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Operator: Good day, everyone, and welcome to today's AdaptHealth Third Quarter 2025 Earnings Release. Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. Before we begin, I'd like to remind everyone that statements included in this conference call and in this press release issued today may constitute forward-looking statements within the meaning of Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2025 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed at length in the company's annual and quarterly SEC filings. AdaptHealth Corp. has no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, the company will reference certain financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin and free cash flow, all of which are non-GAAP financial measures. You can find more information about these non-GAAP measures in this presentation materials accompanying today's call, which are posted on the company's website. This morning's call is being recorded, and a replay of the call will be available later today. I am now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster. Suzanne Foster: Thank you, and good morning, everyone, and welcome to the call. I'm pleased to report that Q3 was a milestone for AdaptHealth. If you recall, last year at this time, we realigned our business into 4 reporting segments, each under general managers and dedicated sales leaders. This was intended to focus our efforts on improving patient service and operational efficiency. By doing so, it allowed us to better manage our resources, and that decision was a key contributor to the mid-single-digit organic growth each segment produced this quarter. The theme for today's call is that over the past year, the team has worked tirelessly to transform our business, and we are now seeing our progress taking hold and flowing through to our financial results. In the third quarter, we completed substantial operational improvements across the organization and delivered financial results that exceeded our expectations. We are continuing to demonstrate progress across all 3 value drivers: growth, profitability and risk profile. Starting with growth. Our third quarter revenue was $820.3 million, up 1.8% from prior year quarter. Organic revenue growth, which does not include changes in revenue from divestitures or acquisitions, was 5.1% versus the prior year quarter with strength across each of our 4 reportable segments. Sleep new starts were up nearly 7% from the prior year quarter, making it our highest quarter in 2 years. We also set new patient census records in both Sleep and Respiratory Health. We experienced robust year-over-year growth in our Wellness at Home segment, driven by orthotics and hospice. And in Diabetes Health, we delivered the first quarter of revenue growth since Q1 2024. Moving to profitability. Our third quarter adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter and above the high end of our guidance range. Adjusted EBITDA margin was 20.7%, up 30 basis points from the prior year quarter as we exhibited discipline on expenses even as we made forward investments in talent, technology and infrastructure to support our new large capitated partnership we announced in August. Turning to our risk profile. We reduced debt by another $50 million during the third quarter, bringing our year-to-date total debt reduction to $225 million. We are delevering quickly and rapidly approaching our 2.50x target net leverage ratio, with our net leverage ratio standing at 2.68x at quarter end. Debt reduction remains among our highest capital allocation priorities as we believe a strong balance sheet is essential to unlocking and sustaining value for shareholders. During the quarter, we continued to make significant strides towards improving patient service and field operations. As planned, we completed the implementation of our standard field operating model and organizational structure, starting with consolidating from 6 to 4 regions. This was a huge step forward. It required empowering our best operators to lead these 4 regions and realigning nearly 8,000 employees to our new field operating structure and standard workflows. As a reminder, we enter nearly 40,000 homes per day. We operate 640 locations across 47 states and without a standard operating model and org structure, rolling out standard workflows and technology can be slow and inefficient. Now with the standard operating model across the country, we can more efficiently deploy operational improvements and technology solutions in a timely manner and at scale. Another initiative that's taken place over the last many months is the consolidation of our previously fragmented call centers into a new national contact center and utilizing a single patient services technology platform. This is a significant enhancement that allows us to dramatically improve how we route our incoming call volume and standardize patient interaction. which creates a higher quality, more consistent experience for the patients we serve. Looking forward, as we deploy technology that allows more patients to self-serve, this new call center will supplement the local branches with increased capacity to manage the most critical patient concerns. We continue to believe that there is significant potential to deploy AI and automation across our business. Therefore, we continue to selectively but aggressively pursue and pilot the use of these tools to drive service excellence and operational efficiencies, and we are already beginning to see the early benefits. For example, in the third quarter, automation enabled the revenue cycle management team to reduce its reliance on offshore labor by approximately 5%. Let me connect these results to where we are headed strategically. We are moving quickly to establish the infrastructure required to service our recently announced exclusive capitated agreement with a large integrated delivery network. This is a significant undertaking that will require approximately 1,200 employees, 30 locations and 300 vehicles. Our partnership with this customer is off to a strong start because we share a philosophy about how best to unite our efforts to provide superior care for patients. This starts with a mutual recognition that the combination of an integrated delivery network at an at-scale home medical equipment and service provider working through a per member, per month or capitated fee model produces the strongest alignment of incentives. This means we share a common commitment to a seamless handoff of care as patients are discharged from the hospital when they are at their most vulnerable and the risk of readmission is the highest. It means being rewarded for clinical appropriateness and efficiency by providing exactly what the patients need, nothing more, nothing less. It also means being motivated to drive patient adherence by investing in setup, training, education and ongoing support to ensure patients use equipment correctly. In short, we are strategic partners working to keep patients healthy at the lowest sustainable cost. We arrived at this moment because of our success with our Humana capitated arrangement, which demonstrated for the first time that an at-scale HME provider could lift and shift significant volumes of activity while maintaining high service standards. Our immediate objective is to replicate that success by delivering on our promises to our new IDN partner as well as to another new capitation partner, a major payer for whom we will be the exclusive provider to an additional 170,000 lives as announced this morning. But as we look out on the horizon, we intend to lead the evolution of our industry by using our results to prove to every IDN and large hospital system in the U.S. that partnering with us produces better outcomes for patients. That means faster time to therapy, higher adherence, greater patient satisfaction and ultimately finding ways to lower readmission rates and deliver genuine clinical value in the home. AdaptHealth is uniquely positioned with our technology infrastructure and operational capacity to offer this value proposition at scale. And our relentless focus on operational discipline and service excellence demonstrated in our Q3 progress is all about enhancing the value proposition. Our national contact center, centralized order intake and adoption of AI and automation are just a few examples of how we are alleviating patient, physician and hospital pain points. This focus extends beyond capitation to our entire business. To be clear about what is at stake, service excellence is where HME providers win or lose loyalty. Hospitals and physicians remember which HME companies respond timely, who handles logistics seamlessly and who prevents patient readmissions. Service excellence creates referral stickiness. For us, operational discipline as the foundation for service excellence is not just about margin improvement. It's the key to competitive differentiation. And because of this, ingraining this discipline into our DNA is becoming one of our highest strategic imperatives. As we look toward the upcoming round of CMS' competitive bidding program, our operating efficiency is a unique and critical strategic asset. While the final rule has yet to be released and the ongoing government shutdown holds the potential to delay it, CMS has not missed words about what it hopes to achieve with the redesign of the program. As outlined in the proposed rule, CMS sees the successful process as one that will cause HME participants, small and large, to submit competitive bids, and it seems to view limiting the number of contracts awarded as the key mechanism for achieving that aim. Some look at the bidding program and focus only on the reimbursement risk. However, rate compression is not a foregone conclusion, and moreover, it is only half the equation. The other half is that if CMS retains its proposal to limit contract awards, this would, by definition, consolidate traditional Medicare market share with knock-on effects that would likely force industry consolidation more broadly. As a result, competitive bidding has more potential to transform HME industry structure than perhaps any other dynamic. AdaptHealth has been preparing for this moment for years. Our cost structure enables us to participate in the bidding program from an advantaged position. Furthermore, as government policy continues to evolve, our improving financial strength affords us the flexibility to take strategic action to consolidate market share. Where others may see risk, we see opportunity. Before I close, I'd like to express how grateful I am to my AdaptHealth colleagues. The progress we've made over the last year and especially in the third quarter, demonstrated our grit, determination and focus is paying off. We have a lot of momentum coming into 2026 and expect to see continuous improvements across our business as our teams execute on these growth opportunities ahead of us. With that, I'd like to pass the call over to Jason to review our financials. Jason Clemens: Thank you, Suzanne, and thanks to everyone for joining our call today. After covering our third quarter 2025 results, I'll provide a review of the balance sheet and our plans for capital allocation. Then I'll finish with guidance for the remainder of 2025 and some perspective on our early expectations for 2026. For third quarter 2025, net revenue of $820.3 million increased 1.8% from the prior year quarter. Organic revenue growth was 5.1% in the quarter. This does not include $34.4 million of prior year revenues related to the divestiture of certain assets from the Wellness at Home segment and $7.7 million of revenue from acquired businesses. As Suzanne noted, our third quarter revenues were characterized by strength across all 4 reportable segments, with each producing year-over-year organic growth. Third quarter Sleep Health segment net revenue increased 5.7% versus the prior year quarter to $354.8 million. Sleep Health starts were approximately 130,000, up 6.8% versus the prior year quarter, resulting in our highest quarter in 2 years. Our Sleep Health census reached a new record of 1.72 million patients, up from 1.70 million in the prior quarter. Third quarter Respiratory Health segment net revenue increased 7.8% from the prior year quarter to $177.0 million. Despite lower-than-anticipated oxygen new starts, retention remained strong, resulting in an oxygen census of 330,000 patients, which was a new third quarter record. Third quarter Diabetes Health segment net revenue increased 6.4% versus the prior year quarter to $150.1 million, our first quarter of year-over-year growth since the first quarter of 2024. Although CGM starts were softer than we expected, CGM census grew over the prior year quarter for the third consecutive quarter, driven by continued improvement in retention rates. Pump and pump supplies revenue continued to grow over the prior year quarter. For the Wellness at Home segment, third quarter net revenue declined 16.0% from the prior year quarter to $138.4 million, including the previously mentioned impact of the dispositions of certain noncore assets. Turning to profitability. Third quarter 2025 adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter. Adjusted EBITDA margin was 20.7%, slightly above the midpoint of our Q3 guidance range and up 30 basis points from 20.4% in Q3 2024. The year-over-year margin trend reflected modest improvement in operating expenses as well as the disposable of less profitable noncore product lines. Our labor expenses were well contained even as we invested in advance of revenue for our new capitated agreement. Moving to cash flow, balance sheet and capital allocation. Q3 2025 cash flow from operations was $161.1 million. CapEx of $94.2 million was 11.5% of revenue, up slightly from the prior quarter as we continue to invest in new patient growth. Free cash flow was $66.8 million, in line with our expectations and unrestricted cash stood at $80.4 million at the end of the quarter. At quarter end, net debt stood at $1.73 billion, down from $1.80 billion at the end of the second quarter. We reduced our TLA balance by $50 million in Q3 2025, bringing the year-to-date total to $225 million. Our focus on debt reduction has decreased year-to-date interest expense by over $15 million as compared with the same period for 2024. Our net leverage ratio stood at 2.68x, down from 2.81x at the end of the second quarter and rapidly approaching our target of 2.5x. Turning to capital allocation. Our highest priorities continue to be investing to accelerate organic growth and debt reduction to strengthen our financial position, followed by strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access. So far in 2025, we have allocated $19 million of capital to tuck-in deals, and we are continuing to advance modest tuck-in deals through our pipeline. Turning to guidance. We are maintaining our full year 2025 revenue guidance range and expect to come in very modestly above the midpoint of that range. We are also maintaining our full year 2025 adjusted EBITDA guidance, but we expect to come in at the bottom end of that range as we prudently accelerate investments in infrastructure, technology and labor to stand up our new capitated arrangement. We are maintaining our free cash flow guidance at a range of $170 million to $190 million. While the government shutdown has the potential to push some cash collections into Q1 2026, given the free cash flow generated year-to-date, we remain confident that we will still achieve our prior guidance range. Given the number of moving parts affecting our expectations for 2026, let me provide a preview of how we are thinking about next year. We anticipate the top line will grow 6% to 8% over full year 2025, which assumes accelerated growth in our core products, revenue from our new capitated contract and the impact of certain assets disposed in 2025. We expect revenue growth will start slower in the first half, but will accelerate in the back half due to the timing of the ramp of the capitated contract and the dispositions. We anticipate full year 2026 adjusted EBITDA margin to be approximately 50 basis points better than 2025, even as we invest in new capitated infrastructure in early 2026 ahead of the revenue ramp. As a reminder, we expect this capitated contract once fully ramped to produce at least $200 million of annual revenue with adjusted EBITDA margin and free cash flow margin in line with the rest of our business. As has been our practice, we intend to provide formal full year 2026 guidance when we report fourth quarter earnings this coming February. That brings me to the end of my remarks. Operator, would you kindly open up the call for questions? Operator: [Operator Instructions] Our first question comes from Eric Coldwell with Baird. Eric Coldwell: Nice job in the quarter. I wanted to hit on the large capitated deal. Your comments on '26, Jason, were very helpful. You mentioned slower growth in the first half, more in the second half. Conversely, the incumbent on that arrangement has been signaling that it actually expects the transition to begin this quarter and to be completely ramped or completed by the end of the second quarter of next year. So the incumbent sounding like the transition is going to happen a little faster. If I'm reading you correctly, it still sounds like you're expecting a little slower. I'm hoping you can just help us triangulate those 2 data points. Jason Clemens: Well, sure, Eric. I mean, I guess I'd say, firstly, that we don't have a lot of perspective on what competitors might be saying out there. What we do know is that the contracted dates that we've signed up to deliver, that's very clear. We're in advance of the bulk of that ramp. And so we think we're being appropriately conservative with our expectations of the ramp over the course of 2026. And as markets come online, we'll certainly gain confidence on having all the infrastructure that we need in place before the first patient shows up. I mean that, in our mind, is the priority is making sure that we've got the labor and the people and the vehicles and the infrastructure in place for those patients prior showing up. And if we do that, we take good care of those patients, that ramp could get better than what we're suggesting. Eric Coldwell: Just one quick follow-up or additional question. You've obviously been pretty successful here recently with these new wins, particularly on the large capitated side. At the same time, again, a competitor has recently announced a -- at least in the near term, an exclusive with a large network, OptumHealth. And I'm curious, based on your 2026 preview, it doesn't sound like that's a big impact, but I'm hoping you can give us some color on perhaps how much exposure you might have had there or if that competitor announcement is at all impactful? I mean, certainly, a larger OptumHealth larger network somewhat visible to the Street. I'm just curious if you have any thoughts on that change? Suzanne Foster: I'll take that one, Eric. So taking a step back, I think that these capitated agreements or preferred provider agreements as some call other types of agreements are evidence that the market, payers and providers are interested in partnering with a single scaled partner to help their membership or patients. But there's a distinction in my understanding between an exclusive capitated agreement and what we call a preferred provider agreement. And so the distinction here is that with -- when we say capitated agreement, we are exclusive, we -- they have to refer to us, and we have to service that patient pool. A preferred provider agreement means, hey, give us the business, we'll service it, but it still means that people can compete for that business. It's still an open network. And so if I understand correctly, the contract that you're referring to, I have not heard that it is exclusive. I have heard that at the end of the day, they have to earn the business just like anyone else would. And like I said, in this business, you earn that business by providing the best service. And so we believe with all of the infrastructure and continuous improvement that we made that we are going to continue to earn business on the basis of our service excellence. And so it does not preclude us from calling on that customer. Jason Clemens: No, Eric, I might add, since the announcement that you're referring to, there has been zero change in our trend lines and our expectations related to that contract. So we'll see what, I guess, tomorrow brings. But for now, we've got full access and coverage, and we feel just fine about it. Operator: We'll now move on to Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats on the quarter. Maybe, Suzanne, I'll just hit on that last comment you made. So as we think about the fact that you've already won Humana, the Kaiser contract and then another one today, I mean, different dynamics there. Humana was not capitated prior. What are you seeing in the market? Or what are the conversations like in terms of getting more payers to convert their approaches to DME to capitation? And how far are we from -- or is it reasonable to think that eventually, this will be mostly capitated at least for the national providers? Suzanne Foster: Thanks, Brian. I mean I believe that this type of model is what's best for the industry. I was recently on the road meeting with some big hospital systems and their CEOs. And what they're talking about is reducing their length of stay, seamless handoffs putting our people alongside their people for discharge planning. So they're incented to move patients through the hospital or if it's a physician practice to have a seamless handoff. And so having a strong partnership where we can hold each other accountable, they can hold us accountable for service level initiatives, that's a big deal for them because if they're managing many, many different players without strong SLAs in place, that makes it difficult. So us showing up saying we're a large public company that takes compliance and integrity seriously, that we cover 47 states that we can do this at scale, that we agree to SLAs in the capitated agreement, they like that model. And so the idea that we can show up and have that seamless handoff for them and quarterly report out how that performance is going between us, that's something that's really getting a lot of interest. And that's where we're putting a lot of resources to go see how many more hospital systems, IDNs and payers that we can convince that by aligning our incentives that this is best for patient care. Brian Tanquilut: That makes sense. And then maybe, Jason, just back to the point of the guidance. I mean, obviously, a good quarter here, and you're maintaining the guidance. First, what exactly are these investments that you mentioned? And then how should we be thinking about the investments related to the new contract? And where are you tracking versus what you thought you'd be spending for Kaiser? Jason Clemens: Right. So I guess, firstly, like kind of when we say infrastructure, we're talking about an estimated 1,200 people that have to be recruited, onboarded, trained and ready for day 1 of patients flowing across multiple states. It's procurement of vehicles to our standards. They've got to be outfitted. They got to be painted, all this detail that needs to happen in order to have trucks running on day 1. So that's all well underway. And finally, it's the procurement of about 3 dozen locations in geographies that we don't compete in yet. And so as we get those locations identified and secured, they got to get outfitted, you got to get them ready, you got to stock them with inventory and capital equipment and again, be ready for that patient on day 1. So we're moving along according to our plans. In fact, in some markets, we've actually advanced due to some local dynamics in those markets, which is why we're seeing expenses running hotter, particularly in the labor lines. And then I'd say related, I mean, we went from 6 regions to 4. I mean we took out 2 kind of operating regions. Now as part of that operating model change, look, there's a lot of talent in the organization, a lot of experience, long time in DME. We think it was prudent to hold on to the folks that want to continue to be part of our business that potentially want to relocate. We're doing a fair amount of that to these markets to stand up new AdaptHealth operations and to grow from there. So that's a little bit about kind of what we're investing in. In terms of what to expect, we do expect to carry additional expense into the first quarter, potentially mid-second quarter. And as this revenue comes online, the nice thing about it is, I mean, you immediately move up to 20% EBITDA margin, which is our expectation for the contract because the infrastructure is paid for, the capital equipment is in, trucks are running. And then at day 1, you start getting paid per member per month. And so there'll be a little bit of forward investment in the fourth quarter and in the first quarter, and then that will start swinging out over the course of '26, and we expect high revenue growth as well as a big improvement in EBITDA margin in the second half of '26. Operator: We'll now move on to Richard Close with Canaccord Genuity. Richard Close: Yes. Just hitting on the capitated agreements a little bit more. In terms of the announcement or the new contract announced today, are there any more details that you can provide? Just curious if there's any geographic overlap with your other agreements that portend maybe some additional operating leverage there or less infrastructure investments on that? And then is there an opportunity to expand the number of lives with that agreement? Jason Clemens: Yes, Richard, I'd say that we announced this agreement more so for the strategic implications to the company and where we're heading in terms of taking control of our own destiny and reimbursement, capping business exclusively where we can contain an entire population and take care of all of those patients. In terms of like financial impact, I mean, 170,000 members, the math doesn't work exactly, but compared to over 10 million lives in this other contract that we've spoken about, you'll see us maybe a couple of percentage points. So it's nowhere near size and scale. There is benefit to the geography of this contract and potential growth. This is a major payer. If we do our jobs and we think we will, it does set up nicely for us to continue to work that payer's pipeline. So more to come. Operator: [Operator Instructions] We'll now move on to Pito Chickering with Deutsche Bank. Kieran Ryan: This is Kieran Ryan on for Pito this morning. Just wanted to check in and see if you could provide any other color on Diabetes. I appreciate the detail on CGMs versus pumps. I'm not sure if you can talk about anything you saw on the pharmacy side or with payer mix in the quarter that maybe contributed to the uptick. Suzanne Foster: I appreciate the question, Jason. I will tag team this. I'll start with just what we're seeing in Diabetes. So listen, we've talked about this now for the past year that this has been a focus of ours to improve our execution that a lot of this was certainly an interesting market dynamic, but that was no excuse for our past year's performance, and we have finally gotten our arms around the business and we're seeing the best attrition rates from our resupply team. We've really stopped that bleeding and servicing patients really well there. Pumps have been strong, and our sales force has been trained, put in place. We've made the changes we needed to. We have a strong leader there. So we're getting out in front of the right customers and leveraging the HME side of our business. The Diabetes team and our HME sales forces are working collectively to identify opportunities. So it's kind of been an all hands on deck that finally has proven to show some success. And then in terms of the numbers, I'll hand that off to Jason to give you a little bit more for that purpose. Jason Clemens: Yes. To get maybe into the weeds a little bit, this was the first quarter or last quarter, I'd say, of a comparable against a different management team, a different resupply organization and processes because those changes were made late September of 2024. And so what you're seeing is just strength in retention, as Suzanne said. Now when we get to Q4, now we're comping that same team that we've got running in Nashville is now comping against themselves. And so we're setting record retention rates, but to grow above that, it does get more challenging. So although we were thrilled to see over 6% growth in Diabetes in Q3, given the softer starts, we still have a ways to go until we're demonstrating consistency and stability and ultimately, some growth in this business. And so that's a little bit about Q3 versus Q4. As we get to '26, again, we expect stable retention, modest improvement in sales. We're taking actions to make sure we secure that. And with a little luck, we'll have a consistent stable business to report in 2026. Suzanne Foster: And to your point around pharmacy versus med benefit, during the past year, we didn't -- we've made the decision to pursue the pharmacy channel. We were slower last year committing to that to wait to see what we would -- this business and how it would perform. But now that we're seeing that providers do really want the optionality to send both, we are making investments to make sure that we can efficiently process those types of orders as well. Kieran Ryan: And then I guess just briefly on the Sleep side, obviously, strong new start and census numbers. I just wanted to still understand if you still expect that mix headwind to be fully comped out as we exit '25. So that's kind of not a factor as we move into '26. Jason Clemens: Yes, exactly. I mean there'll be de minimis impact in Q4. But as we get into '26, that we'll be past all that. So it will be a bit of an easier comp, if you will, as we look towards next year. Operator: We'll now move on to Whit Mayo with Leerink Partners. Benjamin Mayo: Jason, the 6% to 8% revenue growth that you're guiding to for 2026, any way to unpack that by segment, how you're thinking about it? Jason Clemens: Sure. We can probably offer some high-level views and then add a lot more to that when we guide in February. But if you look at the base business today, I mean, we've gone through a lot of disposition activity over the course of kind of late '24 through current. We're starting modest M&A that's been going on around that same time frame. And so you're going to likely have a bit of a canceling effect as we look to '26. Outside of that, our organic growth, which excludes dispositions acquisitions, year-to-date, we're running 1.8%. So as we look to '26, I mean, we think that we can get a little bit of growth there. Some of that will come through the accounting changes that Kieran mentioned in the last question. I mean that alone is $30 million or about 1 point of revenue. So if you look at Sleep, I mean, that alone will -- we expect to produce a better growth rate in Sleep, not just that single factor, but we're starting to near records of new start activity. And so we aim to continue that through '26. Respiratory in '25 so far has just had a blowout year. I don't know that we'll be producing at these upper single-digit levels for Respiratory. We think it will normalize back to kind of a lower single digit, which is what we've seen historically as it relates to Respiratory. And then as it relates to Diabetes and Wellness, we think we'll produce steady and stable revenue, potentially a little bit of growth in one or both of those segments. But all that together, we think organic growth, again, today, a little under 2% could move to a little under 3% next year. And then you've got the benefit, which is also organic of this compensated arrangement that gets you up to that 6% to 8%. Benjamin Mayo: Okay. That's helpful. And I was wondering, is there anything new on RAC audits for PAPs, ventilators, rentals, et cetera, that's on your radar that's concerning or not concerning to you? I think CMS did award a new contract recently. So just wanted to get an update there. Jason Clemens: That's right, Whit. But the number of audits and the kind of frequency of audits, it's been very, very steady. There's been no change or impact. Operator: Thank you. This now brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good morning, and welcome to the New Mountain Finance Corporation's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Kline, President and CEO of NMFC. Please go ahead. John Kline: Thank you, and good morning, everyone. Welcome to New Mountain Finance Corporation's Third Quarter 2025 Earnings Call. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; Laura Holson, COO of NMFC; and Kris Corbett, CFO and Treasurer of NMFC. Steve is going to make some introductory remarks, but before he does, I'd like to ask Kris to make some important statements regarding today's call. Kris Corbett: Thanks, John. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our November 3 press release. I would also like to call your attention to the customary safe harbor disclosures in our press release and on Pages 2 and 3 of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we'll be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time, I'd like to turn the call over to Steve Klinsky, NMFC's Chairman, who will give some highlights beginning on Page 5 of the slide presentation. Steve? Steven Klinsky: Thanks, Kris. It's great to be able to address you all today, both as NMFC's Chairman and as a major fellow shareholder. Adjusted net investment income for the quarter was $0.32 per share, covering our $0.32 per share dividend that was paid in cash on September 30. Our net investment income and dividend were supported by consistent recurring income from our loan portfolio, full utilization of the dividend protection program, which remains in place through the fourth quarter of 2026 and an incremental fee waiver. Looking forward to Q4, we would like to announce a $0.32 dividend payable on December 31 to shareholders of record on December 17. Our net asset value per share declined $0.15 compared to Q2, to $12.06 as NMFC experienced modest decline across four investments, which John will address later in the call. Importantly, however, approximately 95% of our investments are green on our heat map. As a reminder, NMFC lends chiefly in defensive growth sectors such as health care information technology software, insurance services and infrastructure services, which New Mountain Capital knows well from its private equity ownership activities. Furthermore, NMFC's portfolio loan to value stands at just 45%. Our lending lines are being refinanced at lower rates and our percentage of first lien assets is growing. Since our IPO of NMFC in 2011, our stock has generally been a strong performer with consistent earnings and just a 1 basis point total net realized loss rate. I and my fellow managers at New Mountain are the largest shareholders of NMFC and have steadily increased our ownership level over time. Despite these strengths, NMFC's current stock price implies a 20% discount to book value and the dividend of $0.32 quarterly or $1.28 annually, represents more than a 13% yield. Therefore, over the course of the past 7 months, NMFC has fully utilized the $50 million 10b5-1 stock repurchase program with total shares repurchased this year of approximately $47 million at an average price of approximately $10. Our Board recently has approved a new share buyback program totaling an additional $100 million. Additionally, we are also now exploring a portfolio sale of up to $500 million of NMFC assets to a third party, which would accelerate our progress on our strategic initiatives meaningfully. For example, we could potentially sell assets of well-performing names in order to reduce concentrations in our portfolio and to reduce PIK income. This would enhance our financial flexibility in what could be a better deal environment in 2026 as well as provide us with an opportunity to evaluate debt paydowns and/or increase the size of our stock buyback program. While it is early in the process and the outcome is uncertain, we expect to be able to provide a fulsome update on our next call in February, if not before. As a reminder, New Mountain Capital overall now manages about $60 billion in assets. We have generated an estimated $100 billion of enterprise value gains for all shareholders at our private equity company since the firm's inception, and we currently employ over 90,000 people at our PE companies in the field, which is roughly equivalent to #78 on the Fortune 1000. New Mountain's own team has now grown to nearly 300 employees and senior advisers, plus approximately 70 more members on our Executive Advisory Council. Our goal is to apply the same PE business building skill and knowledge to benefit NMFC and our credit platform as a whole. We thank you for your ownership and partnership and we are working diligently to serve your interests in the months and years ahead. With that, let me turn the call to John. John Kline: Thank you, Steve. I would like to begin on Page 8, which offers an overview of our differentiated approach to direct lending. First and foremost, we focus only on sectors of the economy that we believe are defensive and have sustainable tailwinds that will benefit companies within these chosen sectors. We do not invest in industries that are volatile, cyclical or secularly challenged. Secondly, we believe that we have a better model for research as New Mountain uses in-house industry executives and private equity personnel to underwrite direct lending deals within our chosen sectors. If an investment underperforms and we are compelled to take an ownership stake, New Mountain is well positioned to improve the business as an equity owner, utilizing our private equity expertise and in-house operating talent. Finally, we continue to have very strong shareholder alignment with 14% of our outstanding shares owned by NMC employees and senior advisers, and we actively support shareholder returns through the dividend protection program, additional fee waivers and the incremental share repurchase program Steve just announced. Page 9 provides key performance statistics showing a long-term track record of delivering consistent, enhanced yield by minimizing credit losses and distributing virtually all of our excess income to shareholders. Since our IPO in 2011, NMFC has returned approximately $1.5 billion to shareholders through our dividend program, generating an annualized return of 10%. Today, our dividend yield is over 13% annualized based on the $0.32 quarterly payout, which is fully covered by net investment income. We have been a good steward of capital with negligible net realized losses over 14-plus years, and we maintain investment-grade ratings at Moody's and Fitch. Turning to Page 10. NMFC continues to make progress on its strategic priorities which focus on improving the quality and diversity of our asset base, optimizing our liabilities and enhancing the quality and character of our income. To that end, in Q3, we increased our senior oriented assets to 80% of the overall portfolio, up from 78% in the prior quarter. As Steve mentioned earlier, if successful, the potential secondary sale is designed to improve portfolio diversity by reducing exposure to certain more concentrated positions and to decrease our exposure to PIK assets. On the liability side, subsequent to quarter end, we repaid the 7.5% convertible notes at maturity and see an opportunity to refinance the 8.25% unsecured notes in the coming quarters. Finally, we continue to focus on reducing non-yielding assets in 2026. Notably, many of our non-yielding assets are associated with companies with improving performance including Benevis, UniTek and Applied Cleveland. As shown on Pages 11 and 12, the internal risk ratings of our portfolio decreased slightly during the quarter with approximately 95% of the portfolio green rated. At the margin, we did see a few select names migrate down our rating scale, representing $49 million or less than 2% of the portfolio. These migrations, including two health care services names that continue to experience lower growth and higher operating costs as well as a commercial restoration services company that has been impacted by a lack of severe weather activity. Despite the modest negative move in overall risk ratings, our most challenged names, marked orange and red represent only 3.6% of NMFC's fair value, making them a small portion of the portfolio. Turning to Page 13. We provide a graphical analysis of NAV changes during the quarter, resulting in a book value of $12.06, a $0.15 decline compared to last quarter. The main drivers of the decline this quarter were Edmentum, TriMark and Beauty Industry Group, partially offset by a handful of unrealized gains and accretive share repurchases. The biggest negative mover Edmentum is performing well but our mark continues to be pressured by the expensive PIK securities that sit senior to our common equity exposure. We are in the process of exploring a capital structure refinancing to reduce the overall cost of capital and limit future dilution from these securities. Additionally, Edmentum continues to be active on the M&A front and recently completed a tuck-in acquisition that will accelerate its career learning product portfolio, a growth area of the business. We are excited about the acquisition and believe Edmentum is well positioned in this area. Page 14 addresses NMFC's nonaccrual performance. During the quarter, we moved our first lien debt position in Beauty Industry Group to nonaccrual status and expect to equitize a portion of this debt position in the coming months. The company has experienced persistent earnings headwinds due to weaker consumer demand, specific go-to-market challenges and tariffs on its China-oriented supply chain. In coordination with the other lender, we have built a large New Mountain team that will be focused on improving this investment. The team includes members of the core credit team, the PE Consumer Group, NMC operating partners and additional industry executives that we work with. Our goal is to, over time, recover at least our full principal value on this investment. Overall, nonaccruals continue to be very low with only $51 million or 1.7% of the portfolio on nonaccrual at fair value. On the right side of the page, we show our cumulative credit performance since IPO. During that time, NMFC has made over $10.3 billion of investments while realizing losses net of realized gains of just $16 million over the course of our history as a public company. On Page 15, we present NMFC's consistent returns over the last 14-plus years. Cumulatively, NMFC has earned approximately $1.5 billion in net investment income while generating only $16 million of cumulative net realized losses and $159 million of cumulative net realized depreciation, resulting in $1.3 billion of value created for shareholders. While the realized loss rate remains very strong, we, as a management team, are focused on reversing the unrealized depreciation within the existing portfolio. I will now turn the call over to our Chief Operating Officer, Laura Holson, to discuss the current market environment and provide more details on NMFC's quarterly performance. Laura Holson: Thanks, John. As previewed on last quarter's call, we have seen deal activity pick up modestly over the last few months. The pipeline of potential PE exits remains exceptionally full given the extended hold times for many PE-owned assets. The pressure to both deploy dry powder and return capital to LPs are key drivers of sponsor activity. As confidence builds, we think 2026 could be a productive period for LBO activity and have already started seeing signs of that. We believe direct lending remains an attractive asset class in today's market, and continues to provide good risk-adjusted returns relative to other asset classes, including the syndicated loan market, which continues to experience meaningful repricing waves. Direct lending spreads, while tighter than 12 months ago, have been reasonably stable despite the lack of significant M&A. That said, one result of the supply/demand imbalance is a notable lack of dispersion in pricing. Most unitranche loans are pricing at the SOFR plus 450 to 500 range even for lower quality or smaller companies. While we continue to find opportunities in our defensive growth verticals where we can make loans that attach $1.01 in the capital structure at 8.5% plus unlevered returns, our underwriting bar remains higher than ever, and our pass rate on deals has increased. The more challenging environment underscores the importance of our differentiated underwriting strategy, which allows us to go deeper on diligence and identify the best credit opportunities. Deal structures generally remain attractive with significant sponsor equity contribution, representing the majority of the capital structures. Page 17 presents an interest rate analysis that provides insight into the effective base rates on NMFC's earnings. The NMFC loan portfolio is 85% floating rate and 15% fixed rate, while our liabilities are 53% floating rate and 47% fixed rate. Pro forma for the expected upcoming refinancing activity over the next several months, we expect our mix will shift meaningfully to approximately 85% floating and 15% fixed. This will align us with our target of matching our percent of liabilities that float with the percent of our assets that float. As shown in the bottom tables, while we would expect to see earnings pressure in the scenarios where base rates decrease, the ongoing evolution of our liability structure helps to alleviate some of that pressure. Moving on to Page 18. The third quarter was a modest origination quarter. We originated $127 million of assets, offset by $177 million of repayments. Our originations consisted of investments in our core defensive growth power alleys including ERP and IT software, data and information services and financial services. Notable repayments in the quarter included 3 second lien positions, which we've rotated into predominantly first lien securities. Repayment velocity remains strong, and we have line of sight into some additional expected repayments in the coming quarters. While we remain reasonably fully invested, as we receive repayments, we'll likely continue to prioritize share repurchases over new investments if our stock remains at current levels. Turning to Page 19. Approximately 80% of our investments, inclusive of first lien SLPs and net lease are senior in nature, up from 75% in the prior year period and up from 78% in Q2. Second lien positions now represent just 4% of our portfolio given the continued repayment activity we've seen in our second lien names. Approximately 5% of the portfolio is comprised of our equity positions, the largest of which are shown on the right side of the page. We continue to dedicate meaningful time and resources to business building at these companies and are pleased with the progress we are seeing. Page 20 shows that the average yield of NMFC's portfolio decreased slightly to 10.4% due to lower yields on our originations compared to our repayments as we continue to rotate more senior. Despite this, we believe total yields remain attractive for the risk. Page 21 highlights the scale and positive credit trends of our underlying borrowers, which remain largely consistent with prior quarters. The weighted average EBITDA of our portfolio companies increased slightly in the third quarter to $180 million due to growth at the individual companies we lend to and realization of some smaller companies during the quarter. We also show the relevant leverage and interest coverage stats across the portfolio. Loan-to-value continues to be quite compelling, and the current portfolio has an average loan-to-value of 45%. Finally, as illustrated on Page 22, we have a diversified portfolio across 127 portfolio companies. Excluding our investments in the SLPs and net lease funds the top 10 single name issuers account for 26% of total fair value. I will now turn the call over to our Chief Financial Officer, Kris Corbett, to discuss our financial results. Kris Corbett: Thank you, Laura. For more details, please refer to our quarterly report on Form 10-Q that was filed yesterday with the SEC. As shown on Slide 23, the portfolio had $3 billion in investments at fair value on September 30 and total assets of $3.1 billion. Total liabilities were $1.8 billion, of which total statutory debt outstanding was $1.6 billion. Net asset value of $1.3 billion or $12.06 per share was down slightly compared to the prior quarter. At quarter end, our net debt-to-equity ratio was 1.23:1, within our target range of 1:1.25. We remain committed to maintaining leverage within this range. On Slide 24, we show our quarterly income statement results. For the current quarter, we earned total investment income of $80 million, a 4% decrease compared to prior quarter. Total net expenses of $47 million, decreased 5% versus the prior quarter, inclusive of the fee waiver previously mentioned. Our adjusted net investment income for the quarter was $0.32 per weighted average share, which covered our Q3 dividend. Our earnings were driven by our strong core income and effective incentive fee rate of 7.6% and the share repurchase program. Slide 25 represents that 97% of our total investment income is recurring in the third quarter. On the following page, you can see that 80% of our investment income was paid in cash and 15% was PIK income from positions that included PIK from inception to best enable these borrowers to execute on their strategic growth plans. Only 3% of investment income is driven by modified PIK from an amendment or restructuring. Importantly, investments generating noncash income during the third quarter are marked at a weighted average fair market value of 95% of par and over 92% of this income is generated from our green rated names. Turning to Slide 27. The red line shows the coverage of our dividend. For Q4 2025, our Board of Directors has again declared a dividend of $0.32 per share. On Slide 29, we highlight our various financing sources and diversified leverage profile. Taking into account SBA guaranteed debentures, we have $2.5 billion of total borrowing capacity with over $700 million available on our revolving lines subject to borrowing base limitations pro forma for the convertible note that was repaid in October. This more than covers our unfunded commitments of $256 million as well as our near-term bond maturity. As John noted, subsequent to quarter end, we repaid the 7.5% convertible notes utilizing our lower-cost revolver. Looking forward to the next few months, the facilities outlined it red and the recently repaid convertible notes provide us with an opportunity to refinance and either maintain or potentially reduce our cost of financing in the near term. We believe this contrasts with the industry, which faces an increased cost of financing as debt issued in 2020 and 2021 mature. Finally, on Slide 30, we show our leverage maturity schedule. We continue to ladder our maturities and have sufficient liquidity to manage upcoming maturities in early 2026. Notably, approximately 60% of our outstanding debt matures in or after 2028, with near-term maturities representing an opportunity to continue to access the investment-grade bond market. With that, I'd like to turn the call back over to John. John Kline: Thank you, Kris. In closing, we would like to thank all of our stakeholders for the ongoing partnership and look forward to speaking to you again on our fourth quarter 2025 earnings call in February. I will now turn things back to the operator to begin Q&A. Operator? Operator: [Operator Instructions] The first question comes from Finian O'Shea with Wells Fargo. Finian O'Shea: A question on the potential portfolio sale, $500 million seems to imply perhaps a little bit of the affiliate or control book. Correct me if I'm wrong there. And -- if so, would it be sort of centered around that, the legacy equity names? Or should we think more regular way participation or just -- regular way debt deals on the portfolio sale. John Kline: Sure. Fin, thanks for the question. The way we're thinking about the sale is, we're focused on our biggest positions. As you know, we really want to diversify our portfolio. So if you were to look at the top 10 or 20 positions, there'll be names from within that group as well as some other names throughout the book. And it would -- the portfolio sale would address PIK names, but also cash-yielding names that are our larger exposures for NMFC. So that's really our goal. Our goal is to diversify and also reduce PIK income. But the portfolio is a group of well-performing quality names with a mix of interest, characteristics, PIK and cash. Finian O'Shea: Okay. That's helpful. And then a follow-up on the buyback. You were more aggressive this quarter at lower prices, which is great and then announced a larger program. Should we expect you to continue to be aggressive? Or maybe has that sort of run its course for now at your leverage levels and then overall and in consideration for a potential portfolio sale? John Kline: Sure. So I'd say the most important thing as we just think about managing the portfolio and the company is we want to stay within the leverage levels. That is very important to us. At the end of the quarter, you'll see that we were at the high end of our range, but still within the range. So we remain committed to that range going forward. We also see good deal environment or a deal environment that's getting better in the fourth quarter. So there will be -- we expect a lot of repayments throughout the portfolio, both in Q4 and into 2026. So at the margin, as Laura talked about, that does free us up to potentially focus using some of the proceeds from repayments to buy back stock, but we do want to remain, as I said earlier, remain very committed to our leverage range. Operator: The next question comes from Ethan Kaye with Lucid Capital Markets. Ethan Kaye: I wanted to ask about kind of deployment capacity or strategy, kind of following up on the last question here. And Laura, you may have touched on this a bit in your prepared remarks, but given that leverage is at the high end of the range and you're repurchasing shares. I guess my question is like, are you still allocating to kind of all the deals that you maybe would have in the absence of these constraints? Or are you kind of shifting the goalpost a bit and becoming more selective on kind of the deals you're pursuing? Laura Holson: Yes. I mean I think when we look at NMFC specifically, we do remain focused, as John said, on staying within our leverage range, and we are prioritizing share repurchases assuming our stock price remains kind of at this level. That said, that's not a black or white thing, right? We're evaluating each deal opportunity that comes in. We have a broader credit platform, as you know. So we're definitely active in the market regardless even when NMFC is not as active. We do see spreads, as I talked about. While they're reasonably stable, they're definitely a bit on the tighter end of where they have been over the course of the history of unitranche loans. But we still think, in general, still attractive risk-adjusted return. But given the desire around leverage, given the desire around our share repurchase program, those are some of the factors that we're thinking about when allocating. Ethan Kaye: Okay. Great. I appreciate that. And then just kind of switching gears a little on the potential secondary sale. So hit on it briefly, but I guess can you talk a little bit more maybe about how you would kind of prioritize the use of the proceeds from that sale? Would the idea be to kind of redeploy those into new investments or pay down debt or something else? Yes, I'll leave it there. John Kline: Sure. I think it could be any of three things. It could be paying down debt. It could be stock repurchases, depending on where our stock is trading, if and when we consummate the sale, and we could also use the proceeds to buy new loans. And those new loans would be a diversifier compared to where we are today. So we're excited about all three options. Operator: The next question comes from Paul Johnson with KBW. Paul Johnson: Just one or two more on the portfolio sale. I'm just wondering when you do the portfolio sale, is this going to be something that's kind of like a strip of -- sale of a strip of investments where you're kind of partially selling existing positions or kind of more of a selective whole position sort of sale to the third party of those debt investments? John Kline: Sure. Thanks, Paul. So I just want to clarify, the sale is still in very early stages, so it may or may not happen. As you may be aware, some of the trade press picked up on the fact that we were doing it. So we thought it was appropriate to tell our shareholders about it, but it is still pretty early stages. So I just wanted to make that note. And if I were to characterize the way we're thinking about it, I would think about it more as a partial sale of existing quality, well-performing positions that focus on more diversifying our portfolio as well as reducing PIK. So we're not blowing out of names, so to speak. Instead, we're focused on rightsizing a well-performing group of positions to add more diversity to the portfolio with less PIK income, just to be super clear. Paul Johnson: Got it. Appreciate that. And then on the diversification, I guess, how would you kind of focus on that going forward? Would it be smaller? Would you be looking to hold smaller position sizes on new deployment going forward? John Kline: Yes. So we have a vibrant direct lending business, both within NMFC and in institutional funds that we manage. So we've grown over the course of the last 5 to 7 years pretty nicely, which has allowed us to speak for bigger hold sizes, but we're not totally reliant on NMFC effectuating those hold sizes. So the way we manage a lot of our institutional funds, and we've done this over the last 4 or 5 years, and it has been our focus in NMFC as well is that we generally want to have our position sizes be 2% or lower, and the average position size across our funds, whether it's NMFC or our institutional funds, we want to be 1% or lower. We've been going in that direction for a long period of time in NMFC. We just need to -- we feel, accelerate that and just finalize the movement towards a 2% max and a 1% or less average. This sale won't totally get us there, but it will get us almost there. And I think that's a big milestone for NMFC. That's really the way we want to manage the portfolio. What we're trying to deliver our investors across all of our funds is a New Mountain Best Ideas fund, but we don't want any of the positions to be as big as 2.5%, 3%, 4%. We do have some positions that big today in NMFC and our goal is to change that. Paul Johnson: Got it. Appreciate it. Congrats on the share repurchases and the progress on those matters. Operator: The next question comes from Robert Dodd with Raymond James. Robert Dodd: Focusing on credit, if I can, for a moment. Obviously, notorious or Beauty Supply was put on nonaccrual this quarter. You put it on the red list last quarter, so you kind of flagged it. You do have some other portfolio positions like Lash OpCo that are in kind of the same business that also import from China, et cetera. I mean, should we be concerned about the same themes that hit Beauty Supply applying to other portfolio positions that are in kind of the same niche industry? Laura Holson: Yes. I mean, I think we've talked about in the past that we think our portfolio is quite well positioned when we think about an issue like tariffs. And we've talked, I think, on prior calls that Beauty Industry Group really is our one material name that has exposure to tariffs because of its China-oriented supply chain. So I don't see any kind of look through to other subsectors in our portfolio in that regard. We think the rest of the portfolio is quite insulated from a primary impact perspective, and we think that's reflected in the 95% green. Robert Dodd: Got it. And on the other comment -- I think it was John, you said your goal over time was to recover at least full principal. I mean that sounds -- you're going to equitize some of the debt, et cetera. But I mean, going to recover at least, it sounds like you're actually long term quite optimistic about business despite the fact that obviously it's on nonaccrual. John Kline: I think it's a little too soon for us to have all the details that an owner of a business would have. We'll have that over the course of the next months and quarters. But I think it's more of a reflection of our mindset around problem positions. This is a problem position. It's a first lien unitranche loan, we and one other lender are going to take control of the asset. And whenever we do that, we bring the full power of the New Mountain platform to bear on managing the asset. And our mindset is that we are going to get all of our investors' money back. So I think it's more of a mindset than having all the facts, our ducks in a row as it relates to managing the business. We just feel very confident that we have the ability to do it in a differentiated way. And we already have a full, I think, 8-person team, as I mentioned on the call, that's ready to go in and take a very active hand in helping the management team at Beauty Industry to improve their business. Robert Dodd: Got it. And then one more, if I can, on the potential portfolio sale. I mean if that were to occur, you would obviously have quite a large influx of -- depending on how it's structured, potentially have a large influx of cash all at once. To your point, you could use that to delever potentially buy back stock. Would the potential buyback structure change, right? I mean, as it is, you buy it in the market. But if you had an extra couple of hundred million dollars of cash sitting there, would you consider something more like a Dutch tender or some other mechanism to maybe buy back a larger chunk at once? Or would that not be kind of how you'd be thinking about utilizing that capital? John Kline: I think we're going to think about a broad range of alternatives, but it's a little premature to give any specificity around those alternatives or how we're thinking about it. But we'll have a -- we'll be thinking about a broad range of things. Operator: And we have a follow-up from Paul Johnson from KBW. Paul Johnson: Yes. One more question from me. I was wondering if you could just provide maybe a little bit more color on the -- just the Edmentum investment and the markdown this quarter. So is this a case where the multiple or the valuation of this company, the EBITDA is stable. You said it's performing fine, but just the preferred is obviously the claim from the preferred side is growing every quarter. So the [ com ] is essentially getting squeezed out of its value a little bit? Or I mean, I guess, overall, how would you kind of describe the performance of the company at this point? And is this more of a situation where our capital structure was put in place after restructuring and maybe just unforeseen for kind of a victim of its own success, if that makes sense. But any color there would be helpful. Laura Holson: I mean, I think how you described it is largely accurate when we think about the capital structure. I think the good news is that the performance of the company is stable, right? We've talked a lot of times in the past as to how this business had some peaks really during COVID, just given the underlying product and the end market that they serve and then that has since normalized. But performance is definitely quite stable. The business is growing and performing we think, overall well. It's -- they have high-quality products and a good value proposition. So I think those are all positives. I think the challenge from our perspective is, as you described, in the capital structure, and that is something, as John alluded to, that we're in the early stages also of trying to help and work with the company and the other sponsors here to address. So more to come on that. John Kline: And just to zoom out quickly on Edmentum. Edmentum has a big picture been a success story for us. We took ownership of that business years ago, and we sold a significant chunk of the business to another private equity firm. So we've had, in the past, material gains on Edmentum. And I think what's happened over the past couple of years is Edmentum got highly valued during COVID and has had a little bit -- and earnings have come off a little bit since COVID. And now we're working with the company to find its base earnings. And then we're working, as I mentioned in my prepared comments on doing really smart, targeted M&A to grow off a very -- what we think is a very solid base. But big picture Edmentum has been a success story. We're just in a more difficult time right now, but we're still fighting hard to grow the business with the management team. Operator: And we have a follow-up from Finian O'Shea with Wells Fargo. Finian O'Shea: Just jumping in on the follow-ups. A question on the ATM distribution agreement. I think you haven't used this in a few quarters at least, but upsized it not too long ago. Can you give us any color on the sort of ongoing or maintenance fees that the BDC incurs here? What line item that hits? And further if BDCs, if the space remains below book, if that's something you could let roll off or contain? Kris Corbett: I would say overall, I mean, the ongoing maintenance fees to keep that program going are minimal. As you know, we haven't been above book value for a few quarters now, so we haven't actually utilized that. But generally, we want to keep that open and up. So that's -- when and if the share price gets above book that we can start to utilize that again and start growing the fund by issuing shares. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to John Kline, President and CEO of NMFC for any closing remarks. John Kline: Great. Thanks, everyone, for joining our call today, and we look forward to speaking to you again on our next call in February. Thanks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the AudioCodes Third Quarter 2025 Earnings Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Roger Chuchen, Vice President of Investor Relations. Sir, the floor is yours. Roger Chuchen: Thank you, operator. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes' business outlook, future economic performance, product introductions, plans and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters are forward-looking statements as the term is defined under U.S. federal securities law. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. These risks, uncertainties and factors include, but are not limited to, the following: the effect of global economic conditions in general and conditions in AudioCodes' industry and target markets, in particular, including governmental undertakings to address such conditions, shifts in supply and demand, market acceptance of new products and the demand for existing products, the impact of competitive products and pricing on AudioCodes and its customers' products and markets; timely product and technology development upgrades the event of artificial intelligence and the ability to manage changes in market conditions and evolving regulatory regimes as applicable, possible need for additional financing; the ability to satisfy covenants in AudioCodes financing agreements, possible impacts and disruptions from AudioCodes acquisitions, including the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business; possible adverse impacts attributable to any pandemic or other public health crisis on our business and results of operations; the effects of the current and any future hostilities involving Israel, including in the regions in which we or our counterparties operate, which may affect our operations and may limit our ability to produce and sell our solutions, any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel and any other factors described in AudioCodes' filings made with the U.S. Securities and Exchange Commission from time to time. AudioCodes assumes no obligation to update the information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded, and an archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead. Shabtai Adlersberg: Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our third quarter 2025 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance at AudioCodes. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the quarter and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran? Niran Baruch: Thank you, Shabtai, and hello, everyone. Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release this morning, we will post shortly on our Investor Relations website an earnings supplemental deck. On today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call. Revenues for the third quarter were $61.5 million, an increase of 2.2% over the $60.2 million reported in the third quarter of last year. Services revenues for the quarter were $30.9 million, a decrease of 4.8% over a year ago period. Services revenues in the third quarter accounted for 50.3% of total revenues. The amount of deferred revenues as of September 30, 2025, was $81.6 million compared to $78.6 million as of September 30, 2024. Revenues by geographical region for the quarter were split as follow: North America, 48%; EMEA, 33%; Asia Pacific, 15%; and Central and Latin America, 4%. Our top 15 customers represented an aggregate of 53% of our revenues in the third quarter, of which 38% was attributed to our 10 largest distributors. In the third quarter of 2025, we experienced increased expenses due to the implementation of the new tariff of U.S. imports accounting to approximately $0.5 million additional cost, which impacted on both GAAP and non-GAAP. GAAP results are as follows. Gross margin for the quarter was 65.5% compared to 65.2% in Q3 2024. Operating income for the third quarter was $4.1 million or 6.6% of revenues compared to operating income of $4.9 million or 8.1% of revenues in Q3 2024. EBITDA for the quarter was $5.2 million compared to EBITDA of $5.9 million for Q3 2024. Net income for the quarter was $2.7 million or $0.10 per diluted share, compared to net income of $2.7 million or $0.09 per diluted share for Q3 2024. Non-GAAP results are as follow. Non-GAAP gross margin for the quarter was 65.8% compared to 65.6% in Q3 2024. Non-GAAP operating income for the third quarter was $5.8 million or 9.5% of revenues compared to $7 million or 11.7% of revenues in Q3 2024. Non-GAAP EBITDA for the quarter was $6.9 million compared to non-GAAP EBITDA of $7.9 million for Q3 2024. Non-GAAP net income for the third quarter was $4.9 million or $0.17 per diluted share compared to $4.9 million or $0.16 per diluted share in Q3 2024. At the end of September 2025, cash, cash equivalents, bank deposits, marketable securities and financial investment totaled $79.7 million. Net cash provided by operating activities was $4.1 million for the third quarter of 2025. Days sales outstanding as of September 30, 2025, were 122 days. In July 2025, we received court approval in Israel to purchase up to an aggregate amount of $25 million of additional ordinary shares. The court approval also permit us to declare a dividend of any part of this amount. The approval is valid through December 30, 2025. On July 29, 2025, we declared a cash dividend of $0.20 per share. The aggregate amount of the dividend was approximately $5.6 million. The dividend was paid on August 28, 2025, to our shareholders of record at the close of trading on August 14, 2025. During the quarter, we acquired 1,267,000 of our ordinary shares for a total consideration of approximately $12.7 million. Regarding the direct cost impact from the tariff announced since the beginning of 2025, we expect roughly $3 million of cost burden for the full year 2025. Given the recent stabilization in the tariff developments, we are resuming our practice of providing full year outlook. For 2025, we expect revenues of $244 million to $246 million and non-GAAP earning per share of $0.60 to $0.64. I will now turn the call over to Shabtai. Shabtai Adlersberg: Thank you, Niran. I'm pleased to report solid third consecutive quarter of top line growth in the third quarter and execution for our strategic objectives amidst our long-term transformation to an AI-driven hybrid cloud software and services company. In the quarter, we continued to build on the strength of our UCaaS and CCaaS connectivity business, accounting now for over 90% of our revenue and successfully leveraged our enterprise customer base to drive cross-sell of our fast-growing GenAI business applications that make up our Conversational AI division. In fact, in many ways, we can say that as of now, AudioCode has put Voice AI front and center going forward in our operations in terms of sustained growth. Our solid third quarter results were marked by strong traction in our dual growth engines, namely the Live family of Unified Communication and Collaboration and customer experience connectivity services and conversational AI business line. In fact, our conversational AI business increased 50% in the quarter, putting us on track to reach the 40% to 50% growth for the full year 2025. Together, these 2 units drove our annual recurring revenue exit third quarter to $75 million or up 25% year-over-year, which positioned us to reach our full year target of $78 million to $82 million. We are growing ever more optimistic about the continued strong ARR momentum and growth prospect for the overall company, fueled by a strong pipeline of opportunities catalyzed by recent launch of the next-gen live platform and the growing demand for productivity-enhancing GenAI value-add services. This is further reinforced by the growing backlog of live and managed services that will convert to revenue in the coming quarters. We ended third quarter backlog at $76 million, growing 13.4% over the year ago backlog of $67 million. Let me share some key developments in our strategic business lines that underscore our growing confidence in our growth prospect. We have seen growing demand from partners for our live platform, an all-in-one cloud software stack that empowers them to seamlessly integrate connectivity with GenAI-powered business voice applications. To that end, in the third quarter, we signed a live platform agreement with a global Tier 1 system integrator. This strategic landmark deal calls for alignment and coordination of all sales aspects from initial opportunity pursuit to post-sales delivery. This comprehensive approach ensures customer satisfaction and success. The initial scope of the agreement provides managed SVC and Gateway as a service in support of major UC and CX platforms for greenfield deployments and for existing customers looking to transition their legacy infrastructure to the cloud. Where applicable, the partner will also cross-sell our award-winning Teams certified Voca Contact center, delivering a unified UCCX experience. Based on the currently committed services, we anticipated low single-digit millions in recurring revenue during the first year of operation in this agreement. This strategic agreement represents a clear win-win for both parties. For the Tier 1 system integrator, our all-in-one UCCX conversational AI stack simplifies operations, reduces cost to serve and enhances end customer experience. For us, it significantly expands our market reach and scales our go-to-market execution in the enterprise space. Together with our long-standing successful partnership with AT&T in North America, this announcement reinforces our market credibility and position us as a partner of choice for all AI-infused UCCX services. We are seeing strong interest from other Tier 1 prospects. Other Tier 1 system integrator prospects recognize the transformative potential and cost efficiencies of our integrated platform. We look forward to sharing additional updates on new partnership with global system integrators in coming quarters. Now to conversational AI. In addition to pull-through of conversational AI from live platform partners, we are seeing broad-based interest in our Gen AI-powered voice application from end customers. Specifically, I would like to highlight the progress we are making in our newer service, Meeting Insights on-prem, which we call Mia OP. This is our unique Gen AI-powered meeting intelligence platform, providing transcription, summarization, automation and connectivity to other leading enterprise IT application that is completely detached from the Internet and that is tailored for regulated and security-sensitive industries. Launched earlier this year, we have gained significant traction in the Israeli market, mainly in the government space, all through word of mouth. Recently, our leading position in the Israeli market were further cemented when we were officially awarded a contract under Project Nimbus, the Israeli government's multiyear cloud migration initiative. As the exclusive provider of meeting intelligence services in the non-SaaS category for calendar year 2026, this award streamlines procurement for all Israeli agencies, both civilian and military, allowing them to activate Mia OP without the lengthy tender process. We are also actively marketing this solution outside of Israel and initial customer responses in APAC and North America have been overwhelmingly positive. Now to a more successful Gen AI-powered business line in the quarter, Voice AI Connect and Live Hub. Leading our revenue growth in the conversational AI business is the Voice AI Connect and Live Hub connectivity and orchestration services business, which grew north of 50% year-over-year. We delivered a standout quarter with strong performance across the board, highlighted by exceptional third quarter booking growth that puts us on track to exceed our full year target. This momentum was fueled by high volume of new logo wins across the United States, Europe and APAC, along with significant expansion within our existing installed base. Driving this rapid growth is the emergence of the voice bots market, which is experiencing robust growth, driven by advancement in Gen AI and NLP. Market analysis projects that the voice bot market size will reach above $25 billion in 2034, up from just $4.3 billion in 2024, with a compound annual growth rate of 20%. Now to the Voice AI Connect space. A key highlight was a high 6-figure voice, voice access project license agreement aligned with leading agentic platform, AI Agentic platform that's supporting virtual agent and agent assist use cases for its large enterprise clients. We view this initial engagement as the foundation for a strong and mutually beneficial partnership. On the expansion front, we renewed a strategic agreement with a long-standing VoiceAI Connect customer, a leading multinational healthcare company. The expanded contract reflects a substantial increase in total value driven by the customer growing demand for virtual agent and assist capabilities as part of the digital transformation. Additionally, we secured a significant follow-on order from one of the largest credit unions in the U.S., which is deploying our VoiceAI Connect solution for conversational IVR use case. Following the successful implementation of initial order in the first quarter of '25, focused on internal HR and help desk, the customer expanded rollout through its IVR this quarter, enabling self-service option for its end customers. Moving on to Live Hub, offered as a Software-as-a Service. Live Hub is a cloud-native self-serve platform that helps voice bot developers for enterprise and service provider connect, connect, orchestrate and enrich the voice communication collaboration stride across various channels and systems. During the third quarter, another exciting milestone was the introduction of Agentic AI capabilities within our Live Hub platform. This pivotal enhancement delivers an end-to-end solution carrying text-to-speech, speech-to-text and LLM-powered bot development with related best-in-class connectivity services, all tailored to service small to medium-sized customers. Importantly, our Live Hub financial momentum continues with ARR growing above 30% sequentially and substantially above 100% versus the year ago period. Now turning -- before turning to the detailed business line discussion, let me quickly shift to the third quarter profitability metrics outlook. We performed -- outperformed on top line with revenue growing 2.2% year-over-year. Our non-GAAP gross margin for the quarter was 65.8%, which is above our previous quarter of 64.5%. The sequential improvement in our non-GAAP gross margin is attributed mainly to more favorable product mix and lower tariff related cost headwinds of about $0.5 million versus prior expense of above $1 million in the second quarter of 2025. We expect fourth quarter '25 tariff costs to be in the similar range to this recent third quarter. Third quarter non-GAAP operating expenses of $34.7 million compared with $35 million in the second quarter and $32.5 million in the year ago quarter. On a year-on-year basis, the higher expenses are attributed mostly to targeted investment in growing the conversational AI business and higher impact from the weakening U.S. dollars against the euro in the third quarter. Non-GAAP operating margin reached 9.5% compared to 7.2% in the previous quarter and 11.2% in the year ago quarter. Non-GAAP EBITDA margin was 11.2%, again, an improvement compared to 8.6% in the previous quarter. Non-GAAP earning per share was $0.17 compared to $0.14 in the previous quarter and $0.16 in the year ago quarter. In terms of headcount, we ended the quarter with 961 employees, essentially flat across the first 3 quarters 2025 and compared to 935 employees in the year ago period. Net cash provided by operating activities was $4.1 million for the quarter and $25.2 million for the first 3 quarters of 2025. The key takeaway from these financial results is that our business remains strong and is expected to grow steadily through 2026 and beyond across our 2 primary sectors. Looking ahead to the upcoming year, we expect a noticeable shift in our top line performance. Specifically, we project that 2025 will demonstrate both change and growth compared to 2024. This improvement is significant as it will mark a reversal of the declining annual revenue trend experienced in 2023 and '24. So, we're moving to positive trend, and we believe that '26 will be even higher. Firstly, the UCaaS and CX connectivity business has stabilized compared to 2023 and '24. Additionally, 2 significant developments in the third quarter: one, signing the service agreement with the leading global system integrator and increasing engagement with Cisco, which is the second largest shareholder in the UCaaS market, involving all type of services, including Cloud Connect offering devices and more. The 2 developments give us confidence that this connectivity business will perform well in coming years. And secondly, as anticipated, we expect strong growth exceeding 40% annually in our conversational business over the coming years. Now to some of the major business lines, starting with Microsoft. Our third quarter Microsoft business was almost flat year-over-year, impacted by seasonality and late purchase order push into the fourth quarter. For the first 9 months of the year, Microsoft grew 4%, driven by our connectivity business, coupled with increasing attach rate of sales of devices, Voca CIC or Team Certified CCaaS and other conversational business application services. Importantly, our pipeline of created opportunities remained robust in the third quarter, up 20% year-over-year and up 8% for the first 9 of 2025, again, compared to the year ago quarter. Market service and partner inputs continue to support a growth story for Teams Phone business, driven by the Microsoft Operator Connect program, where adoption in the market continues to show healthy growth. Teams Phone usage is also strongly supported by Microsoft efforts to drive Copilot as a central capable chatbot for the Teams Phone meetings and calls. All this points to a strong market today and for coming years and further supports business expansion and dominance in the connectivity area. Before wrapping up on Microsoft business discussion, let me share details of some representative wins. One is a very large greater than 1 million defense information system agency. Here, we have signed $1.1 million total contract value over the next 36 months through AT&T, covering the expansion of additional managed SBC services and calling plans in a new region. Second win is with a financial services company operating internationally. It is a provider of investment management services outside to the U.S. This is a $1 million TCV contract over 36 months deals renewal of all prior services and purchased at a modest increase in value. Third is a win with a large -- one of the largest hospital, pediatric hospitals in the U.S., again, close to $1 million TCV over 36 months, covering live from managed services and gateways, enabling full migration from legacy PBX systems to Microsoft Teams. Now turning to the contact center or customer experience market. CX grew by 13% year-over-year in the quarter, benefiting from growth in connectivity for CCaaS and connectivity services. We continue to see growing customer and partner interest in Live CX, which is an integral component of the live platform and targets applications such as cloud migration of contact center, replacing traditional 1800 services with click-to-call functionality and enabling conversational AI through Voice AI Connect and Live Hub connectivity. As discussed in my earlier remarks, during the third quarter, we signed a landmark live platform agreement with a global Tier 1 system integrator where Live CX was a critical element of the broad-based agreement. Expanding our network of global Tier 1 integrator remains a key strategic initiative as it significantly broadens our addressable market. These partners focus on midsized customer experience customers, a segment traditionally underserved by our direct sales team. Importantly, our pipeline of opportunity remains -- remains robust and gives us confidence about our growth prospects for the balance of '25 and into 2026. Now to conversational AI other lines. As discussed previously, conversational AI business grew 50% in the quarter. Key in the growth for the business line of Voice AI Connect and Live Hub, which we just discussed. Let's now discuss highlights of additional business lines that make up the conversational AI segment. First, Voca CIC. We recorded another quarter -- record quarter of strong year-over-year invoicing and booking growth for Voca. Key highlights include major win in aviation. We signed a deal to deploy our team certified omnichannel contact center at a major APAC, Asia Pacific airport, one of the busiest airports in the world, beating out a couple of well-known premium CCaaS vendors. We won based on our ability to leverage our broad portfolio, offering a tightly integrated Teams-based phone and CCaaS service along with mobile app call enablement to contact center via our click-to-call solution. Ongoing momentum in higher education, we continue to make solid progress in this vertical, adding another university this quarter that selected our best-in-class Teams certified contact center solution alongside our live Teams managed UC services. We now serve 12 university accounts in North America with Voca, including the second largest university in the U.S. and the largest school network on the East Coast. Microsoft Unified certification, Voca became the second vendor worldwide to receive certification. We have distanced our self from competition as the only vendor with real-world enterprise production grade experience with this stack, thanks to our long-standing partnership with Microsoft. Now to a new product update. Later in the fourth quarter, we plan to launch Agent Insights, which brings advanced conversational AI and generative AI to the Voca CAC platform. Powered by LLMs, it transforms recorded Teams interactions into structured insights, including AI summaries, sentiment analysis and one-click CRM updates. Each contact center desk can define customer summary prompts, ensuring precision and compliance across use cases. Strategically, Agent Insights aligns with our unified integration model with Teams Phone, adding a critical AI layer to the Microsoft Teams CX ecosystem and strengthening Voca CIC as the role as the intelligent engagement layer driving efficient and quality business value. Now needless to say that Agent Insight is based on our technology developed in the meeting insight and therefore, we are in a good position to make great value and benefit from a technology in different areas. Overall, our achievements are gaining recognition from leading industry analysts, culminating in a recent award from the UC today for best Microsoft Teams Contact Center, representing back-to-back win for the second year in a row in this category. Moving to Meeting Insights. Meeting Insights Cloud Edition maintained strong momentum in this quarter with continued growth in new customer acquisitions. Other key metrics include the number of meetings and unique active users reached record levels, contributing to continued growth in monthly recurring revenue. In addition to our broad market focus, we have developed workflow solution tailored to specific verticals, adding automation and connectivity to other leading enterprise IT solution aimed at leveraging Gen AI to enhance meeting productivity and accelerate business outcomes. Early traction has been promising. One example involves the University of Central Florida, one of the largest universities in the U.S., which amongst a broad portfolio of solution customer takes from us, they deployed also Meeting Insight to generate AI-powered summaries and transcript of interaction between counselors and students. Working closely with the customer, we perform analytics such as sentiment analysis and speaker [indiscernible] ratio, displaying key metrics in a custom dashboard available to the counselor, supervisors to support student wellness and improve graduation rates. This is just one example of how our vertical solution are transforming data into actionable insights and support workflows, optimizing outcomes. We look forward to sharing more in the coming future. Moving on to Mia OP. Since second quarter, we have made significant strides in Israel and globally that are expected to drive growth in our conversational AI segment. In addition to the exciting contract award under Project Nimbus, we discussed earlier, our momentum in Israel is extending beyond the government vertical. We are now in final stages of several large tenders in other verticals such as healthcare and utilities, reflecting growing demand across various industries. We also witnessed customer interest outside of Israel when customers understand the uniqueness of Mia OP solution that unlocks meeting intelligence at the edge computing level. Fresh from the debate of Mia OP in Asia Pacific in early third quarter, we are now engaging with several government opportunities in APAC countries in setting up a proof-of-concept trials. In late third quarter, we also showcased our solution in the United States and customer response was overwhelmingly positive. We are currently in conversation with several U.S. federal and civilian agencies through a mix of collaboration with partners and direct engagements. We ended the third quarter with close to 10 customers in production and about 15 proof-of-concept project, all arising from word-of-mouth recommendation. Based on our exceptional pipeline of opportunities, we expect our momentum in Mia OP to further accelerate in fourth quarter and into 2026. So, to wrap up our call, in third quarter '25, we continued to make solid progress in our long-term transformation to a hybrid cloud and voice services and Gen AI business application company. We delivered against our strategic objectives in that, a, we have a third consecutive quarter of revenue growth; b, we executed well to our playbook of leveraging our strong connectivity installed base in driving successful cross-sell value-add services. And third, the R&D and sales marketing investments we have made over the past several quarters have led to record conversational AI bookings in the quarter. And importantly, pipeline remains very healthy. This is the basis for our belief that we will grow in the next coming years more than 40% to 50% on an annual basis in the conversational AI business. We are operating from a position of strength, supported by a fortress balance sheet, a dominant connectivity franchise and a growing conversational AI segment that enhances enterprise intelligence and productivity. We believe that these factors position us well for the rest of 2025 and increase growth in top line and earnings into 2026. And with that, I have concluded my presentation, and I'll move over the call to the operator. Operator: [Operator Instructions] We have a question from Joshua Reilly with Needham. Joshua Reilly: All right. Nice job on the quarter here. On the global Tier 1 system integrator win, maybe you could give us some more color on what helped you win that deal from a product perspective or any other factors that you think would be relevant to give to investors here. Niran Baruch: Right. Well, I need to go back to the significance of our Live platform, which is a services delivery platform for UCaaS and CX. I think by now, this is the only platform that allows large system integrators, which serve large enterprises around the world, deliver all of the different services that are needed in order to move to modernizing the enterprise and to move to enhanced, I would say, communication and collaboration. Starting from connectivity, which connects all of the sites of a company across the globe. And then adding on top of that management, management of users, management of sites. And then on top of that, a list of business application and among them, an advanced and AI-first contact center, coding solution, meeting intelligence platform and now we're coming with voice bots and Gen AI applications. So, all in all, this is the most advanced platform these days. And for a large system integrator that operates globally, this would be a great services delivery platform to serve its customers. And I think from that stems the recognition and the importance of that platform. Joshua Reilly: Got it. That's helpful. And then you're obviously building a lot of these kind of adjacent AI solutions for the communication landscape. If you look at the older products that you have in the market, whether it's FPCs or some of the gateways and all the older products that you sell, those are typically in pretty price-sensitive markets. What are you seeing with some of these new AI solutions and your ability to drive pricing power relative to the UCaaS market, which is historically a pretty price-sensitive market. Niran Baruch: Right. Well, voice AI is a emerging market and therefore, those organization which are early adopters and quick to implement workflows and solutions that will substantially enhance their productivity are not less concerned with the cost. So, we do not see any price pressure at this point on the Voice AI business application. And we believe that as we will continue to enhance and add more features and make the solution substantially richer, we can still keep that. So, you have identified correctly the difference between the legacy business, which is price sensitive. But again, there, we enjoy the fact that competition is becoming less and less powerful. But then we enjoy relatively convenient price environment, I would say, for Voice AI business application. Joshua Reilly: Got it. That's helpful. And then on the Microsoft business, I believe last quarter, it grew 6% year-over-year, and I think you said it was flat this quarter. Is there any change in the trends there? Or is that just really around the year-over-year comparison dynamics for the growth rate? Niran Baruch: Right. So, I think overall UCaaS market is kind of flattening out in recent 12 months. We've seen that trend. It's been fairly strong up until '22, '23, then it becomes the expansion rate really decreased. It's a good market. It's a great market, right? Just take into account that out of -- if you go back to like 15 years ago and you talk about 400 million endpoints overall in the enterprise world served in the past by PBX'. So these days, UCaaS I believe, is serving less than $100 million. So, a lot of room to grow. And again, we all need to acknowledge that the majority of the growth occurred more in the U.S., U.K., Western Europe, Canada, Australia, maybe, et cetera. But there's a huge -- actually above 50% of the $400 million market that's still served by the old PBX technology. So, there's a lot of room to grow. So -- but pricing is such that I would assume that UCaaS will grow, but our services should be applied to the non-UCaaS market at a lower range. And I think that would be basically the driver for increased growth going forward. Joshua Reilly: Got it. And then last question for me is, if you look at the mix of revenue in the quarter, I would say that the product revenue was pretty strong, above what my estimate was and what I would have expected. Can you just help us understand maybe what outperformed on the product revenue side in the quarter? Niran Baruch: Yes. As you've seen, first, we had a great quarter in terms of product recognized revenues. It was driven mainly at the software, which is part of the voice AI solution. So that's where the product growth came from. Operator: As we have no further questions on the lines at this time, I'd like to turn the call back over to Mr. Adlersberg for any closing remarks. Shabtai Adlersberg: Okay. Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our UCaaS and CCaaS operations and continued growth in our emerging voice AI business, we believe we are on track to grow revenue and profitability in the next coming years. We look forward to your participation in our next quarterly conference calls. Thank you all. Have a nice day. Operator: Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.
Carrie Gillard: Good morning, and thank you for joining Shopify's Third Quarter 2025 Conference Call. I am Carrie Gillard, Director of Investor Relations. And joining us today are Harley Finkelstein, Shopify's President; and Jeff Hoffmeister, our CFO. After their prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and, therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. Undue reliance should not be placed on those forward-looking statements. We undertake no obligation to update or revise these statements, except as required by law. You can read about these assumptions, risks and uncertainties in our press release this morning as well as in our filings with the U.S. and Canadian regulators. We'll also speak to adjusted financial measures, which are non-GAAP and not a substitute for GAAP financial measures. Reconciliations between the 2 are provided in our press release. And finally, we report in U.S. dollars, so all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I'll turn the call over to Harley. Harley Finkelstein: Thanks, Carrie, and good morning, everyone. It's been another strong quarter for Shopify. I'll take you through the numbers and what we've built and shipped in Q3 shortly. But first, I want to zoom out as I always do. There's a real shift happening in the world of technology right now. And I know you're all going to ask about AI and there's a lot to cover, from enabling agentic commerce with some of the biggest global leaders in conversational AI, to our AI assistant Sidekick supercharging merchants' businesses, to how we are using AI reflexively across the entire business and company to tighten our product loops and to ship world-class solutions more efficiently than ever. But here's the thing. There's a bigger story behind the updates, and it's a story of the evolution of commerce. Now evolution teaches us to adapt or die, and Shopify is built for this pace of change. It's in our DNA. So while you'll certainly see it in how we're leveraging AI, you will also see it in our international expansion. You'll see it in the development of our offline B2B channels. And you'll see it in how we've dramatically lowered the barrier to entry. Every 26 seconds, a new entrepreneur makes their first sale on Shopify. I'm going to say that again. Every 26 seconds, a new entrepreneur makes their first sale on Shopify. In fact, it's happened at least 3 times since I started talking here. That is TAM expansion at its best. And any of those merchants could easily become one of the world's biggest brands in a decade or less. As I said before, that's what we mean when we say we're not just growing our piece of the pie; we are growing the pie itself. That is our superpower. Commerce never stands still and neither do we. We are always building for what's next. And now as we're entering what is likely to be a whole new era of agentic commerce, our scale and agility mean that Shopify is perfectly positioned to lead the way and empower more businesses using AI. AI is an incredible tool for us in what has always been our goal to enable more entrepreneurs in the world. More on that in just a moment. First, back to the numbers. While we're continuously evolving, the story of our results remains incredibly consistent. Normally, I hate repeating myself, but this is one place I'm very happy to do just that. For quite some time now, we've demonstrated that we can balance both growth and profitability. Well, here it is again. Q3 delivered 32% GMV growth, 32% revenue growth and an 18% free cash flow margin. And this is not just a one-off. Revenue grew 27% in Q1 this year, 31% in Q2 and 32% in Q3. At the same time, free cash flow margin has held steady at 15% in Q1 to 16% in Q2 and 18% again in Q3. Consistent, strong, executing just as we said we would. We are really proud of these results. Delivering these numbers quarter after quarter at our sale is a huge achievement. And this consistency is not an accident. It's incredibly intentional. It's a direct outcome of how we operate. We build what merchants need, we ship relentlessly and we grow consistently. This is the right balance for a growth company: invest to capture opportunity, keep margins at a profitable level and deliver durable results quarter after quarter. It's how we operate, powered by a model built to accelerate merchant growth, a team built for execution and millions of businesses pushing from their first sale to full scale. And that's why you continue to see consumers' favorite brands come to Shopify to power their businesses. More on that later. Now let me walk you through what we've built and shipped in Q3 and how it's fueling our growth. I touched on AI at the start of the call. That's because, simply put, we all recognize this could be the biggest shift in technology since the Internet, and Shopify is preparing to be at the center of it. The products we're talking about today could very well become a quintessential piece of technology that will be used by every one, every day. That's how big this could be. And we believe Shopify is perfectly primed to help lead the way. Think of it this way. If AI is fueled by data, then Shopify has a clear advantage. We power millions of merchants and billions of transactions. That gives us access to a world of data across a spectrum of commerce. And we're using that data to create better shopping experiences for both merchants and shoppers. This is the strength of our platform: massive scale paired with unmatched velocity. We think about the evolution of AI in 3 ways: how AI will help our merchants sell everywhere, how AI will help our merchants operate smarter, and how we, as a company, will use AI to build better. Sell everywhere, operate smarter and build better. Let me take each in turn. Let's start with how AI is helping our merchants sell everywhere, what's known as agentic commerce. Put simply, AI is able to fundamentally change how we shop, moving from search to conversation, helping all consumers purchase more efficiently. And that's why we built the Commerce for Agents tools that we introduced on our last call, Catalog, Universal Cart and Checkout Kit. These tools make it easier for agents to shop across merchant stores on a buyer's behalf. But here's the thing. Agentic commerce is so much more than just the last click. Think about it in 3 layers: product discovery, purchasing experience and the post-purchase journey. Now if you're only looking at the payment or checkout layer, you're missing the bigger picture of what we're building: a seamless and intuitive shopping experience end to end. First, let's talk discovery. We've structured data across billions of products so our partners can surface the most relevant items in seconds. It's clear where this is going. Shopping is becoming more conversational, more personalized and much more efficient. And that's why the leading AI partners are already using Catalog to power product discovery inside their experiences. I'm sure you all saw the announcement about our partnership with ChatGPT, which is a strategic play that we're really excited about. But let me be clear, we're also partnered with other leaders in conversational AI like Perplexity, and our goal is to power product discovery for all agents, making us the standard across the Internet. Up next, on purchasing experience. Once a shopper finds what they want, Universal Cart and Checkout Kit make add to cart and checkout seamless inside the conversation. ChatGPT, along with Microsoft Copilot have already partnered with us here to make in-chat shopping flows possible. And finally, post purchase. We're investing in tools that help agents keep customers engaged and informed, order status, return, support, reorder prompts, so the experience stays smooth and merchants build durable relationships with their customers. Of course, different permutations will emerge as agentic commerce evolves, and we are preparing our merchants to be well positioned for whatever path wins. What all this should tell you is that our merchants are primed for success in the new world of agentic commerce, just as they will continue to be armed with the tools for their online store, physical retail stores, B2B channels or wherever commerce goes next. This is the advantage of being on Shopify, we are everywhere commerce is happening and we always aim to get there first. Okay. Let's now talk about how merchants are using AI to operate smarter. We set an extremely high bar for every AI feature we build and ship. We're not just here to keep pace with change; we're here to set the standard for what's possible in commerce technology. Sidekick, our on-platform intelligent assistant, is a prime example of that commitment. And frankly, the rate of adoption speaks for itself. In Q3 alone, over 750,000 shops used Sidekick for the first time. And to date, Sidekick has had almost 100 million conversations with merchants, with 8 million in October alone. And it's quickly becoming the default way merchants get things done. Hundreds of thousands of merchants are running core parts of their business using Sidekick. In fact, conversation can go from 50 to 100 turns deep, covering everything from analytics and building new customer segments, to automating better SCO and so much more. Five years ago, none of this would have been possible. And today, it's a reflexive daily habit for many of them. At this scale, Sidekick will only get smarter and more powerful. We've been betting on this from day 1, and that bet was correct and it's already paying off. Sidekick is central to have so many merchants operate their businesses. Let me be clear, this is not just about automation. This is also about autonomy. This is exactly what we had hoped for when we started out on this journey. It's also something we knew we were uniquely positioned to build given everything we know about the merchants' business and commerce at large. This is what building a purpose-built agent and deeply integrated into the platform looks like, and we are just getting started. The last thing I'll touch on with AI is how we're using it to build better products. For years, we've been honing our internal capabilities in the same way we've been empowering our merchants: shipping fast, measuring what matters and scaling what works using AI. Shopify's founder mode mentality really comes into play here. We're turning vast amounts of raw signal into ship products and features quickly and relentlessly. This is what building with AI looks like at Shopify, using our scale to gain insights, our culture to move really fast and shipping more of what truly matters so merchants win sooner. Let me share one quick example to illustrate this. We have a tool effectually known as Scout. Now Scout is an internal voice of the customer system that indexes hundreds of millions of merchant feedback items, making them searchable within our tools. Any PM, designer, engineer or, frankly, anyone at the company, including myself and Jeff, can ask a question and get grounded answers in seconds. That used to take weeks. Patterns emerge by market, vertical and merchant size, allowing us to write clear specs, prioritize better and ship with confidence. And Scout is just one of many tools we're developing to turn our own signals, whether it's support tickets, usage data, reviews, social interactions or even Sidekick prompts into fast informed decisions. If you take away one thing from this call, let it be this, AI is not just a feature at Shopify. It is central to our engine that powers everything we build. Okay, that's a lot about AI, which should give you some idea about how much is happening behind the scenes over here. But now let's shift our focus to other key products and growth areas that are driving our results. Starting with Shopify Payments. Payments continues to lead the way for driving growth, hitting 65% penetration of GMV in Q3. Shop Pay has seen significant growth as well, up 67% year-over-year to $29 billion this quarter. Now I want to underline what I just said because it's important to understand what we're building here. If there was ever one company that could own the checkout, we believe it can be Shopify. And that's no small feat. If we've made it look easy, then that means we're doing our job. But in reality, the checkout is an incredibly complex system. It's the engine room of commerce. That one simple buy button is a contract between merchant and customer that has to cover a whole world of optionality, from taxes, shipping and inventory, to pricing and payments in any currency, to bundles and upsells and subscriptions, our checkout scales in terms of volume and functionality, all while ensuring compliance with various regulations. Think of it like a really well-made watch. The watch face or the buy button is just the tip of the iceberg. What's underneath is an intricately built network of complications that handles a world of nuance all designed to make the experience beautifully simple. And it doesn't end there. Once the sales complete, we handle refunds, exchanges, store credits, partial captures and loyalty programs, all seamlessly allowing merchants to focus on growth instead of paperwork and building trust with their customers. So why does this matter? Because it demonstrates that we execute incredibly well at scale. No one else can handle this complexity as seamlessly and with such a focus on the merchant as Shopify can. And for our partners, we keep it simple as well. Platforms like Microsoft Copilot can easily plug in to activate commerce quickly embedding checkout and maintaining a native field. And the result, we simplify online stores and check out at scale, empowering our merchants and our partners to thrive wherever commerce happens today and wherever it goes next. So we've talked about AI, we've talked about the checkout, but you'll see this laser focus in everything we build. In Q3, every upgrade we shipped, cut friction simplified selling and put merchants within reach of new markets. I'll give you a few examples related to our payments business. Merchants, using Global-e's managed markets products can now offer Shop Pay as a payment method. Our Klarna partnership now includes local currency displays and streamlined payouts, and Shop Pay installments launched in the U.K. following Canada that rolled out earlier this year. So why am I talking to these specific rollouts? Because it shows how each integration makes it easier for merchants to convert wherever they do business. And we're not close to being done. There's significant runway ahead, especially internationally where our adoption rates are increasing but still remain lower than our core market in North America. We see that momentum continuing. In Europe, penetration gains for Shopify Payments in Q3 were more than 50% higher than the gains in the same quarter a year ago. This is how we continue to capture growth and drive greater payment penetration, by making the hard things simple and putting merchants at the center of every transaction. Let's stay on international because, frankly, the results speak for themselves. International GMV grew 41% in Q3, on top of 42% in Q2 and 31% in Q1. The momentum is real, and we're still only scratching the surface. Europe's market share continues to make gains, while revenue from the region now accounts for 21% of our overall revenue in Q3, up from less than 18% 2 years ago. On top of the payment product enhancements I already mentioned, Q3 was packed with solutions across our business that further break down barriers and open new markets for merchants everywhere. I'm going to drill into the details here because it's important to understand the velocity of progress we are making internationally to add more products in more markets. In point of sale, we launched Shopify Payments for POS to 3 additional countries and rolled out Tap to Pay in 7 more countries. Shopify Capital has now doubled its footprint from where we started the year, with Ireland and Spain launching in Q3. And Shop App expanded Track with Shop and Translations in 6 new markets, making it a top destination for local buyers around the world. On the cross-border front, as I mentioned earlier, Shop Pay is now available for merchants using our managed markets product. Let's talk about shipping and fulfillment next because we made big strides here this quarter. We expanded merchant optionality across the stack for both international and local. This quarter alone, we partnered with Amazon of multichannel fulfillment, Big Blue, DHL Fulfillment Network, Go Bolt and Maple all to give merchants more fulfillment flexibility. We partnered with Australia Post, Royal Mail and DHL Express Canada to give more carrier diversity. And we launched DHL Express DDP, DHL e-commerce DDP and enabled Canada Post DDP, so merchants can collect duties at checkout. With a single integration, we've empowered merchants to eliminate the customs delays that kill international sales. But this is not just about adding integrations. It's about giving merchants the optionality to choose the best solution for their business, whether that's the lowest cost, fastest delivery or best cross-border experience, all managed from a single platform. As regulations shift and merchants' needs evolve, this depth of choice gives our merchants even more ways to be successful, while continuing to build an ecosystem that is truly world-class. And while we're scaling horizontally across geographies, we're also growing vertically across merchant types and channels. As you know, we've built multiple on-ramps into Shopify: online, off-line, B2B and enterprise, so brands can start and scale on their terms. And that is why the biggest brands and retailers are choosing Shopify. Just last week, the Estee Lauder companies announced they're coming to Shopify. This is a global beauty Empire with 80 years of heritage and more than 20 iconic brands under 1 roof, Clinique, MAC, La Mer, Bobbi Brown and more. And now they're trusting us to power their next chapter. So why are industry legends like Estee Lauder, Mattel, Aldo, Hunter Douglas all moving to Shopify? Because our technology wins: on speed, on scale, on agility. And our price-to-value ratio is unmatched. But it's more than just tech. Estee Lauder is still a family-led company at heart. For them, this isn't just business, and it isn't for us either. We simply outcare everybody else. Sometimes that means me spending the weekend on calls with both potential and existing merchants. And sometimes, it's Tobi jumping in to explain a new feature to a merchant. But all the time, it's the roughly 8,100 people at Shopify who're relentlessly merchant-obsessed showing up every day to help them win. And that mix of world-class technology and true partnership, that's what sets Shopify apart and that's what's driving us forward. And you can expect to see that continue to set us apart as we scale. Every day we are seeing some of the world's biggest brands with complex, high-volume operations choose Shopify to unify it's channels, to cut complexity and to move faster. This quarter alone, we have signed an incredible mix of brands that shows just how versatile and scalable Shopify is. Affordable billion dollar beauty giant e.l.f Cosmetics, Italian luxury label TWINSET, iconic American snack brand and household staple Welch's, 3D printing company Formlabs, the sport betting company FanDuel and the 170-year-old French retailer Ladurée. And in the growing baby category, we just welcomed Stokke. Anyone who has small children at home will know this company. Their signature high chair has sold over 16 million times. And just like Estee Lauder, they have an incredible heritage, a 90-year-old company, and they're bringing Shopify in to supercharge their next chapter. And I hear stories like this every day. It's one of the things I love most about what we're building, partnering with generational businesses and setting them up for future generations to come. Meanwhile, some of our other recent signings are now ramping up on Shopify. Since we last spoke, brands like Michael Kors, David's Bridal, Goop, Mejuri and Dooney & Bourke, they're all live on Shopify. That's a serious list of companies I just mentioned, on top of the incredibly diverse brands we mentioned last quarter, which included everything from coffee to luxury outerwear to mining equipment. What's most exciting is that we're increasingly welcoming more brands from all corners of commerce. And this growing merchant diversity, both in the U.S. and all over the world, make Shopify more resilient, expands our addressable market and it fuels our growth. No matter how the market shifts, Shopify is built to thrive. We're widening our reach, we're deepening our offerings and we're laying the groundwork for long-term success, from entrepreneur all the way to enterprise. Now I want to quickly touch on offline as it's one of our long-term growth drivers that is continuing to power forward. Offline GMV in Q3 was up 31%, and we welcomed a host of incredible brands to Shopify. These are retail-first brands led by in-person experiences that are expanding to more channels and looking for a unified commerce solution. Iconic names like UGG Australia, Comme des Garçons are choosing Shopify to power their stores, expand their reach and deliver seamless experiences online and offline. These are not small wins. Our progress with the retail-anchored brands is another strong signal that Shopify is becoming the platform for all brands selling everywhere: in-store, online and across countries, channels and markets. Finally, a quick note on B2B. Our momentum remains strong and steady. Following 2 years of consistent growth over 100%, we nearly doubled B2B GMV again in Q3, up 98% year-over-year. This isn't just 1 cohort or 1 region; we're seeing broad GMV growth across both new and established merchant cohorts. For example, in Canada, Q3 B2B GMV was up over 155% year-over-year. From a vertical perspective, B2B continues to deliver strong results across the board, with home and garden standing out at 150% year-over-year GMV growth in Q3. Shopify's platform is delivering for merchants no matter the size, vertical of our market. Now before I hand it over to Jeff, I want to close out where I started. Shopify is evolving at a pace that is entirely unmatched, while maintaining consistent durable growth. We're 3 quarters into 2025 and we've delivered exactly what we said we would: relentless growth, consistent margins and unwavering execution. We build, we ship, we grow. We're also about to kick off what will be my 16th holiday season or, as we call it, BFCM here at Shopify. This moment has evolved too. It used to be a few peak sales days, but now it stretches across the whole quarter. And it's more global than ever. And more than ever before, AI will play a significant role in how shoppers discover and buy. And we are ready for it. Our merchants are primed to win. They've got AI tools that didn't exist a year ago. They're shipping internationally with options that didn't exist a year ago. And they're doing it all on infrastructure designed to handle peak demand at global scale. This is Shopify at full speed. And with that, I'll turn the call over to Jeff for a deeper dive in the numbers and trends we are seeing. Jeff, over to you. Jeff Hoffmeister: Thank you, Harley. Q3 was another exceptional quarter for Shopify, continuing the strength of what has been an impressive year. Before I dive into the numbers on a line-by-line basis, I want to examine our GMV from a few different angles in order to give you a holistic view of what we are seeing in our business. Let's examine GMV by merchant size, cohorts, geographies and channels. Note that all growth rates mentioned are year-over-year unless specifically stated otherwise. First, regarding merchant size. We saw strong growth across all merchant sizes. In Q3, merchants with annual GMV below $25 million generated the significant majority of our GMV. And we saw a relatively equal balance between GMV from merchants in the $2 million and below band and merchants in the $2 million to $25 million band. Two trends that have been relatively consistent for a while. Merchants with GMV greater than $25 million grew at a faster pace in Q3, but admittedly, that is the smallest segment of the 3 bands I discussed. Next, looking at our cohorts. Q3 was another strong quarter where our growth was fueled by both recent quarterly cohorts and the strength and durability of previous cohorts. In fact, one of the elements of our business that I believe is frequently underestimated is the stickiness and continued growth of cohorts from 2, 3 or more years ago. Year-over-year growth in GMV was primarily driven by the strong performance of our 2024 and 2025 cohorts. But our earlier cohorts also continue to perform well. Notably, the 2025 cohort is currently outpacing and generating more GMV than previous years' cohorts at the same age. Moving to regions. Europe continued to be a standout driving significant growth with GMV up 49% or 42% in constant currency. Approximately half of our GMV dollar growth in Q3 on a constant currency basis came from markets outside North America. We experienced stronger growth from existing merchants compared to new acquisitions in Q3 across all regions. In terms of channels, offline GMV increased 31% as we attract more retail-first brands globally. Our B2B GMV was up 98%, fueled by existing merchants embracing our offerings and our go-to-market initiatives targeting more B2B specific verticals and merchants. Finally, verticals. We saw strong performance in apparel and accessories, health and beauty, home and garden, and food and beverage. We also continue to experience rapid growth in emerging verticals like pet supplies, which grew over 50%, and arts and entertainment, which was up 45%. Our merchants have consistently delivered over 20% GMV growth for 9 consecutive quarters, with Q3 GMV growth rate of 32%, representing the highest growth rate quarter that we've had since the COVID-impacted growth rates of 2021. In short, our merchants are performing well across size, cohorts, geography, vertical and channel. Let's now turn to our Q3 results. In Q3, we reached $92 billion in GMV, marking a 32% increase or a 30% increase on a constant currency basis. This strength was driven largely by North America, which outperformed our expectations, driven by an acceleration in growth rate fueled by stronger contributions from both Standard and Plus merchants. Revenue for the third quarter was up 32% or 31% on a constant currency basis. The strong GMV trends I mentioned drove this revenue growth with these results coming in ahead of expectations, largely on the backs of outperformance in North America. Looking at the 2 components of revenue. Merchant Solutions revenue increased 38%, with the strength in GMV driving the significant majority of the growth. To a lesser extent, we also saw increased penetration of Shopify Payments, which reached 65% for the quarter. This quarter's higher GPV penetration was driven by continued adoption of Payments by more merchants around the world and the strong performance of those merchants, and the expanded partnerships with PayPal and Klarna. These dynamics are partially offset by our continued growth in Europe, which accounted for a larger share of GMV but which has lower payments volume penetration compared to North America. Over time, we expect that this will become less of an impact for Payments penetration as we continue launching Payments in more countries. Subscription Solutions revenue grew 15%, primarily driven by a larger percentage of subscriptions coming from higher-priced plans and, to a lesser extent, higher variable platform fees. Q3 MRR was up 10% year-over-year, led by growth in our Plus plans, which represented 35% of MRR for the quarter. We had 2 headwinds impacting our year-over-year growth rates in MRR. MRR for Q3 last year benefited from the 1-month paid trial, which drove MRR higher and made for a tougher comparison this year. Second, we are also lapping the Plus pricing changes, which went into effect in Q2 of 2024. We will have some year-over-year comparability headwinds on MRR until Q2 of next year as our rollout of the 3-month trials happened in Q4 of last year and Q1 of this year. We now have had a full quarter where all of our regions are back on 3-month trials, which clears up a lot of the noise and comparability of our recent merchant acquisition efforts. We're seeing the results of these efforts settle generally in line with historical trends and are pleased with this part of our business. Gross profit grew 24%, coming in slightly ahead of our expectations, driven by the outperformance in revenue, primarily due to stronger growth of Payments. Gross profit for Subscription Solutions grew 14%, slightly less than the 15% revenue growth for Subscription Solutions, with gross margin coming in at 81.7%. Gross margin was down slightly year-over-year as a result of higher hosting costs needed to support higher merchant transaction volumes and our continued geographic expansion as well as higher AI usage. This downward pressure was partially offset by lower support costs. Gross margin for Subscription Solutions was almost exactly the same as last quarter and healthily above the multiyear trend line of 80%. Gross profit from Merchant Solutions grew 33%, with gross margin coming in at 38.2% compared to 39.7% in Q3 of 2024. The decrease was primarily driven by the same factors we have seen throughout the year, including the impact from the expanded partnership with PayPal, which will become less of a headwind in Q4 and beyond as we will have now lapped the initial expansion of the partnership, and lower noncash revenues from certain partnerships, which carry a high gross margin. This brings our overall Q3 gross margin to 48.9%, compared to 51.7% in the prior year. This year-over-year change in gross margins is driven by the mix shift from Subscription Solutions to Merchant Solutions this year that I have mentioned above and on prior calls, coupled with the continued strength of Payments overall. Increase in Payments penetration will generally drive lower margins initially, but Payments is often the on-ramp for merchants to adopt other Merchant Solutions products. So that is a trade-off as many of you think through modeling how our business trends over time based on your assumptions regarding payments penetration levels. Operating expenses were $1 billion for the quarter or 37% of revenue. To put this leverage into context and focusing on how Q3 has trended the past 3 years, we've reduced our operating expenses from 45% in 2023 to 39% last year and further down to 37% this year. Our discipline on head count has been the key force behind our increased operating leverage. For over 2 years, total head count has consistently been flat to down, both sequentially and year-over-year, as we redeploy talent to the highest-impact work. Our team's productivity is rising through automation, better tooling and the reflexive use of AI, so we can build, ship and deliver more for our merchants. In Q3, transaction and loan losses represented 5% of our revenue, an uptick above our historical trend line. This increase stems mostly from higher losses in our Payments business, resulting primarily from some testing and experimentation with merchant onboarding. Our Payments loss rate is already turning back towards historical levels as some recent changes have already had an impact in lowering these loss rates. We also saw an increase in capital losses driven primarily by the continued volume growth of our capital business, but with a slight increase in the loss rate for the quarter, and with Q4 trending below Q3 and year-to-date. Operating income for the quarter was $343 million or 12% of revenue. Stock-based compensation for Q3 was $116 million and capital expenditures were $6 million for the quarter. Q3 free cash flow was $507 million or 18% of revenue, coming in slightly ahead of our outlook. For the first 9 months of the year, free cash flow margin is at the same 16% as last year at this point, delivering on the consistency of free cash flow margins that I've highlighted in past calls. Moreover, we have done this all while accelerating our year-to-date revenue growth rate in 2025 versus 2024. Note that subsequent to the end of the quarter, our convert became due and settled on November 2. If you pro forma our September 30 cash balance for the settlement of the convert, we sit at $6 billion of cash and marketable securities and no debt. Before we move to our outlook, an update on some of the items that I've discussed the past 2 quarters regarding tariffs and where we are or are not seeing an impact on our merchants businesses. In short, the trends that we are seeing remain very similar to what we have called out on our 2 preceding calls. Two items to highlight briefly. Cross-border GMV was 15% of GMV in Q3, consistent with prior quarters. The U.S. inbound and outbound demand within that, which, as a reminder, is roughly half of the 15%, has remained relatively steady. We still see that our merchants have in the aggregate raise their prices some since the April tariff announcements in the U.S., but the level of pricing increases is, in fact, slightly lower than the trends that we were seeing last quarter. Turning to our outlook for the fourth quarter. We expect Q4 revenue growth to be in the mid to high 20s year-over-year. A few items for appropriate context. We were up against a high benchmark from Q4 last year, which was the highest-growth quarter in 2024. Also, as a reminder, we will lap the expanded partnership with PayPal, which benefited last year's Q4 revenue growth rate. Finally, we have factored into Q4 guidance FX tailwinds that are expected to be slightly higher than what we experienced in Q3. We expect Q4 gross profit dollars to grow in the low to mid-20s. We expect Q4 gross profit to be impacted by essentially the same dynamics that I discussed earlier in the call regarding our Q3 gross profit. We anticipate that our Q4 operating expenses will be 30% to 31% of revenue. Q4 stock-based compensation is expected to be $130 million. Finally, on free cash flow. We expect Q4 free cash flow margin to be slightly above Q3. Two items will affect Q4 margin by a couple of hundred basis points in the aggregate. One, the higher payments losses that I mentioned earlier, which are already trending back towards historical levels but which we expect will remain elevated in Q4, and some tax receivables, the timing of which are outside of our control and which we expect to negatively impact Q4 net working capital. Even with these 2 factors and based on the Q4 outlook that I have provided, we are on track to achieve a free cash flow margin for 2025 similar to 2024. As I've mentioned consistently, we believe that these free cash flow margins strike the right balance between profitability, discipline and investment in future growth. Let me end where it matters most, merchants. We build, we ship, we grow, we execute. Our performance metrics are aligned with merchant outcomes. Our strategy remains unchanged: deliver results, elevate merchant value and foster long-term growth. With that, I will turn the call back over to Carrie. Carrie Gillard: Thanks, Jeff. We will now take your questions before turning the call back to Harley for some final words. [Operator Instructions] Our first question comes from Colin Sebastian at Baird. Colin Sebastian: Great. Good morning, and I appreciate the opportunity here. We see that the integration with OpenAI has already begun. So just curious on any initial observations from those transactions. I guess how quickly you'd expect incremental contribution from -- or versus other channels? And generally, your expectations for how volumes will originate through AI platforms would be helpful. Harley Finkelstein: Colin, Harley. I'll take that first call. Look, I mean, if you just look at the sheer numbers outside of even OpenAI, just around agentic in general, since January, we've seen AI-driven traffic to Shopify stores up like 7x. And we've actually seen orders attributed to AI searches up like 11x since that. So the data is showing it's already growing. And we actually just recently did a survey for -- to consumers to better understand some BFCM trends, and something like 64% of shoppers told us they're likely to use AI to some extent in their buying. But look, we've been building and investing in this infrastructure to make it really easy to bring shopping into every single AI conversation. The fact that we're already working with the leaders in this space should, I think, be a testament to the fact that we want to make sure merchants on Shopify are better prepared than those that are not. It's still obviously very, very early. But what we're really trying to do is laying the rails for agentic commerce. Now in terms of how that's going to affect Shopify, that's the beauty of the business model. The business model is really -- is perfectly aligned with merchant success. The more money they make, the more money we make. And so the way we think about the agentic channel, like any other channel for that matter, whether it's a marketplace or it's social commerce, is that the more money our merchants make, the more customers they're able to sell to, we're able to obviously share in that upside through the GMV, through Payments. That's kind of the way we look at it. But in particular, to your question, this partnership with OpenAI around conversational commerce is really exciting. And again, it's just one more surface area that merchants on Shopify are going to be able to service customers. Carrie Gillard: Our next question comes from Craig Maurer at Financial Technology Partners. Craig Maurer: I wanted to follow up on the prior question. One debate we've been having with investors is how, in an instant checkout flow, accelerated checkout solutions might get prioritized in terms of presentment. So I was curious your view on how over time when you have tons of instant checkout solutions available in the market, how those might be prioritized or presented to consumers. And at the same time, how you're positioning as the merchants platform might advantage, say, Shop Pay in that type of scenario. Harley Finkelstein: I mean, look, that's the value of Shopify and these relationships. The reason that we're able to be front and center, whether it's obviously OpenAI or it's companies like Microsoft or Perplexity, is that fundamentally what's most important is that these agentic products have the best brands, the best brands are on Shopify. Now in terms of the Shop Pay thing, I mean, look, Shop Pay in Q3 processed almost -- I think it was $29 billion in GMV, which is up like 67% year-on-year. It's now processed over $280 billion. So the fact that it is the #1 accelerated checkout on Shopify means it's becoming very popular amongst consumers that are very discerning when it comes to buying from the brands they love, which again are on Shopify. So our mission is to make sure that merchants and [ Shopify ] are best set up. The way that we bring it to these partners is that we make sure that it's the easiest way for these agentic products to get access to all the brands that the consumers are looking for, but also to do it in a way where the technology stack is really simple. This idea of creating this agentic kit, which allows these partners to plug in, checkout, to plug in our Catalog means that it's kind of a no-brainer to work with Shopify. In terms of which accelerated checkout they'll use, the more people that you Shop Pay, which, of course, is growing amazingly well, means that we just will have more of an advantage. Now again, this is still very, very early days for agentic. Obviously, we've been planning for this for years now, but we'll see how things progress. But we think Shopify and our merchants are incredibly well positioned here. Carrie Gillard: Our next question comes from Andrew Boone at JMP Securities. Andrew Boone: I wanted to go back to the marketing investments and given the fact that MRR is just a little bit complicated at this moment. Can you just help us understand the guardrails and what you're seeing in terms of the efficiency of that spend? And then how should we think about that as we think about next year? Harley Finkelstein: Yes. Maybe I'll start there on the marketing side and then Jeff can jump in to some of the MRR stuff. Look, I think we've said it on almost every single call, but Shopify, we are a growth company, and we are focused on driving merchant growth, which leads and fuels our growth. If we see opportunities to lean and accelerate growth in key areas, we're going to make that decision. But ultimately, marketing is an area where we have a lot of flexibility. So let me be very clear. We really like this approach. Our investments in marketing are working really well. It's driving merchant adoption across verticals, across industries, across geos. I mean obviously, you're seeing that happen really well right now in Europe. And for Q4, we don't expect any change in the environment. So we're going to keep spending money where it makes sense. That being said, we have very tight guardrails to make sure that where we spend marketing dollars, we do have the appropriate returns. And you guys have heard us talk about this on the previous calls, where we just see opportunities for us to double down in one particular area or one vertical, we double down on it, we see the payback from that fairly quickly. So we're going to keep doing that. But this is an area -- marketing is an area where we have a lot of levers. And when we do see opportunities, we're a growth company, we want to win. Maybe I'll hand it to Jeff on some of the MRR side. Jeff Hoffmeister: Yes. I would add 2 points. One, Andrew, I think as we look at -- and I referenced this a little bit on our call. When we look at our merchant acquisition engine overall, we're very pleased with what it's doing. I recognize some of the noise, as you allude