rate swap side depending on the shape of the yield curve, it may not be as good as it is today. Today, it's deeply inverted. That's really good for that business. So I kind of see those businesses sort of offsetting each other, but maybe trading some stability at that level. Benjamin Gerlinger: Got you. Okay. That's helpful. And then from a follow-up perspective, it seems like you have a lot of opportunity in front of you. I think that's -- that would be hard to disagree, especially with the other disruption in the markets that you operate in. Is it fair to think you're going to think organically like you're hiring individuals, obviously, and growing loans? Or could you potentially see a small bolt-on deal or something like that? John Corbett: Yes, Ben, it's John. With our particular fact pattern, kind of our view is to invest in SouthState is more interesting right now than doing an M&A deal. And that investment in SouthState comes in 2 forms. The first way is just to increase our sales force and accelerate our organic growth because of all this dislocation that's going on in the markets. The second way as Will described, is in purchasing SouthState shares through our buyback authorization. The capital formation rate is pretty strong right now and the valuation is pretty attractive. So that's kind of how we're thinking about priorities on capital. Operator: Your next question comes from the line of Gary Tenner with D.A. Davidson. Gary Tenner: I just wanted to go back to the NIM-related discussion for a minute. The big delta as I look at the average balance sheet was really the cost on the transaction and money market accounts, up 11 basis points quarter-over-quarter. Can you kind of talk about the dynamics around that? Is it an effort to bring in some new deposits with the anticipation of stronger growth over the next year? Or just maybe comment on kind of the driver there? Stephen Young: Yes. Back in July, when we had the call, Gary, we've talked about the -- our expectation of deposit costs. And we talked about the range this next quarter for the third quarter is 185 to 190. So we were -- it was 191, so we were on the higher end of the range, missed it by a basis point. But really what drove that was in our expectation was that particularly in the CD book, we -- if you look at the second quarter to the third quarter -- or excuse me, the first quarter, second quarter, our CDs went from, I don't know, 7.1 or 7.2 or something to 7.7, I think. And that was back to funding and loan growth and getting the balance sheet where it needed to be. And so those obviously transacted at a higher rate level than others. So as we kind of think about -- that's kind of what's part of our guidance. It's frankly, a tough environment right now with deposits, but we expect that as we get rate cuts and the curve gets a little bit more steady, we could continue to see better. That's why it's a little bit why we're guiding down on the guiding on the 27% deposit beta because ultimately, we need to fund the loan growth that we think is in front of us. Gary Tenner: Great. And then as a follow-up on that beta since you just mentioned as well, to be clear that 27% to 30% beta is relative to the next phase of easing as opposed to cumulative, including last year's? Stephen Young: Right, that's right. That's a great way to say it. Yes. So you're right. If we had to average them, it'd probably be somewhere in the, whatever, low to mid-30s, but yes, that's right. It's the next incremental. Yes. Gary Tenner: Okay. Great. And if I could sneak in a last question. Just on the NIE, I think you had guided previously to a bit of a step down in the fourth quarter, I think, to the $345 million, $350 million range. Any change to that outlook for the fourth quarter? William Matthews: Yes, Gary, I think our guidance for Q4 is still in that $345 million to $350 million range. There's always some variability that's hard to predict with respect to how some of the commission compensation businesses perform, loan origination volume could impact your FAS 91 cost deferral. But similar in that roughly $350 million range. We're pretty clean now in terms of recognizing the cost saves on independent. If you look at Q3 to Q2 was flat even though we had the annual merit increases for most of the company, except for executives July 1, but yes, things were flat. So we've done a good job of getting costs out, getting them out pretty early. Looking ahead to '26, we haven't talked about that, but I might as well address that. Our planning is obviously still underway. We still think for '26 that mid-single digits is a good guide. Maybe it's an inflationary sort of 3% plus another 1% or so for some of the investments in organic growth initiatives like John addressed. So maybe that's what '26 will look like. We're still, as I said, finalizing our planning there, but that's kind of what we're thinking right now. Operator: Your next question comes from the line of Gary Tenner. D.A. Davidson. Stephen Young: That was Gary we just spoke with. Operator: That concludes the Q&A session. I will now turn the call back over to John Corbett for closing remarks. John Corbett: Sorry. Thank you, Bella. Thank you all for calling in this morning. We, as always, appreciate your interest in our company and if you have any follow-up questions on your models, don't hesitate to give us a ring. Have a great day. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you for joining, and you may now disconnect. Everyone, have a great day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2025 Earnings Call. [Operator Instructions] This conference call is being recorded today, Thursday, October 23, 2025. Before we begin, note the matters that the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the company's expectations, strategies, prospects, backlog or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under Risk Factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-Q for the quarter ended September 30, 2025. Speaking today will be Joe Hanna, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hanna. Go ahead, sir. Joseph Hanna: Thank you, Dave. Good afternoon, everyone. We appreciate your attendance on McGrath RentCorp's Third Quarter Earnings Call for 2025. It's a pleasure to be here today, and we're eager to share further insights into our performance. I'll begin with an overview of our third quarter results before Keith shares and financial details, and then we will open up the call for questions. For the third quarter, total company rental operations revenues rose by 4% with growth from all 3 of our rental businesses. Project activity remains steady despite ongoing market uncertainties. Mobile Modular rental revenues increased by 2%. The rental revenue growth we experienced in the quarter was primarily due to commercial activity centered around larger infrastructure projects across all our geographies. Smaller projects have been less prevalent, which is consistent with the trend we have experienced year-to-date. We had a busy education season with a good level of new shipment activity. Funding for the education business remains solid as the need for classroom modernization and growth in select areas remains consistent. With higher shipments, volumes for the quarter, we faced higher inventory center costs to prepare equipment for delivery. We used off-rent inventory rather than investing in new product, continuing to manage the fleet with a sharp focus on deploying capital efficiently. Despite challenges in the demand environment, our booked orders increased during the third quarter. This was encouraging and positive for our momentum entering the fourth quarter. Our ongoing efforts with Mobile Modular Plus and site-related services continue to go well. Both experienced healthy growth during the quarter. We continue to be pleased with our year-to-date progress. At Portable Storage, rental revenues increased by 1% year-over-year and by 2% sequentially from the prior quarter. Shipments grew and pricing remained stable. Opportunities in energy, data centers and seasonal retail offset the flat construction market. Overall, we are encouraged by these positive signs that suggest the market may be stabilizing after a challenging demand contraction in 2024. TRS-RenTelco rental revenue grew by a strong 9%. Both our general purpose and communications rental revenues saw strong growth maintaining positive momentum from the first half of the year. Utilization at a healthy 65% improved year-over-year and remained steady sequentially versus the second quarter. Rental demand pipelines remain solid as we enter the fourth quarter, indicating that the business is well positioned to continue its growth trajectory. Turning my comments to the whole company. We do not believe McGrath is currently facing any immediate headwinds due to the ongoing federal government shutdown and any potential impacts from a long shutdown are unclear at this time. With regard to the dynamic tariff environment, the impact of tariffs has been managed appropriately by our teams and has had minimal impact on our results. Looking ahead to the rest of the year, uncertain market conditions persist. Nonresidential construction indicators such as the Architectural Billing Index, or ABI remains soft. We remain focused on our strategic growth priorities dedicated to expanding our modular and portable storage businesses. Over the course of this year, we have taken steps to enter new regions, grow our Mobile Modular Plus and site-related services initiatives and increase our coverage through tuck-in acquisitions. All of these items support our efforts to become a true national modular solutions provider capable of serving our customers with storage units, single-wide units, large multi-floor and multi-story facilities and services to meet all their space needs. I want to thank all our team members for your third quarter accomplishments and steadfast commitment to delivering the highest quality service to our customers. Our culture at McGrath is a driving force behind our growth as we introduce more customers to the exceptional experience we offer. I am pleased with our progress so far in 2025, and we remain dedicated to providing value to our customers and shareholders as we finish the year. With that, I will turn the call over to Keith, who will take you through the financial details of our quarter and our updated outlook for the full year. Keith E. Pratt: Thank you, Joe, and good afternoon, everyone. Looking at the overall corporate results for the third quarter. Total revenues decreased 4% to $256 million, with rental operations increasing 4% and sales revenues decreasing 18% during the quarter. Adjusted EBITDA decreased 7% to $96.5 million. Excluding prior year items related to the terminated WillScot merger process, net income for the third quarter decreased $3.6 million or 8% to $42.3 million and diluted earnings per share decreased $0.15 to $1.72. Reviewing Mobile Modular's operating performance as compared to the third quarter of 2024, Mobile Modular total revenues decreased 5% to $181.5 million. The business saw 2% higher rental revenues and 5% higher rental-related services revenues which were offset by 21% lower sales revenues. The sales revenues decrease was primarily due to lower new equipment sales as we discussed in July, while 2024 sales were more concentrated in the third quarter. This year, we expect a more balanced contribution from sales and related gross profit across the third and fourth quarters. This quarter had higher inventory center expenses to prepare available fleet for new shipment demand, which allowed us to minimize rental equipment capital spending. We also operated with higher selling and administrative expenses to support broader sales coverage. As a result, adjusted EBITDA decreased 10% to $64.6 million. Conditions, we saw a lower average fleet utilization or 72.6% compared to 77.1% a year earlier. Despite the softer market demand, third quarter monthly revenue per unit on rent increased 6% year-over-year to $865. For new shipments over the last 12 months, the average monthly revenue per unit increased 3% to $1,192. As Joe highlighted, we continue to make progress with our modular services offerings. Global Modular Plus revenues increased to $9.7 million from $7.9 million a year earlier, and site-related services increased to $15.6 million up from $12.7 million. Overall, Mobile Modular had a solid quarter as we continue to make progress with our modular business growth strategy despite some challenging demand conditions. Turning to the review of portable storage. Rental revenues for the quarter increased 1% to $17.3 million, which is the first year-over-year growth since the first quarter of last year. We have begun to feel encouraged that market conditions for Portable Storage are showing signs of stabilization despite soft commercial construction project activity. Average utilization for the quarter was 61.4% compared to 62.8% a year ago. Adjusted EBITDA was $9.2 million, a decrease of 14% compared to the prior year. Turning now to the review of TRS-RenTelco. TRS had a strong quarter with total revenues up 6% to $36.9 million, driven by higher rental revenues. Rental revenues increased 9% as the industry continued to experience improved demand across markets. Average utilization for the quarter was 64.8%, up from 57.3% a year ago. Rental margins improved 43% from 37% a year ago. Adjusted EBITDA was $20.2 million, an increase of 7% compared to last year. The remainder of my comments will be on a total company basis. Third quarter selling and administrative expenses increased $3.2 million to $52.5 million as we operated with broader sales coverage to support long-term business growth and invested in information technology projects. Interest expense was $8.2 million a decrease of $4.5 million as a result of lower average interest rates and lower average debt levels during the quarter. The third quarter provision for income taxes based on an effective tax rate of 27.7% compared to 26.4% a year earlier. Turning to our year-to-date cash flow highlights. Net cash provided by operating activities was $175 million. Rental equipment purchases were $92 million, down from $167 million last year. Consistent with lower fleet utilization and our plans to use available fleet to satisfy customer orders. At quarter end, we had net borrowings of $552 million and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.58:1. Wrapping up the financial review. While there is still uncertainty in the demand environment, we are pleased with our year-to-date results, and we have seen some encouraging positive trends as we enter the fourth quarter. As a result, we have upwardly revised our full year financial outlook, and we currently expect total revenue between $935 million and $955 million, adjusted EBITDA between $350 million and $357 million and gross rental equipment capital expenditures between $120 million and $125 million. We are proud of McGrath's third quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Dave, you may open the lines for questions. Operator: [Operator Instructions] We'll take our first question from Scott Schneeberger with Oppenheimer. Scott Schneeberger: I guess, guys, could you address kind of -- you foreshadowed it last quarter the lumpiness of the sales activity, could you speak a little bit about what the run rate in the business is? Keith, you did a good job outlining that it was big in the third quarter last year. It's more smooth across the year this year. But it looks like it will, over the course of '25 grow over '24 -- how -- is that right? And how should we think about it going forward outside of the lumpiness on an annual basis? Joseph Hanna: Yes, Scott, I can answer that. You're right, we did have a big sales quarter in Q3 of last year, and we did telegraph that it would be more balanced this year. So things are turning out the way that we thought they would. Our sales backlog is strong. We had a number of projects in this particular quarter that didn't close by the end of the quarter that will move into the fourth quarter. We did not lose our -- none of those projects were canceled. So overall, we're very positive on our sales outlook for the year. And as you can see from our guidance adjustment, we think that the business is going to perform well, and sales is a big part of that. So we're confident that we'll be able to hit those numbers. Scott Schneeberger: And is this a business on an upward trajectory, would you say? I'm not asking for '26 guidance, but -- this year, I believe it's going to be probably better than last year. Should we continue to anticipate that kind of trend? Or is it safer just to think about it as a flattish business and take it as it comes? Joseph Hanna: No. We anticipate that, that's going to continue to grow. It's an important part of the market. We're well positioned with resources out in the field to take advantage of these projects. And keep in mind that when we go to a customer, they may have a rental need in 1 year that very well could turn into a sales need in the following year. And so we want to be positioned to be able to take advantage of that customer need, no matter what they need. And so our folks are out there looking for those opportunities, and we feel it's an important part of the business, and it's going to grow. Scott Schneeberger: Sounds good, Joe. The -- keeping it on modular. The -- can we speak to -- I've heard you loud and clear and then it kind of echoes what another larger rental company said earlier today that there really is strong demand at the upper end of the market for larger projects. Could you speak to the education sector? And how is funding there? How do you see that as we're looking out to the next year? Joseph Hanna: Sure. We had a decent Q3 in education. We shipped more than we did last year. And we also got a number of returns this particular year that is part of the normal cadence, but muted our results there a little bit. Now having said that, the thing that makes me sleep well at night, and I've been doing this for a long time. What we realize is that each year with education is always a little bit different. Sometimes districts place orders earlier in the year. Sometimes they place orders later in the year. If there's some kind of economic uncertainty, which there was with the administration and the Department of Education and all the things that were going on there. It just makes districts a little bit nervous. Are we going to have the money for the programs? Programs equals teachers, equals classrooms. And so in this particular year, orders were placed a little bit later in the season, but we're getting orders all the way into Q4 here and we're getting orders for next year. But what really is, I think, makes me sleep well at night is the fact that the funding is very, very good. California passed a $10 billion facility bond. Texas passed another $8 billion in facilities bond. It was later in the year. So we won't see that until 2026. And then there's literally billions of dollars that have been passed at a local level that are waiting to be dispersed and used on projects. So I feel very, very good about the status and the solid nature of our education business and think that it's going to be a tailwind for us in quarters to come. Scott Schneeberger: Good, Joe. Thanks for that clarity. Across both modular and portable storage, obviously, the lower end of the market remains challenged. No big surprise there. Could you speak to the rate environment, the spot rate environment across both, please? Joseph Hanna: Sure. I would say for both businesses, our rates are holding in there pretty well. And you can see that we have this -- we're still working on this differential between our fleet average pricing and what units are going out on new contracts now. And so we do continue to have that tailwind, and that's been a positive and will continue to be a positive for a while as the fleet churns. Over in portable storage, rates are steady. And we've been really working hard to not have to lower our unit rents. We have had to give up a little bit on some of the transportation costs to stay competitive, but we'd rather do that than give up on the rental rate. And so contrary to what's happened in the industry in years past, this is a good sign, and I think we're on pretty solid ground. Scott Schneeberger: One more in storage and then just a couple of others, and I'll pass it on. I found it interesting. You mentioned, I think it was energy data centers and then seasonal retail and storage. That's not an area where you've typically competed, but we've heard recently from a competitor of yours that maybe some of the large players in the industry are changing their strategies with how they did business. Is this an area that you're going to move -- is this a onetime thing? Are you moving to this space more so? If you can just elaborate on specifically the seasonal retail. Joseph Hanna: This is not a big part of our portable storage business. I don't anticipate that it is going to be a big part of our business, but we're happy to pick up orders, and we were well positioned with some of the large retailers to get orders if they're available, and we have people out there that look for them, but it's not a strategic initiative in the business for us to really try to grow that because just for the reason, it is seasonal. Those units go out, they come back. We much rather have a much longer term with other types of customers. But any seasonal business we can pick up, we're happy to do it, and we did some this year. Scott Schneeberger: Okay. And then over in TRS, how is your visibility in the next year? 2025 has been a pretty good year for you in that business. How do you feel about heading into next year? Maybe with some discussion across the end markets? Joseph Hanna: Yes. A little bit -- it's tough to predict into next year. We're in the process of putting our plan together for next year. So I can't comment too much on that, but the encouraging thing is that our bookings have been strong. Our rental order volume has been strong. We managed the inventory appropriately. And I think even coming into Q4 here, things are looking good for the month of October. And I think that's momentum that will carry us into next year. We're not seeing anything different in the landscape that we're seeing right now that's going to indicate a big change for next year, but I think we've got momentum. But keep in mind, too, that this was a much shorter term rental business. So it is harder to see out over the hood in terms of what is coming down the pipe. But so far, we're encouraged and we'll know more and be able to share more in the Q4 call. Scott Schneeberger: Great. And last for me, you called out technology spend or investments in projects and technology. Could you elaborate on what you're doing? And is that to a sizable magnitude and what type of returns you're seeking in that investment? Joseph Hanna: Sure. The bright spot, I'm assuming you're still talking about TRS. The bright spot in that business this year is along the wired communications part of the business and the business that we're getting at data centers. That's been a real strong point for us. And that's very technology oriented. We're well positioned to serve that market. There's a ton of testing that needs to be done when you put in a data center, and we're on it, and that's been good for us this year, and I think it's going to continue. Scott Schneeberger: Love it. That's actually not what I was asking, Joe, but that's a -- what I was pitching for. Joseph Hanna: I am sorry, what did I miss there, in fact? What do you? Scott Schneeberger: I'm glad you added that in there because that was well worth hearing. I was just asking general for the total corporation, it sounded like you've been making some technology investments in McGrath itself. So that's what I was asking. I like your last answer, but if we could touch on that as well, too, please. Joseph Hanna: Sorry about that, Scott. I completely missed that. I should have asked for clarification. Yes, the technology investments that we're making are normal course. We always need to update our systems, systems come out of support in years. We need to move things to the cloud. There's just all kinds of work that we need to do to keep our systems relevant and keep them customer-friendly and customer-facing. So that's pretty much what I meant by the technology enhancements. Scott Schneeberger: Got it. I like what I was hearing about the work you're doing in data centers and TRS. Operator: We'll take our next question from Daniel Moore with CJS Securities. Dan Moore: Joe and Keith, I'll start with -- you obviously -- you mentioned some encouraging trends. Can you just speak to the cadence of inquiries as well as order rates over say the last 1, 3, 6 months, start with Mobile Modular, sequential improvement, more stable? How would you describe it? And then the same question for Portable Storage. Joseph Hanna: Sure. Yes, I'll start with Mobile Modular. Our quote volumes have been healthy, and our booked order levels have been healthy, too, and they were healthy for this particular quarter, up double digits. That was fairly consistent with the second quarter and up from the first quarter. And I would say we're seeing a similar trend in Portable Storage. I wouldn't say that the third quarter, we're not seeing any marked increase over the second quarter, but we're seeing a consistent level of inquiries and booked order flow sequentially. Dan Moore: Really helpful. Something that you've described in detail and laid out again this quarter, the shift from CapEx to OpEx over the last few quarters as you refurbish units rather than purchase new ones, dampens your GAAP margins a little, but not necessarily your cash flow. Is that something you expect to continue into next year? And what would cause you to shift back into a little bit more of a CapEx mode? Keith E. Pratt: Yes, Dan, I can help with that. I think, it all goes to fleet utilization. So if you look at the modular fleet, there are more markets where we have equipment available to meet new orders. If you go back 18 months, 2 years ago, utilization was higher. It was more common that when a new order came in, we were already highly utilized, and we would look to invest capital to meet the orders. So that's the dynamic at play. So I think to answer your question, look at where utilization is when we're entering next year. And for businesses where it's low, which is currently the case of portable storage and in many of our modular regions, we've got available equipment and that's how we'll meet demand. So there will be a trade-off there. It may mean those expenses continue to be more elevated. But from a cash flow point of view, it's the right thing to do. So that's how it's looking. I would say at TRS, where we've seen good recovery, particularly over the last 3 quarters and where utilization in the mid 60s is actually very good utilization for that business. That's an area where already, we're looking at selectively spending the capital and adding to the fleet again, to meet demand and we're very happy to do that. Dan Moore: Really helpful. Clearly, we still have a couple of months to go here, and we'll be looking to guide for a couple of months after that. I just wonder if you could maybe contrast the environment today compared to where we were, say, this time last year and whether or not you expect to get back to a more kind of normalized long-term growth in EBITDA as we look out '26, '27? Keith E. Pratt: Yes, Dan, I'll throw in a couple of comments. I'm sure Joe can add to it. I'd characterize the environment as still mixed. We've talked already about things like the Architectural Billings Index which has really bounced along below 50 for all this year and some months a little better, some months a little worse, but consistently below 50. That's a headwind for parts of the business. Smaller projects and portable storage have definitely suffered as well due to interest rate being high and really a slow journey of seeing interest rates start to come down. And then at various points in the year, a lot of it is related to just the policy and governmental topics there's that era of uncertainty. That probably means some customers have either moved with a little bit more deliberation, a little bit more caution. And we've seen examples of projects just take longer to get executed. So that's really the backdrop of how we've managed through this year. It hasn't been an easy year for us. If you then look into next year, the question is, how many of those headwinds start to ease. Do we see interest rates come down enough that people start to act more quickly on starting up new projects. And do we see some of the broader macro indicators like ABI start to move into positive territory and indicate that people are planning to execute a larger number of projects going forward. I think it's too early to tell. I think as we said in our prepared remarks, we've done a pretty good job this year of counterbalancing some of those headwinds with all of our growth initiatives, the services side of modulars getting good revenue per rental unit, which we're continuing to get and grow and in some of the regional expansion where we have been hiring and we're beginning to fund equipment purchases to support growth in some regions, but for us are relatively undeveloped and where we see longer-term opportunity. So those are the things you've got to lay on the scales as you look at the pluses and minuses that will influence next year. Joseph Hanna: So I'd like to just click on that just a minute, too, and what Keith said about the regional expansion. I mean, we hired a number of folks this year, and we're putting them into new markets and also markets that are adjacent to operating areas that we are already in. And we definitely are anticipating that to be a nice contributor to next year's results. So we're really trying to add that horsepower in there to be able to continue to grow the business despite what the market is doing. Dan Moore: That's really helpful. Last one, and I'll jump out. Maybe just talk a little about the 2 smaller acquisitions you made last quarter. I know it's still early days, but 1 in Mobile Modular, Portable Storage. How are they progressing? And more importantly, what does the pipeline of opportunities look like over the next few quarters? Joseph Hanna: Yes. We -- yes, those were relatively small acquisitions. We closed them in Q2. And there was one, was a modular business and 1 was a Portable Storage business located in the Southeast. And so they're integrated, and we're happy to have them on board and they're contributing at this point. And we'll see what the results are as the next quarter or 2 progress. It is a little bit early to really be able to talk much about how they're performing. But there's no red flags there at this point. Keith E. Pratt: And then maybe the pipeline comment. I think we can say that we're very active in our normal process. We have work going on in the field. We know markets that we have a high level of interest in. And I think the pipeline is active and encouraging and it's going to be part of our growth strategy. Operator: We'll take our next question from Marc Riddick with Sidoti. Marc Riddick: So I just wanted to sort of maybe piggyback on the prior question and line of questioning. Maybe give a bit of an update as far as kind of usage prioritization that you're sort of looking into next year and particularly around the acquisition sort of pipeline. Can you maybe talk a little bit about the valuation that you're seeing now, whether that's changed much over maybe over the last 6 months or so? And then I have a follow-up on the personnel side. Keith E. Pratt: Okay. Marc, I'll take a crack at that. In terms of usage of cash, first high-level comment I would make is, this has been a very good year from a free cash flow point of view. And if you look at us year-to-date, we've reduced our debt. We actually had slightly lower leverage than when we started the year. We've managed to pay our dividends, and we've completed 2 small acquisitions. One of the factors that has allowed us to do that in addition to just good operating performance from the business, but it's that lower CapEx that I referenced in the prepared remarks. We spent a lot less on new equipment this year than we did a year ago. So if we look into next year, and I touched on this earlier, based on fleet utilization, we're probably going to be in a position where we can meet a lot of demand from existing fleet. That's a good thing. That may be a positive, again, from a CapEx point of view. That gives us a lot more flexibility with things like M&A. And that's why the pipeline is active. It's an important part of the strategy. Briefly on valuations, it's very situationally specific what you're looking at, what there is on offer from a business that's for sale. We try to be very measured in how we look at things, fleet quality matters to us a lot and the ability to generate future cash from any business that we acquire. But there are opportunities out there. We'll always pay a fair price for a good quality business. But we'll also know what our walkaway is where it doesn't make sense for us and we'll simply approach the market from other angles. Marc Riddick: Great. And then maybe just a little bit of a follow-up on the commentary around adding folks and tech spend for some opportunities that you see. Are those kind of just sort of a short focus as far as things you're going to be executing on in the short term? Or is this something that you see opportunity sets going into next year? And are there some areas there geographically or otherwise that you're kind of targeting for the potential for new additions, both on the assuming capital side as well as the technology side? Joseph Hanna: Yes. Marc, the hires that we've made this year are definitely long term, we hope to have them be long-term resources in the company, no short-term plans there. We want those salespeople to get out into the market and really start generating some business over the next several years. Most of the hires that we made were in the Midwest area and Northeast, but we will continue to add sales people in places that we need them, where we see business potential and in places that we have resources already that we can leverage to be able to serve the market. So very much long-term strategy, very carefully thought out and implemented, and we're anticipating that's going to be very nice to help our growth. Marc Riddick: Excellent. And the last thing, I think, in your prepared remarks and maybe as a response to 1 of the questions. It really did a great job as far as bringing us up to speed on maybe how education funding has really played out through the year. Are there any valid initiatives that you kind of have an eye on or keen next month that we should be aware or should be thinking about as far as -- is there any that are top of mind at the moment? Or do you sort of feel like we kind of already have a lot of the main ones locked in already? Joseph Hanna: Yes. There's no particular valid issues that I'm aware of right now that we're concerned about concerning facilities funding at this point. So I mean I'm very pleased with the amount of funding that's in place in the markets that we operate in. It's very healthy. And that funding typically doesn't grow cobwebs. That stuff gets implemented and put out into the market as soon as districts can get themselves organized and get the projects underway, and we'll be right there with them when they do it. So we're very, very happy about that and think that it's a good positive. Operator: [Operator Instructions] We can pause for a moment to allow any further questions to queue. And ladies and gentlemen, that appeared to have been our last question. Let me now turn the call back to Mr. Hanna for any closing remarks. Joseph Hanna: I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We look forward to speaking with you again in late February to review our fourth quarter results. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.
Gerardo Lapati: Good morning, everyone, and welcome to Alsea's Third Quarter 2025 Earnings Media Conference. My name is Gerardo Lozoya, Head of Investor Relations and Corporate Affairs. Today, you will hear from our Chief Executive Officer, Christian Gurría; and Federico Rodríguez, our Chief Financial Officer. Before we continue, a friendly reminder that some of our comments today will contain forward-looking statements based on our current view of our business, and that future results may differ materially from these statements. Today's call should be considered in conjunction with disclaimers in our earnings release and our most recent Bolsa Mexicana de Valores report. The company is not obliged to update or revise any such forward-looking statements. Please note that unless specified otherwise, the earnings numbers referred to are based on the pre-IFRS 16 standards. I will now hand it over to Christian for his initial remarks. Please go ahead, Chris. Christian Dubernard: Thank you, Gerardo. Good morning, everyone, and thank you for being with us today. Thank you. Today, I'll provide an overview of our third quarter results, covering our financial earnings, regional highlights and key brand developments. I will also highlight our progress on digital transformation, ESG initiatives and expansion strategy. Federico, our CFO, will follow me with an analysis of our results, including revisions to our 2025 guidance. Before we turn to the quarterly results, I want to remind everyone of the continued focus on our strategic priorities that will guide us moving forward. As we mentioned last quarter, our first priority is to continue driving disciplined organic growth. We remain focused on expansion and innovation to drive same-store sales growth, prioritizing traffic over price increases. We will also improve our customer experience and advance our digital capabilities. In addition, we will continue rolling out successful commercial campaigns such as Menu Del Dia from Vips in Mexico and Spain, Tres para mi or three for me in Chili's in Mexico, Paradiso Italiano with Italiannis in Mexico and Gourmet Burgers from Foster's Hollywood, among others, other initiatives, which have consistently improved our product offering and reflect our commitment on innovation. Our second priority is to optimize our brand portfolio. We will prioritize return on investment by ensuring that each brand and store format is aligned with the needs of each regional market. Also, scalability and growth across all brands remain a core focus to unlock their full potential. We are also addressing and analyzing potential divestments on non-core assets to concentrate on the business with the greatest strategic and financial value. Our third priority is to enhance profitability. More value is being generated in our existing stores portfolio through consistent operational improvements by leveraging the strength of what we call high-impact operational talent. Organic growth is supported by strategic new store openings and the remodeling of key locations. As mentioned, 2 stores are being remodeled for every opening as refreshing the existing base delivers faster and more efficient returns on capital. Finally, our fourth priority consists on discipline and strategic capital allocation. We will prioritize growth and productivity initiatives with clear return thresholds. Also, vertical integration and long-term sustainability continue to be central to our strategy. Our CapEx plan is being optimized, adjusting long-term investments to become even more efficient and ensuring every peso invested aligns with our capital allocation priorities as well as different G&A efficiencies that we have been consolidating and working through the year. Now I'll provide an overview of our quarterly performance, including our financial results, regional highlights and key brand developments, along with updates on our digital advancement ESG initiatives and expansion strategy. In the third quarter, we reported a 5.7% year-over-year increase in total sales, reaching MXN 21 billion or a 6.7% increase, excluding foreign exchange effects, same-store sales grew by 4.1%. EBITDA increased 1.8% in the third quarter, reaching MXN 2.9 billion with a margin of 13.7%, decreasing by 50 basis points year-over-year. Regarding brand performance during the third quarter, Starbucks Alsea same-store sales increased by 3.9%. For Starbucks Mexico, same-store sales grew by 3.3%, demonstrating solid in-store performance backed by our loyal customer base. For Starbucks Europe, same-store sales increased by 1.6%, reflecting a challenging environment in France, offset by continued strong momentum in Spain, driven by effective commercial initiatives. Given the strong results in Spain and the importance of the brand in the country, we are very excited about the latest opening of our flagship store in the Santiago Bernabeu Stadium, Starbucks Bernabeu. Finally, in South America, same-store sales rose 9.6%, driven primarily by Argentina. Excluding Argentina, same-store sales declined 1.3%. Nonetheless, there is a sequential improvement in Chile despite lower traffic. Domino's Pizza Alsea posted 2.6% increase in same-store sales. In Mexico, Domino's same-store sales increased 1.6%, driven by our continued efforts in product innovation. In Spain, same-store sales increased by 2.9%, reflecting the ongoing effective promotional efforts and positive customer response to product innovation. In Colombia, Domino's delivered strong results. Same-store sales increased by 9.1%, supported by successful marketing initiatives. Burger King's Alsea same-store sales, excluding Argentina, decreased 1.4%. In Mexico, Burger King reported a decrease in same-store sales of 1.7%. This was driven by a shift of mix towards low price and discount items, combined with a decrease in premium innovation and digital coupon. The full-service restaurant segment delivered a 4% same-store sales growth. This segment remains strong and resilient, supported by marketing campaigns that enhance our product offering and demonstrates our commitment to innovation. Full-service restaurants in Mexico increased by 5.3%, with most brands growing at mid-single-digit pace with Chili's and Italiannis, while Chili's and Italiannis stood out by achieving high single-digit growth. The performance was driven by the strength of our value product menu offering, product innovation and launches. Same-store sales for full-service restaurants in Spain grew 2.4% with Foster Hollywood and Gino's delivering solid growth of 5.5% and 4%, respectively. We are focusing on introducing new and premium products to attract new guests, capitalize on existing traffic and strengthening our customer loyalty. Our global expansion strategy remains focused on prioritizing quality over quantity, targeting the most profitable opportunities across our key markets. We remain committed to delivering strong value to our customers, maintaining our pricing strategy and customer loyalty through our resilient brand offering. In the third quarter, we opened 46 new stores, 35 corporate units and 11 franchises with an emphasis on high traffic and high potential locations. We expect the pace of openings to pick up on the fourth quarter to meet our full year goal for net stores. This approach reflects our commitment to long-term brand positioning and disciplined strategic growth through flagship developments and selective market expansion. Given the profitability and payback of store remodeling, such as increased customer satisfaction and higher sales, we will continue prioritizing a refresh and modernized look across all our locations. Our digital platforms continue to be key drivers of growth. By the end of the quarter, loyalty sales increased 7.9%, reaching MXN 5.1 billion, representing 24.6 million orders and contributing 26.1% of total sales. We also surpassed 8 million active users across our loyalty programs, confirming the strength of our digital engagement. Additionally, we served nearly 33.6 million digital orders in the quarter, totaling MXN 7.3 billion, which represents 37.4% of our total sales. This quarter, we continue to strengthen our sustainability model by aligning our purpose with every aspect of our operations. As part of this effort, we made significant strides towards reducing CO2 emissions, installing over 215 solar panels in Europe and installing 159 kilowatt per hour of power in Europe in Spain. In Mexico, Starbucks served over 1 million beverage in reusable cups and granted 3.9 million -- 3.2 disposable cups as part of our efforts to reduce waste. We also continue to strengthen our social impact through Fundación Alsea and Movimento Va por mi Cuenta, supporting vulnerable communities and driving positive change. As we launch new fundraising campaign, we expect to surpass previous year's results, reinforcing our long-term commitment to responsible, purpose-driven growth. Let me now turn it over to Federico, our CFO, who will provide further insight and financial performance. Thank you. Federico Rodriguez: Thank you, Christian. Good morning, everyone. During the quarter, the sales increased by 5.7%, supported by the brand resilience and a strong performance in Mexico, Spain and Colombia. Excluding foreign exchange effects, sales increased 6.7%. In the third quarter, sales in Mexico were up 7.5% to MXN 11.5 billion. In Europe, sales increased by 8.2% to MXN 6.5 billion, while in euro terms, sales increased by 3.8%. Finally, South America sales fell 4.7% to MXN 3.1 billion. The EBITDA increased by 1.8% with a margin contraction of 50 basis points, mainly due to a loss of operating leverage given the lower consumer environment in the month of September. These impacts were partially offset by the resilience of the brands across most regions, disciplined revenue management and improved SG&A efficiency. In this context, we chose to limit price increases to protect traffic and sustain brand competitiveness with consumer demand slowdown. In Mexico, adjusted EBITDA remained flat as there was lower operating leverage given the softer consumer environment in the month of September. In Europe, adjusted EBITDA increased by 6.2% year-over-year, primarily due to an increase in same-store sales of 2.3%, driven by new products and campaign launches that led to improvements in all brands, offsetting higher labor costs. In South America, adjusted EBITDA decreased by 14.2%, reflecting a lower consumption environment in the region, except for Colombia. A slowdown in consumer activity weighted on operating leverage and contributed to the slow recovery in the region. The net income for the quarter increased 559% year-over-year, reaching MXN 512 million, reflecting a positive noncash effect, which reduced the cost of our U.S.-denominated debt in Mexican pesos terms. The next slide, please. The CapEx for the first 9 months of the year totaled MXN 3.8 billion. Of this total, 77% was allocated to store development initiatives, including the opening of 35 new corporate units, the renovation and remodeling of existing locations and equipment replacement across the brands. The remaining 23% was directed at the strategic projects such as the distribution center in Guadalajara, technological upgrades, process improvements and software licenses, all reinforcing the long-term competitiveness and operational efficiency. At the end of the third quarter, the pre-IFRS 16 [Foreign Language] thank you. The pre-IFRS 16 gross debt decreased by MXN 1.8 billion year-over-year, reaching MXN 51.8 billion. The company's net debt, not counting the impact of IFRS 16 was MXN 34.5 billion, which is MXN 2.5 billion more than it was at the same time last year. This increase reflects the bank loans used to settle the minority stake in the European operations, short-term debt for working capital and CapEx needs. Consolidated net debt reached MXN 47.1 billion, including lease liabilities. At the end of the quarter, 74% of the debt was long term with 67% denominated in Mexican pesos and 33% in euros. We remain focused on maintaining a healthy capital structure supported by prudent financial management. At the end of the quarter, the cash position stood at MXN 4.7 billion. Turning to financial ratios. The total debt to post-IFRS 16 EBITDA ratio closed the quarter at 2.9x, while the net debt-to-EBITDA ratio stood at 2.6x. While we are still committed, we have adjusted the 2025 guidance given the negative impact generated by a lower-than-expected consumption dynamics during the month of September and the ongoing impact of the appreciation of the Mexican peso affecting the top line. Now we expect a high single-digit top line growth and a low single-digit EBITDA growth for the year. I will now pass you over to the operator for the Q&A session. Thank you very much. Operator: [Operator Instructions] The first question is from Mr. Ben Theurer from Barclays. Benjamin Theurer: So 2 ones real quick, just following up on some of the commentary you had about the softness towards the end of the quarter in September and obviously, the guidance adjustment as you look now for slightly lower top line. If you think about the weakness, how has that potentially carried into the fourth quarter in October? And are you seeing any difference between the formats? So thinking coffee versus pizza versus burger versus food service across the board? Are there certain areas that are a little more affected versus others? So just a little more granularity as to the weakness in September, maybe over the last couple of weeks to understand what's driving the guidance revision. Christian Dubernard: Thank you for your question. No, the reality is that, as we mentioned, the third quarter was -- we saw July and August pretty balanced. And then we have an important drop in September. And this was across, in general, brands and geographies. It's not specific to a particular brand. Obviously, as we mentioned in the report, some of the South American countries, we have a slower -- a higher impact in those countries due to the deceleration of consumption. But in general, was across all geographies and markets. And as you asked going into Q4, it's too early. It's been 2 weeks in October. We see a similar trend in October. Nevertheless, we have very strong commercial initiatives in all of our brands and across all of our geographies for Q4, focusing on mainly 3 particular aspects. One is product and customer experience innovation. The second one, value. We can share some examples of some of the initiatives that have been paying off across the year regarding value like Tres para mi in Chili's in Mexico, Paradiso Italiano with Italiannis in Mexico, not just Magic Magicas or Magical Nights in Ginos in Spain and Gourmet Burgers in Fosters and many of the day in some of our brands. which have been continued driving traffic and that. Nevertheless, for Q4, we have very, very strong and powerful innovative and customer experience-driven campaigns that we are confident that will help us drive the traffic during this quarter. But something very important to highlight is always protecting this gross margin while we preserve traffic. We know that during these times of lower consumption or slowdown, the brands that remain loyal to their customers are recognized when traffic comes back. So that's what we are focusing on. Benjamin Theurer: Perfect. And then my second question is you mentioned potential asset disposal. Could you just elaborate, is that more like regions you think of not being worth maintaining? Or is it brands in particular? I mean we've seen, for example, the Burger King transaction in Spain. So is that something maybe in other regions to follow? How should we think about this? Federico Rodriguez: We have been very vocal, Ben, regarding divesting processes that we are setting in different noncore units. I would say that is one of the main priorities, not only for this year, but for the future. And we're still dealing with more than -- for potential buyers for different business units. It is not going to be relevant in terms of the contribution to the top line or to the EBITDA -- but obviously, what we want to address us to all the investors community is the focus that we want to deliver to the main brands such as Starbucks, Domino's Pizza, et cetera. We are still moving forward. Sorry, we cannot elaborate on rumors. But once we have said and we have completed this M&A activity, we'll give you more news. Operator: Our next question is from Mr. Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I'd like to understand a little bit more the add up of the revised guidance, right? And this is on top of one very particular moving part that is FX. You cut revenue and EBITDA similarly, which could suggest as your broad expectations for margins are virtually unchanged. Obviously, we know that the stronger currency, the translation from Europe is a headwind, but gross margin could actually benefit from that going forward, right? So this is just to see if you could elaborate a little bit more on how you're seeing FX translation versus transaction FX, how your hedging positions are, how you're thinking about pricing and cost and more importantly, what is your underlying assumptions for margins going forward? Federico Rodriguez: Thank you, Thiago. I will answer the first part of the question regarding the cutoff of the guidance in top line and in EBITDA growth. Obviously, we are losing operating leverage and even what we have -- and we are having some help in terms of EBITDA margin from Europe because of the appreciation of the peso in comparison with the euro. We are losing some kind of operating leverage in Mexico, too. We had a really weird quarter. We have a good July and a strange August with one strongest week and a terrible September. So that's the reason that we are cutting up all the guidance for the rest of the year. And I would say it is only operating leverage. We are having tailwinds from the FX. You know that we delivered a guidance with a forecast of MXN 20.8 per dollar, we're having a good gross margin. And in fact, you will see a lower-than-expected loss of margin EBITDA. But having said this, obviously, we have to bring you the reality of what we saw in the quarter. And as Christian have just mentioned, with 3 quarters out of the 13 weeks of the last quarter, it is pretty early to say what is going to happen. That's the reason of the [indiscernible] of the guidance. So if you want to complement? Christian Dubernard: Yes. And also regarding gross margin, we have seen positive tailwinds regarding COGS. As you know, there was a lot of pressure on cost of goods, particularly with some commodities based on the FX -- now we are seeing that both the internal initiatives that we shared some of them last quarter are starting to pay off. There's normally 3 to 5 months of time when you start seeing the different initiatives to pay off. We are seeing that. And also, on the other hand, the initiatives that we had implemented and consolidated around productivity and labor, we have seen them to start to pay off. So in these terms, we are seeing a steady -- slow but steady margin recovery in our brands through these initiatives and still have had some increments on beef, but we are -- again, it's part of our business, we are managing every year as they come and through different platforms. Thiago Bortoluci: This is helpful. And if I may, a quick follow-up. We have been discussing on our opening remarks and now the drag in September, right? Anything you could share to help us calibrate the magnitude of the pressure that you saw particularly in that month? Federico Rodriguez: We do not disclose the transactions by brand, but obviously, there are some brands where we had a contraction of around 100 basis points in terms of the same-store sales in comparison with the previous 2 months. And that's the reason. As I said before, Thiago, it was only 1 month. Unfortunately, when we take a look at the guidance, we prefer to be really honest of what we're looking for the remaining part of the year. You know the seasonality of this business in November and December, maybe we'll have a positive news. But as of today, I cannot say that. Sorry. Operator: Our next question is from Mr. Alejandro Fuchs from Itau BBA. Our next question is from Antonio Hernandez from Actinver. Antonio Hernandez: Just I mean, very good color that you provided regarding the different performance in the 3 months. Just wanted to see if you could provide more color on September. If there were -- how much of that underperformance was because of external factors, maybe competition or anything specifically that you could provide on that, that will be very helpful. Federico Rodriguez: I would say it's really macroeconomical factors, Antonio. I cannot say that we are dealing with something different from a cost of food point of view or something internal. I would say that we are delivering the same campaigns. Obviously, most of the value coming from traffic. We have been telling you these guys. We are not doing a 100% pass-through coming from ticket. We have positive tailwinds regarding FX. Obviously, we have 30% of the food basket dollar index. And I would say that everything is not from competitors. We know that the competitors are slowing down the pace of openings, especially in coffee and pizza. But having said this, we are not dealing with something different from a commercial point of view. Do you want to add. Christian Dubernard: To avoid being repetitive, it's more -- we have seen, in general, a deceleration on consumption, particularly after the end of the summer, which had the highest peak in September. We know that normally every September slows down. Nevertheless, this was a little bit more -- the peak or the value was higher. So again, this has to do more to a macroeconomic environment. And in general, we see less thrust on the consumers in certain geographies as Europe, certain economy slowdown in South America and likewise in Mexico. But we are expecting to have, as you know, most of our -- almost 30% of our revenue EBITDA comes on the last of the quarter. So we are, as I mentioned, with strong campaigns and strong value-driven and innovation campaigns for Q4 in all of our brands and geographies. Antonio Hernandez: And just to clarify that terrible September or bad performance in September is all over the place. I mean, not only in one specific geography? Federico Rodriguez: Yes, it was in the 3 regions. Operator: Our next question is from Ms. Renata Cabral from Citi. Gerardo Lapati: You opened your camera? Renata Fonseca Cabral Sturani: Yes, I did. Christian Dubernard: No worry. Go forward with your question, Renata. Renata Fonseca Cabral Sturani: Sorry for the problem with the connection. My question is regarding Europe and the improvement that we are seeing there. 