to, in looking at MRR in terms of some levels of comparability. I would point out, and I gave the percentage of MRR, which was Plus versus the remainder obviously being Standard and point of sale. And when you look at the Standard piece, this was the first quarter where we had sequential growth. We were up 4% the last few quarters. It's been flat, but that's purely a function of the paid trials, because Q3 was really the first quarter where you had a clean sequential comparison, because Q1 was when we were essentially finishing the migration back to 3-month trials. So that was, in terms of looking at Q2 versus Q1, that was not a clean comparability opportunity for you when you look at Q3 versus Q2, it's up 4%. We're still going on a year-over-year basis. We're going to still have some headwinds until we get to Q1 of next year, because of the timing of the paid trials. But we certainly expect with what the merchant acquisition engine is doing, as Harley mentioned, no change in marketing philosophy, that we feel good about what we can do in terms of merchant adds. Carrie Gillard: Our next question comes from Siti Panigrahi at Mizuho Securities. Sitikantha Panigrahi: I just want to dig into the enterprise business. Could you talk about the success there in changes to the go-to-market and pipeline there? And then specifically, as you're expanding in the enterprise segment, displacing some of the incumbents, how should we think about the take rate from that segment? Harley Finkelstein: Thanks, Siti. I'll take that question. Look, I mean, just to say the thing, I mean, the enterprise is migrating to Shopify. I mentioned last quarter, some of the largest companies in their respective verticals are coming. Obviously now, companies like e.l.f. Cosmetics or Estee Lauder joining us is -- should tell you that the pipeline that we are seeing is quite incredible. Not to mention brands that we talked about a couple of quarters ago, Michael Kors, David's Bridal, Goop, Mejuri, they're now fully launching on it as well. So I think it's not just that we're winning the enterprise in one particular vertical. It's a broad spectrum verticals, and I think that strengthens our platform. We're also being able to go after more international merchants now with proper go-to-market in places like Europe, for example, obviously, our core markets, North America, Australia and New Zealand, Canada are still doing very, very well. But it's still -- I mean, it's hard to say this because I'm mentioning all these great names, but it's still fairly early days for enterprise. I think we are the best positioned to attract merchants while making sure that the existing ones also improve efficiency. This is also we're seeing a lot more partner-led deals. We're seeing Europe and Japan do really well right now. I think a lot of these companies are -- these large enterprise, especially the more -- the older ones, the ones that have been around for decades, they're having conversations in their boardrooms talking about where do we go to future-proof platform, where do we go to make sure that we don't miss out on agentic commerce? And all roads lead to Shopify. So whether it's food or manufacturing or education or even automotive, these are verticals traditionally we didn't go after, and now we're winning them. And we're winning them both from in-house built custom solutions, we're also winning them from some of the larger -- we're displacing a lot of the larger existing enterprise platforms. And I think it's because of the product and, frankly, on the value side, the price-to-value of Shopify's enterprise product is simply best-in-class. And so we're going to keep winning these larger deals. I'm deeply involved in this particular area of our business. I often am and on the calls with the CEOs of these companies. And what I hear is that they're looking to future-proof their business, they want to sort of have what they call their final migration, and Shopify is that partner for them. So I think you can continue to see some of those incredible brands, consumer saver brands continue to migrate to Shopify. Jeff Hoffmeister: Yes. And Siti, the only point I'd add, because you referenced the attach rate, one of the things that you see in our enterprise business, of course, is all these brands that Harley talked about, is we have more and more success bringing more and more of these large GMV brands on the platform. That obviously gives encouragement to even more brands to follow behind and continue to adopt all the great solutions we have. And so I think we're at the front end of the funnel in terms of a lot of these larger enterprises maybe starting with just Payments. But when you look at what we're seeing over time, compare that funnel to how many are also taking point of sale or taking other elements of our business, whether installments, some of the cross-border things we're doing. And so this, in a good way is a multiyear step in the right direction as we continue to have merchants take on, especially the larger merchants, take on more and more products from us. So we feel good about while there's short-term headwinds with attach rate, what that means long term for our business is a positive. Harley Finkelstein: It is also quite interesting to watch some of these merchants, these very large enterprises, first come to us for a very specific commerce component. So they'll come to us really just talk about Shop Pay, or just to talk about checkout. I mean our checkout, obviously, we think, is the best in the world. And frankly, checkout is so complicated. And we've really nailed checkout on a global scale and -- for scale for these massive merchants. But it's so interesting to see them first come to talk to us about exploring, "Hey, we just want to talk about checkout." And then within a couple of weeks, it's a full stack. It's, "Hey, we want all of Shopify now." That sort of land-and-expand strategy that we've been implementing for the last couple of years, maybe the last 2 or 3 years or so, it's really starting to work out. And it's really cool to see these brands moving from just one thing to saying, "Yes, just give us all of Shopify." Carrie Gillard: Moving on to the next question comes from Michael Morton at MoffettNathanson. Michael Morton: Harley, today, you've talked about product search. Tobi talked about it, changing on the cheeky pint. And I would love to know, I know Shopify has a model you will always be where commerce occurs. But as you see product search changing in conversational commerce, what do you envision happening for the product discovery funnel? Does that compress? And then in your world over the next several years, how do you see the winners and losers of the e-commerce landscape evolving? Is it more merit focused on brands, as Tobi referred to in the past? Anything on how you see the world playing out, not your product road map, but what you see commerce looking like several years from now, I think, would be really beneficial to investors. Harley Finkelstein: Yes. Great question. We think about this a lot. Let me say this. I think there's going to be different permutations of how agentic commerce will evolve, how conversational commerce will evolve. It's really exciting. We're all talking about it, we're all excited about it. But the way that Shopify and the way that, certainly, Tobi sees it, ultimately, who's really thinking about the vision around our product he's the one that really understands more than anyone on the planet how commerce and, certainly, retail is evolving, is that whatever permutation will emerge, that we have to be prepared for whatever path wins. That was the same thing when social commerce starts to get a lot of attention or when this idea of it's not e-commerce versus physical commerce, but it's going to be this idea of commerce everywhere. We think that one of the advantages of being on Shopify will be that we are everywhere that commerce is happening, and we always aim to get there first. So in terms of exactly how these conversations are going to happen, what we're building right now are these deep connections to AI agents. So when a shopper asks, it's a Shopify merchant who appears and that is powered by our Catalog. The idea of this Catalog where buyers ask for products and the agent searches millions of items and displays interactive product cards directly in the chat, where the product is robust, it's in real time, it is accurate inventory, localized pricing, [ even if it is ] like smart product clustering, that's what we're bringing to these agentic tools. And I think in terms of your question around who is going to win on the brand side or the retailer side, the one thing that I will say is this has been happening for years, but you're seeing it now more than ever, is that consumers are really voting with their wallets to buy from brands that they absolutely love. And we've always said that Shopify is the place where consumers go to buy things that they want, things that they have a connection to. More and more, if not entirely, those brands are on Shopify. The reason that I spend time on these earnings calls and, frankly, all day long talking about all the brands coming on to Shopify is I love the fact that these brands are coming on. It's very personal and it's also -- there's a lot of pride for us at Shopify that the biggest companies on the planet are choosing us. But what I'm also trying to suggest is that consumers' favorite brands are on Shopify, and those consumers, they have a different connection with those brands than maybe they historically did where it was just some sort of staple item. And so I think brands that have incredible product and incredible brand and incredible connection with the consumer, those are the ones that are going to win ultimately. And we're really fortunate that those are the brands that are on Shopify. Carrie Gillard: Our next question comes from Todd Coupland at CIBC. Thomas Ingham: I'm wondering if you can talk about your view of the state of the consumer by geography and post tariffs now that we've seen a little bit of data there. Harley Finkelstein: Maybe I'll start with the consumer, and then, Jeff, you can talk a bit about tariffs. Look, consumer confidence for us is measured at checkout. That's the truth. That's what we look at. And on Shopify, shoppers keep buying, they keep returning and demand remains really resilient across channels and categories. So I can only comment on what we see at Shopify, but whether it's the GMV, but like I said earlier, consumers are more selective right now and they're buying from brands they love and those brands are on Shopify. And I think even our Q4 outlook suggests that. But we're not complacent. I mean this is not a place where we rest on laurels ever. We always monitor these macro factors, whether it's consumer spending, it's household savings, tariffs, frankly, even FX trends and supply chains with a lot of our partners. But the strength of our merchant cohorts are pretty clear. I think quarter after quarter, they're growing faster than the broader market. In terms of geo, I mean, obviously, Europe is definitely gaining traction for us. I mentioned that in my prepared remarks, which we expect to continue. But again, if you look at consumer [ confidence ] measure at checkout, you saw it through the GMV this quarter, $92 billion. We see that the consumers that care about brands that are buying from brands they love, they're buying them from Shopify stores. Jeff Hoffmeister: Yes. And Todd, on some of the tariff pieces, on my call -- sorry, on my prepared remarks, I mentioned that there's not been a whole lot of change what we've seen this quarter versus the prior quarters. There was a little bit of a downtick in what we're seeing in terms of merchants and in terms of how they're raising their prices. We've basically been tracking that since April when there was a bunch of tariff changes, obviously, in the U.S. It's ticked down a little bit versus what we had seen before. Pretty much everything else has been consistent versus last quarter. When we look at the trade routes, when we look at the percentage that is inbound versus outbound in the U.S., when we look at what we're seeing on de minimis, we've not seen any significant impacts on our merchants, at least from what we can tell from the data we have. We obviously put a lot of primacy in our proprietary data. We don't have as much visibility admittedly into some of the P&Ls of our merchants, so we can see from a price perspective what they're doing. Some of them are obviously choosing to, as they think about some of these price levels, pass those on to consumers in some way. And I think others are basically choosing not to do that, and it's impacting some of their own P&Ls. But you can see this in our GMV, our merchant base remains strong, they're adapting quickly. And we're trying to do everything we can to help them on cross-border. So from a tariff perspective, between the April announcements and then obviously the elimination of de minimis, things have been relatively constant from our vantage point. Carrie Gillard: Our next question comes from Trevor Young at Barclays. Trevor Young: Great. Can you expand upon Shopify campaigns? How do merchants get ramped onto campaigns? How do the economics work? And what do you foresee as the revenue opportunity from that initiative over the next few years? Harley Finkelstein: Yes. I mean, look, I think customer acquisition remains one of the hardest problems that merchants face. We've been working on this for quite some time now. And the way we're sort of looking at it is solving this problem in kind of 2 primary ways. The first is on shop campaigns, which I'll get to in a second specific to your question. The second is on sort of discovery and merchandising enablement, which Shop app obviously plays a role in with helping merchants drive more traffic, increase lifetime value and then Shopify Collective plays a role there as well. Specifically on campaigns though. I mean, what we're really trying to do is we want to run commerce-native performance ads across these high-intent services. And our strategy has been and continues to be to reinvest any gains we achieved through the ads business back into the growth. We want to ensure our advertising inventory and our scale continues to grow. And the proof has been really great. I mean we've seen 9x year-on-year increase in budget commitments from merchants this quarter for campaigns. In fact, if you just look at Q3 2024 to Q3 2025, we've actually seen a 4x year-on-year growth in merchant adoption of campaigns. So it's going really well. And on the product side, this thing keeps getting better and better. We introduced Gross Sales, which is this new default high-reach objective in campaigns. We just shipped an AI-powered ranking improvement, which is showing some really good early results in terms of performance gains. But net-net, I mean, what we're trying to build with campaigns is the scaled, ROI-positive ad engine that really brings merchants more buyers and also unlocks more brand discovery to connect new consumers. So again, this is an area that we're going to continue to work on. We think that early signs have been good. But we -- whenever there's a merchant pain point, we always much prefer to solve it for them than have them solve it themselves. And I think customer acquisition is one of those that we're going to keep working on, and it's already going pretty well. Carrie Gillard: And our last question will come from Mark Zgutowicz at Benchmark. Mark Zgutowicz: Harley, on the last quarter's call, you mentioned more to come on advertising opportunities. And if we think about your merchant spending, roughly 20% of their GMV on advertising, is there a longer-term strategy in terms of a piece of that you want? Maybe if you could talk a little bit about that. And then specific to ChatGPT, I'm curious if there are ad rev share opportunities there with -- in the future with promoted or sponsored listings for you. Harley Finkelstein: Yes. I mean I'm not going to talk about any particular economics of any particular deal. What I will say when it comes to how we make money from these channels is we've always been able to monetize when our merchants do better. So this idea that merchants sell more, Shopify makes more, we monetize through GMV, we monetize through Shopify Payments. That will always be the case across any new channel. And any specific individual deal that has additional economics, we're not -- we don't disclose. To your first part of your question around sort of ads, as I said in the last question, it still remains one of the hardest problems merchants face. We think we can do a better job. We have a ton of data, we have a ton of scale to do this with. The goal here with -- when it comes to advertising for us is that we want to drive greater scale against this opportunity. The way that we do this is we were testing, we're measuring and we're reinvesting to drive really great outcomes for merchants in the future. I still think it's still in early stages. I'll give you a little nod to the fact that you should tune into our next Shopify edition, if you're interested in ads because we're going to spend some time on that as well. But this idea of focusing both on campaigns and then also focusing on the discovery and the merchandising elements through the Shop App and Collective, you're already sort of seeing quite a few breadcrumbs that we're laying down here to show that this is an area that we think we can add even more value to. And again, it's one more thing that we do. We want to make sure that the relationship that we have with the millions of stores who use Shopify is way more than simply being just some software provider. We are their partner in commerce. And as commerce gets bigger and more complicated and more interesting, that they can continue to rely on us to be their partner. It's the reason why the biggest brands come to us and it's the reason why they stay with us. Maybe I think it was the last question, so maybe I'll just spend a quick second or 2 just on some closing remarks, as I've been doing the last couple of quarters here. I just want to kind of say this in case it's not clear, but I hope what is obvious now to all of you is that we are doing exactly what we said that we'd do quarter after quarter. We built AI agent tools last year, now we're partnering with everyone that matters. We built Sidekick 2 years ago, well before any of the hype around that. And in Q3, 75,000 -- excuse me, 750,000 shops used it for the first time. 8 million used it, in October alone, we saw 8 million conversations happen there. So we built enterprise on-ramps into Shopify almost half a decade ago. And now the Estee Lauder Companies, David's Bridal, Aldo, Michael Kors are all choosing us. We're not guessing the future of commerce here. We're really building it. And the thing that I'm most impressed with and most proud of at Shopify is that I think we're balancing 3 critical things simultaneously here. You're going to see us investing aggressively to capture these opportunities. You're seeing us maintain profitable margins, I think, that demonstrate our discipline. And you're also seeing us deliver durable results quarter after quarter. And that is compound execution. And I don't think there are many companies out there that can do all 3 at once at this scale, and we are doing that. So with that, I just want to say thanks for joining the call. And on behalf of Jeff and Carrie and I and the entire Shopify team, we're back to building for our merchants. Thank you so much for joining. Carrie Gillard: And that concludes our third quarter 2025 conference call.
Operator: Welcome to Hertz Global Holdings Third Quarter 2025 Earnings Call. [Operator Instructions] I would like to remind you that this morning's call is being recorded by the company. I would now like to turn the call over to our host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead. Johann Rawlinson: Good morning, everyone, and thank you for joining us. By now, you should have our earnings press release and associated financial information. We've also provided slides to accompany our conference call, and these can be accessed through the Investor Relations section of our website. I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not a guarantee of performance, and by their nature, are subject to inherent risks and uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of today's date, and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements, including factors that could cause our actual results to differ is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section in the filings that we make with the Securities and Exchange Commission. Our filings are available on the SEC's website and the Investor Relations section of the Hertz website. Today, we'll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release and earnings presentation available on the website. We believe that these non-GAAP measures provide additional useful information about our operations, allowing better evaluation of our profitability and performance. Unless otherwise noted, our discussion today focuses on our global business. On the call this morning, we have Gil West, our Chief Executive Officer, who will discuss strategy, operational highlights and our fleet. Our Chief Commercial Officer, Sandeep Dube, will then share insights into our commercial strategy, followed by Scott Haralson, our Chief Financial Officer, who will discuss our financial performance and liquidity. I'll now turn the call over to Gil. Wayne West: Thanks, Johann. I want to start by thanking our teams for their exceptional work this summer. Their disciplined execution is moving this transformation forward, and I'm grateful for their continued commitment of delivering for our customers every day worldwide. We said it would take consistent dedicated effort to rebuild this company's foundation no matter the macro environment by focusing on what we can control, disciplined fleet management, revenue optimization and rigorous cost control, and that is exactly what's happening. This quarter, we achieved $2.5 billion in revenue and delivered adjusted corporate EBITDA of $190 million, a $350 million year-over-year improvement and positive EPS for the first time in 2 years. In Q3, we completed our transformative fleet refresh hitting another major milestone and setting a new standard for our sales and the life cycle of our vehicles. With our younger fleet, we also achieved a record high utilization rate since 2018. While we could not control at 2% of our U.S. fleet was under recall, being able to drive record utilization in that environment shows that even when headwinds get in the way, we're able to deliver strong results. Managing with rigor also means keeping our customers at the center of everything we do. Our Net Promoter Score continues to rise, up nearly 50% year-over-year in North America with measurable improvement in ease of rental and confidence in vehicle quality. Fundamentally, Hertz is an asset management company built on a century of buying, renting, and selling vehicles at scale. That's why we set North Star metrics to guide the improvements to our core rental business and ensure operational excellence comes first. This quarter, we maintained our sub-$350 DPU goal, overcame cost headwinds and inflation to lower DOE per day, both year-over-year and sequentially while continuing to execute initiatives that are driving us closer to the low $30 and made solid progress towards our annual target RPU of over $1,500. These results continue last quarter's momentum and show we're doing what we said we'd do. Our progress is steady, our heads are down, but our eyes are on the horizon. Transforming a 100-year-old company requires executing with discipline today while building, testing, and innovating for tomorrow. That's why our North Star metrics aren't the finish line. They're the stakes we're putting in the ground to rebuild our foundation. Through this work, we're sharpening our skills, enhancing our systems and creating a platform for growth. While our near-term priority remains transforming our rent-a-car business with operational rigor and a relentless customer focus, we're simultaneously laying the groundwork for a diversified value-creating platform. That platform spans four strategic areas: rent-a-car, fleet, service, and mobility. Today, these fuel our core rental business, but we see unique opportunities for each to scale and synergies between them all, unlocking new revenue streams across the entire enterprise. It's still early, but the actions we're taking are already revealing what a bright future for Hertz looks like. Let's start with the fleet, a powerful economic lever. We've transformed our fleet from a headwind to a competitive advantage by continuing to hone our skills, sourcing vehicles optimally, deploying them effectively, and monetizing them strategically. Today, our U.S. fleet is newer and more aligned to customer preference than it's been in years. With the refresh complete, our average fleet age is now under 12 months and we're positioned to sustain a modern fleet aligned with our DPU North Star metric. Model year 2026 buys landed with both price and volume hitting our targets, unlocking model year 2025 sales and activating our short-hold strategy. Shorter vehicle life cycles sustain favorable fleet economics and enable additional unit cost efficiencies in our service operations while also driving stronger residual values in the used car market, reinforcing our retail car sales momentum. which brings us to the big story this quarter, Hertz car sales. For 50 years, Hertz car sales existed as a valuable but under-leveraged business line and dormant brand. We've been working to transform it from a simple fleet rotation mechanism into a profit accretive engine, one that not only strategically monetizes our fleet but expands our relationship with our customers from rental to ownership. We have all the tools traditional dealers have, plus significant built-in advantages. We own and service hundreds of thousands of cars with a consistent inventory pipeline. We're essentially a used car factory that rents to millions of loyal customers who test drive our cars every day. Those differentiators guide our strategy. As such, we're meeting customers where they are and capitalizing on what makes Hertz unique. A great example is our rent-to-buy program, which offers a 3-day test drive before you buy. This leverages our competitive advantage to convert renters into buyers and is now available in more than 100 cities and is working. 70% of our rent-to-buy customers purchase their vehicle, far exceeding traditional dealership conversion rates. With a few notable exceptions, car buying remains a largely antiquated and fragmented industry, and we're here to compete. Our view is simple. Customers shouldn't have to choose between digital ease and dealer confidence. Our strategy connects both worlds, meeting them however they choose to buy with a trusted global brand. So partnering with Cox Automotive, we're further advancing our digital retail channels. We now have a full-service e-commerce site with financing and delivery, turning a browsing tool into a transaction engine. In August, we launched Hertz car sales on Amazon Autos, letting customers browse and purchase our vehicles with one of the world's most trusted retail services. These digital innovations create an omnichannel experience that we believe only Hertz can offer. We strengthen -- our strengthened foundation enables partnerships like Cox and Amazon, giving us flexibility and speed to move from strategy to execution. It's early, but by scaling our direct-to-consumer and e-commerce channels, we're positioned to capture $2,000 or more incremental margin benefit per vehicle versus wholesale channels. And this is all while maximizing fleet utilization by renting vehicles right up until they're sold, reducing holding and selling costs, leveraging real-time AI pricing and capturing back-end finance and insurance revenue. This is just the start. Our goal is to scale these channels so the vast majority of vehicles sell through e-commerce retail. We will execute this effectively, harnessing our fleet size and broad customer base. Every Hertz renter becomes a potential buyer and vice versa. Just as Hertz car sales will create new value and scale, we see the same opportunity across other areas. This company cannot and will not rest on rent-a-car alone. The skills and capabilities we're building through our transformation are strengthening our operations while creating the foundation for diversified growth. It's a platform spanning rent-a-car, fleet, service and mobility that can expand into complementary revenue streams from servicing customer vehicles and scaling Hertz car sales to expanding rideshare partnerships and managing AV fleets. With each area sits at a different maturity stage. But together, they reinforce one vision, turn Hertz into a value-creating mobility platform that meets customers wherever they are. And wherever mobility goes next, from today's rental and ownership models to tomorrow's connected and autonomous vehicle ecosystems, we'll share our momentum as these capabilities mature and demonstrate the tangible results behind our strategy. Near term, our focus remains disciplined fleet management, revenue optimization and rigorous cost control and ensuring each area of our business powers the next and can grow. We're proud of this transformation's progress, but we are most excited about what is to come. What excites us most is how much more the Hertz platform can become. With that, I'll turn it over to Sandeep to walk through the strategic actions we're taking and the progress we're making on our rental business. Sandeep Dube: Thanks, Gil, and good morning, everyone. As we continue to improve fleet economics and agility, we are leveraging that momentum to action our commercial strategy. By maximizing asset productivity and strengthening pricing through enhanced customer experience, diversified durable demand and advanced revenue management actions, we have positioned ourselves to deliver both near-term gains and long-term value. This quarter, we delivered sequential year-over-year improvement in revenue, RPU and RPD while achieving record utilization. While we actively manage RPD, we prioritize RPU because it captures both rate and utilization. This helps our team balance rate and days, giving us a truer measure of the revenue generated by each vehicle in a given month. This is especially relevant for lower rate, longer keep rentals like those in our rideshare and off-airport segments, where costs are lower and rentals are longer. RPU came in at $1,530, nearly flat year-over-year and sequentially improved through the quarter on a year-over-year basis. Internally, we also track RPU across our total fleet, which includes all vehicles irrespective of operating status, whether in service, out of service, or in our car sales inventory. RPU on total fleet better measures our economic progress, and that metric improved 2% year-over-year. Breaking RPU into its components, let's dive into utilization first. As Gil mentioned, we delivered record utilization since 2018 of 84% this quarter. Days were nearly flat, thanks to our strategic ability to offset the impact of recalls despite our decision to operate a 7% smaller fleet overall. This utilization rate, which excludes vehicles being held for sale, improved by 260 basis points year-over-year. Utilization across our total fleet, a term which I just defined a moment ago, showed a more substantial improvement of 460 basis points. This improvement was driven by better process management of our car sales inventory. This utilization performance didn't happen by chance. It's the product of sharper coordination between fleet planning, technical operations, and revenue management, aligning capacity to demand in real time, reducing out-of-service units and accelerating vehicle redeployment. Turning to pricing, which as we discussed last quarter, remains our largest unlock to fuel RPU growth. Our sights are set on delivering a positive RPD for a comparable asset class. Global RPD was down approximately 4% year-over-year. RPD was negatively impacted 2% year-over-year by changes to the fleet mix. Within the quarter, July RPD was down over 3% for a comparable fleet mix and improved by September to down 2%. Encouragingly, October RPD performed even better. The results in late Q3 and October incorporate some of the short-term wins that have come from a critical review of our commercial strategies and tactics. Many of these haven't been innovated for years, and we have been acting upon them with urgency, including driving a better customer experience, which leads to better pricing power, generating greater durable demand from higher-margin channels and segments, including continued diversification beyond airport, improving our pricing tactics and strategies, elevating our revenue management tools and processes, monetizing our higher RPU assets more effectively and integrating world-class commercial talent into our team. The improvement in Q3 was powered by an updated booking curve strategy, enhanced revenue management tools, stronger value-added service monetization and local level fleet mix optimization. As I mentioned earlier, October RPD performed better than September. Looking ahead at the rest of the fourth quarter, there is some softness in the remaining months, driven by seasonal leisure troughs combined with the impact of the government shutdown. Over the next few quarters, we expect our efforts to gain further traction, fueling our ultimate objective of achieving absolute price increases across comparable asset classes. For an insight into what's to come, let's detail the initiatives a bit, starting with delivering better customer experience, a pathway to greater repeat business and brand advocacy. Our focus is on delivering greater consistency, convenience, and care across our customers' rental journey, knowing that when we invest in our customers, they invest in us. Great customer experiences start with great employee experiences. This quarter, we focused on reconnecting our employees around the world through new communication channels and giving them the right tools to succeed. We rolled out a new customer experience training, empowering our customer-facing teams with new approaches to get it right and make it right each time. We also leveraged technology to deliver a smoother customer experience, including making it easier to modify reservations and purchase upgrades digitally, enabling self-service rental extensions and building on customer trust through improved post-rental communications. The AI-powered chat and call support launched earlier this year now services 72% of U.S. inbound chats, delivering faster resolutions and improved satisfaction while also delivering cost efficiency. As Gil said, these improvements translated into a nearly 50% increase in our North American Net Promoter Score versus last year, a clear signal that customers are noticing the difference. To help build further momentum, we welcomed a seasoned leader yesterday as our new Chief Customer Experience Officer. This last quarter, we made progress on growing and diversifying durable demand, a strategy important in growing RPD as it enables us to curate our portfolio by weaning off lower-yielding demand. In the U.S., app bookings increased by 800 basis points year-over-year, making the app our fastest-growing channel. We simplified membership sign-up and added exclusive benefits, driving U.S. Hertz loyalty member enrollments up over 90% year-over-year. Previously, we said we would further diversify revenue streams through our off-airport and rideshare business lines. These combined business lines showed year-over-year sequential revenue improvement, a dynamic which is RPD dilutive, yet RPU and EBITDA accretive. This diversification approach expands scale, drives utilization, especially during truck and shoulder seasons and feeds the flywheel across all four of our verticals. We are also reexamining every aspect of revenue management. The advancements we are making go well beyond the multiyear transformation of our pricing systems and present a significant opportunity. We are improving the demand funnel with the goal of delivering a healthier upward sloping pricing curve for our various segments. Part of October's pricing improvement can be attributed to this work, and we believe we'll unlock greater value as we progress. We also strengthened our revenue management leadership team with a world-class pricing and revenue management systems leader. His experience will help us deliver smarter pricing strategies that maximize value for both our customers and our business. Alongside these commercial upgrades, we are transforming how local teams operate, ensuring we are adapting our strategy to each market's unique demand and opportunity. New dashboards and analytical tools now give field leaders visibility into pricing, utilization, and customer satisfaction drivers in real time, equipping them to identify opportunities and act faster. This shift represents more than a process change. It's a cultural one. We are empowering our teams to think like owners and build lasting trust with every customer. So stepping back, the playbook is working and the results prove it. Better customer experience is increasing loyalty, driving more durable demand. Our revenue management transformation is off the starting blocks led by world-class talent. Revenue metrics improved through the quarter, including a pathway to better RPD. With that, I'll hand it over to Scott to walk through our financial performance and liquidity. Scott Haralson: Thanks, Sandeep. Good morning, everyone, and thank you for joining us. I want to congratulate the team on a great quarter. We achieved our first positive EPS in over 2 years, improved RPD and RPU, record utilization and a major leap in NPS scores. That's great stuff, and we are all proud of the progress, but we're only getting started. Tech, we've barely begun. Our focus doesn't stop with being just the best rental car company. Our vision expands beyond that. If our goal was to just be the same old rental car company in the same old industry that has largely been the same for a couple of generations, the value of our business would be limited. Now that is not to say that the rental car business isn't important. It is, very important, critical, in fact. And we'll strive to be the best in the world, but we view it as a stepping stone to bigger ideas. We're building a diverse platform of value-enhancing capabilities that could make Hertz considerably more valuable than today. It's hard to look past the near-term quarter-to-quarter year-over-year metrics the industry typically focuses on. We just don't view them as the ultimate predictors of real long-term value creation. It will be our job to figure out how to eventually tell the story in a way that highlights that value. Over time, we'll publicly release the components of our platform as they become ready, like we have with our digital car sales platform. We had to start with our rental car fleet in order to turn the rental car business up right. There was no avenue to pursue the extended vision until that was progressing. We've been refining our vision over the last year or so and are still doing that today. We have said all along, this wasn't a quick fix, and we couldn't yet articulate our expanded vision. So we are starting to now. Now changing course, let me give you some details on the numbers for the quarter, our view on Q4 and a framework for 2026. Revenue was $2.5 billion and adjusted corporate EBITDA was $190 million, an 8% margin within guidance and up roughly $350 million year-over-year. We also posted net income of $184 million and positive EPS for the first time in 2 years. Our International segment saw increasingly strong margins with larger RPD and RPU gains as the international market is seeing a strong pricing environment globally, RPU was $1,530, nearly flat year-over-year but improving sequentially through the quarter. Transaction days were almost flat versus Q3 of 2024 despite a 7% smaller fleet, with utilization reaching the highest number in more than 5 years at above 84%, even with more than 2% of the U.S. fleet impacted by OEM recalls. That's the operating model working, tighter fleet, sharper deployment, better productivity. Our buy right, hold right, sell right strategy continues to anchor fleet unit economics. DPU was $273 per month, in line with expectations, supported by healthy residuals and disciplined channel management. As planned, gains on sale moderated with lower volumes with overall fleet returns remaining balanced. On cost, discipline is sticking. Direct operating expenses declined 1% year-over-year and DOE per day improved both sequentially and annually despite inflation and smaller scale. SG&A remained tightly managed as technology and process leverage flowed through. This is the kind of durable cost posture we set out to build. We ended the quarter with $2.2 billion of total liquidity, including about $1.1 billion of unrestricted cash and the balance in revolver capacity and generated approximately $250 million in positive adjusted free cash flow. We had a $154 million benefit in the quarter from cash received from the previously disclosed litigation settlement distribution. Our ABS programs remain healthy with ABS vehicle fair values comfortably above net book values and market access is solid. In September, we completed a $425 million senior unsecured exchangeable notes issuance. We used cap calls to increase the effective strike price of the notes to $13.94. At least $300 million of that will be used to partially redeem our $500 million bond obligation that matures in December of 2026. The remaining balance is our only corporate maturity in 2026. Looking to Q4, we expect transaction days to be close to flat year-over-year, even with our expected fleet to be down just under 5%. Total fleet utilization will face an elevated number of fleet recalls, but should remain solid. We also expect lower DOE per day by roughly 5%. This outsized number is primarily due to a large true-up expense we took in 2024 related to our insurance claims reserve that shouldn't reoccur this quarter. Excluding that, DOE per day would still be down about 1% to 2%. We are, however, seeing a large number of vehicles being sold at auctions in the quarter, which is having an effect on residuals in the period. We believe this to be isolated to the quarter, but it will likely have an effect on used car pricing for Q4. Given that, we expect net DPU to rise slightly quarter-over-quarter to $280 to $285 per month. For revenue, while you heard from Sandeep around the positive pricing trends in October, the softness in the remaining months of the quarter seem to potentially be government shutdown related and are likely transitory. We do expect the peaks of the quarter to perform well. The softness will likely sit in the troughs, which Q4 has a large trough to peak spread given Thanksgiving, Christmas, and some New Year's impact. Also, in October, we experienced three different external system outages at three of our larger infrastructure vendors. Two of the events were isolated to us, but the other one affected multiple companies. We are certainly not happy about the ineffectiveness of the redundancies at our vendors. These outages will likely cost us about $10 million to $20 million of revenue in the fourth quarter. While isolated to this quarter, we are taking further steps to reduce the likelihood of these types of events in the future. As a result of all the Q4 moving pieces, we have updated our Q4 guidance to a slightly negative margin range of negative low to mid-single digits EBITDA margin. So let's talk 2026. While there has been some recent dust in the air for Q4, we are cautiously optimistic for a stable setup for next year. Our fleet is in a good position for continued rotation and growth of Hertz car sales with model year 2026 vehicle purchases progressing nicely as we now have more than 80% of purchase volume already procured with line of sight to a good bit more. We still expect to have run rate net DPU well below $300 per month. For capacity, we are looking to start growing the fleet again in 2026, but doing it the right way. With the three usages for vehicles being: one, our on-airport rental business; two, our HLE or off-airport locations; and three, our rental car adjacent mobility business. Each has different levels of maturity and different growth opportunities. For 2026, we expect to grow the mature airport business at GDP-like levels in the low single-digit range. Our HLE or off-airport business is less developed and has more white space for us to grow. So that business will likely grow in the mid-to-high single-digit range. And lastly, our emerging mobility business has a large amount of runway and will likely grow in the 10% to 20% range next year. All of this together should put us in the mid-single-digit growth range in transaction days and a somewhat smaller number in growth of the fleet with the ability to increase or decrease with minimal lead time based on market dynamics given our fleet flexibility. This is likely the same framework we would see again in 2027 as well. We expect that our continued revenue management initiatives as well as continued cost performance, along with DPU and capacity assumptions in 2026 will drive a significant margin improvement year-over-year. We are targeting a 3% to 6% EBITDA margin for next year and putting us on our way to our target of $1 billion of EBITDA production in 2027. In closing, I am encouraged by the progress we've made in strengthening our rental car business. However, my true optimism lies in the possibilities unlocked by the diverse platform we're building. Car rental is an important piece of our business, but the horizon is expanding well beyond it. It is exciting to think about what Hertz could look like in the years ahead. With that, I'll turn it back to Gil for closing remarks. Wayne West: Thank you, Scott. This is another quarter where we delivered on our commitments. Proof that our strategy is working. That said, we know there's more work to do. We're holding ourselves accountable for the improvements we need to make by driving rigor across each of our North Star metrics and other key financials every day, every month, every quarter. We'll always strive to be the best rental car company we can be for our customers. But as you've heard, this work is more than that. It's about building on our foundation to create a truly diversified value-creating platform that gives our customers more and positions Hertz to thrive across the full spectrum of mobility. Understanding our customers and evolving to meet their needs is in our DNA. It's driven our success for the past 100 years and it's how Hertz will become more than a rental car company for the next 100. Our philosophy is simple. The best way for Hertz to be part of the future is to be in the service of it. The work we're doing to transform this company is deepening our skills and capabilities across all aspects of our business and giving us a foundation few others have. So while the future of mobility continues to evolve and AVs aren't yet ready for mass deployment, we're building the infrastructure and talent today for when they are, whether it's how our people buy or ride in cars or how the cars themselves change will play a key role. With that, let's open it up for questions. Back to you, operator. Operator: Our first question today comes from the line of Chris Woronka from Deutsche Bank. Chris Woronka: Gil, you've talked -- and this is back in the prepared comments, you talked about kind of becoming this -- I think you said value-creating mobility platform. Can you maybe unpack a little bit for us what that kind of means in practice and what the platform includes and maybe how, I guess, in your mind, creates value beyond the traditional and core rental business? Wayne West: Yes. Sure, Chris. Yes, thanks for the question. I guess, I would start just by saying, historically, we've subordinated everything to our rental car business, and we see additional growth and value creation well beyond that. So as I -- maybe I unpack some of that, I'll start with the rental car piece first and just reemphasize, this is our core business. It is job one for us to rebuild that core rental car business. We're making progress. I hope you're seeing that in the numbers, but we got a lot of work to do. So we're not going to be distracted from that is the key message, and we're going to remain focused, but we're far more than a rental car company. So the other pieces that I touched on there, the car sales, service, and mobility, maybe just pulling that back a little bit. The car sales, first of all, the strategy we deployed, the end-to-end buy right, hold right, sell right strategy. That really sets us up well for this, especially with the fleet rotation kind of being in the rearview mirror. And of course, we got an iconic trusted brand. So the way we look at it is we're trading large volume of cars annually, especially as we shorten the hold periods, that volume will increase even further. So we got -- we've also got a pipeline of discounted supply of vehicles. So as I said it earlier, we kind of have used car factories the way I visualize it. So we're producing well-maintained, low mileage, and I'd just add one owner cars with a natural footprint that puts us in the top 5 used car dealerships in the country. So we have scale and we got ongoing supply. We also take trades on vehicles. We can buy used cars in the market and have in the past. So just like other dealers, which generally is their only source of supply. So we got people, as we talked about, test driving our cars daily and a very large installed customer base. So we, in short, have real strategic advantages to other large dealers in the market that we just hadn't been exploiting. So unlocking the e-commerce side of this gives us capacity along with our existing physical footprint and infrastructure to create a scale retail sales model. So that's how we see the car sales side. Service, it's more early innings in service candidly. But we've got a deep and I'd just say, much improved core operating competency and infrastructure to service vehicles. And as you know, we've been cleaning and fueling and maintaining cars for over 100 years. So we've got the opportunity to monetize this core competency beyond just servicing our own vehicles and go direct to really a B2B and a B2C customers, and we're starting to action that. Again, the way we look at it, we got a global footprint of car washes, gas stations, EV charging stations, and repair or oil change shops. So a lot of potential with that footprint. And then finally, last but not least, the mobility part of our business. We're part of the future of mobility. We got great partnerships in rideshare now. We've been piloting some very innovative new models with Uber that we're beginning to start to scale as we go into '26. And of course, I think we're a natural player in the AV space as it continues to evolve. You heard that, I think, on our last earnings call, the rationale behind that. And we've got just an incredible team in the mobility business. So I'm really bullish on mobility as well. But look, everything comes down to execution, and we're staying focused, and we're pushing hard to execute. Chris Woronka: Okay. I appreciate all the details there, Gil. Very helpful. As a follow-up, I think we understand the gist of the strategy that's now well underway, which is rightsized fleet, newer cars, very high utilization. I think one of the things that maybe comes with that slightly smaller vehicle size, smaller purchase price, maybe less maintenance, et cetera. But the question is, are the economics on that -- on those, I'm going to call it, smaller vehicle footprint. Are the economics so much better because you would appear to be giving up a little bit of RPD and pricing on an absolute basis. And I'm curious as to whether that's just the customer mix or utilization, maybe it's rideshare or new accounts, whether it's corporate or leisure. Maybe you can just kind of give us a little tour of like how customer mix and things like that and maintenance and operating expenses are, I guess, accretive from smaller vehicles. Wayne West: Yes. No, it's well said. I think a couple of things. First, I would say on the mix side, I mean there are some RPD headwinds, as you noted. But the way we look at mix is that it's dynamic. So ultimately, we're trying to optimize and align our car class mix around customer demand, what are the customers booking, their willingness to pay and -- for that class, and then the car class unit economics and doing that at a market level, really. So when we think about our model year '26 buys in particular, I'll back up. Our model year '25 buys, to some degree, what was available in the market, coupled with our strategy to rotate and refresh the fleet, right, all that led to a fleet mix that was certainly a big tailwind for us on the macroeconomics of fleet, which is the biggest economic lever we have. But as we think about model year '26 and the availability that we're seeing, that gives us the ability to further improve in this area and get it more dialed in at a market level. So -- and then I think just to touch on model year '26s while I'm talking about it, the buys, as I mentioned, have really come in at the price and volume targets we were seeking, which keeps our DPU well below the North Star target we've been managing to. But it also unlocks our ability to sell off our model year '25 fleet. And as I mentioned, roll into our shorter hold strategy. And that helps us for the unit economics you mentioned, Chris, whether it's maintenance expenses or even our ability to sell easier into the retail side. But the reality is we're really working hard to change our paradigm in the sense of beginning with the end in mind. So when we're buying cars, we're selling them. We're really selling them in mind. So we've got the selling side in mind and trying to develop a real car dealership mindset. Operator: Your next question comes from the line of Chris Stathoulopoulos from Susquehanna International Group. Christopher Stathoulopoulos: On the outlook for the sub-300 DPU for next year, I want to understand the moving pieces here. So it sounds like this vehicle recall is perhaps going to spill into early part of next year. The '26 vehicle purchases seem to be largely in place. And so what other work needs to be done, I guess, with respect to mix and mileage to confidently secure that sub-300 number? Wayne West: Yes. I mean I'll start, Scott, you feel free to jump in. But I think the broader strategy that we've talked about, the end-to-end fleet strategy, buy right, hold right, sell right, that works in any environment for us, right? I mean you think about where we were 1.5 years, 2 years ago as we were really -- I mean, we had fierce headwinds on the fleet itself. And we -- through the fleet rotation, we've turned those around into tailwinds now with the model year '26s and the buys, again, the price and volume that we've seen, that helps us continue that model. In fact, it gets us to the short hold now with the volumes that really perpetuate our ability to hit our North Star DPU targets. Scott Haralson: Yes. No, that's right, Gil. I think Chris, good to see you. Yes, I think, look, what we're looking at today is a very similar platform in '26 we saw in '25. We expect generally stable residuals. We have good pricing on '26. So everything we're seeing and also the sort of channel management of how we dispose of vehicles will influence DPU. And one other point is that while this also even excludes the fact that our F&I revenue doesn't even hit DPU. It hits revenue. So we think we still have a good bit of benefit coming from the Hertz car sales that will benefit DPU, but ultimately impact revenue as well. So we're pretty bullish on the channels and how it affects DPU, but also total EBITDA. Christopher Stathoulopoulos: Okay. Great. And then, Scott, so I appreciate the color on the composition of the fleet for next year. So as I understand it on the airport side, GDP like off-airport, mid-to-high single digits, mobility 10 to 20. It sounds like you feel where you have the tactics in place to sustainably hit this sub-300. There are several efforts out there with respect to pricing utilization, customer satisfaction that Sandeep outlined that I'm guessing should result in lower DOE. So let's call that low single-digit growth. So is that all of these here, this fleet outlook, this sub DPU? Is it fair to think of those as, I guess, the algo going forward when we think about Hertz and I guess, it's pivoting towards this more of a sort of car sales, digital channel sort of focused platform? Scott Haralson: Yes, I'll start. I'm sure Sandeep and Gil want to chime in, too. I think it's a good initial view of the base platform, which is something we've tried to articulate in the call. The base rental car business, yes, DPU-driven DOE per day, RPD, RPU, those sort of historical metrics. Now I think over time, you'll see that get influenced by things that Gil referenced in the first question around some of the services and some of the things that are outside the traditional rental car and even some of the mobility things that we do today that we might do tomorrow. So obviously, our ability to sort of tell that story with additional metrics, additional color commentary might change over time. But I do think, yes, the base rental car business in the near term will be influenced by those things you mentioned. And we tried to outline that a little bit in our script that obviously, we hope to see organic and industry-supported RPD, RPU growth. We're going to drive some scale and efficiencies to get DOE per day benefits. We think the fleet setup is good for DPU. So all of those are foundational. But over time, I think you'll see a few more tangents start to hit. Operator: Your next question comes from the line of Ian Zaffino from Oppenheimer & Company. Ian Zaffino: I was just wondering if you could maybe just give us a little bit of color on just the quarter in general as far as what have you seen from international inbounds or corporate? And also maybe any markets that have been particularly strong or particularly weak? I know you referenced the government shutdown. Was that specifically D.C. area or anything else going on there? Sandeep Dube: And Ian, this is Sandeep here. Just for clarification, you're asking about Q4? Ian Zaffino: I was -- actually 3 and 4, if you can. So what you've seen and what kind of look -- yes, look at for going forward. Yes. Sandeep Dube: Awesome. Great. Thank you. So yes -- so overall starting, I think, high level, there was a substantial improvement from a demand profile in Q3 over -- when compared to Q2 on a year-over-year basis, right? When you look at overall airport demand, airport demand was largely, I'd say, slightly negative from Feb all the way through June this year. And then July onwards, it's been positive. So there's been an uptick both on the leisure side of the business in Q3 as well as on the corporate side of the business. And on -- let me first touch upon the corporate side of the business. There's been a couple of points of improvement when we talk about Q3 over Q4. And I'd say even more of an improvement sequentially within the quarter when you look at August and September, but it was still in negative territory when we talk about corporate. Now that's turned positive in October as we moved into Q4. So positive trends on the corporate side. Inbound had basically -- it was down double digits when you look at Q2, June -- May and June, right? We know some of the impact that had happened earlier on in the year. And a lot of that reduction was from EMEA as well as Australia and New Zealand. What we've seen since then is basically a couple of points of improvement again in inbound demand through summer and improvement going into October as well. But inbound is still down, I'd say, low single digits as such on a year-over-year basis. And then finally, we come to the government side of the business. So that was down substantially in Q2, improved a bit in Q3. Since the start of November, given everything around the federal government, we've seen that part of the business come down significantly in November. But again, we believe that in due course, that will be resolved. But right now, we see impact of that in November. Overall, when I pull up and I ask the question, okay, what does that mean for us? I think Q3 was substantially better from a demand profile perspective relative to Q2, and that was represented in the pricing environment that we had seen at that point in time. As we stepped into Q4 and looked at October, further improvement on the demand profile and I would say, a pretty solid pricing environment as well. So that's the way things have shaped out so far. Ian Zaffino: Okay. And then just maybe as a follow-up, can you talk about the strategy of -- as you go more off-prem, is that insurance replacement? Is that other? How do we think about maybe the competitive dynamics there? And what you kind of expect as far as metrics, whether vis-a-vis what they would look like on-prem versus off-prem? Wayne West: Yes. I'll jump in and then, Sandeep, you can add a lot more color. At least the way we look at it, look, it's a really big market. It's more less cyclic than the airports. We're in the space. We have the footprint and the opportunities are both B2C and B2B opportunities there, including retail. Sandeep Dube: Yes, it's -- to be transparent, that was a less mature part of our business in terms of how we handle that part of the business. I'd say from a demand generation perspective as well as from how we kind of operated that part of the business. And we've been working on improving our ability to generate demand there. There's been improvement on the replacement side of the business, but also, in general, a greater demand coming from direct retail customers as well as from our partnership business. So I'd say, overall, the -- there's a commercial engine that's working on growing greater durable demand for Hertz as a brand overall. And that powers both airport as well as off-airport business. Operator: Your next question comes from the line of Stephanie Moore from Jefferies. Stephanie Benjamin Moore: Great. I wanted to touch on the early -- kind of early view on 2026, particularly the margin commentary. Very helpful to have the range that you provided. But given you guys have made tremendous steps forward in your own execution, it does remain a pretty volatile underlying market in general. Maybe just talk about what we would need to see to either hit the high end of that margin range or on the other side, if it ended up coming at the lower end of the range? And how do you kind of balance between actions that are more within your control and then again, the uncertainty of an underlying environment? Scott Haralson: Stephanie, this is Scott. I'll start. Yes, I think there's a few things there. One, obviously, this is just a first indication of how we're kind of viewing '26. I think some of the details are still to be played out through our internal budget process and plus through as the fourth quarter starts to materialize, giving us a better foundational view for '26. But look, I think there's a few things that we impacted a little bit in some of my comments, but the plan is to generate a little bit of scale in the right way, as I mentioned, less so on airport and more so off-airport and mobility. We think those businesses have a lot of room to grow. So I think as Sandeep talked about some of the maturity we have from a revenue management perspective and that scale will generate a little bit of DOE benefit with continued process efficiency. Like I think those alone, I think, are sort of the foundational components. I think we're cautiously optimistic, too, about the benefit of sort of DPU and the distribution channel, specifically Hertz car sales, which could drive further DPU benefit and/or revenue benefit. So I think as we sort of think about the boundaries of that, I think the upside, obviously, there's additional sort of industry movement on sort of pricing that gives potential upside. But putting some of that to the side, internally, we think it's our ability to ramp up the sort of percentage of flow-through of car sales through our Hertz car sales. Today, we're sort of 20%, 25% of cars through that side. Our ability to get to north of 75%, 80-plus percent will be a big driver of value. So in our internal views, that's probably the component that really drives us to the top end or beyond. Stephanie Benjamin Moore: Great. That's very helpful. And then I just wanted to follow up to your point on the incremental growth for next year. Could you maybe talk about how much net fleet CapEx you would expect to meet those plans? And then secondly, as you're thinking about this overall net fleet itself, maybe talk a little bit about how the 2026 purchases are shaping up and how we should think about in terms of the fleet mix for 2026 versus 2025? Scott Haralson: Yes. Okay, Stephanie, I'll start. I'm sure Gil want to chime in, too. But yes, there will be a CapEx to the growth, probably in the, I'll call it, in the $100 million, $150 million range. The specific number will sort of depend on a number of factors. including vehicle type program versus risk, a number of other things, but probably in that range. And yes, I think you'll probably see us -- and Gil mentioned this, too, the fleet plan and our fleet mix in any given year is dependent on a large number of factors. But I think we'll probably -- we have an opportunity next year to probably look at a shift into some slightly larger vehicles, which we think can play out in a number of geographies for us. But I don't think you're going to see a dramatic shift in our fleet plan, but we have an opportunity to grab some vehicles that we think will be fruitful for us overall. But I think I mentioned, I think, in my script, that we're probably 80% of the way, maybe even north of 80% of the way and line of sight to some good opportunistic buys in '26. So we feel good about where it sits today. So I don't know, Gil, do you want to add. Wayne West: No, I mean that's a good summary. Thanks. All I would say is the volume of model year '26 has been there. We've locked up kind of our primary needs. But we also see spot buy opportunities as we come out throughout the year. We've already done several of those post our original round. So we've got -- we're in a -- and price as well has hit our target. So we are in a position to be far more selective than last year. And I think Scott said it, we'll end up with probably a larger, you call it, richer mix of vehicles than we currently have. But that's all aligned with what we're trying to achieve at a local market level. And I would also say that as, again, we're thinking about when we're buying cars selling them and have that dealership mindset. I would say some of the trim that normally we would default for just for cost purposes for lower cost vehicles, we're thinking more about the sales side of that and can we get paid for different trim packages, especially at a location level, all-wheel drive, 4-wheel drive probably being the most notable example, but there's a lot of trim packages that we're thinking more about on the sales side and what the residual value impacts are than just for cost. So I'll just say we keep refining that model. And then probably one other last thought. There are definitely more program cars available than I think we've seen over the last few years. So that gives us some additional flexibility with mix, especially seasonally when it's a little harder to hit the peaks with large SUVs and luxury vehicles. We've got more flexibility than we've had in the past through program cars to manage that. Operator: Your next question comes from the line of Dan Levy from Barclays. Dan Levy: I wanted to ask about the plans to grow the fleet next year. And specifically in light of the comments in your deck that some of the underlying RPD pressure is still being driven by market pricing pressure. So question is, do you think that fleet levels are rightsized in the industry? Or is there excess fleet? And how do you think the market will absorb your plans to grow fleet? How can you ensure that you will have positive RPD when expanding your fleet next year? Wayne West: Yes. Let me start. I know Sandeep has got thoughts and probably Scott as well. It's a good question, right? So I think Scott laid it out our view well in that you've got to look at this at a segment level because all segments are not created equal, right? And I think, again, airport, off-airport and mobility, off-airport mobility will grow at faster rates than GDP because we've got the ability from a demand generation to generate that and continue the momentum we're already seeing in those businesses. The airport piece of the equation, I think where most of the root of your question comes from, right, is we -- I mean, we view it more in terms of we can grow more or less at GDP. We're not -- I'll just say we're not after gaining market share here. But there is a natural growth now that we've done our fleet rotation and have our unit economics more in line with where they should be, that gives us the right to grow again in all three segments. But we're going to be very disciplined in our approach here. Sandeep Dube: Yes. And the only thing I'll add here is basically even at the airports, I think if I look at the overall pricing environment from the start of the year until where we're sitting here right now, I think that pricing environment in -- especially in Q3 and then as we look so far what we've seen in Q4 is much improved, right? And I'm talking about just the overall industry backward looking, it's much improved. And then the slate of commercial initiatives that we had outlined there's momentum there, and you've seen the impact of that in -- at the tail end of Q3. And so I expect that to take a further foothold in the coming quarters and have an impact in 2026. Dan Levy: Okay. Great. As a follow-up, I wanted to just ask about the utilization in the quarter. And maybe you can just unpack, and I see the commentary here in the deck, but it was -- it seems like close to a quarterly record. Just how sustainable is that? And what type of utilization can we expect into next year? Wayne West: Yes. No, great question. I see we've been building momentum with utilization over the last several quarters. And I attribute it principally to our operational processes are starting to get some real traction to eliminate out-of-service vehicles and idle time in general, along with the commercial team has done a great job with better demand generation. It all starts with demand generation, but we're starting to sweat our assets. And as you've seen, I think we made some big leaps here. I think there's more room to run candidly, albeit the spike in the recalls create a headwind for us in the short run. The fourth quarter is even more of a headwind than we saw in the third quarter. But I want to say we'll never be satisfied with our performance in this area. We're just the team's wired for continuous improvement. And I think the other big item aside from the kind of operational processes is -- plays into how we're selling cars because traditionally, -- and Sandeep talked about total utilization, which is really the way we look at it internally. It's not just operational, it's total utilization because we own those vehicles. The big difference being the inventory we have that is for sale for cars that take the turnaround times there have been very long. So we've process engineered that and some big improvements, which you see in the quarter on total you. But ultimately, as we sell digitally and we can continue to operate vehicles to the point of sale without taking them out of service for a month or 2 to sell, that creates tremendous opportunities for total utilization. So that's really our focus and strategy. Operator: And this concludes the Hertz Global Holdings Third Quarter 2025 Earnings Conference Call. Thank you for your participation.
Operator: Good morning, and welcome to SNDL's Third Quarter 2025 Financial Results Conference Call. This morning, SNDL issued a press release announcing their financial results for the 2025 third quarter, ended on September 30, 2025. This press release is available on the company's website at sndl.com and filed on EDGAR and SEDAR as well. The webcast replay of the conference will also be available on sndl.com website. SNDL has also posted a supplemental investor presentation in addition to the conference call presentation, we will be reviewing today on it's sndl.com website. Presenting on this morning's call, we have Zach George, Chief Executive Officer; and Alberto Paredero, Chief Financial Officer. Before we start, I would like to remind investors that certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's financial reports and other public filings that are made available on SEDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated. We will now make prepared remarks, and then we'll move to analyst questions. I would now like to turn the call over to Zach George. Please go ahead. Zachary George: Welcome to SNDL's Third Quarter 2025 Financial and Operational Results Conference Call. The third quarter of 2025 marks another milestone for SNDL as we report record quarterly free cash flow. And for the first time in our history, positive cumulative free cash flow for the first 9 months of the year. We also continue to report sustained double-digit revenue growth in our combined Cannabis segment, underscoring the strength of our ongoing operational and profitability improvements. Beyond our ability to generate cash, which, in our view, is the ultimate measure of a business' fundamentals. We are also seeing numerous bright spots in our income statement. These include robust growth in our Cannabis segments, margin expansion across our Retail Operations and reductions in SG&A expenses. Collectively, these factors translate into continuous improvements in our financial performance. Despite our progress in operations and our strengthened competitive position, this quarter's P&L reflects the impact of $11.9 million in unfavorable noncash items. These were triggered by increases in our stock valuation as well as inventory and fixed asset impairments, resulting in a reported operating loss of $11 million. For those who are unfamiliar, our unvested long-term incentive equity grants show up as a liability on our balance sheet. So when our stock price increases, we have to take a negative charge to operating income in order to reflect the increased value of that liability. These noncash items and the volatility inherent to our industry should not overshadow the undeniable operational improvements we have achieved. We also continue to leverage the strategic advantage provided by our strong balance sheet with no debt and over $240 million in unrestricted cash as we build a resilient, growth-oriented and profitable business. To this last point, during the third quarter, we continued to support the regulatory review process in Ontario which is the final step before closing the acquisition of 32 1CM cannabis stores. We also accelerated our investment pace to support the opening of 5 new Cannabis stores and 2 new Wine & Beyond stores during the fourth quarter. Additionally, we completed the ramp-up of our Atholville cultivation facility to support international growth, and we are now making further investments in its infrastructure. Last but not least, beyond strengthening our competitive position in Canada, the company continues to work towards resolving the ongoing litigation required to complete the SunStream restructurings. These restructurings are expected to provide shareholders with exposure to dynamic medical markets, including Florida and Texas. I'll pass the call to Alberto now for more insights on our third quarter financial performance. Alberto Paredero-Quiros: Thank you, Zach. I want to remind everyone that the amounts discussed today are denominated in Canadian dollars, unless otherwise stated. Certain figures referred to in this call are non-GAAP and non-IFRS measures. For definitions of these measures, please refer to SNDL's management discussion and analysis document. Our third quarter financial results represent another step forward in profitability, particularly in terms of free cash flow generation. Net revenue for the third quarter of 2025 reached $244 million, reflecting a 3.1% increase compared to Q3 of last year. This growth was driven by our Cannabis segments, while the Liquor segment continues to navigate market headwinds. Gross profit of $64.2 million represents a $1.2 million increase or 1.9% growth year-over-year despite being impacted by $3.9 million in noncash inventory-related adjustments within Cannabis Operations. This inventory adjustments reduced gross margin by 160 basis points, more than offsetting the strong margin expansion in both Liquor and Cannabis Retail segments. As a result, consolidated gross margin declined 30 basis points compared to the prior year. Operating income was affected by noncash adjustments totaling $11.9 million. In addition to the $3.9 million inventory adjustment mentioned earlier, the 121% share price increase during the third quarter triggered a $6.8 million increase in share-based compensation liability. Finally, we recorded a net of $1.6 million fixed asset impairment, mostly driven by the [ idle ] Stelletton facility. These 3 factors fully explain the reported operating loss of $11 million. When excluding a $1.5 million restructuring charge, adjusted operating income ended at a loss of $9.5 million. This represents a $7.1 million improvement or 42.7% compared to last year. Free cash flow is the main highlight of the quarter, with a positive $16.7 million. In addition to the $7.5 million improvement compared to the same period last year, this strong Q3 results enable us for the first time in our history to achieve positive cumulative free cash flow for the first 9 months of the year, totaling $7.7 million year-to-date. When reviewing our 4-year historical performance, we continue to demonstrate a clear upward trajectory, reflecting our sustained focus on growth and improve operational efficiency. Additionally, we can observe the seasonality of free cash flow within the first and second half of the year with a consistent upward trend over time. When analyzing the contributions from each segment across our main financial KPIs, we can clearly see that net revenue growth was driven by our Cannabis segments, partly offset by Liquor Retail. The revenue [ elimination ] for cannabis is related to the sales from the Cannabis Operations segment into our own retail. As in previous quarters, dissemination is increasing as a result of our cannabis business growth. Adjusted operating income shows a solid improvement compared to the prior year, although there is some noise related to noncash adjustments in both periods. Liquor Retail posted a small decline of $0.6 million as gross margin and SG&A improvements were offset by revenue declines and the lapping of a $1.2 million favorable fixed asset impairment reversal recorded in 2024. Cannabis Retail delivered a strong operating income growth, driven by revenue gains, gross margin expansion and SG&A efficiencies. Additionally, this quarter included a $1 million reversal for asset impairments recorded several years ago. Cannabis Operations reported negative operating growth, primarily due by the $3.9 million inventory valuation adjustments and the $2.7 million fixed asset impairment related to the idle Stelletton facility. The Investment segment showed significant favorability year-over-year. As last year included an unfavorable valuation adjustment from the SunStream investment portfolio. Finally, despite meaningful cost reductions in the Corporate segment, the $6.8 million increase in share-based compensation triggered by the 121% rise in our share price during the third quarter, resulted in a $2.2 million unfavorable movement year-over-year. Clearly, there are numerous typical adjustments impacting the third quarter in both years. When we strip away this noise, the underlying improvement in operating income becomes evident. Both the third quarter and the year-to-date free cash flow results are the key highlights. It's representing historic records for the company. In the third quarter, the negative income of $13.3 million was driven by the different noncash adjustments previously mentioned, which leads to the high amount of $30.8 million in noncash add-backs. Inventory and other working capital follow the regular seasonality as the investments in the first half of this year start being offset as of the third quarter. We're also seen the higher amount of CapEx and lease payments in the third quarter compared to the previous 2 quarters, driven by the incremental capital investments for the anticipated store openings in the fourth quarter. This strong Q3 free cash flow results is allowing us to report for the first time in our history, positive cumulative free cash flow in the first 9 months of the year, with a total of $7.7 million. Looking closer at the 3 operating segments, starting with Liquor Retail, we see that the segment delivered net revenue of $139.4 million in the third quarter, a 3.6% year-over-year decline as it continues to face market headwinds. Gross profit of $36.7 million represents a modest reduction of $0.2 million compared to the prior year. As the revenue decline was almost fully offset by 80 basis point improvement in gross margin, which reached 26.3%, a new historic record for the segment. Operating income came in at $11.2 million, a decrease of $0.6 million compared to last year. While the record gross margin and further reduction in SG&A spending provided support, these gains were offset by the lapping of a $1.2 million in fixed asset impairment reversals recorded in 2024. Cannabis Retail delivered outstanding results in the third quarter. Net revenue of $85 million represents a new record for the segment, supported by a 4.8% year-over-year growth, driven primarily by a 3.6% increase in same-store sales. Gross profit of $22.5 million is also a historic high for the segment, reflecting an 8.5% increase compared to last year, supported by a 90 basis points improvement in gross margin. Finally, both operating income and adjusted operating income reached new records for the segment, driven by revenue growth, margin expansion and SG&A optimization. Operating income of $9.1 million more than doubled compared to last year, further benefiting from a $1 million fixed asset impairment reversals recorded in the quarter. Our Cannabis Operations segment delivered mixed results as a result of noncash adjustments impacting the third quarter, masking the underlying improvements. Net revenue for the third quarter of 2025 was $37.4 million, also a new record for the segment, reflecting a $12.4 million or 50% growth compared to the prior year. This growth was driven by edibles following the acquisition of Indiva in the fourth quarter of 2024 as well as the accelerating international sales that reached $4.2 million in the quarter. Gross profit was impacted by $3.9 million inventory write-offs and valuation adjustments primarily related to the cultivation ramp-up at our Atholville facility. Gross margin ended up at 13.4% in the quarter, as the inventory adjustments had a negative impact of 10.4 percentage points to the margin of the segment. Finally, adjusted operating income also reflects a $2.7 million fixed asset impairment related to the Stelletton idle facility. The total of $6.6 million in unfavorable inventory and fixed asset noncash adjustments resulted in the negative $4.8 million adjusted operating income. Over to you, Zach for additional comments related to our strategic priorities. Zachary George: Looking at the progress we've made towards our 3 strategic priorities: growth, profitability and people, there are several highlights I'd like to point out. Let's start with growth. Our Cannabis Retail segment continues to outperform the market, achieving 3.6% same-store sales growth in the third quarter and contributing to an additional 12 basis point gain in market share. Despite softness in the liquor market, our Wine and Beyond banner continues to demonstrate strength with 2.9% same-store sales growth, supported by double-digit growth in private label sales. As mentioned in previous calls, we have accelerated organic capital investments in new store expansion. In addition to the 2 cannabis stores opened during the third quarter, we anticipate opening 5 new cannabis stores and 2 new Wine and Beyond stores in the fourth quarter. It is also encouraging to see strong 50% revenue growth from our Cannabis Operations segment, driven by market leadership in edibles following the acquisition of Indiva in the fourth quarter of last year, as well as continued growth in international sales, which reached $4.2 million in the third quarter. Shifting to profitability. The most significant highlight is the generation of $17 million in free cash flow during the quarter, enabling us to achieve positive year-to-date free cash flow of $7.7 million at the end of the third quarter for the very first time in our history. This was accomplished through revenue and margin expansion, coupled with working capital optimization despite incremental CapEx investments to fund future growth. While adjusted operating income remains negative due to the previously mentioned noncash items reflected in the quarter, it did grow by 43% compared to the prior year, supported by revenue growth, retail margin expansion and reductions in G&A costs. On that point, G&A expenses in the third quarter were $4 million lower than last year as our $5 million of productivity savings more than offset inflationary pressures. Additionally, data licensing revenue contributed $4.6 million in the quarter, providing further support for gross margin expansion. Foundational to all of these improvements is our people strategic priority. During the third quarter, we continued to enhance the deployment of Talent cards and development conversations, a key step in our strategic talent review process. We also launched a recruitment efficiencies project to streamline hiring and improve the experience for recruiters, hiring managers and candidates through automated workflows. Additionally, we introduced a monthly leadership development series, a new networking forum where leaders share personal and professional experiences and discuss our strategic priorities. As we focus on driving strong execution in the fourth quarter and a strong finish to the year, we are also encouraged by the many opportunities and execution plans our teams are developing for 2026, taking us step by step closer to our ambition to become a global cannabis leader. Once again, I'd like to thank our entire team for their contributions and our shareholders for their continued trust. I will now hand the call back to the operator for the analyst Q&A session. Operator: [Operator Instructions] And the first question today will be coming from the line of Aaron Grey of Alliance Global Partners. Please go ahead. Aaron Grey: I see some more of the cash flow generation. First question for me. I just want to kind of strip out some of the one-offs to make sure we have a good understanding of how best to think about the business going forward. So particularly for Cannabis Operations, included the write-offs for inventory within that. So I just want to clarify there from the prepared remarks. Was it only the $3.9 million inventory in the gross margin and the $1.6 million fixed asset, that's SG&A and not in gross margin? So I want to clarify that point. And then secondly, how best to think about the gross margin specifically for the Cannabis Operations going forward? Both of those are added back, it gets you back to that 29% gross margin from prior quarter. If just inventory, gets you more to the mid-20s. So I just want to get a better understanding of how to think about that on a go-forward basis. Alberto Paredero-Quiros: So yes, I confirm the $3.9 million of inventory adjustments that's obviously is impacting gross profit. And it has an impact of about 10.6 percentage points in the margin of the segment. The other onetime adjustments that we saw in the quarter is the Stelletton facility impairment, it's a $2.7 million charge, that happened below gross profit. So it's in other income and expenses. So it's part of operating income, but not reflected in the gross margin. So the total of those 2 things obviously are impacting operating income, but the only impact to gross profit is based on the inventory adjustment. Without those adjustments, we would have been at around 25% margin in the segment, which is what we're expecting. We have seen in round about that number in the last couple of quarters, and we're expecting that to be the low end of the range for the future. Aaron Grey: Okay. Great. Sales to provincial boards saw some nice growth both on a quarter-over-quarter and year-over-year basis. Any specific drivers there? And anything to think about in terms of the mix within that shipment timing for how we think about that line segment going forward? Because it does seem like that growth outpaced some of what we're seeing from the third-party POS data. Alberto Paredero-Quiros: Yes, indeed, we're seeing the same softness overall in the sales to the provincial boards from Cannabis Operations. We know that it's not driven by our own segment as we continue to gain momentum there, and we'll continue to see growth. But we have seen some softness in third-party retail. Obviously, we don't have full visibility to the inventory numbers of the provincial boards. So an element of the slowdown could be as well driven by that. But overall, that we have seen over the last couple of quarters, a slowdown in third-party retail, that we're working on, obviously trying to create some additional momentum and with the changes in new products and innovation, we believe that we're going to be regaining momentum there. Zachary George: And just to add to Alberto's comments. We are seeing great progress in specific categories, including edibles, pre-roll and vape. And so that's enabled us to keep a great pace relative to the broader market. Aaron Grey: Okay. Great. Last 1 for me. I know you've been increasing your efforts internationally. I think you said 4.2% in the quarter. So how best to think about international sales going forward, how big of a part of the business do you feel like that could be within the next 12 to 18 months? Alberto Paredero-Quiros: It does keep to -- continue to gain momentum. We have been increasing quarterly-over-quarter since the beginning of the year. We have a strong demand. We have a lot of purchase orders for the fourth quarter as well. We are bullish as well with the outlook for 2026. A lot of our international partners, they are exploring options to continue increasing purchases from us. They're struggling with reliability of supply from some of their other partners that they have, and they have been very pleased with our performance so far. So yes, we believe and we're anticipating that, that number will continue growing in the future. Zachary George: Worth mentioning that we are continuing to ramp production at our Atholville, New Brunswick facility. The benefits from extremely attractive relative power pricing. And so we should see monthly production based on our targets north of 15,000 kilograms a month in 2026. And so we expect the bulk of that biomass to be directed at international markets. And there are a number of other both 2.0 and other growth opportunities that we're looking at. Operator: [Operator Instructions] Our next question will be coming from the line of Frederico Gomes of ATB Capital Markets. Frederico Yokota Gomes: First question just on the 1CM transaction that still hasn't closed. You said you're waiting regulatory approval in Ontario. So is there anything specific that's been an issue with that approval. I'm just thinking about the previous history year back when you had the [ Indiva ] transaction, and I believe that there was a hold up there in Ontario. So just any comments on that? Zachary George: Fred, we don't have any additional information to share. We thought this would be -- the review would be completed late October. It's early November. There are a number of retail licenses, both applications that have been submitted by affiliated entities as well as third parties that are still moving to the pipeline in Ontario. So we'll update the market as soon as we have greater clarity. Frederico Yokota Gomes: And then second question, just on Cannabis Retail. I guess we saw good same-store sales growth this quarter again, record numbers in gross profit, operating income as well. Just broader comments about what you're seeing in that market right now? Are you seeing opportunities to increase prices and margins? Are you seeing a good pipeline of M&A? Or is it going to be concentrated more on organic growth, obviously, excluding the 1CM transaction? Just some broader color on the outlook for Cannabis Retail in Canada right now. Zachary George: It's a great question. We are seeing maturity. It's really a province-by-province assessment. We've seen extreme saturation start to settle in Alberta. And as you well know, Frederico, Alberta was 1 of the quickest provinces out of the gate in terms of its pace of door count growth. You're seeing signs emerging of maturity in markets like Ontario as well, although there's still -- we still think there's opportunity there. And I think that the days of easy kind of double-digit, high single-digit same-store sales growth upon opening locations and managing a discount retail strategy are going to be in the rearview very quickly. Execution on the floor and owning the consumer relationship with a very convenient and attractive experience for customers is critical at this point. So we are very much focused on our consumer and owning that relationship. Alberto Paredero-Quiros: I would add, Frederico, if you compare to the same period of last year, you have probably noticed in the third quarter that our same-store sales have slowed down somewhat compared to first half of the year. On the other side, we're seeing a significant increase, a 90 basis points improvement in gross margin. The main reason last year, as of the third quarter, we started to run more aggressive promotional activities. That obviously put a little bit the top line but tempered the gross margin. as we are lapping that strong promo activity this year, we're seeing the margin progression, obviously somehow a little bit of a slowdown on same store sales revenue growth. It will probably be a similar dynamic in the fourth quarter, but we still see some -- we've seen margins somewhat stabilizing for the long run. There is always an opportunity to increase efficiencies and manage mix a little bit better and gain marginally on the gross margin. But clearly, yes, as Zach said, on the revenue growth and the market growth, we're assuming -- we're expecting it would stay in the low single digits going forward. Frederico Yokota Gomes: That's very helpful. And then just a final question, just, I guess, related to that as well, just on the Rise Rewards program, now that you have some more time with that. Anything you can share in terms of how the rollout is occurring relative to your expectations? And any data points regarding members of the program, economics, et cetera? Zachary George: Frederico, we're still early days. We're just several months into this launch, but it is tracking quite well. The engagement we're getting from loyalty members is extremely strong. We're excited to roll out a similar and parallel program for our Liquor business in the coming quarters and think that there'll be an interesting opportunity and some very rich data that we can receive from that. We're going to update the market on this program, but wanted to get a couple of quarters of performance underneath our belt before sharing more detailed stats. Operator: Thank you. This does conclude the Q&A session for today. I would like to turn the call back over to Zach George for closing remarks. Please go ahead. Zachary George: Thanks all for joining us today. I appreciate your support, and we look forward to updating you on our progress in the near future. Thank you. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good morning, ladies and gentlemen, and welcome to Henry Schein's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham. Graham Stanley: Thank you, operator, and thanks to each of you for joining us today to discuss Henry Schein's financial results for the 2025 third quarter. With me on today's call are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call will include information that's forward-looking. Risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements, and the company's performance may materially differ from those expressed in or indicated by such statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission and included in the Risk Factors section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based on the company's internal analysis and estimates. Today's remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today's press release and can be found in the Financials and Filings section of our Investor Relations website under the Supplemental Information heading and in our quarterly earnings presentation also posted on our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 4, 2025. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, during today's Q&A session, please limit yourself to a single question so that we can accommodate questions from as many of you as possible. And with that, I'd like to turn the call over to Stanley Bergman. Stanley Bergman: Good morning, everyone. Thank you, Graham. Thank you for joining us. We are pleased with our financial results for the third quarter with sales growth accelerating in each of our reportable segments, including solid market share gains in our distribution businesses as we are once again focused on driving growth now that the cyber incident is fully behind us. The strong sales performance was a key driver of the underlying improvement in our operating income. Our successful execution of the BOLD+1 strategy, including the financial performance of our investments in high-growth, high-margin businesses also sets the foundation for strong future growth. With the continued input from KKR, we have made good progress on advancing the value creation initiatives we announced last year -- last quarter, actually. Based on our first phase of work, we believe we have the opportunity to deliver over $200 million of improvements to operating income over the next few years. We have begun executing on these multiyear projects with key areas of focus that include centralization of support services, indirect procurement, automating and simplifying processes and accelerating sales of corporate brand products. These initiatives support a return to our long-term goal of high single-digit, low double-digit earnings growth. In addition, our Board has approved an amendment to the strategic partnership agreement, giving KKR the right to increase its HSIC stock ownership up to 19.9% through the purchases -- through purchases in the open market. Next, let me touch on a few key highlights from the quarter that advanced our BOLD+1 strategy. We remain on track to achieve our goal of over 50% of non-GAAP operating income coming from high-growth, high-margin businesses by the end of 2027, which is the current strategic planning cycle. And that's -- in addition, we expect more than 10% coming from our corporate brands. So that's in total about 60% of our non-GAAP operating income coming from these high-growth, high-margin businesses and corporate brands. While we have continued to strategically invest in our business, we have focused recent capital deployment on accelerating the repurchase of the company's shares. Our Board recently approved a $750 million increase in this program, and our current expectation is to continue to execute buybacks at a similar pace to the past quarter. Building on the momentum from our successful launch of our new HenrySchein.com Global eCommerce Platform in the U.K. and Ireland, we are rolling out a phased launch in North America. We expect to start the European rollout in 2026. Turning now to a review of our business units. I'll start with the global distribution and value-added services group. Here, we delivered solid sales growth in the third quarter across our global distribution group in both merchandise and equipment sales. In general, patient traffic remained steady throughout the quarter. Notably, sales growth accelerated in the U.S. merchandise area, which reflects strong corporate brand sales growth as well as the positive impact of targeted promotional programs we initiated during the second quarter, resulting in continued increase in our market share in the United States. If we turn now to the U.S. dental equipment sales, which increased in the low single digits with digital equipment delivering double-digit growth. We continue to experience a lower average selling price in digital equipment, but this is offset by strong volume growth. Traditional equipment sales declined slightly. However, it's important to notice, we believe this is a result of the timing of installations. We introduced a new online financing program, which we believe contributed to the good growth in the U.S. equipment arena. Our order intake at DS World was good this year, and we expect this to help our equipment results in the fourth quarter. We expect to maintain overall U.S. equipment growth in the fourth quarter. Turning to the U.S. Medical business. Sales grew in the mid-single digits for the quarter. The growth reflects Strong demand for medical products and for pharmaceuticals and particularly in the dialysis business, along with continued strong performance in Home Solutions. This was partially offset by lower demand for respiratory diagnostic products and a decline in influenza vaccine sales. Our international dental merchandise sales were stable, increasing in the low single digits in constant currencies. If we look at the international equipment sales, here, we have strong growth. Value-added services sales grew modestly with sales growth driven by consulting services, which includes our eAssist revenue cycle management business. Now let's turn to the Global Specialty Products Group. As a reminder, this group includes implants and biomaterials as well as endodontics, orthodontics and orthopedic products. The third quarter sales reflected continued strength in implants and biomaterials as well as endodontics. We were particularly pleased with our implant performance, which built on last quarter's solid trends. Sales growth was in the mid-single digits in constant currency, and we believe we continue to gain market share across most implant markets, in particular, the ones where we have our strength. So where we service the market, we have resources on the ground, we believe we're doing quite well in those implant markets. Sales growth was led by our value segment. Both SIN and Biotech Dental implant systems performed exceptionally well, each posting double-digit gains. This was complemented by steady low single-digit growth in our premium brand, BioHorizons Camlog, demonstrating the strength of our broad portfolio of offerings. In the U.S., implant and biomaterials sales grew in the low single digits against a challenging prior year comparison. This growth, of course, reflects increased traction from our rollout of our BioHorizons Tapered Pro Conical implant and ongoing growth we achieved in the SmartShape Healers abutment . We expect growth in these products to continue. The Tapered Pro Conical product now represents approximately 1/3 of our U.S. implant sales. And it's important to understand that our customer feedback on this product offering is very, very positive. International implant sales increased high single digits, once again driven by strong double-digit growth across the DACH region and Latin America, reflecting strong patient demand and execution by our regional team, which continues to be very good. Our endodontics business delivered mid-single-digit growth for the quarter, benefiting from expanded sales reach through our U.S. distribution team. Orthodontics, while still a small component of our specialty products has stabilized, and we remain focused on improving the profitability of the orthodontics business. And finally, our Orthopedics specialty business posted solid double-digit sales growth. So looking ahead, we are encouraged by the momentum across our specialty business. Now on the Global Technology Group side. Here, we continue to accelerate our growth during the third quarter driven by strong growth in the adoption of our core practice management solutions business, particularly our cloud-based platforms, including Dentrix Ascend and Dentally as well as strong growth in our revenue cycle management solutions, including eClaims electronic billing and patient messaging. As a result, we are seeing growth in annual recurring SaaS subscription revenues as well as in transactional services. Practice management software sales growth was again in the high mid-double digits this quarter, driven by 20% year-over-year increase in the number of cloud-based customers, primarily from new Henry Schein One accounts. The whole cloud-based strategy for us is doing very, very well. We now have over 10,500 Dentrix Ascend and Dentally subscribers. Revenue growth also benefited from recently launched revenue cycle management solutions now being adopted by practitioners as they seek to drive revenue and improve operating efficiencies. There are also some exciting new developments in AI in our technology group. Yesterday, we announced a partnership with Amazon Web Services to integrate its generative AI technology with Dentrix Ascend and Dentally. Among the benefits are a real-time documentation system that uses AI to capture and summarize patient interaction, voice-activated charting, scheduling and communication tools to further personalize the patient experience and predictive business intelligence that automates claims validation and facilitates dynamic pricing tools. We believe this will be a significant addition to the Henry Schein One offering. And we expect these will help our customers drive incremental revenue and greater productivity in their practices. Let me now comment on the announcement we made earlier this year that I'll be retiring as CEO at the end of the year while continuing to serve as Chairman of the Board. As we discussed on our last conference call, the Board started a formal search process supported by a nationally recognized executive search firm considering internal and external candidates and remains on track to announce my successor by the end of the year. Of course, I remain committed to ensuring a smooth and seamless transition. With that, now let me turn over the call to Ron to review our third quarter financial results and discuss 2025 guidance. Ron, please. Ronald South: Thank you, Stanley, and good morning, everyone. As usual, today, I will review the financial highlights for the quarter and would like to remind investors that on our Investor Relations website, we also have included a financial presentation containing additional detailed financial information, including certain reportable segment information. Starting with our third quarter sales results, I will provide details on total sales, total sales growth as well as constant currency sales growth compared with the prior year. Global sales were $3.3 billion with sales growth of 5.2% compared to the third quarter of 2024, reflecting constant currency sales growth of 4.0% and a 1.2% increase resulting from foreign currency exchange. Acquisitions contributed 0.7% sales growth to the quarter. Our GAAP operating margin for the third quarter of 2025 was 4.88%, a decrease of 6 basis points compared to the prior year GAAP operating margin. On a non-GAAP basis, the operating margin for the third quarter was 7.83%, an increase of 19 basis points compared to the prior year non-GAAP operating margin. Operating margin improvement was driven by lower operating expenses as a percentage of sales, partially offset by lower gross margin. We continue to drive improved operational efficiency by integrating acquisitions, restructuring and executing our new value creation programs. Gross margin was down 56 basis points year-over-year, primarily related to product mix in our Global Distribution Group and in our Global Specialty Products segment. Sequentially, gross margins versus the second quarter declined primarily due to the seasonality of flu vaccine sales in our medical business. Of note, gross margins stabilized in the U.S. dental distribution business. Turning to taxes. Our effective tax rate for the third quarter of 2025 on a non-GAAP basis was 22.9%. The lower effective tax rate reflects the nontaxable nature of the remeasurement gain recognized in the quarter. This compares with an effective tax rate of 24.9% for the third quarter of 2024. We expect the effective tax rate to be in the 24% to 25% range in the fourth quarter, which is more in line with recent historical rates. Third quarter 2025 GAAP net income was $101 million or $0.84 per diluted share. This compares with prior year GAAP net income of $99 million or $0.78 per diluted share. Our third quarter 2025 non-GAAP net income was $167 million or $1.38 per diluted share. This compares with prior year non-GAAP net income of $155 million or $1.22 per diluted share. Foreign currency exchange favorably impacted our third quarter diluted EPS by approximately $0.01 versus the prior year. Our third quarter results include a remeasurement gain resulting from the purchase of a controlling interest of a previously held noncontrolling equity investment. That business has performed well since we made our initial investment. And as a result, we recognized a pretax remeasurement gain of $28 million this quarter. This compares to a pretax remeasurement gain of $19 million in the third quarter of 2024. The remeasurement gain in the third quarter of 2025 and its related tax treatment contributed approximately $0.23 to EPS, which is approximately $0.08 more than the remeasurement gain recognized in the third quarter of 2024. Adjusted EBITDA for the third quarter of 2025 was $295 million compared with third quarter 2024 adjusted EBITDA of $268 million, representing growth of 10%. Turning to our sales results. The components of sales growth for the third quarter are included in Exhibit A in this morning's earnings release. So I will provide the primary highlights of the main sales drivers for each reporting segment, starting with our Global Distribution and value-added services group, whose sales grew by 4.8%. Within this segment, U.S. dental merchandise sales grew 3.3% and U.S. dental equipment sales grew 1.2% with strong growth in digital equipment. We ended the quarter with a good equipment order backlog for fourth quarter sales. U.S. medical distribution sales grew 4.7% despite lower demand for influenza vaccines and respiratory diagnostic products. Our Home Solutions business had another strong quarter, growing over 20% on an as-reported basis and 6% excluding acquisitions. International dental merchandise sales grew 6.0% or 2.5% in constant currency, driven by sales growth in Brazil, Canada, Italy, Spain and Australia. International dental equipment sales were strong with 10.1% total growth with constant currency growth of 5.7%, driven by sales in Germany, the U.K., Canada and Australia. And finally, Global value-added services sales grew 3.3%, driven by consulting services. Turning to the Global Specialty Products Group. Sales grew 5.9% or 3.9% in constant currency. Our implant and biomaterial business experienced solid growth in the third quarter, including double-digit growth in value implants and low single-digit growth in premium implants. We achieved modest implant sales growth in a stable U.S. market due to a high prior year comparable and high single-digit sales growth in Europe, including low double-digit growth in Germany. We also had strong results in the Global Technology Group with total sales growth of 9.7% with 9.0% in constant currency. In the U.S., sales growth was driven by practice management software with double-digit growth in Dentrix Ascend as well as solid growth in our revenue cycle management business. Internationally, sales growth was primarily driven by double-digit growth in our Dentally cloud-based practice management solutions products. Turning to our restructuring program. From the restructuring program announced in August of 2024, the company recorded restructuring expenses of $34 million or $0.20 per share during the third quarter of 2025. We expect to achieve annual run rate savings of more than $100 million from that restructuring program. Additionally, from the value creation initiatives announced last quarter, we believe the opportunity should deliver over $200 million of operating income improvement over the next few years. Therefore, we are extending our restructuring plan, and we will continue to record restructuring charges in 2026 and 2027. We expect these initiatives to support a return to our long-term goal of high single-digit, low double-digit earnings growth. Regarding share repurchases, during the third quarter of 2025, the company repurchased approximately 3.3 million shares of common stock at an average price of $68.62 per share for a total of $229 million. At the end of the quarter, Henry Schein had $980 million authorized and available for future share repurchases, which includes $750 million that the Board of Directors authorized in September. As Stan mentioned, our expectation is to continue to execute buybacks at a similar pace to this past quarter. Turning to our cash flow. We generated strong operating cash flow of $174 million in the third quarter of 2025 and continue to expect operating cash flow to exceed net income for the full year. This compares with operating cash flow of $151 million in the third quarter of 2024. Our accounts receivable increased slightly during the quarter, in line with sales growth as third quarter revenues were approximately $100 million higher than the second quarter revenues. Let me conclude my remarks with a discussion of our updated financial guidance. At this time, we are still not able to provide without unreasonable effort, an estimate of restructuring costs associated with the restructuring plan for 2025. Therefore, we are not providing GAAP guidance. We are raising our 2025 financial guidance as follows. We now expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $4.88 per share to $4.96 per share, reflecting stable markets and good third quarter financial results as well as the remeasurement gain realized in the third quarter. 2025 sales growth is now expected to be 3% to 4% over 2024. We expect a full year non-GAAP effective tax rate of approximately 24% to 25%, and we are maintaining our 2025 adjusted EBITDA guidance, which is expected to grow in the mid-single digits versus 2024 adjusted EBITDA of $1.1 billion. Our guidance also assumes that foreign currency exchange rates will remain generally consistent with current levels and that the effects of tariffs can be mitigated. Our 2025 guidance is for current continuing operations and acquisitions that have closed. With that, I'll now turn the call back to Stanley. Stanley Bergman: Thank you, Ron. I'd like to give you -- this is very unusual for our calls, a bit of a reflection on the past 30 years as a public company. Tomorrow, we will be ringing the opening bell at the NASDAQ Stock Exchange to celebrate our 30th anniversary since our IPO. That's 120 quarterly calls. The growth on the journey from IPO in '95 to today has been quite significant, with sales growth over this period growing at over 11% compounded average growth rate. From a market capitalization of $280 million, the value of the company has grown at almost 12% compounded average growth rate, including the value of the Animal Health business we spun off in 2019. So this 12% compounded annual average growth rate over this 30 years as a public company. Like all rapidly growing businesses, there have been some significant ups and downs along the way. When we merged Sullivan Dental and Meer Dental back in 1997, skeptics questioned whether we could integrate 3 distinct cultures and turn our business from a dental mail-order company to a dental full-service operation, including a field sales organization and equipment sales and service while integrating these 3 cultures. That year, we also acquired Dentrix Dental Systems, creating what some call a 3-legged chair, selling products, services and technology. Shortly thereafter, we had a dental and aesthetic recall issue. When our stock price fell, we chose the difficult path of continuing the journey of creating the world's largest full-service dental distribution and dental practice management software businesses. Within a short period of time, our customers saw the value of our one-stop shop of products and related services. Then came our bold expansion into Europe, which was accelerated in 2004 with the acquisition of Demedis, the recently spun out distribution business of Sirona. This created a global platform, which changed the level of discussion within the industry to a global one, new markets, new regulations, new cultures, new common values. When the 2008 financial crisis struck, we were forced to make difficult decisions while staying true to our values. We tightened our belt but kept investing in our people and our future. Fast forward to 2020, COVID temporarily closed down the dental market. There were empty offices, disrupted supply chains and uncertainty everywhere. But Team Schein adapted and using our world-class supply chain network played a key role with governments in supplying personal protective equipment, mainly masks as well as COVID tests to, of course, health care professionals, health care practices throughout the world. When the world reopened, we bounced back. The business was growing well until October of '23 when the cyber event hit us. For a moment, it felt like everything we built was vulnerable to an invisible threat. But once again, our team rallied, restored our systems and began the recovery. Some customers took a while to return, but appreciated our offering in the end. This is now behind us, not forgotten, but overcome by this incredible Team Schein, which is once again focused on driving sales. Each challenge made us sharper, more resilient and more united, which brings us to today's BOLD+1 strategy, which accelerates us into product development, innovation, expanding our digital capabilities, deepening customer partnership and our owned brands. All of this enables us to provide our customers with solutions to operate a more efficient practice so that our customers can focus on providing better patient care. Our recent results demonstrate the success of the strategy. In addition to the outstanding growth over the past 30 years, I'm particularly satisfied with the work of the company and all Team Schein members who have undertaken this incredible journey to make an impact on the profession and the communities we serve around the world. We have become a leader and a model with our work to create and strengthen public-private partnerships, whether it's in the profession or in the local markets that we serve or even on a global basis that have expanded access to care around the world. We have made a difference in enhancing global health preparedness and reinforced the vital link between oral and overall health, including, as I've said, access to care. This has been a big goal of ours and has driven our brand and driven our sales and related profits. In closing, I have huge confidence in the management team who are talented, motivated, working diligently to execute our strategies, including our value creation programs, which we provided further clarity today, and I'm quite in fact, very optimistic about where this will go and how this will drive up operating income and therefore, shareholder value. So before we take questions, let me thank all 25,000 Team Schein members around the world, our incredible Board, our suppliers, those investors that have confidence in us. I believe you will be well rewarded in the years to come. Thank you for supporting us for the past 30 years. I personally wish to thank those on this call that I've known for so many years, many analysts for decades, many investors since the beginning, it's been a true wonderful journey. It's been wonderful getting to know all those constituents that are active in supporting the office-based dental and medical practitioners. So with that in mind, let me turn over the call now to the operator to answer some questions. Thank you very much. And sorry for the add and lengthy words here, but I just -- 120 calls later. I think I should be able to make a couple of extra words. Thank you. Operator: [Operator Instructions] Our first question is from the line of Jason Bednar with Piper Sandler. Jason Bednar: Nice quarter. And Stan, it's been a pleasure working with you. Congrats on everything. I'll try to stick with the single question request, but I may bend the rule here with a multipart question. I wanted to focus on the comments you're making about future earnings growth. The third quarter performance might suggest you're back to posting better top line growth. It also seems like you're picking up some benefit from the restructuring program that's been ongoing. And then you have the first phase of the value creation targeting $200 million in EBIT benefit. When you say that you're returning to your long-term goal of high single to low double-digit EPS growth, I guess my question is whether that's a comment that's applicable to 2026. And that $200 million benefit is pretty large. I think it's larger than a lot of us were expecting today. Shouldn't that program alone get you in that EPS CAGR range before we even think about core revenue growth and capital allocation opportunities? Stanley Bergman: So Jason, thank you. And I think you're one of the 2 analysts that have the longest experience in our space and really know it. So thank you for sticking with Dental. I think Dental will present good rates of return to investors over time. So I think it's a good place to focus from an analyst point of view. But just I'll deal with the sales momentum. I think we're very comfortable now that the cyber incident is behind us. Our salespeople are out aggressively going after business. It's not a matter anymore of explaining what happened in terms of cyber incident. I think it's quite clear now that many in health care, unfortunately, have been through this, it's kind of almost normalized. And I think a lot of our customers have tried alternative options to save $0.01 here or there, but realize that the service we provide from a supply chain and all the value-added services makes it really worthwhile. So I would say the organization, we've got great management throughout, in particular, as it relates to sales, the sales management, the marketing management is great throughout the world. And so the momentum is very good. We're attracting excellent representatives to join our sales representatives. So the momentum is there, and I think that's indicative of the fact that we upped our sales guidance. Now Ron, as it relates to the financials, your thoughts. Ronald South: Yes. Certainly, Jason. With reference to 2026, as you can appreciate, this is a kind of a multiyear plan to deliver the $200 million in operating income improvements. Having said that, we do expect some operating improvements in 2026. So as we assess the plan and as we kind of work through the sequence that will be necessary to deliver that $200 million, we'll be able to determine the estimated impact and the estimated benefit that will be in 2026, and we'll reflect that in our 2026 guidance when we provide that in February. Operator: The next question comes from the line of John Block with Stifel. Jonathan Block: Stanley certainly echo everyone else's congratulations. A quick one for me. Ron, the midpoint of '25 EPS guidance came up by $0.05, if I've got that correct. The remeasurement was $0.08 above last year. So maybe if you can talk about what was embedded in the original guidance and clarify that. And then just taking a step back, and maybe this one is for you, Stanley. Just the quarter -- the third quarter was certainly better relative to 2Q. You mentioned some share gains, but I'm just curious, how much of that was market improving versus Henry Schein execution? And maybe any early comments on October? Ronald South: Okay. I'll start with the guide and Stanley, if -- you can do the back half. On the guide, John, with the remeasurement gain, there's a range of outcomes that we have to estimate there because until you actually complete the transaction, it's difficult to assess exactly how much we will be there. So it was slightly higher perhaps than what we would have expected, but was within the range of our expectations. So the $0.05 has a little bit of a benefit from that remeasurement gain, but it also reflects, I think, the momentum we feel like we have in sales growth. I mean if you look at year-over-year for us and strip out the remeasurement gain, strip out the $28 million in the third quarter on a pretax basis this year, strip out the $19 million on a pretax basis last year and take a look at our non-GAAP operating income, we did achieve about 4.5% operating income growth. And that's -- we think that's pointing us in the right direction. And so we're confident with the momentum we're seeing coming out of the third quarter going into the fourth quarter, and that's reflected in the revised guide for this year. Stan, do you want to do... Stanley Bergman: Yes. Thank you, Ron. John, -- and thank you also for following us in the dental industry for so long. The markets are, I would say, generally stable. Of course, there are some markets that are a little bit better, some that are not. But generally, the big markets are stable. I think units are pretty constant in the markets. It's most encouraging that this time now, we don't see pricing going down too much. It's pretty stable, I would say. I don't think customers are moving significantly to lower-priced national brands, there was a movement in that area. Having said that, our own brands have increased -- continue to increase now for the last few quarters. I think there's good momentum there. There is a little bit of tariff inflation, maybe 100 or so basis points in the United States, but not a lot. We've been able to talk to some manufacturers about absorbing the tariffs. Others -- for some products, we've switched to U.S. manufacturing, perhaps a few items, more than a few to markets where the tariffs a little bit less. So generally, the market is stable with a tad of inflation, 100% or so. Glove pricing has stabilized. Units are little bit up now for us. We are gaining net market share there. But generally, I would say, from a Henry Schein point of view, we believe we're gaining market share. And I'm talking about distribution now. Where it becomes a bit clearer is on the implants and related bone regeneration there, we believe we definitely are growing faster than the market. Maybe there's one manufacturer doing a bit better than us in certain markets that we are not focused on. But generally, I would say we are doing quite well in the implant field, where the market is relatively stable. And endodontics, relatively stable. We're gaining market share. On the medical side, -- generally, pharmaceutical side at Henry Schein has done well. I think it's stable. I don't think there's much in the generics to report this quarter for medical equipment, med-surg products relatively stable. There has been a decrease in testing and respiratory products. It's just not been -- people have not been very sick this season. But overall, I think the 4%, 5% we're growing in medical in the U.S. is indicative of the market with not a significant amount of inflation, and I think we are picking up market share there. And of course, on the software side, it's quite clear we're doing extremely well. And that's driven by our cloud-based system, systems growth, our various value-added products that we've added to electronic medical record system. And overall, I would say we're doing generally quite well. We've listed countries where we're doing a little bit better. And obviously, those are countries where it's largely market share growth because the markets throughout the world are relatively stable. Operator: Your next question is from the line of Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: Stanley, congrats. Very excited for you and you've achieved so much in this company over the years. So I appreciate all of your work there. Maybe just going -- you talked about, I think, during the call, some of the stabilization in the gross margin in the distribution business. Ron, I was wondering if you could expand on that a bit and sort of talk through the puts and takes of that and sort of how you see that developing maybe in the fourth quarter and as we think about going forward? Ronald South: Certainly. So yes, on the U.S. -- specifically, I was making reference to the U.S. dental side. We did see stabilization in the margins there as Glove pricing stabilized. So that definitely helped and we returned to a more normal level of promotional activity in the quarter. So the Q3 gross margins in U.S. Dental are consistent with what we saw in the second quarter. And I would expect that to continue into the fourth quarter as well as largely driven by continued stabilization in PPE, specifically clubs because that is a very important product category. Within Medical, we did have a little bit of product mix there as influenza vaccine sales tend to be very strong in the third quarter relative to the rest of the year, even though they were down year-over-year, and that is a lower margin product. Also, medical saw very good sales growth in their pharmaceutical products in the quarter, and those tend to be a little lower margin than the overall margin in medical. But very pleased with the sales growth we got in medical and believe we can continue to see that continue into the fourth quarter. Stanley Bergman: Firstly, thank you, Elizabeth, for your comment. But Ron, if you could answer -- I forgot to answer John's question on October. Ronald South: Yes, certainly. And with reference to October, we continue to see, I think, the similar trends to what we saw in the third quarter. As we work through October and looked at the results, we've seen a -- there may have been some forward buying a little bit as people are trying to get out in front of tariffs, but we didn't really see that impact October negatively for us. Medical will be -- often is driven by the timing of the respiratory season. So we're anticipating some improvement in our diagnostic kit sales in the fourth quarter, depending on the timing of the respiratory season as well. And on the equipment side, while we had very good in the third quarter, digital equipment revenues -- our traditional equipment revenues were relatively flat or down a little bit in the U.S., mostly just due to the timing of some installations, and we're very comfortable with the equipment backlog we saw. We're beginning to see some of that benefit in October and kind of running into the fourth quarter as well. Operator: Our next question comes from the line of John Stansel with JPMorgan. John Stansel: Congratulations, Stanley, on all your accomplishments as CEO across the career. Just want to quickly talk about Specialty Products operating profit. I appreciate it was up significantly year-over-year, but with the $28 million remeasurement gain, it looks like it would be, call it, flat to down stripping that out. And I think you've highlighted some solid top line trends that you're seeing across implants. Can you just talk about what you're seeing on the margin side of the Specialty Products Group and what might be driving that? Ronald South: Certainly, John. I think a couple of things in the year-over-year on the specialty side. Yes, you're right, we do have to look at it kind of ex the $28 million remeasurement gain. Last year, we did have a relatively strong quarter on the U.S. implant business. That did develop a little bit of a strong or difficult comparable for them. But also what we are seeing in the market is -- and we mentioned this in the prepared remarks that the value implant growth was in the low double digits, while premium implants were really kind of growing in the low single digits. And we do get better margins on those premium implants versus the value implants. So while it's great to see the growth in value, it does dilute that margin a little bit. And I think that the combination of the comp to the prior year and a little bit of a dilution in that gross margin is creating the dynamic that you're referring to there. Operator: Our next question comes from the line of Allen Lutz with Bank of America. Allen Lutz: Stan, congrats again on the retirement. I appreciate all the time and insights over the years. A question for Ron. Just a follow-up on that last question around the specialty growth trajectory. As we think about the lower, I guess, gross profit dollar contribution from value implants relative to premium, can you talk about what you need to see in the model for EBIT dollars within that specialty business to go up in 2026? Not looking for guidance on 2026, but how does the model have to behave in order for that part of the business to grow next year? Ronald South: Well, I mean, I think, Allen, the obvious answer would be greater growth in the premium implants. But I do think that continued growth in value implants can give us gross profit dollar growth ultimately and then recovery -- a slight recovery in the market for premium. would also benefit that. Endodontic sales, which is also within that specialty area, continue to be steady and should continue to provide some gross profit dollar growth. And I would say that the -- within the orthodontics, we have made some significant operating changes there, and I would expect that to begin being more of a contributor to some growth in 2026 as well, albeit it's still a small part of that segment, but I think it can provide some greater contribution to gross profit growth. Stanley Bergman: One other thing, thanks. There's a lot of work going on in that group on value creation, consolidating front office procedures, consolidating facilities, consolidating manufacturing. That has all been planned over the last couple of years being executed. And I think we'll see some good results in '26. In particular, also, Ron mentioned the orthodontics. I don't think we're going to invest heavily in marketing of orthodontics. It just doesn't give us the traction that I think we can get by using those dollars and investing in other parts of the specialty area. So we have some orthodontic products. They sell nicely through the Henry Schein sales force, but we're reducing our focus on orthodontic field sales force. And generally, these various consolidation concepts I mentioned, this should all drive up operating income on the specialty product side. Operator: Our next question is from the line of Jeff Johnson with Baird. Jeffrey Johnson: Stanley, thank you for the walk down memory lane there in your prepared remarks. It's been a heck of a run. And obviously, we all wish you nothing but the best. Ron, I was hoping maybe -- or Stanley, hoping I could maybe ask kind of a phasing question. I know you're not really talking about 2026 at this point. But in that $200 million now in op income cost savings, are you expecting that to be, one, a net number then inclusive of any kind of reinvestments back into the business, number one? And number two, should we split that over the next 3 years, kind of $70, $70, $70 million something in that ballpark? And on top of that phasing question, maybe just the remeasurement gain, that $28 million, can we expect something similar next year? Or should we not have something like that in our model next year just as we think about the year-over-year comparable there? Ronald South: Jeff, yes, thanks for the question. I think that I'll start with the $200 million. And as we said, this is a multiyear plan. I don't -- we're not in a position yet to kind of commit to what we expect the phasing of that to be. As you've inferred, it will be phased over a period of time. And we are currently assessing what we believe the 2026 benefits may be from these value creation initiatives as we get started on them as -- and many of them are actually kind of in process now, those initiatives, right? So we'll be able to have a more accurate assessment of what we think the '26 benefit will be, and we'll reflect that within our 2026 guidance. With reference to a remeasurement gain, what I can say is that they've been a regular part of our business, and they've popped up in the last few years in our results. There's always further opportunities to invest in these types of affiliates, but we're not expecting anything significant in the near future. So to the extent that in 2026, if we believe there's not going to be something significant, we will make sure that, that is clear when we provide that guidance. If we believe that there is something out there, we will try to provide some color as to what magnitude that could be. But the -- I would expect it to be a -- it has to be an integral part of our guidance when we provide that. And then with reference to the $200 million, is it net? I mean, as we've said in the press release, this is $200 million of operating income improvement. So yes, it is net. There will be some additional investment that will be necessary that we think we can do with the cash we generate from these value creation initiatives. So there will be some areas that we have to invest in that might create some costs. But over time, we think that this is a $200 million net opportunity for us to the operating income improvement. Operator: Our next question is from the line of Michael Cherny with Leerink Partners. Michael Cherny: Yes, Stan, not a ton more to add there, but I appreciate all the time over the years. Maybe if I could just think about the market a little bit again. You talked about the share gains. Obviously, your biggest competitor has had a change in structure, change in management. As you think about the pathway of getting back to a normalized growth rate, what are the assumptions for share gains on the merchandise on the equipment side going forward? Stanley Bergman: So I don't know if -- we haven't really given guidance on assumptions for '26. So I think -- I mean, unless Ron has something specific, I don't think that's... Ronald South: No. I mean the only thing I would add is we've -- we're confident we've been taking some share over a period of time, and we're confident that some of the promotional activity that we deployed earlier this year has assisted in some of the market share gains that we believe we had in the third quarter. And so it's simply a matter of continuing with that type of activity in a thoughtful way such that we can assume some level of market share gains. But at this point in time, if we think it's a relevant assumption when talking about our 2026 guidance, we can provide more color there. Stanley Bergman: Thanks, Ron. Having said that, we did give guidance on sales growth for this balance of the year. I think it's implicit in there that we feel strength in the business. Really, when you're in one of these cyber incidents, you don't realize, systems were up and running, et cetera, but you don't realize what work has to get done to get the customers back in the door because some of those customers tried alternate sources. Maybe they got a better deal. Maybe there was a program that was offered, maybe Coke at the end of the aisle was at a lower price. I think a lot of that is behind us. Our sales organization is highly motivated right now, dental, medical in the United States abroad, they've got their systems back. There's a lot of tools they've gotten that were promised and worked on before the cyber incident that are there. They can see that the GEP, the henryschein.com system is working in a number of parts of the world. There's huge enthusiasm with that. And generally, we're getting some salespeople that are knocking on our door from our competitors, just not one, but multiple competitors. And generally, and I'm talking about distribution now, the distribution part of Henry Schein has gained momentum. It's back in its stride. We're winning, we're fighting. Our equipment business is solid. Our consumable business is doing quite well, units, pricing. We've got a great offering. And generally, the move amongst our sales organization is great, both in the field, the telesales group, which was largely focused on customer service for at least 1.5 years is back aggressively selling. Our e-commerce services generally, that group is doing very well. The whole social media group is doing well. And I might add, our relationship with our major suppliers is good. Our suppliers want to work with Henry Schein. And then if you put -- you add to that the -- in the leveraging, leveraging relationships amongst our different businesses, I think you'll see the programs are working. We have a great group that is just focused now on our owned brands, products, specialty products that we're selling through distribution. That group is doing very well, the [ Dental ] part, the Clinician's Choice part, the bone regeneration part. There just is a lot of good momentum in the business. And it sort of started getting better a couple of quarters ago. We gave that push of the promotion last quarter. That's now stuck. And generally, I think the momentum is good, and that's reflected in the increase in sales guidance that we've given. And I can't see why that kind of momentum wouldn't go into '26, although I don't think we should be talking about specific numbers for '26 on this call. Operator: Our next question is from the line of Kevin Caliendo with UBS. Kevin Caliendo: And Stan, it's been a pleasure to get to know you over these past 20-plus years. I really appreciate everything. My question is around the Heartland relationship, how -- where we stand with that? It was sort of a key debate a couple of months ago and drew some worry from investors. I guess I just want to sort of -- if there's any update on that relationship, if it's going to continue at the same level? And I guess to that point, how successful has the company been with been able to push through the higher costs related to tariffs and things if you can maybe give us an update on that. Stanley Bergman: Thanks, Kevin. Thanks for that question. Thanks for your good wishes. I don't think we have ever spoken about specific DSO or even IDN relationships. I don't think that's something we should talk about when we gain account, when we lose an account. We never talk about that. Maybe we did 10 years ago, but we stopped doing that. Our relationships with our DSOs are generally quite good. In fact, I think there are DSOs, specifically the regional ones that are moving over to us. And we definitely have something that others don't have. The supply chain is superb. Supply chain solutions are, I believe, and I'm sure many will tell you the best in the industry, both in terms of dental and medical, the value-added services, the combination of software, the DSOs that get the consumables from us, their software from us, those that are also have moved to our implant business. In fact, we've just gained another decent movement from a DSO into the implant arena. All of this, you put this all together, and we offer a very good offering and actually, I think the most compelling offering. So I don't think we will talk about any specific customer moving one way or the other. As analysts, of course, your job is to try to find out what's going on, but I don't think it's going to come to us, it can't. It's not right. So I'm sure you'll hear through the marketplace about any of the specific DSOs, but generally, we feel very comfortable with our business. I can't imagine any DSO saying to Henry Schein, you know what, we're not going to test your pricing. We want better pricing. They all -- which is standards what they do for looming. And our job to go into the marketplace to get the best pricing we can for our customers. That's our job. As it relates to the tariffs, generally, we've been able to find a way in which we can move product locally. We can negotiate with the manufacturer, find alternative countries. And there's been somewhat of an increase, I think, 1% or so of inflation here. I would say a lot of that has to do with tariffs, not much to do with general pricing increases. So generally, it's sticking. And it's not that our -- that our customers think we're trying to take advantage of them. They know we're doing the best we can to get the best pricing, best pricing options, moving to private brand if the national brands are insisting on increasing pricing. So I think overall, it's working okay at this point. I think there's been some reduction in tariffs in a couple of important countries. And I think -- I mean, it's hard to tell where this is going to go. But I think generally, we're doing okay on the tariff side at the moment. Operator: We have time for one last question coming from the line of Brandon Vazquez with William Blair. Brandon Vazquez: Stan, I'll echo everyone's congrats on a great career at Henry Schein. I wanted to ask on the update around KKR and the Board's approval for KKR to take an even bigger stake in the company. Just curious if you could talk a little bit about the impetus of that decision? What kind of conversations are happening there? And should we think about as KKR continues to take bigger and bigger slugs of the equity ownership here potentially, does the partnership become a little more -- I don't know the right word for it, but maybe a little more intimate. Are you guys working a little bit closer to the strategies on a go-forward basis for Henry Schein see more meaningful changes as they become a bigger and bigger shareholder of this company? Stanley Bergman: Thank you, Brandon. Thank you. You guys have followed us since the day we went public, in fact, it took us public. So thank you. As it relates to KKR, we didn't approach them. They came to us I think they've gained an appreciation of the company. They studied the dental space for, I don't know, for a long time, arguably over a decade. They know a lot about the space, the consumables, the providers, the software and value-added service providers. I think they like our company. So they came to us and asked that they could go up. Our Board had a discussion. Our Board ensured that -- the Board was fully aware of all the factors involved in taking this number up to 19.9%. And they made a decision. I think the decision was based on all of substance, not on any particular promises or anything from Henry Schein to KKR, was a pure decision they made on the value they see within the company and the future and the potential. KKR's Capstone Group did work with us on selecting the 2 consulting firms. We've been involved in discussions with our management team. Andrea Albertini and Tom Popeck are running the value creation project. KKR is aware of the project. They've given us some input on best practices. They helped us also with some of the indirect spending. They have some good relationships with providers of services that has helped us. So I would say it's a very good relationship. The 2 members on the Board are very active. One is experts in health care. The other one understands the dental market very well, expert on various kinds of supply chain methodology, et cetera, and they've been very helpful. So I would say it's been a good relationship and things have worked out quite well. That's why they asked to increase their position in Henry Schein. And our Board, as I said, discussed that and made the decision to approve that the request to go up to 19.9%. So Graham, we are done -- well, let me just end by saying, I think you've heard to my voice, to my words, I think the company is in very good shape. We have a great team in place. The team is motivated. The team is winning. The management team in each of the areas of responsibility, the business units, the functions, good management all around. And I think the BOLD+1 plan with the addition of the value creation program, which centers around simplicity for a lot of businesses. We've advanced in a lot of businesses, how do we make the business more simple? How do we take out costs? How do we manage our margins in the best way possible? This is all a supplement to the BOLD+1 initiative or refinement as we're calling it internally. So I think we've got a good plan. We've got a good road map. We've got the team to execute on this. Obviously, there will be some ups and downs as they always are in any business. But I think this team is highly enthusiastic and ready to continue to advance the business in accordance with the plans, BOLD+1 and this value creation program that we've added. So with that in mind, I thank everyone for the support over 30 years. It's been a great experience. I've enjoyed getting to know the Wall Street analysts, the community, the investors. There have been a lot of great strategic investors over the years. There's been those that have invested short term and then exited and come back. These are all the components of Wall Street. I've enjoyed understanding how this works. I've learned a lot. The team has learned a lot. And I look forward to seeing people at conferences in the future, although not as Henry Schein CEO, but as a keen follower of what goes on in health care. So thank you all for your interest, and appreciate everything. Tomorrow, you can see us on -- I think, on the NASDAQ media for the opening of the stock exchange or the NASDAQ. And I appreciate everything. Thank you. Thank you. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Ingredion Q3 2025 Earnings Call. [Operator Instructions] At this time, that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Noah Weiss, Vice President of Investor Relations. Please go ahead. Noah Weiss: Good morning, and welcome to Ingredion's Third Quarter 2025 Earnings Call. I'm Noah Weiss, Vice President of Investor Relations. Joining me on today's call are Jim Zallie, our President and CEO; and Jim Gray, our Executive Vice President and CFO. The press release we issued today as well as the presentation we will reference for the third quarter results can be found on our website, ingredion.com, in the Investors section. As a reminder, our commitment -- our comments within the presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from those estimated in the forward-looking statements, and Ingredion assumes no obligation to update them in the future as or if circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. During the call, we also refer to certain non-GAAP financial measures, including adjusted earnings per share, adjusted operating income and adjusted effective tax rate, which are reconciled to U.S. GAAP measures in Note 2 non-GAAP information included in our press release and in today's presentation appendix. With that, I will turn the call over to Jim Zallie. James Zallie: Thank you, Noah, and good morning, everyone. The third quarter was more challenging than we expected, with net sales and adjusted operating income down more than our previous guidance. Despite Q3's results, we are, however, confident that Ingredion's diversified business portfolio will deliver another full year of operating income growth. As we discussed the performance in the quarter, we will highlight the progress we are making to improve upon recent and near-term operating challenges while navigating with agility, pockets of economic weakness and uncertainty by remaining focused on driving innovation and operating excellence to deliver profit growth. Turning to the next slide. Let's start with a summary of our net sales volume growth for the quarter. Texture & Healthful Solutions delivered a solid performance with 4% sales volume growth across U.S., Canada and EMEA, including double-digit sales increases for clean-label ingredient solutions. Growth in foodservice channels globally as well as for convenient grab-and-go offerings at retail drove increased demand for our batter and breading ingredients in the quarter. Additionally, our solutions portfolio continues to grow, outpacing the segment's net sales growth, thanks to increased demand for specialty blends that help customers address affordability, eliminate artificial ingredients and simplify labels. In Food & Industrial Ingredients, LatAm. The main driver of the sales volume decrease came from softer brewing industry volumes with customers attributing it to cooler, wetter weather for some of the seasonal decline. More broadly, weaker LatAm demand became increasingly evident as higher inflation and interest rates impacted consumer spending. Our Food & Industrial Ingredients U.S./Canada segment experienced a 5% decline in net sales volume, largely due to our inability to meet customer demand requirements from continued production challenges at our Chicago plant as well as overall softness in beverage and food volumes. In contrast, we saw increasing volume demand for industrial starches to our major corrugating and paper and packaging customers. Moving to the next slide. I would like to take a moment to elaborate on the primary factor contributing to our Food & Industrial Ingredients U.S./Canada performance, and that is the ongoing operational challenges at our Argo facility outside of Chicago. For background, Argo is one of the largest plants in our network and accounts for more than 40% of the segment's net sales. Following a fire in our feed dryer at the end of quarter 2, which halted the entire plant's production we faced several challenges while plant operations recovered during the third quarter. This quickly and directly contributed to tighter inventories being available for incremental sales. Given the size of the volumes that move through this plant on a daily basis, we estimate that the cumulative operating income impact to the segment was approximately $22 million across both the second and third quarters with $12 million of that operating income impact being felt in quarter 3. Production rates remained challenged in July and August before improving in September. In quarter 4, our team remains focused on stabilizing production and rebuilding inventories. Also in the quarter, we experienced the overall market demand for sweetener products weakening in July and August before bouncing back in September. We believe many beverage and food customers were experiencing slowing demand as a result of price increases that were put into effect to offset anticipated rising packaging costs, particularly from aluminum and tin plate. Turning to the next slide, our Food & Industrial Ingredients, LatAm segment saw a decrease in operating income this quarter, down 11% versus last year. The reduction is primarily attributable to the strategic realignment of our brewing customer mix as well as lower brewing industry volumes. We are making good progress strategically diversifying our customer and product mix in LatAm towards higher-margin sweeteners that serve food and confectionery customers. We will continue to repurpose our grind to improve the consistency of profit margins over time. Beyond what we believe was a transitory impact from the brewing segment in the quarter. We are monitoring softer consumer demand in general across LatAm, which became increasingly evident in quarter 3 as higher inflation and rising interest rates weigh upon GDP growth and consumer spending. Turning to the next slide. It is important to reinforce the fact that we have made considerable progress to expand the company's gross margins over the last 3 years through a combination of service differentiation, operational excellence and solutions selling. We are focused on not only sustaining the performance but steadily improving upon it by executing against our strategic pillars to drive mix improvement and enterprise productivity. Let me now update you on progress against our 3 strategic pillars. To start I'd like to highlight our focus on driving profitable growth, particularly within Texture & Healthful Solutions segment where we continue to expand our leadership in clean label ingredients and solutions globally. North America and Asia Pac experienced double-digit clean label growth this quarter, reflecting a growing demand from customers and consumers for greater transparency and simplicity in ingredient labeling. This trend has become mainstream with both private label and CPG consumer -- customers reformulating products at an accelerated pace. Additionally, demand for protein isolates remains robust as evidenced by our record sales for protein fortification during the quarter and the fact that we are already more than 50% contracted for isolates for 2026. Our high-value pea protein isolates offer notable functional advantages and benefits from labeling preferences compared to other protein sources across various food categories with our new product introductions being preferred for their taste and overall quality. Moving now to our second pillar, innovation. Our focus on integrated solutions continues to favorably impact Texture & Healthful's results with solutions-based sales growing at a faster rate than the overall segment's net sales growth for the quarter. Furthermore, as food inflation -- food inflation pressures persist, affordability remains a key catalyst for recipe reformulation across our customer base. Brands are actively seeking our assistance with cost-effective ingredient solutions that allow them to maintain quality and shelf life while reducing input costs. Our latest innovations in egg and cocoa replacement solutions delivered cost savings, improved functionality and enhanced flavor profiles. By enabling customers to reformulate recipes without compromising taste or texture, we're helping them differentiate their products and respond quickly to market trends. As consumer demand for natural sweeteners continues to increase, Ingredion is advancing development partnerships for sweet proteins and novel customized clean taste solutions containing stevia and sweet proteins. We believe this will further strengthen Ingredion's position as a leader in sugar reduction innovation. Lastly, I'd like to comment on our operational excellence pillar. Our operational focus has translated into meaningful benefits at our Indianapolis facility, where we've taken steps to maximize asset utilization across our starch network. By modernizing the plant layout and reengineering slurry transfer systems, we've created flexibility to run specialty starch operations in a more integrated manner with downstream operations. This means fewer bottlenecks, better load balancing and improved throughput. These changes reduce inventory requirements, enhance service levels and deliver meaningful savings, all while better positioning the plant to support future growth for texture solutions. Additionally, we feel confident we will surpass our $50 million run-rate Cost2Compete savings target, and we'll realize more than $55 million in run-rate savings by the end of 2025. This achievement reflects a relentless focus on operational efficiency and disciplined cost management across the organization. By optimizing processes, eliminating waste, leveraging technology and driving continuous improvement initiatives, we've been able to unlock significant savings. Last month, we hosted our first ever Supplier Day, bringing together strategic partners from across our supply chain globally in the pursuit of shared value creation. This was a valuable forum for collaboration, knowledge sharing and strengthening of relationships. The event created increased awareness and understanding by our suppliers of our business and is already leading to new opportunities for value creation for us and them. Lastly, in October, we held a Global AI Forum for our entire employee base to accelerate adoption for the responsible usage of AI. Our AI priorities for value creation are focused on enhancing the customer experience, driving supply chain and manufacturing efficiency and accelerating innovation. Now I'm pleased to hand it off to Jim Gray for the financial review. Jim? Jim Gray: Thank you, Jim, and good morning, everyone. Moving to our income statement. Net sales for the third quarter were $1.8 billion, down 3% versus prior year. Gross profit dollars decreased by 5% and with gross margin slightly lower at 25.1% as volume headwinds are partially offset by lower input costs. Reported and adjusted operating income were $249 million and $254 million, respectively. Turning to our Q3 net sales bridge. The 3% decrease was driven by $39 million in lower volume and $30 million in lower price mix, offset partially by $15 million of favorable foreign exchange. Moving to the next slide. We highlight net sales drivers for the third quarter. Texture & Healthful Solutions net sales were up 1%, driven by sales volume growth of 4% and foreign exchange favorability of 2%, partially offset by price/mix. Food & Industrial Ingredients LatAm reported a net sales decrease of minus 6%, largely attributed to a reduction in sales volumes, which was mainly influenced by weaker brewing demand as well as slower macroeconomic growth across the segment. Food & Industrial Ingredients U.S./CAN net sales declined 7%. The sales volume decline of 5% was impacted by the extended recovery time to normalize production at our Argo plant as well as softness in sweetener volume demand. Now let's turn to a summary of results by segment. For the third quarter 2025, Texture & Healthful Solutions net sales was up 1% and operating income was up 9%, equating to a 17.4% operating income margin, significantly higher than prior year. This result has been driven by lower raw material costs, as well as favorable volume impact, partially offset by unfavorable price/mix. In Food & Industrial Ingredients, LatAm, net sales were down 6% versus last year. Operating income declined to $116 million with an operating income margin at 19.8%, holding strong. Moving to Food & Industrial Ingredients, U.S./CAN, third quarter net sales were down 7%. Operating income was $81 million, down 18% or $18 million. driven by production challenges at our Argo plant and lower-than-expected beverage and food volume demand. As we stated earlier, we estimate that this disruption has had a $12 million operating loss impact on the quarter's results. For the all other group of businesses, the 17% increase in net sales was driven by increases across the board. Operating income was flat versus the prior year as protein fortification gains were offset by lower profits from the Pakistan business. Turning to our earnings bridge. On the top half, you can see the reconciliation from reported to adjusted earnings per share. Operationally, we saw a decrease of $0.31 per share for the quarter, driven by a decrease in operating margin of $0.22 and a volume of minus $0.12, partially offset by foreign exchange of $0.03 per share. Moving to the change in nonoperational items. We had an increase of $0.01 per share. Shares outstanding had a favorable impact of $0.05 and a lower tax rate equivalent had a $0.02 per share impact, partially offset by higher financing costs of minus $0.06 per share. Shifting to our year-to-date income statement highlights. Net sales for the first 9 months were approximately $5.5 billion, down 3% versus prior year. Gross profit dollars grew by 4% and gross margin has increased to 25.6%, up 180 basis points. Reported and adjusted operating income were $796 million and $800 million, an increase of 10% and 4%, respectively. Turning to our year-to-date earnings bridge. The result is an increase of $0.58 per share. Operationally, we saw an increase of $0.36 per share for the 9 months. The increase was driven by an operating margin increase of $0.61 as well as favorable other income of $0.14 per share, primarily from our Argentina joint venture, and these were partially offset by volume of minus $0.38. Moving to the change in nonoperational items. We had an increase of $0.22 per share, primarily driven by fewer shares outstanding of $0.15 as well as lower financing costs and tax rate of $0.03 per share each. Moving to cash flow. Year-to-date cash from operations was $539 million which includes an investment in working capital in the current year. Year-to-date capital expenditures net of disposals were $298 million. The company expects to invest in organic growth initiatives that provide a significantly higher return than our cost of capital. Lastly, we have repurchased $134 million of outstanding common shares, exceeding our share repurchase target of $100 million. We have paid out $157 million in dividends and increased the dividend per share to $0.82 for the quarter, which represents our 11th consecutive annual dividend increase. Now let me turn to our updated outlook for the year. For the full year 2025, we anticipate net sales to be flat to down low single digits with our outlook reflecting lower price/mix due to pass-through of corn costs and an updated view of the effects of foreign exchange. We anticipate that adjusted operating income will be up low single digits to mid-single digits for the full year. Our 2025 financing cost estimate will now be in the range of $35 million to $40 million, reflecting year-to-date foreign exchange impact. For the full year 2025, we expect a reported effective tax rate of 25.5% to 26.5%, and adjusted effective tax rate of 26% to 27%. We are narrowing our full year adjusted EPS range to be $11.10 to $11.30. Given the macroeconomic softness evident in the third quarter for Latin American economies and the incremental issues that we absorbed related to F&II U.S./CAN segment's Chicago plant outage. We anticipate our 2025 cash from operations will now be in the range of $800 million to $900 million. Our guidance reflects current tariff levels in effect at the end of 2025. In addition, this guidance excludes any acquisition-related integration or restructuring costs as well as any potential impairment costs. Turning to the full year outlook for each segment where we have made updates. For Texture & Healthful Solutions, our estimate for net sales is to be up low single digits. We have raised our operating income profit growth to now be up high double digits. For F&II LatAm, we have lowered our net sales outlook to be down mid-single digits and operating profit to be flat to up low single digits. For F&II U.S./Canada, we have now lowered our outlook for net sales to be down mid-single digits and operating income to be down low double digits based upon operating challenges. That concludes my comments, and I'll turn it back over to Jim. James Zallie: Thank you, Jim. As we conclude today's call, I want to emphasize the focus we have on our operational and strategic priorities. Clearly, we have a near-term focus on improving productivity at Argo and rebuilding inventories and driving sales recovery in our U.S. Food & Industrial Ingredients segment. Complementing this focus on operational excellence, the entire organization is committed to exceeding its Cost to Compete target, delivering $55 million of run rate savings by year-end. We will continue to deploy capital towards organic growth opportunities to expand and strengthen our Texture & Healthful Solutions portfolio. Lastly, we remain committed to returning capital to shareholders through share repurchases. As of the end of September, we exceeded our full year target by purchasing $134 million worth of shares and have increased our 2025 share repurchase target to $200 million, underscoring our commitment to maximizing shareholder value and reflecting our confidence in the future, we are announcing that our Board has authorized a new share repurchase program of up to 8 million shares over the next 3 years. Now let's open the call for questions. Operator: [Operator Instructions] And our first question will come from the line of Andrew Strelzik with BMO Capital Markets. Andrew Strelzik: I wanted to start on the demand environment, and I apologize if you covered some of this in the prepared remarks that I missed. But I guess I'm just curious that you're seeing that evolve. It certainly seems a bit softer than anticipated. And so I guess, are you seeing it continue sequentially to slow? Or are you seeing any signs of stabilization? In the release, you mentioned some customer mix management. I was hoping you could maybe elaborate on that as well. James Zallie: Yes, Andrew I'm going... Operator: Ladies and gentlemen, please remain on the line. Your conference will resume shortly. Once again, ladies and gentlemen, please remain on the line. Mr. Strelzik, I just want to make sure that you can hear me. Andrew Strelzik: I can, yes. Operator: Speakers? James Zallie: Yes. We're back. Operator: Okay. You're loud and clear, and we still have Andrew on the line for his question. James Zallie: Okay. Andrew, I'm going to start back with the response related to what's happening in LatAm and with Mexico and Brazil, I think that's where the line got cut off. Is that correct? Andrew Strelzik: Yes. I mean the question was broadly about the demand backdrop and if you're seeing any signs of stabilization, but then there was the comment. I think it was on LatAm about the mix management, customer mix management. I was hoping you could elaborate on. James Zallie: Right, right. Yes. So in Brazil and in Mexico, we're seeing inflation, elevated prices that are impacting the consumer. Interest rates are relatively high versus history and we do believe that's impacting consumer spending and confidence. Mexico GDP is forecasted to only grow 0.5% and Brazil's GDP is forecasted to grow only 2% It's just noteworthy to remind everyone that food spending represents approximately 20% to 30% of disposable income for the LatAm consumer. And thus, when we see softness and thus, we're seeing the cumulative impacts related to softness in beverage and multiple food categories. Moving to the United States, we saw demand for sweeteners in particular decrease in July and August. That's what the industry data showed. It was a pretty notable drop in July and August, but it did recover nicely in September. So -- but for the quarter, July and August was impacted. And of course, we, at the same time, in those months, had issues related to Argo depletion of inventories inability to sell, but things picked up in September. And again, as it relates to Texture & Healthful, we didn't see that kind of decline. In fact, the U.S. market contributed most to volume, net sales and operating income growth, but all 3 geographies grew operating income high single digits for Global and Texture & Healthful. Hopefully, that answers the question. Andrew Strelzik: It does. And as a follow-up, I was hoping you could drill down a little bit more on the Texture & Healthful Solutions segment. The change in the outlook there. Is that -- what kind of is the biggest driver of that piece? Is it more what you saw in 3Q? Is it more what your expectation is for the 4Q? I was just looking for a little more color on the guidance change there. James Zallie: Jim Gray, I'm going to let you take that . Jim Gray: Andrew, I mean, I think that as we look at Q4, we have from prior years, kind of a slightly easier lap. But I think more importantly, when we look across Texture & Healthful, it's really a diversity of customers. And so we have some of our largest customers that are in foodservice. We also have customers that are into private label as well as kind of branded CPG. So when affordability and value against either the U.S. or the European consumer, we're already benefiting a bit from what that sort of food service traffic and food service ticket looks like as well as whether it's store brands or private label brand. I think we're seeing a nice balance of our volume demand across all of our customers. And so we feel like that's a well diversified and very solid business right now that has some growth right in front of it. James Zallie: And we're also benefiting from a focus with a well-defined definition for solutions selling, where we went through a complete retraining of our go-to-market sales and technical service force. And we're into the second full year of, I would say, more advanced solution selling than we've ever had in relationship to selling differentiating ingredients, customized blends and solutions all around consumer benefit platforms around affordability, health and wellness, which are really aligned to the trends. And that's why I think we're seeing the strength in our clean label solutions growth, which again grew double digits in the U.S. and Asia Pac. Operator: One moment for our next question. That will come from the line of Kristen Owen with Oppenheimer. Kristen Owen: Jim, I did want to follow up on the F&II businesses. You gave some helpful color on Argo in the prepared remarks. But can you just help us unpack how much of the volume was sort of this macro weakening that you addressed in the first question, how much of that was sort of these company-specific events like the Chicago plant or this transition in your brewery business in LatAm? And I'm just trying to think how much of those onetime items kind of roll off in the fourth quarter and what sticks with that? If we could start there and then I'll have a follow-up. Jim Gray: Kristen, can we just clarify which segment? So U.S./CAN F&II first. James Zallie: Yes. Let's take -- why don't we take U.S./CANADA F&II first, Jim, and then maybe I'll take the LatAm F&II. Jim Gray: Yes. Okay. Is that okay, Kristen. Yes. Kristen Owen: Yes, I was hoping to get both. Jim Gray: So I think with regard to U.S./CAN F&II, so first of all, as Jim mentioned on the prerecording that the feed dryer is very much at the end of the process. When that goes down, the entire plant has to shut down and so then as we looked at those, we just -- we wanted to bring up the full recovery of the plant. And so we had a couple of impacts in terms of you have some lower value from your coproducts that you got to clear out. You also had some periodic halting of the grind, which impacted a variety of the refinery processes. And so we didn't have as much volume available. We also had to absorb some fixed costs and then as we've got running to kind of normal production rates in September, you can really put a kind of cap on those costs, and that cap is around $12 million impact to Q3. Don't really anticipate that, that's going to repeat, right? I mean, we want to work on reliability. We think about our planning as we go forward. And obviously, we plan to run at normal to full capacities in 2026. So I really don't think we're going to overlap this maintenance and the idle plant charges within U.S./CAN F&II. James Zallie: So $12 million of the $18 million decline, we would attribute to the Argo issues. The remainder related to the market weakness that we saw, which was very curious with the drop off in July and August, but the good news is we saw industry recovery in September. So let me pivot and I'll talk about LatAm. For the LatAm F&II segment, approximately 40% of the revenue decline year-on-year was attributable to soft brewing volumes. Now the largest contributing factor was related to the impact of the terms and timing of purchases associated with the rollover of significant customers multiyear agreement. That situation is now satisfactorily resolved and it should not repeat. So for color, in the quarter, Mexico was down 10% with half of the net sales decline due to brewing related situations to that unique customer situation. And in Brazil, 90% of the decline was due to brewing demand, again, predominantly related to that customer situation. And because brewing adjunct represents 18% of net sales for F&II/LatAm and a larger percentage of our volume what we've been doing is we're actively pursuing alternative paths to utilize our grind more profitably by trading up to support higher-margin products in food and confectionery. We believe this represents an exciting incremental opportunity to diversify beyond brewing and valorize our grind more profitably. So hopefully, that answers the question related to the -- what we believe is some transitory aspects in F&II with about half of the decline in LatAm was due to the brewing transitory nature, and Jim indicated about 2/3 of the decline in F&II US/Canada was related to the Argo situation. Hopefully, that's clear. Kristen Owen: No, really, I appreciate all of that color. That is very helpful in helping us understand what goes the way in the fourth quarter. My follow-up question is actually as far as thinking about fourth quarter contracting season, I understand it's a little early on 2026. But just given some of these onetime items in '25 I'm wondering if you can give us a sense of how you're thinking about price cost dynamics into 2026. I mean we've had a lot of volatility on the input cost side. And then you've got some of these onetime items on the cost side. So just some of the big buckets that we should think about from a price cost perspective into 2026 would be very helpful. James Zallie: Yes. I would say, just as it relates to contracting, obviously, we're early in the process. I would say that we're currently midway through firm price contracting in the U.S. and in Europe. So still a long way to go. And as it relates to inflationary pressures, which there are on input costs, along with U.S. cost of corn projected to be higher in '26 versus '25, we anticipate this is going to prolong customer commitments and that contracting will not be completed until late in the year. And obviously, we always do a, we think, a pretty good job of balancing all of the puts and takes, especially given the pricing centers of excellence that we have stood up over the last few years that have served us very well during the inflationary period, and now as we manage a more benign but yet still sticky inflationary period. We're cautiously optimistic that 2026 contracting will position us for another year of modest profit growth based on everything that's happening in the economies globally along with the backdrop of uncertainty. Operator: One moment for our next question. And that will come from the line of Ben Theurer with Barclays. Benjamin Theurer: I wanted to follow up on T&H, just the dynamics in the quarter and the outlook. So the first question really is related, if you could elaborate maybe with a few examples on what's been driving the negative price mix in Texture & Healthful Solutions, which at minus 5% look pretty high. So that's the first thing I would like to understand. And then I have a quick follow-up. James Zallie: Let me have Jim make that comment, Jim? Jim Gray: So Ben, on the price mix, when you look quarter-over-quarter, right? So some of the pricing that we had coming into the beginning of 2025 from Europe. We had some higher energy costs that were evident in '24. And so as energy costs had come down, that was part of our pricing mix. That's been kind of true all year as well as some of the corn -- corn was about equal, but we've also seen some higher expected corn costs and like basis for some of our specialty grains. So that's literally -- in the prior year, that was there. And then as there's been more plentiful corn some of that basis has come down year-over-year. So it's really more of a pass-through, I think, of some of the -- either net corn costs or the inputs. Benjamin Theurer: Okay. Perfect. And then my follow-up question is really coming back to some of the dynamics in Food & Industrial, Latin America and the outlook in particular. So as you're probably aware of, in Mexico, there is a proposal out which is about to be approved for a significant increase on taxation for soft drinks which would not only affect the ones with caloric content but also the ones with no sugar in it. So no caloric content at all. It's still being taxed. And the bottler is down there [indiscernible] expectation that there's going to be a significant need to pass pricing because of these taxes and with an expectation of large volume declines. So I wanted to understand what is your provisioning? And how can you kind of like protect maybe volume? Or what are you doing in order -- on your contracting side, particularly in Mexico, as it relates to the sweeteners piece, but also the non-caloric sweeteners as alternatives, which both are going to be impacted by the taxation into 2026? James Zallie: Jim, why don't you take first, and then I'll pick up on it. Jim Gray: So obviously, what Ben, you're discussing is this kind of sweetness tax that is across both caloric as well as non-caloric or light beverages that will impact in Mexico. I think that legislation is up for vote or maybe it's approved, but the effective date, I thought was January 1, 2026. So on the caloric side, clearly, the bottlers in Mexico have a choice between kind of liquefied sugar and HFCS, and we think that as you look at the cost competitiveness and the formulation for HFCS, it should lean a little bit more towards kind of the use of HFCS and then just -- and what we've also seen historically when we've seen kind of taxes go into place on beverages is that usually, there's an initial sort of sticker shock. But then after that, I think consumers generally kind of sort of accept or work that in to their overall cost of their grocery basket or their cost of lunch on the go or dinner. And so there's always usually an initial impact for anywhere between a month to 3, 4, 5 months. And then it sort of -- it works through. I think the customers that we have also are very much thoughtful around their pack -- their price pack architecture, and we'll think about value in those trade-offs. I think for non-caloric sweeteners, it's more of an interesting issue, right, which is there's a consumption tax going in will you see any separation for beverages that we sell like maybe a stevia solution into where you have where you have maybe a unique proposition on that beverage and that might be able to withstand that tax increase. James Zallie: Yes. What I would also say, Ben, is that this proposed increase, which I think is $0.17 a liter on sugary drinks. And again, nonsugary drinks but sweetened with artificial sweeteners as well that will go into effect. It's coming now maybe 8 years later than first 6.8% tax that was put in place. And as Jim said, when that went into effect, there was a dampening for 6 months to 9 months on purchases. And then what was interesting, is consumer behavior was modified and the tax actually had unintended consequences and impacted purchases of other products outside even the food category, where people then went back to products that they liked, which were some of the caloric beverages, especially consumed by laborers and the construction workers, et cetera. And we actually observe that. Now we'll see what's going to happen this time. But the other important point, Jim, that I think is important for us to highlight is we do not export a lot of, say, HFCS into Mexico. In fact, it's a very small quantity because we produce locally and we're not a large HFCS producer locally. We're much more of a glucose producer locally. So from a standpoint of how directly -- so I use the word directly going to be impacted, I don't foresee it will have a direct impact, how it impacts the industry and what indirect effects are kind of remains to be seen. But I do think it won't be a 1 for 1 that is prolonged, it will -- consumers will adjust as they did when that tax went into effect in 2016, '17 and we'll see then what happens from there. Operator: One moment for our next question. And that will come from the line of Pooran Sharma with Stephens. Pooran Sharma: I just wanted to ask about U.S./Canada F&II . I think you mentioned it in the prepared comments and in the Q&A here. I think you called out $12 million weakness from Argo and $6 million from a softer market and just parsing into that further, you mentioned softness in July and August, but a recovery in September. Were you speaking on a volume basis? And are you able to kind of share if that recovery has held into October? Or what you're seeing thus far quarter-to-date? James Zallie: Yes. I think you've summarized it accurately as it relates to U.S./Canada. And the comments that we made about July and August in U.S./Canada related to volume shipments in the industry of sweeteners, which is what we were specifically talking about and that recovery in September was also volume related and related to sweeteners. I would say it's early yet in the quarter for quarter 4, but we're not, I don't believe, going to see the July and August step-downs that we saw from an order of magnitude, and we do really believe that it was related to a subset of brand companies -- brand food companies in both beverages and packaged foods, taking price, promoting less and absorbing higher aluminum and tinplate packaging costs, passing those on. Because the 232 tariffs that went into effect actually were announced, I believe, in March. And by the time they started to be manifested at the retail level, we believe that, that onetime impact was experienced in those months. And the manufacturers were optimizing their approach to how they were going to price and thus the impact was felt by consumers. The adjustments have occurred and again, September was evidence of that. That's how we have interpreted it. And again, we need more data points going forward to really be conclusive, but that's our best understanding of what took place and how we would explain the impact in the quarter. Pooran Sharma: Great. Great. I appreciate that detail there. And just maybe wanted to understand just Argo a little bit better. Maybe I was wrong in my thinking, but I think last time we had spoke or last earnings call, you were expecting to get some of the volumes back as we work through 3Q and 4Q. So I was just wondering what you are all facing from like a production challenge standpoint. And do you see these manufacturing issues abating by 2026? Or what kind of time line should we be thinking of here? James Zallie: Yes. No, you are correct in what we had expected and what we thought was possible. The point we wanted to make and the point we'll make again is that Argo is a big complex facility factory. And when it runs well, we can make up for a lot of lost ground. And what we were expecting was that it was going to recover more quickly than it did. And unfortunately, the recovery lasted into the quarter. So not to be repetitive, but when a factory like that of that size goes down, the first challenge that we have because it impacted what we call the back end, which is the coproducts and the feed is we then lose the valorization premium on coproducts. And we have to get the plant up and running, and we have to dispose of the coproducts so it doesn't become a bottleneck and it takes time to normalize the quality of those coproducts to get the valorization. In addition, you then have periodic halting of the grind that impacts the downstream refinery processes, and then that leads to product downgrades and then that leads to under-absorption of fixed costs and unplanned maintenance costs, and we incurred all of that. The -- again, the production impacts that we experienced separate from what we saw in the industry from a standpoint of volume for us was particularly acute in July and August, but September returned to normal production rates. So the team right now is very focused. We don't want to declare victory. They are -- we're seeing steady recovery, stabilization and we're hopeful that certainly quarter 4 is going to be better than quarter 3. And then as we go into the winter, assuming we don't hit -- we've lived through polar vortexes and those kind of things. Assuming we don't have anything like that, we should be on a steady road to recovery at Argo. Operator: One moment for our next question and that will come from the line of Josh Spector from UBS. Joshua Spector: So a follow-up on the U.S./Canada side. Just specific for our fourth quarter I mean it looks like on your guidance for the year, down low double digits, it maybe implies that your fourth quarter is around $70 million in EBIT. So you're still down around $10 million year-over-year I guess, is that right? And is that primarily just comments around weaker market buying and seasonality? Or are there any other effects there? And I guess I'll ask my follow-up in addition here that around -- does that carry into the first half of next year with some of the comments around weaker consumer buying or not? Jim Gray: Josh, this is Jim Gray. I think with regard to how we think about the momentum going into Q4, we don't really expect any kind of operational issues or onetime issues, whether -- if it's the U.S./CAN Chicago plant operations or kind of the LatAm brewing what we did want to come back and just say for U.S./CAN market for the demand for beverages and food, for kind of our sweetener serves. I think we do see some customers not just branded but also private label taking price in the market. They are overcoming package -- expected package cost inflation. And our markets are always -- consumer is always going to be a little elastic. And we've seen this before. It's not dramatic in terms of the overall cost inflation that we're seeing in the market. But you are seeing some unit price increases show up in the kind of the scanner data. And I do anticipate that, that will carry into Q4 and so that's kind of what's shaped our guidance a little bit. But overall, it's not a shock. I think the U.S. consumer is in a good spot with regard to wages and affordability is always top of mind, but I think there is some necessary, if not modest pricing inflation on behalf of some beverage and food customers, and that's going to always slow the demand for sweeteners. But we're in a good spot if that sweetener demand does pick up in Q4, and that's kind of part of our guidance. Operator: One moment for our next question. And that will come from the line of Heather Jones with Heather Jones Research. Heather Jones: And apologies if I repeat anything. I got on the call late. I was wondering you talk about LatAm and as you're thinking about '26 and the Mexico tax issue that you discussed and then just the broader inflation challenges for the consumer. Just wondering -- I know you're not giving '26 guidance yet, but just wondering now, how you're thinking about that setup for next year, particularly given it's had a couple of really good years. Just I was hoping you could give us some color on that. . James Zallie: Yes. We -- let me just make a comment. We just actually celebrated our 100th year operating in Mexico. In fact, we had a Board meeting in Mexico, and we were able to meet with government officials, and we were able to hear from economists in relationship to the pulse on the economy. And definitely, the government's budget deficit in Mexico has presented a challenge along with the muted GDP growth. So we are seeing a softer Mexican economy and also some of the companies that we sell to there export to the U.S. and export to a Hispanic community in the U.S. from a standpoint of some of their products and brands. So -- and we all have read from CPG companies in the U.S. about a weaker Hispanic consumer here in the U.S. So clearly, that manifested itself in the shipments that we make to these customers in the third quarter, not really prior to that. It's starting. And you're going to have an overhang as well in relationship to USMCA negotiations that will need to be resolved or postponed by July of '26. So there will be, we believe, some uncertainty that will hang over certainly the Mexican economy and that's kind of what we're anticipating as we exit the year and as we head into the year. That all being said, the position that we hold in the Mexican market is a very solid position, very strong position. And the overall Mexican consumer has been resilient and affordability is going to be very, very important that plays to one of our strengths from a standpoint of how we work with customers on recipe development. And -- we also really know how to optimize our network down there. We've got 3 great plants, and the team is working very hard to optimize supply chains and look at cost management. So that's kind of the backdrop, and that's how we're approaching it right now. But it's early. It's really early to project too much forward what we've seen in Q3 into '26 at this point in time. Heather Jones: Okay. And then my next question is just on the share repo. This is a throwback to years ago, but I remember at one point, your shares weren't as liquid as far as how they trade and all. And so that sort of limited the optionality on the magnitude of share repurchases. So I was just wondering if you could update us as far as your thinking on that? Is there a limit to how many you want to repurchase ultimately and just update it. Thank you on that. Jim Gray: Yes. Well, first of all, I mean, why the new authorization from our Board on our share repurchase program. So our -- the program that we had in place was set to expire at the end of '25. I think overall, we're confident in the growth strategy for the company and believe that organic investment is going to continue to favorably impact cash flow growth. And so if you look at that going forward, then our capital allocation priorities are still around reliability capital, organic growth investment supporting the dividend. But after that, we have strategic cash to deploy, and we have a healthy cash balance today. And so I think we look at our repurchase history for 2024 and now for 2025 with trying to exceed $200 million of share repurchases in 2025. So we're going to anticipate that we're going to have kind of more share repurchases in '26, '27, '28 and thus the need to come back and renew and reauthorize it at 8 million shares over that time period. 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. Jim Zallie for any closing remarks. . James Zallie: Thank you, operator, and I want to thank all of you for joining us this morning. We look forward to seeing many of you at our upcoming investor events in the next engagement being the Stephens Annual Investment Conference in mid-November. And at this time, I just want to thank everybody again for your continued interest in Ingredion. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: [Foreign Language] Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. Third Quarter 2025 Results Conference Call. [Operator Instructions] And now, I would like to turn the conference over to your speaker today, Richard Perron, President and Chief Financial Officer. Please go ahead, sir. Richard Perron: Good morning, everyone, and thank you for joining us for our Q3 2025 Results Conference Call and Webcast. We will begin with a short presentation followed by a question period with financial analysts. Joining me this morning is Gervais Jacques, our CEO. We issued our financial results yesterday, and posted a short presentation on the Investors section of our website. I would like to draw your attention to Slide 2 of this presentation. Information in this presentation and remarks made by speakers today will contain statements about expected future events and financial results that are forward-looking and therefore, subject to risks and uncertainties. A detailed description of the risk factors that may affect future results is contained in our management discussion and analysis of 2024 dated February 25, 2025, available on our website in our public filings. In the analysis of our quarterly results, you will note that we use and discuss certain non-IFRS measures, which definitions may differ from those used by other companies. For further information, please refer to our management discussion and analysis. I would now turn the conference call over to Gervais. Gervais Jacques: Good morning. Thank you, Richard, and thank you all for joining us this morning. This quarter marks another financial milestone for 5N Plus, with our strongest quarterly revenue in a decade, record adjusted gross margin and a new high for quarterly adjusted EBITDA. These results reflect strong performance across strategic sectors, reinforced by our global sourcing, our manufacturing capabilities and our focus on high-growth and high-value markets. These trends have continued consistently throughout the year. In a complex environment, we are executing our growth strategy with discipline, focusing on the factors within our control. We are building on our unique advanced materials capabilities and leveraging our market positioning as the trusted partner of choice. Entering the year with incredible momentum, our performance has exceeded our expectations, improving quarter after quarter. This is reflected in the latest upward revision to our annual adjusted EBITDA guidance and sets a high bar for the year ahead. Now, let's start with an overview of our Specialty Semiconductor segment. In terrestrial renewable energy, demand remained very strong in the third quarter, with revenue for this sector up 53% over the past year. We continue to ship increased volumes to our key strategic customer under the terms of the expanded supply agreement, which we announced along with our Q2 results in August. Under the new terms, semiconductor compound supply volumes are set to rise approximately 33% above initial contract levels for 2025-2026 period, with a further 25% increase expected over the subsequent 2-year term. Our teams in Montreal and in Germany are working diligently to meet this higher demand, building on our experience from previous expansions. New equipment has mostly been installed, and we are now progressively ramping up effective capacity, with a focus on hiring and training new staff and on maximizing efficiency and productivity. Turning to space power sector. AZUR's revenues increased 43% compared to the same period last year. We have a robust long-term project pipeline firmly in place. At our Heilbronn site, the ramp-up of solar cell production is on track to add an additional 30% by year-end as planned. We continue to explore further opportunities to expand our operations and capture growing demand. On the Performance Materials side, we continue to benefit from exceptional margins despite lower volumes. This once again reflects our unique positioning in a volatile business environment and the strength of our strategic diversified global supply. Thanks to our market leadership and competitive advantages, we will continue to solidify our position as the strategic partner of choice. Looking to 2026, several demand trends are expected to support our continued growth. As discussed last quarter, domestic solar energy is expected to remain a key component of the U.S. energy equation despite shifts in U.S. energy policy. 5N Plus is poised to benefit as a key strategic North American supplier within our U.S.-based customers value chain as reflected in our expanded supply agreement. This outlook is further reinforced by the acceleration in AI adoption, which will rely on abundant clean power and seamless global connectivity. We are uniquely positioned at the intersection of both these megatrends. We can deliver the advanced semiconductor compounds required for the thin-film photovoltaics on earth as well as space solar cells using germanium substrates, which are needed for clean energy and satellite infrastructure. Although the global business environment remains unpredictable, our unique expertise and manufacturing footprint position us to grow organically while we also pursue external growth opportunities. Before moving to financial details, I would like to say a few words about Richard, who, as we announced last week, was appointed President on November 1 and will succeed me as CEO at the end of May. Having worked closely with Richard over the past 5 years, I have full confidence in his leadership, strategic insight and ability to drive 5N Plus forward. He has been instrumental in shaping our growth strategy and strengthening our operations, making him exceptionally well placed to lead the company into its next phase. This transition also comes at the right time for 5N Plus, ensuring continuity at a time of strong momentum. We believe this positions for 5N Plus to maintain its market leadership, execute on growth initiatives and continue delivering for our shareholders. For my part, I look forward to taking on the new role of Executive Chair upon Richard's appointment as CEO next May. In that capacity, I will continue to support the leadership team in the execution of our strategic priorities, ensuring that we remain steadfast in our focus on long-term value creation. With that, I'll pass it over to Richard for a review of our financial results. Richard Perron: Good morning, everyone, and thank you, Gervais, for your kind words. I appreciate your trust and support. I'm honored by this appointment, and I look forward to taking on increased responsibilities as President and to leading 5N Plus into its next chapter. I have a strong foundation and a clear strategy and a great team. I also look forward to continuing to work closely with Gervais and the rest of the Board to keep 5N Plus on its path for growth. On that note, let's move to our financial results. Another record quarter that highlights the continued strength of our strategy and operations. Increase in revenue, earnings and margins this quarter reflects the accelerating demand we have seen since the beginning of the year in the terrestrial renewable energy and space solar power sectors as well as strong pricing for bismuth-based products. Once again, these results speak for themselves. In today's complex environment, our unique positioning, expertise and agile global supply chain makes us the reliable partner of choice across our strategic sectors. We remain one of the few businesses in our sector and geographies that can both source critical minerals and recycle or refine secondary materials, a key competitive advantage in the current geopolitical context. Starting with our consolidated results, revenue in Q3 increased by 33%, reaching $104.9 million and marking a 10-year high, while year-to-date revenue reached $289.1 million. We delivered record quarterly adjusted gross margin, both in terms of dollars and as a percentage of sales. In dollars, adjusted gross margin increased by 58% to $38.7 million and came in at 36.9% of sales. Adjusted gross margin year-to-date was $102.1 million and 35.3% of sales. We also generated our highest adjusted EBITDA, which increased by 86% to a record $29.1 million in Q3 and grew to $74 million year-to-date 2025, an 81% increase compared to year-to-date 2024. Turning now to our segments, starting with Specialty Semiconductors, where we saw strong volumes across our strategic sectors, better pricing that outpaced inflation and continued benefits from economies of scale. Segment revenue was $75.2 million compared to $53 million in Q3 last year. Year-to-date revenue was $209.2 million compared to $150.5 million last year. Adjusted gross margin was 30.8% of sales compared to 24.8% in Q3 last year. Year-to-date, it was 32.7% compared to 29% last year, favorably impacted by economies of scale due to higher production and higher pricing, net of inflation. Adjusted EBITDA increased by 120% to reach $19.2 million in Q3 and year-to-date $24.5 million -- increased by $24.5 million to $55.8 million. Backlog for Specialty Semiconductors was maxed out at 365 days of annualized revenue as per our definition. However, the effective backlog in reality surpassed the next 12 months at quarter end, given our strong pipeline of locked-in orders. Turning now to Performance Materials, where we continue to experience extraordinary margins, thanks to a combination of favorable inventory positioning, strong pricing conditions over metal output -- input costs. Segment revenue was $29.7 million in Q3 compared to $25.9 million in Q3 last year, where year-to-date revenue was $79.9 million compared to $68 million year-to-date last year. Adjusted gross margin was a record 53.1% of sales in Q3 this year compared to 44.4% in Q3 last year and 42.9% for year-to-date this year versus 36.5% year-to-date last year. Adjusted EBITDA in Q3 increased by 39% to $13.3 million. Adjusted EBITDA year-to-date increased by $9 million to $27.4 million. Backlog for Performance Materials was 104 days, 23 days lower than on June. Combined with Specialty Semiconductors, this bring our consolidated backlog to 311 days of annualized revenue at quarter end, 14 days higher than in the previous quarter. Looking now at our financial position. Net debt was once again maintained at a low level of $63.3 million. This represents a decrease of $26.8 million compared to year-end. That brings our net debt-to-EBITDA ratio to 0.74x at quarter end. Our strong balance sheet and borrowing capacity continue to give us the flexibility to pursue growth opportunities. We are actively assessing potential acquisitions with a preference for the U.S., but we will take the time needed to find the right fit. In parallel, we remain highly focused on hitting our increased capacity targets, optimizing production and identifying more opportunities to expand capacity to meet anticipated demand. Turning now to guidance. For the remainder of 2025, we anticipate demand under Specialty Semiconductors from both the terrestrial renewable energy and space solar power markets to remain strong as customers look to secure advanced materials from trusted and reliable partners. Performance Materials volumes are expected to be slightly lower compared to the first half of the year, consistent with historical trends. Margins will continue to benefit from our strategic global supply chain and sourcing capabilities in today's volatile business environment. Based on our financial performance year-to-date, along with anticipated seasonality and other operational factors, we have increased our adjusted EBITDA guidance from a range of $65 million to $70 million to a new range of $85 million to $90 million. This means that 2025 will be a truly exceptional year from an earnings generation perspective, and the whole team deserves recognition for making this possible. Now, we must remain focused on execution through the end of the year. We look forward to providing 2026 guidance in conjunction with our Q4 results released in February of next year. Looking ahead, we remain prudent in an evolving geopolitical environment that could have impacts on operating costs. As a preferred supplier of ultra-high purity and high-quality advanced materials, we are well positioned to continue solidifying our leadership in key markets through the end of 2025 and into 2026. That concludes our formal remarks. I will now turn the call back over to the operator for the Q&A session with financial analysts. Operator: [Operator Instructions] Your first question comes from Amr Ezzat with Ventum Capital Markets. Amr Ezzat: Congrats on the outstanding quarter. Gervais Jacques: Thanks. Amr Ezzat: Yes, on a personal note, I'd like to congratulate both of you on the leadership transition. I'm sure I speak for many when I say it's great to see both of you continuing to play a key role in the company. Gervais Jacques: Thank you. Amr Ezzat: On to that outstanding quarter, Performance Materials, like 53% gross margin just blew my mind. You noted in the MD&A and in your prepared remarks, support from higher business pricing, product mix and favorable inventory position. Can you help disaggregate how much of that uplift actually came from pricing power versus inventory timing or other one-offs? Richard Perron: The most -- if you have to weigh the various factors, the most important factor remains the better pricing over the input metal costs, okay, supported by our unique supply chain. The inventory position is a factor, but it's not the most important in realizing the great margins that we've done in Q3. Amr Ezzat: Understood. That's great to hear. So looking ahead, how should we think about the structural floor for Performance Materials when it comes to gross margins? I've always thought of this as a 30% to 35% sort of gross margin business is like 40% plus like the new sort of bands? Or how do I think of that? Richard Perron: I have to be honest. This year's performance for that segment is also a surprise for us. But ultimately, when you look back, I mean, it's the -- we're realizing those margins because of all the different things we've done over the years. And now based on the current geopolitical environment, we're doing even better than ever anticipated. So to answer your question, looking forward, this quarter was exceptional. I'll be more inclined to look at the performance or the average performance of the first 2 quarters going forward, which still represent a fairly high gross margin. Amr Ezzat: Yes, indeed. Okay. Then on your updated 2025 EBITDA guidance of $85 million to $90 million, it implies a material step down in Q4, especially considering the last couple of quarters have just been blockbuster quarters. Can you walk us through the moving pieces driving the implied Q4 EBITDA? Is it mostly like Performance Materials maybe like coming back down to what you consider to be a normal quarter? Or is there some costs maybe embedded in Q4 that we should think about? Richard Perron: Well, there's a factor that remains under Performance Materials. Typically, if you leave aside the pricing over the metal cost, volume tends to be lower in the second half, and it's in Q4 that it occurs the most, okay? It has the biggest impact from a seasonality perspective. For Specialty Semiconductors, the volume is definitely better than in previous periods in our overall financial performance. But we're in a situation where we're going to take advantage of this Q4 to most likely accelerate some of our annual maintenance announced to start 2026 on a more stronger foot