2024, we know that it was a challenging year in terms of same-store sales, and we are seeing now a stabilization in the region contributing to the company's results. So my question is, what were the main changes that you have implemented to reach to the current results and still the opportunities that you see to further improve the results on Europe. Christian Dubernard: Thank you for your question. Let me take this one. I believe what we have seen in terms of the recovery that you mentioned, particularly driven by Spain. We've seen very -- the customer reacting to the different campaigns in terms of innovation and value-driven campaigns as well as improved portfolios in terms of core offering like our brands in Starbucks, value-driven initiatives in Vips and Ginos, new very innovative campaigns around chicken and burgers in terms of -- in the case of Foster's Hollywood and particularly Domino's also the first half of the year, they were very much driven in having more, let's say, less traffic-driven and promotional activity which brought us good margins. And now we -- second half for Domino's will be more driven on achieving traffic, obviously, protecting the margin. So I would say to make the answer short, is the consolidation and the understanding and reading of the environment and looking forward of how the customer is behaving that we were able to adjust and adapt our different initiatives to respond to the customer needs. For Q4 and looking forward, as I mentioned before, innovation is going to be one of our main drivers. And likewise, as protecting value and margin for the customer -- value driven -- to protect value for the customer to drive traffic, but at the same time, in a smart way to protect our margins. So I believe understanding what is the behavior and what the customer is looking for is what's been paying off particularly driven by Spain. Federico Rodriguez: Additionally, Renata, in the bottom part of the P&L, we are implementing a lot of different strategies. In the stores, for example, we are increasing the productivity, trying to measure what are the peak hours of the day to have a better deployment of the workforce, and we are having terrific results. Additionally, in all the headquarter offices, obviously, we are stopping with doing non-core activities. We have been growing really -- we had a relevant growth during the last 10 years in Alsea. So we are going back to basis to consolidate synergies, moving different areas to where we are performing the best tasks. So we are having a lot of efficiencies in the bottom. But obviously, when we are losing the leverage as we have seen in September, it is impossible to offset only with these efficiencies, the loss of sales. Christian Dubernard: And to complement this last that you mentioned, Renata, also, we have seen this, let's say, approach where we consolidate the brands and when we are capturing opportunities like in the FSR segment where we are creating and generating a lot of synergies, it's paying off. So in a way, the strategy that we started at the beginning of the year in these terms is maturing, and we are already seeing part of the benefits of this strategy. Operator: Our next question is from Mr. Ulises Argote from Santander. Ulises Argote Bolio: I just wanted to understand a little bit better here on the pace of remodeling. Is this something we can expect going forward for the next couple of years? Or what's more or less the time line that you guys have in mind for this? And also to understand if this is focused on any specific format or region or if it's more across the board. Then a follow-up to that is if you guys have any color that you can share maybe on the sales lift that you're seeing on these remodeled stores. Christian Dubernard: Yes, I will take that one. Yes, as I mentioned in our first call, one of our main priorities is how do we make our existing portfolio more profitable. through driving same-store sales and basically driven by traffic. And remodeling is clearly a very strategic lever that allows us to drive this additional traffic, both one way through having better-looking stores, but also more efficient stores. When you have a remodel a store that has been operating for 5, 7, 10 years, you already know how the store behaves, what type of customers you get in those stores. So when we do these types of renovations or remodelings, we are just adapt to the reality of each one of the stores and the needs of each one of the stores. So as we mentioned in the first -- in our last call, we are in an average of 2: 1, 2 remodelings or renovations for each opening. That shifts between different brands, some brands or some geographies, we are 3:1. In some cases, we are 1:1. But clearly, the renovation of our existing portfolio is one of the key drivers of traffic together with having the best operational talent in each one of our stores, which is also one of our key strategies where we are focusing. Regarding payoff, where we have seen the highest impact in terms of payoff is in the FSR or casual dining segment and in Starbucks because obviously, different from Domino's or the customer doesn't necessarily stay in the store for a long period of time. In the case of Starbucks and our food service restaurant segment in both geographies, we clearly see that the customer really appreciates these types of renovation. So we've seen between mid- to high single-digit growth in some of the segments and to double -- I would say double. Low teens in the case of FSR. So it's a core -- it's part of now a clear strategy for us and a clear priority. Operator: Our next question is from Ms. Isabella Lamas from UBS. Isabella Pinheiro F. Lamas: I have 2 here. So firstly, could you discuss a little bit more about the input costs, particularly in the scenario of the peso appreciation. We were kind of wanted to get a sense of how you're thinking about your cost inflation going forward and how that compares to what you have experienced for this year? And how should we think about the margin setup for next year? And my second one is a quick one, is regarding leverage ratio. You've just reiterated your guidance for this year. So we were wondering if you have any views you could share for next year, any kind of range or what should be aiming for? That's it. Federico Rodriguez: Okay. Thank you, Isabella. Regarding the input costs, we are not having -- I'm talking only regarding Mexico and South America. We are not having more headwinds regarding FX. I would say that at this point of the year is totally comparable and in some cases, better than in 2024. That's from one side. As you know, we have 30% of the inputs dollar index in Mexico and the rest of South America brands. And additionally, for the next year, we are forecasting mid low single-digit input cost for 2026. And regarding the guidance, we changed the guidance for 2025 from a low teens in top line to high single digit and regarding EBITDA growth from a mid-single digit to a low single digit. Regarding 2026, it is too early. We are building our budget with the different variables. So we'll tell you something in the next conference in the month of February. Operator: Our next question is from Ms. Julia Rizzo from Morgan Stanley. Julia Rizzo: I have 3 actually. One, could you -- I noticed a sharp increase in the leasing expense on the cash flow from MXN 4.6 billion from MXN 3.6 billion, 26% increase actually, which is quite high compared to your sales and also to the store base. Is there anything here was a renegotiation in some regions, specific some brand? Is there something that is not perhaps recurring or it is related with some stores that you're already opening under construction and paying but not open. Can you give me a little bit of sense of how we should interpret this, especially looking forward, right? Because it increases from 6.3% of sales to 7.4% of sales in 1 year. Federico Rodriguez: Okay, Julia. Yes, Julia. We have been very vocal from December on regarding the lease change that we do from a post-IFRS 16 perspective. As you know, we manage the business on pre-IFRS 16 figures and -- but the change was because we standardized the criteria of all the leasing contracts across the geographies to have a single one company-wide. For example, we had a different policy in Europe from a bps perspective, that bps here in Mexico, while it's the same business, et cetera. So it is more an accounting perspective than a real change on the lease payment that we do on a monthly basis. This does not imply -- and just to be repetitive, an increase in the rental expense, but in the way that we account these leases. This is an effect we'll have until the last quarter of 2025. And from the first quarter of 2026, it is not going to be a relevant change. I don't know if you had another question, Julia. Julia Rizzo: Yes. Just as a follow-up. I'm not talking about the depreciation and amortization. I'm talking about the cash flow payment on the free cash flow generation. Federico Rodriguez: No changes. From a free cash flow payment, it is pretty much the same. We have around 35% of the lease contracts on a variable base totally linked to the gross revenues and the remaining 65%, 70%, depending on the region is totally fixed and increased with half of the inflation of each one of the countries. So we do not have a relevant change from a cash flow perspective into the lease part. Julia Rizzo: Okay. So we follow up later. And also on the interest expenses, also when we annualize the rate of how much you paid, again, on a cash basis, the MXN 2.9 billion was MXN 3 billion compared to the average net debt of the period. We have kind of a rate around 14% roughly, which is well above the base rate. Is there anything here that is nonrecurring? Again, looking forward, how we should expect the cost of that or interest expenses to be? Federico Rodriguez: Well, unfortunately, it was like that because even while we had -- well, we have the $500 million bonds at 7.750%, it is swap. So we pay a rate above 13% from the dollar bonds. And that's the reason, and I want to link to what are we doing with the LT with the liabilities management for 2026. We are moving forward accordingly to the plan. We are almost ending with the refinancing of the 100% of the liabilities, the financial liabilities in the balance sheet, and we'll have savings above $20 million for 2026. We're still dealing with it. That's the reason I do not want to give you more details, but we will change from bonds in dollars and in euros to bank debt, which is cheaper and that will improve the average duration that we have into the balance sheet. But you will see savings on the 2026. Julia Rizzo: Fantastic. Last one would be on the remodeling, the focus -- the increased focus of the company on the remodeling. Can you -- is there any specific brand or region that are you going to allocate resources more or less? And can you give me a rough sense of how much it costs a remodeling Starbucks versus one opening? Just we can make some calculations here of how that would be. Federico Rodriguez: Regarding the cost, it's around 1/3 of the cost of a new opening and regarding the regions and the. Christian Dubernard: Yes. Regarding the regions and the brands, as I was sharing before, Julia, we are -- the brands where we see that are -- that react most -- the best when we do a remodeling are Starbucks and all the FSR segment. So we also do remodelings in some of the other brands, but we are focusing mainly on the brands where we have the best reaction from our customers in terms of traffic, which are the casual dining segment and Starbucks. Regarding the geographies, it's a strategic approach. It depends on the aging of the portfolio in some cases, depends on the -- if there is a particular region, area, city where we see that we have an opportunity to drive additional traffic. And I can tell you that -- or in the case where we see some additional competition coming in. So there is a different -- a very strategic approach to this. And as I mentioned before, we are privileging remodeling our openings with a much more focused and disciplined growth. Julia Rizzo: So it's mostly Starbucks and casual dining. Region, you don't have a specific targeted. Christian Dubernard: It's in general, obviously, where we have a higher number of store or a bigger portfolio like we do in Mexico with more than 900 Starbucks stores, you will see a bigger number of renovations, likewise, with the FSR or casual dining segment in Mexico and Spain, where we have also an important portfolio there. So that depends more on the size of your existing portfolio. But this is a very -- it's a high priority for us and with a good ROI every time we do, as Federico was saying, it's 1/3 of what we do in a new store and the ROI is very, very good. Operator: Our next question is from Mr. Bruno Ramirez from JPMorgan. Bruno Gabriel Ramírez Fernández: So question would be regarding full-service restaurants. How sustainable is to keep seeing this performance as it has been in the past quarters? And second question would be about the run rate for CapEx levels. Federico Rodriguez: I will go with the second one regarding the CapEx. This year, we will be spending around MXN 6 billion, MXN 6.1 billion for CapEx. We are turning things into the company. So only we have non-[indiscernible] projects. As you know, we have recently opened the facility of the distribution center in Guadalajara. It was on Tuesday, and we'll have a lot of profitability and diversification to all the different routes. So for 2026, I think that the guidance, as I said before, it is too early, but should be in the range of MXN 5.5 billion, at least for 2026. And the openings should be a similar figure to what we have seen during 2025 of around 200 openings, taking into consideration not only corporate stores, but franchisees and sub franchisees too. Christian Dubernard: Yes, I'm taking this one. As you have seen in the past, I would say, 24 months, we have seen a very steady growth in the performance of our FSR segment, both in Spain and Mexico. We continue delivering with a lot of innovation and very disciplined and focused growth on each one of the brands, both our own brands like we do in Europe and with our franchisors from the other brands in our portfolio, where we are working -- we have seen clearly brands like Chili's doing an extraordinary -- with an extraordinary performance in the U.S. So we learn a lot from that. We continue holding hands with our franchisors and seeing how this is really being executed and transferred with some value-driven initiatives in Mexico, likewise with the Cheesecake Factory. So I believe the preference of the consumer of our brands. And I would say the consistency that we have been able to deliver in the last years is clearly paying us and showing us that the customer wants to be in our stores and the quality of our products has continues to be a big differentiator. We have not fallen into this attractive or sexy approach into trying to reduce costs through -- by reducing portions or things like that. We are clearly going the other way. We are very disciplined in maintaining our value-driven initiatives that have been there for more than 3 years now, and we keep refreshing them with innovation and new products. So again, this is a segment that we are very happy with the performance. At the same time, we are very -- obviously, the investment in these types of stores or restaurants is an important investment. So we are always very cautious and careful on going for the no-brainer and locations that we know we're going to do well. And as I said before, Bruno we still have an important number of stores to renovate, and we know that this is going to drive and continue driving additional traffic. And also in some cases, growing through our franchisees is a very important part of our strategy. Our franchisees are very happy and confident with the performance of this brand. So we continue getting demands on trying to continue developing the brand through franchisees, particularly in Europe and in some of our brands in Mexico. Bruno Gabriel Ramírez Fernández: And just a follow-up question in the -- regarding CapEx. So beyond 2026, what percentage of sales should we expect? Is 2026 levels a good proxy between 2026? Federico Rodriguez: I would say it should be around 1.5% as a perpetuity rate, the CapEx. But it is better to have the guidance, and I will deliver both answers what to model in 2026 and what is happening in the next 10 years. Operator: Our next question is from Mr. Nicolas Riva from Bank of America. Our next question is from Thiago Bortoluci from Goldman Sachs. Thiago Bortoluci: I don't know, but I think I'm double counted here. No further questions on my end. Operator: That was the last question. I will now hand over to Mr. Christian Gurría for final comments. Christian Dubernard: First of all, I want to thank everyone for being here today and the interest and for your questions. Thank you very much. Before we conclude, we would like to thank you for your participation and interest in our quarterly conference call. If you have any additional questions or require further information, our Investor Relations team is always available to assist you. We wish you an excellent day and look forward to having you join us for our next quarterly update and the best holidays and the best holiday season and best wishes for you for this last quarter. Thank you, everyone. Thank you. Operator: Alsea would like to thank you for participating in today's video conference. You may now disconnect.
Operator: Good afternoon, and welcome to Alfa's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would like to turn the call over to Mr. Hernan Lozano, Vice President of Investor Relations. Mr. Lozano, you may begin. Hernan Lozano: Good day, everyone, and thank you for joining us. Further details about our financial results can be found in our press release, which was distributed yesterday afternoon, together with a summarized presentation. Both are available on our website in the Investor Relations section. Let me remind you that during this call, we will share forward-looking information and statements, which are based on variables and assumptions that are uncertain at this time. It is my pleasure to participate in today's call together with Roberto Olivares, Sigma's CFO. I will provide a brief update related to Alfa, Sigma, then Roberto will discuss Sigma's third quarter results and outlook. It is exciting to report Alfa, Sigma's first complete quarter as a streamlined global branded food player. We have experienced a smooth transition into a steady-state business after years of transformational developments. To better reflect Alfa's new identity and to concentrate on growing Sigma's corporate brand equity, we are implementing a re-branding initiative. As a first step to sunset the Alfa brand, an extraordinary shareholder meeting will be convened soon to propose adopting a Sigma-related entity name at the Alfa level. We will share updates on these changes in due course. Returning value to shareholders through cash dividends will remain core to capital allocation. On October 1, the Board approved the first dividend under the company's new food-focused structure, a $35 million payment, bringing total cash dividends for the year to $119 million. This amount is aligned with distribution levels historically supported by Sigma's strong cash generating ability. With that, I will now turn the call over to Roberto to discuss Sigma's results. Roberto Olivares: Thank you, Hernan, and thank you all for joining us today. We are pleased to report another quarter of positive sequential improvement in volume, revenues and comparable EBITDA, underscoring consistent progress adapting to raw material cost pressures in a global environment of soft consumer confidence. Consumers are moving across channels, categories and brands, including varying shift between retail and food service, dairy and packaged meats as well as value and premium brands. The good news is that Sigma's diversified business platform gives us a relative advantage to maintain strong connections with consumers throughout the broad marketplace. One of the biggest industry-wide challenges we continue to face is rising raw material costs. In particular, turkey breast has experienced the sharpest price increase, reflecting supply constraints amplified by seasonal avian flu. Prices reached an all-time high of $7.10 per pound at the close of 3Q '25, which was an outstanding 244% increase from a year ago. Although we have certainly felt the effects of high turkey prices and other protein costs, Sigma's large scale and global supply chain have helped reduce their impact on our results. Looking ahead, we anticipate that current high prices, vaccination and low feed cost will be supportive of a gradual improvement in turkey supply and cost. In addition to Sigma's structural advantages, our experienced teams have done an incredible job staying on top of consumer needs and expectations. All the initiatives we have undertaken drove third quarter revenues to a record $2.4 billion, up 8% year-on-year and 5% sequentially. We have been implementing targeted price actions through a balanced approach to mitigate rising input costs while also supporting volume. EBITDA was down 9% year-on-year due to sustained raw material cost pressures and a record high comparison in 3Q '24. Adjusting for the Torrente property damage reimbursements in the second quarter, comparable EBITDA increased 3% sequentially, marking the third consecutive quarter of improvement. As a result, 9-month comparable EBITDA of $722 million is tracking in range with our full year guidance. We are confident that this upward trend will continue gaining momentum into the fourth quarter, which implies significant year-over-year growth for the first time in 2025. Moving next to key highlights by region. Mexico was once again the standout with revenues in local currency increasing both year-over-year and sequentially. Volume increased 1% quarter-on-quarter as growth from retail channels offset weaker performance in food service, which was impacted by soft hospitality demand. By product, yogurt and value branded packaged meats were key drivers in the retail channels. FX-neutral EBITDA improved 6% sequentially as ongoing revenue management and efficiency initiatives offset higher raw material costs. In the United States, revenues were flat year-on-year and quarter-on-quarter as favorable pricing was offset by lower volume in both periods. Softer demand for packaged meats in national brands was partially offset as Hispanic brands continue to gain traction in mainstream channels and new customer acquisitions. EBITDA was 17% lower quarter-on-quarter, reflecting lower volume in national brands and changes in mix involving lower dairy sales. Staying in the Americas, Latin America delivered 2% currency-neutral revenue growth in the third quarter, driven by higher volume year-on-year and sequentially. EBITDA decreased 11% versus 3Q '24 due to higher protein costs and mix effects, but increased 10% quarter-on-quarter due to operating efficiencies achieved in the Central American operations. The underlying business in Europe has maintained an upward trajectory. Adjusting for all insurance reimbursements received last quarter, EBITDA increased more than 100% sequentially as effective price actions and Torrente-related production adjustments drove a recovery trend that is expected to be amplified with seasonality effects in the fourth quarter. Lastly, Sigma's Europe capacity recovery plan continues advancing on schedule towards full restoration in 2027. Looking at our financial position and select cash flow items, we maintained a strong consolidated net debt-to-EBITDA ratio of 2.7x at the close of the third quarter with a stable net debt. CapEx represents our largest use of cash, driven by planned investments. Projects underway include capacity and distribution expansions, primarily in Mexico and the United States, plus the previously discussed capacity recovery in Spain. Next, let me briefly touch on some of the exciting steps we are actively taking to strengthen the business model for long-term success. Our growth business unit remains focused on piloting and scaling new products and ventures with disruptive growth potential. Grill House, our direct-to-consumer venture that caters to the grilling enthusiasts is ready to make its entrance into the U.S. after uninterrupted growth in Mexico for the last 5 years. At the same time, the Studio, Sigma's Global Center of Excellence for design and innovation is moving forward in its first year with developing 46 prototypes and advancing on 11 innovation commitments to boost core brands. Advancements in these areas like these will continue to set us apart from competitors in all regions. With this, let's open the call for questions. Please, operator. Operator: Our first question comes from Ricardo Alves from Morgan Stanley. Ricardo Alves: I had a question on Mexico. I think that certainly, as you mentioned in the preliminary remarks, another quite positive and resilient performance in top line in the low double digits. With that in mind, can you break that down into more details as it pertains to eventual share gains? I'm really looking forward to what has been driving the strength of you relative to other food players in Mexico. If you can talk about share gains or your revenue management initiatives or even on a channel by channel? Is it exposure to smaller purchases that is benefiting you more than others with a less diversified SKU? So just trying to get some more granularity to try and explain the strength in top line in Mexico and if that's something that should continue going forward, that would be helpful. My second question, I think that, Roberto, you did refer to the guidance. We appreciate the fact that the company is reiterating the guidance. I think that the message is pretty clear here, and it does imply to the comment that you made that the fourth quarter should be significantly stronger. I think that we're talking about almost 10% EBITDA growth on a sequential basis. So, with that in mind, can you also lay out in more details in your view, what are the key value drivers from the third quarter into the fourth quarter for this big sequential improvement? Is it -- when we look historically, the seasonality doesn't really help us to come to a conclusion that the fourth quarter is going to be significantly better. So is it something that we cannot model as well as you can, meaning your hedges may be looking better or to one of the points that you made, maybe Europe is going to be improving much faster than expected. Is there any top 2 or top 3 value drivers for us to be more confident about this sequential recovery into the fourth quarter? Roberto Olivares: Thank you, Ricardo, for the question. Let me first address the first one related to Mexico. In general, let me first explain that in Mexico, we do have the retail business and the foodservice business. We have seen different dynamics in each one of them. Foodservice first being more soft on volume, particularly due to raw material cost increase, particularly beef, but also softer hospitality trends, as I explained in my initial remarks. If you divide the business, retail is actually growing a little bit more on volume and foodservice is decreasing in volume. And in retail, we have a good presence in both the modern and traditional channel and a good presence across the different value segments across the socioeconomic spectrum. So we do have brands that whenever a consumer is trading down or trading up, we manage to catch the consumer as they move. So we have been seeing a little bit of trading down. So volume from our value brands is growing a little bit higher than the premium and the mainstream brands. And also volume in some of our dairy brands, particularly yogurt, continues to increase. I would say those are the 2 main drivers of the resilient volume that we have seen in Mexico. Then let me address your second question regarding reiterating the guidance and what we see in the fourth quarter of 2025. First, let me just make the comment that last quarter was -- fourth quarter '24, we have some extraordinary impacts, particularly in Mexico. If you see the margin that we have seen through this year in Mexico up to today, up to the third quarter, we were almost at 15% EBITDA margin. If you normalize that effect, we have close to $30 million more in Mexico in the fourth quarter versus the fourth quarter of 2024 just because of that. Additionally, we do expect to receive -- to continue receiving the reimbursement from the business interruption insurance from the Torrente incident we expect between $15 million and $20 million of business interruption coming in the fourth quarter. We actually already received a small portion of that during the month of October. We do also expect the European operation to have better results than the fourth quarter of 2024 because of higher prices and the momentum that we have seen in the operation between $5 million to $10 million in that sense. And in the case of the U.S., we see that we will move from a decrease versus last year in this third quarter to actually being able to have a similar result in the U.S. versus the fourth quarter of 2024. So those are the main key drivers for us being in range with the guidance. Ricardo Alves: Exactly what we are looking for, Roberto. Operator: Our next question comes from Renata Cabral of Citi. Renata Fonseca Cabral Sturani: So I have 2 regarding the U.S. business. One -- the first one about category trends. How would you describe the overall competitive environment right now in the U.S. in packaged meats and refrigerated food? Are private label or value play is gaining share right now? And how is Sigma positioning to defend pricing? And still on the U.S. business, in the release, it's mentioned that we have volumes in the national brands. My question is to what extent was this driven by category contraction or share loss and how the company has just seen the product mix to reaccelerate volumes in 2026? Roberto Olivares: Thank you, Renata, for your question. Regarding category trends in the U.S., we have been seeing just more competition of private label in the category, particularly, I would say, because of all of our regions, probably the U.S. is the one that has a softer consumer confidence recently. Consumers in the U.S. are managing a tighter budget. They are more cost conscious. Having said that, we -- particularly in the national brands business, we play as a smart choice, I would say, very close to the segment where private label is playing. And although we have seen that private label is penetrating more in the category, has not necessarily impacted our brands, has impacted more of the mainstream brands in the category. We try to position ourselves as a smart value brand, playing a lot with innovation on convenience on -- not only on affordability that has helped maintain our position with the consumers. And actually, we, in that sense, have been doing well. In regards to what we see going forward, definitely, the category this year, mainly in the Americas has suffered a lot because of raw material cost. We have mentioned a lot that turkey, but also pork and also other -- beef, other materials has been increasing. We do expect for 2026 for raw materials to ease, to start to recover production, particularly in turkey, that will increase the supply in the production and also impacting raw material to the downside. And hopefully, with that, we do expect a pickup in the category for next year. Operator: Our next question comes from Federico Galassi of Rohatyn Group. Unknown Analyst: I don't know if I was allowed to speak. It's [ Matteo ] here. I wanted to know if you could give us some color on how is operating leverage looking in this scenario with lower volumes. I think the picture in terms of raw material costs is very clear. Everyone understands the pressure particularly turkey has had on your results. But I wanted to see if you could provide us some guidance on what we should expect in terms of OpEx as a percentage of sales with more granularity by country, if possible? Hernan Lozano: Matteo, this is Hernan. Let me see if we understand your question correctly. So the first part refers to operating leverage and whether the decrease in volume is creating some slack in terms of the level of operation that we maintain across the different regions. Is that right? Unknown Analyst: Yes, exactly. Hernan Lozano: Okay. So the answer is no. This is not creating any slack in terms of operating leverage. What we're seeing is we are operating at pretty much capacity, especially in the Americas, in Mexico and the U.S., if you look at many of our CapEx projects, these have to do with catching up with volume that has grown at a pretty strong rate before 2025. So from an operating standpoint, the operations are normal, I would say. Roberto Olivares: I will add that -- thank you. I will add that it's not that volume is necessarily decreasing a lot. I mean, again, in the case of the U.S., was 1% this quarter is -- we do expect to continue growing in volume in the next years. Unknown Analyst: And one quick follow-up related to cost of raw materials. It should be fair to expect that particularly turkey prices stabilize towards the end of the year and that we see lower raw material prices for next year. What's your strategy, your view on pricing, if you could give us any idea on that for next year? Roberto Olivares: Sure. Thank you, Matteo. I mean, in general, we do expect, I would say, more friendly raw material environment next year. We -- let me talk about turkey. We are starting to see some indications that some recovery in the turkey production is starting to happen. There was an inflection point in July where production is starting to increase versus last year. And actually, the rate of increment or the rate of how the production has increased has been at a good rate. Having said that, there is still some uncertainty on how it's going to continue that rate in the next months, particularly because, again, we're entering the winter in this hemisphere and potentially, there could be more diseases coming along. There was a particular disease that affected a lot the Turkey this year was a pneumovirus. And they developed a vaccine for that virus that started to help. They started to vaccinate the turkeys around April and May. So we do expect that, that continues helping with the production over the next months. We are cautiously optimistic. I will say that we do expect production of Turkey to continue increasing. But again, cautious about the rate of that increase. Operator: Our next question comes from Fernando Olvera of Bank of America. Fernando Olvera Espinosa de los Monteros: Roberto, Hernan can you hear me? Roberto Olivares: Yes. Fernando Olvera Espinosa de los Monteros: Perfect. My question, just a couple of follow-ups. Regarding or linked to the cost outlook, I mean, thinking that turkey prices should start easing going forward, how are you thinking about pricing mainly in Mexico towards year-end and next year, trying to see if any additional adjustments might be needed. And also thinking about volume softness overall, how are you thinking about CapEx for next year? Roberto Olivares: Thank you, Fernando. Let me just make the comment that although we have been seeing that some indication that production of turkey started to increase, prices of turkey has not reflect that. So prices of turkey continues to be at a record level, both in turkey breast and turkey thigh. And we do expect them to decrease in the following -- particularly in the following year. I will say more as the -- probably between the first and second quarter of the next year, that is our expectations. Regarding pricing, when that happened, we have been working very closely with the revenue management teams to be able to protect both margin and volume. We try to do any price increase that we do, we try to do it very -- with a lot of analysis in regards to elasticity, how the competition is moving and also how the consumer perceives that price increase. We want to maintain the preference of our consumers. So whenever there is something that we can see that we can act both on higher raw material costs and lower raw material costs, we will act upon that to be able to protect and to continue growing volume. In regards to that, your question about CapEx in general, again, particularly Mexico and the U.S. operation, for the last couple of years, we have been working at capacity or almost at full capacity. So we have been planning and investing in some projects to increase the capacity. We also have the recovery plan in Europe to recover the capacity that we lost in the Torrente flood. So we will be working also on that on next year. So at least, we still don't have our guidance number for CapEx for next year. But what I will say directionally, we'll continue to be around the same level that this year. Fernando Olvera Espinosa de los Monteros: Okay. Roberto, regarding pricing, I mean, at this point, do you feel comfortable with the price hikes implemented so far or additional hikes might be seen going forward in that sense? I mean, thinking about the turkey price that you were saying that they might start to decline until the first and second quarter of next year. Roberto Olivares: Yes. Thank you, Fernando. I will say that unless, again, the raw materials continues to increase, which we are not expecting that. We not necessarily will do something structural on prices as of right now. There might be the need to do some particular adjustments in some particular product, but not something that will be structural for the whole company. Operator: Our next question comes from Felipe Ucros of Scotiabank. Felipe Ucros Nunez: A couple of questions on my end. So one has to do with your pricing power. Can you talk a little bit about your capacity to maintain your pricing levels when costs start coming down and margins start expanding. Historically, what has been the behavior of your competitors? Are they typically disciplined? And I guess, how does that change by region? I have an impression that perhaps Mexico and the U.S. are stronger than Europe. But any color you can give us on that would be great. And then on the second question, is there any direction you can give us about which proteins are most important to you out of the ones you use? And I know this varies because there's reformulations depending on where the costs are at given times. But even if you can't give us precise numbers, perhaps you can give us a ranking or some directional idea of which ones are the most important proteins. Roberto Olivares: Thank you, Felipe. Let me first tackle the second one. So we -- regarding protein, -- and when we have this information in our website in our corporate presentation, around 40% of our protein -- of our raw material cost of -- the raw materials is pork. Then we have close to 20% is turkey, then around 10% is chicken and then around 30% will be dairy, mainly milk, but also cheese and some other dairy proteins. We -- particularly pork ham, I would say, is our largest material that we buy, both in -- particularly in Europe, but also in Mexico. And in the case of Mexico, more turkey, turkey thigh, turkey breast and in the case of the U.S., particularly chicken. Regarding your first question, I will say we -- again, as I explained to the question that Fernando did, we try to take a very disciplined approach in terms of price management. Whenever the -- we take a look of elasticity, how the competition is moving. And whenever we see an opportunity area where we can either protect margin or protect volume, we will be taking that opportunity. In general, I will say it varies by region. But in Europe, given the competition, the penetration of private label and some excess capacity that there's in the industry, we have -- it takes us more time to increase prices between the rest of the regions. Operator: There being no further questions, I would like to return the call to management. Roberto Olivares: Thank you, everyone. On a final note, we entered the fourth quarter focused on a strong close for 2025, building upon our positive sequential momentum. Looking ahead, we're preparing to capitalize on opportunities in 2026 and advance our long-term consumer-centered growth initiatives. Thank you very much for your interest in Alfa, Sigma. Please feel free to reach out to us if you have additional questions. Have a great day. We will now disconnect. Operator: This concludes today's conference call. You may disconnect.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Rogers Communications, Inc. Third Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Paul Carpino, Vice President of Investor Relations with Rogers Communications. Please go ahead, Mr. Carpino. Paul Carpino: Thank you, Galyene, and good morning, everyone, and thank you for joining us. Today, I'm here with our President and Chief Executive Officer, Tony Staffieri; and our Chief Financial Officer, Glenn Brandt. Today's discussion will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report and in our 2024 annual report regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Tony to begin. Anthony Staffieri: Thank you, Paul, and good morning, everyone. It's been quite a week for our Toronto Blue Jays, American League Champions, so I just wanted to say a few words about Canada's team. We're thrilled. The Blue Jays are in the world series, and it all starts north of the border tomorrow. As owner, our job is to give leadership the tools and resources to win. And as Canada's communications and entertainment company, we're about providing Canadians with the best sports and entertainment experiences. This is one of those moments, and this is what Rogers is all about. Let me now turn to the quarter. Q3 was another strong quarter for Rogers. We delivered industry-best combined mobile phone and Internet customer additions. We continue to grow our Cable business anchored by Canada's most reliable Internet. We again delivered the best Wireless and Cable margins in our sector, and we're seeing healthy revenue growth from our Media operations through organic growth and through now including MLSE revenue in our results. Overall, we executed with discipline and a clear focus on driving growth across our three main businesses. Let me start with Wireless. In the highly competitive Wireless market, we saw some pressure on service revenue and ARPU. Our priority continues to be on the consistent delivery of results. We added 111,000 total mobile phone net additions in Q3 and year-to-date, we added 206,000 mobile subscribers with the vast majority on the Rogers postpaid brand. We are leading the industry with innovative, transparent, feature-rich add-a-line plans. These plans meet the dual objective of providing customers with simple value-add options while targeting revenue growth opportunities to support strategic investments in our network. We are also leading the industry with satellite to mobile. This new groundbreaking technology connects Canadians in remote areas, and we now deliver 3x more coverage than any other carrier in Canada. Since launching our beta trial in July, we have seen terrific response from both our customers and Canadians. We recently extended the beta trial and will launch even more capabilities in the coming months. The launch of satellite to mobile reinforces our 65-year history of leading the industry and innovating for Canadians. Our customers are embracing the strategic approach. Our postpaid churn in the quarter was 0.99%, down 13 basis points year-on-year and the lowest churn in over two years. We are leading in innovation and delivering more value for our customers while maintaining industry-leading Wireless margins of 67%. In Cable, growth remains positive, reflecting a clear reversal of the negative trends seen in previous years. Retail Internet additions were 29,000 in the quarter, and we have delivered approximately 80,000 new Internet subscribers year-to-date across the country. This is in part driven by Rogers leading 5G home Internet technology. 5G Home Internet is one of many areas where we're leading. With the Xfinity road map, we're rolling out new features and plans that drive value and deliver new innovations on our world-class entertainment platform. We've launched Rogers Xfinity StreamSaver to bring together popular streaming services at a price point that's attractive to the consumer. We've launched more smart home devices and new features for Rogers Xfinity self-protection. We were the first Canadian Internet provider to introduce WiFi 7, the latest generation of WiFi technology. Our focus on execution, efficiency and discipline continues to drive industry-leading Cable margins of 58%. Finally, in Media, revenue growth was up 26% driven by a strong Blue Jays regular season and the consolidation of MLSE results. We are in the early stages of transforming our Sports & Entertainment business into one of the best sports businesses globally. This is our third pillar of growth beyond Wireless and Cable and will be meaningful to Rogers over time. With the acquisition of the additional stake in MLSE, we have added revenue and profitability growth to our core business. Taking a step back, in calendar 2025, we project Media revenue and adjusted EBITDA, including MLSE for the full year to be $4 billion and $250 million, respectively. Our collection of Sports and Media assets has a value in excess of $15 billion and is among the most impressive in the world. This value is not currently reflected in our share price. We are well positioned to surface this significant unrecognized value for Rogers shareholders over time. In 2026, we expect to acquire the outstanding minority state in MLSE as part of this process, so more to come on this. We are building a sports business at scale, and we are assessing multiple options to unlock additional value. We will take the time to be thoughtful, deliberate and get it right. In the meantime, we will continue to operate with financial discipline while providing team leadership with the tools and resources to build championships. Finally, on balance sheet and capital spending, we are effectively managing leverage down even as we scale up our exceptional asset base. In Q3, we continue to execute on our commitment to maintain a strong balance sheet. We reported a debt leverage ratio of 3.9x. This was achieved after completing the acquisition of the additional stake in MLSE. As you saw this morning, we now expect CapEx for the current year to come in at $3.7 billion. This is below our previous target of $3.8 billion and reflects the current regulatory environment. Free cash flow is now expected to be between $3.2 billion and $3.3 billion, higher than our previous target. In the coming quarters, we will maintain our laser-like focus on preserving a strong, investment-grade balance sheet even as we complete our transformational investments. As we pursue growth in our three core businesses, we will continue to align capital spending and free cash flow growth to the best growth opportunities and balance sheet deleveraging priorities. As we get ready for peak selling in the fourth quarter, we will remain focused on balancing execution discipline with revenue and subscriber growth. Thank you to our exceptional team for their continued commitment to drive growth long term. I will now turn the call over to Glenn. Glenn Brandt: Thank you, Tony, and good morning, everyone. Thank you for joining us. We are pleased to report that Rogers' Third Quarter results reflect another quarter of strong, disciplined and leading financial and operating performance. Once again, we have delivered industry-leading margin performance in Cable and Wireless, and our Wireless churn is the best we have seen in over two years. We have delivered positive Cable revenue and adjusted EBITDA growth, and we expect that our combined Internet and wireless loading will once again lead our peers. Media has once again delivered sector-leading growth driven by our added Warner, Discovery media content and by our Toronto Blue Jays' very strong regular season performance. As well, this is the first quarter in which MLSE results are now fully consolidated with our Rogers Sports and Media business segment. And so we are pleased to report that Rogers is delivering solid results across all three core businesses against the backdrop of a competitive environment and slower growth economy. Starting with Wireless. We continue to deliver solid market share supported by disciplined financials. Wireless service revenue was flat and adjusted EBITDA was up 1% year-over-year, primarily reflecting the ongoing competitive intensity in the marketplace, continued lower immigration and lower international roaming and wholesale revenue. Our sustained emphasis driving cost efficiencies has moved our industry-leading Wireless margin to 67%, up 60 basis points against the prior year and near our all-time high of 68%. As well, we have maintained strong market share for mobile phone net additions, adding 111,000 net new subscribers, consisting of 62,000 postpaid and 49,000 prepaid mobile customers. Across the entire sector, Wireless subscriber additions continued lower versus prior year, reflecting continued lower immigration levels. Against this lower growth backdrop, we have added a sector-leading 206,000 net new mobile phone customers year-to-date, with the majority of these subscribers added on our feature-rich Rogers premium service plans. Continued emphasis on responsive customer service and improved customer base management has lowered customer churn to a very strong 0.99%, our best churn performance in over two years. Blended mobile phone ARPU of $56.70 is down 3% from the prior year, reflecting the ongoing impact from competitive intensity, combined with lower international and wholesale roaming revenue, as mentioned earlier. Moving to Cable. Cable service revenue has once again grown 1% year-over-year, driven by retail Internet subscriber growth, combined with continued discipline in the face of ongoing market competition. Cable adjusted EBITDA is up 2% year-over-year, driven by the flow-through of modest service revenue growth combined with our ongoing cost efficiency initiatives. As a result, Cable margins have reached an industry-leading 58%, an increase of 70 basis points over the prior year. Internet net additions of 29,000 customers reflect our continued success expanding subscribers throughout our national footprint and includes our continued success with 5G Home Internet, expanding our bundled service offerings into every region from coast to coast. And finally, Rogers Sports & Media revenue of $753 million, was up by 26% over the prior year, reflecting the combined contributions of three key initiatives: Our added Warner Discovery suite of media content; stronger results for Sportsnet and the Toronto Blue Jays, particularly through September to close out the regular season and the consolidation of MLSE effective July 1. Media EBITDA was $75 million compared to $136 million last year, reflecting both the positive flow-through of Warner Discovery and the Blue Jays regular season, offset by the seasonally low third quarter EBITDA loss for MLSE, which is consolidated in 2025, but not in 2024. We expect MLSE will be substantially accretive to earnings in Q4 and for the second half of 2025. As well, the Blue Jays' very successful MLB playoffs and World Series run will provide further added growth in the fourth quarter. In terms of unlocking additional value from our Sports & Media assets, let me recap our current view on process and timing. To be clear, we remain determined and committed to delevering our balance sheet and to unlocking the significant unrecognized value in the RCI share price from these world-class sports assets. With the current estimated value of more than $15 billion for our Sports & Media properties, we continue our work to identify and execute on the best long-term strategy to surface value. And the way our Toronto Blue Jays World Series run is captivating this country is a very clear demonstration of the power of our iconic sports teams. We anticipate a transaction could occur over the next 18 months or so, likely coincident with or subsequent to us acquiring the remaining 25% minority interest in MLSE. In the meantime, as we assess multiple options, our Sports & Media operations remain highly successful. They operate at scale and are delivering sector-leading and growing financial results and investment returns. Finally, rounding out my comments on the third quarter. Our consolidated service revenue is up by 4% to $4.7 billion and adjusted EBITDA is $2.5 billion, down 1%. As mentioned earlier, the year-over-year changes in both service revenue and EBITDA reflect the flow-through of modest growth in Wireless, Cable and Media combined with consolidation of MLSE results starting this quarter. Capital expenditures were $964 million, which is relatively flat to last year, even as we absorbed some additional capital spending from consolidating MLSE. Free cash flow of $829 million was down 9%, driven by increasing taxable income and the timing of tax installment payments. We continued to delever in Q3 even as we acquired our additional stake in MLSE for $4.7 billion, roughly a 0.5 turn increase in leverage at acquisition. Immediate execution on driving operating synergies and MLSE EBITDA growth, combined with ongoing application of free cash flow and capital initiatives to delever, allowed us to close the quarter with debt leverage of 3.9x, down roughly 10 to 20 basis points in the first three months of the MLSE acquisition. Notwithstanding this notable progress, our third quarter leverage is up by 0.3x as a result of the MLSE acquisition. And so here, I will emphasize that we remain committed to strengthening our balance sheet further and to improving our investment-grade credit ratings. We are in regular contact with each of the credit rating agencies to communicate our plans and progress. This will be driven by continued prudent capital priorities together with earnings and free cash flow growth to pay down debt and lower leverage. Unlocking value from our Sports & Media Holdings is a very substantial part of that exercise. At quarter end, we maintained our very strong liquidity position with available liquidity of $6.4 billion. This included $1.5 billion in cash and cash equivalents and $4.9 billion available under our bank and other credit facilities. As you have seen in our Q3 cash flow -- free cash flow statement issued today, we are now reporting distributions paid by subsidiaries to noncontrolling interest, reflecting the distribution payment associated with the minority investment and a portion of our Wireless network infrastructure. The $14 million amount reflects the prorated timing for the transaction, which closed in late June, and so the Q3 distribution is for a partial prior quarter. In our Q4 results and going forward, the full quarterly amount of the distribution will be reflected, which we anticipate will be approximately $100 million per quarter. And as we discussed last quarter, a very substantial portion of this quarterly distribution is offset by the lower interest expense generated from using the proceeds from this transaction to pay down debt. The last piece I will touch on before we open up the call for Q&A is for affirmation and updates to our 2025 guidance, where we have improved our outlook for both capital expenditures and free cash flow for the rest of the year, reflecting our ongoing efforts to drive more efficient capital allocation and also reflecting the current regulatory environment. We now expect to end 2025 with capital expenditures of approximately $3.7 billion, which is a further $100 million reduction to our previous adjusted target of $3.8 billion and a full $300 million improvement from the previously anticipated high end of our guidance range announced in January, when we were targeting $3.8 billion to $4 billion. Notably, we are improving our targeted capital outlook even as we absorb the additional capital expenditures associated with MLSE. We have driven careful prioritization of our capital investments in 2025 and you should expect this determined prioritization to continue in 2026. As well, we now expect our 2025 free cash flow to be in the range of $3.2 billion to $3.3 billion compared to the $3.0 billion to $3.2 billion range previously estimated at the beginning of the year. As we prepare for 2026 and beyond, you should expect that we will continue to drive more efficient capital investment, improve free cash flow and further strengthen and delever the balance sheet. And so in summary, our Q3 results demonstrate that Rogers continues to successfully execute on its core Wireless and Cable strategies. We have achieved consistent strong performance for almost four years now, and we will continue to build on this track record in the quarters and years ahead. In Sports & Media, we continue to make progress on our very unique opportunity to surface significant unrecognized value from these assets for our shareholders. And in the meantime, we continue to pursue sector-leading growth and improved profitability for Rogers Sports & Media. Let me close by extending a very sincere and appreciative thank you to our employees who are the engine driving and sustaining our strong execution and who play a critical role in driving our future success. Thank you for your tremendous pride and determination. And finally, Go Jays. I will now ask Galyene to open the call for our Q&A session. Thank you. Operator: [Operator Instructions] First question is from Stephanie Price with CIBC. Stephanie Price: I was hoping you could talk a little bit more on the Wireless competitive environment as we head into the holiday season? And if you think the current pricing environment can be sustained here? Anthony Staffieri: Stephanie, thanks for the question. In terms of -- we approached back-to-school, with a view of having a very simple redefined value propositions for the customer. And so we streamlined our price offerings. We made it more clear on the differentiation amongst the plans with features that are beyond just data bucket sizes. And what we found is it resonated well. We focused on add-a-line construct so that we could increase the number of lines per customer, and that's trending well for us as well. And we recently introduced tiered hardware promotional discounts so that the amount of discount on our hardware is graduated depending on the plan that the customer comes in on Verizon, if they're in currently customers today. And what we're finding is that's resonating extremely well with customers, and you're seeing that in our subscriber performance. And that's been continuing throughout October as well. And so we think we've got the right value proposition as we head into Black Friday and to the end of the year. And so that's what you should expect to see from us. We'll see how the marketplace responds. And to the extent we need to pivot based on the market dynamics, then we'll do so. But right now, we're feeling pretty good about the pricing constructs that we have in the marketplace. Stephanie Price: And then maybe a follow-up on churn. Your churn has been down over the past 2 quarters. Great to see and hoping you can give us some thoughts on churn management and where there's further opportunities potentially. Anthony Staffieri: What you're seeing is a very concerted effort. We've always focused on base management, but we've taken a much more holistic approach to base management and employing tactics that are resonating with customers in terms of what's important to them, drilling down on customers that we think might have a propensity to churn and dealing with the issues in advance of them calling us. And so there are a number of tactics that we've been going through, and the team is executing extremely well in base management. We expect to continue to see good churn performance across our entire base. Operator: The next question is from Aravinda Galappatthige with Canaccord Genuity. Aravinda Galappatthige: I wanted to start off with Wireless. Obviously, the lag effect of the historical promotional activity, it continues to show in the service revenue numbers. But just looking at the sequential trend in service revenue growth, I wanted to sort of clarify whether that was sort of items around roaming or external customers that would have had an impact on that number? Glenn Brandt: Thanks, Aravinda. Yes, the part of that decline really is lower roaming volumes as well as a reference to some wholesale revenues that, I'll shortcut and simply say, moved to another carrier. And so you're seeing that roll through. That's a very substantial part of what you've seen in the revenue. Aravinda Galappatthige: And just maybe just a bigger picture question on operating leverage. I mean with the progress that's made on the AI side of things, the latest generation being agentic AI and so forth. Can you talk about the magnitude of the opportunities that you have to potentially deploy those technologies within the firm and potentially drive streamlining efforts within Rogers, whether it's in CX or even on the network operations side, marketing, et cetera? Just to get a sense of how material that could be from an operating leverage perspective to the company. Anthony Staffieri: Thanks for the question, Aravinda. Really good question and something we've been spending quite a bit of time on, not just historically, but as advancements in AI tools and technology continues to grow exponentially, we continue to look at ways to capitalize on it. And we see three main areas. One is the customer experience, as you indicated, combining with a completely digital experience, and that's the journey we're on. It's going to allow us to give the customer a more consistent, streamlined experience to address whatever issue they have. And we're really looking forward to that and are much more cost effective -- on a much more cost-effective basis. The second relates to efficiency and the ability of these AI tools to make us much more efficient and some of which you're seeing already in our industry-leading margins in both Wireless and Cable. And then the third really relates to security and the ability to continue to enhance security for our customers and for our own data. And so it's all three of those categories that we're very much focused on, and we'll continue to deploy. So the opportunity for this is significant for us in this sector and we'll continue to follow in many ways the large players globally and the tools that they've deployed successfully, so that we're a fast follower in many of these areas and implementing them efficiently. Operator: The next question is from Drew McReynolds with RBC. Drew McReynolds: Maybe extending the network revenue question, I think from Aravinda. Maybe, Glenn, can you talk about just, let's level set expectations about how that trends just given all the moving parts whether you want to talk about Q4 into 2026, just how are you thinking of the puts and takes and the trajectory? And then second question, obviously going to fit in a Jays one here. On the sports assets, I mean, clearly, incredible to see the whole country alive here. Maybe, Tony, you've talked about kind of how these three businesses have to stand on their own, but clearly, there's a branding and cross-promotional aspect to this all. Just wondering if we would see or have seen direct impacts on your telecom business in terms of subscriber growth or benefits that are coming your way on the telecom side that we'd see in either Q3 or Q4 or just maybe longer term? Glenn Brandt: Thanks, Drew. Let me start with the first part of that. I'm not going to take the opportunity to start guiding for '26. I will say the trends you see, I'll say, through the first 3 quarters of 2025 and the trajectory of hitting growth on the year for service revenue, we remain firmly committed to and expect. And so for the year, you'll see positive service revenue growth for Wireless. We all know the competitive framework that we operate in and the slower subscriber growth. That's why you see us leaning in on base management and churn improvement. That's a very efficient way of finding, if not revenue growth, certainly sustaining the base of operations. And so we remain committed to that. Q4, I expect, you'll see strong execution. Part of our Q3 backdrop as we are lapping a very strong Q3 in the prior year, and we have sustained and held the very fast part of that growth that you saw in '24 through the first 3 quarters of '25. So I'm pleased with that progress. So Q4 will be another strong quarter. I won't comment further on guiding for that or beyond in '26, but pleased with progress for sustaining that base management through the 3 quarters. Anthony Staffieri: Drew, with respect to your second question, as you pointed out, we're looking to each one of our pillars of growth being Wireless, Cable and now Sports & Entertainment to stand on their own and drive value, profitability and growth in their own respect. But we also look to ensure that we're capitalizing on the cross synergies amongst all our assets. And the run of the Toronto Blue Jays and heading into the World Series, you can see that in spades in terms of the ability to enhance our brand, the ability to showcase our Cable and Wireless products and services to viewers of the game, and we've seen that throughout the year. If you think about some of the key events in 2025, Four Nations, the playoff run of the Toronto Maple Leafs, and then the Toronto Blue Jays and there are others as well. But you see the power of live sports, and it's good to see, and it's been a benefit for us, as I said, in and of itself, but also in terms of helping the broader Rogers. Operator: The next question is from Vince Valentini with TD Cowen. Vince Valentini: I assume you're getting a lot of favors and requests for tickets for the World Series. I'm wondering if you can compare that. How many requests are you getting for this versus the Taylor Swift concerts. You don't have to answer that. Anthony Staffieri: These are the most World Series requests we've had in 32 years. Vince Valentini: Thanks, Glenn, a very accurate answer as always. The more serious question. Look, you've been asked this several times. I want to hit this head on. Given pricing is improving in Wireless, your front book is now above your back book. And we've seen the CPI stats showed a material improvement in September to basically flat for Wireless pricing versus double-digit declines earlier in the year. All that should mean that Q3 is the trough quarter for Wireless ARPU at minus 3.2%. Can you not confirm that, that it won't get worse than that and should gradually get better over the next 5, 6 quarters? Glenn Brandt: Succinctly, I agree with your sentiment. I think we are seeing some strong initiatives around a large number of initiatives to sustain the base, low churn and sustain revenue. And so broadly, yes, I think you are seeing us continue solid Wireless growth on a full year as well as quarter-to-quarter. You saw a dip in the third quarter, but all of the elements that you've pointed out are true Vince. Vince Valentini: If I can just sneak in one more. Wireless equipment margin was pretty positive contributor to EBITDA again this quarter. In the past, it hasn't always been a positive. Has something changed in terms of handset subsidies and the amounts you're giving out to or something changed with your deals with the vendors to allow that to be a sustainable source of positive EBITDA? Anthony Staffieri: That's -- the driver for it in the third quarter was really our shift to the tiered promotional discounting that I spoke about. Although we implemented it later in the quarter, it came out of time with higher volumes with back-to-school. And so it was extremely and continues to be very effective in reducing our net hardware costs, but also in incenting the customer to move up tier. And so when we look at our ARPU in, we're really pleased with the effect that it's happening. You see ARPU in up very nicely year-on-year. So we like what we see there. And so it is, we believe, the beginning of a trend in terms of net hardware cost for us. Operator: The next question is from Maher Yaghi with Scotiabank. Maher Yaghi: Glenn, I just wanted to double check on something. You -- in the previous question, you said in your response that you agreed with all the assumptions based on the basis of the question. But I'd just be very specific. Are you saying that you confirm that the back book of your Wireless service customers is above -- sorry, is below the current front book? Glenn Brandt: I'm answering from a general sentiment of whether or not we are troughing whether or not Wireless service revenue is growing. I'm not getting into the detail of front or back book. You've heard me answer these questions consistently, Vince, when -- or Maher, when we're asked on what's ARPU trajectory, I focus on service revenue growth and EBITDA growth. And on service revenue growth, I expect Wireless service revenue to grow each quarter and each year. We had a slight and it's a very slight decline just below 0 or flat in the third quarter. For the year we'll be positive, and I expect will be positive going forward. It's a mix of subscriber additions, pricing initiatives, service plan initiatives, simplifying our service plan offerings and trying to move customers up through premium plans. I could go on and on. So I don't want to talk about front and back book because it makes it seem like there's a difference between new and long-standing customers. It's really working with our service plans and our initiatives all around that to drive service revenue and EBITDA growth. So don't read too much into that. I'm answering from a general sentiment we expect Wireless Service revenue to grow period. Maher Yaghi: Perfect. Thank you for answering this question more precisely because I think there's still some gap left to be closed, but I agree that there's upside for next year. So I just wanted to ask you, I know it's not much visible in your results. And I'm not surprised because in Canada, we have a lag to the U.S. in terms of new product introduction, but results from AT&T yesterday and T-Mobile this morning are showing a significant increase in jump balls coming from customers looking to get their hands on the new iPhones. So I wanted to just see if you're noticing thus far in Q4, a slight pickup in jump balls in Canada yet? Or if not, why not? And how are you positioning yourself for Q4 for -- if we do see the same trend occurring in Canada, do you think handset subsidization will become a bigger factor in overall economics of floating customers in Q4 versus prior quarters? Anthony Staffieri: A couple of things that you touched on, and I'll work backwards from your question. In terms of Q4, the demand for new devices and the subsidy and cost for us, what you see in market for us is how we intend to approach the marketplace in the fourth quarter. We think we have a very good value proposition, and our promotional incentives are really going to be centered around hardware rather than rate plans. But we're also going to be very disciplined in the tiering constructs that I spoke about earlier, so that higher promotional discounts come with our more premium plans and vice versa. In terms of, to use your term, jump ball that we're seeing with the launch of the new iPhone device, we've seen good demand for it. Our bigger constraint has been supply, frankly, on that front. And so that's been a limiting factor for us, but I would say at the margin. But we're seeing the same type of industry constructs for our business that you described. Operator: The next question is from Batya Levi with UBS. Batya Levi: Can you talk a little bit about the competitive environment in terms of, if you're seeing any pickup in go-to-market strategy with converged offers? And from your perspective, can you give us a sense of maybe what percent of your broadband base takes the Rogers services as for mobile? And what are some benefits you see beyond just churn reduction? Anthony Staffieri: Thanks, Batya, for the question. Converged offering is something that we spoke about in previous calls and continues to be competitive advantage for us, frankly, given our Wireline and Wireless converged footprint. And now with FWA, we're essentially converged on 100%. And so our go-to-market strategy has been to leverage our distribution channels, which are the strongest and frankly, the best in the industry here in Canada and leverage those to offer customers a converged home solution as well as their wireless products, and we're seeing good pickup in that. In terms of the percentage, we don't disclose that, but it continues to rise rather rapidly and customers looking for that solution. And there are a number of benefits beyond. The converged offer is a bundled discount, a modest discount for it, but there are other benefits the customer sees in terms of simplified servicing, having to deal with only one provider. And the convergence of the technologies as that evolves, they see benefit in that. Batya Levi: Got it. And just a quick follow-up on the lower CapEx for this year. Can you just provide a bit more color on where it's coming from and also how we should think about capital intensity going forward? Anthony Staffieri: We've been very focused on efficiency throughout our operations. You've seen it and continue to see it in our operating margins across our Cable and Wireless businesses. And you'll see it in our Media business as well going forward at scale. But we've also continued to focus on capital efficiency. And that's what you're seeing play out there. There are projects that we decided not to invest in as a result of government decision on TPIA. Certain projects were just not viable and carried too much uncertainty and it's disappointing. We're a company that wants to invest in this country and in infrastructure. And when faced with uncertainty that those types of decisions create for us, we have no choice but to pull back on capital investment, and you see that impacting the total dollars. In terms of going forward, you should expect us to continue to look for improved efficiencies and ways of continuing to reduce our capital intensity across our businesses. Operator: The next question is from Jerome Dubreuil with Desjardins. Jerome Dubreuil: The first one, I just wanted to hear maybe more about the financing plan for the Kilmer deal, which we understand is coming. Glenn, you mentioned that there's been credit agencies discussion. I'm sure they're aware but if you can comment on the plan maybe to bridge a gap just so the market is ready, and we don't have to start over with the balance sheet questions when the Kilmer deal comes. Glenn Brandt: So the -- what we're focused -- thank you, Jerome. What we're focused on is, first, acquiring the remaining 25% minority stake, combining the operations and then proceeding with recapitalizing the combined Roger Sports & Media, including MLSE and Blue Jays entity. That could happen very shortly on the heels of acquiring the minority stake or it could happen sometime following that. And so we're guiding towards -- within the next 18 months. I do anticipate it could well be in 2026, which is just inside 18 months now that we're standing in October. But it's over a timeframe that is going to take some time to work through the acquisition of the 25% stake. And over the course of that exercise, we are working with our analysis to figure out how best to capitalize that combined entity. It's going to depend upon the arrangements that we strike with the minority shareholder on buying out their stake and just when that comes. Tremendous interest being expressed by institutional -- potential institutional investors. They are an extremely attractive set of assets. We are working with the credit rating agencies, so they are aware of our timing. You mentioned -- you heard me mention on the second quarter call, critical for us was getting our arms around the Shaw delevering at midyear before and then embarking on this MLSE consolidation with RSM and recapitalization that allows the calendar to be reset, gives us time to fill in those details. So I'll quickly draw to a conclusion then, Jerome, that I'm not going to give you the roadmap on exactly how much we're selling down into whom because we -- I don't want to pre-announce. I don't have anything to pre-announce. I do know we have assets that are worth more than $20 billion once we combine it all and tremendous interest in buying in. We have shown time and again, most recently, with the Shaw acquisition, our ability to delever. We are absolutely focused on that exercise, and we have a tremendous value of assets here to do that with. So I'm highly confident on our execution. Jerome Dubreuil: Great, Glenn, and if I can just go more specifically on this if I can summarize there is that credit agencies are aware we're not going to need any equity to bridge a gap and probably -- I know the answer to that question, but it would be great to have it out there. Glenn Brandt: The -- yes, succinctly, yes, they are aware we have time to execute. They know we are committed to executing on this. I have been managing our credit ratings and our capitalization and capital structure and funding as a primary part of my role for coming up on 34 years now, I've been working with these credit rating agencies throughout that 34-year period. They're well aware of our intentions and our capabilities. Paul Carpino: Galyene, we have time for two more questions, please. Operator: The next question is from Matthew Griffiths with Bank of America. Matthew Griffiths: Just on the Sports, in the past, if I'm not mistaken, it's been a priority to consider control of the assets following the transaction. That hasn't been brought up this morning, but I just wanted to see if that remains kind of one of the priorities that you're factoring in, in addition to the kind of shareholder return maximization from any potential deal 18 months down the road? And then separately, just on Wireless. On the cost side, in the release, it was mentioned kind of the satellite -- launch of the satellite service was one of the items called out for increased cost. And I just was curious if that was mostly a marketing-related comment or if it's related to kind of the payments to the partner or a combination of both? Just kind of what was -- what exactly is that referring to? Because I know so it's early days. So I just wanted some clarity, if it's possible. Glenn Brandt: Thank you, Matt. Let me start with the Sports side of it. I'll answer it quickly with just a reference back to the asset value within our sports holdings is, as I've said, somewhere in the range of once we own 100% of everything, Blue Jays and RSM operations today plus MLSE. We've indicated we think the value of that is over $20 billion if we were to sell a majority stake that would be raising north of $10 billion. I don't need $10 billion of equity improvement in the RCI balance sheet. And so I do expect we will maintain control simply because the exercise is not that large, and these assets are very valuable. We do anticipate we will control these assets. Anthony Staffieri: And the second part of your question, Matt, in terms of our Wireless operating costs, you're referring to the comments made in the press release. Year-on-year, we've had a very modest increase in operating costs, and you see it in the disclosures of about $8 million. It's a combination of several factors. One of those factors that is described is the satellite to mobile initiative. And as you rightly point out, it does encompass both the marketing as well as the fee paid for the service under our contract. And we are currently in the beta trial mode. We've extended the beta trial mode to allow the commercial launch to be coincident with the launch of new feature capabilities of the satellite. Right now, it is just texting, but very soon, we're pleased to announce and see that it will include data as well. And so that's the reason for extending the beta trial before we get to commercial launch. And so you don't see any of the revenue pickup in our Q3 results, and you won't see it until we move to commercial launch. Operator: The next question is from David McFadgen with Cormark Securities. David McFadgen: So maybe just following on the Rogers Satellite for a second. So right now, this texting, do you expect to add data, I guess that would be a light data plan. And then do you have any ideas when you'd be able to offer text, voice and just full data? Anthony Staffieri: Thanks for the question, David. So on launch, again, to reiterate, it was texting, including 911 texting in terms of capability. We are extremely pleased with the advancement of the roadmap. Data wasn't going to come until next year and voice was planned for the year after that. As a result of the work that our partner has been doing at a very rapid pace, we're pleased that this quarter, what we will have for our customers is the ability to use data and apps. As you describe, it will be somewhat light data. We'll see the capability in terms of bandwidth once it's into production. But we're really excited about that. And then the next to follow is voice. We don't have something we can disclose on that. But you should expect it at some point in 2026. David McFadgen: Okay. And then can you give us any idea on the number of people that have signed up for the trial so far? Anthony Staffieri: It's received terrific demand from our customers and Canadians broadly in signing up for it. As you can imagine, just given our topography and landscape here in Canada, there are significant areas that weren't covered by any wireless network, including some major highways. And so the use case for it is significant. And what we're seeing is a very good pickup. So it's a material amount. What I can tell you, it's over $1 million, but we're not disclosing the specific number because we don't want to get too far ahead of ourselves in trying to extrapolate what kind of revenue that means. Glenn Brandt: One of the real opportunities here for us, David, is that it covers the very remote regions of the country, it covers virtually every road and highway. And so there's the individual Canadians that are signing up the enablement of this for businesses is tremendous and the opportunity for us is tremendous. David McFadgen: Well, the fact that you've had over 1 million sign-ups, that's pretty very good. And then just one, if I could squeeze in one more. Just on the Wireless side. So if we don't see any change in immigration, immigration stays at the current levels, do you think your Wireless net adds would be similar next year or higher or lower? Glenn Brandt: Right. I think let me avoid guiding for next year. But I would say if I look at 2025, even with very, very low immigration our growth is in the range of 3% for the sector, for the industry and 3% growth is roughly 1 million adds for the industry. And so I would expect that to continue until immigration turns up again. It will at some point. I don't expect that in '26, would be wonderful if it did, but it will come back at some point. We will look to growing the population. Again, I expect that's a key part of economic growth for any country, but 3% growth in the base is certainly something we can still build on. Paul Carpino: Thanks, everyone for joining us. If there's any follow-up, please feel free to reach out, and have a great day. Glenn Brandt: Thank you all. Go Jays. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good morning, and welcome to CenterPoint Energy's Third Quarter 2025 Earnings Conference Call with senior management. [Operator Instructions] I will now turn the call over to Ben Vallejo, Director of Investor Relations and Corporate Planning. Mr. Vallejo? Ben Vallejo: Good morning, and welcome to CenterPoint's Q3 2025 Earnings Conference Call. Jason Wells, our CEO; and Chris Foster, our CFO, will discuss the company's third quarter results. Management will discuss certain topics that will contain projections and other forward-looking information and statements that are currently based on management's beliefs, assumptions and information currently available to management. These forward-looking statements are subject to risks and uncertainties. Actual results could differ materially based on various factors as noted in our Form 10-Q and other SEC filings as well as our earnings materials. We undertake no obligation to revise or update publicly any forward-looking statement other than as required under applicable securities laws. We reported diluted earnings per share of $0.45 for the third quarter of 2025 on a GAAP basis. Management will be discussing certain non-GAAP measures on today's call. When providing guidance, we use the non-GAAP EPS measure of diluted adjusted earnings per share on a consolidated basis referred to as non-GAAP EPS. For information on our guidance methodology and reconciliation of the non-GAAP measures used in providing guidance, please refer to our earnings news release and presentation on our website. We use our website to announce material information. This call is being recorded. Information on how to access the replay can be found on our website. Now I'd like to turn the call over to Jason. Jason Wells: Thank you, Ben, and good morning, everyone. On today's call, I'd like to address 3 key focus areas for the quarter. First, I will briefly touch on the 10-year financial plan update we introduced just weeks ago. Second, I will walk through our strong third quarter financial results. And lastly, I'll discuss our announcement from earlier this week regarding the sale of our Ohio gas LDC. Last month, we introduced an ambitious 10-year plan focused on supporting economic development, delivering strong customer outcomes, reducing O&M through operational efficiency and driving value for our investors. Our capital investment plan of at least $65 billion is supported by some of the fastest-growing demand for energy anywhere in the country. Importantly, we also have visibility to at least $10 billion of incremental capital investment opportunities over the course of the plan, particularly in Texas, given the dramatic growth the communities we serve continue to experience. Specifically, in our Houston Electric service territory, we forecast peak load demand to increase by 10 gigawatts in 2031. This forecasted growth would represent a nearly 50% increase in peak demand over the next 6 years. Additionally, through the middle of the next decade, we estimate the electric load demand on our system will double to approximately 42 gigawatts. This level of demand will continue to support a strong investment profile. Our capital investment plan through 2030 drives a projected rate base CAGR of over 11% through the end of the decade and the potential for double-digit rate base growth through the middle of the next decade. The Greater Houston area is thriving, powered by what we believe is the most diverse set of growth drivers in the sector. It is not relying on any single industry and the results speak for themselves. This growth isn't aspirational. It's already here. Notably throughput in our Houston Electric business were up 9% year-to-date. This strong growth is anchored by our surge in industrial customer class throughput, which are up over 17% quarter-over-quarter and up over 11% year-to-date. This incredible growth provides a solid foundation for our earnings guidance. Specifically, we have strong conviction in our ability to achieve non-GAAP EPS at the mid- to high end of our 7% to 9% annual growth guidance from 2026 through 2028, and 7% to 9% annually thereafter through 2035. I continue to believe we have one of the most differentiated plans in the industry because of our unique combination of the diversity and pace of electric demand growth, a derisked regulatory and financing profile and our ability to continue investing affordably for the benefit of our customers. These attributes set us apart from our peers and enable us to continue to deliver value for all our stakeholders over the next decade and beyond. Now moving to our strong third quarter financial results. This morning, we reported non-GAAP EPS of $0.50 for the third quarter, representing a 60% increase over the same period last year. As we signaled last quarter, 2025 earnings reflect a more back-end weighted profile for the year, consistent with our return to traditional capital recovery mechanisms now that the bulk of our rate case activity is behind us. I'll let Chris cover the details in his section, but we remain well positioned to execute on our recently increased 2025 non-GAAP EPS guidance. As such, we are reiterating our full year 2025 non-GAAP EPS guidance range of $1.75 to $1.77, which would represent 9% growth over 2024 delivered results of $1.62 per share. Additionally, we are also reiterating our 2026 non-GAAP earnings guidance we initiated a few weeks ago. As a reminder, we are targeting at least the midpoint of $1.89 to $1.91 per share. At the midpoint, this range would represent an 8% increase over the midpoint of our 2025 non-GAAP EPS guidance range. Further, we continue to expect to grow non-GAAP EPS at the mid- to high end of our 7% to 9% long-term annual guidance range from 2026 through 2028 and 7% to 9% annually through 2035. As a reminder, our guidance is based on actual delivered results as we continue to execute and deliver value for our shareholders each and every year. I'd now like to discuss the recent announcement regarding the sale of our Ohio gas LDC. Earlier this week, we announced the signing of our Ohio gas LDC transaction, which is expected to generate approximately $2.6 billion in gross proceeds, representing a significant milestone in executing our 10-year financial plan. The strong valuation of approximately 1.9x 2024 rate base underscores the exceptional demand for U.S. natural gas LDCs. This outcome once again demonstrates our ability to efficiently finance our growth investments, this time by recycling the transaction proceeds of a high-quality business at nearly 2x book value and reallocating capital into our remaining portfolio at 1x book value. The after-tax net cash proceeds of approximately $2.4 billion will be redeployed into higher growth jurisdictions to efficiently fund our capital investment plan. Importantly, the proceeds should also provide additional flexibility in funding for future incremental capital investments. The transaction is expected to close in the fourth quarter of 2026. Chris will go into the details of the transaction, including its structure, which will allow us to more smoothly redeploy capital while maintaining a strong earnings profile. It has been a privilege to serve the customers and communities in our Ohio gas business, and we are committed to a smooth transition for our customers. This is a tremendous business with fantastic employees, and we know they will continue to provide great service to the 335,000 meter customers in Ohio. This transaction reflects our continued commitment to disciplined capital allocation as we seek to further enable growth, especially in Texas and long-term value creation for all stakeholders. Our growing capital investment opportunities are supported by accelerating and diverse set of load growth drivers. This, coupled with our ability to efficiently finance our plan continues to support our conviction that we have one of the most tangible long-term growth plans in the industry. And with that, I'll hand it over to Chris. Christopher Foster: Thanks, Jason. This morning, I will address 4 key areas of focus. First, I will review the details of our third quarter results. Second, I'll discuss the transaction structure of the recently announced sale of our Ohio gas LDC. Third, I'll highlight our progress on the execution of our 2025 capital investment plan. And lastly, I'll provide an update on where we ended the third quarter with respect to the balance sheet. Let's now move to the financial results shown on Slide 5. On a GAAP EPS basis, we reported $0.45 for the third quarter of 2025. On a non-GAAP EPS basis, we reported $0.50 for the third quarter of 2025 compared to $0.31 in the third quarter of 2024. Our non-GAAP results removed $0.03 of charges, primarily consisting of tax true-ups related to the sale of our Louisiana and Mississippi businesses and transaction costs in connection with our announced Ohio gas LDC sale. In addition, it removes $0.02 related to our temporary generation units as these units are no longer part of our rate-regulated business. These strong results give us confidence in meeting our positively revised 2025 non-GAAP EPS guidance of $1.75 to $1.77. Now taking a closer look at the drivers of our third quarter earnings. Growth and rate recovery when netted with depreciation and other taxes were a favorable variance of $0.07 when compared to the same quarter of last year. This positive variance underscores the strength of our interim capital tracker mechanisms, which continue to support the efficient recovery of our investments. We expect these tailwinds to continue driving earnings through the remainder of the year. During the quarter, we filed for our second set of interim capital recovery trackers at Houston Electric, the TCOS and DCRF mechanisms, which support the timely recovery of transmission and distribution investments, respectively. Our TCOS filing, which included a $15 million annual revenue requirement increase was approved and reflected in customer rates on October 10. Our DCRF filing, which includes a $55 million annual revenue increase is on the PUCT open meeting agenda for later today with updated rates expected to take effect in December. Weather and usage were $0.01 favorable when compared to the comparable quarter last year, driven by fewer outages across our Houston Electric service territory related to storm activity. O&M was $0.12 favorable compared to the third quarter of 2024. This significant improvement in O&M is primarily driven by last August vegetation management and other storm-related costs, where we spent approximately $100 million to accelerate work and improve customer outcomes. Additionally, we had $0.03 of favorability in other, which is primarily driven by an income tax remeasurement. This reflects our continued efforts to optimize our tax structure to align with the evolving composition of our portfolio, which after the closing of our Ohio transaction, will skew more heavily towards Texas. These favorable drivers were partially offset by $0.04 of higher interest expense and financing costs, primarily due to incremental debt issuances since the third quarter of 2024. Next, I'll go through the details of our recently announced Ohio gas LDC sale. As many of you may have seen earlier this week, we announced the sale of our Ohio gas LDC, which is expected to generate gross sale proceeds of approximately $2.62 billion, garnering a multiple of nearly 1.9x 2024 year-end rate base. We anticipate total net proceeds of roughly $2.4 billion after taxes and transaction costs. This is an outstanding outcome. This result exceeds what was contemplated in our financing plans, underscoring the conservative approach we take to our planning process. As such, the transaction will be accretive to both our plan and alternative financing sources. In the near term, these proceeds will serve to further strengthen our balance sheet. And over the long term, as Jason alluded to, this transaction will allow for greater financing flexibility and may enable us to fund incremental capital investments with less equity than the 47% rule of thumb we provided at our September investor update. Transaction proceeds will be redeployed into higher growth jurisdictions to support near-term capital investments in our Texas Electric and Gas businesses. Notably, after the close of this transaction, Texas will represent 70% of our investment portfolio. In connection with the transaction, we will enter into a 1-year seller's note with a 6.5% annual coupon, which will help support earnings in 2027. As a reminder, last quarter, we announced an increase to our 2025 investment plan as we continue to make targeted system enhancements. These incremental investments will help partially offset the loss of Ohio investments upon the close of the sale. The transaction is expected to close in the fourth quarter of 2026, aligning with our financing plans and long-term value creation goals. Next, I'll touch on our capital investment plan execution through the third quarter, as shown here on Slide 7. For the quarter, we are right on track to meet our positively revised 2025 capital investment target of $5.3 billion. In the third quarter, we invested $1.3 billion of base work for the benefit of our customers and communities, which, combined with the $2.4 billion we invested in the first half of the year, represents approximately 70% of our total year target. In short, we remain well positioned to achieve our investment targets for 2025. Now moving to an update on our balance sheet and credit metrics. As of the end of the quarter, our trailing 12 months adjusted FFO to debt ratio based on the Moody's rating methodology was 14% when removing transitory storm-related impacts. We anticipate these credit metrics could be further improved by early next year as we expect to issue securitization bonds in connection with Hurricane Barrel in the first quarter of 2026. We continue to target 100 to 150 basis points above our Moody's downgrade threshold of 13% as we remain laser-focused on efficiently financing our robust capital investment plan. Earlier this month, we once again illustrated our commitment to a strong balance sheet through our $700 million junior subordinated note issuance, which provides 50% equity credit. Our common equity guide through 2030 remains unchanged at $2.75 billion. As a reminder, we have derisked over $1 billion of these equity needs through the forward sales we executed earlier this year, and we do not anticipate common equity needs beyond those forward sales from now through 2027. We believe we are well positioned to execute the remainder of the year and beyond, and we are reaffirming our 2025 non-GAAP EPS guidance range of $1.75 to $1.77, which equates to 9% growth at the midpoint from our delivered 2024 non-GAAP EPS of $1.62. Additionally, we are also reiterating our 2026 non-GAAP earnings guidance we initiated a few weeks ago at our investor update from the midpoint of our new and higher 2025 range. For 2026, we are targeting at least the midpoint of $1.89 to $1.91. At the midpoint, this would represent an 8% increase over the midpoint of our 2025 non-GAAP EPS guidance range. Looking ahead, we expect to grow non-GAAP EPS at the mid- to high end of our 7% to 9% range from 2026 through 2028. After 2028, we will target growing earnings annually at 7% to 9% through 2035. We look forward to executing our plan that delivers on the most diverse growth drivers in the country, fueling economic development for years to come. And with that, I'll now turn the call back over to Jason. Jason Wells: Thank you, Chris. I'm proud of the team's continued execution over the past quarter and the results that firmly put us on track to deliver our guidance this year. This management team will work to not only execute the ambitious targets we set forth in our new industry-leading 10-year plan, but we will also work to enhance the plan for the benefit of all of our stakeholders. Ben Vallejo: Thanks, Jason. Operator, I'd now like to turn it over to Q&A. Operator: [Operator Instructions] Our first question is from Nick Campanella of Barclays. Nicholas Campanella: I just wanted to ask, Chris, you talked a little bit about it in your prepared remarks on balance sheet capacity here from the Ohio transaction. How are you kind of viewing it on like an FFO to debt improvement basis versus the plan? You mentioned financing maybe less than the 47% equity assumption. Is that now 30% or 15%? Is there any kind of way to further quantify that? Christopher Foster: Sure. Nick, if I could just maybe take a step back. And as you look at the transaction, there's really a couple of things going on. One is, over time, you've seen us continue down this path of increasing really the focus on the portfolio where we're reducing also earnings and cash lag where we can. So maybe that kind of goes to your FFO to debt point. As you look at the total outcome as we do sources and uses, you'll probably see us initially step into reducing the OpCo debt that's there. So that's roughly $800 million if you base it on a year-end '26 rate base of $1.6 billion. And then as we look at our plan overall, you're probably looking on the order of $400 million of benefit net to plan. So ultimately, what this puts us in a position to do, as you can imagine, is we'll evaluate both the improvement to the balance sheet here in the near term. And then as we go forward, it could allow us to deploy additional CapEx to the plan in an accretive way. Nicholas Campanella: Okay. Great. Appreciate it. And then just maybe on the deal, just any update on how local feedback has been on the ground and reception to the deal from state leadership since it was announced? Jason Wells: Yes. Nick, it's Jason. Reception has been great so far, very supportive. Don't anticipate any challenges and obviously going to work with our counterparty to successfully transition this business and continue the track record of great service in Ohio. Operator: Our next question is from Steve Fleishman with Wolfe Research. Steven Fleishman: Just maybe, Jason or Chris, more color on the sales growth in Texas, which obviously that's very strong. Just what sectors are driving the industrial sales so much higher this year? Jason Wells: Steve, thanks for the question. I think the throughput growth quarter-over-quarter, year-over-year really reflects the diversity of drivers that we have here in the Greater Houston area. We've already connected this year alone over 0.5 gig of data center activity. Much of that is on the transmission sort of industrial rate side. We continue to see very strong demand from energy, refining, processing and exports. And I think what we really saw as a differentiator this quarter was the increase in activity at the Port of Houston. It's the largest port by waterborne tonnage in the world. And we saw about an 18% increase quarter-over-quarter in exports. So it's really just a diversity of drivers. This isn't growth that we're anticipating coming down the line. This is growth across a number of different industries that we're experiencing today. Steven Fleishman: Okay. Great. That's helpful. And then just any update on prospects of data center activity in Indiana. And I don't know if you want to share any thoughts on how you're feeling about the regulatory environment in Indiana. I know you don't have any cases there right now, but just thoughts there. Jason Wells: Yes. We continue to actively work on data center opportunities in Indiana and feel well positioned to deliver on that. As we've talked about in the past, I think we're pretty uniquely positioned in the fact that we've got excess capacity today in the system that allows us to move quickly. It's an area that is very constructive, both from a cost of and availability of land, water, et cetera. And we've just brought online our simple cycle plant that was built to be easily converted to combined cycle that would allow us to efficiently increase the level of capacity available. So we continue to feel good about the prospects of bringing data center activity to Southwest Indiana. Stepping back on kind of a broader basis, we are all focused on affordability of our service up there. We, like many of the other Indiana utilities had a fairly significant step-up in rates last year as a result of a long-term trend of closing some very old generating facilities. As we project forward, though, we don't -- we see our rates growing in line with inflation over the remainder of this decade. We've taken some steps to help kind of mitigate the impact. We've canceled about $1 billion of renewable projects and we'll push out the retirement of our third and final coal facility a few more years. And so I think at the end of the day, we, like other utilities, are taking proactive steps to make sure that we moderate the pace of rate increases, but working constructively to bring economic development activity to the state. And I think that's very much aligned with the state leadership goals. Operator: Our next question is from Jeremy Tonet with JPMorgan Securities. Jeremy Tonet: Chris, thanks for the comments there on the asset sale. I was just wondering if you might be able to expand a little bit more. It sounds like a nice credit accretive properties to the final deal terms versus expectations. I'm just wondering if you could expand a bit more, I guess, on whether you see this being accretive to the earnings over time or any thoughts on that side? Christopher Foster: Sure. I think, Jeremy, a couple of ways to look at this. We do see it as directly beneficial to the financing plan, as I mentioned, and helpful from an earnings standpoint, too. A thing to keep in mind is, as we looked at the sale here of Ohio specifically from a -- as we reallocate spend, we're going to be in a situation where we're experiencing 25% to 30% less cash lag just on a historical basis. So I think that's certainly helpful as well. Going forward, we'll be putting those dollars to work, as Jason mentioned, certainly heavily in our Texas Gas and Electric business, including in a set of Texas gas projects that we're excited about really for years to come, where it really is a great business, as you know, coming out of the rate case last year there. So I think well positioned both financing-wise and from an earnings standpoint. Keep in mind, I alluded to this in my prepared remarks, but I would just emphasize here, too, as we're stepping into making sure that we were managing any otherwise earnings impact, we've already deployed about $500 million this year that we expressed in our plan. And keep in mind, as I mentioned earlier, this is about $1.6 billion of year-end '26 rate base. So you should assume that we're also going to accelerate another roughly $1 billion in 2026. That means that here, we're going to fully replace that rate base by the beginning of 2027. So overall, positions us well going forward. Jeremy Tonet: That's very helpful. And just one more, I guess, on the seller's note as you guys are receiving in the deal as far as how you think about how that helps facilitate the plan and what value, I guess, that brings to CenterPoint here being able to layer that in and how that allows you, I guess, to manage earnings going forward, but it sounds like the capital plan, as you said, really is a big offset there. Christopher Foster: Yes. Certainly, from a capital allocation plan, we've been prefunding thoughtfully. What I would say on the seller note is it's a pretty straightforward instrument there where we'll have that opportunity for the second year to 2027, having that 6.5% coupon associated with it on just over $1 billion. And so it allows us, again, to have good clarity. It also settles on a quarterly basis, I think, which is nice, too. So there's no real lag there. So straightforward instrument, one that it's a helpful component of the plan as well. Operator: Our last question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Jason, quickly, a couple of things to follow up on. First off, I know you alluded to it a few weeks ago here, but how do you think about the AMI and rollout and the time line on that front? I mean, certainly, it seems like this is a multiyear project here. But certainly, within the scope of the 5-year plan, how do you think about the cadence of that rolling in? When do we start to get some visibility around that and contributions? Jason Wells: Yes, Julien, thanks for the question. This next generation of AMI investments really will start to fold into the plan in '26. Maybe taking a step back for a second, as we released the new $65 billion 10-year CapEx plan we identified more than $10 billion of upside. I would consider one of these projects as one of the upside opportunities to that plan. I think coming back to the timing, the most important thing that we can do is run a pilot in '26 to prove the use case and benefits for our customers. And then I would really look at that once we have that pilot in hand, making a filing with the PUCT and really starting to kind of work this project in earnest beginning in 2027 and beyond. I think there are very real benefits for our customers. As we've talked about in the past, when we experienced Winter Storm Uri, because of the generation of meters we had at the time, we could not use those meters for load shed-related activities. Instead, we had to shed load at the circuit level. This next generation of smart meters would allow us to do that at the home and I think would allow us to be much more targeted and allow for even more rolling of power if an event like Winter Storm Uri was to occur again. So a number of benefits to our customers. We need to prove those out with a pilot in '26 and then look towards more fulsome deployment beginning in '27. Julien Dumoulin-Smith: Excellent. And then if I could pivot in a slightly different direction, obviously, kudos on the transaction here. The other item, if I were to think about like what's not in terms of included in the formal guidance on cash flows is mobile gen. I perceive that the economics and price points there continue to improve as evidenced maybe by some of the folks out there like Fermi talking about this. But how would you characterize today where you are around that and the opportunities that exist more in the longer term, obviously, is that it's less committed in terms of the existing units and your exposure to some of that improved market pricing? Jason Wells: Yes. There's really 2 aspects to that, Julien. There's first, we've got what we call medium-sized units, just a little bit larger than 5 megawatts a piece, 5 units, 5 megawatts a piece that currently we have the ability to market and are actively doing that. The market for those units remains very strong and would be a potential cash flow tailwind to the plan. On a larger basis, we have 15 units that are roughly kind of call them, 30 megawatts a piece that are now actively supporting the grid outside of San Antonio until either kind of late '26, early '27 at the latest, at which time then we'll be able to remarket those units. As you said, the market remains strong. If anything, it is improving modestly. That will become a cash flow tailwind when we can release those units from the support of the ERCOT grid in San Antonio and remarket those again probably likely around spring of '27. So we continue to work with brokers, third parties to keep a pulse on the market and think about how we can kind of derisk and take advantage of this growth. But obviously, more to come here as the quarters unfold and as we get closer to those -- the release of those units. Julien Dumoulin-Smith: Excellent. Sorry, nothing to, but one final detail here. HB4384, right? So that's -- your peers in the state, your peer gas utilities in the state have been talking a good bit about this. I know that you all in the interim have talked up even more gas investments in your plan a few weeks ago. Is the scope of the contribution from that legislation fully included in the plan? And to what extent is there anything else that we should be considering here given your expanded investment in gas in recent weeks? Jason Wells: Yes. We think that was a very constructive piece of legislation to help sort of reduce regulatory lag. What I would say is the benefit of that legislation is incorporated in the plan that we released with respect to the investments that we have identified as we continue to look at enhancing the plan, and we've alluded to the $10 billion plus outside, there is opportunity as we fold gas-related capital in that the plan could be enhanced further with the benefit of that legislation. So partially in the plan has the opportunity to be improved as we fold more capital in. Ben Vallejo: Thanks, Jason. Operator, this concludes our call. Thank you all for joining. Operator: This concludes CenterPoint Energy's Third Quarter 202 Earnings Conference Call. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Altisource Portfolio Solutions Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Michelle Esterman, Chief Financial Officer. Please go ahead. Michelle Esterman: Thank you, operator. We first want to remind you that the earnings release and quarterly slides are available on our website at www.altisource.com. These provide additional information investors may find useful. Our remarks today include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ. Please review the forward-looking statements sections in the company's earnings release and quarterly slides as well as the risk factors contained in our 2024 Form 10-K and our 2025 Form 10-Q filings. These describe some factors that may lead to different results. We undertake no obligation to update statements, financial scenarios and projections previously provided or provided herein as a result of the change in circumstances, new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. In our earnings release and quarterly slides, you will find additional disclosures regarding the non-GAAP measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix to the quarterly slides. Joining me for today's call is Bill Shepro, our Chairman and Chief Executive Officer. I'll now turn the call over to Bill. William Shepro: Thanks, Michelle, and good morning. I'll begin on Slide 4. We delivered solid third quarter performance. We grew service revenue and improved pre- and post-tax GAAP earnings, GAAP earnings per share and cash flow from operations compared to the third quarter of last year. This is largely from our focus on growing our businesses that have tailwinds, cost discipline and lower interest expense. Turning to Slide 5. Compared to the third quarter of last year, we grew total company service revenue by 4% to $39.7 million. Service revenue growth primarily reflects the ramp of the Renovation business and growth in the Lenders One, Foreclosure Trustee, Granite Construction Risk Management and Field Services businesses. The business segments generated $10.9 million of adjusted EBITDA, representing modest growth compared to the third quarter of 2024. The Corporate segment's adjusted EBITDA loss of $7.3 million was slightly higher than the third quarter of last year. Adjusted EBITDA was flat at $3.6 million, primarily from service revenue growth, offset by lower business segment margins from revenue mix. Moving to Slide 6. From a GAAP perspective, our loss before income taxes and noncontrolling interests improved by $6.8 million to a pre-tax loss of $1.7 million in the third quarter of 2025 compared to a pretax loss of $8.5 million in the same quarter of last year. This was primarily driven by lower interest expense from the new debt. For the quarter, we improved operating cash flow by $2.3 million compared to last year. We ended the quarter with $28.6 million in unrestricted cash. In addition to delivering solid financial performance, we are making progress diversifying our customer base and growing the businesses that we believe represent an outsized growth opportunity for Altisource. These businesses, which are set forth on Slides 7 and 8 include Renovation, Granite Construction Risk Management, Lenders One, Hubzu Marketplace, Foreclosure Trustee, Field Services and Title. On these slides, we provide a summary of the opportunities and the progress we are making with each. The success of these initiatives does not depend on an increase in foreclosure starts or sales nor on a growing residential loan origination market. We believe these initiatives represent a strong growth engine for the company. Moving to Slide 9 and our largely countercyclical Servicer and Real Estate segment. Third quarter 2025 service revenue of $31.2 million was 3% higher than the third quarter of '24, primarily from the ramp of the Renovation business and growth in the Foreclosure Trustee, Granite and Field Services businesses, partially offset by fewer home sales in the Marketplace business. Third quarter 2025 adjusted EBITDA of $10 million for the segment was $100,000 or 1% higher than the third quarter of '24. Adjusted EBITDA margins declined to 32.1% from 32.5% from revenue mix with higher growth in the lower-margin Renovation business. Slide 10 provides a summary of our Servicer and Real Estate sales wins and pipeline. For the third quarter, we won new business that we estimate will generate $3.2 million in annual service revenue on a stabilized basis over the next couple of years. We ended the quarter with a Servicer and Real Estate segment estimated total weighted average sales pipeline of $24.4 million of annual service revenue on a stabilized basis. The pipeline includes a few very significant foreclosure auction and REO asset management opportunities that we hope to close in the fourth quarter. Before turning to our Origination segment, I'd like to discuss the status of the Cooperative Brokerage Agreement between Altisource and Rithm, which I'll refer to as the CBA. Under the terms of the CBA, the agreement expired on August 31. At Rithm's discretion, Altisource has continued to manage the REO and receive new referrals with limited exceptions despite the expiration of this agreement. Moving to our Origination segment on Slide 11. Third quarter 2025 service revenue of $8.5 million was 9% higher than the third quarter of 2024. Adjusted EBITDA of $900,000 was flat compared to the same quarter last year, and adjusted EBITDA margins declined to 10.3% from 11.7%. The increase in service revenue primarily reflects growth in the Lenders One business, while the margin decline relates to product mix. Slide 12 provides a summary of our Origination segment sales wins and pipeline. Our focus on helping Lenders One members save money and better compete continues to drive substantial interest in our solutions. On an annualized stabilized basis, we won an estimated $11.2 million in new sales in the third quarter, primarily in our Lenders One business. On a fully stabilized basis, this new business would increase the Origination segment's annualized third quarter service revenue by 33%. We have already onboarded most of these wins and anticipate beginning to benefit from them in the fourth quarter. Our estimated weighted average sales pipeline at the end of the quarter was $13.4 million. We anticipate that our sales pipeline and recent sales wins will contribute to strong growth in our Origination segment. Turning to our Corporate segment on Slide 13. Third quarter 2025 Corporate adjusted EBITDA loss of $7.3 million was $100,000 higher than the third quarter of 2024. We believe that we can maintain relatively stable Corporate segment costs as revenue grows. Moving to Slide 14 and the business environment. Starting with the residential mortgage default market, 90-plus day mortgage delinquency rates remain near historic lows at 1.3% in August. Despite the low delinquency rates, foreclosure starts and sales are increasing. Foreclosure starts increased by 19% and foreclosure sales increased by 10% for the 8 months ended August 2025 compared to the same period in 2024. We believe the increase reflects rising FHA delinquency rates and a weakening real estate market. Borrowers may soon face additional pressure as the April FHA Mortgagee Letter extends the time between loan modifications from every 18 months to every 24 months, beginning as early as October 1. Turning to the real estate market. We believe the market is weakening as demonstrated by higher for-sale inventory, extended sales time lines and rising sale cancellation rates. As a result, we believe a lower percentage of homes are selling to third parties at the foreclosure auctions, driving higher REO inventory. This is supported by our own experience. Altisource's third quarter REO asset management referrals from Onity and Rithm were the highest since the second quarter of 2024. For the origination market, mortgage origination unit volume increased by 17% for the 9 months ended September 30, 2025, compared to the same period in '24, with purchase origination volume declining by 4% and refinance volume increasing by 103%. For the full year, the MBA's October 2025 forecast projects that there will be 5.4 million loans originated in 2025, an 18% increase compared to '24. The MBA's full year projections reflect an 87% increase in refinance activity and a 2% decline in purchase activity. Turning to Slide 15. We are pleased with our third quarter results. More importantly, we are winning new business and have a strong sales pipeline while maintaining cost discipline and significantly reducing corporate interest expense. To support longer-term growth, we are focusing our efforts on accelerating the growth of those businesses that we believe have tailwinds in what remains a close to historically low delinquency environment. Should loan delinquencies, foreclosure starts and foreclosure sales increase, we believe we are well positioned to also benefit from stronger revenue and adjusted EBITDA growth in our largest and most profitable countercyclical businesses. I'll now open up the call for questions. Operator? Operator: [Operator Instructions] And I would now like to turn the call to Michelle for additional questions. Michelle Esterman: So we received an e-mail question. I'll read that. On August 18, the company announced some customer wins for the Equator platform. Are these customer wins expected to translate to more inventory on Hubzu in the future? William Shepro: Yes. Thanks, Michelle. So in August, we announced we won four new customers for the Equator platform. Three of those customers are now live and loading properties and one is in the process of implementing the Equator system. As these customers load more assets, we should begin to generate revenue. And then historically, we've had good success in cross-selling Equator customers with the Hubzu platform and other services, which we would hope to continue to do with some of these newer customers. Operator, is there any additional questions? Operator: [Operator Instructions] And I am showing no further questions. I would now like to hand the call back to Bill for closing remarks. William Shepro: Great. Thank you, operator. We're pleased with our third quarter performance and believe we are set up well for continued growth. Thanks for joining us today. Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to Lazard's Third Quarter and First 9 Months 2025 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations and Treasury. Please go ahead. Alexandra Deignan: Good morning, and welcome to Lazard's earnings call for the third quarter and first 9 months of 2025. I'm Alexandra Deignan, Head of Investor Relations and Treasury. In addition to today's audio comments, we have posted our earnings release on our website. A replay of this call will also be available on our website later today. Before we begin, let me remind you that we may make forward-looking statements about our business and performance. There are important factors that could cause our actual results, level of activity, performance, achievements or other events to differ materially from those expressed or implied by the forward-looking statements, including, but not limited to, those factors discussed in the company's SEC filings, which you can access on our website. Lazard assumes no responsibility for the accuracy or completeness of these forward-looking statements and assumes no duty to update them. Please note that unless we state otherwise, all financial measures we discuss today are non-GAAP adjusted financial measures. We believe that these non-GAAP financial measures are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in our earnings release and investor presentation. Hosting our call today are Peter Orxzag, Lazard's Chief Executive Officer and Chairman; and Mary Ann Betsch, Lazard's Chief Financial Officer. I'll now turn the call over to Peter. Peter Orszag: Thank you, Ale, and thank you to everyone for joining today's call. We are pleased to report another quarter of strong results, reflecting an ongoing focus on our clients and continued momentum behind our long-term growth strategy. For the first 9 months of the year, total firm-wide revenue was $2.1 billion, including record financial advisory revenue of $1.3 billion. Financial Advisory was active during the third quarter with strength in M&A across health care, industrials and consumer and retail in restructuring and liability management and in primary and secondary fundraising. Our recruiting efforts have resulted in 20 new MDs joining Lazard so far this year with world-class talent attracted to our premier brand and our vision for the future. Overall, financial advisory performance has demonstrated how our commercial and collegial approach is producing results by capturing new business opportunities. Looking ahead, we see an increasingly constructive environment for advisory activity, which I will discuss later. In Asset Management, it is now clear that 2025 is an inflection point for the business. For the first 9 months of the year, revenue totaled $827 million. And in the third quarter, revenue was up 8% year-over-year. Improved investment performance, our increased focus on key products and strategies and more favorable market conditions have resulted in record gross inflows for the third quarter and for the first 9 months of the year. Year-to-date, we have achieved net positive flows of $1.6 billion with total AUM up 17%. We look forward to welcoming Chris Hogbin as our CEO of Lazard Asset Management in December, helping to further accelerate our progress and evolve this business for future growth. Let me now turn the call over to Mary Ann to provide further details on the quarter's results, and then I'll share more on our outlook and the successful execution of our long-term growth strategy, Lazard 2030. Mary Betsch: Thank you, Peter. Today, we've reported record third quarter firm-wide revenue of $725 million, up 12% from the same time last year, driven by activity across both our businesses. Financial Advisory revenue totaled $422 million, up 14% from 1 year ago. Lazard participated in several marquee transactions during the third quarter, reflecting collaboration across banking teams and the strength of our global franchise. Completed transactions include Mallinckrodt Pharmaceuticals $6.7 billion combination with Endo Pharmaceuticals, Ferrero's $3.1 billion acquisition of W.K. Kellogg, Altice France's landmark agreement with creditors and Sixth Street on its investment together with a consortium led by William Chisholm to acquire a majority controlling interest in the Boston Celtics in a deal valued at $6.1 billion. Recently announced transactions include Keurig Dr. Pepper's $23 billion acquisition of JDE Peet's and planned subsequent separation into 2 independent companies and Caithness Energy on multiple transactions, including the $3.8 billion sale of assets to Talen Energy. In addition, corporate restructuring assignments include company roles with Anthology, CityFibre and Saks Global. We also engaged in several private equity assignments, including advising Norvestor on a continuation fund, advising on the closing of Nexus Capital Management Fund IV and Pacific Avenues Fund II and advising on capital structure and capital raises for Morrisons and Tennant Holdings. Turning to Asset Management. For the third quarter, revenue was $294 million, up 8% compared to the third quarter last year and up 10% on a sequential basis. Management fees for the third quarter increased 6% compared to the third quarter last year and increased 8% sequentially. Incentive fees were $9 million in the third quarter compared to $3 million in the third quarter last year. Average AUM for the third quarter of $257 billion was 5% higher than the third quarter of 2024 and up 8% on a sequential basis. As of September 30, we reported AUM of $265 billion, 7% higher than both September 2024 and June 2025. During the quarter, we had market appreciation of $12 billion and net inflows of $4.6 billion, partially offset by foreign exchange depreciation of $400 million. We see ongoing client engagement and demand across our investment platforms, particularly with our quantitative and emerging market strategies. Illustrative examples of this include $3 billion from a Korean institution into Global Equity Advantage, $1 billion from a U.S. public fund into international Equity Advantage and $1 billion from a U.S. financial intermediary client into emerging markets equity. In addition, we received over $1 billion from a Netherlands-based client for a custom U.S. equity mandate and approximately $900 million from a U.S. institutional investor into international quality growth. Now turning to expenses. For the third quarter of 2025, our compensation expense was $475 million, resulting in a ratio of 65.5% compared to 66% for the third quarter 1 year ago. Our noncompensation expense for the third quarter was $149 million, equating to a ratio of 20.5% compared to 21.4% for the third quarter last year. We are maintaining a disciplined approach to our expenses, while investing to support long-term growth. This includes substantially expanding our team of financial advisory managing directors and opening new offices in the Middle East and Northern Europe this year. It also includes the build-out of our ETF business in asset management with 6 strategies launched in 2025 and more to come. Shifting to taxes. Our effective tax rate for the third quarter was 21.4% compared to 32.5% for the third quarter of 2024. As an update to our tax guidance, we currently expect our full year 2025 effective tax rate to be around 20%. Turning to capital allocation. In the third quarter of 2025, we returned $60 million to shareholders, including a quarterly dividend of $47 million. In addition, yesterday, we declared a quarterly dividend of $0.50 per share. Now I'll turn the call back to Peter. Peter Orszag: Thank you, Mary Ann. Firm-wide client engagement remains strong. While the U.S. government shutdown may temporarily affect the timing of deal approvals among other potential effects, we see an increasingly improving environment for financial advisory activity. In any moment of turbulence, there is also a substantial opportunity for our clients as they navigate shifting geopolitical and macroeconomic landscapes as well as advances in AI. Demand for M&A continues to increase, while restructuring and liability management activity also remains strong as businesses reposition to address evolving market conditions. Our expanded connectivity to private capital positions us well as private equity comes back on to the playing field and demand remains robust for secondary and continuation funds. This is occurring across all our major geographies, including the United States and Europe as well as now the Middle East, further underscoring the diversification of our business. We are also making steady progress toward our long-term growth goals. We remain on track this year to achieve or exceed our 2030 objective of expanding our team of financial advisory MDs by 10 to 15 net per year with significant hiring already this year. On productivity, we achieved average revenue per MD of $8.6 million during 2024, 1 year ahead of schedule. And since then, average revenue per MD has increased to almost $9 million. We remain confident in our ability to continue raising productivity, including beyond our 2028 goal of average revenue per MD of $10 million through our focus on mandate selection, our disciplined fee structure, the quality of our managing directors and our ongoing emphasis on a commercial and collegial culture. Turning to asset management. We have made significant strides in sharpening our focus on the areas of the market, where active management is most likely to add value to clients, leading to improved flows this year. Active management plays a particularly valuable role for clients, where information is imperfect and where technology can be applied to generate excess returns. This includes quantitatively driven strategies, emerging markets and customized solutions that are not readily available in the broader market. These strategies have delivered significant outperformance this year and represent especially promising future growth opportunities. At the same time, and as we have emphasized before, our sub-advised funds associated with U.S. multi-manager mandates have different dynamics from the rest of our asset management business. These funds have disproportionately contributed to outflows over the past few years, which we have more than offset in 2025 due to our focus on the areas of the business that represent growth opportunities. With 97% of our asset management revenue already outside of this sub-advised category, our prospects going forward are strong as our efforts to strategically reposition the business take hold. Looking forward, we believe that we can also expand our range of offerings to reach new clients, including through active ETFs. In the third quarter, we launched 2 new active ETFs, the Lazard U.S. Systematic Small Cap and listed infrastructure ETFs, bringing our total to 6 in the United States. Our ETF platform is off to a solid start as we bring our leading strategies to more investors with further global expansion in the coming months. In addition, we are excited to welcome Chris Hogbin as CEO of Lazard Asset Management later this year. His collaborative leadership style and experience in building and growing a global asset management business will help us to meet clients' evolving needs and accelerate progress toward our long-term strategy. Across Lazard, we are focused on key differentiators that support our ability to deliver for our clients and shareholders. Lazard has long been recognized for our unique combination of insight into business and geopolitical trends. Building on the success of our world-class geopolitical advisory group, we are honored that Erik Kurilla, retired Four-star U.S. Army General and former Commander of U.S. Central Command, has joined Lazard as a senior adviser. His expertise is particularly valuable given client interest and ongoing developments in the Middle East and our expansion in that area of the world. Clients turn to Lazard for the most sophisticated advice and investment solutions, and we succeed with the unrivaled collective intellectual capital of our firm. With AI, we have the capability to meaningfully scale this capital, while reinforcing the importance of client relationships. Helping to further advance our efforts, we are pleased that Dmitry Shevelenko, Chief Business Officer of Perplexity, has joined Lazard's Board of Directors. She is already contributing to our efforts to become the leading AI-enabled independent financial services firm. Finally, as I've recently completed 2 years as CEO, I wanted to take a moment to reflect on our progress to date and the road ahead. In pursuit of our long-term growth strategy, we set forth several objectives in Financial Advisory to boost revenue by increasing average productivity per MD and by expanding our team of managing directors and in asset management to achieve a more balanced flow picture this year by strengthening our research platform and by focusing our distribution efforts on key products and strategies. We are successfully executing against our plan in achieving these objectives as demonstrated again this quarter. We continue to evaluate our overall success across 3 dimensions: relevance, revenue and returns. Our goals remain consistent to double firm-wide revenue from 2023 to 2030 and deliver an average annual shareholder return of at least 10% to 15% per year over that same period. While early results are quite promising, what I am most proud of is the degree of cultural change across the firm. Building on our long-standing commitment to excellence, we have meaningfully raised our ambitions and our collaborative approach. We have also transformed our Managing Director group in Financial Advisory through hiring and promotions and with heightened expectations for commercial outcomes and collegial behavior. At Lazard, we are playing to win and playing to win together. We are only at the start of realizing the sustained advantage that our reenergized culture creates, and we are confident that our success in creating very strong organizational health will increasingly pay off in results as we move forward. This early success and momentum are the result of our colleagues' dedication to our clients and commitment to realizing this vision for our future. And to them, I extend my appreciation and respect. Now we'll open the call to questions. Operator: [Operator Instructions] We'll take our first question from Alex Bond with KBW. Alexander Bond: Peter, maybe just to start on the hiring environment. It seems like the backdrop and your competition for senior talent appears to be relatively high at the moment. And you've noted that you expect to be at or near the high end of your targeted net MD addition range for the year. Can you just walk us through how you're thinking about balancing bringing on strong talent, who can add to the revenue base while also considering how that impacts the ultimate level of comp leverage moving forward? And then also curious how talent retention fits into this narrative, just given your peers also remain active on the hiring front as well. Peter Orszag: Sure. So we've had a lot of success bringing people on to the platform. I think there's a sense of a reenergized Lazard and a lot of excitement about our momentum in key areas like industrials, health care, the Nordics, Middle East, FIG, private equity coverage among many others. And the quality of the people that we're attracting, if you look not only at their personal trajectory, but also where they're coming from is very high. So we're excited about that. With regard to the opposite direction, we've had very, very few regrettable departures and I'd say the state of our Managing Director pool is very strong. We just completed an internal survey as 1 example, and the MD engagement scores on the financial advisory side are extremely high, which, again, I think speaks to the organizational health point that I made. With regard to comp leverage, the reason that we're out hiring these people is because we believe that they'll not only lead to growth over time, but also to helping to continue to raise our productivity per MD. And that then speaks to the comp leverage point because I want to reemphasize something I've made -- point I've made many times before. A substantial amount of comp leverage comes from raising productivity per MD. And the reason for that, in turn, is that the non-MD expense associated with a more productive partner is not that different from the non-MD expense compensation associated with a less productive MD partner. So as you raise productivity per MD, you get a substantial amount of operating leverage because the non-MD compensation declines as a share of revenue and you get the operating leverage there. So we're bringing on to the platform people that we believe are going to be super productive moving forward. We've added a significant amount of diligence to our hiring process, that increases our confidence about that. And if you look at the early results of some of the people that we've been hiring over the past couple of years, that seems to be paying off. So comp leverage over time because the folks we're bringing on are going to help contribute to raising productivity. That is one of the factors that gives me confidence to say that as we move past 2028, we're going to continue raising our productivity per MD aspirations. And I think, for example, something in the range of $12.5 million by 2030 is imminently achievable. Alexander Bond: Great. That's helpful. And maybe just switching gears for my next question, but maybe if you can just speak to the recent success you've had driving that inflows in the Asset Management unit. And to the extent these recent inflows are being driven by new client wins. I mean it sounds like the geographic distribution here, there's a pretty good mix. And then also curious as to your confidence level in achieving net neutral flows for the year now that we're a decent way into the fourth quarter. Peter Orszag: Sure. So on the first part of the question, the flows are -- again, it's a bit of -- we've got to be clear about it on a gross basis, significant inflows into the part that I'm going to talk about and then ongoing outflows from the sub-advised accounts that I mentioned in the script, with regard to where the inflows are coming from, they are disproportionately in areas of the business that we're very excited about the kind of go forward on, our quantitative and systematic strategies, emerging market equities, customized solutions, global listed infrastructure and other examples like that. And also among European investors, our sustainable products are areas of interest. With regard to the geographic mix there is also increasingly play towards diversification outside of the United States. And so the vast majority, 80% to 95% of our current one, but not funded mandates are for products and strategies outside the U.S. and among clients that are also geographically outside of the United States. So to your point, yes, the global footprint that we have, both on the product side and on the distribution side is beneficial. With regard to the year as a whole, I had put forward the flat flows or net zero flows as a stretch goal. I think many of the people on this call may have been skeptical that, that was even remotely possible. And again, therefore, I think the year-to-date results are particularly striking, given that there was -- there had been so much skepticism. As we approach the end of the year, obviously, we are increasingly looking to actually hit that bogey. We'll have to see. But I think, again, I'll just go back to year-to-date, things look very good, and we continue to win new mandates, including 2 that I got notified about this morning. So we will see that everything looks very positive in terms of the overall flow picture right now, especially in those products and strategies that I was highlighting. And that is the second point I want to make, which is what's happening here is that even while the net number is positive, we're also seeing a significant transformation of the business towards those areas that we think are the most promising on a sustainable basis over time. Highlight again quant areas of equities, where there are more information in perfections and therefore active management is more likely to have some sort of edge emerging market equities is a great example of that. And then customized solutions, where it's just harder to put together the portfolio that clients are looking for on their own. So overall net positive, but also we're losing -- or we're seeing outflows in the large sub-advised accounts, and we're seeing disproportionate inflows into those new areas of the business. So under the surface, there's also a shift towards those products and strategies where we have a high degree of confidence that the theory of the case for active management makes a lot of sense. Operator: Our next question will come from Jim Mitchell with Seaport Global Securities. James Mitchell: Maybe just a follow-up on some of those -- that discussion there first on the Asset Management business. You talked about record gross inflows. Are you seeing any change in the trends in gross outflows, I guess, not just within the sub-advisory group, but just more broadly because I think if you look at the trends that you guys disclosed, your gross outflows have still been relatively high. You're seeing any improvement there? Peter Orszag: Yes. Gross outflows are lower than they were last year. And again, they're disproportionately accounted for by the sub-advised accounts. So if you were to do a net flow picture outside of subadvised accounts, the trajectory looks even more promising, and I think that may be an important way to consider things given that 97% of our revenue is outside of that category. So that might be a paradigm that's worth continuing to highlight on a going-forward basis. James Mitchell: Okay. And then -- and just maybe when you think about Asset Management and the turnaround there, you have a lot of momentum, obviously, assuming the markets hold up, especially heading into next year, it seems like you have more operating leverage and comp leverage in that business. So does that lower the bar on the Advisory side to carry the weight to get to that 60%? So just how are you thinking more positively about getting to that 60% in the intermediate term? Just any thoughts on getting to that goal? Peter Orszag: I am quite confident that we will see operating leverage kick in further in 2026 and so that we'll make progress on reducing the comp ratio. I don't want to attach a particular timetable because that's obviously dependent on a variety of factors. So let me just unpack some of the things that will lead to operating leverage over time. 1 is that ongoing improvement in productivity per MD that I mentioned. Part of that also is the mechanic -- almost mechanical or arithmetic kind of effects of what's been happening with our big step-up in hiring because when we hire people, there's a temporary ramp that kind of artificially depresses productivity per MD or raises the comp ratio either way you want to look at it because they're getting used to the platform and what have you, as they mature that affect flip sign or kind of attenuates. And so there's almost a mechanical uplift in productivity that we expect to be occurring as we move through time, even at a higher hiring rate because these are all sort of transition effects as we've moved to a much more aggressive hiring stance over the past couple of years. On the Asset side of the business, there will be operating leverage that comes from these inflows, but also from a lot of care and attention that we're paying to what I would call scale for strategy. So if you wanted to highlight the big -- obviously, there are many things that go into operating leverage, but to simplify it on the Advisory side of the business, a lot of operating leverage comes from revenue per MD. And on the Asset side of the business, a lot of operating leverage comes from scale per strategy, not overall scale, but scale for strategy. So, those are the types of metrics that we're looking at to produce operating leverage. Obviously, lots of other things go into it in terms of the ability for us to find further efficiencies in many of our processes because of artificial intelligence and other factors, but those are 2 big drivers on each side of the business. Operator: Our next question will come from Brennan Hawken with BMO Capital Markets. Brennan Hawken: First, Peter, I'll definitely caught to it. I was one of the doubters in you guys getting and turning around the flows as quickly as you did. So no question there, just tip of the cap. Peter Orszag: Thank you for that, much appreciated. Brennan Hawken: You're welcome. I'm impressed with how well it's gone. And you still have leadership inbound. So actually, I'll turn it into a question. I know we've got new leadership coming in December. When do you think it's realistic for the analyst and investor community to hear Chris' plans for the business? I know he's not started yet, but I also, I'm sure about executive of that caliber I doubt he didn't start hatching plans, when going through the whole hiring process and interviewing process. So how long do you think it will be before we'll get an idea or at least a framework of what he's thinking? Peter Orszag: I think it will be relatively fast. We do want him to find his way around the hallways and what have you. But to your point, he's a very experienced leader in the space, so comes into this with that advantage. And I think has a very good sense of our business and the opportunities for it. So to be specific, let's say, January, maybe or at least January or February, when we want to get past our fourth quarter results, but sometime in that time frame, it's not going to be 6 months. Brennan Hawken: Right. Okay. We'll call it at some point in the first quarter. Peter Orszag: Okay, that's great. We're happy to set up the appropriate kinds of discussions. Brennan Hawken: Perfect. Okay. And then thinking about Advisory, right? So you've done a lot of changes. You've spoken to bringing up the productivity number and the productivity numbers that improved really quite well under the new strategic direction. And so all that's really encouraging. I'm guessing this might have changed how we think about the mix within Advisory. So can you give us maybe like a high-level sense of the major buckets within Advisory. And if you want to talk about it on like an LTM basis or like how it's been trending recently versus maybe historical levels, like how does it break down in between like M&A, PCA, like there is a Private Capital Advisory business, your Restructuring business, the major buckets that you would break it into. How does that break down versus the history? And has that changed a lot? Peter Orszag: Yes. And we -- I'd note a couple differences relative to history, while we're doing this. 1 is M&A versus non-M&A. Over the past year or so, it's been kind of 60-40 M&A, non-M&A, in this quarter. And I think this is a precursor of things to come. The mix is actually closer to 50-50, not quite M&A, non-M&A, as we've seen increasing growth in some of the other Advisory Services. And the second piece of this is the mix between public company and private capital, where we are also trending towards a much more balanced mix than was the case historically for Lazard. This quarter was a little bit off from that. We had a little bit more tilt towards public companies, but that's just because quarters bounce around a bit. So bottom line is, I think you should expect a significant amount of growth, not only in the M&A part of our business, but as we built out our Fundraising business, Restructuring and Liability management, those are trending more towards approaching half of the business. And I think that's a reasonable medium-term objective, while maintaining our strength in the core M&A product across the globe. Operator: Our next question will come from Brendan O'Brien with Wolfe Research. Brendan O'Brien: I guess just following up on one of your remarks you just made, Peter, on the Restructuring business. Concerns on the credit outlook you've been building in recent weeks following comments made by one of the big banks on 2 of the recent defaults, however at the same time, the Fed as well as other central banks have begun to lower rates, which should help to alleviate the stresses put on corporate balance sheets. So it would be great to get your perspective around whether your Restructuring business is seeing any signs of building stress at this juncture? And how you're thinking about the outlook for the business given these puts and takes? Peter Orszag: Sure. Let me make a few comments on this, just unpack it a little bit. First, we do not view the recent examples of bankruptcies that have gotten a lot of press attention as a canary in the coal mine for broader problems in Private Credit. We are advising on one of those situations now, and so I'll be careful about going into too much detail, but I think that's the broad conclusion. There are -- it's clear Private credit has grown very rapidly. It would make a lot of sense and one should expect that at some point, there will be wobbles in that market even as it remains a more permanent part of the financing environment. I just don't think that these recent cases are a symbol or a signal of that wobble at this point. So that's the first point. Second point is, there has been a quite notable change that should affect the timing of Restructuring and Liability Management or the correlation of the covariance between Restructuring and Liability Management and other Advisory Services, especially M&A. Historically, as you know, it was pretty much always the case that when Restructuring and Liability Management was booming, M&A was weaker and vice versa. What changed over the past decade or even 2 decades is a massive increase in the dispersion across firms and their performance. So if you as one example, if you take return on invested capital as a metric of firm performance and look at the 90th or 95th percentile of firms versus the 50 or 15th or the 25th, you just see this explosion that looks like when those income inequality charts, a lot of growth at the top kind of stagnant in the middle and then declines at the bottom. And that wider dispersion I think, needs to feed into thinking about the cycle because as corporate performance becomes more varied you can have the coexistence of a very strong incentive for M&A, but also a lot of Restructuring and Liability Management activity occurring. And the reason for that is pretty simple, which is, as actually research out of Stanford shows, one of the motivations for M&A is that the top-performing firms believe they can buy the lower-performing firms and improve their internal operations and productivity through better management, basically. And as the degree of dispersion goes up, that incentive gets stronger. So that's one of the vectors for M&A activity. But at the same time, as you have more firms down at the bottom that are struggling, you've got ongoing Restructuring and Liability Management. So we just think that this is a -- there's a change in the environment, where both of these things could increasingly occur or could coexist to a degree that may not have been the case historically. Finally, I'd say one area, where I probably vary from the conventional wisdom somewhat is I still think the markets are being -- just coming back to your point about rates. I think the markets are being a bit too optimistic about the probability of more than one additional rate cut from the Federal Reserve over the next couple of months, the next few months. We can talk about why that is, in my opinion. But the consequence, if I were right, of rates remaining a bit higher, at least at the short end of the curve would be probably more impactful or have more impact on the Restructuring and Liability Management world than on M&A. Rates are one input into M&A, but I think a kind of secondary tertiary one, they have a bit more effect on the Restructuring and Liability Management side of the equation. Brendan O'Brien: That's a really helpful response. Peter. I mean for my follow-up, I just want to touch on Europe a bit. The expectation last quarter was that the pickup in M&A activity would be largely driven by the U.S., which the data suggests has largely played out that way. However, at the same time, it does seem like trends in Europe has been quite strong as well. So I was just hoping you could unpack what you're seeing in Europe relative to the U.S., if there's any notable divergences, and how you think those 2 fee pools will track relative to each other over the near to intermediate term? Peter Orszag: Yes. Look, for the quarter, we saw a bit more of a tilt towards Europe in the revenue mix this quarter. These will bounce around a bit for us. One of the benefits of having a really strong franchise, both in the United States and Europe is that we can kind of surf to, wherever the activity is the hottest, if you will. With regard to Europe specifically, I think the most important thing to realize is people often conflate the macro with -- I don't want to call it the micro, but I'll call it the micro. There are lots of phenomenal European companies. And even against the backdrop of a bit more challenging macroeconomic situation, which in turn reflects political polarization in a lot of countries that we could talk about, there's a lot of interest among European companies to do something and a lot of strength in the corporate sector. And as an example, there's been a lot of attention paid to the political turmoil in France. Most CAP 40 companies only have a very small share of their activity inside of France. And so the question is, how can you still have such ongoing activity out of the French market even while there's the backdrop of political drama, and I think the short answer is that many French companies are global, and they are affected by what's happening in France, but it's not the only thing affecting their outlook. Final thing I'll say is for the M&A cycle as a whole, the next stage of this developing is the return of private equity in M&A, in particular. And so that applies to Europe also. I think the question is at what point and we think this will increasingly play out in 2026, will demand from LPs for liquidity, not be fully satisfied only by secondary/continuation funds, but require M&A by the Private Equity houses. Our sense is that, that's going to be increasingly relevant in 2026. And our expanded connectivity to those sources of Private Capital will -- the investments that we have been making in our coverage efforts will increasingly pay off therefore in 2026. Operator: Our next question will come from Ryan Kenny with Morgan Stanley. Ryan Kenny: Want to follow-up on the earlier comment that the U.S. government shutdown could impact some deals. Could you impact which pieces of Advisory are impacted? And how quickly after the shutdown is lifted, can these deals move forward? Peter Orszag: Sure. Look, many deals require either some combination of SEC approval or Department of Justice and FTC approval. So anything that requires those approvals or other agencies that don't fall into the kind of essential part of the government component -- could be affected by timing. We think that any backlog that builds up from that will be cleared relatively quickly, matters of weeks, not months after the government fully reopened. And I would also note that if the government shutdown were to continue for a significant period of time, the administration always has the ability to alter its definition of what's essential and what's not. And I would imagine that if something were to start to affect the macro economy in a quite material way, for example, not clearing important transactions, they may want to reexplore that boundary. So in past government shutdowns, we haven't really seen a very substantial effect because of the kind of catch-up being quite quick, and that's what we would anticipate this time too. Ryan Kenny: And then separately on non-comp, different topic. Any color how we should think about the trajectory here? You mentioned your ambitions to be a leader in AI. Is there an upfront investments been needed to get there? Peter Orszag: The upfront investments in AI are, I think, modest relative to the scale of other expenditures and the returns are so high that I don't think you should be focused on the upfront investments as a material mover of the non-comp component, but more broadly. Mary Ann, if you want to come in on non-comp trajectories. Mary Betsch: Sure. So. I would just maintain the guidance from last quarter, which is we're still expecting a high single-digit increase in dollars year-over-year, high single-digit percentage year-over-year, but in the dollars, not the ratio. And that's driven by the same factors we've been talking about. So continued investments in technology, ongoing increases in business development, some FX headwinds and then asset servicing fees, which are higher as our AUM has grown. So those are the drivers of the increase there. Operator: Our next question will come from James Yaro with Goldman Sachs. James Yaro: Maybe just could you help us think a little bit in more detail on the secondary's outlook from here? We've seen a very strong CAGR in this business over the past 3 to 4 years. Is anything slowing down there perhaps this year and more recently? Peter Orszag: No. I mean that's a pretty simple answer. No. The trends there are -- the tailwinds are very strong, and we see this continuing. I think some people have incorrectly assumed that as M&A and the IPO market reopens that the secondaries business will be negatively affected. We don't really see it that way. We see the kind of artificial priming of the pump from other exit strategies being kind of temporarily harder to do -- as only doing that priming the pump for this asset class, if you will. And I think we expect and most market participants expect that this will be a permanent part of the environment going forward. And when you look at the penetration rate of this products or this vector, among private equity funds is still relatively modest. So there's tons of room to grow, and that's what we're experiencing in real time in terms of client engagement. So we don't see any deceleration at least in our business and don't expect it, if anything, the opposite. James Yaro: Okay. Great. You were very clear about where you expect inflows and outflows to come from in Asset Management. Perhaps you could just comment on the fee rates on these outflows and inflows. And I guess, just more broadly, how we should think about your fee rate in Asset Management trending going forward? Peter Orszag: Well, as you will have seen, there was a small increase in the average fee rate in the quarter. I think that's because -- well, mechanically, because the things that are flowing in have higher fees than the things that are flowing out. And going forward, we don't anticipate any material change one way or another in the average fee rate. Obviously, the specifics will depend a little bit on exactly, where the inflows come from among those products and strategies that I was describing as being where we're experiencing the most growth. But I think a reasonable expectation is roughly flat, at least for the near term. Operator: This concludes the Q&A portion of today's call, and it also concludes Lazard's third quarter and first 9 months 2025 earnings conference call. You may now disconnect.
Operator: Good day, and welcome to West's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to John Sweeney, Vice President of Investor Relations. Please go ahead. John Sweeney: Good morning, and welcome to West's Third Quarter 2025 Earnings Conference Call, which has been webcast live. With me today on the call are West's CEO, Eric Green; and CFO, Bob McMahon. Earlier today, we issued our third quarter financial results. A copy of the press release, along with today's slide presentation containing to supplement information for your reference has been posted in the Investors section of the company's website located at investor.westpharma.com. Later today, a replay of the webcast will also be available in the Investors section of our website. On the call, we will review our financial results and provide an update to our business and outlook for FY '25. Statements made by management on the call and the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results as well as those expressed or implied in any forward-looking statements made here. Please refer to today's press release, as well as other disclosures made by the company regarding the risks to which it is subject, including our 10-K and 10-Q. During the call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, free cash flow and adjusted diluted EPS. Limitations and reconciliations of non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release. I'll now turn the call over to our CEO, Eric Green. Eric? Eric Green: Thank you, John, and good morning, everyone. Thanks for joining us today. I'm pleased to report we delivered solid third quarter results with revenues, margins and adjusted EPS coming in above our expectations. Revenues of $805 million were up 5% on an organic basis. The adjusted operating margins were 21.1%, and adjusted EPS of $1.96 was up 6% compared to prior year. As you will hear today, our business momentum is steadily improving, and we expect this trend to continue. As a result of this strong performance, we are increasing our guidance for 2025. I want to especially thank our West team members for their efforts and continued focus in achieving these results. Before getting into the details of our Q3 performance, I want to highlight two notable appointments, which further strengthened our executive leadership team. In August, our new CFO, Bob McMahon joined West. Many of you know Bob, and he has done an exceptional job transitioning into his role, already visiting several of our websites and meeting with many of you. I'm excited to have Bob on board and partner together to lead the next phase of West grow. I'm also extremely pleased to welcome [ Davis matter ], our new Chief Technology Officer, who also joined West in August and is tasked with accelerating our innovation and new product introductions. Our team looks forward to benefiting from his industry experience and expertise. Now back to the Q3 financial results. Let's begin with a review of the Proprietary Products segment. Revenues of $648 million were up 5.1% on an organic basis. These results were driven by HVP components, our largest and most profitable business. We have a strong market position because of our trusted reputation for high-quality scale and reliability. This business has continued to strengthen each quarter, and revenues increased 13% organically in Q3. Several factors drove the strength of HVP components. First, elastomers for GLP-1 has strong growth and now account for 9% of total company sales. We benefit from our long-standing relationships as we partner with our customers in this market, supporting them as they expand their GLP-1 franchises. We're also collaborating closely with customers who are launching a pipeline of new GLP-1 molecules and generics. And we expect this market to continue to evolve as there are a number of new early-stage trials seeking to expand the range of indications and treatments using GLP-1s. Second, in biologics. We're encouraged for their underlying market demand as ordering trends are returning to normal. Less participation rate for biologics and biosimilars is trending above our historical levels year-to-date of greater than 90%. The third driver is HVP upgrades, including Annex 1. Given our strong market position with our elastomers portfolio, we are well positioned to benefit from what we believe is a long-term opportunity. We are tracking ahead of our expectations, and we currently have 375 ongoing Annex 1 upgrade projects. With the robust pipeline of new projects and our ability to partner with customers to convert current projects into commercial production, we anticipate Annex 1 and related HVP upgrades to deliver 200 basis points of growth this year, up from our previous expectation of 150 basis points. We expect Annex 1 to drive continuing demand for higher-quality products as European regulators now require pharmaceutical companies to demonstrate their culture of continuous manufacturing improvement. West is well positioned to support our customers with HVP components and technical documentation to meet those requirements. We continue to work through our constraint at our HVP manufacturing site in Germany. During the quarter, we made good progress hiring and training employees in installing new equipment to expand capacity. These efforts, in addition to product tech transfers, will allow us to further leverage our investments made in our global HVP components infrastructure and balance production across the network, enabling enough to drive future growth. Moving to the HVP Delivery Device business. Revenues declined compared to prior year as expected, driven mainly by the $19 million incentive payment we received last year. With respect to Smart [ Gild ] 3.5, which is less than 4% of the total company revenues were improving profitability every quarter by driving down costs and remain on track to go live with automation in early 2026, even as we continue to evaluate options to maximize the value of this business. Lastly, our Standard Products business increased 3.6% on an organic basis this quarter. Converting standard products to HVP components over time serves as an important funnel for our business by generating revenue and expanding margins. Turning to Contract Manufacturing segment. This business performed well in the quarter, delivering revenues of $157 million, growing by 4.9% organically. Moving forward, we are now utilizing our Arizona CTM footprint to consolidate operations from less efficient locations. We continue to expect the second CGM contract to conclude at the end of Q2 2026. The future available space is in an attractive location with strong operating team that is resulting in a number of promising discussions with multiple customers. Turning to our Dublin site. We continue to ramp production of delivery devices for the obesity market. We are currently validating and testing the equipment installed for the commercialization of our drug handling business in early 2026. GLP-1s is in the Contract Manufacturing segment accounts for 8% of total company sales. Overall, I'm very pleased with the performance of both the proprietary products and contract manufacturing segments along with the trends that we are seeing in our business and in the markets. Now I will turn the call over to Bob. Bob? Robert McMahon: Thanks, Eric, and good morning, everyone. It's great to be here, and I'm pleased to be part of the West team. West team. West's Injectable Solutions and Services business is second to none, and I'm excited about the long-term growth potential of the company. Now before getting into the details, I wanted to highlight that we have revamped our quarterly presentation to provide some supplemental segment information, which we may find useful going forward. Now on to the quarterly results. In my remarks this morning, I'll provide some additional details on revenue as well as take you through the income statement and some other key financial metrics. I'll then cover our updated full year and fourth quarter guidance. As Eric mentioned, third quarter revenue was $805 million, above the top end of our revenue guidance, beating our expectations. On a reported basis, total revenues increased 7.7%. Currency had a positive impact of 2.7 percentage points, resulting in organic growth of 5.0%. Of note, the incentive fee reduced organic growth by 280 basis points. So a solid result overall. I'll now go through each of our businesses in more detail. Within the proprietary segment, HPV components, our largest business, accounting for 48% of total company sales was the standout. Revenues of $390 million increased 13.3% organically. This was driven by robust growth in GLP-1s, HVP upgrades, including Annex 1, improving performance in biologics and a normalizing demand environment. We are very pleased with the continued momentum in this business this year. In our HVP delivery devices business, which accounted for 12% of the company's net sales in the quarter, revenues were $99 million. This was down 16.7% year-on-year organically, but roughly flat sequentially as we expected. In Standard Products, revenues of $158 million increased 3.6% on an organic basis, even as we saw Annex 1 accelerate. Standard products accounted for 20% of total company net sales this quarter. Now looking across our end markets for proprietary. Biologics revenue was $329 million and up 8.3% on an organic basis. Growth in products using our laminated technology and strength in Westar and Envision offset the headwind from the incentive fee in the prior year. Pharma revenue rose 1.4% on an organic basis to $183 million, with growth in RU seals, stoppers and plungers. And generics revenue increased 2.6% organically to $136 million, also driven by growth in seals and stockers. Now finishing up revenues. Our Contract Manufacturing segment delivered $157 million, growing 4.9% on an organic basis. Segment performance in the quarter was driven by an increase in sales of self-injected devices for obesity and diabetes, partially offset by a decrease in sales of health care diagnostic devices. Contract manufacturing accounted for 20% of total company net sales in the quarter. Pricing was a positive 1.7%, and we are tracking at roughly 2.4% for the first 9 months of the year, right in line with our 2 to 3 percentage point expectation. Now let's take a closer look at the rest of the P&L. Gross margin was 36.6% in the quarter, up 120 basis points as compared to the prior year. This strong result is due to the positive mix of HVP components, as well as good execution in our supply network. Adjusted operating margins of 21.1%, while down 40 basis points compared to the prior year were ahead of our expectations. And below the line, our net interest income was $4.5 million. The tax rate came in at 19.8%, slightly better than expected, and we had 72.6 million diluted shares outstanding in the quarter. Now putting it all together, Q3 adjusted earnings per share were $1.96, up 6% versus last year and $0.26 above confident of guidance. Moving on to a few cash flow metrics. Year-to-date, operating cash flow is $504 million, up 9%, while free cash flow of $294 million is 54% higher than last year as capital expenditures are down 23%. To date, we have invested $210 million in capital expenditures and remain on track for $275 million for the year. In summary, we had a very solid third quarter operationally that exceeded our expectations. And as a result, we're increasing our full year guidance on both revenue and earnings per share. For the full year, we are now anticipating our reported revenue to be in the range of $3.06 billion to $3.07 billion. This represents reported growth of 5.8% to 6.1% and organic growth of 3.75% to 4% for the full year. The foreign exchange environment has remained relatively stable since our last guide and so currency is still expected to be a $59 million tailwind for the year. We are also increasing our full year adjusted EPS range to $7.06 to $7.11 representing year-on-year growth of 4.6% to 5.3%. A few more items to help you modeling. This assumes flat other income and expense, a 21% tax rate in the fourth quarter and 72.6 million diluted shares outstanding. In addition, we continue to anticipate $15 million to $20 million in tariff-related costs this year and now expect to mitigate more than half of those costs in 2025. For 2026, we expect to fully mitigate the impact based on the current tariff landscape. Our updated full year guidance translates to fourth quarter revenue of $790 million to $800 million. This is a reported increase of 5.5% to 6.8% and an organic increase of 1% to 2.3%. And as a reminder, we also had a $25 million incentive fee in Q4 of last year, which we do not expect to repeat this year and is reducing our expected Q4 organic growth by roughly 360 basis points. In fourth quarter, adjusted earnings per share are expected to be between $1.81 and $1.86. Before turning the call back over to Eric. And while we're still going through our planning process, I did want to share a few thoughts on 2026. We are exiting 2025 in a good place. We believe destocking is largely behind us and demand will continue to improve for our key growth drivers. That said, our end markets remain dynamic, and we could see a range of outcomes. So we will be prudent with our planning. Our HPV components business will lead the way given the multiyear growth drivers of GLP-1s and HVP upgrades, driving our biologics end market. We are anticipating the remaining CGM contract will continue to run at full capacity until exiting in mid-2026. This is roughly a $40 million headwind for the second half of 2026. We are actively working on refilling that space with higher-margin business with the expectation of the pacing and ramp, the pipeline coming in better view by the end of the year. Lastly, we are building out drug handling in our Dublin facility, and this is expected to add roughly $20 million in revenue for next year, which will help offset the CGM contract. And we will get back to expanding margins. So while early, I believe 2026 is coming into better focus, and I look forward to giving specific guidance on the next earnings call. Now I'd like to turn the call over to Eric for closing comments. Eric? Eric Green: Great. Thanks, Bob. To summarize, we had a solid quarter, resulting in an upward adjustment to our guidance. We believe the positive trends in our business are sustainable due to strong execution, improving market conditions and our ability to respond to the evolving needs of our customers, our reputation for high-quality and services paramount. West has key competitive advantages that allow us to protect our business model long term, especially in our highest-margin HVP components franchise, and we continue to make progress improving our margins. This is why I'm confident that we are well positioned for Q4 and into 2026. Operator, we're ready to take questions. Thank you. Operator: [Operator Instructions] Our first question comes from Paul Knight with KeyBanc Capital Markets. Paul Knight: Congrats on the quarter. As you think about your long-term construct of 7% to 9% growth, are we heading there in 2026 in your opinion in terms of the momentum you're citing here in 3Q? Eric Green: Yes. Thanks for that, Paul. And I'll start and then maybe ask Bob to join us in the conversation. But as we think about the key drivers to be able to deliver the long-range plan and long-term construct it really -- the thesis is really around the HVP components and driving into double-digit growth consistently year-over-year. And as you know, the key drivers of that for us are biologics or biosimilars, it's also the driver on Annex 1 and also GLP-1. So we feel good that we have the foundation laid that allows us to drive in the right direction to get to that LRP long term. Bob, do you want to give more color? Robert McMahon: Yes. Paul, thanks for the question. As Eric said, the biggest growth driver we're seeing really nice momentum. As I mentioned on the call earlier, we've got some puts and takes here in 2026. But we feel good about the long-term growth of the business. We have to work through the puts and takes of some of the contracts that are coming in and out. And right now, I would say the street is in a good place. Operator: Our next question comes from Michael Ryskin with Bank of America. Michael Ryskin: Maybe just to follow up on that. The HPV components, as you said, a big part of the story. Really good growth in 2Q, continued that in the third quarter. Obviously, on GLP-1 and Annex 1 part of that. But could you talk about the sustainability of that being over double -- the double digits. You talked about hitting in the fourth quarter as well, but then going beyond just confidence in that trajectory? And then if I could throw on just a quick second part on the margin comment you made, Bob, about expanding margins next year. Can you talk about the new pieces of that between gross margin and volume leverage or your cost actions? Eric Green: Thanks, Michael. And you're absolutely correct on the HVP components, I mean, the growth is starting to sequentially get stronger from the beginning of this year as we as we were looking at how the order patterns are becoming more normalized. So we're seeing the markets become more in line with what we would expect long term. We're seeing that with the order trends through our discussions with our customers. And another precursor for us, we keep a cool sign on as the bioprocessing space. As you know, that's a key indicator of what we should see and expect more near to midterm. We also are -- so we're confident in our position in biologics and biosimilars, particularly of the products in market but also new approvals that are in pipeline. And then Annex 1 is another key driver that has multiyear growth algorithm conversion from standard to high-value products, which is a -- it's a good opportunity for long-term growth to get us to that growth algorithm we talked about double digits for high-value product components. And Bob, do you want to? Robert McMahon: Yes, Mike, thanks for the question. Maybe to add on the first question about HVP components. Certainly, we're feeling good about the momentum here. We're actually building to our Q4 guidance is low to mid-teens. So that momentum we're expecting to continue. Obviously, as we get into next year, there's some more challenging comps in the back half of the year. But that being said, the long-term growth drivers of GLP-1s and Annex 1 and the HPV upgrades are there. And that actually leads to your second question around the margin expansion. One of the things that I think we saw here in the quarter was just the beauty of that business being upgraded. The power of being able to drive more efficiency through the -- through the factories with the investments that we've made over time here as well as being able to provide more value-added products to our customers. I would expect that to continue next year. So when we think about opportunities, I do expect gross margin to be an area of opportunity for us to expand margins. But we're also looking at how do we ensure that we're also driving efficiencies kind of below the gross margin level as well. So I'd say it's both. But certainly, as HVP drives the growth that's -- we generate a mix benefit as well. So very nice from that standpoint. Operator: Our next question comes from Patrick Donnelly with Citi. Patrick Donnelly: Maybe one quick one on the CDM contract. It sounds like -- kind of the exited mid-'26. I appreciate the commentary there, Bob, on the $40 million headwind. I guess in terms of the visibility and fulfilling that with high-margin business, it sounds like -- what are the conversations there? What would the timing look like in terms of the backfill? How big of a gap would there be? And then maybe secondarily, just following up on Mike's question there, Bob, I know you spent a lot of time thinking about the margin opportunity here, where there's opportunities, whether it's footprint, higher utilization when you dug into the company here and look at the margin opportunity, can you just talk about some of that long-term stuff that you see and what opportunity you see on the margin, not only the mix to high value but also just more efficient operations? Eric Green: Yes. No, it's a great question, Patrick. Let me -- I'll cover the first, and then Bob will address your second question. But in regards to contract manufacturing, specifically the CGM manufacturing we have in Dublin, we have a number of customers we're engaged with today that late-stage discussions to identify what would be appropriate business to replace the CGM business that we be exiting or finishing the current agreement until the end of June of 2026. So we feel good about the prospects. We do know that the economics of the future business. The expectation is to be stronger than what we currently have in that facility. And secondarily, there will be a transition period the second half of 2026. But usually, what you'll find is, as we extract the equipment for our previous customer and install new equipment, there's engineering fees that we incorporate into our revenue for contract manufacturing. So there will be revenues to replace the gap. And I won't say it's going to be 1:1, but healthy revenues and margin. And we expect to have commercial operations up towards the end of 2026 if it is a pretty straightforward process. So I'm feeling good about the prospects and now the conversations have been ongoing and very, very attractive business that we could put into that location. Robert McMahon: Yes. And Patrick, on your second element of the question around our supply network. I think one of the things that I would say first off, is as we look at the footprint our ability to be local for local is a big opportunity and advantage for us for our customers. That being said, I think there's an opportunity in the medium and longer term to really optimize our footprint. And we're actually going through that analysis right now given the investments that we've made to kind of not only level load and fill those factories with check transfers across, but also the ability to actually drive more efficiency within the existing footprint. And I think that there probably is more opportunity to consolidate certain areas to drive even more efficiency as we go forward. That's not a 2026 element time frame. That's more of a longer term, which actually makes me feel good that there's not only some near-term opportunities to drive cost efficiencies, but also longer-term opportunities. Operator: Our next question comes from Daniel Markowitz with Evercore ISI. Daniel Markowitz: Guys, congrats on the print and welcome, Bob. Robert McMahon: Thanks good to be here. Daniel Markowitz: Awesome. So Eric and Bob, I had a 2-parter for you. First, I'm curious on high-level headwinds and tailwinds