than ever, okay? We've been pushing hard on all of our teams and equipment this year. So this year, we're going to be bringing forward some of our annual maintenance that were originally planned for 2026 and other things around our operations to start 2026 in perfect shape. Amr Ezzat: Okay. Understood. So that's just like... Richard Perron: So, we are moving -- we're going to be moving maintenance schedule essentially and other projects forward. Gervais Jacques: In order to meet the growing demand for 2026, you need to be -- we need to make sure that all the equipment are in great shape. Amr Ezzat: Understood. So, you're moving forward some OpEx from 2026 into Q4? Richard Perron: It's going to have an impact, both on OpEx because we're going to be accelerating some of our planned maintenance expenses of next year. And it may have some impact also on volume that will be most likely realized starting in the new year. Amr Ezzat: Yes. Understood. And ensuring that, you've got a good first year as President and CEO. Then maybe one last one for me. On the First Solar conference call, an announcement, they were speaking about their new 3.7 gigawatt facility in the U.S. And like, obviously, the theme we've been following the reshoring, I guess, from Southeast Asia. I'm just wondering if we should think of this as incremental demand for 5N? Or is it just part of the agreement you guys just announced or the expanded agreement, I should say, that you guys announced last quarter? And if it is part of the agreement you announced last quarter, is there a potential for you guys to start to see some like pull forward of volumes into the second half of 2026 as this facility comes online? Maybe just some of your thoughts on that. Gervais Jacques: Well first of all, it's a great news to see First Solar investing in North America. I think it supports our strategy, and it's a great news. Secondly, the announcement was related to a finishing line. Then it's not the full line that they are moving. It's really the finishing part of the panels. Then we don't expect that to have an impact directly on our volume, though it was already embedded in the new contract we signed for the existing line. It does not mean that further investment will not happen for First Solar. But for the time being, it does not have a material impact on the volume we're producing to them. Remember, we're growing 33% for '25 and '26 and an additional 25% for '27 and '28. Richard Perron: But as Gervais said, it remains a very important announcement because that confirms that they're definitely extremely competitive in the U.S. market, which is one of the most important growing market. Amr Ezzat: Congratulations again to both of you. Gervais Jacques: Thank you. Richard Perron: Thanks. Operator: Your next question comes from Michael Glen with Raymond James. Michael Glen: I'll just echo Amr's comments. Congratulations on the promotion and for all of the progress made at 5N Plus since you stepped into the role as well. Gervais Jacques: Thanks. Richard Perron: Thanks. Michael Glen: Just to come back to the pricing dynamic on business. Is it natural to think, or is there a scenario where if you're getting this better pricing on the business, you will have to eventually flow that through to some of the end customers in the market? Richard Perron: No, no, no. I'm not sure I understand your question, but there's essentially the way it works, it's a bit different from one product to another. But for many of our key products that are especially performing well this year, we charge a premium over the most recent notation. And then anything that we have from a positioning or supply advantage becomes part of the profit on top. Michael Glen: So, you're able to hold on to whatever that input cost pricing is? Richard Perron: Yes, yes. That gets repriced every period or -- yes. Michael Glen: And moving over to some of the critical materials that you're involved with on the AZUR and First Solar side, germanium availability, have you seen any limiting factors with germanium availability in your global supply chain? And maybe as well, if you could comment on tellurium as well. Gervais Jacques: Well, in terms of germanium, there's definitely no problem on availability. On pricing, though, it costs more. And you've seen the germanium price increase over the last few months. But in terms of availability, there's no -- it's not an issue for us. In terms of tellurium, again, same thing. Pricing has been evolving over the last few months. But in terms of availability, we have a strategy to capture all the tellurium available outside of China. Michael Glen: And just circling in on germanium, we do get a lot of questions about sourcing of the material. Can you give us some sense as to how you source your internal needs for germanium, where the material comes from? And is there still material that does get supplied from Chinese sources in... Gervais Jacques: No. Without disclosing names, our germanium is coming from Canada, coming from Europe and some small volume from the U.S. Richard Perron: Germanium is not exclusive to China. Germanium comes from zinc and coal operations. So, there's definitely germanium available outside China. And germanium usage consumption for space applications remain quite small compared to other sectors like fiber optics and others. Gervais Jacques: And currently, there's a lot of germanium being landfilled, not being valorized. Now at the new pricing, some companies that are currently not valorizing germanium, they're looking at projects to start valorizing it. One example is Kennecott Utah Copper. They're not valorizing their germanium so far. Michael Glen: Interesting. And just one final. Just with AZUR, can you speak to what we should think about in terms of margin tailwinds at AZUR? Is there still -- for '26, '27, is there still pricing tailwinds, mix tailwinds? Just trying to think about what's still there from a margin expansion perspective. Richard Perron: Okay. On an absolute basis, as you're aware, we've been adding constantly capacity. So, you're going to have economies of scale from producing more. From a pricing perspective, we expect that we'll be able to adjust pricing over and above inflation and/or cost of the key input materials. So, that's what we foresee forward. So economies of scale from our production, while at the same time being able to adjust price based on inflation and input costs. Operator: Next question comes from Michael Doumet with National Bank. Michael Doumet: Again, congratulations on the results and obviously, congratulations on the [indiscernible]. The first question I had, and it really, I guess, leads up to the previous one. I was wondering if there was any change or evolution in how the company is currently securing China metals this year. I think you already talked about germanium, but in the previous question. But I'd like to hear a little bit more on the business side versus prior years and whether or not that's leading to [indiscernible] margins? Richard Perron: Look, we have not changed anything. We're just -- we just have, as you know, adjusted our footprint over the years in our product portfolio. And today, we've been holding on to the best of the best products, the best combination of clients and products, while at the same time, we've been investing in our assets. So today, we're in that position where we can source business at a very good price, while at the same time, products that we're making and supplying to our clients are critical, and our clients are extremely happy to rely on us for that key material. Michael Doumet: And then I guess turning to AZUR, you talked about how well that business performed in the quarter. At what point do you think you'll have enough visibility to consider another capacity expansion beyond the 30% [indiscernible]. Gervais Jacques: The way we work, and we've been super consistent on that, we are securing the contracts. And when the backlog is large enough, we're investing. Then we've been doing that since the acquisition of AZUR, and we will continue to adopt this strategy. Then so far, most of the sales for next year are already being done. We're securing contracts for '27, '28. We already have some volume after '28 already secured. Then once we're going to feel comfortable enough, we will look at further increasing the capacity. Michael Doumet: So not quite there yet, but presumably getting closer. Maybe just a third question, I guess. On the M&A piece, you spent -- it sounds like quite a bit of time doing diligence and M&A opportunities. So, I'm assuming you've refined, I guess, what you're looking at this point. Any way you can outline for us the framework or how investors should think about next deal could look like for the company? Richard Perron: It's a bit early to give details, but I guess we can say what it won't be. It won't be a start-up, and it won't be a business that does not generate EBITDA today. It's going to be a quality asset in the material technology field and/or specialty chemical field that ideally has those 3 key attributes that are behind today's success for the company, manufacturing and selling enablers to our clients, remaining a small cost component to our clients' products and ideally the relationship this business will have with its clients will be one that is referred to as a partnership rather than making and trying to sell stuff. Operator: Your next question comes from Nick Boychuk with Cormark Securities. Nicholas Boychuk: On the AZUR pipeline and capacity expansion in Germany, can you give us a little bit of color on how you're thinking about where that capacity expansion is going to happen and how much you can take the Heilbronn facility higher? And at that point, what the next step would look like? Gervais Jacques: Well, at Heilbronn, I think we have the space to further grow the capacity. Then I think we're not limited by the physical space of the Heilbronn facility. It will most likely -- the expansion will most likely happen in Germany to take on the benefit of having all the experts located at Heilbronn. Then it's really a matter of making sure that we have all the contracts on hand before further increasing the capacity. Richard Perron: We believe we still have a few rounds of capacity expansions. We're working the layout and using the available space. Nicholas Boychuk: Got it. And then switching to margins within the specialty semiconductor space. I'm hoping you can maybe unpack a little bit how much of the year-over-year improvement was due specifically to price versus economies of scale. Obviously, it's tough with First Solar given the new contracts, but how should we be thinking about what that margin profile looks like now going forward, given that effectively all of the volume with First Solar is now contracted and no longer spot? Richard Perron: Well, if you look at it from a year-to-date perspective, that should be a good level to go forward. Obviously, we'll continue to be positively impacted by economies of scale. But as we've been mentioning, being quite vocal, we expect some costs to increase due to inflation and other geopolitical factors. Nicholas Boychuk: And then last one, can you give us a little bit of an update on some of the other maybe longer-tail growth initiatives you have ongoing, things like MRI applications in defense with germanium, long-duration storage, any of those programs progressing and advancing as you'd like to see? Gervais Jacques: Well, in the case of medical imaging, I think we're collaborating with different customers. We've been developing products with them together with the different customers. They are now -- they've been testing it. They've been producing their spect scan or their photon counting detectors, depending on their products. And some of them are currently into commercialization like Siemens. Other one will soon launch their products. Then we're getting closer and closer to see the demand increasing. We have all the capacity available at our St. George, facility in Montreal. Now it's a matter of meeting the demand when the demand will be there. Then we're quite confident to see the volume increasing next year, but significantly in year 2 and 3. Richard Perron: Yes. How it's going to evolve most likely will go from spot business to long-term contracts. Nicholas Boychuk: And is that the same kind of picture that we're seeing with some of the long-duration storage and defense applications? Richard Perron: Yes, most likely, similar scenario. Gervais Jacques: Similar scenario as well, yes. Operator: [Operator Instructions] Your next question comes from Frederic Tremblay with Desjardins. Frederic Tremblay: I wanted to ask on AZUR, if you've seen any notable changes in the business environment there, whether it's from a competition perspective or customer demand in the space sector, just your update on the business environment in space? Gervais Jacques: Well, so far, if you look at the supply -- the fundamental supply and demand, we believe that the market is still stretched, meaning that the demand is currently exceeding the supply. Then we're taking -- because we were the first one to move and install additional capacity, we're taking full benefit of securing these contracts. Our competitors is also currently -- one of them is currently investing, increasing its capacity. It will have an impact on 2027 onwards. Then we have another year ahead of us to secure more contract and taking the full advantage of being the first mover. Frederic Tremblay: Great. And then obviously, in terrestrial, we know about your key customer there. But for AZUR, how is the customer concentration landscape? Is the customer base pretty broad? Or is there 1 or 2 that are the bulk of the business? Maybe just a reminder on that would be helpful. Gervais Jacques: The way it works is we're earning contracts. Then every year, if you look at our top 5 customers, there's a lot of movement. It's not the same 5 customers year after year. We do have one, which has been there for the last 2 years because we developed the product together, then they are already -- they are always on the top 5. But the remaining list is quite in motion depending on the contract we earn. Then if I look at the year to come, we will see again some changes on the top 5 list. Richard Perron: So, you have somewhere between 5 and 10 really active clients. And from one year to another, the actual revenue level changes based on the projects that we've earned with these guys. But it does not have the concentration that we have on the renewable energy. Frederic Tremblay: Understood. And then lastly, just on CapEx, maybe as we look to next year, I know it's probably tough to tell right now. But directionally speaking, should we expect CapEx to move up slightly or perhaps meaningfully if there's something to do at AZUR? Richard Perron: It's most likely going to be at a similar level than this year. Operator: There are no further questions at this time. I will now turn the call over to Mr. Perron for closing remarks. Richard Perron: Okay. Well, we would like to thank you all for joining us this morning, and we wish you all a good day. Gervais Jacques: Thank you. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good day, everyone, and welcome to the Marriott International Q3 2025 Earnings. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] I'd now like to turn the floor over to Jackie McConagha, Senior Vice President, Investor Relations. Please go ahead. Jackie McConagha: Thank you. Good morning, everyone, and welcome to Marriott's Third Quarter 2025 Earnings Call. On the call with me today are Tony Capuano, our President and Chief Executive Officer; Leeny Oberg, our Chief Financial Officer; and Executive Vice President, Development; and Pilar Fernandez, our Senior Director of Investor Relations. Before we begin, I would like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Unless otherwise stated, our RevPAR occupancy, average daily rate and property level revenues comments reflect system-wide constant currency results for comparable hotels and all changes refer to year-over-year changes for the comparable period. Statements in our comments and the press release we issued earlier today are effective only today and will not be updated as actual events unfold. You can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks today on our Investor Relations website. And now I will turn the call over to Tony. Anthony Capuano: Thanks, Jackie, and good morning, everyone. We are pleased with our third quarter financial results, which were ahead of our previous expectations. Development activity remained strong, and we grew our industry-leading global portfolio of rooms by 4.7% year-over-year to over 1.75 million rooms across more than 9,700 properties at the end of September. As expected, RevPAR growth in the quarter was modest, reflecting ongoing global macroeconomic uncertainty. Our hotels continued to gain RevPAR index. Third full quarter global RevPAR rose 0.5%. International RevPAR grew 2.6%, again outperforming the U.S. & Canada, where RevPAR was down 0.4%. By region, RevPAR growth was strongest in APEC, which has been benefiting from solid macroeconomic growth in many countries and double-digit rooms growth. Third quarter RevPAR in APEC increased nearly 5% driven by robust ADR growth and higher demand from international travelers, particularly from Greater China and Europe. Third quarter RevPAR in EMEA rose 2.5% on increases in both ADR and occupancy, led by strong regional demand. Excluding the impact of the Olympics in France and the Euro 2024 in Germany last year, EMEA RevPAR would have been up 5%. RevPAR in CALA rose nearly 3% with gains in both ADR and occupancy and helped by citywide events in Puerto Rico and Rio. City Express hotels across the region are seeing meaningful benefit from being integrated into our ecosystem and are performing very well. The operating environment in Greater China remains challenged by weaker macro conditions, though our market share across the region continued to grow. With year-over-year comps easing and demand stabilizing, RevPAR was flat and would have been slightly positive, excluding the impact of multiple typhoons. Leisure demand was solid, offsetting a decline in business transient demand. The slight RevPAR decrease in the U.S. & Canada was driven by declines in select service brands, which offset nice gains in luxury along with calendar shifts impacting group. Third quarter group RevPAR decreased 3% while leisure was up slightly and business transient was down slightly compared to last year. Business transient was further impacted by government RevPAR declining 14%. Globally, RevPAR growth was again strongest at the higher end as high-end consumers have demonstrated resilience to macroeconomic uncertainties and continue to prioritize traffic. Luxury RevPAR rose 4% as performance weakened down the chain scales. Our portfolio is well positioned to benefit from outperformance at the upper end as 10% of our rooms are in the luxury segment and another 42% are in the full-service premium segment. By customer segment on a global basis, leisure transient continue to lead RevPAR performance, rising 1%. Business transient RevPAR was flat and group RevPAR declined 2%, reflecting timing of events. As Leeny will discuss further, RevPAR growth is anticipated to accelerate from the third quarter, with RevPAR expected to increase 1% to 2% in Q4 compared to the prior year. Full year 2025 RevPAR is still anticipated to rise between 1.5% and 2.5% year-over-year. We also still expect strong net rooms growth in 2025 and beyond, as owners continue to show preference for our brands. Despite higher construction costs and the challenging financing environment in both the U.S. and Europe, we still have excellent momentum in our global signings. During the first 9 months of the year, signings reached a record year-to-date level. Our pipeline grew to a new high of more than 596,000 rooms at quarter end with over 250,000 pipeline rooms under construction. Conversions remain a key driver of our portfolio expansion, reflecting the many revenue and cost-related benefits of being part of the Marriott ecosystem. Conversions accounted for around 30% of both signings and openings in the first 9 months of the year. We remain keenly focused on driving growth and are being in more places around the world with the best brands and experiences. In September, we launched outdoor collection by Marriott Bonvoy, which includes Postcard cabins and Trailborn hotels. This new portfolio offers guests unique outdoor-focused stays with easy access to popular activities like skiing, snowboarding, biking and hiking. We also announced the U.S. debut of Series by Marriott less than 3 months after the brand's initial launch with an agreement to convert 5 select-service found hotels in major U.S. cities. As the largest global lodging loyalty program, Marriott Bonvoy serves as a powerful engine for guest engagement and bring significant value to our owners and franchisees. Membership grew to nearly 260 million members at the end of September, up 18% year-over-year. The power of Marriott Bonvoy is evident across our many adjacent businesses, including Marriott Bonvoy boutiques, Marriott Media Network, Homes & Villas by Marriott Bonvoy and our portfolio of 32 co-branded credit cards across 11 countries. Our U.S. cards are by far the largest contributor of our credit card fees. Our current U.S. deals were signed in 2017 and extended in 2020 and we are currently in active discussions with our current credit card partners. Our best estimate right now is that we could have new deals in place, sometimes next -- sometime next year that reflect the increased relevance of Marriott Bonvoy and the significant growth of our global lodging portfolio. On the technology front, we continue to progress in the multiyear evolution of our property management, reservations and loyalty platforms and the deployment of new cloud-based systems across our global portfolio, which we believe will enable Marriott to have an industry-leading technology stack, leveraging best-in-class technology architecture and proprietary innovations, this tech transformation is expected to deliver a new ecosystem of capabilities and revenue-driving opportunities on property. Owners are excited about the potential top and bottom line benefits at their hotels. The first few hotels recently started to transition onto the new systems and associates have shared very positive feedback about the new capabilities and how they empower them to deliver on the customer experience. We plan to continue deploying our systems to hotels around the world over the next few years. We're also excited about increasingly leveraging AI across our business with a focus on areas like content creation, augmented business intelligence for associates and more efficient processes that help associates deliver elevated customer experiences. Before I turn the call over to Leeny, I want to thank our fantastic teams around the world for all that they do. Their commitment and perseverance are invaluable to our continued success and among the many reasons I remain incredibly optimistic about Marriott's future. Leeny? Kathleen Oberg: Thank you, Tony. Our results today demonstrate the power of Marriott's business model and the numerous levers driving our earnings growth. Despite continued macroeconomic uncertainty and modest global RevPAR growth, our third quarter adjusted EBITDA rose 10% and our adjusted EPS grew 9%. As Tony noted, third quarter global RevPAR increased 50 basis points, in line with expectations, driven by nearly 1% ADR growth, offsetting a 30 basis point decline in occupancy. Third quarter total gross fee revenues increased 4% year-over-year to $1.34 billion. The increase primarily reflects rooms growth and strong co-branded credit card fee growth. Co-branded credit card fees rose 13%, reflecting robust card acquisitions and meaningfully higher global card spending as well as the timing of point transfer promotions. Fees from our international cards, which continue to ramp nicely, rose nearly 20%, driven by particularly strong performance in Japan and the UAE. Incentive management fees, or IMF, totaled $148 million higher than previously anticipated, down 7% year-over-year. The change was primarily due to declines in the U.S. & Canada, reflecting some large hotels undergoing renovations in the third quarter this year and certain hotels in Florida benefiting from insurance proceeds in the third quarter last year. Owned, leased and other revenue, net of expenses, surpassed expectations, rising 16% compared to the prior year. The year-over-year increase was largely driven by contributions from the Sheraton Grand Chicago, which we purchased in the fourth quarter last year as well as improved performance at other hotels in the portfolio. Third quarter G&A declined 15% compared to last year's third quarter, which included a $19 million operating guarantee reserve for a U.S. hotel. The year-over-year decline also reflects timing and lower compensation costs as we continue to benefit from the work we did last year across the enterprise to enhance our efficiency and productivity. The strong growth in gross fee revenues and owned leased and other net coupled with the decline in G&A led to adjusted EBITDA increasing 10% to $1.35 billion, above the high end of our guidance. Now let's talk about our outlook. With ongoing economic uncertainty, we expect global RevPAR to increase 1% to 2% in the fourth quarter. The acceleration in global RevPAR growth from the third quarter to the fourth quarter is partially due to calendar shifts and onetime events. RevPAR growth is anticipated to still be meaningfully stronger internationally than in the U.S. & Canada, and higher-end chain scales are expected to continue to outperform lower-end chain scales. As we look ahead to next year, while we're still working on our budget, our preliminary view is that 2026 year-over-year global RevPAR growth could be similar to the 1.5% to 2.5% growth expected this year. Growth is expected to again be higher internationally than in the U.S. & Canada. And next summer's World Cup could contribute around 30 to 35 basis points to full year global RevPAR growth. Turning to this year's P&L in the fourth quarter. Gross fee growth could be in the 4% to 5% range. Compared to prior expectations, this outlook reflects slightly lower expectations for IMF and fees on F&B revenues in Asia. Fourth quarter IMF are now expected to rise in the low to mid-single-digit range, partially reflecting the timing of some fees that shifted to the third quarter. Full year IMFs are anticipated to be around flat with last year. Fourth quarter RevPAR fee growth will still be impacted by the timing of residential branding fees, which are expected to be down year-over-year. Fourth quarter adjusted EBITDA is expected to increase 7% to 9%. For the full year, we expect gross fees to increase around 4.5% to 5% year-over-year. Full year co-brand credit card fees are now anticipated to grow roughly 9%, primarily reflecting stronger-than-expected third quarter performance. Timeshare fees are still expected to be around $110 million, and full year residential branding fees are now anticipated to decline around 20%, a meaningful improvement compared to expectations at the beginning of the year, reflecting the continued success of our residential business and the volatility in the timing of residential project sales. Owned, leased and other revenue, net of expenses, is expected to total around $370 million. 2025 G&A expense is anticipated to decline 8% to 9% to $975 million to $985 million. This decline reflects roughly $90 million of above property savings from our enterprise-wide initiatives to enhance our effectiveness and efficiency across the company that is also expected to yield cost savings to our owners. Full year adjusted EBITDA could increase between 7% and 8% to $5.35 billion to $5.38 billion. Full year adjusted EPS could total $9.98 to $10.06. Our full year adjusted effective tax rate is expected to be just over 1 percentage point higher than a year ago, given the shift in earnings to higher tax rate jurisdictions. Our underlying full year core cash tax rate is still anticipated to be in the low 20% range. Our 2025 net rooms growth is still anticipated to approach 5%. As we look ahead to the next few years with our strong momentum in global signings and conversions in particular, we still expect global net rooms growth in the mid-single-digit range. Full year total advertisement spending is expected to be roughly $1.1 billion or $1.45 billion, you include around $350 million for the citizenM transaction. Our capital allocation philosophy remains the same. We're committed to our investment-grade rating, investing in growth that is accretive to shareholder value, and then returning excess capital to shareholders through a combination of a modest cash dividend, which has risen meaningfully over time and share repurchases. We're pleased with the company's strong year-to-date cash flow performance and outlook. Given strong cash flow generation, we expect full year capital returns to shareholders to be roughly $4 billion while maintaining our leverage in the lower part of our net debt-to-EBITDA range of 3 to 3.5x. The operator can now open the lines for questions. Please ask just one question each so we can speak to as many of you as possible. Thank you. Operator: [Operator Instructions] We'll take our first question from Shaun Kelley with Bank of America. Shaun Kelley: Tony or Leeny, obviously, the language around the credit card program and renewal conversation there is new. So I think we're going to field a lot of questions on the parameters of what that deal could look like. So obviously, these things are delicate while they're in negotiation. But maybe you could put it in perspective, a couple of things for us. One, just current size of the program; two, how we should think about maybe what's on the table or what could be renegotiated relative to maybe some of the growth rates that you saw back when you combined the programs and did the renegotiation back in 2017? I think just some parameters around that would be helpful. And then third, if I can sort of add it into the general gist. Earlier late in the year would be helpful just because it could be a meaningful earnings contributor. So just any timing refinement would be useful, too. Anthony Capuano: Thank you, Shaun. Well, the good news is you've been asking for a few quarters, so I'm going to make you happy that we talked about it. That news, I'm probably not going to give you the specificity you want for exactly the reason you described that we are still -- we are in active and fluid negotiations. But maybe I can give you a little bit of atmospherics around how we're thinking about it. And then if it would be helpful, I might ask Leeny, just to remind you about how the mechanics of the program work. As we said in the prepared remarks, we're in active discussions with our current partners. The power of Bonvoy, the value that Bonvoy owing to our customers, the strength of the portfolio and the brands, the broad array of experiences that we offer without question, make us one of the most attractive customer groups in any industry for our partners in financial services as they think about credit card products. Number one. Number two, as Bonvoy continues to grow, that growth translates to more cardholders, more spend. And we expect to see that reflected in growing co-brand credit card fees. And you heard Leeny talk a little bit about that. And then I would just remind you that when we did the deals originally in 2017 and then extended them in '20, the value that Marriott and Bonvoy brings to these partnerships has grown exponentially. So I mean, when we did the deal in '17, Bonvoy didn't even exist. We launched it in '19. The membership in our loyalty platform has more than doubled from 110 million members back in '17 to the nearly 260 million that we described earlier in the call. Since the end of '17, the number of co-brand accounts and global spending on our cards have both grown by about 80%. And our system size has grown from around -- or has grown around 50% from 6,400 properties globally back in 2017 to over 9,700 at the end of Q3. So with that, Leeny, I might ask you to remind Shaun and the rest of the participants just exactly how the mechanics of the program work. Kathleen Oberg: Sure. And thanks for the question, Shaun. I think it's definitely too early to talk about potential upside from these deals. But I think kind of a reminder about how the basic economics of the credit card partnerships work is useful. Our credit card partners basically pay us overwhelmingly variable amounts with the funding mostly based on the volume of cardholder spend with some additional smaller payments based on items like number of free night certificates, et cetera, a number of loyalty program points actually purchased by cardholders. And it's really worth remembering that the co-brand card payments actually account for more than half of the Marriott Bonvoy program funding. And the co-brand financial services companies actually pay a higher amount per point than what our hotel owners pay. So it's an important part of the overall benefit to our hotel owners and frankly, to the power of Marriott Bonvoy and what we can provide in value to our Bonvoy members. And then as you think about what then flows into Marriott's income statement, obviously, we recognized revenue in our franchise schemes that gives a compensation for the licensing of our intellectual property. And so we take a royalty rate to earnings that is essentially a percentage of the total credit card funding. And so as we move forward, well, it would actually, of course, not make any sense for us to talk about specifics in the negotiations, I think Tony was clear in pointing out the increased relevance of Bonvoy overall. And we're very excited about the how our cards have done and how they continue to perform and are very optimistic about the outcome next year of these discussions. Anthony Capuano: And then I think, Shaun, your last question was you were hoping for some specificity on timing. Again, we are in the throes of negotiation, hard to give you a specific other than to tell you, given the value we think these projects will unlock for our financial services partners, for Bonvoy and our owner community and for Marriott International, the teams will work diligently to try to get them done as reasonably quickly as possible. Kathleen Oberg: And just as a reminder about how we're performing this year, in 2024, our credit card branding fees were $660 million, and we're looking at that growing this year, 9% in 2025 from, again, the continued powerful of the credit card partners and Marriott Bonvoy. Operator: We'll hear next from Michael Bellisario with Baird. Michael Bellisario: Can we dig into the health of the franchise, I think just this year, you've reduced loyalty chargebacks, you've expanded your renovation scopes framework, I think, to our brands. And obviously, RevPAR has slowed. So I guess 2 parts. What are owners still asking for? What else can you provide them to ensure that economics remain attractive and you can go back to your mid-single-digit net unit growth target? Anthony Capuano: Yes. So there's a lot in that question. I'll try to unwrap. I think the fact that through the first 9 months of the year, we have on a global basis, achieved record signings is indicative that I think we're hitting the right mark with the owner and franchise community. We are focused on driving enhanced top line performance. And we think that, that's one of the most compelling features of technology transformation journey that we're on. We think that represents some really exciting opportunity to continue to drive top line. The reduction in the loyalty charge-out rate was an example of an ongoing effort to identify across the landscape opportunities to reduce affiliation costs. And then we continue from the work we started last year, not just to lower corporate G&A expense, but to look for opportunities for margin enhancement across the portfolio. Kathleen Oberg: And I'd just add to that, that as we do all the normal comparisons of our affiliation costs against our competitors, we believe we have the lowest affiliation costs relative to revenue in the industry, and we expect that our economies of scale to continue to work on improving that even more. Operator: We'll go now to David Katz with Jefferies. David Katz: One of the observations is the investment spending has sort of moved up to the high -- I think the higher end of the range for what the guidance was before. I can venture some guesses as to what's driving that, but I'd love to have you sort of unpack that a little bit. And in particular, give us some color on key money and how that is trending because I suspect that's one of the drivers there. Kathleen Oberg: Yes. Well, thanks, David very much for the question. I'm happy to. As you remember, when we talked at the beginning of the year, we talked about these expenses, these investments breaking up into roughly 3 fairly even categories, which is key money, tech investments and then CapEx expenditures in our owned, leased and existing portfolio. And from that standpoint, it's actually not development-related key money. The increase is really around clear visibility around the nondevelopment-related expenditures. So for example, the timing of tech transformation investments, owned, leased CapEx, timing, investment in our existing hotel base when there may be a particular asset sale, et cetera. So in that regard, it's really not reflective of any sort of change in our key money philosophy or actually the amounts that we're spending relative to key money. As you know, very often, the deals that you signed or for hotels that are either converting over the next year or so or for new build hotels, which then don't actually open for several years. And the comments that we've made about our key money used in new unit development are actually quite consistent in terms of both amounts and the way that we're using it. Operator: We'll turn now to Dan Politzer with JPMorgan. Daniel Politzer: I wanted to go back to the 2026 outlook, the 1.5% to 2%, 2.5% RevPAR growth. I mean it seems like you guys are kind of extending or assuming a status quo mostly hold here, but maybe you can unpack that a bit in terms of what you're seeing across leisure, business transient and group for next year? And any kind of color on pacing there, too. Kathleen Oberg: Yes. sure. Absolutely. We'd be happy talk about that. So first of all, just a reminder that we have talked -- we said in our prepared remarks, we continue to expect that U.S. will be lower than international and that overall, broadly speaking, we'd expect it to be roughly the same globally. I will say that we would expect the U.S. to end up slightly higher next year than this year, and a lot of that benefit is related to the World Cup. So when you think about the World Cup next year, having a very healthy impact on U.S. and Canada that from that standpoint, this extra 30 to 35 basis points globally is heavily squarely in the U.S. and Canada benefit side of things. When I think about group, I think it is, again, very encouraging to see that our group pace for next year is up 7%. That's similar to a year -- to a quarter ago. And actually, group pace for the U.S. is up 8%. So I think as we look into next year, I do agree with you that I expect leisure to continue to be a stronger performer on a relative basis and particularly in the upper chain scales. But overall, a fairly similar environment globally. Anthony Capuano: Yes. And I might just reemphasize the comment I made in the prepared remarks, and that is to remind yourself of the distribution of our portfolio with 10% of the rooms in the luxury tier and another 42% in upper upscale. We've had questions the last couple of quarters about the sustainability of the high end and to post another quarter with 4% RevPAR index leading the charge, I think, is a pretty powerful illustration of the strength and appetite of that luxury consumer. Operator: We'll go next to Conor Cunningham with Melius Research. Conor Cunningham: Sorry to go back to the credit card for a quick second here. Can you talk about the benefits of being between Amex and Chase? Is there anything that that's helpful having 2 partners rather than one? And then if you could just high-level talk a little bit about the opportunity there. Like is it further -- is there just like a scale opportunity from having 2 different providers in general? Anthony Capuano: Yes. Thanks for the question. Happy to take it. We are obviously delighted with the success of the dual insurer strategy we've had since 2017. Having 2 issuers, it's really the success of that strategy is demonstrated by the growth of our branding fees and our partners' contributions to the loyalty program. And you heard Leeny provides some context to that. Going with the dual issuer approach gives us access to what we think are 2 very complementary customer bases, gives us the ability to achieve really broad market coverage while providing customers with a unique set of choices. So we think it's a really powerful opportunity for us. It also gives us -- gives our cardholders greater trial and point transfer sales with their proprietary card base. Operator: We'll go now to Stephen Grambling with Morgan Stanley. Stephen Grambling: Just wanted to dig into the pipeline a little bit. I think you touched on this a little bit in your intro remarks, but it looks like you had a sequential improvement in the under construction in particular, also grew pretty substantially year-over-year. So just curious where some of that strength is coming from? And if you've seen any kind of change in the environment from changes in rates or otherwise? Kathleen Oberg: Yes. Sure, absolutely. First, I'm going to point out, Stephen, what has continued -- which continues to be a real trend, and that's all around conversions. So the momentum around conversions has not stopped, and that obviously feeds into our under-construction pipeline in a material way. And we fully expect 1/3 of our room openings this year to be conversion rooms. And frankly, when you look at our signings that trend, it's not doing anything except staying the same, if not actually moving up a little bit. So I think that's very encouraging as you look at rooms growth. But when you talk about the under construction pipeline is probably a good reminder that in the U.S. that Marriott has kind of the leading share of both signings for new build construction hotels as well, it's actually what's under construction at 29% of signed and 28% of under construction. And we did see a pickup in Q3 of rooms going under actually digging the shovel in the ground. But I would say overall, the trend is fairly similar. We are still meaningfully below construction starts for compared to 2019. And when you think about the environment, we don't see a major trend. Clearly, as you look at dropping rates that should help. We are seeing a bit of a pickup in asset sale transactions in proven markets with proven brands. But I would say we still need to see more improvement on the financing environment to see a dramatic pickup in new build construction starts. But again, every little bit of momentum is appreciated that we are seeing a little bit. Operator: We'll go next to Patrick Scholes with Truist. Charles Scholes: In relation to the last question, can we drill down a little bit about the development -- the latest trends in the development environment and APAC and China? Kathleen Oberg: Yes, sure. So basically, we're thrilled with what we see in terms of both rooms growth and continued signings in Asia. Let me talk first about Greater China, again, broadly speaking, both areas are seeing double-digit rooms growth and continued disproportionate share of signings as we move forward. So when you look at the pipeline, I would say we've got a situation where in APAC, you've got 8% of our existing rooms while 15% of our pipeline and in Greater China 11% of our existing rooms and 18% of our pipeline. So really great progress there. And they have different situations where in APAC, you've got a number of economies that are growing rapidly and meaningful need of greater lodging supply to meet the demand growth. And so when we think about markets like India, Indonesia, Japan, we just see continued outperformance for Marriott as compared to our competitors in signing new deals across all the chain scales. We're continuing to do lots of premium deals there, but also now seeing more extension down into the upscale and even mid-scale space. In Greater China, it's obviously a little bit of a different story, where there, while we see the same big increase in signings growth, it is much more concentrated in the upscale tier. And from that standpoint, you're seeing investors appreciate the relatively lower volatility and lower unit costs for developing a hotel as compared to a luxury hotel in a Tier 1 city, for example. So as we see the continued growing strength of our brands in Greater China, the demand for a strong model that has the power of Marriott Bonvoy and also very competitive affiliation costs and operating costs, those brands are doing particularly well. So we've seen very strong improvement there. And again, just as a reminder from a Greater China perspective, we are right now still seeing a bit higher percentage of domestic travelers than we did pre-COVID in the low 80 percentage. And I think it's a good reminder that our hotels provide jobs for Chinese citizens. They're overwhelmingly for Chinese customers. And as our brands grow in strength, you are seeing this growth across markets and across chain scales for Marriott International. Anthony Capuano: And Patrick, just to quantify some of that greater China momentum that Leeny described. Year-to-date through the end of the third quarter, our room signings in Greater China are up 24% year-over-year. Operator: We'll hear next from Brandt Montour with Barclays. Brandt Montour: I was hoping we could double-click on business transient. It doesn't sound like you guys are baking in a dramatic recovery in the fourth quarter or your comments on '26, but trends did seem to sort of worsen as of late. So just wondering how much of that was the government shutdown or government-related and ex government, have you seen trends stabilize or any sort of green shoots there you can talk about? Anthony Capuano: Yes. Let me give it a try. The global business transient in the quarter was effectively flat, but there was a sequential improvement versus Q2 when global BT was down 2%. Global BT RevPAR, if you exclude government, to your point, was actually up 1% year-over-year, but we saw government transient down 15% year-over-year. And I think as we look into 2026, a little bit more of the same, the larger companies that make up BT, we're seeing actually pretty encouraging strength, but you are seeing a bit of hesitancy from some of the SMEs as they try to navigate the volatile economic environment. Kathleen Oberg: And the only thing I'll add is that on a -- from a kind of relative basis of the larger corporate BT versus the small and medium-sized businesses, we did see relatively more weakness in the smaller and medium-sized businesses, which, as you might imagine, has a bit greater impact on our select service brands. Operator: Your next from Aryeh Klein with BMO. Aryeh Klein: Going back to the credit cards, there's been some pretty big program renewals for premium cards at both Capes and Amex with their own offerings. I'm curious if you view that as competition in any way? And what, if anything, that might mean for the upcoming renewals? Anthony Capuano: Yes. Listen, I think it's not limited to those companies. There is a broad recognition across the financial services players about the strength and the long runway for travel-related spending. Certainly, in the context of the discussions we've been having with our partners, we think those cards can exist and be complementary. But it's something that will be incorporated into the ongoing discussions. Operator: We'll hear next from Richard Clarke with Bernstein. Richard Clarke: I guess you gave some helpful color on how you're using AI artificial intelligence internally. Just any comments on the sort of external use, making your hotel discoverable, bookable through ChatGPT and other platforms. Do you see that as an opportunity? Is that something that's being worked on at Marriott? Anthony Capuano: Yes. Without question, when we think about our distribution strategy broadly, we are increasingly certain that AI platforms can and will be helpful new distribution channel for us. More and more guests are going to use them for trip suggestions, trip planning. While the search and the commerce models are still, you could argue in their infancy, we are certainly optimizing the content across our platforms to take advantage of GenAI services. Our channel strategy broadly is designed to ensure we've got broad reach across all traditional and emerging channels. And certainly, generative AI, Agentic AI falls squarely in that emerging category. Operator: We'll turn now to Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Wanted to ask you about any changes you're seeing in underlying seasonality. One of the things we've heard from the airlines has been a shift in the underlying seasonality to Europe, a little less focus on peak summer, July and August and better trend in the fall with October seeing more demand versus maybe the pre-pandemic period. I wonder if you're seeing this elongated peak seasonality too? And can you just remind us how much of your Europe demand comes from U.S. point of sale? Anthony Capuano: Yes. While Leeny's pointing that, I want to give you the precise number, I'll give you maybe a more anecdotal answer. I've been on the road for the last 6 or 7 weeks. I was in a few cities in Europe, I was in Rome and Milan and Venice. And walking around in October in those markets felt like the traditional rounds in June and July. I do think some of that is weather related. I was in Florence talking to our teams there, and they said the pretty significant press coverage about elevated temperatures during traditional peak season caused a bunch of rebookings into the fall. As I talk to our operators across Europe, there is certainly a view that the season, it's extending earlier into the spring and later into the fall. And Leeny and I were in Japan for the opening of our new JW Marriott in Tokyo. And I think we saw the same thing there, a really strong extension of peak season into the fall. Kathleen Oberg: Yes. So just from a just straightforward numbers perspective, the mix of U.S. customers in Europe in Q3 this year was 36%. For the full year last year, it was 33%. So there's not really a huge shift. I think, generally speaking, looking to see if there are any other of kind of categories that look meaningfully higher. And just a little bit more from certain other parts like APAC, et cetera. But I'd say overwhelmingly, pretty similar. You would have thought that with FX, with the weakening dollar that you might have seen more of an impact, but we still saw a very strong summer results. And then just as a reminder, there were certain events that happened in Q3 a year ago as compared to this Q3, like the Paris Olympics, which I think also is just a point to mention. But from an overall seasonality, we've got the boomers, obviously traveling all over, but I'd say no major shifts. Operator: We'll go next to Smedes Rose with Citi. Bennett Rose: I just wanted to go back to the rooms growth expectations. Just a little bit, just because we keep hearing a lot of discussion, which we have for some time now around kind of the K economy, the lower end consumer not doing that well, and we certainly see it showing up in kind of select service, limited service RevPAR numbers and that softness, I think, in general, it is expected to continue. Do you have a sense of how developers in the U.S. are thinking about returns on that kind of products have they come down? Do you feel like you'll take more share given the strength of your brands within what is being built? Or just kind of curious like how does the developer decide to put a shovel on the ground now given what we're seeing, at least on the revenue side? Kathleen Oberg: So I'm going to talk about 2 effects of this, and one is on conversions and one is on new build because I do appreciate the opportunity to have a little advertisement regarding our growth in mid-scale. We've only been in the mid-scale space a couple of years. We've already got 200 rooms open, and we've got well over 200 more in the pipeline in the mid-scale space across our StudioRes, City Express and Four Points Flex. Anthony Capuano: Hotels. Kathleen Oberg: Hotels. Yes. And in the U.S. and Canada, for example, we've got 150 mid-scale hotels in the pipeline. So it's really very excited about the opportunities there. And to your point, we actually see meaningful interest in the conversions to our brands for the strength that we provide relative to revenues as well as extremely competitive affiliation costs. I think on the new build side, there continues to be a host of factors that have meant that there is a bit more reluctance and part of this is around expectations on interest rates, i.e., when might it be that money is cheaper on the financing side and when the constraints around exactly how much debt and equity have to be put in, whether that will change. Now we've also got the reality that you've seen labor cost and construction costs also have gone up meaningfully over the last few years. And so seeing those moderates would be helpful as well. That being said, we continue to see a steady drumbeat of new hotels going under construction. But I think we all have to recognize that compared to 2019 when the financing costs were close to 0, that it is a different environment. But we think from an attractiveness of the asset standpoint that it still fits many of the qualities for a limited service hotel, where you see strong cash on cash yields, fairly steady performance over time and a good environment. So I think some of this is about standing on the sidelines and waiting to go back in rather than not doing the deals at all. Operator: We'll go now to Lizzie Dove with Goldman Sachs. Elizabeth Dove: I just wanted to ask if you have any kind of appetite for whether it's kind of small tuck-in M&A or partnerships similar to kind of citizenM. And if so, if there's any kind of areas of the portfolio you'd be looking to kind of fill out more? Anthony Capuano: Sure. So at the risk of being repetitive, I'll give you the answer I've given you in the past, which is I don't think the team feels any burning need to chase M&A in pursuit of scale. Thankfully, we enjoy industry-leading scale. We'll apply the same lens that we've applied historically to opportunities that may present themselves. And the lenses we have applied if we see a geographic area that we think represents real opportunity for growth and/or represents an important outbound demand generation market, and we are dissatisfied with our pace of organic growth, we might look for an opportunity. If we scan our brand architecture and we see a gap that we think is more effectively filled by a tuck-in M&A acquisition versus the launch of an organic platform, we would consider it there. But again, I think we'll be quite deliberate and will apply same financial rigor that we always do and as was evidenced in a deal like citizenM. Operator: We'll turn now to Meredith Jensen with HSBC. Meredith Prichard Jensen: Maybe following on a little bit from what Richard and Lizzie asked. On the launch of the Bonvoy Outdoor, I was hoping you might speak a little bit about how this sort of dedicated digital vertical within Bonvoy might sort of serve as a framework for future loyalty sub kind of ecosystems or if this was more opportunistic given that homes and villas and some of the properties were already on a sort of separate platform for digital integration. And maybe just to add on to that, if sort of looking at these platforms like citizenM or the outdoor platform sort of shift your way of thinking about digital distribution in a broader sense. Anthony Capuano: Yes. Let me give it a try. The -- some of this is really inexorably linked to the central reservations transformation, which we think will be quite reflective of how our customers want to shop. So the ability to search our portfolio through passions as opposed to simply a geographic search. Homes and villas is a good example of that. Outdoor collection is a great example of that. So rather than saying I want to go to Costa Rica or I want to go to Hawaii, I made search surfing options within the portfolio. And the new central res system will give our guests a seamless ability to do that. CitizenM, I would view as a little more traditional. It's a terrific product, but I think that will likely benefit from a more traditional geographic search. Kathleen Oberg: I think the only thing I would add is as you talk about kind of the broader view of what our digital channels provide and how we think about that platform, obviously, we want people to be coming to the Bonvoy platform and then being able to do their shopping and their communication with us however they choose, whether it's by city or whether it's by activity. But one thing just as a really critical piece that we view an ultimate critical component of it is that we control the experience that our customers have. And that is where we really want to be the providers of fantastic experiences of being able to communicate with them about what they want, what they need, how they want that to go. And so while yes, the digital shopping is very important, at the end of the day, the face-to-face person-to-person way that people experience their lodging stays is something that we feel very strongly about, and we'll want that to be part of the overall advantage. Operator: And ladies and gentlemen, with no further questions at this time. I'd like to turn the floor back over to Tony Capuano for any additional or closing comments. Anthony Capuano: Great. Well, thank you all again for your continued interest and coverage of Marriott. Leeny and I have both been on the road quite a bit. We have some extraordinary hotels and some new additions to the portfolio. Our teams continue to be as passionate as engaged as you would hope, and we look forward to seeing you on the road and hosting you. Have a great afternoon. Operator: Thank you. Ladies and gentlemen, that will conclude today's event. Thank you for your participation. You may disconnect at this time, and have a wonderful rest of your day.
Operator: Good day, and welcome to the Costamare Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Gregory Zikos, CFO. Please go ahead. Gregory Zikos: Thank you, and good morning, ladies and gentlemen. During the third quarter of the year, the company generated net income of about $99 million. After the spin-off of Costamare Partners Holdings Limited, Costamare Inc. remains the sole shareholder of 69 containerships as well as the controlling shareholder of Neptune Maritime Leasing. In September, following up from our previously announced order of 3,100 TEU capacity containerships, we exercised our option for 2 more sister ships to be delivered in Q1 2028. Upon delivery, they will also commence an 8-year time charter with the first-class liner company. Since last quarter, we have also fixed 8 vessels with a forward start for periods ranging from 12 to 38 months. These transactions resulted in increased contracted revenues of about $310 million. Our fleet deployment stands at 100% and 80% for 2025 and '26, respectively. Total contracted revenues amount to $2.6 billion, with a remaining time charter duration of about 3.2 years. Regarding the market, the positive outcome from the latest trade discussion between U.S. and China and the delay in the implementation of port fees should positively contribute to global increased trade flows. Without the fleet of less than 1%, the charter market remains strong with rates fixed at healthy and stable levels on the back of vessel shortage and steady demand. Finally, with regards to Neptune Maritime Leasing, the growing leasing platform, 50 shipping assets have been funded or are committed and total investments and commitments are exceeding $650 million. Moving now to the slide presentation. On Slide 3, you can see our third quarter results. Adjusted net income was $98 million or $0.81 per share. Net income for the quarter was around $93 million or $0.77 per share. Our liquidity stands at about $560 million. Slide 4. We have concluded newbuild contracts for another 3,100 TEU containerships with expected delivery in Q1 '28, bringing the total number of newbuilding orders to 6. Upon delivery, each vessel will commence an 8-year charter with a leading liner company. On the employment side, we have increased our contracted revenues through new chartering agreements by more than $310 million. In addition, our revenue days are 100% fixed for '25 and 80% for '26, while our contracted revenues are $2.6 billion with a TEU-weighted remaining duration of 3.2 years. Moving to Slide 5. Regarding our financing arrangements, we have agreed to the pre- and post-delivery financing of our 4 newbuilding's. We have no major maturities till 2027. On the S&P side, we have concluded the acquisition of 6,500 TEU container vessel. Slide 6. On our leasing platform, we have invested around $180 million. NML has funded or committed to fund 50 shipping assets for a total amount of more than $650 million. Finally, we continue to have a long uninterrupted dividend track record. Moving to Slide 7, the last slide. Charter rates in the containership market remain at firm levels. The idle fleet remains at low levels at about 0.9%, indicating a fully employed market. With that, we can conclude our presentation, and we can now take questions. Thank you. Operator, we can take questions now. Operator: [Operator Instructions] The first question comes from Omar Nokta with Jefferies. Omar Nokta: Just a couple from me. Obviously, just looking at your chartering activity, you've been able to add a good amount of visibility forward fixing several ships. It looks like maybe an average of at least 2 years or so from what's on the -- from where they were before. But I just wanted to get your sense in terms of how has chartering activity in general sort of developed here over the past maybe couple of months because you've had obviously a very volatile year for, say, the underlying freight market where there's been huge swings upwards and downwards for freight rates. They bottomed about a month ago. Now they've jumped. Just want to get a sense from you, given just how active you are in the chartering market, have you noticed any shift in liner appetite? Have things changed here over the past several weeks? Any kind of color you can give on developments on charter it would be great. Gregory Zikos: Sure. First of all, regarding the box rates, you are right. I mean, last week and last month in general, box rates have been up, especially on the U.S. West Coast trade route. Now regarding the charter market, there is a shortage of ships, especially larger vessels. So I mean, whichever ships come out, there are definitely candidates to have them chartered in. So still the market remains at very healthy levels. There is demand and ships are easily absorbed. And I think the main indicator, or someone needs to look at is the idle vessels, where if you back out any dry dockings or sort of technical issues, this is less than 1%. So less than 1% idle fleet means that practically we have a fully employed market. So -- and charter rates, in general, they are holding up very well. Now whether this will continue or not, and for how long, it's hard to say because we have a series of geopolitical events that might affect it. But for the time being, it is a healthy market. Liners are generally eager to charter in vessels. Now you can argue that probably they may not want to go for longer periods in general compared to the past. But still, you still see like a 2- or 3-year time charter for secondhand vessels on a forward basis. So in that respect, I think that the fundamentals, as they stand today, considering that the supply of vessels is quite thin, the fundamentals are quite tight and quite positive, I would say. Omar Nokta: And then maybe just a follow-up. I wanted to ask about the secondhand acquisition you mentioned. You bought the 06 built 6,000 TEU vessel. That looks like it's on contract to Maersk. Is that -- could you maybe talk about kind of the -- how that came about? Was this a direct acquisition from Maersk with a charter back to them? Are there more opportunities like that, do you think in the sale and purchase? Gregory Zikos: Yes. I think this vessel has been chartered back to Maersk. This is a structure sale and leaseback deal. There may be more opportunities like that in the future. I mean we haven't come across anything that -- something like that, that probably would make sense. And as -- but definitely, there may be. And as you've seen, we have been focusing on all the new buildings for the 3,100 TEU ships, we had concluded 4 previously announced in the Q2 results. We have added 2 more options now. Those are going to be delivered in Q1 '28. On a back-to-back basis, we have pretty much arranged the charter for the first 4 -- sorry, the financing for the first 4, and we are closing the commitment of the financing for the last 2. So which is something that also makes sense. And we are generally active. So either secondhand or even new buildings, assuming that we feel comfortable with the residual value risk of our equity, I think we are -- we will be quite active. Operator: The next question is from Climent Molins with Value Investors. Climent Molins: Following up on Omar's question on the first one. Could you talk a bit about whether you believe the recent increase in freight rates is sustainable? It seems it was mostly a function of front running as tensions between the U.S. and China increased, but those have been lowered since. So how do you think about the trade-off of having more visibility versus the front running? Gregory Zikos: Yes. For the freight rates, I mean, the box rates, this is something that could also be directly addressed to the liners who sort of may have a better visibility. I agree with you that last week and last month, freight rates push has been because of front running, may have to do with the pushback of the port fees, et cetera, rearrangement of schedules of the liner companies. Now to what extent they are sort of medium or long-term sustainable, I cannot comment on that. They are sort of -- because if you look historically at the 3 or 6 months or like 1-year box rates, they have been on a negative trend. But I'm afraid I cannot forecast where box rates are going to be starting from today over the next 3 to 6 months. To some extent, this is something that also liner companies. I think they do have a greater visibility on that. Climent Molins: Yes, makes sense. No one can really forecast that. And also following up on Omar's second question, it seems the Maersk Puelo is fully committed until next October, but Maersk has options to extend employment until 2031. Could you talk about how likely those are to be exercised given the rate? Gregory Zikos: Okay. I'm afraid these are charter risk option. So as mentioned, it's up to the charter to have them exercised. So again, I cannot forecast what a third party will be doing. So I think market levels will dictate whether the charter will take those options or not. But on a committed basis, you are right, this is a 1-year charter. And from our side, we have run the numbers to -- so that being conservative, we have been factoring in this 1-year time charter period. After that, it's up to the charter to decide based on its needs, based on market rates, based on the cargo demand to see whether those options one by one are going to be subsequently exercised. Operator: This concludes our Q&A or question-and-answer session. I would like to turn the conference back over to Gregory Zikos for any closing remarks. Gregory Zikos: Yes. Thank you for dialing in today and for your interest in Costamare Inc. We are looking forward to speaking with you again during the Q4 and year-end results call. Thank you. Operator, I think we have concluded. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Gregory Zikos: Thank you.