to high-value components in 2026 as you see it today. As I think about it, I see a few tailwinds. One is that you're comping the destock, especially in the first half. Second, you have GLP-1s growing off of a larger base. Third, Annex 1 is accelerating following the uptick in project growth through 2025. And then lastly, you have this unique one-off customer situation that I think was about 150 basis point headwind to 25%, but should benefit $26 million. So wrapping up on this first one, is there anything else I should be thinking about as a headwind on the other side or anything I'm missing? And then the second question, zooming in on one of those on GLP-1 elastomer growth, it was mid-single-digit percent of sales in 2024, and now it's been climbing pretty steadily to now about 9% of total revs. That implies a pretty healthy growth for GLP-1s in 2025. Is it right to think it's more than like 50% growth? And if so, what's causing that, should we expect sustained over 20% growth over the next few years? Thank you and sorry for being long-winded. Robert McMahon: Yes. I'll verify your math, Dan. We've been very pleased with the growth in GLP-1. And I'll turn it over to Eric to actually give some of the color commentary on what's been driving that. But I think it's important to understand that we expect that GLP-1s, while they may not be growing at that level, given the law of large numbers coming into next year, we are expecting very healthy growth in GLP-1 next year given the kind of underlying market dynamics there, Eric? Eric Green: Yes, that's an excellent question. So as we think about the key drivers for other product components, you're absolutely correct that GLP-1s will continue to grow over seeing even -- as you think of long term with the potential introduction of orals into the equation, we do think the market itself will be a healthy blend of injectables and orals with injectables continue to be the larger portion, but the overall market continues to grow quite nicely based on what we are hearing from our customers, but also other sources. So we're very well positioned with GLP-1s. As you remember, this is -- this is leveraging our high-value product manufacturing plants. We have five across the globe. And it's -- so we do have scale. We do have the portfolio that supports our customers in that area. You commented about the timing of potential headwinds. I think the one area I would say is on Annex 1 while we have really good momentum in our contamination control strategy, working with our customers is really resonating. And as you know, this is really converting our standard products that are on drug molecules in commercial today to high-value products. And the economics for us is very attractive. As you know, our averages for standard products are margins in the 20% to 30% range, while the HVP is 60-plus percent. And so it's -- but the timing on how these projects roll off into commercial revenues do vary from client to client. And so that -- I wouldn't say it's a headwind. It's more of a timing from quarter-to-quarter, but we're really optimistic and confident in the pipeline that we're currently working on, but also know that we're only touching a fraction of the 6 billion components, we believe, is the market opportunity here. I think the other area is just, again, timing of new drug molecules approved in market. If you kind of look at last year to this year, a number of approvals by the FDA might be a little bit lower for various reasons. But as we are planning with our customers of future launches, the timing might be a little bit on certain launches. Now saying that, the growth levers that you mentioned earlier about biologics, biosimilars, GLP-1s and Annex 1 are very favorable. And those are the tailwinds that we're moving to the balance of this year and into next year. Robert McMahon: Daniel, just maybe one other thing to follow up on your initial question around GLP-1s. Obviously, we watch that very closely and feel that our growth is largely in line with the growth that the end market is seeing as well. Operator: Our next question comes from Dan Leonard with UBS. Daniel Leonard: Thank you and Bob, you might have addressed my question right there, but I have a follow-up on GLP-1. It does seem like from the script data for Novo and Lilly that you're growing a lot faster than the market is growing. I wonder if there's a way to reconcile that. Could there be a compound or element here? Is it the clinical trial participation you alluded to? Any thoughts would be appreciated. Eric Green: Yes, Dan, this is Eric. You're touching on exactly the areas. So if you think about we're starting to see an increase in vials. So therefore, our stockers and seals are necessary. So that's a factor when we think about our volumes and also the pipeline of new molecules being looked at and gone through clinical. So there's other factors that we're working with several customers. And also, there's a couple of geographies. There's an element around generics that were also able to support. So overall, it's -- I would say it's a little bit broader than just the scripts data of our two customers. Operator: Our next question comes from Justin Bowers with Deutsche Bank. Justin Bowers: Good morning everyone, and first, I appreciate the increase detail and transparency on some of the disclosures this quarter. So a 2-parter for me. One, I just wanted to follow up on Annex 1. There were some updates earlier this year. And just curious how that's impacting customer decision-making and some of the conversions. And if that's been a catalyst for some of the acceleration we're seeing. And then part 2 earlier in the prepared remarks, you talked about liquid handling in Dublin, being about a $20 million opportunity, plus or minus. Is that sort of the peak opportunity? Or is there room for growth there in that facility beyond 2026? Eric Green: Yes, Justin, thank you for that. First of all, touch on the Dublin real quick. On the $20 million that we communicated. As we ramp up a new site, it does take time to get to full utilization. So I would consider this as early stages. And as we move into 2027 and a little bit beyond, that's when we get into our peak volumes and revenues. So the $20 million is really just kind of the ramp-up stage and then move through efficiencies through a few quarters, you'll start seeing the utilization significantly go up. So I would not look at $20 million as the peak revenues of that site for the drug handling. On the Annex 1, it's -- there are different factors. We do know that there are more conversations with the EU regulators with our customers as they are auditing and discussing about the regulations. Therefore, there is an interest to continue these projects on an accelerated pace. But again, as I mentioned earlier, there's a tremendous amount of opportunity of drug molecule that goes into Europe that we believe this is just really early stages out of the $6 billion components, it's a small fraction that we are currently converted to commercial at this time. Operator: Our next question comes from Larry Solow with CGS Securities. Lawrence Solow: Great. I echo the appreciation on the transparency, and I also welcome, Bob. I guess I want to just follow up on the -- just on the gross margin, really strong this quarter. Just curious if you guys are actually seeing, and I think this has been part of the team too, just an improvement in mix within HVP and getting more towards the -- up and to the right until the NovaPure and higher-margin HVP components. Are you seeing that dynamic continue as well? Robert McMahon: Larry, I appreciate the feedback. And to your question on gross margin, yes, that certainly is an element of it. When you look at our gross margin despite the incentive fee, we were actually up year-on-year 120 basis points. That was up almost 300 basis points. If you take that out kind of on a like-for-like basis and really the proprietary business, our HVP component business drove that. So what we're seeing is not only the investments that we made over the last couple of years being able to be filled and that capacity driving and you can imagine with the fixed installed base, the incremental margins are quite nice from that standpoint as it goes through the factory. But then as you're having these higher-value products there, you're driving higher ASP products through the facilities. And I think you see that, that's a very positive mix standpoint. The team has also done a very good job of driving down costs and driving up efficiencies. If I think about scrap and our yields, those are also areas of focus that the teams are really driving and I think as we talked about earlier, I think that we've got a multiyear opportunity from that standpoint. And then also, one of the areas is around also being much more focused on some of the raw material input costs. We're building out capabilities in our sourcing organization, working closely with our supply chain as well as streamlining some of the production traveling of our -- some of our products before they get to customers. So there's a number of elements, I think, that are in the next several years that I feel that we have an opportunity to continue to drive that gross margin opportunity Operator: Our next question comes from Doug Schenkel with Wolfe Research. Douglas Schenkel: Two quick topics I want to touch on. One is just a question on Q4 guidance and then one is on really visibility heading into next year. So on the fourth quarter, I want to confirm that you essentially bumped up guidance by the magnitude of the revenue beat. And if so, were there any timing dynamics in the third quarter that held you back from bumping up guidance more? Or was this just trying to be conservative in a period of continued uncertainty. So that's the first topic. The second is risk and visibility as a topic. So part of the attraction for a long time of West for investors has been that this has been a great sleep at night story, a steady compounder last year, with that in mind, I think the company and certainly the investment community were surprised by the roll-off of the incentive payments and drug delivery and also the changes in contract manufacturing. How would you characterize anything resembling that category of risk heading into year-end? I would guess you feel pretty good about it, but I just want to give you an opportunity to kind of tell us where we should all feel better about this getting back to be in the old West again? Robert McMahon: Yes, I'll start, Doug, and on the Q4 guidance, don't read anything into that. We don't believe that there was any material pull forward when we look at it, actually, if you look at it on a 2-year stack basis, Q4 is actually an acceleration but there's also an element of prudence that even given the market dynamics outside that we want to make sure that we feel good about that, and we do. And so we've got some good momentum there and I'll just leave it at that. Maybe I'll start with the second piece and then turn it over to Eric as well. I think this is an area that I'm focused on intently. And I don't want to declare victory just yet in terms of that. And we -- but we do feel good about some of the trends. I would say we have -- in our -- we're committed to improving and providing more transparency, which we'll continue to do over time. But the market is still dynamic. I think we are improving our visibility. But the market still has some variables that we're working through our business planning process right now, and that's why we wanted to provide some puts and takes to what we know today for next year. And I think the long-term trends are positive. It's the pace of when we get back there. And I'll turn it over to Eric to maybe add anything. Eric Green: Yes. No, thanks, Bob. And Doug, it's a great question because that's critical for historically what has been consistently from a demand profile perspective, pretty consistent of the market -- the injectable market space. We believe, based on the work that we have been doing and Bob did touch on this, is that going deeper in the different segments with clear accountability and ownership has given us better line of sight of our markets, obviously, engage with our customers, getting closer to them, which we observed during the pandemic period, we needed to do more of. And I'm confident we're making good headway and traction in that direction. The underlying market conditions continue to improve, considering where we were a while back. But your point is we are laser-focused on making sure we are reducing those risks and increase in visibility. And also providing more of that lens as we engage in these conversations. Operator: Our next question comes from Mac Etoch with Stephens Inc. Steven Etoch: Just one on delivery license, relatively flat year-over-year, excluding the incentive fee. And I think you highlighted some improving economics ahead of the automated line coming on in 2026. So, can you just highlight some of the various aspects driving performance during the quarter and the variables that you're seeing on the top line of margins as well? Eric Green: Yes. No, absolutely. Thanks for the question. When we look at the direct delivery device business, the area look at it holistically, the entire portfolio, we have administration systems in that category. We have Crystal Zenith and obviously, injectable devices like SmartDose. And I'm really pleased with the progress we're going to have throughout the year for our Crystal Zenith and also our admin systems. The area of focus has been on SmartDose to drive two levers with urgency. One is to drive down costs and improve efficiencies. And that -- the progress the team has made is on track with our expectations for this year, and we're seeing an improved margin performance or profitability quarter-over-quarter. There's more to come. With the automation that we are -- kind of being commercializing in early 2026, we're just going through the validation process as we speak. And we're confident that we'll be able to drive even more cost out of the -- out of the product itself. The second is to continue to look at alternative options to create even more value. with that product. And we will communicate once we can, but the final decision, but we're making progress in both areas. Robert McMahon: Yes. And I would just add, Mac, on that. If you look at it on a quarterly basis sequentially, is it where we expected it to. So we feel good about that and that work that Eric just talked about, we're looking at both of those paths with urgency and focus. And so I feel good that each quarter, the economics have improved in delivery devices, as we said in our prepared remarks, and there's more room to go, but we're also making sure that we're looking at this for the long term and evaluating what's the best value for shareholders. Operator: Our next question comes from Matt Larew with William Blair. Matthew Larew: Kind of a 2-part question around your manufacturing network. So after a couple of years of pressure on free cash flow and obviously an elevated CapEx spend for you, you've had a significant improvement in free cash this year as CapEx has normalized down to around 9%. So Bob, you referred a couple of times the opportunity for network optimization, but there's then the balance of obviously customers thinking about regionalization of manufacturing, some of the policy dynamics and obviously, still significant investment in HVP. So just as you think about maybe that balance of network optimization versus making sure you have capacity available for customers. But how are you thinking about the levels of CapEx needed to support growth, that'd be the first part. The second part is there's been a number of recent headlines around pharma tariffs and MFN. And I realize your business is tied to commercial volumes, not necessarily earlier-stage R&D how tuned in are your customers to those headlines in terms of influencing investment decisions versus sort of -- the train has left the station in terms of realization of their manufacturing. Eric Green: Yes, Matt, thanks for the question. Let me start with the CapEx that we are -- we have spent. But you're absolutely correct. Our focus really is on the high-value product components with our five center of excellence that we have, obviously, in Asia, Europe and U.S. Fortunately, over time, we have built the capacity and the capabilities to be able to support our global customers from multiple sites. So as you think about being more regionalized, we will support our customers in all markets. We're very well positioned from an infrastructure perspective. You're correct. As volumes increase, we will need to layer in additional capital, but we do feel comfortable that we're going to be back to the 6% to 8% of sales corridor for CapEx, but heavily weighted towards the high-value product components part of our business. And again, the concept of the center of excellence giving us that network capability, but also more of a campus site perspective versus doing more greenfield. I'll talk a little briefly on the -- on the second question you posed, and I'll turn it over to Bob to add any comments. But you're right. That conversation is active with our customers in the sense of what can we do to support our customers to drive down costs to support them. One is continue to leverage our global network. So there are a few cases where we could do tech transfers to move from one location to another geography to be more co-located with their end market. That's one opportunity that we are working with, but those do take around 12 to 18 months to complete and then to commercialize. But also I just want to comment. The products that we provide, the elastomer components that we provide are critical to the drug molecule, and they are less than 1% of the COGS of the drug. And so therefore, our focus is how can we help our customers drive better yields and efficiencies of their fill/finish process by providing more of the HVP services. So in that sense, we are working with our customers to provide additional services to improve the yield output from our -- for our customers. So it's an active dialogue. But for us, we're seeing less discussion about price, but more about making sure we're balanced from our global manufacturing perspective. Bob? Robert McMahon: Yes. Matt, I'll just add a couple of things. Obviously, that's one of the areas that's pretty dynamic when we talk about kind of the MFN here in the U.S. just recently, we haven't seen any change in our customer buying behavior. That's something that we'll continue to watch. But -- and on the other side, I actually think that, that's a potential lift of an overhang so that they can now move forward. And then the investments here that we're seeing in the U.S. we are seeing that -- we believe that's real. That's a multiyear kind of investment. But as we think about we're talking about kind of level loading, we've made a lot of investment in the U.S. for the COVID capabilities and capacity a couple of years ago. And so we're working very closely with those -- as those customers are building out additional capacity in the U.S. about this tech transfer that Eric was just talking about. So I think we've got good relationships with those customers. And I think we're well placed to be able to continue to invest. And I'll just want to reiterate what Eric said. We do think that we're going to continue to drive down our capital spend as a percent of revenue. but disproportionately invest behind our highest growth opportunities, which is an HVP. Operator: Our next question comes from Tucker Remmers with Jefferies. Unknown Analyst: I had another question on Annex 1. So talk about 2% contribution this year from Annex 1 projects. Can you break down how that split between those projects that are in a development or validation phase versus switches that have already been put in place and sort of hitting what I would call commercial production? Eric Green: Yes, great question. I would say if we look at the entire -- at the end of Q3, the number of open projects that we're currently working on, and the number of projects that convert into revenues are less than 40% with having converted since the duration of this project or this move towards Annex 1, so that kind of gives you a feel of as we ramp more new projects and they're rolling up. And we did mention earlier that some projects could be 3 to 4 quarters and a few others could be a 6 to 8 quarters. So it does depend on the scale of the project and the speed that our customers want to convert. Operator: And our next question comes from Luke Sergott with Barclays. Luke Sergott: Just wanted to ask here about the capital allocation. The first one of the hat tip to the transparency on the -- and the deck is beautiful. So given that you guys have like a pristine balance sheet right now, producing a lot of cash margins going the right way. Free cash flow seems to be picking back up. So update us on your capital allocation priorities, favoritism towards maybe a repo versus more bolt-on M&A? Robert McMahon: I appreciate the feedback. This is Bob. And you're hitting on one of the key priorities that I've got and talking with Eric and the rest of the team and actually just spoke with our Board about this I think there's an opportunity for us to better define and establish a capital policy. And to your point, with being blessed with such a strong balance sheet and our cash flows to be more active in using those cash flows to really drive the business. And so what I would say is stay tuned, but it is high on the list of opportunities that will help continue to grow the business over time. Operator: I'm showing no further questions at this time. I'd like to turn the call back over to John Sweeney for any further remarks. John Sweeney: Thank you all very much for joining us today on the call. An online archive is available at our website at westpharma.com in the Investor Relations section. That concludes the call. Thank you very much, everybody, and have a great day. Operator: Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Mobileye 3Q '25 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Galves. Mr. Galves, you may begin. Daniel Galves: Thank you. Hello, everyone, and welcome to Mobileye's Third Quarter 2025 Earnings Conference Call for the period ending September 27, 2025. Please note that today's discussion contains forward-looking statements based on the business environment as we currently see it. Such statements involve risks and uncertainties. Please refer to the accompanying press release, which includes additional information on the specific factors that could cause actual results to differ materially. Additionally, on this call, we will refer to both GAAP and non-GAAP figures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. Joining us on the call today are Professor Amnon Shashua, Mobileye's CEO and President; Moran Shemesh, Mobileye's CFO; and Nimrod Nehushtan, Mobileye's EVP of Business Development and Strategy. Thanks. And now I'll turn the call over to Amnon. Amnon Shashua: Hello, everyone, and thanks for joining our earnings call. Starting with the results. Q3 revenue of $504 million was up 4% year-over-year. The driving force was 8% EyeQ volume growth significantly outpacing the 1% growth in overall vehicle production among our top 10 customers in Q3. Operating cash flow was again a highlight. We generated $167 million of operating cash flow in Q3, well above net income. On a year-to-date basis, we have generated nearly $500 million of operating cash flow, up around 150% year-over-year. This reflects the cash generative nature of our business and our continued discipline in managing working capital. The core ADAS business is performing well, with volumes in very healthy range for the last 5 quarters and expected to do so again in Q4 based on our updated guidance. We again raised the midpoint of our full year outlook this time by 2% in terms of revenue and 11% in terms of adjusted operating income. Compared to our initial 2025 guidance, these increases are even more pronounced, 7% for revenue and 27% for operating income at the midpoint. Overall, we expect volumes to come in about 2 million units higher than our original guidance. This outperformance reflects a combination of stronger-than-expected launch activity, ADAS adoption growth and better than accepted results in China both from our shipments to Chinese OEMs and from the performance of our top 10 Western OEM customers in China. If we adjust our inventory digested in 2024, our 2025 volume growth is expected to outperform the production of our top 10 OEM customers globally by about 5 percentage points. We see continued momentum as EyeQ6 light is generating ADAS program wins at a high rate. So far this year, we already have been nominated for programs with future expected volumes well above our full year 2025 volume. We have added a new customer in Volvo. The growth potential in India is becoming increasingly clear as strengthening adoption trends and supportive regulatory environment. Additionally, we are seeing continued traction in adding REM to front-facing camera programs further reinforcing our base business. On the advanced product side, our position is differentiated in the fact that we are an OEM neutral platform that is cost-efficient and scalable with a credible technology path to eyes-off autonomy in both privately owned vehicles and robotaxis. All 4 of our advanced products surround ADAS, SuperVision, Chauffeur and Drive share common building blocks including the EyeQ6 high inference chip, substantial portions of our perception policy AI stacks and the REM crowded crowdsourcing driving intelligence and robust safety frameworks and the company's comprehensive data and validation infrastructure. The EyeQ6 high-based surround ADAS systems continue to develop as the next generation of standardized driving assist on high-volume vehicle platforms. This system addresses multiple objectives in a cost-efficient package. It's designed to meet stricter late-decade safety standards enables highway hands-free performance for lower cost and current systems and supports OEM goals to consolidate ECUs and to integrate technology on a single SoC. We have meaningful traction with a number of OEMs and very recently, received confirmation from a leading Western OEM that were nominated for a high-volume EyeQ6 high-based surround ADAS program across mass market vehicles. We continue to pursue a number of promising SuperVision and Chauffeur opportunities, although timing remains difficult to predict. The best way to ensure eventual new customers is to focus on execution of the SuperVision and Chauffeur production programs with Volkswagen Group, where we are first movers. Near-term execution includes major software drops in the coming few months that embodies significant innovation in AI. A few weeks ago, we received the first silicon sample of our next-generation SoC, the EyeQ7 high and all initial tests have been successful. EyeQ7 and its successor EyeQ8 now in design stages are designed for upgrading eyes-off autonomy to minds-off autonomy. Eyes-off systems is what Mobileye is bringing into production in early 2027 and also describes the current technological state of robotaxis. In both cases, there is a human either the driver or a teleoperator, that can resolve issues when needed. In the minds-off system, which we are targeting for 2029 and beyond, there is no human to resolve issues, and therefore, the driver can sleep and the robotaxi no longer needs teleoperators to intervene. This transition from eyes-off to minds-off is where EyeQ7 is going to play a meaningful role. More details will follow in the coming months. Turning to robotaxi. Our engagements are expanding through both Volkswagen and Holon, a division of Benteler. Once we remove safety drivers in our first U.S. city in 2026 and secure type approval for self-driving vehicles, the Volkswagen ID.Buzz and Holon urban shuttle in Europe, we anticipate geographic expansion. VW and Uber in Los Angeles, Lyft and Holon in the U.S. and multiple commercialization initiatives with Volkswagen and public transport operators across Europe. Additionally, we continue to get closer to naming an automaker and vehicle platform to complete the Lyft Marubeni value chain. That will enable preparations for commercialization in Dallas and other cities to accelerate. On the robotaxi technology front, we continued to outfit more of the ID.Buzz test fleet with a full EyeQ6 high-based production hardware and have successfully completed the first closed-loop testing with the Holon production vehicle. The MTBF performance is tracking well against the KPIs that are required to remove safety drivers in 2026 and begin commercialization. Everything continues on track. In summary, the opportunity set in front of us today is larger, broader and more urgent than it was when we went public in 2022. Near-term volumes remained strong. The demand for higher performance at lower cost is intensifying and eyes-off capability whether for personal cars or robotaxi is no longer seen as an experimental science project, but as an achievable and commercially viable reality. This is exactly where Mobileye excels. I'll now turn the call over to Moran. Moran Rojansky: Thank you, Amnon, and thanks for joining the call, everyone. Before I begin, please be aware that all my comments on profitability may refer to non-GAAP measurements. The primary exclusion in Mobileye's non-GAAP numbers is amortization of intangible assets, which is mainly related to Intel's acquisition of Mobileye in 2017. We also exclude stock-based compensation. Our Q3 results exceeded the color we provided on the Q2 2025 earnings call in July, with revenue up 4% year-over-year versus our prior outlook of roughly flat. The upside was a combination of EyeQ volume, which came in at 9.2 million units compared to the outlook of 8.7 million to 9.3 million and SuperVision volume, which was higher than 20,000 units in the quarter, a meaningful uptick versus Q2. Just a quick note on SuperVision. Volumes were higher than prior quarters, but should not be viewed as establishing a new higher run rate. We now expect around 50,000 units this year. This full year number is significantly higher than our original expectations and a good reflection on what we see as a sustainable run rate heading into next year for the current first generation programs applied to ZEEKR export volume and Polestar 4. These programs remain relatively small within our overall business and quarterly volumes can fluctuate as they have this year. Our gross margin declined by just over 100 basis points year-over-year basis. EyeQ ASP was down about $0.50 year-over-year. This was primarily due to higher volume of Chinese OEMs, where pricing remains a significant headwind, as we've discussed before. Another factor was higher volume of ADAS program based on EyeQ5 which carry lower gross margin due to higher costs. EyeQ5 currently represents about 10% of volume and is expected to peak to around 15% next year, creating some continued pressure. Beginning in 2027 and the more profitable EyeQ6 Lite significantly ramps up EyeQ5 share will go down, providing a tailwind to margins. Operating expenses were up 4% year-over-year, which was a bit higher than what we expected due to timing of engineering reimbursement. We continue to expect overall non-GAAP operating expenses in 2025 to be up about 7% to just below $1 billion. As Amnon mentioned, operating cash flow was $489 million through the first 3 quarters of the year. This is primarily due to strong cash flow from the core business. However, we've also managed tight control over the working capital accounts, particularly our balance sheet inventory which came down by about $100 million year-to-date. We are now well aligned with our 6-month target for balance sheet inventory, and we expect working capital to be more cash natural going forward. Turning to full year guidance. We are increasing the revenue midpoint by 2% and the adjusted operating income midpoint by 11%. Our full year outlook is based on EyeQ volumes of 35 million to 35.5 million, up from 33.5 million to 35.5 million. Earlier in the year, we maintained an unusually wide range to reflect macro uncertainty and ensure conservatism. Without condition now better clarified, we have greater confidence in narrowing the range and increasing the midpoint. Giving 27.3 million units year-to-date, the implied outlook for Q4 is 7.7 million to 8.2 million. At this point in the year, we expect that Q4 volume will end at the higher end of the guidance. We retained a small buffer to account for any unforeseen year-end logistical issues or OEM production constraints to stay cautious. In terms of understanding the current run rate of volume, we think it is best to look at the full year. This is particularly the case in 2025 where normal seasonality was affected somewhat by tariff timing and expectations. Typically, global production is stronger in the second half than the first, but that pattern did not hold this year. Bottom line is the lower Q4 volume compared to Q3 and Q2 should not be interpreted as a trend. It simply reflects an alignment of supply and demand across the full year to ensure customers enter 2026 with lean inventories. As noted earlier, SuperVision volumes are tracking ahead of expectations, and we are modestly raising the outlook to low 50,000 units at the midpoint versus prior outlook of around 40,000 and original outlook in the low 20,000. We expect full year gross margin to be right around 68%, implying a slight uptick in Q4 versus Q3. The full year is expected to be up about 30 basis points year-over-year, pretty consistent with our July commentary. Operating expenses, as noted earlier, are expected to be up 7% year-over-year to just below $1 billion, in line with our original outlook. Thank you, and we will now take your questions. Operator: [Operator Instructions] Our first question comes from the line of Aaron Rakers with Wells Fargo. Aaron Rakers: I guess the first question is, you mentioned a Western OEM design win that you've achieved. Can you just remind us again, is that additive to the prior kind of development engagement status that you've outlined previously? Is that reflective of the prior Western OEM that was on that list? And just anything around timing of volume contributions? And then I have a quick follow-up. Nimrod Nehushtan: So to be clear, the confirmation for a nomination that Amnon referred to in his remarks is for a second surround ADAS program. We have announced previously in the year our first surround ADAS program. This is the second from a second OEM, a leading Western OEM with significant volumes with multiple vehicle models, and we expect this to be a significant portion of that OEM's vehicle lineup in the future. And we will disclose more details on this in the next few weeks. Daniel Galves: Yes. And Aaron, this is Dan. You might be referring to the IR Day, the Investor Day slide from last year. It is one of the OEMs that was on that chart for surround ADAS. Aaron Rakers: Yes. I appreciate that. And then talk a little bit about gross margin. You highlighted the fact that EyeQ5 volumes at 10% would go to 15%, and that would continue to be a headwind to gross margin. As the EyeQ6 volumes start to ramp, how do we think about the delta or the gross margin inflection as we think about 2026 between those platforms? Moran Rojansky: Yes. So just to highlight that EyeQ5 volume doesn't have a lot of running programs or production programs, and we don't anticipate any new programs with EyeQ5. So all the new launches we have with EyeQ6 Lite. The profitability is not that different between them. It's just that it has a bit lower profitability than our EyeQ4. As for EyeQ6 that, again, is launching for our new programs, the profitability is, of course, the gross margin is higher than EyeQ5 and very similar to EyeQ4 that we are currently selling. So it's not some significant headwind. It's just a matter of platforms or specific of vehicle launches, mix between products, sometimes some of the projects ramp more, some of -- it's not something you can anticipate, but it's not very dramatic in terms of gross margin fluctuations. Daniel Galves: Exactly. Yes. I don't think we're going to specify like the impact, but the bottom line is EyeQ5 like percentage of total will be the highest next year, around 15%, so not too meaningful versus this year and then start to go down. Operator: Our next question comes from the line of Edison Yu with Deutsche Bank. Yan Dong: This is Winnie on for Edison. My first question is on the 4Q expectations. Just curious if there's any other factors that you're factoring into the market or recently, we've heard about the chip issue, whether you're baking that into the outlook? And then the second question is wondering if you can provide a bit more details around the Lyft and demo program, the launch time, the economics, et cetera. Daniel Galves: Yes. So I think on the Q4 volume, I think the point we're trying to make in the script is that you should look at the full year volume of kind of around 35.5% as the right number. Like when we're looking at '26, we are -- the starting point is 35.5%. It's not Q4 volume times 4. So there's really nothing going on specifically besides seasonality was different this year due to really, we think, because of the tariffs and trying to pull ahead some production into Q2 and Q3. So this is kind of exactly within expectations for us, shouldn't be seen as a trend. And I think that we see the trend of around $9 million a quarter. And that's -- there's -- in terms of [ Nexar ] we have not received any indications of request to reduce production, reduce shipments at all. In fact, if anything, it's the opposite. It's a very new situation. We don't -- in talking to customers, we don't expect any material impact in Q4, but we do have a bit of margin in the guidance versus the high end to account for that if there's a bit of lower production, but we don't expect it to affect Q4. Amnon Shashua: What was the second question, if you can repeat it? Yan Dong: It was on the Lyft and demo program, you can talk about the evolution to that win, the launch time and the economics. Nimrod Nehushtan: So if you refer to the Lyft robotaxi program, so we are working with Lyft and Marubeni and a vehicle producer on a robotaxi program in the U.S. We disclosed that the first city will be in Dallas-Fort Worth. We are now in advanced testing stages of this program, and it follows the leading program we have with Volkswagen Group for robotaxi activities in the U.S., and it's been tracking well. And the launch date will be disclosed in the near future. Operator: Our next question comes from the line of Joshua Buchalter with TD Cowen. Joshua Buchalter: I wanted to ask about the metric you gave about normalizing for inventory. I think you said you grew volumes 5% more than your top 10 customers. Is this sort of a rule of thumb we should be using of your expectations for sort of normalized unit growth in '26 and beyond as you see ADAS market and attach rates develop and then we layer in ASPs more. I'd just be curious to hear if that's like sort of a normalized growth rate you think is the right level for us to benchmark to on a unit basis? Daniel Galves: Yes. I think the key here is that investors and analysts should focus on kind of the expected volume of our top 10 customers, which are mostly legacy OEMs and has been a bit below kind of the overall vehicle production for the last few years, not meaningfully, but a bit below. And then we would expect to grow faster than in volume and revenue, we would expect to grow faster than that level because of things like ADAS adoption growth because of things like growing share within some of those customers because of things like emerging markets like India. So this year, we consider the performance pretty good. We grew about 5 percentage points faster than the top 10 OEMs, which were down 2% to 3%. And we're not going to put a precise number on what we think it should be going forward, but something in that range is probably fair. Joshua Buchalter: Got it. Dan, I appreciate the color there. And for my follow-up, so it sounds like you're speaking to engagements for eyes-off continuing to move forward. And it does seem like there is a good amount of momentum across the industry from both the robotaxi side and in consumer passenger vehicles for eyes-off features. I guess what do you think the OEMs need to see that gets them across the line in these engagements and I guess, any time line you would expect to be able to -- a reasonable time line to expect where you think you will be able to announce some additional Chauffeur or even SuperVision wins? Amnon Shashua: I think the focus now is execution. We are with the SuperVision, the hardware is on the C sample stage, which is very advanced from a production level. We have a number of meaningful software drops in the coming 6 months. So I believe that somewhere in the first half of 2026, we'll be in a very good position of being very close to production ready with the platforms of SuperVision and Chauffeur. And that should enable us to get more exposures to new program -- new program wins. So the focus of the company in that area is execution also in the robotaxi with a driver is execution. So really 2026 is an execution year and not necessarily focusing on bringing new business, at least not in the first half of the year. Nimrod Nehushtan: If I can add color to what Amnon said, in the last 1.5 years, we've been working simultaneously on SuperVision, Chauffeur robotaxi for execution in the past, let's say, 8 months, we've added also surround ADAS production program that execution process. Right now, we are on track with the original time lines of all of these programs, and we are in B sample or C sample hardware and stable platforms, which is an important achievement in order to maintain the original time line. And now we're focusing on software iterations, AI innovation and integrating the latest AI stack into these platforms. Doing so simultaneously is a significant achievement for us. And we believe that now within the next few months of showing a very mature production platform that uses production hardware with the latest AI technologies that shows meaningful performance improvement compared to what exists today in the industry is the next big thing for us to show in general to our customers and also for new engagements, and that's expected within months from today. Operator: Our next question comes from the line of Chris McNally with Evercore ISI. Chris McNally: Amnon, I wanted to dive in on the Surround and congratulations on the big win. It sounds like there's a different technology path that maybe you and the industry had thought a couple of years ago where supervision would sort of be the kind of a walkway to higher forms of Chauffeur and eyes-off and it sounds like given the industry has been a little bit slower on that front, maybe how much they would charge for it, et cetera, it seems like Surround is now that technology gateway. And I just would love to understand from your standpoint, is it sounds like a must for the OEM to hit 2029 regs, meaning they really can't do this with an internal solution or even the solution that you've been providing them originally with the $50 chip. So is this sort of -- is this one of the reasons you're seeing so much traction this is the logical step up of your Level 2 customers to Surround? Amnon Shashua: Okay. So I'll let Nimrod first answer and then I'll complete if necessary. Nimrod Nehushtan: Chris, so I think Surround ADAS is a very important category for OEMs because it's not just about new user experiences, but also adhering to emerging regulation in developed markets. And it's a very, very cost-optimized product segment. because it's designed for high-volume vehicles and for pretty much $20,000, $30,000 vehicles and above, it requires very, very efficient design and a close software hardware integration. Mobileye is known to have a very efficient chip and very efficient software, and we can achieve pretty much, we think, the most competitive price point for this product category. And from an OEM standpoint, thinking about whether you want to buy or build a product in that category, it's not just about understanding AI or different software technologies, can you get to such a level of efficiency on vehicles that are in tens of millions per year, if you fail, you may jeopardize your core business. And so forcing an existing available solution that is very mature is the safe choice. And maybe if you're into in-house development, you can focus this on the higher end of applications and smaller volumes, maybe 1% of your cars and then if it fails or is significantly delayed, there is no damage done to the core cash cow of the company. And that's where we see their interest just yesterday, GM announced their Level 3 eyes-off development. That is designed for a very specific vehicle category. I think they disclosed the type of vehicle, and it's a very high price point. As you all know, GM sells cars in $30,000, $40,000 also. Obviously, that solution is not appropriate for these vehicle price points. And it may make sense for them to find a proven, reliable, trustworthy high-performing, cost-efficient solution for the vast majority of volumes, while they focus on the high end. Amnon Shashua: And I think I'll continue. I think likewise going into Level 2 plus with 11 cameras, our SuperVision, we are working very diligently on very innovative cost reduction schemes. So looking into 2028 time frames and beyond, we can offer significant price reduction on SuperVision. The next level that OEMs are considering are eyes-off systems. And there, as I said before, execution is the key. If we launch an eyes-off system, and that's what we are planning to do in 2027 with Audi, that will be kind of an inflection point. Seeing such a product at work passing through all the regulation, the sub certification and regulatory approvals, passing the MTBF bar that is needed to have eyes-off, this is a significant achievement. Once we pass that bar, I think that will be a big inflection point. Nimrod Nehushtan: Yes. I think that there is no question beyond or about the fact that eyes-off driving and later mind-off driving is the ultimate value proposition for consumers. And we think that most OEMs are very interested and very bullish on this sort of proposition. The question is, is now the right time given the maturity of the technology and the available system is what costs for them to go all in with a partner. Today in the industry outside of China, there is no other technology provider that is working closely on the entire system, hardware, software, silicon, AI -- receiving approvals for testing and going through the ropes of homologation and all the necessary check boxes other than Mobileye with Audi. And all eyes are on us. And hopefully, within months, we'll show more and more evidence of the maturity of the technology getting there. And as Amnon said, we believe that will be a significant inflection point for that product. Chris McNally: Nimrod, my only clarification or a summary of what you said is super helpful. So is it logical then to think like your first customer, which is VW, that basically your target audience it's not going to be 100%. But your target audience for Surround is existing basic ADAS customers that now need to convert for 2029 and so your second customer, as an example, upgrades ADAS into Surround. And then there's a future path beyond that to eyes-off? Nimrod Nehushtan: That's exactly the case in that nomination we disclosed. It's an upgrade from EyeQ6 Lite to EyeQ6 High. That's -- that's essentially the decision that OEM made. And so that's the right summary of how we see things. Operator: Our next question comes from the line of Mark Delaney with Goldman Sachs. Mark Delaney: I hope you can double-click on the DRIVE opportunity with Lyft and Marubeni. I believe the company said today, I think it can name the OEM partner for that engagement soon. So should investors assume that the OEM partner is already effectively finalized? Or is there still uncertainty as to which OEM Mobileye is going to partner with? And if there is still uncertainty, what would the time frame need to be to line up the OEM partner in order to meet the 2026 start of operations objective? Amnon Shashua: So there's no uncertainty who that OEM is, but it's not finalized yet. So I cannot say with 100% guarantee that it will be finalized, but it looks on track and it looks good. I would say that this is in parallel to our existing activity with Volkswagen of the ID.Buzz and with the Holon platform with Benteler. So we have quite a lot of scale opportunity with the existing relationships. We have -- this is why I mentioned before that it really focuses execution. Scale and business will come once execution is there. Nimrod you want to add something? Nimrod Nehushtan: Just one more clarification, Mark. That vehicle provider, it's not that we will just start working with that vehicle OEM once we will finalize the agreement. In the past almost 18 months, we've been working closely between Marubeni, that vehicle OEM and Mobileye on creating multiple prototype vehicles and then working on the actual vehicle platform itself, integrating our self-driving system with the sensors, and it's all pretty much -- we have numerous vehicles that are equipped with all the sensors and all the compute infrastructure needed as if it's like an ID.Buzz we do in our leading program, and so we are starting -- we're hitting the ground running once it will be finalized and disclosed. It's a natural transition into serious development towards commercial launch. Daniel Galves: Yes. And I would just add one more point here is that if there's a bit of wait and see on consumer-owned high-end eyes-on and eyes-off technology, robotaxi is exactly the opposite. There's so much activity, but the key is removing the safety driver and starting to commercialize. And that's our main priority right now. And the core technology is the same, no matter what the vehicle platform is. There's integration work to be done, but it's the core technology that's being worked on. And once we kind of can remove the safety driver, then we can start to commercialize and scale. Mark Delaney: That's all very helpful. My follow-up question is also on Drive with VW and the ID.Buzz, you mentioned you're tracking to be driver out next year. Could you just speak a bit more on what still needs to happen in order to take the driver out next year? And any sense of when within the year that milestone may occur? Amnon Shashua: Well, there are a number of milestones. One is the readiness of the vehicle that should be ready in the next weeks or a few months. And second is the MTBF KPIs, which we are tracking, that are on track. And we believe that in the first half of 2026 we can start removing the safety driver in one city in the U.S. and to prepare for a commercial deployment later in the year and beginning of 2027. Operator: Our next question comes from the line of Joe Spak with UBS. Joseph Spak: Just going back to the surround ADAS nomination. I was wondering if you guys could provide a little bit of color as to sort of what got the customer over the line, maybe a little bit of detail on the level of integration that you were doing versus maybe the automaker is DXP involved? And then just in terms of the rollout, is this a case where we need to wait for new model launches? Or can this product be placed on refreshes? Nimrod Nehushtan: I will take this, Joe. So we think the driving forces behind this decision to upgrade from EyeQ6 Lite to EyeQ6 High was about basically, the standard sensor set for that OEM is at minimum 5 cameras and 5 radars. And in the older days, these -- some of these cameras was used just for top tier visualization when you do parking, for example, for the human driver. And just the front camera was used for ADAS and the radars were used for ADAS and that created a very inefficient design. And that OEM decided to create a more consolidated ECU architecture in which you can think of this as somewhat of a -- like simplifying the architecture and then routing all the sensors to the EyeQ, the EyeQ6 High is powerful to process all of these sensors and creates a much richer sensing state, a much richer user offering. For example, hands-free driving in highways, supporting all of the most cutting-edge advanced ADAS requirements in NCAP and so on, as we've mentioned. So it's about system simplification consolidating efforts and routing all sensors that already exist in the car to a more powerful chip, they can process them more intelligently and offer better user experience. The added cost for that OEM was very reasonable compared to the added value as evidenced by their decision. So it's not like a 10x more expensive chip in order to get that value, it's as we've disclosed in the past, it's 2 to 3x more expensive for that silicon component generally speaking. So I think it makes -- as they said it, it makes too much sense not to make this transition. We are also discussing about potential future -- that's with other OEMs but potential future consolidations like with parking applications and driver monitoring system and ADAS and hands-free driving all can be processed and provided by Mobileye on the EyeQ6 High chip with a very attractive cost and I think that's a compelling proposition for OEMs. And regarding your question about vehicle launches, it's a new architecture. And in parallel, we work on other, let's say, more existing architectures as well. So it's a combination of the two. Joseph Spak: And then I guess just as a follow-up, I think in the prior update there were maybe 3 or 4 other sort of advanced engagements about Surround. I was wondering if you could just get an update there. And maybe going off of some of the commentary on Chris' question, like have you seen sort of more initial maybe SuperVision move more towards surround in the near term? Nimrod Nehushtan: So I wouldn't say it's SuperVision engagements moving towards around. It's more about base ADAS engagement expanding to Surround from what we're seeing. The first 2 design wins we have for Surround ADAS are examples of OEMs with high volumes, the sell cars at relatively low vehicle price points that have, in the past, sourced a front camera solution and these examples decided to source Surround ADAS solution for the same vehicle category. So I think that's the evidence that we're basing our assessment on. And yes, we have a lot of engagement. Mobileye works with pretty much all of the OEMs on a recurring basis on what we have to offer, and we see a lot of interest. And I think we will -- we prefer to disclose when we have nominations and it's concrete like we did today. But we remain confident in the strength of our outlook. Operator: Our next question comes from the line of Shreyas Patil with Wolfe Research. Shreyas Patil: Maybe just to follow up on the earlier one. How do you think about the competitive landscape when it comes to Surround ADAS? I think there are 3 or 4 other major suppliers that are trying to win awards here as well. And maybe just to give a little bit of background on the bidding process that went into securing this award, the second award that you just announced. Amnon Shashua: We're talking about a very highly competitive in terms of cost, cost optimized product. So all the high-performance chips that you hear the price point is not relevant for such a product. Our chip, the EyeQ6 High is both the core chip for our AV, for example, in SuperVision, we have 2 of those chips and in Drive we have 4 of those chips and in Chauffeur 3. But one chip is highly cost optimized, and we can meet the cost desires of OEMs with our system on chip that can process all those multiple sensors, 5, 6 or 7 cameras and 5 radars and ultrasonic and so forth. So we're talking about the game in which cost is highly, highly critical. So we have first mover advantage. So we were the first to receive nomination with the Volkswagen Group on Surround ADAS. And the new win of today shows that we are successful in leveraging our first-mover advantage. So it's all about here cost and performance, but cost is critical because we're talking about high-volume vehicle categories. And so it's not that there is no competition, but we do have first-mover advantage, and we are showing that we can leverage that. Yes, Nimrod go ahead. Nimrod Nehushtan: Another aspect of efficiency that we are -- should be considered beyond just the price, our EyeQ6 High chip does not have any limitation in deploying pretty much all of the state-of-the-art AI architectures while being very efficient in power consumption. This offers us -- this allows us to offer a solution that is passive cooled, for example, and does not require liquid cooling. So this is a small technical detail, but for the OEMs, it's a big difference in overall system cost in the complexity of the system, combustion engine vehicles may not have liquid cooling available, for example. Other competitors are trying to rely on more -- because the underlying product requires sophisticated processing of sensors and using some of the AI technologies, other competitors may try to use a high-performance chip for that product category. And beyond just the price disadvantage, it also complicates the overall system. So this is another element that is hard to compete with the low power consumption of our chip without compromising performance. Amnon Shashua: Yes, I'll just give a color in terms of performance of the EyeQ6 High. Our internal benchmarks running on both convolutional METs and vision transformers show that we are on par and in many cases, better than the Orin-X, which is now the choice of competition when OEMs are considering the Level 2+ systems. But at a price point, which is less than 25% of it. So this gives us a great advantage. On one hand, we have a high-performance chip, which is on par with the latest high-performing chips in the automotive industry. On the other hand with a cost structure and power consumption constraints that are way, way more appealing. Shreyas Patil: Okay. That's really helpful. And then maybe, Amnon, I think last quarter, you talked about Drive potentially becoming a more material revenue contributor by 2027. Wondering if maybe you can expand on that a little bit. And you've talked about in the past at a relatively high upfront revenue stream, maybe $40,000 to $45,000? How should we think about the rate at which you can bring that down, especially as robotaxi operators are looking to bring down vehicle costs to improve overall unit economics? Amnon Shashua: Our economics from every robotaxi is comprised of both onetime fee and revenue sharing on price per mile. And over time, we will kind of change the equation, maybe reduce the onetime fee, increase the cost per mile. So we both will have a recurring revenue and also the onetime fee of the system. With the robotaxi, it's really just execution because the current contracts that we have with the existing partners they talk about many tens of thousands of vehicles in the end of the decade. Just to give you a proportion, today's very, very successful Waymo is based on 3,000 vehicles. So it's really just a matter of execution. If we execute, we execute our plans of removing the driver during the first half of 2026 prepare this for commercialization beginning of 2027, the volume is there and in very, very big numbers. Daniel Galves: And in terms of the upfront cost, we have we have the room to switch around upfront cost versus recurring revenue because we have low costs in general. So we can stay profitable on the upfront cost down quite a bit and kind of replace that with more recurring revenue. Operator: Our next question comes from the line of Luke Junk with Baird. Luke Junk: I want to stick with robotaxi. We've talked a lot about U.S. robotaxi and Driver Out this morning. Hoping we could get an update on progress towards Driver Out in Europe as well, especially relative to the different regulatory homologation there and just maybe Europe versus U.S. dynamics in general right now for Mobileye. Amnon Shashua: Yes. So there are differences between Europe and the U.S. U.S. is mostly a self-certification process which we're doing. And we have today, close to 100 vehicles driving in the 3 locations in the U.S. for testing and working with additional carmakers or additional robotaxi platforms as mentioned, expanding that further. In Europe, we have an equivalent, let's say, volume of vehicles. The process for launching commercially is around -- is more about homologation and engaging with regulatory bodies in advance before you can commercially launch. We are doing this process alongside Volkswagen Group that are directly engaging with the German government. Just to add color on this, in the last IAA conference in Munich, we had a chance to meet the German chancellor who visited the Mobileye booth, and he also participated in a test trial with our ID.Buzz vehicle in Hamburg, and he was very impressed, he made remarks. It was covered all over the German media, and he made a very interesting remark about how Germany wants to be the leading country in Europe for autonomous driving, that he believes the time is now that our funds by the German government that should be allocated to accelerate this as much as possible. And he was very happy to see the successful collaboration between Volkswagen and Mobileye on this, and it's all covered in the German news so there is nothing confidential in what it I just said. And we think that we have good tailwinds to engage with the German government, specifically, and we plan to launch first in Germany. In Munich, in Hamburg and Berlin are the first 3 cities and we have good support, good alignment working with Volkswagen on that. We think it raises the entry barrier for other competitors when they want to enter the European market. So it's -- I think, again, as the first mover advantage by collaborating with an OEM at Volkswagen that has good ties with the German government, which really helps us in this situation. Luke Junk: And then for my follow-up, Amnon, you mentioned just a wrinkle in terms of more OEMs adding REM to front-facing programs, just curious your thoughts on that. Is it mainly around increasing the data collection? Could it be maybe a precursor of something in terms of future advanced product engagements with those customers as well? Amnon Shashua: So it's both for data collection, what we call harvesting. We have more OEMs using REM for harvesting and that's a precursor to also using REM for hands-free driving. Maybe Nimrod, do you want to add more? Nimrod Nehushtan: Yes. We recently signed with a new OEM for one of the bigger OEMs in the world that has significant volumes, and that's designed to provide significant volumes for harvesting globally and also use the REM database to improve the performance of the front-facing camera. It is for us today, the strategic value is mostly about expanding the OEM pool that uploads data. This data is important for us not just to use REM database explicitly as one of our moats, as we mentioned many times in the past, but also it's -- we use this very elegantly in our AI training and development. And that's something that maybe we'll share more details on in the future. But it is a very significant competitive advantage and expanding by being able to offer much better performance with not significant price increase OEMs of for front cameras, getting more data from multiple OEMs in millions. I think today, we have more than 7 million vehicles globally uploading data, more than 2 million vehicles in the U.S. alone. Europe is a similar number, also in Japan and Korea and soon in India and so on. So it's really a good global coverage but it is also diverse in terms of the type of OEM, type of vehicles, a number of OEMs. So we feel very comfortable with the strength of harvesting. Operator: Our next question comes from the line of Dan Levy with Barclays. Dan Levy: I wanted to just follow up on the prior question first and on the driver out, specifically in the U.S. for some of the programs you had, I know you said it was a self-certification process, maybe you can just go into maybe what are some of the gating factors that you need to see from a technical side to get comfortable to actually pull the driver? And what is the expected timing on driver out? Amnon Shashua: In terms of expected timing, we said it's going to be the first half of 2026 in one city in the U.S. In terms of the technical milestones, now we have a very elaborated safety program. It's called the PGF that we talked about in the past IR meetings and at the CES and we made that public also in terms of an academic paper that we published around it. And also in terms of mileage driven in order to prove to ourselves what is the MTBF. So together with ADMT which is the daughter company of Volkswagen, who was responsible for this program, we have agreed on MTBF milestones per type of accident. So it's not just one number. There are a number of different types of accidents. What is the MTBF, and we're tracking those numbers. And the trajectory that we see gives us confidence that we can achieve that by the first half of 2026. Dan Levy: Great. As a follow-up, on Tesla's call last night, Elon talked quite a bit about efforts with AI, their AI5 chip and all of the efforts in design and the strength of the performance, really emphasizing this, I think, is a key advantage. So -- and I think you've talked about this on the call here and more broadly. But as it relates to EyeQ6 and eventually EyeQ7, can you maybe just remind us to what extent the engagements with customers are looking at the strength of your SoC design, how that stacks up versus some of the other players? And for those that are maybe SoC agnostic, bring your own silicon, to what extent you're seeing customers actually leaning into your solution because of the SoC? Amnon Shashua: Well, I think the first question that you need to ask is why do you need more compute? And Tesla's approach and Mobileye's approach are different. Tesla is relying on a single sensor modality, which is cameras, omni cameras. And therefore, there are this bias variance in machine learning, you want to lower the variance, you need more and more data and more and more compute in order to bring the variance down to a point in which the MTBF is high enough. And the MTBF of Tesla's FSDs, just based on the public record of the FSD tracker, is orders of magnitude away from the bar that you need to pass in order to be unsupervised. Therefore, the requirement of significant more compute and significant more data is very, very intense and hence, the AI fight. Mobileye's approach relies also on redundancy. So we are doubling down on computer vision, on cameras and bringing the camera processing MTBF to be very high, but we are also relying on imaging radars, relying also on a front-facing LiDAR for eyes-off. So when you have redundancy, it's a different equation. And this is our PGF framework for creating profusing redundant subsystems. So then in our context, the question is, if with the EyeQ6 High, we are going to launch eyes-off at a very, very cost-optimized platform, right? The Chauffeur has 3 EyeQ6, and it's very, very -- it's highly cost optimized. The Drive 4 EyeQ6 is highly cost optimized, especially compared to platforms of robotaxis of today. So then the question is, why do we need more compute? Right, we replaced the EyeQ6 with EyeQ7. Is that going to reduce -- for what purpose? Is this to reduce price, not necessarily. So in our view, you need more compute to move from eyes-off to minds-off, and this is something that the industry are not talking about at all. All the targets around eyes-off, what is the bar to reach an eyes-off system. We are thinking of 0.29 and above on mind-off. And mind-off means that you need an AI that has very, very strong see understanding capabilities maybe it can work at lower frame rates. It doesn't have to be, let's say, 10 frames per second. Maybe it can be slower frame rate doesn't have to be doesn't have to replace the safety mechanism. So in our view, the EyeQ7 and EyeQ8 and all the additional compute comes on top of EyeQ6 and does not replace it. So it's a different concept. It's not that we have an EyeQ6 generation, and now we're replacing the EyeQ6 with EyeQ7 generation and then we'll replace EyeQ7 generation with EyeQ8, actually does not make sense when you are thinking about eyes-off systems because the validation process that is required to remove the driver is huge, is huge, right? So now you did all this validation process and now you are replacing your chip, and you have to do all those validation process again, doesn't make sense. So we have a completely different view of where compute is needed, where the added compute is needed. Daniel Galves: This will be our last question. Operator: Okay. Our final question is coming from Colin Rusch with Oppenheimer & Company. Colin Rusch: I just have a quick one around the cadence of your own chip design. Given some of the tools that we're seeing out there and the potential for accelerated time frames, are you seeing meaningful opportunities in terms of accelerating some of those development time lines and really being able to validate some of these more simplified designs that you guys are talking about? Amnon Shashua: Our chip portfolio covers both the very, very low end, like EyeQ6 Lite and the very high end. So EyeQ6 High, which is in production, is equivalent to, say, Orin-X in terms of looking at running programs like convolutional net ResNet, Vision net transformers, and the like. And EyeQ7 would compare to Thor in terms of its strength. And EyeQ8 is going to be -- which is now in the design stages and will be ready for 2029 production, is going to be 3, 4x stronger. And again, the EyeQ7 and EyeQ8 are responsible for the minds-off. It's not -- for the eyes-off we are set. We have the EyeQ6. We don't need to replace EyeQ6 with a more powerful chip to reach eyes-off capability or to reach a robotaxi -- robotaxi with teleoperators in the back office. The idea in robotaxi is to remove the teleoperators. This is why we want minds-off and the idea with consumer operated cars is to enable the driver to sleep while using the system. This is where we need more compute. And the cadence is once every 2 years. So this is the cadence and which is sufficient for the speed of where the industry is going and where technology is going. Daniel Galves: Colin, thanks for the question. I don't think we have time for a follow-up. I want to respect everyone's time. Operator: Thank you. This now concludes our question-and-answer session. I would like to turn the floor back over to management, Dan Galves for closing comments. Daniel Galves: Thanks, everyone, and looking forward to the Q4 call in January. Thank you. Have a good day. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to the Allegion Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vice President of Investor Relations, Josh Pokrzywinski. Please go ahead. Joshua Pokrzywinski: Thank you, Betsy. Good morning, everyone. Thank you for joining us for Allegion's Third Quarter 2025 Earnings Call. With me today are John Stone, President and Chief Executive Officer; and Mike Wagnes, Senior Vice President and Chief Financial Officer of Allegion. Our earnings release, which was issued earlier this morning, and the presentation, which we will refer to in today's call, are available on our website at investor.allegion.com. This call will be recorded and archived on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements that are made pursuant to the safe harbor provisions of federal securities law. Please see our most recent SEC filings for a description of some of the factors that may cause actual results to differ materially from our projections. The company assumes no obligation to update these forward-looking statements. Today's presentation and commentary include non-GAAP financial measures. Please refer to the reconciliation in the financial tables of our press release for further details. Please go to Slide 3, and I'll turn the call over to John. John Stone: Thanks, Josh. Good morning, everyone. Thanks for joining. Q3 was another strong quarter as we execute our long-term strategy and steadily deliver on our commitments to shareholders. I'm proud of our team's performance as we've remained agile in a dynamic operating environment. The double-digit revenue growth for the enterprise and continued segment margin expansion speaks to the resiliency of our model, our broad end market exposures and the depth of our relationships with channel partners and end users. We continue to take advantage of our business' strong cash generation, returning cash to shareholders and growing our business through accretive acquisitions. Year-to-date, we have allocated approximately $600 million to acquiring businesses consistent with the priorities we outlined at our Investor Day. As we approach year-end, the key market trends supporting our outlook are largely unchanged. Our team continues to execute well, and we are allocating capital for the long-term benefit of our shareholders. As such, we are raising our 2025 full year outlook for adjusted earnings per share to $8.10 to $8.20. I'll be back later to discuss the outlook and share some early views on markets for 2026. Please go to Slide 4. Let's take a look at capital allocation for the third quarter, starting with our investments for organic growth. In September, the Allegion team launched a new mid-tier commercial product line for Schlage, our Performance Series locks. These locks bring Schlage quality to more price points in nonresidential applications, giving us more ways to win in the aftermarket and building on the success of the mid-price point Von Duprin 70 Series exit devices released last year. Turning to M&A. Since we spoke at Q2 earnings, Allegion has announced 2 more acquisitions, UAP and Brisant. These U.K.-based businesses strengthen our product portfolio, including electronic locks in addition to enhancing our cost position. As discussed previously, the acquisitions of ELATEC, Gatewise and Waitwhile closed earlier in the third quarter. Allegion continues to be a dividend paying stock, and in the third quarter, this amounted to $0.51 per share or approximately $44 million. We did not repurchase shares in the quarter. And you can continue to expect Allegion to be balanced, consistent and disciplined with capital deployment over time with a clear priority of investing for profitable growth. Mike will now walk you through the third quarter financial results. Michael Wagnes: Thanks, John, and good morning, everyone. Thank you for joining today's call. Please go to Slide #5. As John shared, our Q3 results reflect continued strong execution from the Allegion team, delivering double-digit revenue growth for the enterprise. Revenue for the third quarter was over $1 billion, an increase of 10.7% compared to 2024. Organic revenue increased 5.9% in the quarter as a result of favorable price and volume led by our Americas nonresidential business, where demand remains healthy. Q3 adjusted operating margin was 24.1%, down 10 basis points compared to last year. Both our segments had margin expansion which was offset by higher corporate expenses relative to the prior year comparable. Volume leverage and mix were accretive to margins. Additionally, price and productivity, net of inflation and investment was a tailwind of $2.2 million. Adjusted earnings per share of $2.30 increased $0.14 or 6.5% versus the prior year. Operational performance and accretive acquisitions contributed 10.6 points of EPS growth. This was partially offset by higher tax and interest and other. We still anticipate the full year tax rate to be in the range of 17% to 18%. Finally, year-to-date available cash flow was $485.2 million, which was up 25.1% as we continue to generate strong cash flow. I'll provide more details on the balance sheet and cash flow a little later in the presentation. Please go to Slide #6. Our Americas segment delivered strong operating results in Q3. Revenue of $844 million was up 7.9% on a reported basis and up 6.4% on an organic basis, led by our nonresidential business. Organic growth included both favorable price and volume in the quarter. Reported revenue includes 1.5 points of growth from acquisitions. Pricing in our Americas segment was 4.6% in the quarter. This includes a combination of core pricing and surcharges as we cover inflation, including tariffs. Our nonresidential business increased mid-single digits organically and demand for our products remains healthy, supported by our broad end market exposure. Our residential business grew mid-single digits, primarily driven by volume associated with new electronic products that we launched in the quarter and price. However, we still consider overall residential market demand to be soft, consistent with year-to-date growth rates. Electronics revenue was up mid-teens and continues to be a long-term growth driver for Allegion. Americas adjusted operating income of $252 million increased 9% versus the prior year. Adjusted operating margin was up 40 basis points as volume leverage and favorable mix were accretive to margins. Price and productivity, net of inflation and investments was a tailwind of $10.2 million. Please go to Slide #7. Our International segment delivered revenue of $226 million, which was up 22.5% on a reported basis and up 3.6% organically, led by our electronics businesses. Acquisitions contributed 13.6% to segment revenue, consisting of the acquisitions John mentioned earlier, net of the previously announced divestiture of API. Currency was also a tailwind, positively impacting reported revenue by 5.3%. International adjusted operating income of $32.3 million increased 28.2% versus the prior year period. Adjusted operating margin for the quarter increased 70 basis points, driven by volume leverage and mix. Acquisitions were accretive to segment margin rates, although slightly dilutive to the enterprise rates. We continue to drive portfolio quality in the International segment through self-help and adding high-performing businesses where we have a right to win. Please go to Slide 8, and I will provide an overview on our cash flow and balance sheet. Year-to-date available cash flow was $485.2 million, up nearly $100 million versus the prior year. This increase is driven by higher earnings, lower capital expenditures and improvements in working capital. I am pleased with the strong cash generation in 2025. And based on year-to-date performance, we see upside to our previous cash flow outlook. We now expect conversion of 85% to 95% of adjusted net income. Working capital as a percent of revenue increased due to acquired working capital, which does not impact cash flow. Organic working capital improved compared to prior year. Finally, our balance sheet remains strong, and our net debt to adjusted EBITDA is at a healthy ratio of 1.8x. We continue to generate strong cash flow and our balance sheet supports continued capital deployment. I will now hand the call back over to John. John Stone: Thanks, Mike. Please go to Slide 9, and I'll share our updated outlook. With one quarter remaining in the year, our markets remain largely consistent with our prior outlook. And the Americas nonresidential markets remain resilient, and Allegion is performing well in the aftermarket. Our spec activity has grown over 2024 and year-to-date 2025, driven by our broad end market exposure, and this supports our outlook. Residential markets, however, remain soft. And as Mike mentioned, solid performance in Q3 was primarily driven by new electronic product launches. International markets have largely been unchanged year-to-date, and we continue to expect roughly flat organic performance. We expect approximately $40 million of surcharge revenue in the Americas related to tariff recovery, which does include the August 18 scope expansion for Section 232. Based on strong execution and the recent acquisitions of UAP and Brisant, we're increasing our 2025 adjusted EPS outlook to $8.10 to $8.20. You can find additional details as well as below-the-line model items in the appendix. As you know, we'll provide Allegion's formal 2026 financial outlook during our February earnings call. So please go to Slide 10. Today, we'd like to provide a preliminary view on our markets for next year. And I'd say, overall, we expect rather similar market conditions to 2025. In the Americas, our broad end market coverage and spec activity continue to support organic growth in our nonresidential business. Residential markets continue to be soft. The input cost environment remains dynamic with tariffs, and you can expect us to continue to drive price to offset inflation. Internationally, markets have been sluggish; however, we do expect to benefit from 2025 acquisition activity. For the enterprise, we expect carryover revenue contribution of approximately 2 points from acquisitions closed in 2025. Please go to Slide 11. In summary, Allegion is executing at a high level, while staying agile and steadily delivering on the long-term commitments we shared with you at our Investor Day. Our performance is led by an enduring business model in nonresidential Americas, double-digit electronics growth and accretive capital deployment as we acquire good businesses in markets where we have a right to win. I'm proud of the performance by the Allegion team in this very dynamic environment, which gives us the confidence to increase our EPS outlook for the year. With that, we'll take the questions. Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Joe Ritchie with Goldman Sachs. Joseph Ritchie: So I appreciate all the color and the initial look into 2026. John, maybe just pulling on that thread on spec writing continuing to be up and nonres specifically, I think you mentioned last quarter that you were starting to see some positive momentum on spec writing specifically as it relates to office. Can you maybe just give us an update on the key verticals and whether there's -- there were any kind of like discernible differences between how you feel today versus how you felt a quarter ago? John Stone: Yes, it's a good question, Joe. And I think the comments would be very consistent that our spec activity accelerated over the course of 2024 and has grown year-to-date 2025. Rather than picking and choosing this vertical or that vertical, I would just say Allegion's spec writers are very versatile in their expertise and one day could be writing a specification for an elementary school. The next day, they could be doing multifamily and the next day after that, they could be doing a data center. So they have that capability and that engine never turns off. I think the main thing we'd have you take away is that spec activity has continued to grow in 2025, broadly speaking. And spec activity supports our outlook as we talked about in the prepared remarks and gives us the confidence that we still see organic growth in non-res Americas. Joseph Ritchie: Okay. Great. Helpful. And then I want to also kind of just talk a little bit more about your M&A pipeline. It's been such a great part of the story, really over the last, like, 12 to 18 months. And recognize that you've kind of given us the 2 points as a placeholder for next year. Just talk about the pipeline as you see it today. And as you're kind of thinking about like the potential accretion from an earnings standpoint into next year based on what you already know, just any color around that would be helpful. John Stone: Yes, it's a great question, Joe, and it's something we're really excited about. I think the pipeline is still strong and strong in both of our reporting segments, so strong in International, strong in the Americas. And if you recall our Investor Day material, where we talked product categories that we're looking for, whether that's portfolio expansion in our mechanical business, whether that's electronics, whether that's complementary software, we've got activity in all of those categories right now. So very excited about the pipeline. And I'd say you can expect us to continue to be disciplined around the strategy and around the types of businesses we acquire and around the shareholder returns that we generate from these acquisitions. So I feel real good about it. And I think it continues to be an important part of Allegion's overall growth story. Michael Wagnes: Joe, with respect to the question on the EPS. In the appendix, we provide what the full year benefit this year is, which allows you to calculate what the EPS benefit on acquisitions is in the fourth quarter. And think about that as a carryover rate for the first 2 quarters of the year. The acquisitions were largely done early July. So that should provide you enough information for you to get a framework for the relative size of the benefit that we have. Operator: The next question comes from Joe O'Dea with Wells Fargo. Joseph O'Dea: Can you just talk about conversations with building owners, architects, overall end users on the current kind of uncertainty impact in the macro, what they're looking for? Really just trying to get a sense for what your perception is of activity that's sidelined and just waiting for a little bit better visibility and what some of those key ingredients are to bringing that activity off the sidelines? John Stone: Yes, Joe, it's a good question. And I would say there's a couple of things going on. And as we are out with customers and end users quite frequently, our own channel checks would indicate comments very consistent with what we shared with you in the prepared remarks, that nonres project activity is humming along pretty well. And I think some private finance came off the sidelines this year. A more favorable interest rate environment would certainly continue to be a swing factor that we would see to bring more of that private finance off the sidelines. But I would say, overall, positive environment and channel checks, our customers' backlogs are pretty healthy and has given them pretty good confidence about organic growth as well. And that's what we've tried to convey to you today. I think nonres overall is humming along pretty well. Joseph O'Dea: Appreciate that. And then on the International side, I think this was the first quarter of volume growth after 4 of declines, actually better volume growth in International than Americas even this quarter. So just kind of unpacking a little bit more what you saw in the quarter, how you think about any momentum behind a little bit of volume growth there? John Stone: Yes. I appreciate you noticing that, Joe. I mean we were certainly really happy to see that and proud of the International team to put those numbers up on the board this quarter. I would say our view on the end markets is still largely unchanged, that it's around flattish kind of organic growth. But I would also say you've had some of the market segments there really at historical troughs, and we don't anticipate that they trend negative in perpetuity. So I think the International team has executed well in a lot of pretty challenging environments. And like Mike mentioned in the prepared remarks, our electronics businesses are still performing very well. And you add to that, we're still really excited about the ELATEC acquisition, which is a pretty sizable deal for us that will continue to add momentum there in the electronic space. Operator: The next question comes from Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start with maybe the adjusted operating margins. So those were flattish in the third quarter year-on-year. Just wanted to check, but it looks like perhaps you're assuming they pick up again with some margin expansion of a few tens of basis points in the fourth quarter. Just wanted to check if that was the right assumption and how we should think about the corporate cost movement into Q4 and next year in that context? Michael Wagnes: Yes. Thanks for the question, Julian. If you look at the third quarter, pleased with the segment margin expansion, did a really good job. We were negative in corporate. Part of that is just the year-on-year comp. Last year in the third quarter, corporate was low. This year, our third quarter is really consistent, slightly less than even what you saw in the second quarter. As you think about margin expansion for the year, you can back into it, we expect to have margin expansion for the year and in the fourth quarter. And then from a run rate perspective of corporate, the question you asked, you saw what we put up in the third quarter. Think of that as relatively what we've ran in the last couple. So you can kind of use that as a fine estimate. Julian Mitchell: That's very helpful. And just within the Americas segment for a second. You had a decent tailwind from that PPII bucket in the third quarter, and I think that was a good pickup from what you'd seen, that being flattish in the second. When we're looking out the next few quarters, should we assume that, that sort of gross price of about 4 or 5 points is a good placeholder and PPII stays as a decent tailwind? Just trying to understand operating leverage, you have that mid-30s placeholder from the Investor Day. Are we sort of on that path now leaving aside the corporate costs moving around? Michael Wagnes: Yes. If you think about the Americas, I talked about this earlier in the year. Inflation, especially associated with the tariffs, right, was a little quicker than some of the pricing benefits. We said that would improve as the year progressed. You see that in the third quarter. The big item for us on the pricing side is what is inflation and tariffs are a component of that inflation. Just look for us to drive pricing and productivity, and you've heard me mention this many times before. Pricing and productivity covers the inflation and the investment, and that helps drive the margin expansion. Overall, I feel good about the progress we're making in the Americas. I think we're doing a great job in combating a very dynamic environment of change when you think about tariffs and expect us to continue to drive that margin expansion that we talked about. Julian Mitchell: Got it. And that sort of mid-30s type rate based on inflation and mix and price, that should be achievable the next x kind of quarters. Nothing looks too out of line versus that. Michael Wagnes: Yes. Certainly, Q4 you could calculate. We'll be back in February to give you a '26 margin outlook. Think of that as a long term, right, to the long-term investors out there. Long term, we should be able to drive incrementals of 35%. Let us get to February of next year when we give our outlook and complete the annual operating plan. But certainly, for the fourth quarter, you could calculate the implied margin expansion. Operator: The next question comes from Jeff Sprague with Vertical Research. Jeffrey Sprague: I want to come back to the deals, really kind of maybe a 2-part question. First, just thinking about sort of everything that you've done here. It all looks like it makes sense and fits in and is nicely moving the needle as we've seen your results. But just thinking about kind of the margin entitlement of what you've acquired, where you might be on integrating these assets? Are they all truly being integrated or any of them sort of stand-alone? Just trying to kind of get my head around kind of the journey you're on here. John Stone: Yes, I appreciate the question, Jeff. And I think if you recall our Investor Day commentary, we talked about being disciplined. And I would say some of those guardrails around being disciplined would be consistent with our strategy, consistent with our geographic exposure and consistent with markets where we've got a right to win, meaning we've got brand strength, we've got human capital and talent, we've got distribution strength. And so yes, to specifically answer your question, all of these acquisitions are being integrated and being integrated rapidly. I think there are synergies across the board in revenue synergies, cost synergies. There are exposure to faster-growing segments that we've acquired. So I feel real good about the strategic alignment of every deal we've done and continue to feel the same way about the outlook on our pipeline there. So really good. But yes, I mean, we're not looking to acquire our way into adjacent spaces. We're not looking to expand geographic scope. We're staying in markets we know where we've got a right to win, and we're acquiring enhancements to our product portfolio in electronics and mechanical and complementary software and feel real good about it. So I think you can -- again, you can look for us to continue to be acquisitive but continue to be disciplined like we've shown. Jeffrey Sprague: And then I guess, discipline also includes the element of price paid. And I kind of appreciate like each individual deal, it's hard for me to press Josh or Mike for like specifics on multiples and all that. But is there a way to just step back and sort of collectively say, you gave us the dollars deployed, right, on a year-to-date basis, kind of what the average multiple has been? And when you think about the synergies, kind of what the -- maybe what the forward multiple would be looking out kind of 12, 24 months as you integrate these things? John Stone: Yes, Jeff, it's a good question. Very fair question. I think we've had some commentary around this in past quarters. So on the mechanical side, if we're expanding our mechanical portfolio, you would see something in the high single-digit EBITDA multiple would be a fair approximation. On the higher growth electronics and software, you're going to see a bit of a higher multiple there because we're expecting higher growth and higher longer-term returns. Michael Wagnes: Jeff, maybe also to help you out, the biggest acquisition is ELATEC. Clearly, that is the lion's share. So we gave that information when we released the -- when we made the acquisition and we issued the press release. You could see that and you get at least a pretty good idea of all the acquisitions, what's the biggest piece there from a multiple [ paid. ] Operator: The next question comes from Tomo Sano with JPMorgan. Tomohiko Sano: I'd like to ask you about the residential outlook for Q4 in America. So the residential revenue improved to up mid-single digit in Q3. And you mentioned no clear signs of the recovery of the market for 2026. But how do you see the residential segment performing in Q4? Could you share your current market outlook and also the new product contributions, especially for electronics in Q4, please? Michael Wagnes: Tomo, to answer your question on the residential. I apologize, we had some phone difficulties there. Overall, market demand for residential is soft. It's been that way for a while. In the third quarter, we did have that benefit associated with the new product introductions, the e-locks, that was the Arrive lock that we talked about in the first quarter earnings call. We launched it in the third quarter, and we had the benefit. As I said on the prepared remarks, overall, think of market demand consistent with year-to-date growth rates for residential, which is down slightly. So as you think about the fourth quarter, we would not expect a mid-single-digit positive growth. We would expect it more in line with market demand, which is that softer nonresidential market that we're in -- I'm sorry, residential. Tomohiko Sano: And my follow-up question is on tariffs and pricing. So you have demonstrated strong pricing power and agility in managing a tariff-related cost pressures. And are you seeing any signs of pricing fatigue or customer weakness? And how would you see the other market players reacting for pricing in the market, please? John Stone: Tomo, this is John. I would say -- I appreciate the comment. And yes, I think our teams and our customers have collectively responded well to the inflationary nature of the tariffs. I think our industry as a whole has moved up with price realization. And I'd say, just as Mike said in the prepared comments, as inflationary pressures continue, we stand ready to cover that with price. I would say the demand environment in nonres, as we mentioned, is good. It's healthy. Nonres is humming along pretty well. So I haven't yet seen something that we would call fatigue. Operator: We have one final question in our queue today. The next question comes from Tim Wojs of Baird. Timothy Wojs: Maybe just the first one, I'm kind of thinking bigger picture about kind of spec and spec writing and just kind of content within the spec. John, how would you kind of compare the content in the spec that you're kind of writing today versus maybe what you were doing 3 years ago? And I'm just trying to kind of get at how that spec is evolving, particularly as you kind of have done some of the, I'd say, ancillary product kind of M&A over the last couple of years? John Stone: Tim, that's a great question. I appreciate you asking. I would say a couple of things come to mind in terms of spec content. We're seeing electronics adoption accelerate, and that's evident in our specs. And I think evident in the electronics growth numbers that we've been showing lately. So very pleased with that. And I think the new product launches that we've been doing in nonres, in particular, are paying dividends there. I would also say we're starting to see -- it would be very small, but starting to see even opportunities to spec in some of the complementary software that we've developed organically into like a multifamily application. So that's very exciting for us to see as well. In terms of the new acquisitions, several of them, if you talk nonres Americas like Krieger Specialty Products, hand-in-glove fit with our spec engine, and we're excited to see the growth there. Because if you recall, that acquisition brought products that we didn't have in our hollow metal portfolio, high-margin, fast-growing niche products that we're finding great opportunities to spec into new customers even. So really good fit. Another good example from this year would be Trimco, makes high-end specialty hardware for commercial applications. If you had pulled channel customers of ours for the last couple of years, they would highlight something like a Trimco as one of the best acquisition targets for Allegion to go after. So really excited to have that team on board with us. And it's -- again, it fits right into the spec engine. So we're happy to see that momentum. Timothy Wojs: Okay. Okay. That's great to hear. And then maybe just on the modeling side. Just in International, kind of the opposite of Julian's question on PPII, that flipped negative this quarter. Is that just a timing consideration? Or is there anything kind of to read in there around price, productivity and inflation? Michael Wagnes: Yes. If you think about margins in International, good performance this quarter. It was slightly negative on the PPII. On a year-to-date basis, though, Tim, think of it as it's negative like $1 million if you add up the 3 quarters. So it's essentially covered. And look for us in International to cover that inflationary pressure. So I wouldn't look too much into the third quarter at all. Look at the year-to-date rate and you get an idea, we're doing a pretty good job there. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to CEO, John Stone, for any closing remarks. John Stone: Thanks very much, and thanks, everyone, for the very engaging Q&A. We look forward to connecting with you on our Q4 earnings call in February. Be safe, be healthy. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded. [Operator Instructions] I would now like to turn the call over to Zack Moxcey, Vice President of Investor Relations. Please go ahead. Zack Moxcey: Good morning, and thank you all for joining us as we discuss the third quarter 2025 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Jason Conley, Executive Vice President and Chief Financial Officer; Brandon Cross, Vice President and Principal Accounting Officer; and Shannon O'Callaghan, Senior Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now if you please turn to Page 2. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements, which are subject to risks and uncertainties as described on this page, in our press release and in our SEC filings. You should listen to today's call in the context of that information. And now if you please turn to Page 3. Today, we will discuss our results primarily on an adjusted non-GAAP and continuing operations basis. For the third quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets, transaction-related expenses associated with completed acquisitions; and lastly, financial impacts associated with our minority investment in Indicor. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now if you please turn to Page 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil? Neil Hunn: Thank you, Zack, and thanks to everyone for joining us and excited to be with you this morning. As we turn to Page 4, you'll see the topics we plan to cover today. We'll start with our third quarter highlights and financial results. Next, we'll review our segment performance, our AI progress and momentum and our most recent set of bolt-on acquisitions. Then I'll get into our guidance details and of course, wrap up with your questions. So with that, let's go ahead and get started. Next slide, please. Turning to Page 5. Let me run through the 4 key takeaways for today's call. First, we had a strong third quarter. Total revenue grew 14%, organic revenue grew 6%, software bookings grew in the high singles area, and we continue to deliver impressive free cash flow with free cash flow growing 17%. And of note, free cash flow margins posted at 32% for the TTM period, really impressive financial results. Second, we're super encouraged by the progress and momentum we're seeing across all of our businesses as it relates to our AI enablement and our product stacks and our internal operations and more on this in a moment. Third, we're announcing today our first share repurchase authorization, $3 billion in total. And lastly, we continue to execute on our M&A strategy of acquiring faster growth platforms and bolt-on or tuck-in acquisitions at a high fidelity rate. In the quarter, we deployed $1.3 billion, $800 million for Subsplash, which we detailed this time last quarter, and $500 million on a series of tuck-in acquisitions. Also more on this later, but worth highlighting here, we are very encouraged by this recent capital deployment execution and the future growth potential that's being layered into our enterprise. Importantly, we remain very well positioned for the continued execution of our M&A strategy and continue to have north of $5 billion of capital deployment capacity available over the next 12 months or so. As I turn the call over to Jason, reflecting on the quarter, I'm quite bullish on most of what we're seeing, a very strong 3Q, real demonstrable AI progress, which is a long-term growth driver for us, excellent execution of our higher growth, higher returning capital deployment strategy and the announcement of our first-ever buyback authorization. This all bodes very well for the future. That said, we'd like to see some of our markets start to cooperate a bit better, namely the government contracting and freight markets, and we have some delays in Neptune. Much more on this as we walk through today's call. So with that, let me turn the call over to Jason to talk through our P&L and our balance sheet. Jason Conley: Thanks, Neil. Good morning, everyone, and thanks for joining us today. I'm pleased to take you through our third quarter results and strong financial position. Turning to Page 6. Q3 and TTM results reflect the long-term financial profile of Roper, which is to compound cash flow in the mid-teens area. We'll start with revenue, which was 14% over prior year and surpassed the $2 billion mark. Acquisitions contributed 8%, led by the final quarter of Transact before it turns organic and CentralReach, which we acquired in April this year. Of note, these businesses are tracking very well against our acquisition expectations. We printed 6% organic growth, both for the consolidated enterprise and across each of our 3 segments. Our Application and Network Software segments were in line with expectations, while TEP was a bit below given near-term timing at Neptune, which Neil will discuss further. EBITDA of $810 million was 13% over prior year with EBITDA margin of 40.2%. Core margins expanded 10 basis points and segment core margins expanded 30 basis points, led by our software segments. DEPS of $5.14 was 11% over prior year and $0.02 above the high end of our guidance range despite absorbing $0.05 of dilution from Q3 acquisitions that were not reflected in previous guidance. Free cash flow was outstanding at $842 million, up 17% over prior year and representing 32% of revenue on a TTM basis. Our software businesses captured strong renewals, and we drove great working capital performance across the board. Broadening out a bit, TTM cash flow of over $2.4 billion is a 17% CAGR over a 3-year period. And for those looking at per share metrics, you'll note that our share count has compounded at about 0.5% over that same time period. At Roper, we have been and will continue to be relentlessly focused on cash flow and shareholder value creation. Now let's turn to Slide 7 and discuss our very strong financial position. Our net debt-to-EBITDA stands at 3x, which is up only modestly from Q2 at 2.9x despite deploying $1.3 billion towards acquisitions. This places us in a great position with over $5 billion in next 12-month capacity for capital deployment. Regarding M&A, you can see that we've been quite active this year in acquiring high-quality growth businesses and several strategic bolt-ons. This is against the backdrop of a muted PE deal environment. The pipeline of high-quality acquisitions continues to build as assets mature in PE portfolios and a return of capital to LPs becomes paramount. Additionally, as Neil mentioned, we're pleased to announce another capital deployment lever that was previously unavailable. Our Board has authorized a $3 billion share repurchase program with an open-ended time period to execute. While M&A will continue to be the majority of our capital deployment allocation, our share repurchase program will allow us to opportunistically complement our M&A program. Over the last year or 2, we have talked about the great business building taking place across the Roper portfolio from strategy to talent to execution, all now greatly turbocharged by AI. Our repurchase program reflects both confidence in our strategy and our commitment to delivering long-term shareholder value. So with that, I'll turn it back over to Neil to talk about our segment performance. Neil? Neil Hunn: Thanks, Jason. Turning to Page 8. And before we get into our segment details, we want to discuss why AI is a powerful and durable growth driver for Roper. To start, AI represents a meaningful expansion of our TAM across the portfolio. We can now deliver transformational software solutions that automate labor-intensive work adjacent to our existing platforms. This creates substantial new value streams for our customers and correspondingly facilitates long-term growth for Roper and our businesses. Importantly, our businesses are uniquely positioned to win in AI, in fact, having a very high right to win in the AI world. Our software solutions are deeply embedded system of record applications with workflow-oriented domain-specific architectures. The decades of cumulative workflow knowledge built into our platforms, combined with the proprietary vertical market data, provide the precise context needed to develop Agentic AI solutions. Because of this, our businesses have an exceptionally high right to win as we deploy these capabilities across our VMS end markets. Internally, we're becoming AI native across all functions to drive productivity gains. We're excited to reinvest these gains to further accelerate our product development and go-to-market initiatives. It's important to note, we've always had more great ideas than resources needed to execute, and AI has the potential to attack this challenge. Finally, we have tangible proof points, though it's still early. Aderant has claimed a technology leadership position in legal tech, accelerating their bookings growth. CentralReach now has roughly 75% of their bookings attributed to AI-enabled products, which have automated 100 million reimbursement rule evaluations, over 3.5 million learner appointments and over 1 million clinical summaries being generated, great real-world examples of the power of AI. Deltek has released over 40 AI features into their cloud offerings, driving increased cloud conversion activity. And DAT has industry-leading AI/ML-enabled freight matching capabilities, which I'll detail shortly. These are but a few examples from across the portfolio. Very exciting times for sure. With that, let's now turn to our segment review, starting with Page 10 and our Application Software segment. Revenue for the quarter grew by 18% in total and organic revenue grew by 6%. EBITDA margins were 43.4% and core margins improved 40 basis points in the quarter. Starting with Deltek. Deltek delivered solid performance in the quarter with particularly strong results in their private sector end markets. Construction, architecture and engineering remained robust throughout. The GovCon business experienced softness in September as agencies paused activity ahead of the pending government shutdown. This timing is unfortunate. Pipeline activity and commercial momentum had been building nicely following the passage of the one big beautiful bill in July, and we are seeing increased engagement across our customer base heading into the new fiscal year. The fundamentals remain strong. The OB3 authorized significant increases in defense and infrastructure spending that will flow through to our customers once appropriations are finalized. This is simply the timing issue, not a demand issue. Finally, retention levels across the entire Deltek franchise remain very high. Aderant continues to be incredibly strong and continues to post impressive bookings and recurring revenue growth. The booking strength is broad-based, fueled by their AI-enabled solutions, especially as it relates to AI-enabled compliant time capture and billing and is a combination of market share gains, cloud migration and SaaS growth. Vertafore continues once again to be steady and solid for us. We continue to see consistent ARR growth and strong customer retention and strength across their agency, MGA and carrier solutions. This growth is enabled by their strong go-to-market capabilities and their long-term commitment to product strength. PowerPlan's performance has been terrific. Their success is a result of several years of business building in the product stack, the go-to-market capabilities, their service delivery really across all functions. In addition, to remind everyone, they serve power generation customers, which are adding capacity as quickly as possible to handle the AI workloads. The setup here should be quite good for a long time. Also in the quarter, we completed the acquisition of Orchard, a tuck-in acquisition for our Clinisys business. Orchard brings additional clinical laboratory capability to Clinisys with particular strength in reference, physician office and public health labs. Finally, the balance of our application software portfolio continues to execute very well. CentralReach was awesome again in the quarter, driving accelerating adoption of their AI tools and capturing ABA therapy capacity additions. Procare made a great installment of progress with new bookings continuing to be strong, posting low double-digit growth in payments with improved gross margins, though still work to do, in particular, with faster implementation time frames and share of wallet expansion, but meaningful progress for sure. Finally, Strata and Transact were steady and solid in the quarter. As we look to the final quarter of the year, we expect to deliver mid-single-digit organic revenue growth. This outlook reflects high single-digit growth in our recurring revenue base, offset by declines in nonrecurring revenue, primarily due to anticipated softness in our Deltek business stemming from the ongoing government shutdown. Given the uncertainty surrounding the duration and impact of the shutdown, we see potential outcomes across the full range of our MSD outlook from the lower to the higher end. That said, our businesses in this segment continue to compete and execute exceptionally well. The primary variable remains a higher level of market uncertainty than we typically experience for our Deltek business. Please turn with us to Page 11. Total revenue in our Network segment grew 13% and organic revenue 6% in the quarter. EBITDA margins remained strong at 53.7% with core margins improving 60 basis points. As we dig into the individual businesses, we'll start with DAT. DAT was solid in the quarter and had strong ARPU improvements. DAT continues to execute exceptionally well on their core strategy of driving enhanced network value for both brokers and carriers. This dual-sided approach positions DAT to better monetize their entire network ecosystem and more on this when we turn to the next page. ConstructConnect was solid again for us in the quarter. The growth was fueled by strong customer bookings activity and improved customer net retention. Of note, this business continues to make good progress with our emerging AI-enabled takeoff and estimating solution. Foundry is turning the corner on growth, posting continued sequential improvements in ARR, and we expect our Q4 exit ARR to grow year-over-year in the HSD area. Really happy for the team there as they've had to work through some tough market conditions. Next, our network health care businesses, MHA, SHP and SoftWriters were very good in the quarter. Of particular note, SoftWriters is executing at an exceptional level, winning a few very large pharmacy customers and making substantial progress on a high-impact AI solution, which is being beta tested in the market currently. Congrats to Scott and his entire team for their success. Finally, Subsplash, our most recent acquisition that closed on July 25, is off to a great start, delivering financial results in line with our deal model expectations. Of note, they saw very good market traction with their AI-driven [ sermon ] content offering, Pulpit AI, and they deepened its integration with their core engagement platform, driving strong product-led growth, exciting stuff. As we turn to the outlook for the final quarter of the year, we expect to see organic revenue growth at the higher end of the mid-singles area. As we turn to Page 12, we'd like to spend a few minutes describing the strategic evolution of our DAT business and why we're so excited about its future growth prospects. To start, our legacy DAT platform is the largest freight matching network across the U.S. and Canada. The scale is remarkable, over 1.2 million loads posted and 15 million rate views every single day. DAT is the clear market leader, delivering tremendous value to both freight brokers and carriers, both of whom pay to participate in this powerful network. As strong as the legacy business is, we're even more bullish about where DAT is headed. To bring this vision to life, DAT is building capabilities across the entire freight automation workflow from carrier vetting to broker carrier matching to AI-driven rate negotiation, load management tracking and finally, payment and settlement. Through deep customer partnering with the brokerage community, DAT is working to fully automate the freight matching process. As this happens, DAT will generate $100 to $200 per load in savings for brokers while giving carriers greater predictability and faster payments on their invoices. What sets DAT apart is this end-to-end product capability and its role as a neutral trusted partner, a Switzerland-like player that equally serves the entire freight brokerage market. This is a truly unique position in the market. This evolution also highlights the Roper DAT partnership at its best. We work closely with the DA team to craft this strategy, then we executed a focused M&A program to strengthen it through 3 strategic tuck-ins: Trucker Tools, Outdo and Convoy. With the deals complete, DAT is now fully focused on delivering against this strategic opportunity. Important to note, Convoy is an unusual transaction for us as it currently is not profitable, but we expect the financial returns over the next several years to be extremely attractive. The key to success is scaling efficiently, leveraging DAT's advantaged customer unit economics for both brokers and carriers to drive sustained growth and profitability. We are confident in this strategy, market position and DAT's ability to execute. I know this was a bit of a deep dive, but we wanted to share with you why we're so excited about the growth opportunity that sits in front of DAT, true AI-based freight automation. Now let's turn to Page 13 and review our TEP segment's quarterly results. Total revenue here grew 7% and organic revenue grew 6%. EBITDA margins came in at 35.2%. Let's start with Neptune. As we've said before, Neptune continues to execute really well, particularly around its ultrasonic meter strategy, and we're seeing strong traction in its data and software billing solutions. The new copper tariff that took effect on August 1 caused some short-term disruption. Neptune responded by implementing surcharges to offset the tariffs impact, which temporarily slowed order timing. These actions reflect the benefit of being part of Roper, doing the right long-term thing for customers and the business even when it creates near-term headwinds. Verathon continues to perform well. In particular, during the quarter, Verathon saw continued strength in its single-use recurring product lines, both BFlex and GlideScope, which remain key growth drivers. NDI also delivered an excellent quarter. As we discussed previously, NDI provides proprietary world-class precision measurement technologies to a range of health care OEMs. These technologies in turn enable guidance-enabled solutions across multiple clinical markets, including orthopedic surgery, interventional radiology and cardiac ablation. Finally, we saw strong execution and growth across CIVCO, FMI, Inovonics, IPA and rf IDEAS, rounding out a solid overall performance for this group of companies. Looking ahead to the fourth quarter, we expect organic growth in the low single-digit area given the very difficult prior year comp and the timing we discussed at Neptune. Now let's turn to Page 15 and review our Q4 and updated full year 2025 guidance. Starting with the full year outlook, we continue to expect total revenue to remain in the 13% area. Also, given the delays at Neptune and the temporary impact of the government shutdown, which is slowing year-end commercial activity at Deltek, we now expect organic revenue to land in the 6% area versus our previous 6% to 7% range. Relative to our full year DEPS outlook, we're tightening guidance to the high end of our prior range after adjusting for $0.10 of dilution from the $500 million of tuck-in acquisitions completed during the quarter. Specifically, we now expect adjusted DEPS to be in the range of $19.90 and $19.95. We expect to see our tax rate at the lower end of our 21% to 22% area for the full year. For the fourth quarter, we're establishing adjusted DEPS guidance to be between $5.11 and $5.16, which includes $0.05 of dilution for last quarter's tuck-in deals. Now please turn with us to Page 16, and we'll open it up to your questions. We'll conclude with the same key takeaways with which we started. First, we had a very good third quarter with exceptional free cash flow. Second, we're super excited about the pace of AI innovation and the growth potential in front of our enterprise. Third, we're announcing a $3 billion authorization for a share repurchase. And finally, we remain super well positioned for further M&A activity. Relative to our financial results, we grew total revenue 14% and organic revenue 6%, grew EBITDA 13% and delivered 17% free cash flow growth in the quarter. AI is a significant growth driver for Roper, expanding our TAMs by automating tasks and work across our vertical market offerings. With deep workflow integration, proprietary data and vertical market-specific architectures, our businesses are well positioned to succeed in AI, in fact, have a very high right to win and are already seeing measurable yet early product and commercial results. DAT exemplifies this strategy in action, evolving from a traditional freight matching network to a fully automated freight marketplace powered by AI. Through this transformation, DAT is unlocking significant efficiency and economic value for brokers and carriers alike, positioning itself for improved high-quality growth. As Jason mentioned earlier, we're excited to announce a $3 billion share repurchase authorization, which will deploy opportunistically, enabling us to take advantage of dislocations in the market. We're super confident with our talent advantage, our strategy and our execution capabilities, and this first-ever buyback is evidence of such. Importantly, we remain exceptionally well positioned to execute our M&A strategy. We have north of $5 billion of available firepower over the next 12 months and a very active, large and attractive pipeline of opportunities. Importantly, Roper continues to strengthen its position as an acquirer of choice for both target CEOs and their private equity owners. As always, we'll pursue these opportunities with our consistent, unbiased, patient and disciplined approach. Prior to turning to your questions and if you flip to the final slide, our strategic compounding flywheel, we'd like to remind everyone that what we do as Roper is simple. We compound cash flow over a long arc of time by executing a low-risk strategy and running our dual threat offense. First, we have a proven powerful business model that begins with operating a portfolio of market-leading application-specific and vertically oriented businesses. Once the company is part of Roper, we operate a decentralized environment so our businesses can compete and win based on customer intimacy. We coach our businesses on how to structurally improve their long-term and sustainable organic growth rates and underlying business quality. Second, we run a centralized process-driven capital deployment strategy that focuses in a deliberate and disciplined manner on cultivating, curating and acquiring the next great vertical market-leading business or tuck-in acquisition to add to our cash flow compounding flywheel. Taken together, we compound our cash flow over a long arc of time in the mid-teens area, meaning we double our cash flow every 5 years or so. So with that, we'd like to thank you for your continued interest and support and open the call to your questions. Operator: [Operator Instructions] Your first question comes from the line of George Kurosawa with Citi. George Michael Kurosawa: Great to be on the call here. Wanted to first touch on kind of the high-level organic growth picture. I think you can -- took a step back this quarter, but I think you can certainly argue there are some onetime or short-term dynamics at play here. Maybe just if you could frame your confidence in a reacceleration from here, particularly as we start to sharpen our pencils for '26. Neil Hunn: Yes. Appreciate it. Thanks for being on the call this morning. So the -- yes, I think you're right. I mean the reason that was a little rough this quarter were the 2 reasons we talked about, the commercial activity at Deltek with the government shutdown and then this tariff-related impact at Neptune. As we think about '26, I mean, it's a little early for us to get super detailed about '26. But if you sort of roll sort of segment by segment, it's been pretty -- in application, it's been pretty consistent trends there throughout '25. Deltek and government contracting should improve next year given the passage of OB3. I think the timing of when that improves is still up in the air a little bit. We'll see that as we get through our planning and roll into next year. But there's definitely sort of improvement happening in that market given the spending attached to OB3. In the Networks segment, it's been pretty consistent over the last 3 quarters. There is sort of a comp thing in the first quarter. So pretty consistent over the last 3 quarters despite the sort of the headwinds in the freight market. We'll have to see how the freight market evolves next year, but really like the business building we're doing at DAT, as I talked about. As I also mentioned, foundry is going to be better next year. And then on TEP, the Neptune order patterns likely continue normalizing the pre-COVID sort of lead time levels. Orders there have been pretty good. It's just the lead -- and the lead times are going to continue to shorten. NDI is poised for a couple of strong years, but we really need to get through our planning process to have more clarity on how TEP is going to play out next year. But all in all, we feel pretty good about the trends in GovCon, Foundry, CentralReach and Subsplash turning organic in the second half of next year and the general business building. But as usual, we go through a pretty exhaustive Q4 planning process, which we kick off in a couple of weeks. George Michael Kurosawa: Okay. That's super helpful color. And then maybe just one quick follow-up here on the AI strategy. I think you disclosed 25 products last quarter. I'm curious if you have an updated number just to give us a sense for the pace of innovation and just more generally, how you feel businesses are coming up the AI curve here. Neil Hunn: Yes. We feel very, very good. I won't rehash all the prepared comments about why we feel that way. But we're going from having a large number of products and key features. We talked about the 40 AI features in the Deltek core that's driving sort of the cloud migrations and SaaS. But increasingly, we're seeing sort of AI SKUs. So we feel real good about that. Now we've got to get through the commercial activities as we release these SKUs across essentially every one of our software businesses now and in the first half of next year that we got to go sell them and commercialize them and then the momentum will sort of pick up from there. But feel very good, very high right to win, a lot of compounding of knowledge about how to do all this stuff internally. This is -- you can hire some talent, you got to build it. So we feel real good about that. A lot of internal sharing that's going on, which is great to see, a lot of momentum. So we can certainly talk more about that, but feel great about where we are on the AI front. Operator: And the next question comes from the line of Brent Thill with Jefferies. Brent Thill: Just on the buyback, I guess, maybe walk through the strategy, why not leaning harder into M&A versus -- I believe this is your first buyback ever. What drove that decision? Neil Hunn: Yes, I appreciate it. The -- so just to be clear on what it is. So it's $3 billion. It's open-ended timing. It's opportunistic and in no way, shape or form, a change in our strategy. Set this in the context of the amount of capital we have to deploy over the next 3 years is somewhere in the $15 billion to $20 billion range. So it's not a change in any way, shape or form. The rationale for it is pretty straightforward. We just have a ton of conviction in what we're doing. And in terms of the talent we have on the team and that lead our companies, the strategies, the AI execution, the general continuous improvement execution, the business building we're doing. And we think this buyback is just clear evidence and support for our conviction there. But we're going to maintain a strong bias towards M&A. The compounding nature of the numerator is better than the denominator. It's just straight math. We're super active on the M&A front. We cultivate every day. In fact, our Janet Glazer leads our capital deployment efforts had a fantastic meeting 3 or 4 weeks ago, I think, with 18 CEOs of companies that are in the pipeline, so a marketing event, and it was met with great reviews, and we're really becoming sort of a buyer of choice, both for the CEOs of companies and also the private equity sellers. So we feel real good about the execution of our M&A strategy, and this buyback is just a small complement to the overall strategy of Roper. Brent Thill: Okay. Neil, I know the last couple of years, we've had a couple of things that maybe haven't gone the way you wanted to. The question is just how do you derisk this out of the guide? And I think investors have looked at the portfolio and said that you get the diversification aspect, but why do we keep having kind of the setbacks if we're that diverse. So that's the question I'm getting. Neil Hunn: Yes. So you're right. I mean we've built this portfolio to essentially take as much cyclicality and cycle risk as you can take out of an enterprise. If you look back over our long history, before we sold and divested all the industrial businesses, we'd cycle up or down 5 to 10 points. Now we're cycling like a point here or there. So we've essentially beaten out ostensively all the cycle risk you can in an enterprise. In this case, it's just -- it's frustratingly bespoke situations. Government contracting, normally, you're in GovTech because of the stability of the end market here. It's been anything but that the last couple of years. Transportation, who would have predicted like a 3-year freight recession. And so it is frustrating these things are stacking on top of each other, but they're bespoke, and we like the construct of the portfolio for sure. Jason Conley: I think the cash flow generation continues to be strong and consistent with what we thought. Obviously, we've had some new deals come in that have been dilutive, but we have been able to sort of push through that. Our guidance is -- adjusted for dilution is pretty close to where we were before. So despite some of the softness we've seen, we've been able to sort of maintain the bottom. Operator: The next question comes from Brad Reback with Stifel. Brad Reback: Software bookings decelerated a little bit sequentially, I think from the mid-teens to the high singles. Was that predominantly Deltek? Or were there other drivers there? Jason Conley: Yes. It was mainly Deltek, a little bit of frontline. We've talked about the -- some of the funding from the DOE. We don't get a ton of funding down to the states, but at the margin, it does slow down a little bit in K-12. But yes, it's Deltek Frontline. Outside of that, it's very strong. So if you look on a TTM, also a very lumpy dynamic, right? Software bookings are -- can be lumpy quarter-to-quarter. TTM is up low single digits -- sorry, low double digits. So I feel good about that trend. And I would also just call out that health care has been particularly strong this quarter. Our Strata business, we combined Strata and Syntellis a couple of years ago, and that's really starting to take hold in the market. So bookings are really strong there. And actually, our Clinisys business is doing quite well, too, in Europe and even in the U.S. with some of the bolt-ons we've done for them to get outside of the hospital, that's starting to gain traction as well. So just some color behind the bookings this quarter. Brad Reback: Great. And then, Neil, I think 2 questions ago, you talked about the rollout of the AI SKUs happening now through the first half of '26 and then needing to sell it. That all seems like we should be thinking about this more of a '27 and beyond organic driver as opposed to '26? Neil Hunn: I think that's a fair -- we're certainly viewing it that way. I think it's a fair assumption. We'll certainly see progress in bookings throughout next year because again, this is across 20-plus software companies and multiple products across 20 software companies. And so we'll see building momentum. But before it has a meaningful impact, I think it's '27 because of the commercial activity that has to go along with the innovation. Operator: The next question comes from Ken Wong with Oppenheimer. Hoi-Fung Wong: Fantastic. I wanted to maybe drill in a little bit on just the organic growth. Any way for you guys to help kind of slice what you might have seen from maybe the same-store sales versus maybe the net new organic that's coming on to the P&L. Hopefully, that question makes sense. Neil Hunn: We want to make sure we're framing -- answering the right question. Essentially, what's the cross-sell versus sort of net new mix? Is that your question? Hoi-Fung Wong: No. I guess what was coming from, let's say, the portfolio, let's say, prior to, let's say, like a Procare, Transact versus the stuff that is now kind of flowing in as incremental organic. What was once inorganic coming in as organic? Does that make a little more sense? Jason Conley: Yes, like what's the impact of Procare coming into organic. A little bit of accretion from Procare, not as we talked about, not as much as we had thought when we did the deal, but it's certainly accretive to the segment. Hoi-Fung Wong: Okay. Got it. And then on the TEP business, I think going into the quarter, I think the expectations were high single digit in the back half. I guess, yet only 6% in the quarter, low single in Q4. Was that isolated to any particular piece? Or was it a little more broad-based? Is it just Neptune? Or should we think about any other pieces that contributed to that slight weakness? Jason Conley: Yes. It was Neptune predominantly. I mean you had -- it was an acute impact in Q3. We always had a little bit of a tougher setup in Q4, but even aside from that, it was definitely down in both quarters -- it's Neptune, sorry Neptune. Operator: The next question comes from Joshua Tilton with Wolfe Research. Joshua Tilton: Hey guys, can you hear me? Neil Hunn: Yes. Joshua Tilton: I've been bounced around a few earnings this morning, so I apologize if it's already been asked. But I guess the #1 question for me is just, is there anything you can give us on the guidance front, specifically for organic revenue growth that could increase our confidence that like you derisked it enough. Maybe you could just like walk us through a little bit further on where the derisking is coming from Deltek versus Neptune and kind of what gives you the confidence that this is a good base to start for the rest of the year? Jason Conley: Yes. I mean I think we've given the outline by segment. And so I think Neil had framed at AS, we've got it at mid-single-digit growth. There could be a range there, and it really depends on Deltek's perpetual license activity and a little bit to a lesser extent, there's a couple of projects at our Transact business that might hit this quarter or next quarter. So that's sort of the range there. And so I think we've given you that. Network is going to be sort of mid-single-digit plus. I think we've -- a lot of that's recurring revenue. And the only thing that can move around is Truckers, right? They can come in and out of the DAT on a monthly basis. So we think we've sort of -- we've got that sort of boxed. And then on low single digits for TEP, I think we've identified where the challenges are for Neptune's tariff activity. NDI works on mostly backlog for the quarter. The others are a little bit less backlog. But just based on the trends and the call downs we had with the business, we feel like that's an appropriate number for the quarter. Joshua Tilton: Really appreciate the color. And just maybe for a quick follow-up. I really appreciate all the color you guys gave on the AI positioning that you guys have and some of the examples. I guess what I'm trying to understand is it feels like every company that we talk to is trying to race to be a winner in this AI world at a pace that we've kind of never seen before. Is there a dynamic? Or do you feel that maybe you guys have this unique AI think tank going on inside of Roper because you have a group or a portfolio of companies that are all marching towards the same AI goal? And then if that's the case, maybe could you share with us how they're sharing knowledge and best practices and what they're seeing across some of the use cases that are already being successful to kind of set up the rest of the portfolio to be just as successful in their AI endeavor? Neil Hunn: Yes, I appreciate that. So I don't know if I would go as far as say like there's some think tank sitting in Sarasota that's like crafting all this. What it is, is we have clarity of purpose, right? So when you're vertical market, system of record, you're going to evolve like system of work, it's everybody -- the portfolio construct is so similar that we're running basically the same play across the 20-plus software companies. There's common purpose and common understanding about that. Then there is a lot of information sharing. Every 3 weeks, there's an AI sort of showcase inside of Roper. We have a few hundred people in sort of talking about 1 company or 2 companies to highlight what they're doing internally or externally, architecture, commercial, whatever it may be. We send a weekly e-mail about sort of where the state of the technology is, the state of the evolution of AI to galvanize the leaders. There's telemetry we're putting into our planning process that we're looking for, for both the product road maps and internal productivity. The group executives who, as you know, coach 6 or 7 businesses each, those businesses are together all the time on all things related to business, AI being a big topic of it. And I could see us in the not-too-distant future, sort of adding some resources at the corporate office at the center that are an overlay to all of that, that are really sort of scanning the horizon for the -- enabling technologies are going and how to apply that technology. Because at the end of the day, this stuff is hard. I mean it's what we're trying to do to identify tasks and work where you have to be deterministic and not probabilistic. It's hard to do. It's good that it's hard because when you do something that's hard, you create this magical moment for your customer, and that's where you can sort of have this win-win relationship on value. And so we're super excited about all that, again, have this high right to win because of all the context and data and decades of sort of accumulated knowledge about how these verticals work. And the final thing I would say is the real unlock for really anything inside of Roper is our org structure, right? where this highly decentralized high-trust autonomous structure, taking an $8 billion P&L gets put into 29 units. You have super talented leadership teams that are highly motivated intrinsically and through our financial reward system to compete and win in the marketplace, and this is the new frontier on how to do that. Joshua Tilton: Sounds like a good setup for AI success. Operator: The next question comes from Terry Tillman with Truist Securities. Terrell Tillman: Two questions. The first question is on software bookings and specifically with Deltek. The second one is going to be DAT. So first, in terms of software bookings, I think you said high singles in 3Q. So what are you assuming in 4Q? And the second part of that first question is, and maybe this is wildly optimistic, but assuming at some point, the government shutdown thesis, could you actually get those licenses in still in November or December? Or are you just assuming that doesn't happen? And then I'll have that DAT follow-up. Jason Conley: So -- yes, so thanks for the question, Terry. So I think for the fourth quarter, we'll see how it plays out. We had a very strong Q4 last year. So the comps are a little tougher, but I think it's the end of the year. And obviously, the pipelines look very strong across our businesses. You're right about Deltek. We're not assuming that's going to hit this year, but we've also seen customers make very quick decisions in the last few days, especially if it's sort of -- they've got an internal budget dynamic that they can utilize. So we're not assuming that at this point, but I will say just for '26, we do feel really good about what [indiscernible] is going to mean for Deltek. Additionally, I mean, just Deltek's had -- the markets haven't been cooperative just in general for the last couple of years. So the demand is definitely there. Deltek has done a lot to their cloud product. They're incorporating a lot of the new AI features that are going to be cloud only. So that should help drive some higher conversion. That's one of our -- I think it's our biggest maintenance base at Roper. So excited about the future, just need to get past this quarter of sort of uncertainty. Terrell Tillman: Got it. And then, Neil, on Slide 12, I like that slide, shows kind of where you've delivered on the platform. I know with DAT, pricing and packaging was an important kind of growth unlock and improvement this year. But now you have this idea of one-click automation and then newer areas that seem like they've expanded the TAM around management and payments. Like is there any way you can frame like how much you can garner now per successful load or transaction going forward with some of this newer technology versus the past or the present as you laid out on that page? Neil Hunn: Yes. I appreciate it. So yes, you're right. So the strategy at DAT, and I've called this out for a few quarters, if not longer, is we have this remarkable business that's a network between brokers and carriers, and we monetize both sides of the network on a subscription basis. And we have -- what we have is the market captured, and we have very favorable go-to-market unit economics, especially on the carrier side because the carrier, you get your authority first, then you probably subscribe to DAT second, so you can understand where you're going to grab your load from. So they -- it's a very efficient go-to-market motion on capture there, very unique go-to-market motion relative to the unit economics. So then the strategy is how do you just scaffold more value on both sides of that network. And then the ultimate value creation is the one you're talking about, which is how you sort of take the labor -- the task labor out of the matching of a broker transaction. As we mentioned today, we broker about -- there's about 1.2 million loads a day on DAT. There's about $100 to $200 in task labor savings for each one of those that's automated. So you can apply whatever percentage you think is fair. I'm going to leave that open at the moment. We have a good indication internally, but some small percentage of the total loads and then some small percentage, a fair percentage of the labor task savings, and you'll get a very large sort of opportunity. Now that's the opportunity. Now we have to go equip it. You've got to make -- we've got to integrate this capability into the TMS of every broker, so it's native. You got to onboard a large portion of the carrier base into this, which we're actively doing. So we're super excited. The early results were like sold out on the broker front. So the early results for integration is great. But there's a business we've got to go build here. And the reason that we're unique in this is that we're truly Switzerland. Like we don't -- we're not competing with the brokers. We're enabling the brokers, and it's a huge value savings for both the brokers and the carriers. Operator: The next question comes from Deane Dray with RBC Capital Markets. Deane Dray: Just want to get a clarification on the timing delays at Neptune. Our experience has been, especially recently going through COVID is once a utility is ready to place an order, they're unlikely to switch. It's already gone through the rate case. It's all a pilot study and so forth. So have they lost any of these orders? Or this is strictly delay at this point? Neil Hunn: No, no, just to be super clear. This is pushed to the right. So what we've done, and I alluded to this in the prepared remarks, is we have this tariff coming through. We at Neptune decided we concurred fully that they're going to assess a surcharge, which then you've got to go essentially recontract or renegotiate with all the open orders about how to do that, and it just puts some gum into the system. It's a little bit easier when you're going through distribution to do that because you have a distribution partner, you can sort of share some of this surcharge with, but when you're doing the direct business, that's a little bit more difficult to do it and a little bit slower. So this is 100% pushed to the right. In fact, Neptune reports, I mean, there was a little market share gain in the quarter for Neptune, but these sort of market share quarter-to-quarter are sort of a point here, a point there, 0.5 point here, 0.5 point there, but the latest report is the share has actually improved a little bit with Neptune in the quarter. Deane Dray: That's really helpful. And then a follow-up, and I'll echo the -- how much we appreciate that spotlight on DAT. And just the idea, can you talk about the implications of making the investment in Convoy. You added that it's not profitable, but just the willingness to subsidize and make that investment so you have this end-to-end automation, but just the implications of a bolt-on that's not profitable. Neil Hunn: Yes. So I'll just -- I'll start and ask Jason to add a little bit of color. In our case, it was very -- it was a unique situation for us. It was very much a buy versus build. This is very complicated. It sounds very easy. It is very complicated, complex algorithms to do this. They have to be absolutely deterministic. It's more ML than AI. There's a very large group of talented engineers that came with the acquisition. They're now part of the DAT sort of franchise. And so it's unique in that it's money losing at the moment, but it's like the final piece to sort of manifest the strategy of DAT and because of what we talked about earlier, we have such high conviction of what's going to happen here. Jason Conley: Yes. I would just add that, I mean, most of our strategies call for tuck-ins that are adjacent and they sort of fold them in. It's like we just did Orchard for Clinisys. That's sort of the bread and butter that we would do for bolt-ons. This is really a technology acquisition that was -- it's really to create a new market. And so I would say that's very rare for us, but we think it's a great opportunity. And so we're willing to make that technology investment. Operator: The next question comes from Dylan Becker with William Blair. Faith Brunner: It's Faith on for Dylan. Maybe expanding on the DAT question. It seems like this end-to-end platform has been in the making for some time. So can you talk about where you see DAT growing as you continue to build out this network and the long-term potential there? And maybe even how this can drive durability despite some of the headwinds we're seeing in freight? Neil Hunn: Yes. So we want to -- so the DAT core business is a low double-digit growth business when you get the benefit of some unit growth versus just packaging and price. So that's the long-term sort of organic growth rate of the core business. When you talk about this sort of this entire sort of tracking automated business, we're talking about adding a capability that doesn't exist in the industry that is multiples of the existing TAM. And so we want to see actual momentum in there before we quote sort of what the acceleration magnitude could be to DAT, but it's exciting for sure. So I know that's a little bit of a -- but not an answer you're not looking for at the moment, but we want to actually see the growth on the field before we call the how much accelerated growth rate that's going to be there. Faith Brunner: All right. No, that's helpful. And then maybe just double-clicking on Deltek. Can you maybe remind us what you guys saw during past government shutdowns and the impact to the business and any potential insulation there? Neil Hunn: Yes, happy to do that. So just to remind everybody, Deltek is 60% GovCon, 40% non-GovCon. We're talking about the 60% of Deltek that's in GovCon. What we've seen is when you have the government shutdown, it's the pending -- it's the potential of the shutdown and the actual shutdown that it just pauses commercial activity. The activity is still there. The pipelines continue to build. There's still discussions because everybody knows the shutdown will end, the government will be operational again, and we have this OB3 spending where we have to -- all that will be awarded and has to be delivered. It's just -- in the height of the uncertainty, there's just not a lot of signing of the purchase orders or the contracts. If this were -- hypothetically, if this were happening in March, we would probably not be calling down the year because there'll be time left in the balance of the year to sort of for the commercial activity to sort of resolve itself. It's just we're sitting here in the last 2 or 3 months of the year, we're going to run the clock out on the year and roll into next year. Operator: The next question comes from Joe Giordano with TD Cowen. Joseph Giordano: Just looking at App Software, I mean, if we strip out the Deltek GovCon stuff for a second and just think about like the acceleration of organic here, what's the catalyst for this? I mean you look back, I mean, it's been small variance, but we're kind of like 3 years around 6%, give or take. So like what in your sense is like really the catalyst to bring this into like a high single to -- more of like a high single framework? Neil Hunn: Yes. So it certainly will help when your largest business -- the largest segment of your largest business can sort of grow at its normalized growth rate. I mean we're a couple of years into sort of a slowdown with the uncertainties across all the government sort of spending so that helps quite a bit when you look at that. We've had -- just going through the businesses, Vertafore is steady for us, a lot of AI opportunity in front of that business, probably takes -- I mean, we'll see some early green shoots of that next year, but as we said earlier, probably more '27. Aderant has been just killing it. PowerPlan, doing a great job. CentralReach will turn organic, which will help. Frontline has been a little sluggish for the last couple of quarters, couple of years -- a couple of quarters, largely because of some uncertainty around the funding coming from what's happening in Department of Education. You've got this hangover from all the COVID spending and it's just now that's getting more normalized. So frontline reaccelerating, which is in the offing in the next couple of years will be super helpful to that regard. And then finally, our Clinisys business for the U.S. part of our laboratory business, the legacy Sunquest has just lagged for all the reasons that everybody knows for 8 years, and now that's turning or that's a mid-single-digit organic growth enterprise for us now. So that starts to help. So we like what's happening here in terms of the growth optionality and growth capability. Joseph Giordano: When you think about the buyback now and you think about the multiple of your stock, like what's the thought process when you're weighing like, okay, here's a $1 billion opportunity here or $1 billion of deploying capital. Like it used to kind of be pretty straightforward with where the multiple your stock was versus the multiple of what you're acquiring, and now it's kind of -- it slipped a little bit. So maybe talk us through how much that's informing your decisions on where to allocate at a given moment in time. Neil Hunn: Yes. For us, it's never been about the multiple of our stock. It's been what's in the compounding math for a cash flow acceleration, what's the best deployment of capital to optimize the long-term cash flow compounding of the enterprise. And now we just have another lever to buyback to put into that consideration set. Operator: The next question comes from Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start off with the outlook for TEP and Neptune, in particular, on the top line. So you had the backlog declining there for sort of 2-plus years. The revenue growth is slowing a little bit. So I just wondered sort of what's the confidence that, that organic growth on revenue doesn't continue slowing into next year, just given those backlog dynamics? Neil Hunn: Well, I think we got to -- so let's be clear about the backlog dynamic. This is about the buildup from the COVID period. I mean pre-COVID, this was -- you might have a couple of quarters of visibility to an order backlog. And it wasn't quite a book and ship business, but much more book and ship than it was when you ran up through COVID. And then all the customers gave us blanket orders that were a year plus out. Now we're -- when I spoke earlier, we're normalizing the order lead times slowly over time. So we -- the backlog grew and it's bleeding down based on this order timing dynamic. Set that apart from the demand environment, the market share environment. So that's point one. Point two, on the more normalizing piece at Neptune on the demand environment is we're just in a cycle now this year, probably next year, where we're just in normalized growth for that business, where the prior 2 or 3 years were accelerated growth because of the hangover from the COVID period. Julian Mitchell: That's very helpful. And then just my second one might be around sort of with all this effort around sort of AI, just wondered what the implication for that might be on your, let's say, core R&D. Is that -- could that be a bigger headwind to core margin expansion in future? And whether there's been any view to sort of looking to acquire more AI-intensive businesses within your overall capital deployment framework? Jason Conley: Yes. So actually, this is Jason. I think the -- it's interesting. We're getting quite a bit of activity using some of the frontier models out there, CloudCode, Codex, Cursor. And so we're not really seeing now. Obviously, we're going through our planning this year, but it's creating a lot of opportunity to just do more with less. And so that's the -- that's our posture is that our R&D envelope will probably stay the same, and we'll just get more out of it. And when it comes to acquisitions, look, yes, we'll look for small tuck-ins that we can do. We just did a really small one for Aderant, and that's not necessarily buying AI talent, but it's providing an AI solution that gets us faster to market. So we'll do those occasionally, I think it's not going to be our primary way to get after AI faster, but certainly will be an option. Operator: And this concludes our question-and-answer session. We will now return back to Zack Moxcey for closing remarks. Zack Moxcey: Thank you, everyone, for joining us today. We look forward to speaking with you during our next earnings call. Operator: And this -- the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. [Operator Instructions] You may submit questions also via X by sending a post to @TMobileIR, @MikeSievert or @SriniGopalan using hashtag #TMUS. I would now like to turn the conference over to Cathy Yao, Senior Vice President of Investor Relations for T-Mobile US. Please go ahead. Quan Yao: Good morning. Welcome to T-Mobile's Third Quarter 2025 Earnings Call. Joining me on our call today are Mike Sievert, our President and CEO; Srini Gopalan, our COO and incoming CEO; Peter Osvaldik, our CFO; as well as other members of the senior leadership team. During this call, we will make forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factors set forth in our SEC filings. Our earnings release, investor fact book and other documents related to our results, as well as reconciliations between GAAP and non-GAAP results discussed on this call can be found on our Investor Relations website. With that, let me now turn it over to Mike. G. Sievert: Thanks, Cathy. Great job. Good morning, everybody. Well, as you can see, Srini and I are here in New York with the senior team ready to discuss another truly extraordinary quarter for T-Mobile. But first, let me do a couple of welcomes. I want to first start by welcoming André Almeida to the team and to the table. André is a deep industry expert and a long-time colleague of Srini's. And he has also been a strategic adviser to me on many topics for many years. And I am so happy that he is here leading such a big part of our team. André Almeida: Thanks, Mike. Thank you very much. G. Sievert: And also, you all know Dr. John Saw, now serving as our President of Technology, and resident genius. John, thanks for stepping into this expanded role for us as President of Technology. John and I go way back to 2009 at Clearwire. So together and separately, we've been stewards of this centerpiece of T-Mobile's 5G spectrum strategy for a long time. It's great to have you here as our President of Technology. John Saw: Thank you, Mike. G. Sievert: All right. Well, let me just start by saying this. This call is an especially meaningful one for me as it actually marks the 50th quarterly earnings report for T-Mobile. And that means it's also my 50th report here. I've been here for every single one to offer my perspective and to help shape our narrative about the future, and I have had a blast. Leading this company over the past 13 years has been the honor of a lifetime. Together, we've transformed T-Mobile from a distant #4 player in crisis and decline into the world's most successful and customer-centric telecommunications company. I've seen T-Mobile go from last to first with the best network, the best value, the best customer experience in the market. And today, that margin of our differentiation is only widening, and the growth and financial momentum that flows from this, in many ways, only just beginning. I'm excited to continue to support this team right here and the strategies that enable this success in my new role as Vice Chairman. Just a few weeks ago, I talked about what it means to get CEO succession right, that you do it when three things are true. First, when the company has never been more successful; second, when the opportunity ahead has never been more exciting; and third and most importantly, when the leader to take us into the future is fully ready. Q3 is living proof that all three are true for T-Mobile right now. Now Srini is going to cover the results here in a minute with you, but I just want to say, wow, what another spectacular quarter. This team once again delivered the thoughtful, profitable and durable growth for which we are known. We smashed not only all-time customer records like best-ever postpaid account growth, best-ever total postpaid net additions while also leading the industry in postpaid phones with over 1 million nets and phone churn. But importantly, we also once again led the industry in financial growth by a wide margin across a wide variety of metrics, beating expectations again. Clearly, it is evident that this team under Srini's leadership executes like no other team. This quarter was a showcase of Srini's and this entire team's ability to rally the organization to deliver exceptional results while at the same time, building on the durable advantages that make it all possible. T-Mobile has never been stronger. Our growth runway is broad-based, our differentiation is widening. The Un-carrier ethos continues to disrupt the industry and delight customers. The opportunity ahead to generate even more outsized, durable and profitable growth across wireless, broadband, smart new adjacencies as well as digital transformation has never been more exciting. So with that, let's dive in. Srini, in more ways than one, over to you, my friend. Srinivasan Gopalan: Thank you, Mike. Hi, everyone, and thanks for joining in. I can't wait to start talking about Q3, but I'll take a minute. I just want to start by saying it's an incredible privilege to be here with this fantastic team, the best in the industry. And in the last 13 years, Mike, you have truly turned around this business and you've made the Un-carrier into this force for good, this disruptive, innovative, the most admired telco in the world. The network has gone from last to first like you've talked about, and we've delivered on industry-leading customer and financial growth. You and the team have created more value than any other CEO in the history of this industry, not just in the U.S. but globally. Thank you. Look, I've been involved in this team for some time now. And the one truly amazing thing the Un-carrier has done, and this is rare in this industry, differentiation. It's the one truly rare commodity in this industry. For a large part of this journey, that differentiation has come from outstanding customer value and experience. And as I look forward now, the foundation for the next big leap has already been laid. We have the opportunity to widen this differentiation even further with network leadership and digital transformation. I can talk about this all day, but I'll come back to it in our continuing strategy. But first off, to Q3 and the phenomenal quarter we've delivered. Starting with wireless. We had our all-time best postpaid customer account growth, and that's saying something when it comes from the Un-carrier. We achieved our best-ever total postpaid net additions and delivered over 1 million postpaid phone net additions, our best Q3 in over a decade. And that coming from T-Mobile is something. What I like is how broad-based this growth is. It's in the Top 100 markets, it's in smaller markets and rural areas. Even within the Top 100, our postpaid share of households is up where we're #1, #2 and #3 in market share. So it's truly broad-based growth. And it's not just gross additions momentum. In Q3, we led the industry in postpaid phone churn. So across the board, tremendous customer momentum. And it's not just volume, it's also in value. We saw postpaid ARPA grow by 3.8% on an organic basis when you exclude kind of the dilutive impact of UScellular, Metronet and Lumos. We're also delighted to have welcomed UScellular customers to the T-Mobile family, and provided them with immediate benefits from an improved network experience to great thankings like T-Mobile Tuesdays. Integration is off to the races. We're using everything from the T-Mobile playbook that we learned and perfected with Sprint, and we're simultaneously deepening our relationships. Let me turn to broadband, another huge growth opportunity for us. Again, we led the industry with over 500,000 customer additions on 5G broadband and over 50,000 on the newest addition to our family fiber, and that includes the contribution from Metronet following our close on 24th July. This is an amazing business. And here's an often underrated fact. Our 5G broadband ARPUs and customer lifetime values are very similar to our postpaid phone business, and that just drives great value creation. Now our customer results and industry-leading customer results flow through to industry-leading financial growth. Our postpaid service revenue grew by 12% year-over-year. Now that's obviously industry-leading. Our service revenue, as a whole, 9%. Core adjusted EBITDA, 6%. And another incredible quarter of service revenue to free cash flow conversion at 26%. So there's great customer momentum. And importantly, that's translating into that one key metric, cash conversion. So overall, an amazing quarter. Let me come back to what I was saying earlier about my strategic priorities and spend a moment on that. Let me start by saying I have enormous conviction in what the team outlined during Capital Markets Day, and even more so now that we're a year into that journey. Everything we've seen in the last year makes us double down on our convictions and convinces us that we're heading in the right direction. I expect continued profitable growth in our core wireless and broadband businesses. And this is the big deal, which is that momentum which we are seeing right now is being driven by widening differentiation, which means it's truly sustainable. And that widening differentiation is driven by kind of two big things. On the one hand, you have our growing network leadership, not just in reality, but in perception as well. And that's complemented by our digital transformation, which just takes pain out of the customer process. Let me talk about this in a bit more detail, start with the natural place to start, our network. We're often asked how big is this whole network perception opportunity? Let me give you some sense of it. One out of every three AT&T and Verizon customers chose them at some point because they were the best network. And these customers are paying a premium for something that is simply no longer true. You work the math. That means there are 70 million customers that are paying a premium for something that is simply no longer true and that we can unlock with our best network. And more and more of these customers are beginning to change their perception. In Q3, we hit an all-time high in our network perception amongst switches, and that's a big driver to the outperformance we're seeing. Now our network perception is changing because the reality is changing. Let me give you a couple of examples of how powerful our network is. Ookla data shows that our median download speeds on the new iPhone are nearly 90% faster than one of our benchmark competitors and over 40% faster than the other. That's why when you have jump balls with the device change, you see the Un-carrier's continued outperformance. Driving superiority in the network for a new device like this and such visible superiority is a huge driver to our performance. Another great example is our 5G broadband business. Now using the fallow capacity model in the last 2 years, we've nearly doubled our number of customers. Each of them use 30% more, so a phenomenal 580 gigabytes a month. At the same time, so doubling customers, 30% more usage per customer. At the same time, our average download speeds have increased by nearly 50% and our wireless speeds have gone up as well. That's what an ultra capacity network truly looks like. And we're not standing still. So we're making progress on perception. The reality is only getting better, and we will not stop. We're not standing still. We're building and upgrading thousands of new cell sites, many of which are in smaller markets and rural areas, and we're deploying and leveraging our nationwide 5G advanced network. I want all of you to know that I am committed to not only being the network leader of today, but also investing tirelessly to defend and widen the margin of our network leadership for tomorrow. Let me talk a bit about digital transformation. The amount of friction and frustration we cause customers today because of our processes and the state of evolution in this industry is phenomenal. We have a huge opportunity to change that with our digital transformation, and we saw great progress in adoption. Now I love this stat. Three out of four of our iPhone upgrades during our preorder window were digital. That is widening differentiation. Together with the stats I shared with you about network quality, that creates a moment where it's clear that we're different. And T-Life continues to be the center of our digital engagement with over 85 million app installs. Look, I can sit here all day and talk about all of this. But ultimately, what will matter is our results going forward quarter-after-quarter. And Q3 is just another proof point that the Un-carrier strategy is working, that our differentiation is widening. Now Peter will give you an update shortly on our guidance. I just want to say that I'm really excited to discuss our guidance in detail for '26 and '27 on our year-end call. I plan on increasing our guidance for '26 and '27, and that reflects the core strength in the underlying business and M&A. And I'm looking forward to our future. And as I look at it, it's even better than what we said a year ago. Let me conclude by saying our differentiation is only widening, this team's ability to deliver is totally unmatched. We've come a long way, and our most exciting days are ahead of us. Our future is bright. Our vision is clear. Our results will continue to speak for themselves as we march towards our lofty long-term goals. With that, over to you, Peter. Peter Osvaldik: All right. Thanks, Srini. As you can see, we had a fabulous Q3, which underpins the confidence in our increased guidance. So starting with customers, we are raising our expectation for total postpaid net additions to now be between 7.2 million to 7.4 million, an increase of just over 1 million at the midpoint. As part of that total, we are also increasing our expectation for postpaid phone net additions, now expected to be 3.3 million, highlighting the tremendous momentum we're seeing in the business. And on the strength of our T-Fiber rollout, we are also raising our fiber customer net additions guidance to be approximately 103,000 this year, up from approximately 100,000 previously. We now expect postpaid ARPA growth of at least 3.5% for the full year, including the dilutive impacts of UScellular, Metronet and Lumos. Excluding the impacts of UScellular and the fiber JVs, our underlying ARPA growth is now expected to be up approximately 4% for the full year. We now expect core adjusted EBITDA to be between $33.7 billion and $33.9 billion for the full year, an increase of $300 million at the midpoint, reflecting our ongoing core operating strength and the inclusion of UScellular into our full year guidance. And speaking of UScellular, in September, we both increased our synergy guidance to $1.2 billion in total OpEx and CapEx run rate synergies and accelerated the time line to realizing those run rate synergies to within 2 years of close. As part of that accelerated synergy realization plan, we expect to incur approximately $300 million in costs to achieve in Q4, primarily driven by merger-related costs related to UScellular, which will be excluded from core adjusted EBITDA. In network, where we remain focused on using our customer-driven coverage model to both defend and expand the margin of our network leadership, the merger also allowed us to accelerate a broader network transformation initiative focused on optimizing customer experience and value through cell site location optimization. As part of this effort in Q4, we expect to incur approximately $160 million in additional expenses related to cell site decommissioning that will be excluded from core adjusted EBITDA. With all M&A and financing incorporated, we anticipate Q4 depreciation and amortization expense of approximately $3.7 billion and interest expense of $1 billion. All right. Turning to cash CapEx. We now expect cash CapEx to be approximately $10 billion, an increase of $500 million, driven entirely by the inclusion of UScellular. And we now expect adjusted free cash flow, including payments for merger-related costs in the range of $17.8 billion to $18 billion, representing an increase of $200 million at the lower end of the range. All right. To sum it all up, not only did our results continue to demonstrate our ability to consistently execute and deliver outsized and profitable growth, we could not be more excited to carry our strong momentum far into the future. So with that, I'll now turn the call back to Cathy to begin the Q&A. Cathy? Quan Yao: Thanks, Peter. All right. Let's get to your questions. [Operator Instructions] We will start with a question on the phone and wrap a few minutes early for closing remarks today. Operator, first question, please. Operator: First question will come from Benjamin Swinburne with Morgan Stanley. Benjamin Swinburne: One for Srini, maybe one for Peter. Srini, you talked about sort of this -- the network perception gap and committing to narrowing that. Can you guys talk a little bit about your strategy and tactics to close that gap as quickly as possible? I would think the faster you can convince customers you have the best network across the country, the faster the business can grow. So your intentions are clear, but would love to hear about how you're thinking about making that happen beyond just spending more in marketing. And then, Peter, just going back to the USM synergies, very clear sort of how that's going to ramp over the -- well, very clear where you're going to get to at the end of the ramp. But can you talk a little bit about the path from here to full run rate, if there's any guidance you can provide to us on sort of the time line to capture all those synergies and what that looks like over the course of the next 2 years? G. Sievert: That's good. We'll start with the first question with Srini, and Mike wants to pile in on that one, too, and then pivot over. Srinivasan Gopalan: Yes. Thanks, Mike. Thanks for the question, Ben. Let me start with where we are on network perception. I mean one of the reasons you saw the outsized delivery this quarter is the extent to which we're already closing the gap. I mean if you look at this quarter, you saw at the margin more switching behavior. I mean that's due to a few different things. You had a new device going in. You also saw kind of churn normalization, partly driven by the fact that some of our competitors had 36-month contracts over a period of time, et cetera, et cetera, all of which meant at the margin more switching. And at that point in time, seeing our network perception really widened the gap. Like I said earlier, our perception among switchers is now at an all-time high. That's what drove some of the volume. So that gives you some sense of the critical impact this has. To your piece of what are we going to do about it, I think this is something we will attack across multiple vectors. Marketing is clearly one piece of it. There's also a reality, which is network perception ultimately is an incredibly local thing. It's down to how each customer feels about it. And when we think about activating all of our channels, activating digital to actually speak to customers at an individual basis, this is where some of our digital transformation and our network perception, our two big initiatives actually have a huge overlap. Using digital, using our local reach in stores and as an organization, becoming obsessed about how we drive this message of network perception home are central to how we drive this. The other piece is also just making it easier to come to us, because network perception is a barrier and inertia is a big part of network perception. So a lot of the stuff that we're talking about in our digital transformation just makes it a lot easier to come to us. And again, 75% of our upgrades, and you'll see an increasing number of our acquisition will come to us through digital channels. And that reduces a lot of the barrier of the switch because one of the big barriers is just kind of, I kind of get that T-Mobile now has the best network, but am I going to take the time to do it. So that's -- it's a multitude of initiatives. And to a large part, it's the intersection space between our digital transformation and our network perception. G. Sievert: Anything to add, Mike? Michael Katz: Yes. The only other two things I'd say is continuing to have the best network. We have a network that's 2 years ahead of everybody else. We've talked about it being still 2 years ahead 2 years from now, and making sure that we're widening that gap. And we've talked a lot about our strategies using things like customer-driven coverage to direct our network capital into places that really matter for customers to improve their experience, to make sure that they have the best possible experience there. And then when you have big switching like in quarters like this one where we have over 400 -- we have nearly 400,000 accounts come, that is one of the biggest ways to change network perception. Because think about the way that you learn about network perception. It's from friends and family and neighbors. And the more of those customers that join T-Mobile that talk to it about their friends and families, yes, we'll do marketing and all those things, but the most powerful way to change perception is from recommendations from the people around you. So big -- continuing to have big quarters like this one is a big part of changing those perceptions. G. Sievert: Love the question, Ben. Hopefully, what you're hearing from us is lots of confidence because we're in this kind of sweet spot on this one where the data tells us two things simultaneously. It tells us, one, what we're doing is working. And it was a big factor, as Srini said, in fueling all-time record customer results this quarter. So that's great. And at the second time, the data also tells us there is lots of room to run here. So a lot of people still have yet to make a decision either on the vector of it being worth it or on the vector of it being better. And that just shows us a strategy that's working, has lots of potential tailwind to fuel our business into the future. So we're feeling good. Peter Osvaldik: All right. UScellular, I couldn't be more excited about how we've hit the ground running, both with Jon Freier and his team from a customer perspective and Dr. Saw running to the races on network. So you're going to see this kind of go exactly, except quicker than Sprint. And what that really means from a modeling perspective, I won't get into the dollars, we'll incorporate that into our '26 and '27 guide. But you're going to see us invest in those costs to achieve early on. So I'd expect the vast majority of those to come in 2026 and then achieve the full run rate of those synergies. Remember, it was $950 million of OpEx synergies and $250 million of CapEx synergies, and we'll achieve those inside of 2 years. So as I model it out kind of by the end of '27, you're going to have those full synergies already coming to bear. Quan Yao: Thanks, Peter. Operator, next question please. Operator: The next question will come from John Hodulik with UBS. John Hodulik: And one last congrats again to Mike on his retirement. G. Sievert: Thanks, John. John Hodulik: Can we dig into the broadband business? I guess, first on the fiber, you guys had some new disclosures. But I guess for Srini, how big of an opportunity do you think the sort of fiber business is? I know you have targets out there for homes passed. But can you talk about how many sort of homes passed you have now at fiber, how you expect that to grow? Any targets for penetration? And then maybe comment on the sort of environment for more deals to potentially back up the JVs you already have out there. And then on the fixed wireless business, obviously, a big quarter. What's the opportunity there? And sort of what drove those sort of big lift in net adds this quarter? And sort of how do you see that playing out as we look into '26? Srinivasan Gopalan: Thanks for that question, John. So look, I'll talk about the big picture in terms of how we see broadband as an opportunity first and then spend a few minutes on FWA as well as fiber. We're really excited by the broadband opportunity. This plays to the heart of the Un-carrier, because what we've got here is customers in a place where they have an inferior product quite often, where they're paying a huge premium. It's classic Un-carrier territory, going in and attacking incumbents who have not invested in their networks and who are charging a large premium for a product that isn't living up to expectations. Now we'll go after that with both FWA as well as fiber. We see those as complementary. And the way we think about both those businesses is setting them up in a way that the economics allow us to pursue the Un-carrier strategy. What I love about FWA is the heart of it is the fallow capacity model. And what we're benefiting from is the ultra capacity network, but also the rapid evolution you're seeing in mobile technology, which is moving far quicker than a lot of other technologies, which is giving us more and more runway and also making the product incredibly sustainable. We see FWA as not a temporary category, but something that's here to stay as mobile technology gets better and better and taps into a customer need, which a lot of people trapped in old relationships with incumbents are suffering from. Fiber, again, we've been very thoughtful about setting up the economics in a way that we can scale and sustain this business. The way we thought about fiber is go after specific places where we're confident that the economics will work for us to create a win-win situation for customers. That's been the heart of the areas that we've picked fiber, places where we're either first to fiber, near first to fiber, places where we believe we can set up these JVs that allows us to be capital-light. Also, these JVs allow us to bring complementary skills into the things that we bring to the table like distribution, like the brand, along with the expertise that those folks bring in. Now we've talked about numbers on both of those. Let me just hand over to André to share his perspective on the scalability of these businesses. André Almeida: Thank you, Srini. So as you said, and I'll just double-click on a couple of the topics. One, I think we're very, very happy with our FWA results. I think as Srini mentioned in his opening comments, we did more than 500,000 net adds. That's an impressive 22% year-on-year growth. So we see a lot of strength and a lot of runway. And what I think has been outstanding about our FWA product is it's not just industry-leading, something we introduced into the U.S. in 2021 is the product keeps getting better. In 2 years, the speeds that we're giving our customers have gone up 50%, while we almost doubled the base of customers we have. So this is clearly, as Srini mentioned, a very sustainable product that we see is here for the long run. On fiber, I think we've been very consistent. We see this as a great complement to our FWA nationwide offer. And we love the business under the right parameters, as Srini said. And these parameters for us have always been threefold. One is technology. We love fiber, and we love the fact that we can be present in the two technologies that are gaining share in the U.S. market, FWA and fiber. The second one is price. We went -- go into fiber and FWA to create outsized returns for our shareholders. That means we need to be able to look at these opportunities at the right price, at the right valuation. And lastly, as Srini mentioned, is structure. We are committed to our capital-light structure because it not only allows us to scale, but it also allows us, as Srini mentioned, to use complementary capabilities. We're great at what we do. Our brand translates very strongly into fiber, and our early results show it. But we also love to bring in partners that are experts in building out and to make sure that the two of us together can create the best of both worlds. And as Srini mentioned, a win-win for customers. Srinivasan Gopalan: So John, hopefully, what you're hearing is lots of confidence in the numbers that we've put out. We've said 12 million fixed wireless access. We've said 12 million to 15 million homes passed on fiber. Are we looking at new assets? Yes, as long as they fit the criteria that André just laid out. But you know what this theme is like. We put a set of numbers out there. You can see the confidence we have in hitting those numbers, and then we strive to exceed them. That's exactly what you should expect in broadband as well. Quan Yao: All right. Great. Let's move on to our next question, please. Operator: The next question will come from Sam McHugh with BNP. Samuel McHugh: A couple of quick questions. First, just running the numbers on cost of acquisition. It doesn't look like you're spending a ton more on a per sub basis to acquire these customers versus recent quarters, which I think is quite encouraging. But can you just tell me what you're seeing in terms of SAC and SRC as well and the competitive environment? And I guess related to that, Srini, you talked about digital customer acquisition. I'm a Verizon customer, so apologies. I've been trialing the T-Mobile network with the T-Life app and the eSIM. Is that what you're talking about when you think about pushing digital for customer acquisition? Should we expect you to be a bit more vocal about the ability for competitor customers to trial the T-Mobile network and then go through the customer acquisition journey through the app? Is that what we're looking at? G. Sievert: Well, let's start with Peter on the first question and then maybe turn to Srini on the second question. We probably won't be able to give you as much as you're hoping for on this, Sam, telling you all of our plans on how we're going to compete. So you might be a little unsatisfied, but we'll start with the one we could answer. Peter Osvaldik: Absolutely. Let me -- you're not asking for my spreadsheet this time, Srini's. Look, you're absolutely right in terms of we continue to see extremely strong customer lifetime values. And from a SAC perspective and everything that comes from that, including linkage of our top-tier promos primarily to highest tier ARPU plans. And you'll love this. In fact, we now believe for the full year, we'll have ARPU increase of approximately 2%, so up from 1.5% that we had previously guided to. So that's really strong. But yes, we're continuing to see very strong customer lifetime values. And of course, it's because promos are an element of this industry, always have been. It's great when you see promotional times like holiday seasonality because it creates more customer consideration. And in those moments, we win. But one of the big tailwinds that we're also seeing that drives customer switching to T-Mobile as we've been talking about here so excitedly, is this best value, best network, best experience proposition. And the more we're getting from a tailwind on best network, that's just another benefit in terms of why customers are coming here. So we're very excited about what we're seeing from customer lifetime values and how that translates into ARPAs and ARPUs. Srinivasan Gopalan: Yes. So on the digital acquisition bit, Sam, as Mike said, we're not going to talk to you about all of our plans in detail. But look, a good parallel of what you should expect is what we did with upgrades. Like we said, 75% of our upgrades are now on T-Life. Now the heart of getting there was to actually take the upgrade process and simplify it, which is to take this painful -- I don't remember, John, it was what, 36 steps or something like that, and bring that down to something which feels like a transaction you're doing in 2025 rather than in 2002, right? It's -- digital acquisition and moving our customers to digital is fundamentally going after customer pain points and going after the way we've always done things in this industry and change -- and radically relooking at that process, and just making it simpler to do the one thing you can't do on your wireless, which is buy wireless. We feel it's kind of crazy that you can do. You can shop for any other category on your wireless except for wireless, right? And so it's a lot more than some of the things of we've been doing like test drive and being able to try out the T-Mobile network. It's a comprehensive relook at the entire process, and we'll work at that. G. Sievert: AI is playing a big role in this. And we talked a year ago about our intention to co-invent IntentCX with OpenAI. And in these breakthrough results you're seeing on the upgrade path, that's starting to come together. So quietly, some of the early elements of IntentCX are hitting customers now. And one of the reasons, I love it when you say this, Srini, like you could buy everything under the sun from this mobile phone, except your mobile phone service at scale. And the reason for that is that it's complicated -- it's a very complicated transaction involving trade-ins and valuing trade-ins and signing up for a 2-year payment plan, picking a plan, getting a promotion against that plan, possibly a promotion against that device and people throw their hands up and say, I need help. Well, AI is great at making the complicated uncomplicated, and we're seeing that in our upgrade flows. You start with your existing customers that already know how to transact with you, but there's obvious extensions here. And it's really great to see the power of this partnership starting to pay dividends. Quan Yao: Great. Thanks, Mike. Thanks, Sam. Let's move on to our next question on the phone, please. Operator: The next question will come from David Barden with New Street Research. David Barden: It's really great to be here again. Srini, congratulations on the new seat. Mike, while I have you, I wanted to follow up on a couple of things. One was, last quarter, you were joking with Craig about how new the satellite product was, and you didn't have any real color on what it meant for T-Mobile to be partnered with Starlink. I would love to get an update on kind of your learnings there and what that partnership means for you and how that partnership might be different than, say, AT&T and Verizon who have invested in AST SpaceMobile? And the second thing would be just on the comments you were making about the AI stuff. A year ago, you had Sam and you had Jensen on stage and you were talking about all the amazing stuff that AI was going to do as you kind of maybe disrupted the business model, the way you disrupted the go-to-market model in mobile. Could you kind of give us where we are now on that path? And maybe Srini could add where we're going to go. G. Sievert: Yes, I'll make a couple of comments and then turn to Srini. First of all, how we do it is we tend -- one of the things that has always worked well for T-Mobile is we look around corners. And you think about when we kind of invented the fixed wireless industry, nobody really believed us that we would create what we've created. Now they're all following and their best argument is, well, maybe it's temporary, maybe it will only last a decade. I mean good luck with that. So we saw that future, and now we're leading that industry. When I went on stage with Elon to say we were going to co-invent satellite directly to your cellular, people didn't believe that, that would happen. Some did, some didn't. But then what happened was really interesting. We did that announcement, so everybody would know we had this technology alliance. And then we put our heads down and did the inventing. And it took 2 years before we came back with a product and began beta testing it. And so that's what we did a year ago. We talked about the future of 6G and that together, we intended with the world leaders to craft 6G for the benefit of T-Mobile and T-Mobile's customers. And that an inherent part of this was this idea called AI-RAN that AI would be at the core of 6G networks and that it would be something that would be co-invented with T-Mobile's influence. And so we brought Jensen, we brought Nokia, we brought Ericsson, NVIDIA, and we laid out a future there. We did the same thing with how AI could transform subscription-based businesses. You can't just take all those models and implement them. You have to co-invent agents for every customer intention. And when you can do that, you can serve customers where they are, you can meet them with exactly what they're trying to accomplish and solve their problem and create a deeper relationship faster and more efficiently than the old way. And so these are the things we do. We lay out a future. We then go put our heads down and do them. To the question that you're asking, how are we doing at the ones we laid out a year ago, we are so pleased with it. As I said, IntentCX is well on its way. In fact, it's starting to touch customers now, which is really great. It's starting to affect our actual results, as you saw in these upgrade rates. And what we're doing in the labs together with OpenAI about how we can totally transform the customer experience is blowing our minds. So we are really excited about that. You also asked about what we see in the future as it relates to direct to sell and SpaceX. And it's hard to predict right now other than that it's going to get better. We see version 2 over the next few years is going to be backed, as you saw in recent transactions by more spectrum. That means as an adjacent service to terrestrial, something that adds on and makes dead zones more of a thing of the past, it's going to get better, and that's our whole goal here. So I don't know if you want to comment on what you're seeing, Srini, working closely with them. Srinivasan Gopalan: Yes. So I think there's this one remarkable thing about us as a company, right, which is this ability to have a clear vision, deliver stuff today and then build for tomorrow. Now the same thing is true of satellite. We work very, very closely with SpaceX. I mean the whole idea of flying towers in space, being able to communicate with the mobile device, which was also moving. That technology is something that people like John Saw have worked very closely with SpaceX to really invent. And our vision of this whole space started off with the end of dead zones. I think we're making huge progress on that. But when I pull together everything from 6G to satellite and the rest of it, I'll draw a parallel to where we are in 5G. We've invented a lot of this space. We're continuing to work on that. We believe as this technology matures, we will be 2 to 3 years ahead of the rest of the industry, just as we are in 5G. And that's the core of it, which is deliver things today that customers can actually use. We're seeing that in terms of upgrades on our plans. We're seeing lots of customers being able to benefit from this. And at the same time, have this vision of the world where we will be 2 years ahead of everyone else as the technology evolves. I think the same thing is true of AI as well. AI today makes a massive difference. The stuff Mike Katz was talking about in terms of customer-driven coverage, that is AI in use today. And at the same point, we're looking at what is everything we can do in the future, how does AI sit at the core of our network and drive everything we do with our network. Quan Yao: Great, thanks. Let's move on to the next question, please. Operator: The next question will come from Michael Rollins with Citi. Michael Rollins: Mike, congratulations on your successful tenure at T-Mobile. Best wishes as you move on to your next role as Vice Chairman. And Srini, congratulations on becoming CEO. So in terms of the switcher pool, can you discuss what you're seeing from that? Do you expect it to be higher for longer? And given that you use a 2-year EIP for your devices, is there something about your customer cohorts that could result in a future increase in upgrade rates to sustain or enhance customer retention? G. Sievert: Yes. I mean let's start by pointing out that we're just ending now as an industry, a cycle where we did see industry churn, particularly at our two benchmark competitors suppressed temporarily as they moved from 2-year to 3-year payment plans across the majority of their customers. And now we're starting to round trip those 3-year plans and customers are rolling off those at a normal pace. And so what you're seeing across the industry in 2025 is industry churn kind of returning to normative rates based on that dynamic and lots of other dynamics, but based on that dynamic. We haven't announced any plans to change our payment plans. So you have a run rate happening now that has a little bit of elevated switching due to a number of different dynamics, but that's certainly one of them. And just on the margin, this is really good because as you saw in this quarter's results, I mean, as Srini likes to say, more jump balls is good for us as the net share taker. And so that's a dynamic that we really like. Maybe, John, you could talk about what you're seeing out in the marketplace as it relates to the state of competition because I know one of the things that's kind of implied in your question is that a lot of people look at our industry and they're concerned about "overinvesting" in competition. We've covered earlier that, that's not what's happening, at least not at T-Mobile. We're really comfortable with what we're seeing. But what are the dynamics driving our outsized performance out there in the marketplace? John Saw: Yes. Thank you, Mike. And thank you, Mike Rollins. The overall dynamics is it's pretty consistent relative to the overall promotional activities that are happening into the market. So what you're seeing with us is this overall widening differentiation that both Mike and Srini have talked about that more and more people are realizing that there's a far better experience with the network at T-Mobile in addition to our long-held fame of value. And then, of course, what we're seeing is more opportunities in our Top 100 markets and then, of course, in our smaller market rural areas where we have continued growth out there. So this promotional construct that we've been using has been really resonating, which is our new plans on our experience, more experience beyond plans, some of our no trade up to a certain value in terms of what you're getting with us. All of those promotional constructs are working really, really well. But the overall environment is just generally being consistent. And then like what Mike said just a few moments ago, more switching in the marketplace against that backdrop is definitely helping to fuel our overall momentum in the marketplace. And of course, with lower churn and better retention that you're seeing from T-Mobile, coupled with higher gross adds, that's producing the overall volume that you're seeing in the marketplace. So we feel really good about what happened in Q3, obviously. We're seeing that momentum continue into Q4 so far, and that's reflected in the numbers and the guidance that you heard from both Srini and Peter just a few moments ago. So all of that's going incredibly well. We're excited about it. It's going against our plans, and that's what's really happening out there in the marketplace. G. Sievert: And what about -- how is it affecting customer lifetime values, the state of the competition out there? John Saw: Yes. Our CLVs have been very, very resilient. So when you look at -- we look at this, we don't report, obviously, CLVs, and we don't look at this on a daily or a weekly basis. But we certainly look at it and monitor these very, very carefully on a monthly and quarterly and ongoing basis. But overall, CLVs are holding very, very constant. As you're seeing premium plan adoption, customers self-selecting up that rate card continuing to increase, churn continuing to decrease relative to what others have seen in the marketplace. So overall, CLVs are holding very, very steady across the entire portfolio. G. Sievert: It's interesting because one of the critiques that some people have in the industry is they cherrypick one metric such as a device promotion and a broad CLV picture for customers and talk themselves into saying, well, competition is overheated. But that's not our experience. That might be an experience at some other companies, I don't know, but it's not our experience. And I think it's important to see because it's overall an equation of how long does the customer stay, what else do they buy from us, how deeper does their relationship become, how do we monetize that relationship, how efficiently can we serve them and so on. And all those -- even Peter has been forced to admit that our ARPA guidance needs to be increased yet again, and that's saying something. Quan Yao: All right. Thanks, Mike. Next question. Operator: The next question will come from Craig Moffett with MoffettNathanson. Craig Moffett: Mike, let me be on the long list of people saying congratulations on a remarkable run. And Srini, congratulations on stepping into the new role. And while I have all of you, let me also say Happy Birthday to Cathy. Happy Birthday. Quan Yao: Thanks, Craig. Craig Moffett: I want to ask about the iPhone cycle. There's been a lot of talk about this being certainly not a super cycle, but at least a more normal and more robust cycle than the last couple of years. Are you seeing that? Do you think that, that's likely to have carryover into the fourth quarter? And if so, what kind of opportunities does that create? And what kind of cost does it create in terms of accelerated number of subsidies that you would have to give for retention as well as customer acquisition? G. Sievert: Okay, great. Srini? Srinivasan Gopalan: Yes. Thanks for the question, Craig. So we're seeing -- this has been our best iPhone performance. We're seeing a strong cycle. Now to your questions of what does that land up meaning for promotions and spend and the rest of it. Look, the heart of it is every time there's a new device, people sort of reassess their choice. And that's one of the big drivers to our momentum in the last quarter. And when people reassess their choice and differentiation has widened, you see the kind of performance you saw in the last quarter. As we look at Q4, our momentum into Q4 is continuing to be strong, and that's driven our raise in our guide on postpaid phones. And so we're feeling really good about where we are in Q4. Now one of the really nice things when you drive volume through widening differentiation rather than simply promoting is you can drive volume at the same point as deliver the outsized financial results we've delivered this quarter. So we're feeling really good, and that's reflected in kind of our guide for Q4, not just in terms of what we're saying on volumes, but also what we've said in EBITDA and importantly, free cash flow. Quan Yao: Great. Thank you so much. Operator, let's do one more question on the phone, and then we'll turn to social. G. Sievert: All right. And I'm wondering, too, could we make it a hard hitting question for John about the network. I said in my opening remarks, by the way, this is my 50th one of these. And in the era where we had me and John and Braxton and Neville, Neville did all the talking because nobody could understand that we might actually be able to build a leading network. So he was always explaining it. So poor John is going to sit here because everybody is like, hey, yes, you guys have the best network. We're convinced. Anyway, sorry. You don't have to ask about network, I'm just kidding. Operator: The next question comes from Eric Luebchow with Wells Fargo. Eric Luebchow: Great. I appreciate it, and thanks Mike and Srini for all the comments. I guess I will try to touch on the network given that prompt, but maybe you could talk a little bit about your spectrum positioning today. Obviously, one of your competitors announced a large deal. There's another block of spectrum AWS-3 that's speculated out there. So certainly seems like they're coming with more spectrum soon. You talked about not just defending but extending your lead over the next couple of years. So can you talk about what you're -- where you're still deploying spectrum, maybe where there are opportunities to add given the balance sheet strength you have and other things you're doing on the technology side within the network to help extend the lead. That would be great. G. Sievert: I love it. Eric, all kidding aside, that's actually -- that's a really important question. And maybe we start with Srini, characterize what you saw in those transactions, maybe what our thinking, our thought process is and was. And then maybe we can talk -- hear from John, too, because while spectrum is the lifeblood, we're the leaders here and intend to remain the leaders and extend our leadership. There's a lot more to network leadership than spectrum. But first and foremost, on spectrum, Srini. Srinivasan Gopalan: So we love our current spectrum position. We not only have more spectrum than anyone else, we have better spectrum than anyone else. Now that drives a lot of decisions. And we see ourselves as kind of incredibly responsible caretakers of your investment in us. And therefore, the way we think when spectrum comes up, and there's been quite a few secondary market transactions on spectrum. We go through kind of the rigorous analysis of what is better. Is it better to buy the spectrum? Or is it better to densify? And our answer in all of those cases was it was cheaper for us to densify than pay the price that was being asked in those secondary market transactions. Now other people might have to make different choices. And in some sense, the fact that they have to make different choices is a reflection of the gap in our spectrum position. And that's the way we've thought of a lot of the conversations that have happened to date. Now let me be also kind of crystal clear on one thing. My intent is not just to defend our spectrum leadership, but to grow it. And the good news is we see several opportunities to do that in the coming years, whether that's other kind of strategic secondary opportunities or whether it's the auctions that will come by. And we feel in a very, very good place to go out and defend and even expand our spectrum lead. But like Mike said, building the world's best network is a lot more than spectrum. And John, maybe you can talk a bit about that. John Saw: Absolutely. First of all, I'm glad that there's actually not that many questions on the network because I think the network speaks for itself. It is our product. And you can see its impact on customer acquisition and customer retention. So absolutely pleased with where we are. A couple of words on our network leadership. And Srini, you're right that it's more than spectrum. It starts with our cell sites. We have more sites than the competition. And the grid of our sites are actually the denser as well, built like a layered cake with the right technology and with the best propagating low-band and mid-band spectrum. Now we were also the first to roll out stand-alone -- 5G stand-alone network, and our competition is just now getting started on it. And with this stand-alone network, we have launched new capabilities like slicing that is actually powering new services like T-Priority for first responders and SuperMobile. We were also first to roll out a 5G advanced network earlier this year. And with that, we have actually unlocked new capabilities ahead of our competition, like low latency, application-aware called L4S, better performance on uplink and downlink. It is not surprising at all to us that the latest smartphones released to the market performs best on our network. Like Srini said, 90% faster on iPhone 17 than one of our competitors. And not to leave our Android, the Samsung S25 is more than 100% faster than that same competitor, right? And by the way, and I can go on and on, but one thing, the Apple Watch this year that was released this year actually runs on our 5G advanced network using a new format called 5G rate cap, which is actually, for the first time, 5G optimized for wearables. Which means longer battery lives, lower latency and higher throughputs than those LTE watches that is running on our competitors' network. I can go on and on, but Eric and Mike, this is -- we won't stop. And with these assets and these capabilities, we are going to maintain and extend our lead for years to come. Quan Yao: Great. Thanks so much, John. Operator, let's actually take our final question from the phone, please. Operator: Yes, ma'am. That will come from Kannan Venkateshwar with Barclays. Kannan Venkateshwar: Maybe Srini, one on the balance sheet and Peter, for you as well. But broadly, when we think about the differences between the different operators right now, one of the biggest advantages you guys have versus your peers is you have massive balance sheet capacity, and your peers are now more constrained. It might be useful to get your perspective on how you could leverage that position. I mean you could obviously drive a more aggressive go-to-market strategy using that, but you could also use that balance sheet in other ways, like you mentioned spectrum or fiber or something along those lines. So it would be good to get some perspective on how you view your position from a balance sheet perspective and how you plan to use that. Srinivasan Gopalan: Thanks, Kannan. Look, we're delighted we have the strength in the balance sheet. And the way we think about it is strength in balance sheet does not take away our responsibility to be incredibly thoughtful stewards of your capital. So we do have strength in the balance sheet. That doesn't translate into, therefore, let's go do a bunch of things which don't make sense from a capital allocation perspective. One of the most rigorous processes we follow is how we thoughtfully allocate capital, right? Now you've talked about fiber. We will continue to pursue a capital-light strategy in fiber because it brings us a bunch of other skills that our partners bring to the table. Go-to-market, we will focus that based on what CLVs make sense, not because we have more balance sheet strength. From a spectrum perspective, we'll again follow the rigorous process of buying spectrum that makes sense from our portfolio perspective, buying spectrum where it passes our test of it's better to buy than to build. So love the balance sheet strength. But let's be clear, we're not going to be any less responsible because we're strong. G. Sievert: I love that. And the other thing that didn't come out in our spectrum discussion is sort of our speculation about the future. I mean one of the things that has happened this year is that auction authority has been restored to the FCC by Congress, along with a mandate to make a large amount of spectrum available. And spectrum prices, as always, will be a function of supply and demand. We see a lot of supply coming. Prices right now in the market are a function of low supply and a function of a once-in-a-generation sort of existential threat faced by our benchmark competitors at the time of the C-band auction created by T-Mobile that pushed prices to unprecedented levels, and that's where they stay. That will probably change over time. That's our bet. And the difference between us and others is that they might be in a business place where they need to act right now at these elevated prices, where we have the ability to be patient and pick our moments on spectrum. And we see those moments coming. So we -- as Srini says, we will not just defend but extend our lead over time. And certainly, entering those with a strong balance sheet is an element of it. And I just love your point that then like now, we will be thoughtful and we will be great stewards of your capital. So hopefully, that helps. Quan Yao: Thanks, Mike. All right. That's all the time we have today for questions. Mike, before I turn the call back over to you, I'm first going to hand the mic over to Srini for just a couple of brief comments. G. Sievert: I don't know if you guys are watching. I don't know if you're watching this instead of listening to it, they just brought us all champagne. Is that because of our quarter? It's got to be because of our quarter. Srinivasan Gopalan: Mike, look, I just wanted to say thank you so much. You've shown us what the Un-carrier spirit truly is like. You've shown us what it is to make bold bets. You've shown us the kind of grit that turns kind of ambitious goals into everyday wins. And for me, thank you for everything. Thank you, everything you've done -- for everything you've done to this team. And personally, thank you for being a great friend, thought partner and also just a wonderful human being. And I'm really looking forward to continuing to work with you in our next chapter. G. Sievert: All right. Thanks, man. Thank you, guys. Hopefully, over the last hour, what you saw is what I told you a month ago that this company is in great hands. We heard mostly from Srini today, that wasn't accidental. We wanted you to hear his voice and his vision for the future. You are going to be an exceptional leader for us and for this company. And of course, you're going to have the benefit of being backed by the best management team in American business. So you guys, it's been an honor and a privilege of a lifetime to be the CEO, and I look forward to continuing to support this team in my new role. I promise we don't plan to spend the day running your company day drinking. Thanks for joining the call, everybody. Cheers. André Almeida: Cheers. Quan Yao: Thanks, guys. Operator: Ladies and gentlemen, this concludes the T-Mobile's Third Quarter 2025 Earnings Call. Thank you for your participation. You may now disconnect, and have a pleasant day.
Kati Kaksone: Good morning, everybody, and welcome to Terveystalo's Q3 Results Call and Webcast. My name is Kati Kaksonen. I'm responsible for Investor Relations and Sustainability here at Terveystalo. As usual, we'll go through the result highlights with our CEO, Ville Iho; and our CFO, Juuso Pajunen. And after the presentation, you will have a chance to ask questions. I will take the questions from the phone lines, as well as through the webcast, after the presentation. Without further ado, over to you, Ville. Ville Iho: Thank you, Kati, and good morning from my behalf. Let's dive directly into Q3 highlights. As you can see from the numbers, this quarter 3 was a quarter of margin improvement amid a revenue headwind. So the EBIT -- adjusted EBIT margin developed positively; very strong operating cash flow; EPS developing positively as expected; very high NPS, taking all-time highs all the time; but then with a decline of some 5% top line, adjusted EBIT in absolute terms slightly down. Double-clicking into different P&Ls and their role in the business, how they are contributing and continue contributing in the future, starting from Sweden. Just as a reminder, Sweden is in a phase still of turnaround. We have been adamant in the fact that we continue focusing only on turnaround and profitability improvement. Sweden is getting -- our Sweden team is getting the results. The underlying efficiency is continuously improving. The results continue to improve. The market being fairly muted at this stage still, we are not making proper profits yet. But looking at next year, volume development looks positive, and we start making results, and then it's time to focus on growth. Portfolio Businesses, quite the same story. The profitability turnaround has for large parts happened. Some minor fixes in smaller businesses, but the bigger businesses are doing fine and developing positively. Now, it's time to grow, and we are eyeing specifically in 2 different segments, as we have said before, dental and then opening public market. Healthcare Services, our biggest business, margin on a very, very high level, really strong, starting from a very strong position. Now, our eyes and focus turn into volume growth, and we continue to boost that one with selective specialties-driven M&A, and then investments in digital delivery and capabilities. Further double-clicking into the strategic agenda, as I said, Sweden profitability improvement program, [ Gamma ], almost done and dusted. Efficiency in all-time high level. Now, looking at organic and potentially inorganic growth there on a solid base. Portfolio Businesses, as I said, profitability improvement done and dusted. Now, organic growth in dental and also inorganic growth in dental and public partnership being relevant in the opening market when health care counties are actually starting buying, where we have seen positive signs already. Inside Healthcare Services, we are seeing very strong development in our consumer-driven businesses. We continue boosting that one, Kela 65 being a prime example of sort of a positive drive. Also in insurance business, our position continues to be strong and developing nicely; out-of-pocket in good place and developing positively against the low morbidity. We have reorganized our operations and our delivery model so that there's clearly separate brick-and-mortar delivery through our health care services or hospital network, and then, now, forcefully and decisively scaling up the digital health 10x, where we are eyeing at major leaps in efficiency, in transactions, more intellect in our patient and customer steering, and then finally, truly scaling up truly digital health care services, tech-based services, nurse services and in very near future also, AI-supported health services. Among all the positive developments, the challenge currently, which we'll further discuss is in occupational health care. We know exactly where we are. We know how to turn around the negative development. There we have a program called [indiscernible], led by new SVP, Occupational Health care or Corporate Health, Laura Karotie, and that one will be discussed in more detail. So, all in all, agenda, very clear, sort of 9 out of 10 moving very fast to the positive territory, more focus needed for occupational health care, which will be fixed. Looking at the volume development and our sort of view on markets in near term, next 12 months, starting from the smallest, Sweden, as we have communicated many times, the market has been very soft. Swedish economy has driven the demand for occupational health care services very low. Now, looking forward, both the market seems to be picking up. Sweden economy is doing better next year. But more importantly, looking at our internal view on the sales funnel, commercial activities, sales funnel looks positive. And when we are able to do, in next year, more volume on higher operating leverage, of course, then we'll start making money. Portfolio Businesses, public business, as all know, has been very, very slow in buying. Health care counties are only sort of picking up the buying activities. What we see in large tenders and also in smaller tenders is increased activity. And looking at the next 12 months, we see the market developing positively. Same goes with the consumer business. It has been fairly muted due to low confidence of consumers. We have seen already some positive signs, specifically in the dental services, which typically is the most sensitive for consumer behavior, and we expect the positive drive and vibe to continue for next 12 months. In public business, when we jump over to Healthcare Services, in public services produced by health care services units, it has come down and it has brought -- or contributed to lower volumes in Healthcare Services. We see that one bottoming out, and next 12 months should be more positive. Consumer business, even though our own position has been strengthening, has been fairly flat due to low morbidity. But with the sort of normalized view on that one, our strong drive in Kela 65 and insurance business, we see that one developing positively also going forward. Insurance business, equally, it has actually been the growth driver inside Healthcare Services, continues to be so. Number of insured persons in Finland continues to slowly pick up, and use of services is on a high level. Occupational health care, finally, so we'll double-click on the development, what has contributed to lower volumes in Q3, but very shortly, it's number of connected employees, sort of thinner scopes in the agreements by the corporate clients, and then inside those agreement scopes, lower use of services. All of these are slightly negative from our business point of view. It's been negative. It's going to stabilize. But specifically, number of connected employees will not be sort of turned around in 1 quarter. We'll turn that one around, but it will take a couple of quarters to get to -- again to all-time highs. If we dive deeper into this phenomena, as you can see, and it's good to remember the phases that we have seen in the development over the last couple of years and quarters. In '22 and '23, in the number of connected employees, we were pushing all-time highs. At the same time, as you remember, the profitability of this business was really, really low. And we struggled with the low contribution to rest of the business and hence, the Alpha program. With the Alpha program, we totally turned around the profitability of not only occupational health care, but the company. With that one, of course, the -- some of the less profitable agreements went out. And now, we see also some unintended tail effects of the Alpha period. Now what we are doing is, of course, we are rebalancing products, pricing, offering, and it's not going to be either or. It's going to be both, so both profitability and volumes. Occupational health care, as I said, is the biggest focus area in our agenda currently. It will be turned around with our program. It's a comprehensive exercise of renewing, partly even transforming sales and account management, our product offering to become more relevant and according to expectations by ever-demanding customers. And then, finally, digital front renewal, which we now can accelerate and fast track with our MedHelp joint venture. And our customers will see tangible results already from Q1 onwards on this area. Positive thing -- a very, very positive thing in our portfolio is consumer side, so combined insurance, Kela 65, out-of-pocket area. Our brand is doing fine. And that's, of course, one of the basic building blocks for boosting this business. We are the most preferred brand when we look at the brand preference development. We have been so. But now, we are all-time high. Also in top of mind, the company, health care services company that Finnish consumers think about them when they wake up in the morning, that's now Terveystalo for the first time. And that itself gives a very solid base for further improvement in this business. We have invested heavily in services. We invested heavily in digital engagement with our consumer customers. We have invested in Kela 65. And in that particular new segment, we are a clear leader in that developing market. Finally, Juuso will explain in detail the strength of our finances, the profitability, cash flow and balance sheet. We continue increasing our investments in our digital capabilities. It's an ever-increasing value driver in our business model. And we have some key focus points and developments in that digital ecosystem. For the professionals, we have launched the Ella user interface and digital front door and continue scaling that one up. And that's going to bring tangible efficiency improvements during next year in our sort of traditional brick-and-mortar appointment activities. For individual care, looking at -- looking from a customer's point of view, as I said, it's very much in the core of our 10x agenda. We are making leaps in efficiency, in transactions related to our incoming traffic and customer contacts. We are going to further improve the leading capabilities that we today already have in patient steering and customer steering. And then, finally, we'll make efficiency leaps in text-based appointments, text-based digital appointments, nurse services and introduce first AI-supported health services in very near future. In occupational health, as I said already, we are now in a very good position to migrate our occupational health capabilities, digital capabilities into new MedHelp environment. It's best-in-class in Europe. And our customers, as I said, they will see tangible results and fully a new view and sort of better control on their own people, own organization, sick leaves, workability, starting from Q1 next year when we start deploying new system to first customers. All in all, we are, in this digital journey, in very strong, very good place. Our architecture is where it should be. Our initiatives, projects create value, not in years, but rather in months, and we are confident in investing more and getting more yield out of the digital engine. With that one, over to you, Juuso. Juuso Pajunen: Thank you, Ville. So good morning all. I'm Juuso Pajunen, CFO of Terveystalo, and let's talk about the financial performance in the third quarter. So first of all, if we look at the whole group, we have the positive margin development continued despite the revenue headwinds. This was, in relative terms, the second best Q3 during the group's history, and the best one was during the COVID times. So what I want to highlight is that our efficiency is in place, our machine is [ ticking ]. But also having said that one, we do know that we can't be happy on the growth and especially the revenue development when it comes to occupational health care. So if we look at the big picture, portfolios in Sweden improved both in relative and absolute profitability, while they are still facing anticipated negative growth. So portfolios in the outsourcing businesses in Sweden, we are still coming from the efficiency hunt and now going for the growth mode. And then, with Healthcare Services, we have the strong margin, but the headwinds in the occupational health and the morbidity have been pushing the growth negative, like Ville also explained a bit on the occupational health part. So then, if we look first on the Healthcare Services, I will double-click in the next slide on the growth, especially what comes to visit growth. So let's park that question. But all in all, the performance, what comes to the relative profitability, it was really solid. We had the decline in revenues, headwind in the markets. And despite those ones, we were able, through solid cost control and our flexible operating model, to keep our profitability in a good place, especially remembering that this is the low season Q3. And for the growth, we have a strong plan. And in the longer perspective, I still remind you that the megatrends will continue to support our long-term outlook [ what ] comes to the growth. So then, let's see the visits. Let's address the elephant in the room. So basically, we can split our visits growth. So now, we are talking about the volume. We can split it into different type of buckets. First of all, we have the morbidity. So, that one is basically seasonal. We have no control over that one. And we had plenty fewer visits compared to previous year. And this is part of normal seasonal variation, and it changes annually. We have -- then if we go into the occupational health care, we have different factors behind the decline. We have basically macro-driven components. So the general employment in Finland is lower than earlier, and we have a sluggish economy, and that one also then impacts on the employers' behavior. So basically, they are implementing cost reduction initiatives due to own economic pressures and push, and that one impacts on our demand also. So, a concrete example on that one would be narrowing down the contract scopes on what they offer to their employees. Then we have the third component, which goes into more on what we have done ourselves. As Ville explained, how our profit improvement program has been progressing and how the -- despite having very high amount of connected employees, our occupational health business was not super profitable. Now, we have very efficient machine, profitable business, and we need to load further volume on that one and get then the benefit of the operating leverage. And for that part, we have a solid strong program ongoing, like Ville mentioned. The name is [indiscernible]. And we are confident that by implementing that program, we will address the weaknesses we have had, and we would expect to see growth in the number of connected employees in the coming year. In public sector, especially the capacity sales, which is a minor part in the Healthcare Services segment, but it is in a very low level due to the wellbeing county setups and all of that one. But now we have seen that the sales pipeline is opening up and the market is little by little finding its form. And then, we have the positive momentum, Kela 65 consumer insurance market where we have been growing and we have been able to capture positive momentum. And that one, we will obviously continue pushing. The experiences from Kela 65 are very positive from the patient perspective and also from our perspective. So with all of this one, there are various factors impacting our growth, and we will address especially the occupational health part decisively when going forward. Then if we go into the Portfolio Businesses, we have clear improvement in profitability. We have been able to improve the EBIT margins continuously, 2.2 percentage points up compared to previous year. And then, we have the momentum in especially public sector business. Outsourcing, we have been guiding you that it will most likely decline EUR 30 million this year, and we are on that trend, on that pattern and continuing on that one. On staffing, we started to have revenue headwinds during roughly a year ago, and now those ones are stabilizing out. And part of that one was also our own selection on how we address the market. But now little by little, the positives are coming, markets are opening up. Wellbeing counties are more and more capable of also buying and willing to buy. So this market momentum is little by little turning. And then, we have the consumer part that is growing. It is performing positively, and we will obviously continue to push on that part. So solid performance improvement in the portfolios when it comes to profitability. Then in Sweden, we are also improving both absolute EBIT and relative EBIT. We are still showing heftily negative numbers in a very seasonally low quarter. So Q3 is always difficult and weak in Sweden due to how the offering behaves during vacation period. In here, what I'm really proud is that our efficiency continues to ramp up. We have -- we continuously see, on our KPIs, positive development what comes to occupancy rates, but also we start to see that one on a monthly gross margin levels going up. So we are now getting into an efficiency place, and we will load further volumes on top of that one. We have a solid sales pipeline that supports us getting back on track and on heftily numbers. So program is in plan. Improvements are now continuously more visible also in the backward-looking income statement, and we will push forward. However, there is a weak market environment still in Sweden as a totality. So the macro has not recovered yet to the full extent. But despite macro, we are able to push Sweden back to good numbers in the coming year. Then, if we look at our investments, we've been continuously investing in technology. We have been stating since the Capital Markets Day last year that we will land somewhere between 4% to 5% of revenues in the longer perspective on the investments. Now, we are at 3.4%. We are heavy in digital. We have been talking about Ella, our professional user interface and related flows. You have seen, during the quarter, investments in MedHelp, the joint venture, which will be the digital front door in our occupational health. And then, some may have seen that we have deepening our collaboration with Gosta in the artificial intelligence and ambient scribing, further improving our tools. We have a good momentum. We have solid technology road map, and we have capability to invest. So we will continue on doing on that one. And then, in inorganic growth, the market is there, and we are evaluating different type of opportunities. And for those opportunities, we had a solid quarter for cash flow. We are now in the green bucket again. As was the [ negative part ] normal seasonality, so is this one. Our cash profile has not materially changed, and there is no reason to believe it materially changes either, so normal volatility. We are the Swiss clock we have been. We tick, tick, tick cash. And then, our leverage ratios, 2.1 at the moment, so we have powder to continue investing. So positive financial position, and we can definitely do organic and inorganic investments. Then, if we look for our guidance, basically this is unchanged. So despite some market headwinds, we reiterate our guidance after the second best third quarter ever. So we are expecting our adjusted EBIT to be between EUR 155 million and EUR 165 million. These are based on the current demand environment, employment levels and morbidity rates. So normal disclaimers, nothing new on that one. What is good to note maybe that the implied range for Q4 seems highish compared to previous year Q4. But then, you need to look back on your notes and remember that in previous year Q4, we had especially personnel-related items that we don't have this quarter -- this year in Q4. So the baseline adjusting needs to be a bit taken to understand our Q4 performance. So all in all, I'm happy to reiterate our guidance, EUR 155 million to EUR 165 million in total. With these words, let's invite Kati on stage and let's have a Q&A. Kati Kaksone: Thanks, Juuso. I think we are ready to take questions from the phone lines. Operator: [Operator Instructions] The next question comes from Anssi Raussi from SEB. Anssi Raussi: Maybe I'll start with your guidance as you mentioned that as the last item here. So you already said that there were some special items in your comparison period. But how should we think about underlying assumptions here? Like, does it require any improvement in the market sentiment or something you are not seeing yet to reach your lower end of the guidance range? Juuso Pajunen: I think that's a very relevant question. So, at the moment, the guidance is based on the current market environment and the current morbidity rates. So it already factors in, like always when issuing the guidance, everything we know up to yesterday evening. So the current guidance assumes lowish morbidity rates and the occupational health market in the conditions we know at the moment. Anssi Raussi: Got it. That's clear then. And maybe the second question about your occupational health care. So I think you said that maybe you lost some connected employees due to your profit improvement program. So do you think that it's possible to increase the number of employees or connected employees without sacrificing some of your profitability gains in this program? Ville Iho: Yes. Again, a good question. So, as I said during the presentation, it is not going to be either or, so either volume or profitability. It's going to be both going forward. It requires some balancing in our sort of offering and pricing, but we are not going to sacrifice the profitability just for the sake of absolute volume. Anssi Raussi: Okay. So maybe continuing on that one. So when we look at your -- of course, you showed your appointment volumes and the impact of prices. So how should we think about the pricing going forward in the coming quarters or years? Ville Iho: So, of course, the cycle is very much different than it was, let's say, 2, 3 years ago. The pressure on the -- contracts pressure on prices is, of course, higher post inflation cycle. And we should not -- or you should not expect as sort of a rapid price development going forward. Now, it's more on the how we package our products, what is the mix in our sort of agreement portfolio, and how efficient are we under the hood in delivering those services. And then, final component is the volume. So the growth cannot be, for example, next year, driven so much by the price increases as we have seen during last -- or past 2 years. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Kati Kaksone: All right. It's a busy results day today. I think there are some 30 companies today. There's one question in the webcast currently from DNB Carnegie from Iiris; two parts. Regarding the plan to address the revenue headwind, can we talk about when do we actually expect to see these measures to become visible in the top line and whether we plan to provide any financial estimates of the sales or earnings impact of those actions? Juuso Pajunen: If I start, like I actually hinted a bit, or not even hinted, written out loud in the bridge that we would expect the connected employees' impact to be visible in '26. And that's obviously coming from the nature that if you today win something before it's visible and the connected employees are part of our portfolio, that, especially in the big cases, is a matter of months rather than anything else. So we would expect on '26 the impact. And at the moment, obviously, our financial guidance relates to Q4 and full year '25, and we will come back for the total guidance for '26 along with Q4 publication. Ville Iho: Yes. Again, the only caveat is sort of with what Juuso said, this is that -- as I said before, we are not hunting the volume with the price of profitability. So it is going to be both profitability and revenue and also volumes. So we are not repeating the mistakes that the company did some 6, 7 -- or 5, 6, 7 years ago. Kati Kaksone: Maybe then, continuing on that one, a follow-up question from Iiris. We talked about an update to our product offering in the occupational health to make it more relevant for our customers. Can we give some examples on what that means in practical terms and where we expect to see the largest positive impact? Ville Iho: It's down to the segmentation of different needs amongst our customers. Of course, we are serving 30,000 -- roughly 30,000 different companies in Finland. And there's a wide spectrum of different type of needs and appetites also to pay for the services. Now, when we are talking about sort of transforming or renewing the products, typically, it concerns the sort of customers who are more sort of keen on looking at the price and value for money type of sort of comparisons. And there, we do have strong means inside the company to steer the services across our vast network. We have not used them to the full extent. So what I mean is that if there's a company whose main focus is to get things to a certain level and then look at the spend after that one, we have means to serve that type of customer. If there's a customer that wants to maximize the services to the employees, then we can serve that type of customer. If there's a product, which is priced with a fixed contract, we have means to control both the profitability, delivery and cost for that type of customers. And that type of steering capabilities will be sort of utilized to full extent now going forward. So we have the flexibility. We have different type of delivery models, and we are also renewing sort of commercial packaging of these type of different models. Kati Kaksone: Yes. And of course, MedHelp is a concrete example of the value increase that we can show to our customers in a relatively short term as well. Ville Iho: Absolutely. It's going to be the next level. Kati Kaksone: Good. Then, a question on the public outsourcing tenders and the outlook there. Besides the tender of Pirkanmaa wellbeing services county, which was won by our peer yesterday, are there any larger tenders opening up at the moment? Ville Iho: Well, there's one other which we know of. And then, I think what's going to happen is that health care counties are watching very closely each other. And when somebody is opening a path, then the rest will follow, specifically if there's a successful implementation of a certain model. So we believe that this is only a first step, this [ Pirka ], and congrats to Pihlajalinna for good competition and a nice win in there. Kati Kaksone: Yes, indeed. Then maybe a question to both of you. Can we talk about the M&A pipeline? How does it look at the moment? Juuso Pajunen: Yes, if I start, so basically, it is fair to say that M&A opportunities are now little by little emerging in different type of segments. And we are, as we have said, happy to do disciplined M&A when we see an opportunity to fill a blank, whether it's a technology bank, offering blank or other blank. So, that market is little by little activating, and we are and we will be active in that one. Ville Iho: Yes. There's -- just looking from sort of a short history perspective, where we have been and where we are now and potentially will be, the activity on our desk is way higher than it has been for 5 years or so -- 5, 6 years, sort of post-COVID or during COVID times. This is sort of an all-time high activity. And there are sort of real potentials out there. Of course, you always need to get to the -- get over the sort of finish line to get something materialized. But the funnel is there, and it's strongest that it has ever been during my term in Terveystalo. Kati Kaksone: Yes, definitely signs of picking up there. Then a couple of questions from Matti Kaurola, OP. We mentioned that the insurance business is growing fast. Are there any possibilities to take more market share from other players in that segment? Ville Iho: Well, I would say, it's not growing fast. It's growing steadily. So it's -- coverage of insurances in Finland has been developing positively, and then use of services have been developing positively. We have gained market share over the 2 last years. And then, further gaining market share, of course, requires also new means and new type of value creation for insurance companies. I think we have a strong plan there, which we continue implementing. The bigger moves, in my view, will happen only in 2027. Next year will be more like a steady progress in this segment. Kati Kaksone: Of course, we have a clear attack plan for 2027 to deepen the cooperation with the insurance companies. Then, maybe continuing on the outsourcing market and the well-being services counties, how do we look at the public outsourcing market in general in the future? Is it attractive? And is it a part of our core offering and our business going forward? Ville Iho: Well, we explicitly said earlier that we are interested in this new type of outsourcing deals. We were part of [ Pirka tender ]. And one can say looking now in hindsight, the competition and the outcome that each and every out of 3 main players were on the ball in sort of pricing and offering the package. So very close margins who won and who did not win. When it comes to profitability, of course, this would have not been sort of the richest agreement, but still value-creating, EPS enhancing, which is the key for our business model. So when this type of tenders come to the market, we are interested. Kati Kaksone: Indeed. At the moment, we don't -- we have one more question from the phone lines. Let's take it now. Operator: The next question comes from Anssi Raussi from SEB. Anssi Raussi: One follow-up from me. So you also mentioned these somewhat extraordinary costs last year in Q4 and that there were some one-offs related to employee expenses. But can you remind us like what kind of amount we are talking about that you consider one-offs in Q4 last year? Juuso Pajunen: Yes. So basically, compared to baseline in last year, if you go into the details, you remember that we paid EUR 500 per employee to all employees an extra bonus. And based on the CLA, there was EUR 500 per employee fall all under CLA. So that's the personnel expenses I referred to. And then, if you go into a bit deeper, you see that there was a bit of accelerated amortizations and depreciations in the income statement in Q4 last year. So, that one you need to put your finger into yourself, but normally, forecasting depreciation and amortization is not super difficult. Kati Kaksone: Thanks. With that, I believe we don't have any further questions on the phone lines or from the webcast. So any closing words? Over to you, Ville. Ville Iho: Well, as discussed earlier, a quarter of improving margins with revenue headwind; strong agenda to further accelerate the areas where we are progressing well and to tackle the headwind in occupational health care; investments with the dry powder provided by [indiscernible], used more and more to digital offering, where the agenda is -- strong architecture is there and delivering tangible results. Kati Kaksone: Great. With that, we thank you for your time, and have a great rest of the week. Juuso Pajunen: Thank you. Ville Iho: Thank you.