Operator: Good day, and welcome to the Chicago Atlantic Real Estate Finance, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Tripp Sullivan of Investor Relations. Please go ahead. Harry Sullivan: Thank you. Good morning. Welcome to the Chicago Atlantic Real Estate Finance Conference Call to review the company's results. On the call today will be Peter Sack, Co-Chief Executive Officer; David Kite, Chief Operating Officer; and Phillip Silverman, Chief Financial Officer. Our results were released this morning in our earnings press release, which can be found on the Investor Relations section of our website, along with our supplemental filed with the SEC. A live audio webcast of this call is being made available today. For those who listen to the replay of this webcast, we remind you that the remarks made herein are as of today and will not be updated subsequent to this call. During this call, certain comments and statements we make may be deemed forward-looking statements within the meaning prescribed by the securities laws, including statements related to the future performance of our portfolio, our pipeline of potential loans and other investments, future dividends and financing activities. All forward-looking statements represent Chicago Atlantic's judgment as of the date of this conference call and are subject to risks and uncertainties that can cause actual results to differ materially from our current expectations. Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed in the company's filings with the SEC. We also will discuss certain non-GAAP measures, including, but not limited to, distributable earnings. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our filings with the SEC. I'll now turn the call over to Peter Sack. Please go ahead. Peter Sack: Thank you, Tripp. Good morning, everyone. This quarter, against the backdrop of a volatile private credit environment, we demonstrated another consistent period of execution and performance. The benefits of our consistent approach and disciplined focus on principal protection yielded a strong quarter and this quarter's gross originations have us on pace to hit our goal of net growth in the loan portfolio. Challenges in private credit markets have created newfound concern in the investor community. Declining interest rates impacted lenders with floating rate portfolios. The syndicated loan market experienced high-profile fears of fraud and excess capital in the market underlies perceived lack of underwriting standards. I suspect that these broader concerns have caused us to trade at a sizable discount to our book value rather than the premium we long enjoyed since our IPO nearly 4 years ago. Noting this disconnect from the reality of our portfolio, our management team and Board of Directors recently purchased shares on the open market, bringing our collective ownership of the common stock to nearly 1.8 million shares on a fully diluted basis. There are several reasons why we're so confident with what we've created at Chicago Atlantic. The first is that we have a cannabis pipeline that currently stands at approximately $441 million. We believe that this pipeline of opportunities is unrivaled in the industry and is diversified across growth investments, maturities in the market, M&A activity related to operational and balance sheet restructurings and potential ESOP sale transactions. Secondly, we have the most robust platform and capital to meet the growth of the industry. We deploy capital with consumer and product-focused operators in limited license jurisdictions at low leverage profiles to support fundamentally sound growth initiatives. I can't think of a better example of our commitment to the industry than Chicago Atlantic's funding this quarter of what we believe to be the largest real estate-backed revolving credit facility among U.S. operators in the history of the industry, a $75 million 3-year secured revolver with Verano. Lastly, we've constructed a portfolio with differentiated and low levered risk return profile that is insulated from both Cannabis Equity and interest rate volatility. As David will break down for you in a moment, because we have structured our floating loans with interest rate floors, only approximately 14% of our total loan portfolio is exposed to any further rate declines based on today's 7% prime rate. That discipline provides a meaningful measure of protection to the portfolio. We are focused on outperforming and delivering the kind of returns that we all expect to shareholders. Confidence in the strategy is important. And hopefully, I've provided some insight into why we are enthusiastic and why we, as a management team, executed share repurchases in recent weeks. But execution on our plan matters even more and I look forward to reporting on our continued progress over the balance of the year. David, why don't you take it from here? David Kite: Thank you, Peter. As of September 30, our loan portfolio principal totaled approximately $400 million across 26 portfolio companies with a weighted average yield to maturity of 16.5% compared with 16.8% for the second quarter. Gross originations during the quarter were $39.5 million of principal fundings of which $11 million was advanced to a new borrower and $20 million was related to the new Verano credit facility that Peter mentioned earlier. These were offset by unscheduled principal repayments of $62.7 million that we disclosed last quarter. As of September 30, 2025, our portfolio consisted of 36.7% fixed rate loans and 63.3% floating rate loans. The floating rate portion is primarily benchmarked to the prime rate. Following last week's 25 basis point rate reduction, bringing the prime rate to 7%, only 14% of our portfolio remains exposed to further rate decline. The remaining 86% is either fixed rate or protected by primary floors of 7% or higher. Importantly, our floating rate loans are not exposed to interest rate caps. This structural advantage, combined with our rate floor protections positions our portfolio favorably compared to most mortgage REITs. Should the Federal Reserve implement another adjustment to the Fed funds target in December, we are well insulated against the adverse effects of declining interest rates. Total leverage equaled 33% of book equity at September 30 compared with 39% as of June 30. As of September 30, we had $52.4 million outstanding on our senior secured revolving credit facility and $49.3 million outstanding on our unsecured term loan. As of today, we have approximately $69.1 million available on the senior credit facility and total liquidity, net of estimated liabilities of approximately $63 million. I'll now turn it over to Phillip. Phillip Silverman: Thanks, David. Our net interest income of $13.7 million for the third quarter represented a 5.1% decrease from $14.4 million during the second quarter of 2025. The decrease was primarily attributable to nonrecurring prepayment make-whole exit and structuring fees, which amounted to $1.1 million for Q3 2025 compared with $1.5 million in Q2 2025. Additionally, approximately $0.1 million of the decrease in net interest income was attributed to the impact of the 25 basis point rate cut late in September on our floating rate portfolio and interest expense on our revolving credit facility. Total interest expense, including noncash amortization of financing costs for the third quarter was approximately $1.6 million, down from $2.1 million in the second quarter. The weighted average borrowings on our revolving loan decreased $14 million compared to $42.3 million during the second quarter. Our CECL reserve on our loans held for investment as of September 30, 2025, was approximately $5 million compared with $4.4 million as of June 30. On a relative size basis, our reserve for expected credit losses represents approximately 1.25% of our outstanding principal of our loans held for investment. On a weighted average basis, our portfolio maintained strong real estate coverage of 1.2x. Our loans are secured by various forms of other collateral in addition to real estate, including UCC-1, all asset liens on our borrower credit parties. These other collateral types contribute to overall credit quality and lower loan-to-value ratios. Our portfolio has a loan-to-enterprise value ratio on a weighted average basis of 43.5% as of September 30, calculated as senior indebtedness of the borrower divided by the fair value of total collateral to refi. Distributable earnings per weighted average share on a basic and fully diluted basis were approximately $0.50 and $0.49 for the third quarter, a modest decrease from $0.52 and $0.51, respectively, during the second quarter. And in October, we distributed the third quarter dividend of $0.47 per common share declared by our Board in September. Our book value per common share outstanding was $14.71 as of September 30, 2025, and there are approximately 21.5 million common shares outstanding on a fully diluted basis as of such date. We continue to expect to maintain a dividend payout ratio based on our basic distributable earnings per share of 90% to 100% for the 2025 tax year. If our taxable income requires additional distributions more than the regular quarter dividend to meet our taxable income requirements, we expect to meet that requirement with a special dividend in the fourth quarter. Operator, we're now ready to take questions. Operator: [Operator Instructions] At this time we will take today's first question from Aaron Grey with Alliance Global Partners. Aaron Grey: First question for me. I just wanted to talk about the pipeline a bit. So $415 million, I know that's down a little bit from prior quarters. So I just wanted to talk about where there are some large potential originations that exited the pipeline. And I know prior quarter, you had talked about ESOPs and potential opportunity there. So I want to see if you still see those as appealing and within the pipeline opportunities. Peter Sack: Yes. ESOPs continue to form a large part of the pipeline. There was no significant exits other than ordinary turnaround of our pipeline quarter-over-quarter. We have -- our pipeline tends to refresh every quarter or so as deals that -- as deals either disappear, get turned down by us or get funded. And so changes quarter-over-quarter were ordinary churn. Aaron Grey: Okay. Great. Glad to hear ESOPs are still a good opportunity for you guys. Second question for me, just in terms of some of the loans that are maturing before year-end. Any color you can talk about in terms of how those conversations are panning out? I know you're still targeting net portfolio growth for the year. So any color on those would be greatly appreciated. Peter Sack: We are in the midst of negotiating the terms under which we may extend to maintain the business and maintain the position. And I expect that the vast majority of those loans that are maturing before the end of the year, we will retain in some form or another. Aaron Grey: Okay. That's great to hear. Last question for me. No direct implications for new cannabis legalization in the election today but some indirect, particularly for Virginia, if there is a new government that comes in that's more pro-cannabis. Particularly looking at that state, I know new states coming online could be a good opportunity for you guys. So how would you guys potentially look at a state like Virginia in terms of the opportunities there and how the regulatory landscape exists today and could exist tomorrow based on pass legislation for retail setup? Peter Sack: We think Virginia is a very attractive medical market due to its very controlled licensure structure and the way in which the regulator has set up the geographic orientation of license holders. And we think it will be an extremely attractive recreational market as well. So as those discussions progress, we'll be looking to expand our relationships in the state and deploy capital. Operator: And today's next question comes from Chris Muller with Citizens Capital Markets. Christopher Muller: Congrats on another solid quarter here. So you guys have done a really great job underwriting a pretty challenging part of the market here. So can you guys talk about your approach to underwriting and what's driving that success? Is it more the type of borrowers you focus on or the geographies or maybe a combination of those? Peter Sack: Yes, I think you've hit on some of the key points. The first -- I think the foundation of our underwriting is an analysis of each of the markets, each of the markets of the 40 states that are legalized medical or recreational cannabis and that underwrite begins before we've deployed a single dollar into that market. And it's not just a focus on the state, it's also a deeper dive into each piece of the supply chain within that market. We focus on limited license jurisdictions because we find that in these spaces, the regulatory moat creates greater predictability of wholesale prices, margins and the competitive environment. Within that framework, we're focused on operators with a diverse source of earnings streams, whether that's earnings coming from a diverse portfolio of retail operations, retail and vertical integration or retail vertical integration spread across multiple limited license states. And then lastly, in addition to -- apologies, in addition to real estate collateral, we're focused on lending to operators at conservative leverage levels of under 2x EBITDA. And the combination of all of these factors, frankly, allows for diversity of repayment, diversity of potential growth opportunities. And then while we're in structuring loans, I think it's important that in the majority of our loans, not only is our capital going towards growth initiatives that drive EBITDA improvement, and the majority of our loans also include amortization. Christopher Muller: Got it. That's all very helpful and I guess... Peter Sack: And so the aim is that our loans will be less risky by their maturity date by virtue of EBITDA growth and loan paydown than they were at the outset and that we can then continue to support those clients in the next phase of their growth, whether that's acquisitions, expansion of cultivation, expansion of retail. And it's really just consistency with what we think are pretty simple fundamentals approach to this industry, a focus on credit quality and a focus on principal protection that's allowed us to maintain the track record through a lot of volatility in equity valuations and in the marketplaces, the operating marketplaces in each of these states. Christopher Muller: Got it. That's very, very helpful. And I guess maybe looking forward a little bit. So looking at the LTVs of your portfolio, they're well below what we see for a typical commercial mortgage REIT. So if we do end up getting some type of reform, whether it's this year or next year, whenever that timing is, what type of normalized LTV would you expect to see in the portfolio? Peter Sack: Well, it's a difficult question to answer because there's a few variables. I would expect that in the case if the reform that we're discussing about is rescheduling, I haven't seen examples of a significant amount of new lenders entering the market in the event of rescheduling. And so I think there's opportunity to increase our loan sizes in many cases with many of our borrowers by nature of the improved cash flow dynamics of operators in a rescheduling environment because of the lack of the impact of 280E taxes. So that's one reason why you might see loan balances go up in a post- rescheduling world because the fundamental cash flow profile of the industry and individual operators has improved significantly. But also on the other hand, I would expect there to be a lot more equity interest in the sector as a result of rescheduling. And so I would expect to see the denominator, the V in that ratio increase significantly starting with public operators and public cannabis valuations. And so the combination of those two, it's difficult to parse exactly what would be the change in LTV. Christopher Muller: Got it. There's a lot of unknowns out there still. So that's very fair. Peter Sack: Yes. But I would note that we focus in our underwriting on the ability of a cannabis operator to service its indebtedness and to pay back that indebtedness. And that was our focus when cannabis companies were valued in the high teens EV to EBITDA. And that's our focus today when cannabis companies are valued in single-digit EV to EBITDA. And so I think it's -- and so that's why the understanding of the cash flow and diversity of cash flows and the collateral is really fundamental to us and more fundamental to us than an ephemeral -- potentially ephemeral market cap, potentially an ephemeral license value. Christopher Muller: Got it. That's all very, very helpful. And I guess just one clarifying one real quick, if I could. Did I hear you guys correctly say that 86% of the portfolio has active floors in place as we sit today? Peter Sack: That's a combination of floors and fixed rate. Operator: And the next question comes from Pablo Zuanic with Zuanic & Associates. Pablo Zuanic: Peter, I realize that every company is different. But for example, IIPR this morning announced an investment outside cannabis, AFC Gamma transforming to a BDC investing outside cannabis. Chicago Atlantic BDC also is investing outside cannabis. Is that something that Chicago Atlantic Real Estate Finance would also consider given the environment in cannabis? Peter Sack: We have, on occasion, invested outside of cannabis, but we find that the risk reward profile for real estate-backed loans in the cannabis space is simply much more attractive than the risk reward in most cases than the risk-reward profile of real estate-backed loans in non-cannabis real estate opportunities. And I think that's what's driving our focus and the overwhelming allocation of the portfolio to cannabis opportunities in refi. But to the extent that changes, to the extent that we find attractive real estate-backed opportunities, we will certainly offer them to refi and may deploy them in refi. But Chicago Atlantic was founded with a focus on idiosyncratic and niche areas of the private credit market and with a focus on cannabis. And that's part of our DNA and that focus on cannabis and our fidelity to the sector is not going to change. And I think it's one of the reasons why we've persisted in this industry and continue to deploy in this industry as the equity markets have experienced significant volatility as other lenders have exited the space. We think that focus and specialization can drive outsized returns and really differentiated returns for our investors and that we can provide a better product, better support, better relationship with our clients, with our borrowers. And we find that consistent presence in the market, that consistent support to our borrowers leads to better relationships, leads to more longevity of relationships and leads to a greater ability for us to build relationships with the next top operator that emerges from the ecosystem. Pablo Zuanic: Right. That's good color. Just moving on in terms of 280E, you explained in the prior question that your main focus is on the company's ability to service debt, right? So how do you think about the uncertain tax provision that most MSOs have, right? The majority of them -- well, most MSOs, not the majority, like pretty much all of them except one, are paying their taxes, declaring taxes as a normal corporation and assuming 280E does not apply and based on lawyers and auditors recommendations, their advice, they are putting an item that's called uncertain tax provisions or benefits as a long-term liability, right? We will see if it's ever due and it doesn't have a maturity date. But how do you factor that in your ability to service debt? Peter Sack: We consider it as another form of leverage. And so we aim to create covenants that limit the ability of our borrowers to incur uncertain tax liabilities above a certain amount. And that amount is set by our comfort of the total leverage profile of the company. Pablo Zuanic: That's good. Look, I know we normally do not talk about specific borrowers, but you mentioned Verano in your prepared remarks. I'm trying to understand here the dynamics. In the case of Verano, Chicago Atlantic, I believe, as a group, not just refi, has about a $300 million facility, $292 million book in Verano due next year, right? And now you have issued these revolvers for $75 million, 3-year revolver. I'm trying to understand the dynamics in terms of why not just restructure the whole thing and just have to restructure the $300 million loan that was due next year? Or given that we don't know what's going to happen in reform, you might just -- I'm just trying to understand why not do that as opposed to issuing a 3-year short-term revolver here? Peter Sack: We have incredible respect for the team at revolver -- at Verano and what the team at Verano has accomplished, what they're executing on today and their growth prospects. And we think their footprint, their asset base and their mindset when approaching the industry is something that we think is really unique within the space and we really value the partnership. And so to the extent that we can support them in any way, we're going to be ready and willing and we'll do our best to further their next growth initiatives and that applies for the rest of our portfolio as well. And so I can't -- I don't want to speak for what the team's aims are and how they wish to structure their balance sheet, except to say that we value their relationship, we value their partnership and we would love to support them in any way we can. And are really excited for what they're executing on within their portfolio. Pablo Zuanic: Okay. And one last one, if I may. I know that we discussed the competition from other sectors before. I was recently at the Blank Rome conference. Bank Needham there, they said that they had issued about $500 million in loans to the cannabis sector, including Curaleaf most recently. They said they would never go to $2 billion, but they implied that they could double the current amount. So my read is that the competition from the regional banks under the current regulatory status quo is increasing, whether it's Valley Bank, Needham or other people. Am I wrong about that read, Peter? Peter Sack: I think those banks that have developed an expertise that have invested in the infrastructure and invested in the relationships of the cannabis space, in general, those banks have done well because they've deployed capital with discipline and conservatism and built relationships with some of the strongest operators in the space. And in many cases, those banks are now opting to go deeper because they've seen -- they've experienced success. And so I think we've seen that among some of the largest banks that have consistently deployed capital in the space that they're seeking to do more, and that's great. We view banks as partners in our deployment strategy. They are leverage providers in both our public and private funds. There are co-lenders in many transactions. There are co-lenders in unitranche transactions in many transactions. And so we think they're an integral part of the lending ecosystem, and they're part of this process of building a mature capital markets for the cannabis industry. And I think to compare -- just to compare where the banking industry sits within the broader private credit ecosystem today, banks are not outside of the cannabis industry. Banks are operators alongside of the private credit space. And the private credit space and whether that's mortgage REITs and/or BDCs operate alongside the banking ecosystem, and they benefit one another significantly and work together as part of this ecosystem. And that's what we hope to see develop in the cannabis industry, and that's what we're trying to build at Chicago Atlantic through our various partnerships with nearly all of the major banks that are operating in the cannabis space today. So long story short, we welcome and have worked to help banking institutions enter the cannabis space and we hope more will do so. Pablo Zuanic: Look, I'm sorry, I want to add one more question if you don't mind, and apologies if there's someone else on the queue here. Can you give an update in terms of your lending program to the New York? I think your loan is to the regulator, right? It's not necessarily or to a fund there, not necessarily to the stores. I think we're up to 251 stores. Obviously, the state continues to expand in terms of retail stores, but I haven't seen necessarily that reflected in your loan book or maybe I'm missing something, but if you can provide an update on that. Peter Sack: I'm sorry, Pablo, I lost you at the beginning of your question. Could you repeat it? Pablo Zuanic: Okay. I'm going to repeat that. I'm talking about New York state in terms of the number of stores and dispensaries in New York continues to grow. We are, I think, north of 250 now. And I thought that given the agreement that you have with the regulator there in terms of the funding, the fund there that as the number of stores increases that your lending to the program will have increased. But I don't see that reflecting in your loan book or maybe I'm missing something. And I'm sorry if it's about connection. Peter Sack: The New York Social Equity Fund has opted not to draw additional capital from our funds. They've supported the construction of close to 23 stores across the state and they've taken a pause on deployments. That being said, we are ready and willing to support them if they decide to continue deployments and continue to grow the portfolio of stores that they're supporting. Operator: This concludes our question-and-answer session for today. I would now like to turn the conference back over to Peter Sack for any closing remarks. Peter Sack: Thank you all for the support and the questions. Glad to follow up offline with any questions and please reach out at any time. Thank you again. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, everyone. Thank you for standing by. Welcome to Pet Valu's Third Quarter 2025 Earnings Conference Call. My name is Harry, and I'll be coordinating today's call. [Operator Instructions] I would now like to turn the call over to James Allison, Investor Relations at Pet Valu. Please go ahead, Mr. Allison. James Allison: Good morning, and thank you for joining Pet Valu's call to discuss our third quarter 2025 results, which were released earlier this morning and can be found on our website at investors.petvalu.com. With me on the call is Greg Ramier, Chief Executive Officer; and Linda Drysdale, Chief Financial Officer. Before we begin, I would like to remind you that management may make forward-looking statements, which include guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties, which could cause actual results to differ materially from those expressed today. For a broader description of risks related to our business, please see our Q3 2025 MD&A, 2024 annual information form and other filings available on SEDAR+. Today's remarks will also be accompanied by an earnings presentation, which can be viewed through our live webcast and is also available on our website. Now, I'd like to turn the call over to Greg. Greg Ramier: Thank you, James, and good morning, everyone. I'll start by reviewing some of our key highlights from the quarter before handing it over to Linda to discuss our financials and the update to our outlook for 2025. Before I begin, I'd like to express how excited I am to step into the role of CEO. Hard to believe it's been a year since I joined Pet Valu, but in that time, I've seen countless examples firsthand of why millions of devoted pet lovers turn to us for their pets' needs. From how deeply our ACEs and franchisees care about providing the best in-aisle expertise to the scale and quality of our store network, digital channel and supply chain, to the breadth and innovation of our proprietary brand assortment, we truly are unmatched in the Canadian pet. I'm thrilled to have the opportunity to help lead Pet Valu through this next chapter of growth and to add to our legacy of serving Canadians' devoted pet lovers. Now moving to the results. Our business delivered another quarter of growth and healthy margins in Q3 as we continue to navigate an uneven discretionary demand environment. With our growth once again outpacing the market, it's clear devoted pet lovers are increasingly drawn to our unique combination of strength in convenience, value, quality and expertise, which together creates our compelling retail experience unmatched in Canadian pet. System-wide sales increased 4%, supported by continued momentum on a same-store basis as well as our strategic expansion in our industry-leading store network. This translated into 5% revenue growth, including contribution from higher wholesale penetration. We achieved these outcomes through responsible and balanced investments in everyday value across our assortment and new product introductions. And we supplemented these investments with events to drive excitement to invigorate discretionary demand. At the same time, our teams continue to find opportunities to realize operating expense savings to offset inflation. As a result, adjusted EBITDA margins improved sequentially to 22%. The resilience and consistency of our performance speaks to the success of our commercial playbook and long-term strategies working in tandem. Let me unpack a few of the highlights from the quarter. We took several actions in Q3 to help solidify our position as Canada's local and everywhere pet specialty retailer. We and our franchisees opened 16 new stores in the quarter, bringing us to 849 locations coast-to-coast. With 26 stores opened year-to-date, we are well along our way of reaching 40 new stores by year-end. At the same time, we and our franchisees renovated, expanded or relocated another 72 locations, almost all of which related to our enhanced culinary experience, which I'll touch on shortly. Our digital channel continues to scale with all elements, our transactional website, AutoShip and marketplace contributing to its success. In the quarter, we featured a limited time AutoShip offer, providing 20% off first orders of key Made in Canada brands, including our Performatrin family of products; generating strong uptake and helping drive our continued growth in active subscriptions with devoted pet lovers. We are also seeing great ramp-up in our marketplace offering, which complements our other channels. Following a successful first year with Instacart, we plan to add more options for devoted pet lovers in Q4 to further elevate our industry-leading omnichannel offering and convenience. At the same time, we continue to leverage our strengths to deliver the best pet customer experience. Devoted pet lovers are taking note of the everyday value we deliver with strong response to the investments we made in our Fresh 4 Life litter last fall and in particular, to our Performatrin Prime investment this spring, with both programs exceeding expectations in volumes and sales. On the back of this success, we bolstered our everyday value proposition across hundreds of additional items in the latter part of Q3 and early Q4 with our Lower to Lock program, including investments at both retail as well as wholesale, so our franchisees can participate alongside us. While it's still early, these actions strengthen our position to continue to win the monthly shop. We complemented our everyday value with a smart and exciting promotional program, powered by our new pricing and promotions tool, celebrating events like our anniversary sale and the limited time 20% off AutoShip discount. We also broadened the portfolio of brands eligible under our frequent buyer loyalty program, including the exciting addition of Purina Pro Plan in early Q4. Equally important are our investments in innovation and quality. In the quarter, we introduced approximately 150 SKUs of national branded toys, collars and leashes, better aligning our hardlines offering with what devoted pet lovers are looking for. We also continue to innovate with our proprietary brands. This included new product introductions such as plant-based dog kibble and freeze-dried cat treats under our Performatrin Ultra brand. Fresh 4 Life corn litter and opening price point travel carriers and accessories under our Essentials brand. And finally, our enhanced culinary experience. With 70 stores completed in the quarter, including a handful of initial franchise locations, we're pleased with the pace of implementation. While still very early in its deployment, initial data reaffirms the strong lifetime value of culinary customers who visit and spend more than twice that of a traditional customer. We remain on pace to bring this enhanced experience to roughly 120 corporate stores by the end of the year. Now moving to our third focus, to fortify strong retail and wholesale fundamentals. As previously shared, we concluded our supply chain transformation in Q3 with the commissioning of our new Calgary DC in July and the exit of our legacy facility and third-party storage space in that market by the end of September. With over 1.3 million square feet of modern, partially automated distribution capacity in Canada, we have successfully built Canada's strongest supply chain, supporting the pet specialty industry and one that will support our growth over the next decade plus. For those of you who've been with us on this journey over the last several years, you know we haven't had to wait for this moment to realize the compelling benefits this transformation brings. For the past 2 years, these new facilities have enabled efficient new store growth, unlocked our ability to capture higher wholesale penetration with our franchisees and supported inventory leverage. In the third quarter, we reached another important inflection point, delivering year-over-year leverage in our consolidated distribution costs as we began to lap the step-up in fixed costs associated with these new DCs. We believe this is a strong signal for the opportunities ahead to drive profitability and reinvestment as we grow into our upsized capacity. All of these achievements, network expansion, merchandising excellence, transformation of our supply chain would not have been possible without the talent and commitment of our ACEs, our franchisees and leaders across the organization. We are a business built around nurturing the love pet parents share with their pets, and this is only made possible by nurturing and supporting our people and franchisees. We are humbled to have recently been recognized for our efforts, including receiving the 2025 Hall of Fame Award from the Canadian Franchise Association for our leadership and contributions to the Canadian franchising industry, and being named a 2025 Employer of Choice by Canadian HR Reporter. By forming strong relationships and providing safe and rewarding working environments, we help drive stability and tenure with our franchisees and ACEs, which benefits everyone, including our devoted pet lovers. To learn more about how we accomplish this, please see our 2024 ESG report, which was released this morning alongside our Q3 results. With that, I'll pass it over to Linda to review our financials and 2025 outlook. Linda? Linda Drysdale: Thank you, Greg. Overall, our business delivered another quarter of responsible growth and healthy margins in Q3 as devoted pet lovers alongside all Canadians continue to navigate today's uncertain environment. This financial resilience is a direct result of both the right strategies and our strong culture built around providing the best for our customers and relentless pursuit of efficiencies and savings. Let me review some key financial highlights before turning to our refined outlook for the full year. System-wide sales grew 4% in Q3 to $374 million. On a same-store basis, sales increased 2.3%, similar to the pace seen in Q2 and supported by growth in both basket and transactions. Comp trends across categories were relatively consistent to those seen in Q2. From a non-comp basis, we opened 16 stores in the quarter and 45 over the last 12 months, bringing us to 849 sites coast-to-coast at the end of Q3. Q3 revenue was $289 million, representing an increase of 5%, slightly ahead of system-wide sales as we continue to increase wholesale penetration with our franchisees. As expected, the gap between revenue growth and system-wide sales growth eased as we began to lap our wholesale catalog expansion in Q3 last year. Gross profit was $96 million, up 7% from last year. Excluding nonrecurring costs related to the supply chain transformation, gross margin was 33.5%, similar to last year. While we continue to see impacts from higher occupancy costs and to a lesser extent, higher wholesale merchandise sales, these factors were offset by leverage in our distribution costs, allowing the margin stability of our commercial plan to shine through. Echoing Greg's earlier comments, achieving leverage in our distribution costs has been a long promised benefit of our supply chain transformation, and I want to pause to celebrate this moment and to congratulate our teams for their perseverance and dedication to getting us here. Q3 marks the start of what we expect to be many years of distribution cost leverage from our recent supply chain investments, which will provide opportunities for greater profitability and flexibility for reinvestment to fuel our growth and support financial resilience. Moving to operating expenses. SG&A in the third quarter was $54 million. Excluding share-based compensation and costs not indicative of business performance, our SG&A expenses were $51.5 million, similar to Q2 as our team did a fantastic job in diligently managing our expenses and finding efficiencies to offset expected inflation. Adjusted EBITDA was $64 million, representing 22% of revenue, an improvement from our margin in the first half of the year. Net income was $25 million compared to $23 million last year. Excluding share-based compensation and items not indicative of business performance, adjusted net income was $28 million or $0.40 per diluted share compared to $30 million or $0.41 per diluted share last year. Now turning to our balance sheet and cash flow. We ended the third quarter with ample liquidity, consisting of $15 million in cash and $140 million in unused borrowing capacity. Total debt net of deferred financing costs was $294 million, a decrease of $17 million from Q2 as we directed free cash flow towards repayments on our revolver. Factoring in net lease obligations, our leverage remains at 2.4x, consistent with last quarter and just slightly above our recent run rate over the last several years. Q3 inventories were $141 million, up 5% from Q3 last year, in line with revenue growth. Our supply chain and replenishment teams continue to do an excellent job managing turns across our DCs and delivering industry-leading store service rates, all while completing the final DC transition into our new facility in Calgary, Alberta. As we enter the busiest season of the year, we believe our DCs and stores are stocked with the right quality and quantity of product to meet the everyday and holiday needs of Canada's devoted pet lovers. Net capital expenditures were $8 million in the quarter, bringing us to $30 million year-to-date. With key investments into our supply chain transformation now behind us, our capital investments are now being directed towards the continued rollout of our enhanced culinary experience across our corporate stores, new store builds and ongoing store refreshes and other maintenance projects. And finally, we generated $25 million in free cash flow in Q3. Year-to-date, this brings us to $67 million, up 9% from last year, driven by improved earnings and lower CapEx. Importantly, free cash flow conversion on a trailing 4-quarter basis was 43%, consistent with our framework of roughly 40% or greater. While we continue to return a portion of our free cash flow to shareholders in the quarter through dividends, we directed the majority of it towards repayments on our revolver. We expect to complete these repayments by the end of the year, after which we will once again look to share repurchases on an opportunistic basis. Now to our outlook for 2025. As Greg indicated, the Canadian pet industry has displayed resilient yet tepid growth this year as pet parents seek out the best opportunities for quality and value to care for their pets. Devoted pet lovers are increasingly turning to pet value to fulfill this need, driven by our industry-leading omnichannel convenience, curated offerings of specialty pet products, in-isle expertise and recent investments in everyday value. Our strong financial performance and market share gains underscore the success of these strategies. At the same time, macro uncertainty continues to weigh on consumer spending, creating uneven discretionary demand, which has continued into Q4. Based on this, we have narrowed our full year outlook to reflect year-to-date performance and current market conditions. As a reminder, our 2025 outlook incorporates an extra week given the 53-week calendar this year. We now expect 2025 revenues between $1.175 billion and $1.185 billion, supported by approximately 40 new store openings, same-store sales growth of approximately 2% and increased wholesale penetration. Adjusted EBITDA is expected to land between $257 million and $260 million, representing growth between 4% and 5%. This continues to incorporate normalization of operating expenses and planned investments. Factoring in our narrowed revenue and adjusted EBITDA ranges, we now expect adjusted net income per diluted share between $1.63 and $1.66, representing growth between 4% and 6%. As a reminder, this includes absorption of approximately $0.12 of incremental depreciation and lease liability expense associated with our new distribution centers. And finally, capital allocation. We continue to expect approximately $45 million in net capital expenditures. We also continue to expect to convert roughly 40% of adjusted EBITDA into free cash flow this year, the vast majority of which is being returned to our shareholders. Before turning it back to Greg, I'd like to share our initial view on 2026 as we near year-end. With no real certainty on when today's macroeconomic conditions will improve, there is a strong likelihood that uneven discretionary demand we've seen through much of 2025 could extend into 2026, which may keep growth in the Canadian pet industry below its long-term average. As we say consistently each year, our aim is to grow alongside the industry and lean into initiatives to expand market share like continuing new store openings in 2026 at a pace similar to 2025 and further investing in our culinary renovations. With the completion of our supply chain transformation, we expect earnings growth to improve starting in Q4 and continuing into 2026 as we lap the major step-ups in fixed DC costs. And most importantly, we plan to grow our free cash flow, which we plan to deploy in accretive ways, including opportunistic share repurchases. We look forward to sharing more details around our financial and operational outlook for 2026 when we report our Q4 results in March. With that, I'll turn it back to Greg for some closing remarks. Greg Ramier: Thanks, Linda. As we complete our supply chain transformation and commence the next leg of our growth within the Canadian pet landscape, I'm excited about the opportunities ahead of us. With a great team, great assets and a clear strategy, we are well positioned to deliver on our mission to be Canada's preferred pet retailer, delivering the products, care, expertise and memorable moments that devoted pet lovers want. With that, we'll now be happy to take your questions. Operator: [Operator Instructions] Our first question will be from the line of Mark Petrie with CIBC. Mark Petrie: Just on same-store sales, traffic maintained positive, but you were lapping a pretty weak period last year. There was some modest deceleration sequentially. So could you just talk about sort of consumer behavior and specifically the traffic figure? Greg Ramier: Absolutely. Mark, maybe I'll talk about same-store sales first. We were very pleased with the pace in Q2, it was similar -- or in Q3, it was similar to Q2. Growth did come in a bit lighter than we initially expected in the quarter. And I'd say the main reason for that is tied to the shape of demand. If you recall in Q2, we've seen some early signs of stability in hardlines with trends improving sequentially from the beginning of the year. This progress paused in the third quarter, suggesting customers are more closely monitoring their spending given all the uncertainty around trade and other macro factors. I think the key takeaway for us, though, is that even in this constrained environment, we're winning share. This is a result of the actions that we've taken so far this year, including Q3, both the long-term actions around network expansion and digital investments, but more recently, the investments we made in everyday value and having a sharpened promotional program. I think specifically on a 2-year basis, we don't think that the 2-year stack is a particularly helpful way to look at our performance given that 2024 was a fairly stable year in how our weekly sales progressed, which is something we're also seeing this year. And our comments all year have been around this -- our original 1% to 4% guidance range, which we continue to deliver within, and we now expect to reach roughly 2% for the full year. Mark Petrie: Okay. And if I could just follow up on culinary. Obviously, it's still relatively early days, but just wondering how that's performing. And curious if that category has more variation in its performance by sort of local demographics and neighborhoods than other parts of the assortment. Greg Ramier: As I shared in my prepared remarks, Mark, I'm very happy with the pace of the rollout. We've already completed almost 80 stores so far this year, including 70 in the quarter. Still very early in the deployment, but I can share the data that we're seeing, the first few weeks reaffirms how much the culinary customer spends in their pets. We've begun to expand the experience into a handful of franchise stores. So we're looking forward to what it's going to do in 2026. This category continues to be at the high end of growth for us in double digits. And we don't see a lot of variance to your question regionally or within different stores. Linda Drysdale: The one thing I'd add, Mark, is that we have rightsized the level of investment by store to best complement the existing layout in culinary presentation. So as a result, we expect the returns on these to be above our internal hurdle rates. Operator: The next question is from the line of Irene Nattel with RBC. Irene Nattel: Just continuing the discussion around same-store sales. Could you walk us through, please, sort of where you're seeing the highest level of unevenness? That's the first part of the question. And then the second part of the question is I'm wondering about sort of the degree to which the investments and the introduction of private label products at lower prices is kind of -- be acting in a deflationary way from a basket perspective. Greg Ramier: Thanks, Irene. I'll start on the consumers. So we continue to see devoted pet lovers seek out quality products, looking for better nutrition and better ways to feed and care for their pets. And we do see our highest growth still in premium kibble and in our culinary products as a result of that. At the same time, devoted pet lovers are looking for value. And this is where our proprietary brands really shine. And we've been very pleased with the progress on that front, both in volume and in sales. And really, the way that those themes have -- are manifested from a category perspective is we've seen and continue to see resilient growth in needs-based consumables and more uneven or opportunistic spending within discretionary hardlines. And as I noted, we saw early signs of stability on that discretionary demand in Q2. It held. We didn't see any further improvement in Q3, which I think really ties back to the macro environment. I do think that in this environment, what's really important is the things that we've done over the last several quarters to lean into our strengths, our points of difference to show how Pet Valu can deliver on both quality and value. Three things that I'd point out within this that we're doing to be successful in this environment. First is our focus on high-growth quality categories like culinary that we just talked about. The second is leaning into the role that our proprietary brands can play and -- both in innovation and in value, and they performed well. Third is the investment we've made to provide everyday better value, and you would have seen the -- us talking about our new Lower to Lock program across hundreds of key items that we launched at the end of Q3. These strategies in total are working. We're winning the monthly shop. We did that in Q3, and we're gaining share, growing same-store transactions. Irene Nattel: That's really helpful. And then just thinking ahead to 2026, what I heard you say is if we have all been thinking about, let's call it, mid-ish single-digit same-store sales growth in 2026, unless we see something change in the environment, which doesn't seem likely at this point, that will be difficult to achieve. So I guess, is that, in fact, what you wanted us to hear? Greg Ramier: Yes. With the macro environment playing such a critical role in how devoted pet lovers and frankly, all consumers are spending and given how fluid the trade environment remains, I think it's a bit premature to make a firm call. But our view and as per Linda's remarks, is we think industry growth will remain below its long-term mid-single-digit run rate through next year. I do think there's going to be a couple of big themes that are going to remain consistent, though, within that. First is the stability of demand for needs-based consumables, which account for about 80% of our sales. And this is the -- this has been a consistent growth driver for us through 2025, and I don't expect that to change next year. And second is the humanization trend and seeing that continue. So culinary products, as we talked about, continuing to gain traffic. And we're leaning into that category to make sure that we continue the growth curve that we've seen on it. Those are both big themes within what we view will be a fairly similar industry backdrop. Operator: The next question today is from the line of Martin Landry with Stifel. Martin Landry: I would like to just go again looking at the long-term outlook of the industry. I think the industry has been growing slower than its historical pace in '24 and '25, and you're calling for maybe a cautious outlook for '26. When do you expect the industry to get back to its historical growth rates? I think you quoted historically 4% to 6%, and it's even been higher than that over the last 20 years. At what point could we see the industry return to more healthier growth rates? Greg Ramier: Thanks, Martin. The -- as we pointed out in the past, the Canadian pet industry has an impressive track record of resilient growth over 30-plus years. When you take a look at what's driving that is really the humanization and premiumization of pet care that we've talked about. That tailwind hasn't stopped even in today's environment. We continue to see it every day in the conversations that we have with devoted pet lovers in store and the questions they're asking, and especially in the products they're buying. The best example of this continues to be the strong sales growth in our most premium peers of kibble and culinary. The slower pace of the industry growth that we've seen over the last few years has really been isolated to the more discretionary pockets of our industry, as we've said, particularly in hardlines like toys, apparel, collars, beds. These are categories where pet parents exhibit more compromise through either deferral or substitution when the environment is uncertain like it is today. But as history has shown time and time again, we believe this softness to be transitory. We expect it to stabilize as the macro environment stabilizes. In the meantime, what you've seen is we're leaning into our strengths of convenience, quality, value and expertise to win in today's environment, which has been driving our market share gains. Martin Landry: Okay. And how much of the industry you think is switching online? It feels like the online channel is growing maybe a little faster than the brick-and-mortar channel. And how are you positioned to capture that switch? Greg Ramier: Very well positioned. We've been very pleased with what we're seeing in our digital channel. Our online sales continue to outpace our company average. But what's even more important is the role this channel plays in our omnichannel offering. As we've shared in the past, our omnichannel customer visits the store and site 5x more than a non-omni customer and spends 4x more. They're not -- not only are they more engaged, but they're the most valuable, least price-sensitive customer segment that we have. We've seen -- so we've seen good growth in our omnichannel. It's outpaced our total business. Operator: The next question is from the line of Michael Van Aelst with TD Cowen. Michael Van Aelst: I wanted to talk to you more about the franchise and corporate mix that you've got this year. In the past, you've said you've reiterated the view that there's strong demand for franchises. But this year, you've opened 25 new stores and 21 of the net new stores are corporate versus 4 franchise. So can you talk about the health of the franchisee, that four-wall per EBITDA? And why specifically are you not seeing more franchisees stepping up this year? Greg Ramier: Mike, thanks. For most of our history, we've operated both franchise and corporate networks at scale. And they're both strategically important for us with unique benefits that complement each other. One of the strategic benefits of this dual structure is operating at a best site first strategy with the flexibility to lean into either a bit more corporate or a bit more franchise, depending on where we find the sites and where our franchisees -- our franchisee pipeline where they physically are. Right now, we've opened a bunch of really great locations, most of which we haven't identified the right franchisee yet. So we're opening them as corporate stores, which I'll remind you still provide fantastic returns for us. We may choose to resell some of those to existing or new franchisees, but we'll make that determination on what's in the best interest of both the community, the store and the franchisee given that they're making a 10-year commitment. Our health and pipeline of franchisee -- franchise inquiries is still strong. So that has remained consistent through this environment. And I think, Linda, from a four-wall EBITDA? Linda Drysdale: Yes. So I mean, we update that annually in the AIF. As we stated from last year, it was $230,000, and we'll update it again in the next year. Michael Van Aelst: Linda, are you willing to at least give us an indication of direction whether that -- whether it's higher or lower than what it was last year? Linda Drysdale: I can't at this time, Michael. Yes, I think there's compelling returns to the franchisee, and that's as far as I'll go on that. Greg Ramier: And Michael, we continue to see strong interest. Michael Van Aelst: Okay. So Greg, just to follow up on that, though. Historically, I think Richard had said, given the indication that you wanted at least 200 corporate stores and probably would be happy something. It sounded like it was something in the 200 to 230 level in that ballpark, let's call it. So with the corporate store count rising now up to 241, I think that's the highest level you've ever been at. Do you see that number coming down over time still? Or do you expect to start growing more? Is it changing a little bit where it's not as much of an asset-light growth strategy going forward? Greg Ramier: No, you shouldn't anticipate a change in that strategy. The strategy for real estate is best site first. And we will continue to be around that rate of franchise stores as a percentage. It will depend on where we find the best sites and how our franchise pipeline is looking for those trade areas. So you shouldn't expect a material change there. Operator: The next question will be from the line of Chris Li with Desjardins. Christopher Li: First question is -- first, thanks for all the discussions on the consumer so far. But Greg, I was wondering if you can talk a little bit more about the competitive environment as well. Have you seen an uptick in promotional intensity during the quarter? And how is it looking so far in Q4? Greg Ramier: Thanks, Chris. I'll start off by saying, generally speaking, and as a reminder, we operate in the least competitively intense end of the pet industry where devoted pet lovers -- with devoted pet lovers who value more than just price when shopping for pets. So as a result, we tend to have a very rational trading environment. In September, we did see promotional intensity increase from select specialty peers. That's perhaps in response to recent market share trends. But with that said, we continue to stick with our strategy of providing devoted pet lovers with quality and value that they can count on every day. It's a strategy that's anchored in what our customers appreciate. It's a strategy that works in driving the -- and winning the monthly shop. And we've got not only that, but a full agenda planned in Q4 from a commercial plan with some of our biggest weeks left to come in the quarter. Christopher Li: Okay. And I think just a follow-up maybe for Linda. If we take around just the midpoint of your full year guidance, I think the implied Q4 SSSG is going to be around 2% and EPS growth maybe around 9% if you exclude the extra week impact. If my math is right, I guess my question is looking out to next year, if let's say, same-store sales will remain a bit tepid like more in the low single-digit as opposed to mid-single-digit growth, is there still enough operating leverage within your business model to achieve at least that high single-digit EPS growth for next year? Linda Drysdale: Yes. Thanks, Chris. You're really choppy, but I think I caught your question. But for the 2026 growth, what I would say is we're still early days for plan 2026, and I'll provide more detail when we release our 2026 outlook. But from a high level, we do plan to continue to be successful winning customers and growing market share while delivering solid earnings growth in this environment. Operator: The next question will be from the line of Chris Murray with ATB Capital Markets. Chris Murray: Maybe talking a little bit about the wholesale business now that, I guess, the supply chain transformation is sort of behind us a little bit. Can you talk about where you're at in terms of that wholesale penetration number? And how we should maybe think about the next couple of years now that you've got the supply chain base really in place? Greg Ramier: Thanks, Chris. It's Greg. The -- so we continue to see good performance from a revenue perspective with outpacing system-wide sales. That's really driven by two primary factors. One is the clear opportunity we have had and still have in Chico as we grow that business and we -- from a store perspective and grow our wholesale penetration there, and with the capacity that we have in the supply chain. So we continue to add both innovation and new assortment into the distribution center that will -- that's going to continue to -- because we have lots of capacity that we're leveraging right now. That will continue to be a tailwind for us over the next several years. Chris Murray: Is it fair to think that your wholesale sales might actually kind of outstrip kind of like what you would think the same-store number will be over the next couple of years just as you capture additional share? Is that the right way to think about this going forward? Greg Ramier: Yes. The way you should think about our -- shape of our sales over the next few years is our system-wide sales should outpace our same-store sales because of our continued focus on new store growth and that our revenue should outpace our system-wide sales because of the wholesale penetration opportunity we have with Pet Valu franchisees and especially because of the opportunity in Quebec with Chico. Linda Drysdale: And the pace of that will ease from the current... Chris Murray: Okay. And then just maybe a quick one for me. Just sort of thinking kind of into '26 in capital spending. I know it's still early, but if you think about it semantically, no major investments in supply chain. Maybe some store level investments you talked a little bit about the ability to continue to roll out fresh product. But kind of on the whole, is there any reason to believe that there's anything that would be taking capital spending actually up materially from where it is going to end up this year? Or should we be thinking about kind of like just gradually tying it to sales growth over the next little while? Linda Drysdale: Yes. So we're still working through capital plans for 2026, Chris. But I'd say the expenditures will be in the ballpark of what we've targeted for this year would be a good starting point. We're continuing opening new stores, as you said, rolling out our enhanced culinary experience across both corporate and franchise stores. So you can also expect us to start to return to share repurchase in the next year. I'll add that in with respect to our capital. Chris Murray: Okay. But there's no major capital expenditures planned or anything like that, that we should be aware of? Linda Drysdale: No. Operator: The next question is from the line of Vishal Shreedhar with National Bank of Canada. Vishal Shreedhar: With respect to industry square footage growth, do you have -- or industry capacity growth, do you have an estimate of that? Is it growing at an accelerated pace? Or has it moderated in line with these more challenging conditions you've seen over the last couple of years? Greg Ramier: Vishal, what we saw in Q3 was quite similar to what we've seen so far this year. We are the lion's share of industry footage growth. We are fully on track to be at our 40 stores again this year. We've seen slow or muted growth from other competitors. So that is an area, as Linda said, that we are leaning into right now to make sure that we get growth now and growth in the future and find the best sites to be in over the long term. Vishal Shreedhar: Greg, as you continue to expand and right now, you operate at a premium end of the market. But as you continue to expand, you start bumping up against a customer who's more value conscious or who values other attributes that maybe Pet Valu doesn't focus on as much. Wondering your perspective on this, the expansion and your premium tier, I mean, there's only so many customers that value those attributes. Greg Ramier: Our store decision-making isn't just about the here and now. When we open a store, whether it's corporate or franchise, we're making a 10-year commitment. And that 10-year commitment includes or encompasses all the phases of an economic cycle. So that's how we look at it when we are making the decision about opening a store. As you've heard us share in the past, we believe that there's a clear opportunity for us to operate over 1,200 stores across Canada. We do lots of modeling around that, both on the location and the customer base. We see a large portion of devoted pet lovers within those locations that will allow us to be successful with our model. We're only roughly 2/3 of the way along that path of 1,200 stores. I'd love the pace of us with 40 stores a year. It's a nice manageable size, but still provides really good growth trajectory for us. And we continue to see strong returns, both corporate and franchise returns with the new stores that we're opening. Vishal Shreedhar: Okay. And with respect to the environment which you anticipate and granted, I know there's substantial uncertainty regarding the outlook, but you anticipate it to be more challenging, at least relative to historical trends. Do you feel -- and you've come in and you've implemented the pricing initiatives and more analytical promo decisions. Do you feel that pricing at Pet Valu is sufficient? Or do you think the gap versus peers could still use some adjustment? Greg Ramier: It's a good question, Vishal. I'll come back to our strengths, which are convenience, value, quality and expertise. We've made some changes in our value program this year, starting about this time last year to have a sharper promotional plan and to have better everyday value across especially our brands, but now some key value items in national brands. That has allowed us to gain share consistently. We are -- as we talked about, we're winning the monthly shop. We're growing same-store transactions. We have stable margins at the same time because we've done a lot of good work under the -- under all of that. So I like where we are right now. I think it sets us up to be very successful next year during what we expect to be a similar environment to this year. Operator: [Operator Instructions] And our next question will be from the line of Adrienne Yih with Barclays. Adrienne Yih-Tennant: Great to see the progress. Craig, I wanted to ask a couple of things on pricing. So the brands have obviously raised prices sort of year-to-date this year. How much pricing have they taken? And has the spread between the brands and your private label expanded? And what do you expect in terms of future pricing as we go into 2026? And then for Linda, you talked about the EPS growth kind of accelerating in the fourth quarter and then into next year. Is that largely because you're starting to anniversary the fixed costs and the incremental depreciation from the investments? Greg Ramier: Adrienne, so I'll -- there's a couple of questions within that. I'll maybe start with the inflation question and then go to brands and then get Linda to ask or to answer the last part. There wasn't -- we had inflation in Q3. It was a bit less than what we've seen in previous quarters, but it's still positive. And this is really a result of the intentional actions that we've taken to make sure that we have the right everyday value. That would be earlier or this time last year that we're still lapping the Fresh 4 Life and the litter reductions that we did, the value that we did in Prime at the end of Q2, and then just now at the end of Q3 with the recent changes that we've done with the Lower to Lock program. So we've been focused on making sure that we have the right value and that we're competing to win that monthly shop. Within that, we've made sure that our proprietary brands are positioned to give the savings for devoted pet lovers. I'll remind everybody that they're 1/4 of our sales. They're an important part of our business. They give savings to customers, great quality and better margins for us. So it's a very helpful environment. So that's what we've really seen. We've done the work with making sure that we are focused on and building our brand sales and basket penetration has been a key focus for us this year. Linda Drysdale: Yes. And on your question about the growth on the EPS, you nailed it, Adrienne. It's the returning -- as we annualize the investments in our supply chain, that's unlocked that, and we're really looking forward to that. Adrienne Yih-Tennant: Okay. And then can you just -- as a follow-up, can you just remind us where you are in the journey of sort of increased productivity gains and capacity utilization? I remember earlier on, you had talked about and we are seeing it that it would start to really manifest in the back half of this year, but it was a multiyear journey. And so if we're just starting to see that, I can only imagine that there's more to come, so it's going to help us where we are here. Greg Ramier: Adrienne, we're very early in this journey. So we've built capacity for 10-plus years. We will leverage that capacity through those 10 years. And we were pleased with starting to see some -- both leverage and productivity gains in Q3. That Q3 was a little stronger and a little better than what we had anticipated. We foresee a strong tailwind from both the leverage and the productivity opportunities that we've created with the supply chain investment. Adrienne Yih-Tennant: Fantastic. Controlling what you can in an uncertain macro is the name of the game. So good luck. Greg Ramier: Thank you. Operator: The next question will be from the line of Mark Petrie with CIBC. Mark Petrie: I think I heard a comment earlier about adding a bunch of national -- I think it was 150 SKUs of national brands in hard goods. And can you just confirm that? And could you just talk about that decision in the context of what you're highlighting with regards to the consumer and sort of the importance of value around private labels? And so what's the background there? Greg Ramier: Mark, that is true. Our strategy in hardlines, and this is an area where we want to compete stronger next year is to make sure that we have the right innovation, both from our brands and from national brands. We've added some great specialty brands into the portfolio to close out the year that will help us in Q4 and to make sure that we have the right value in both led with our proprietary brands. We want a great balance between the innovation and value of both national brands -- the right national brands and our proprietary brand. Mark Petrie: Okay. So is this more a substitution of what your national brand portfolio was before or -- and just sort of a refresh there? Or are you sort of shifting like -- maybe you went too far on the proprietary brands and now you're shifting some of the SKUs from own brands to back to national brands? Greg Ramier: No, Mark. This is an effort to make sure that we have the right national brands with the right newness and the right innovation as we go into the holidays. Operator: With no further questions on the line at this time, I will now hand the call back to Greg Ramier for some closing remarks. Greg Ramier: Thank you, everybody, for joining us. Looking forward to speaking with you in March. I hope everybody has a great Q4 and a great holiday season. Thank you very much. Operator: This concludes the Pet Valu Third Quarter 2025 Earnings Conference Call. Thank you to everyone who joined us today. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the Sterling Infrastructure Third Quarter Webcast and Conference Call. [Operator Instructions] As a reminder, this call is being recorded on Tuesday, November 4, 2025. And I would now like to turn the conference over to Noelle Dilts, Vice President of Investor Relations and Corporate Strategy. Please go ahead. Noelle Dilts: Good morning to everyone joining us, and welcome to Sterling Infrastructure's 2025 Third Quarter Earnings Conference Call and Webcast. I'm pleased to be here today to discuss our results with Joe Cutillo, Sterling's Chief Executive Officer; and Nick Grindstaff, Sterling's Chief Financial Officer. Joe will open the call with an overview of the company and its performance in the quarter. Nick will then discuss our financial results and guidance, after which Joe will provide a market and full year outlook. We will then open the call up for questions. As a reminder, there are accompanying slides on the Investor Relations section of our website. These slides include details on our full year 2025 financial guidance. Before turning the call over to Joe, I will read the safe harbor statement. The discussion today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Sterling's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligations to update forward-looking statements as a result of new information, future events or otherwise. Please also note that management may reference EBITDA, adjusted EBITDA, adjusted net income or adjusted earnings per share on this call, which are all financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our earnings release issued yesterday afternoon. Our discussion of all results today, including revenue and backlog, refer to figures that adjust prior period results to conform to the current accounting for RHB JV, unless otherwise noted. Additionally, all comparisons are to the prior year quarter unless otherwise noted. I'll now turn the call over to our CEO, Joe Cutillo. Joseph Cutillo: Thanks, Noelle. Good morning, everyone, and thank you for joining today's call. Sterling delivered another outstanding quarter as we achieved strong revenue growth, expanded margins, grew backlog and generated excellent cash flow. We are pleased to discuss these results today with you, but even more excited about the opportunities ahead of us. Beginning with the third quarter results, revenue grew 32%, fueled by 58% growth in our E-Infrastructure Solutions segment, including 42% organic growth. In addition, our Transportation segment grew 10% in the quarter. We grew adjusted earnings per share by 58% to $3.48 and delivered adjusted EBITDA of $156 million, an increase of 47%. Our gross profit margins expanded 280 basis points from the prior year to reach 24.7%. Additionally, operating cash flow generation in the quarter was again very strong at $84 million. Our backlog position and strong visibility drive our confidence in the future. Backlog at the end of the quarter totaled $2.6 billion, a 64% year-over-year increase. Excluding the contribution from the recent acquisition of CEC, backlog increased a strong 34% year-over-year. E-Infrastructure Solutions backlog of $1.8 billion was up 97% in total and 45%, excluding the contributions from CEC. When you layer in our unsigned awards and pipeline of future phase opportunities, we have visibility into a pool of work in excess of $4 billion for Sterling. The Sterling Way, which is our commitment to take care of our people, our environment, our investors and our communities while we work to build America's infrastructure, remains our guiding principle as we execute our strategy and grow the company. Now I'd like to discuss our segment results in more detail. In E-Infrastructure, third quarter revenue grew 58% over prior year and over 34% sequentially. Excluding CEC, revenue grew more than 42% over prior year and 21% sequentially. The data center market, again, was a primary growth driver in the quarter, as revenue from this market grew more than 125% year-over-year. Adjusted segment operating income grew 57%, or 48% excluding CEC. Adjusted operating margins for the legacy E-Infrastructure Site Development business were 28.4% and increased over 140 basis points from prior year levels and 10 basis points sequentially. This was driven by our continued shift towards large mission-critical projects, including data centers, where our superior project management and ability to finish jobs on or as scheduled are extremely valuable to our customers. We are pleased to have closed the CEC acquisition during the quarter. We see tremendous opportunities ahead to leverage our expanded service portfolio and are seeing early positive reception from our customers. CEC contributed $41.4 million of revenue in September and adjusted operating margins that were in line with our expectations. We continue to have very good visibility in the E-Infrastructure business. With the recent CEC acquisition, the aggregate of our E-Infrastructure signed backlog, unsigned electrical awards and future phase site development opportunities total approximately $3 billion. Moving to Transportation Solutions. Third quarter revenue grew 10% and adjusted operating profit grew 40%, driven by strong market demand and the benefits of the mix shift towards higher-margin services. We ended the quarter with Transportation Solutions backlog of $733 million, a 23% year-over-year increase. Sequentially, segment backlog was roughly flat, with awards keeping pace with burn. As a reminder, the wind down of our Texas low-bid heavy highway operation is impacting backlog to some extent this year, but will ultimately benefit segment margins. Shifting to Building Solutions. In the third quarter, segment revenue declined 1% and adjusted operating income declined 10%. Adjusted operating margins in the quarter were 12%. Overall demand for homes has been impacted as potential buyers struggle with affordability challenges. Revenue from our legacy residential business declined 17%, driven by softness in the overall housing market. Even with these headwinds in Building Solutions, the strength of Sterling's diversified portfolio and strategy to focus on growth in high-margin end markets enabled us to deliver another record quarter. With that, I'd like to turn it over to Nick to give you more details on some of our financial metrics and full year guidance. Nick? Nicholas Grindstaff: Thanks, Joe, and good morning. I'll begin with our consolidated backlog metrics, all of which are adjusted to exclude RHB for the prior year. Our third quarter backlog totaled $2.58 billion, a 64% increase from the prior year second quarter. CEC contributed $475 million to backlog. Excluding CEC, backlog increased 33.8% year-over-year. We closed the quarter with combined backlog of $3.44 billion, which was up 88%. Excluding CEC, combined backlog increased 43.5% year-over-year. Third quarter 2025 book-to-burn ratios excluding CEC were 1.23x for backlog and 1.76x for combined backlog. Year-to-date book-to-burn ratios excluding CEC were 1.31x for backlog and 1.58x for combined backlog. Moving to our cash flow metrics. Cash flow from operating activities for the first 9 months of 2025 was a strong $253.9 million compared to $322.8 million in prior year period. Cash flow used in investing activities for the first 9 months of 2025 included $46.9 million of net CapEx and $484.2 million for acquisitions, including CEC. Year-to-date cash flow from financing activities was a $80.7 million outflow, primarily driven by share repurchases of $48.5 million at an average price of $135.96 per share. Remaining availability under the existing repurchase authorization is $80.9 million. We are in great shape from a balance sheet perspective. We ended the quarter with a very strong liquidity position consisting of $306.4 million of cash and debt of $294.6 million for a cash net of debt balance of $11.8 million. Our $150 million revolving credit facility remained undrawn during the period. Now I'd like to discuss our guidance. The strong tailwinds behind our business position us for another record year at Sterling in 2025. We are increasing our guidance ranges to: revenue of $2.375 billion to $2.390 billion, which is a more than 5% increase at the midpoint relative to our previous guidance range; diluted EPS of $8.73 to $8.87; adjusted diluted EPS of $10.35 to $10.52 -- this represents a 9% increase at the midpoint over our previous guidance range -- EBITDA of $448 million to $453 million; adjusted EBITDA of $486 million to $491 million, a 6% increase at the midpoint over our previous guidance range. From a financial standpoint, we are in an excellent position to continue to take advantage of both organic and inorganic growth opportunities in the years ahead. Now I will turn the call back to Joe. Joseph Cutillo: Thanks, Nick. As we look to the future, we remain very bullish on the multiyear opportunity in each of our markets. Our strong backlog, future phase opportunities and discussions with our customers contribute to our confidence. First, in E-Infrastructure site development, we anticipate that the current strength in data center demand will continue for the foreseeable future. Our customers are discussing multiyear capital deployment plans and our focus on how to align with the right partners to support these plans. We are getting pulled into new geographies by our customers, including Texas, where we are now performing site development work. In the manufacturing market, we are seeing a fairly steady pace of activity in 2025. As we look out to 2026 and 2027, there remains a very big pool of megaprojects on the horizon. This would include planned semiconductor fabrication facilities. The e-commerce market has strengthened significantly in 2025. We have built a sizable level of backlog and believe we should continue to see momentum in 2026. Together, these dynamics support strong growth opportunities over a multiyear period. Moving to CEC. We have very good momentum heading into 2026. Customer demand is very strong, particularly in the data center market, and the organization has booked several large projects in recent months. We continue to see opportunities for margin expansion over the next couple of years. We have a high degree of confidence in our ability to leverage the combination of site development and electrical services as we head into the new year. For 2025, we expect to deliver E-Infrastructure revenue growth of 30% or higher on an organic basis and approaching 50%, including CEC. Adjusted operating profit margins for E-Infrastructure should approximate 25% for the full year including CEC, as compared to 23.7% in 2024. In Transportation Solutions, we are approaching the final year of the current federal funding cycle, which concludes September 2026. We have built over 2 years of backlog and continue to see good levels of bid activity. For 2025, we anticipate continued growth in our core Rocky Mountain and Arizona markets. The downsizing of our low-bid heavy highway business in Texas is progressing according to plan, resulting in some moderation of Transportation Solutions top line and backlog, but should drive meaningful margin improvements as we move through the year. We expect Transportation Solutions revenue growth in the low teens on an adjusted basis in 2025. We forecast adjusted operating profit margins in the 13.5% to 14% range compared to 9.6% in 2024. In Building Solutions, we continue to believe the business is well positioned for growth over a multiyear period. Our key geographies of Dallas-Fort Worth, Houston and Phoenix are expected to see continued population growth, driving new home demand. Additionally, there is a significant opportunity for share gain in Houston and Phoenix. In the near term, we are anticipating a continuation of soft market conditions driven by affordability challenges. For full year Building Solutions revenue, we forecast a mid- to high single-digit decline. We anticipate adjusted operating margins in the low double digits as compared to 14.8% in 2024. As a reminder, from a seasonality perspective, our fourth quarter and first quarter tend to be slower than our second and third quarter, with the first quarter typically our lowest of the year. On the acquisition front, we are continuing to look for small to midsized acquisitions that are the right strategic fit to enhance our service offerings and geographic footprint. Moving to our full year guidance. The midpoint of our increased 2025 guidance range would represent 27% revenue growth year-over-year as adjusted for RHB, 47% adjusted EPS growth and 42% adjusted EBITDA growth. With that, I'd like to turn it over for questions. Operator: [Operator Instructions] The first question comes from Brent Thielman at D.A. Davidson. Brent Thielman: Joe, yes, maybe just a first question. It looks -- I mean, it looks like CEC signed and unsigned work has substantially grown since the June deal announcement. So again, I would just be sort of interested on kind of what's behind the momentum and award activity there. And how do we think about -- sounds like some large data center projects. But how do we think about them converting that over the next sort of 12-plus months? Joseph Cutillo: Yes. So they had very good and strong bookings and wins in the quarter. It's mostly around the data center front as that continues to move forward, along with a couple of other big projects that are a little outside of the data center front. We are -- here's what I'll tell you, they had a great bookings quarter. We're excited about that. But we're really excited about the reception that we're getting from our end customers in our end markets from this combination and are in the early stages of talking about several 2026 projects and how do we do those as a joint package instead of an individual package. So we're very excited about that. As we said in the call, we have started doing site development in Texas. We think that is going to grow very aggressively as we go into 2026. And I will tell you, the teams are working diligently together to pull each other into that market into these next big future phase jobs. So we're -- man, I'm tickled to death with where we are. The team spent 2 weeks together right out of the chute, working on stuff, and I was excited about the deal before. I came away even more excited after that 2 weeks together on the opportunities they saw between the site development and the electrical teams. Brent Thielman: And Joe, it sounded as though you're optimistic around some margin expansion opportunities there or some specific things that you're seeing in the award activity that gives you some confidence there. What drives that margin expansion [indiscernible]? Joseph Cutillo: Yes. So a combination of things. Certainly, on just the pure site development, the size of these projects continue to get bigger and bigger. And what our customers are talking to us about the next level of projects that are coming out, again, they just -- they're getting bigger, which is fantastic for us. On the combination of the electrical and site development side, we've proven significant productivity gains with the small dry conduit business tuck-in we did at the beginning of January. We've seen their margins improve 40% just by combining that with the site development. We think there's certainly some opportunities to lever that larger with CEC. But also as CEC continues to move further and further into data center space, those margins are accretive to their average margin. So if we can build their portfolio and backlog stronger in that area, their margins will continue to increase as well. So we feel very good on continued margin enhancement across the segment. Brent Thielman: Okay. Just last one, I think, along those lines on the E-Infrastructure business and that the current backlog, I guess, for the legacy Site Development side. Joe, could you talk about maybe how the size of projects even within mission-critical has evolved over the last 12-plus months? I know mission-critical is bigger for you now, but how is that sort of being redefined with the projects you're putting in backlog now? Joseph Cutillo: I don't know that we're really redefining it. The only incremental add to E-Infrastructure is obviously the CEC acquisition piece. But the base business was up, was it 34%, I think in backlog. And so for us, mission-critical, again, is data centers, manufacturing, e-commerce distribution is kind of what I'll call the 3 core elements of it. Did I miss anything? Nicholas Grindstaff: 45%. Joseph Cutillo: 45? Yes. So we're up 45% in that area. So we haven't redefined anything, just the project size of these data centers. And when the chip plants come out, those are pretty sizable as well will continue to help us on the margin front. One of the things we really don't talk about in the script that I think is important that everybody understands is -- we said we're in Texas. I will tell you that there's some other geographic footprints that we are aggressively looking at expanding into. Not because there's large projects there today, but we believe there's going to be large projects there based on our customers telling us that over the next 2 to 3 years. So we're trying to get in early, get our footprint established and be ready for those to come up. Noelle Dilts: Yes, Brent, this is Noelle. I would just say we're now over 80% of our work is mission-critical in backlog, looking at kind of data centers, manufacturing, et cetera. So that continues to move higher. And then to Joe's point, even within that bucket of mission-critical, the projects are getting larger and more complex in that there's underground infrastructure, which is great for us. And so that intensity of the work we're doing continues to expand. Joseph Cutillo: Yes. And just to add to that, I think it's part -- kind of a thought. If you think -- not only -- we talk about data centers getting bigger. But I will tell you that every piece of mission-critical jobs are getting bigger in size as we talk about e-commerce distribution coming back, and I think we're up 150% in backlog growth in e-commerce distribution. Those jobs are about 2x to 2.5x the size of historical ones. Not only are the footprints getting bigger, but Noelle mentioned, the infrastructure associated with these -- an e-commerce distribution center is starting to look a little bit more like a data center. And what I mean by that is with all the EVs that are being used by an Amazon, all the underground utilities that now have to be run to these charging stations and everything else look like a mini duct bank. So it just continues to add to the complexity, the size and the scope, which is perfect for us. And now adding the electrical piece, you can quickly, in your head, see how we can integrate those two together and make that part of the package. Operator: The next question comes from Julio Romero of Sidoti & Company. Julio Romero: I wanted to hone in on the combined backlog plus the forward pipeline of future phase work of $4 billion plus that you mentioned. Help us think about the mix of end markets or customers that are driving the growth of that forward pipeline? And then secondly, what's your estimation of when that forward pipeline begins to convert into orders? Joseph Cutillo: Well, I think you got to break it down into the pieces. The backlog, we're either converting or we'll be converting shortly into work. The low unsigned, those are projects that we either have letters of intent or we have won the physical job or negotiating terms of contracts or there's a final design work that's taking place. Those are likely to start in '26. Depending on the actual project, when in '26 could vary. And some may start first quarter, second quarter, third quarter. A lot of the big design-build highway projects, I will tell you, are going to start second and third quarter of next year, kind of in the process there. And then that future phase work, the way to look at it is as we burn off current backlog, the work we're working on today, that then flows into current backlog. So that spreads out over what I'll call a '26, '27 and into '28 time frame in which that will hit. Julio Romero: Got it. Very helpful there. And then just -- go ahead, sorry. Joseph Cutillo: I'm sorry. I just want to make sure I answered everything you're looking for there, really. Noelle Dilts: I would say in terms of the composition... Joseph Cutillo: Well, if you take a look at it, $3 billion of the $4 billion is in E-Infrastructure. And the highest percentage of that is going to be data center, which would probably be 75% or 80% of that piece there. Julio Romero: Got it. Extremely helpful there. And then maybe just turning to Transportation Solutions, really notable margin strength there, here in the third quarter. If you could help us unpack the drivers there? I don't think the impact of low-bid phase is starting to come through, unless I'm mistaken. And then just talk about the margin profile of what you have in Transportation backlog and unsigned awards. Joseph Cutillo: Yes. I think people grossly underestimate the progress that Transportation group has really made. We have best-in-class margins, and they continue to get better. It's really -- again, it's really around what I'll call project selection and focus as we continue to do more design-build or alternative delivery-type projects, along with aviation and rail, continue to diversify that portfolio, the margins will continue to increase. We haven't seen a significant part of that, though we've seen a little from the wind down of our Texas low-bid business. We'll see that impact more in 2026 as we weed out or wean down, I should say, that backlog. But that will continue. So probably the first -- most of that will be burned off in the first half of 2026. Operator: The next question comes from Adam Thalhimer at Thompson Davis. Adam Thalhimer: Joe, I wanted to ask you about -- so you said '26 and '27, big pool of megaprojects. Obviously, your ability to bid on megaprojects isn't -- your capacity to bid isn't infinite. So how do you think about how you prioritize what you're bidding on? And how do you price that work? Joseph Cutillo: Yes. I think that's a good question, Adam. We do have a fair more capacity. We've been planning for this. We've been in conversations on some of these projects for a couple of years now with our customers. So we have been doing stuff internally to plan for this. As we've said, generally, our biggest limitation to capacity is around project management and the program we put in place to develop future project managers. We've been doing it for, I think, 4 or 5 years now, is really starting to pay off to add some increased capacity. But at the end of the day, I don't want anybody to be surprised if we pass on one of these megaprojects because if the pricing is not right, the margins are not right or the complexity of the contracts don't make sense for us, we're okay to pass on that with the visibility we have in data centers and the rest of mission-critical stuff coming out. But I will tell you, we're looking at those and we will continue to build capacity as needed to do those. Just keep in mind, if we have a year runway to build capacity, we can build a lot. If somebody comes in tomorrow and says, "I've got three $500 million jobs," it may be tough for us -- and they need to start in 60 days, that would be a challenge for us. But we've got -- our customers have been very good, the hyperscalers, and even these big chip plants have been very good, kind of forward looking and anticipating what's coming out. The other good thing on the chip plants is they've taken much longer than I think the builders have anticipated for them to hit the ground running with all the upfront work that's had to be done. So we've seen these coming now for 2 years. So we'll be ready. Adam Thalhimer: And then I was curious, you talked about entering Texas for site prep. I guess you're doing that organically. And I was curious if -- or kind of what you're doing with the assets from the Texas highway work that's winding down? Joseph Cutillo: Yes. Another good question. Well, you may see those on a site development job or two. The smaller assets that we have there are very capable of doing some of the utility and underground work. With CEC and those assets combined, now we can start doing duct banks in Texas. So I think over the next 6 to 12 months, if you go to one of our sites, you may see some stuff that has a TSC logo on. Adam Thalhimer: Cool. And then lastly, you said you were -- you continue to look at small and midsized deals. Was that just a comment in the residential segment? Or is that for the whole company? Joseph Cutillo: No, no. We're -- yes, we're looking -- the vast majority of deals we're looking at are in and around E-Infrastructure. It's not that we won't look at stuff and be opportunistic in Building Solutions. But I would tell you right now, about 95% of everything we're looking at or folks we're talking to is and around added either capabilities, geographic expansion or just pure assets in and around E-Infrastructure. Operator: The next question comes from Noah Levitz at William Blair. Noah Levitz: To start off on the transportation side, has there been any impact from the government shutdown on transportation funding? And you've also mentioned in the past about a potential successor bill to the IIJA. Can you give any update as to -- do you still think that's moving along? Should it be bigger? Anything you can add there? Joseph Cutillo: Yes. So first, no impacts from government shutdown. The funding that's on these jobs has already been allocated. It's out there, so no impact at all on that. That's not to say there may be some grant projects or grant programs that somebody has out there, they could be delayed. Good news is, I'm not aware that we have anything tied to that. I haven't heard a single word from our business units in a few or so, not an issue there. On the next bill, the existing bill ends at the end of September of 2026. I will say that -- I was with the DC team, it's probably been 4 weeks ago now or 5. Things have been progressing very well. I always use the caveat, it is DC, and it is the government, and we can see the functions or dysfunctions of things. But they're probably 6 months ahead of where they have been historically. And I'm optimistic that something will happen in a timely manner. However, keep in mind that why we are not losing any sleep over this is we will go into September with roughly 2 years of backlog. Second, if there is not a resolution or a new bill passed is probably how I should phrase it, they will put an extension in place, generally. Or historically, the extensions have been the current kind of spend rates plus an inflation adjustment. So we don't stop. We continue at that. The thing that does generally happen in that year where there's a gap or that 6 months or whatever time frame it takes to bridge to the new bill is the states tend to do more smaller projects than the big multiyear projects because they're unsure of how much funding they'll have over a multiyear period. But the reality is the world doesn't shut down. Our projects don't stop. The bid activity projects change a little bit. But what we're seeing -- the thing that people don't understand is that there is spending that will continue to take place on this current bill. There's still 2 years of spending left approximately on the current bill that they have to get out before the end. So today, we're anticipating going in with 2 years of backlog. We can go in with more backlog than that, depending on what projects get squeezed into this last, call it, 18 months or less now. I guess it's almost a year until the next one. Noah Levitz: Great. That's helpful. And then just my last question. You said that data center growth was greater than 125%, which is exceptional, and it comes after last quarter, which was more than doubled. Can you break that down a bit more? Just -- is that growth in existing projects? Is that new projects coming online? Is it the current phases that the work was being done during the quarter being bigger phases? Like can you -- yes. Joseph Cutillo: Yes, it's a combination. I think if you talk to our teams out in the field, one of the things we're most proud about in the quarter isn't the great quarter they had and the results they were able to deliver. But it was really impressive for them to grow total backlog with the burn rates that they have. But some of that is new projects. And the way to look at it is if we didn't get new projects and we just shifted from future phase to backlog, our total would have decreased, right? So we not only shifted future phase to backlog, but we won enough new projects to offset that burn rate and grow that total backlog. Operator: The next question comes from Alex Rygiel at Texas Capital. Alexander Rygiel: Very nice quarter. A lot of good answers here so far on the call, but I've got a few here, questions for you. Do you generally experience any permitting issues that possibly delay project starts historically? Joseph Cutillo: Well, what I will tell you is the permitting process certainly is longer today than it was pre-COVID. And I would have told you, pre-COVID, that it sucked and was really long, okay? It definitely takes longer for permits to happen. But we -- generally, on the site development side, where we see the delay isn't from the time we get the contracts to start, it's more waiting to get the contracts. So we know the projects are coming. We know that it's going to -- we're going to win them. But we may not win them in this month, and maybe a month later, it may not be this quarter, maybe the next quarter. We haven't seen historically where we've got equipment ready to go, we're ready -- or on the site and we have delays. So we're fortunate in that where it takes place in our process tends to be before we start. However, I will tell you that from historical numbers, it certainly is -- what used to take 6 weeks for a permit now takes 3 months. Maybe 5 in certain markets. So that upfront piece is delaying stuff. It's also why some of these megaprojects are taking so long to hit the ground. These chip plants, we know they're there. We know they're coming, but they're still going through a lot of the permitting, getting utilities. And utilities require permits and everything else, right? So it kind of cascades. So it's definitely a long pole in the tent. I will tell you -- and I have told everybody this. If the U.S. wants to accelerate onshoring, reshoring chip plants, whatever it is out of build, if they can get through the regulatory and permitting issues, it would speed up these projects and spending and funding exponentially. Alexander Rygiel: And then within Building Solutions, are you seeing any signs of green shoots? Joseph Cutillo: I'm sorry. Say that again? Alexander Rygiel: Within Building Solutions, are you seeing any signs that 2026 could start to improve again? Joseph Cutillo: No. I think we don't believe, honestly, that anything would happen until the second half of '26 at the earliest. Certainly, interest rates continue to creep down, builders have a lot of programs in place. We have not seen -- we've flattened, okay? It's not getting worse. That's the good news. But we have not seen anything that would tell us we're going to see an uptick here anytime soon. Operator: Thank you. We have no further questions. I will turn the call back over to Joe Cutillo for closing comments. Joseph Cutillo: Thank you. Thanks again, everybody, for joining today's call. If you have any further follow-up questions or would like to set up a call, please contact Noelle Dilts. Or if -- contact information is in our earnings release. I hope everybody has a great day, and I appreciate you taking the time. Thanks. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask you that you please disconnect your lines.
Operator: Hello, everyone, and thank you for joining the VPG Third Quarter 2025 Earnings Call. My name is Claire, and I will be coordinating your call today. [Operator Instructions] I will now hand over to Steve Cantor from VPG to begin. Please go ahead. Steve Cantor: Thank you, operator, and good morning, everyone. Welcome to VPG's Third Quarter 2025 Earnings Conference Call. Our Q3 press release and accompanying slides have been posted on our website at vpgsensors.com. An audio recording of today's call will be available on the Internet for a limited time and can also be accessed on the VPG website. Today's remarks are governed by the safe harbor provisions of the 1995 Private Securities Litigation Reform Act. Our actual results may vary from forward-looking statements. For a discussion of the risks associated with VPG's operations, we encourage you to refer to our SEC filings, especially the Form 10-K for the year ended December 31, 2024, and our other recent SEC filings. On the call today are Ziv Shoshani, CEO and President; and Bill Clancy, CFO. I'll now turn the call to Ziv for some prepared remarks. Please refer to Slide 3 of the quarterly presentation. Ziv? Ziv Shoshani: Thank you, Steve. I will begin with some commentary on our results and trends for the third quarter. Bill will then provide financial details about the quarter and our outlook for the fourth quarter of 2025. Moving to Slide 3. Beginning with revenue, third quarter revenue of $79.7 million grew 6.1% from the second quarter and was up 5.3% from the prior year. Total bookings of $79.7 million were at similar levels with the second quarter, reflecting mixed but stable global trends. Strong double-digit growth in Sensors offset lower orders for Weighing Solutions and Measurement Systems sequentially. Our consolidated book-to-bill was 1.0, marking the fourth sequential quarter with a book-to-bill of 1.0 or higher. Our Sensors and Measurement Systems segment reported a book-to-bill of 1.07 and 1.04, respectively. Our adjusted gross margin of 40.5% reflected improved in the Sensors segment and another record quarter for Weighing Solutions segment. However, consolidated gross margin included a significant impact from unfavorable FX and product mix, which offset the effect of the higher sequential revenue. We achieved an adjusted operating margin of 6.2%, which improved compared to both Q2 and the prior year. We continue to make progress with our long-term business development and cost optimization initiatives. This translated into a solid cash generation with $9.2 million in adjusted EBITDA and $7.4 million in adjusted free cash flow. We successfully mitigated the impact of tariff cost to a price adjustments to our customers and do not believe tariffs impacted demand. Moving to Slide 4. Beginning with our Sensors segment, third quarter revenue increased 19.1% sequentially, reflecting higher sales of precision resistors in the Test and Measurement and AMS and higher sales of strain gages in the General Industrial market. Sensor bookings rose 13.5% sequentially, reaching the highest level in 12 quarters and resulted in a book-to-bill of 1.07. The bookings growth was driven by demand from precision resistors for semiconductor test and AMS applications. We expect this momentum to continue in the fourth quarter as some distributors replenish inventories for AMS applications. Regarding humanoid robots, we are optimistic about the long-term potential for VPG in the emerging markets. While humanoid robots market is still in its infancy and initial real-world deployment of this robot is expected in 2026, we believe we are in a good position in high-performance niches for our sensor technology. We received $1.8 million in orders from July to October related to our two current humanoid developer customers. This included prototype orders of approximately $600,000 from our second humanoid customer in October. This brings the total orders year-to-date to approximately $3.6 million related to humanoid projects. We are also in the initial discussions with additional developers of humanoid. Moving to Slide 5. Moving to our Weighing Solutions segment. Third quarter sales decreased 6.4% from the second quarter. The decline reflected lower sales in the transportation market as well as in the construction and precision ag equipment markets. Weighing Solutions orders of $24.5 million were about 10% lower compared to the second quarter, resulting in a book-to-bill of 0.89. Order trends for Weighing Solutions softened but were at stable levels. Moving to Slide 6. Turning to our Measurement Systems segment. Revenue in the third quarter of $20.6 million increased 7.3% sequentially. The increase reflected higher sales to the steel market of our KELK and DSI products. Third quarter Measurement Systems orders of $21.4 million decreased 6.9% sequentially, and resulted in a book-to-bill of 1.04. The lower sequential bookings reflected ongoing softness in DTS due to delays related to defense and space government projects. We expect delays in some of these defense projects to continue into the fourth quarter due to the U.S. government shutdown. We were pleased to receive an order from Stoney Brook University for the beta of our new UHTC system. This is the second university which ordered the system. This system designed to perform band testing on nonconductive materials such as ceramics, which are used in critical high-performance applications such as hypersonic missiles in aerospace as well as in avionics, energy and industrial applications. Moving to Slide 7. I'll now provide an update on our strategic priorities for 2025. First, we generated approximately $26 million in business development orders through the first 9 months of this year, which put us on track to achieve our $30 million goal for 2025. Second, regarding our cost efficiency goals for 2025, we expect to have in place $5 million of annualized cost reductions by the end of this year. We also continue to execute our ongoing operational efficiency plans with the sale of a building in July. Third, we also continue to look for attractive M&A opportunities. Our strategic priorities are designed to increase growth and profitability. They reflect several years of focused investments and have built strong foundation to reach our long-term financial goals even on a lower revenue than we originally expected. As VPG enters this next phase, we are expanding our senior leadership team with two new C-suite roles. We have appointed Yair Alcobi to the newly created position of Chief Business and Product Officer, responsible for overseeing sales, marketing, product strategy and business development. Yair brings considerable experience in accelerating growth and profitability from his previous executive leadership roles at leading industrial tech companies, including in the semiconductor test market for KLA-Tencor, among others. We have also appointed Rafi Ouzan to the newly created role of Chief Operating Officer to lead VPG's manufacturing and our operational excellence initiatives. Rafi has more than 30 years of experience in key executive and operational roles for VPG and Vishay Intertechnology, including as Senior Vice President and Head of our Weighing Solutions segment. I want to welcome these two executives to our senior team and look forward to their contributions to delivering business excellence and execution, which are prime strategic trusts for VPG. Yair and Rafi will help drive our focused mainstream global trends, increase the speed of innovation and R&D and leverage our strong brands. I believe these new positions will enhance and accelerate value to our customers and stockholders and will also allow me to focus on continuing to build a dynamic culture supporting future growth and scalable M&A strategy. In summary, we are pleased with the solid quarter. We see stable, moderately improved business environment. We are making organizational changes that align our reporting segment to accelerate top line growth and strengthen our operational excellence. We are continuing to make progress with our business development initiatives, including supporting our humanoid customers. I will now turn it over to Bill Clancy. Bill? William Clancy: Thank you, Steve. Referring to Slide 8 and the reconciliation tables of the slide deck, our third quarter 2025 revenues were $79.7 million. Adjusted gross margin was 40.5% in the third quarter. Compared to 41% in the second quarter, the third quarter gross margin was impacted by $600,000 of unfavorable foreign exchange and $800,000 from unfavorable product mix, which offset higher volume and tariff-related net price adjustments. Sequentially by segment, adjusted gross margin for the Sensors of 33.7% increased primarily from volume and tariff-related net price adjustments, partially offset by a decrease in inventories and unfavorable foreign exchange rates. The Weighing Solutions adjusted gross margin of 40.3% increased slightly from the second quarter and reached an all-time record, primarily reflecting tariff-related net price adjustments and cost reductions, partially offset by lower volume. The gross margin for the Measurement Systems of 51.1% declined from the second quarter due primarily to unfavorable product mix. Moving to Slide 9. Our adjusted operating margin was 6.2% which excluded start-up costs, restructuring costs and purchase accounting adjustments amounting to $362,000 and the gain on the sale of a building of $5.5 million. This improved from 4.8% in the second quarter of 2025. Selling, general and administrative expenses for the third quarter was $27.2 million or 34.2% of revenues, which decreased from $27.7 million or 36.9% of revenues for the second quarter of 2025. The operational tax rate in the third quarter was 26%. And for the full year of 2025, we are forecasting an operational tax rate of approximately 28%. We reported net earnings of $7.8 million or $0.58 per diluted share. Adjusted net earnings for the third quarter was $3.5 million or $0.26 per diluted share, compared to $2.3 million or $0.17 per diluted share in the second quarter of 2025. Moving to Slide 10. Adjusted EBITDA was $9.2 million or 11.5% of revenue, compared to $7.9 million or 10.5% of revenue in the second quarter. CapEx in the third quarter was $2.2 million. For the full year of 2025, we are forecasting $10 million for capital expenditures. We increased our adjusted free cash flow to $7.4 million for the third quarter from $4.7 million in the second quarter. As of the end of the third quarter, our cash position was $86.3 million, and our long-term debt was $20.5 million, giving us a net cash position of $65.8 million. This reflects the debt paydown of $11 million from the proceeds of the sale of a building in July. Regarding the outlook, for the fourth fiscal quarter of 2025 at constant third fiscal quarter 2025 exchange rates, we expect net revenues to be in the range of $75 million to $81 million. In summary, we grew sales quarter-to-quarter and year-to-date. We continue to improve our operating margin, which reflect our cost reduction and efficiency programs. And we remain excited about the potential of our business development initiatives, particularly in humanoid robotics. With that, let's open the lines for questions. Thank you. Operator: [Operator Instructions] Our first question comes from John Franzreb from Sidoti. John Franzreb: Ziv, I guess I'm kind of curious, firstly, about maybe the disconnect that we're seeing in the Weighing Solutions business. And by that, I mean, the book-to-bill has been below 1 for a couple of quarters, but the revenues kind of held up relatively well. Is that becoming a shorter cycle business? Or maybe you could provide some color there? Ziv Shoshani: Sure, absolutely. Regarding Weighing Solutions. The Weighing Solutions business relies on a few pillars. First, we have the OEM business, which is encompass -- which consists of precision ag and construction. Those large companies, given the interest rates and the environment, do see a significant slowdown. On the other hand, the general industrial or the general -- sorry, the general weighing business, that's the other piece is very much linked to the industrial sector, which is also fairly stable. On the -- regarding the on-board weighing, the main driver there is the European economy, which is improving, but we have, to an extent, the seasonal effect for Q3. Regarding the overall bookings for this segment, we see a fairly stable environment, but still the larger companies do not see a significant upside from demand. And what we mainly see is the replenishment of the pipeline -- of the queue in the pipeline. John Franzreb: And the record gross margin of 40.3%, is that a sustainable number on an annualized basis? I get there should be some seasonality in Q4. But how should we think about that going forward into 2026? Ziv Shoshani: There are significant cost reduction initiatives in this segment as we continue to streamline our manufacturing from other parts of the world to India. So given the continuous operational excellence, I would say, initiatives at a similar revenue level, this gross margin is sustainable. John Franzreb: That's excellent to hear. And just sticking on the cost savings topic, you expect $5 million to be realized by the end of the year, and I assume that's on an annualized basis. But what's the year-to-date, how much of that $5 million has been realized? Ziv Shoshani: We do expect to meet the $5 million by the end of the year, and you are correct, this is an annualized number. And by now, we already reached $4 million. John Franzreb: And you touched on the -- No, I heard you. And on the humanoid robotics topic, you mentioned that you expect more shipments in 2026. Can you give us a sense of what kind of ramp that you expect to see? And will you need to add any manufacturing square footage to meet that demand? Ziv Shoshani: Absolutely. As I indicated, year-to-date, we have received $3.6 million of orders from two humanoid suppliers -- customers. One, we are ahead with the design and the other, we are in the prototype levels. Already now, there are some discussions regarding higher volume production, and there are discussions between us and our customers regarding VPG capability to support higher volume manufacturing. At this point in time, and unfortunately, I cannot get to specifics, but there are discussions. We don't know what is the ramp-up time and how quickly they are going to ramp up, but they are preparing for a higher volume application. And when time comes, they will -- we will continue to have this conversation and to be prepared to support our customers. Operator: Our next question comes from Josh Nichols from B. Riley. Josh Nichols: Good to see the orders from the two humanoid customers. You mentioned briefly on the call that you're in discussions with other potential customers as well. Do you think there's opportunities to bring at least one new customer into the fold over the next couple of quarters? Or where are you in those early additional customer discussions today? Ziv Shoshani: We are in the engineering dialogue providing or discussing a certain solution or a certain sensing solution to their humanoid. I would say that we don't have such a visibility to know exactly when they would approve the design even with some of the earlier discussions. Our customers have continued to change the design. They didn't freeze the design. It took them quite some time. So it's hard to tell. But I think that the main thing is that our customers do see and believe that VPG can provide value added when it comes to those sensing solutions. And this is why they approach us, and this is why they are ready to -- or they would like to work with us for their applications. So those are definitely good signs, but it's very hard to know exactly where we are in the design stage given their, I would say, proprietary process. Josh Nichols: Fair enough. And again, for these new business development initiatives, $26 million for the first 9 months on track to hit $30 million. Does that imply some additional expected humanoid orders in the fourth quarter? Or is that coming from other new areas of the business like ceramics overall? Ziv Shoshani: The $26 million are coming from very different applications, humanoid is part of them. We have also -- as you indicated, the ceramics, we have also some other designs for semiconductor back-end testing for, I would say, fiber optics. It comes from many, many different new applications across the complete company, across all the divisions. Josh Nichols: And then last question for me. I think you mentioned there was a little bit of softness related specifically for defense associated with like the U.S. government shutdown and that's likely to continue into 4Q. Any way you could quantify the impact to 3Q or what type of impact do you expect that to have to 4Q based on the guidance that you kind of laid out? Ziv Shoshani: Sure, absolutely. We believe that given the U.S. government shutdown, the effect is going to be mainly on our Measurement Systems division, I would say, more specifically on the -- for DTS product line, where we know that we -- I mean, there is a challenge having discussions or placing orders or shipping. So I would say that I would be a little bit more cautious to put a number, but it definitely will be -- this -- the effect will be at least in the hundreds of thousands of dollars, if not more. But that's really the kind of the ballpark. Operator: [Operator Instructions] We currently have no further questions. So I'll hand back to Steve Cantor for closing remarks. Steve Cantor: Before we conclude, I want to note that VPG will be presenting at the Three Part Advisors IDEAS Conference later this month, and the Sidoti Virtual Conference in December, and you can contact me for more details. And with that, we thank you for joining our call, and we look forward to updating you next quarter. Operator: This concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Welcome to the Third Quarter 2025 Sequans Earnings Conference Call. My name is Jonathan, and I will be your operator for today's call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to turn the program over to David Hanover, Investor Relations. David, you may begin. David Hanover: Thank you, Jonathan, and thank you to everyone participating in today's call. Joining me on the call from Sequans Communications are Georges Karam, CEO and Chairman; and Deborah Choate, CFO. Before turning the call over to Georges, I would like to remind our participants of the following important information on behalf of Sequans. First, Sequans issued an earnings press release this morning, and you'll find a copy of the release on the company's website at www.sequans.com under the Newsroom section. Second, this conference call contains projections and other forward-looking statements regarding future events or our future financial performance and potential financing sources. All statements other than present and historical facts and conditions contained in this release, including any statements regarding our business strategy, cost optimization, strategic plans, the ability to enter into new strategic agreements, expectations for sales, our ability to convert our pipeline to revenue and our objectives for future operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1999, Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements are only predictions and reflect our current beliefs and expectations with respect to future events and are based on assumptions and subject to risks and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not rely on or place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. And now I'd like to hand the call over to Georges Karam. Please go ahead, Georges. Georges Karam: Thank you, David. Good morning to everyone. We announced this morning that Sequans has taken a proactive approach to reduce its debt by 50% through its strategic asset reallocation of its Bitcoin treasury. We remain fully committed to our Bitcoin treasury strategy, which we continue to believe will deliver meaningful long-term value for our shareholders. This is why we executed our major financing deal in July as the starting foundation of our Bitcoin strategy. As you know, the financing deal included both equity and convertible debt components that introduced approximately 50% leverage into our treasury structure. Initially, we thought the shares would appreciate following the deal announcement and the debt would convert due to share price appreciation. While there is no urgency for us as we are not paying interest on the debt for the first 12 months, we have chosen to act proactively given current digital asset treasury market conditions. With many of our peers currently trading significantly below an mNAV of 1. We find ourselves constrained by the lack of available options to meaningfully advance our treasury strategy at this time. Thus, we have opted to move forward and negotiate with our debt holder to reduce our debt exposure and provide us with greater flexibility moving forward. As a result, we announced today that we are reducing by half our convertible debt via a tactical sale of a portion of our Bitcoin holdings. We undertook this action for the following reasons: First, it has lowered our debt-to-NAV ratio closer to the 35% range, a more appropriate level while still maintaining decent leverage on the remaining portion of the convertible debt. This puts us in a better position for issuing preferred shares in the future. Second, we have reduced some of the debt covenant constraints, increasing our ability to use all of the treasury tools at our disposal, including buying back ADS and executing on the ATM based on market conditions. With respect to our ADS buyback program, factoring in the current valuation, selling Bitcoin on a tactical basis makes sense in this environment to fund the repurchase of our ADS, which are trading at a significant discount to our Bitcoin net value plus our net cash. Note that our current valuation does not reflect the value-creating opportunities we believe are available to us through our IoT business, which I will discuss shortly. And lastly, we have freed up some of the Bitcoin we hold, enabling us to generate some yield with minimum risk. Such yield can be deployed to buy Bitcoin. So to summarize this move -- to summarize, this move was undertaken to unlock shareholder value and put us in a better position to execute on our treasury strategy. We intend to continue to follow a disciplined and opportunistic approach to Bitcoin accumulation. We'll be patient with market conditions, but we remain proactive. Ongoing Bitcoin purchases could be funded by issuance of debt, equity or preferred as well as IoT business monetization and operating cash flow. We have the tools or option in place to execute the strategy. An ATM, which provides us with the option that when our share price is much higher than where it is today, we'll be able to execute opportunistically on our Bitcoin accumulation strategy in an accretive manner. We have also an ADS buyback program in place, which has been approved by the Board. And given the current share price, we'll execute on this as soon as we are able to. We have reduced our debt exposure, which affords us the option to consider other new instruments like preferred shares in the future. Returning to my earlier point about the large valuation discrepancy in our shares, I wanted to stress that our current net equivalent cash position that includes equivalent cash of Bitcoin net asset value minus debt is above $170 million. This is approximately $12 per outstanding ADS. You can see the deep discount our shares are trading at on this basis alone. This ignores any IoT business value we are creating and expect to create in the future. It also ignores the leverage we can create with our Bitcoin treasury strategy. While Bitcoin treasury companies as a whole may be in a transition phase that has affected current equity valuations, we continue to be fully committed to the Bitcoin treasury strategy we have initiated and are exploring all opportunities to unlock shareholder value through our Bitcoin treasury alongside our IoT operations. Our goal remains to create long-term value to our shareholders. As for our IoT business itself, it's moving in the right direction. Our pipeline remains healthy, representing about $550 million in a potential 3 years product revenue across our 4G and RF product lines. In Q3, we won 6 new projects, and I'm pleased to announce that around $300 million of this pipeline are design win projects, a 20% increase versus our last reported figure. Some of the design win projects are in mass production phase currently generating revenue and others are under development by our customers with revenue potential in 2026 and beyond. Our execution remains focused on increasing the design win pipeline, but more importantly, on helping our customers with projects not yet in production, finishing the development and certification of their products and turning them to revenue-generating design wins. In Q3, 3 design win projects transitioned to production. In Q4, we expect to add 5 more, positioning us to enter 2026 with over 45% of our design win projects in production and generating revenue. This aligns with the target we set at the beginning of 2025 and represents a more than 2x improvement of this key business metric. We anticipate this positive trend to continue into the first half of 2026, supporting our revenue growth in the second half of 2026. Our design win projects span multiple verticals. Tracking, fleet management and smart metering remain the strongest verticals for us with good presence in security and e-health and medical. Looking at smart metering, we are now shipping product for 3 projects of Honeywell and 2 of Itron and should have 2 new metering customers ramping early 2026. In fleet management, Geotab is ramping, and we will have another customer ramping in early 2026. We continue to have strong business with AsiaTEL, a channel partner addressing auto tracking and other vertical applications. Now I will briefly review the third quarter business and discuss our fourth quarter outlook. Let me start by highlighting that Q3 was the first quarter without any remaining revenue -- revenue recognition tailwind from the Qualcomm deal closed last year. While this has an optical impact on the licensing and services revenue component, it does not affect cash flow. Q3 product revenue was impacted by minor delays as some customer projects shifted their ramp-up scheduled to Q4. While this has postponed our expected Q3 revenue growth, we remain confident that the ramp will materialize in Q4 as planned. In addition, we faced some late production challenges with our OSAT partner and revenue fell short of our target due to substrate availability issue. The impact was around $1 million in Q3. Substrate lead times became extended last quarter due to industry demand from AI leaders. We mitigated this by working with suppliers and anticipating orders. However, our execution timing was right on the edge of the quarter end. This ended up delaying some of our shipments by a couple of weeks. However, this issue is now under control for our fourth quarter shipments. Given our Q4 visibility, our current Q4 view is that product revenue will exceed $6 million with around $1 million incremental revenue of services and IP licensing. We aim to finish the Q4 with revenue above $7 million by adding the 2 components. On the product development front, we launched our 4G Cat1 bis worldwide SKU module and have made very good progress on our 5G IoT. In this regard, I'm pleased to announce that we have just taped out our 5G eRedCap test chip as planned. This is a major milestone in our 5G IoT project. This program will enable us to sample our third generation of IoT chips supporting 5G eRedCap late 2026. This is an extremely advanced technology that we believe has significant value. In summary, our 4G IoT business will grow and generate positive cash flow in 2026, becoming a profitable business line for us with the potential to grow further in 2027 by around 50% year-over-year. This business is helping to fund our ongoing investment in 5G R&D, which can start generating product revenue in 2027 and licensing revenue in 2026. We expect the IP created with this 5G investment could result in strategic deals with significant near-term value creation as we have successfully demonstrated in the past with 4G. More generally, we have launched new IP initiatives and announced a portfolio of IP that we are willing to license. We have done a few licensing deals in the past, but here, we are shifting from an opportunistic approach to a proactive go-to-market strategy, maximizing our customer reach and accelerating the monetization of our IP portfolio, all without additional investment. Currently, we have several opportunities under discussion, and we hope to conclude a few of them in the coming quarters. We believe services and IP licensing should contribute high-margin revenue in 2026. We further expect longer-term product revenue strength based on current design wins and order backlog of 4G chips and module and radio transceivers. Considering the $300 million product design win pipeline, we currently have in hand and factoring that we will enter 2026 with 45% of the design win projects generating revenue, this could generate [ $45 million ] average annual product revenue over the coming 3 years. This doesn't include the growing number of projects that are expected to enter into production in 2026, the new projects we are working on to win or IP licensing and services contribution. On the operating expense front, our goal is to limit cash burn in 2026 in order to reach breakeven in Q4. To support this, we are implementing a 20% cost reduction program across functions while safeguarding core innovation. This approach provides downside protection and preserves flexibility to scale up if upside revenue opportunities materialize. I will now take a moment to discuss some of the IoT-related strategic alternatives we are currently evaluating. Since launching our Bitcoin treasury, we have been actively reassessing how best to position our IoT business to ensure shareholders benefit from its full value potential. Our Board is currently evaluating a range of strategic alternatives we have. While several options being explored, I can share that we are in serious discussions regarding a few strategic partnership opportunities for our IoT business. The objective is to accelerate the path to breakeven, enhance the business overall value and strengthen its cash flow generating capability. I will now turn the call over to Deborah to review the third quarter 2025 preliminary financial results in greater detail. Deborah? Deborah Choate: Thank you, Georges, and good morning, everyone. I'll cover our third quarter financial results and then speak more about our Bitcoin holdings. Total revenues in Q3 2025 were $4.3 million, a decrease of 47.3% compared to the second quarter of 2025 as the last license revenues from Qualcomm finished in Q2 2025. Gross margin was 40.9% compared to 64.4% in Q2, again, reflecting much lower high-margin license revenue in the mix in Q3. Operating expenses in Q3 2025, excluding the unrealized loss on the marked-to-market of the Bitcoin treasury asset were $14 million, stable compared with Q2 2025. Both quarters included a number of nonrecurring expenses related to various legal and advisory fees related to our strategic transactions. Operating expenses in Q3 included nearly $800,000 in noncash stock compensation expense and $1.6 million in amortization and depreciation expense. As Georges mentioned, we are putting in place cost reduction measures to reduce cash operating expenses, meaning excluding stock comp and depreciation expense to be below $10 million per quarter in 2026. Operating loss was $20.4 million in Q3 compared to an operating loss of $8.7 million in the second quarter of 2025. The operating loss in the third quarter of 2025 included an $8.2 million unrealized loss on impairment of the value of our Bitcoin asset, which was mark-to-market. For the third quarter of 2025, our net loss was $6.7 million or $0.48 per diluted ADS compared to a net loss of $9.1 million or a loss of $3.59 per diluted ADS in Q2 2025. Net loss in the third quarter of 2025 included a noncash $20.6 million gain on the change in value of the embedded derivative related to the convertible debt issued in July and included net interest expense of $6.9 million that was also primarily noncash and related to the IFRS accounting for the convertible debt issued in July. Our non-IFRS loss in Q3 2025 was $11 million compared to a non-IFRS net loss of $8.1 million in Q2 2025. Cash and cash equivalents at September 30, 2025, totaled $13.4 million compared to $41.6 million at June 30, 2025. The September 30 balance does not include the $10 million final payment from the 2024 Qualcomm transaction that was released from escrow in October 2025, giving us a pro forma ending cash of $23.4 million. At September 30, 2025, the company held 3,234 Bitcoin with a market value of $365.6 million, all of which was pledged as security for the $189 million of convertible debt issued in July. Following the recently announced amendment of the debt agreement, 1,617 Bitcoin are being released from the pledge and the company has sold 970 Bitcoin in order to reimburse half of the debt. The remaining 647 unpledged Bitcoin remain in our treasury but are -- that are available for the previously announced ADS repurchase program if needed. I'd also like to refer you to our Bitcoin dashboard on our website at sequans.com/bitcoin-treasury, where investors can find our Bitcoin-related statistics in one location. We now have many tools in place to pursue our Bitcoin treasury strategy and strategic options for our IoT business. We will use these to maximize shareholder value based on our own specific circumstances. And now I'll turn the call back to Georges before we begin Q&A. Georges Karam: Thank you, Deborah. So to conclude this call before the Q&A, I would like to stress like the 2 points. On the Bitcoin, we continue to be committed to the Bitcoin treasury strategy we've launched. Given the current digital asset treasury market condition, we decided to adjust our treasury structure and redeem half of the debt in order to be in a better shape to execute on our Bitcoin treasury strategy. With this move, we have now a more appropriate debt-to-NAV ratio while still maintaining decent leverage, also put ourselves in a stronger position to execute on the ADS buyback program as well as other financial instruments. On the IoT business, our design win pipeline is growing well, and we remain on track to have by end of this year, more than 45% of the projects -- of the customer projects moving to mass production and generating revenue. In parallel, we are taking all actions needed to control our OpEx and limit cash burn with the target to reach breakeven in Q4 2026. And finally, we are seriously considering a few strategic alternatives to ensure shareholders benefit from the full value potential of our IoT business. With that, let's now begin the Q&A session. Operator? Operator: [Operator Instructions] our first question comes from the line of Scott Searle from ROTH. Scott Searle: Deborah, maybe just to dive in quickly. In the third quarter, were there any licensing or service revenues a part of the $4.3 million, trying to understand if there was a sequential uptick in the product revenues. Also, I just want to clarify the timing on the OpEx going below $10 million. And Georges, from a high level, kind of looking at where the net asset value of the company is relative to the current stock price. How aggressive will you be on the buyback? If you got another 600 Bitcoin available to pursue that strategy, given the stock is trading at $7 versus net asset value around $12, would seem like it's a pretty good arbitration move to do that. So how quickly and how aggressively do you plan to tackle that? Georges Karam: Yes. I mean, Scott, first of all, and just to take your last point, as aggressive as needed and as the rational makes sense, right? I mean our Bitcoin value, the Bitcoin get acquired with the share at $14. So technically, if the share is at $7, you will be making 50% gain by selling a Bitcoin that you purchased at $14 and you recover the price you paid for it at $7, right? I mean, which is your share. So we have all in place. Board resolution is there. We were not able to execute on it in this period because, as you know, we were on the window. I mean, we were restricted and we could not act on this. But I don't know any 1 or 2 days, we will be free and we'll be moving on this. And obviously, consider depending where the stock is, but it makes full sense for shareholders today to buy back the shares of the company if it's trading low. And for the people staying with the company, we'll get the value of the NAV we have there. So we are completely committed to be aggressive on this if needed. Deborah Choate: Scott, on the revenue side, we are about 2/3 product, 1/3 licensing and services in Q3. And in terms of the OpEx reduction, this is being put in place now. We expect it will be mostly realized in Q1, and we're looking at it fully in place by Q2, but with an overall for the year being below $10 million a quarter. And that includes the new cost of managing the Bitcoin treasury. Scott Searle: Okay. Very helpful. And then, Georges, maybe to follow up in terms of the pipeline building for the IoT business. It's a lot of momentum in 1 quarter where you're growing about 20% in terms of your design wins. I guess, you'll kind of enter 2026 at almost double-digit revenues, right, somewhere in that $10 million to $11 million, I guess, is the run rate off of that 45% that go into production. I think in the past, you talked about what you might be exiting 2026. Is there a figure that you're thinking about right now because it sounds like that gets you to breakeven, particularly given the OpEx reductions that you have ongoing, so we should see that by the fourth quarter of '26. Georges Karam: I mean, Scott, and the business, the IoT business, as you know, is many, many projects, and each project is not huge. So that mix, if you want like at the beginning, when you're ramping, it's a little bit slow and frustrating to some extent. But once the products are in shipment, our customer is shipping, it's there for 7 years in average, like if you take meters, sometimes even more than this. So -- and give us very good visibility for the future. We are -- I'm very happy as we are exiting this year close to our range of 50%. But this will continue because, as you know, the design win project I don't qualify them like 100% secured, but we could have the risk on what we have a win in hand is very, very minimum. More than 90% based on the history of the project continue, I mean, except really some small projects or small company that you could have over the execution of projects, some surprises, but we are dealing with Tier 1 players that are there when you decide to launch a project they are in. It may take them longer than what we thought to be ready for production, but they get it there. So we -- I believe 2026 will continue ramping, and we should be -- because the pipeline will continue, I could not say what we have in hand today, maybe close to 90% plus will be in production. But obviously, in the meantime, we'll be adding new projects. So when we exit, the pipeline should be more than [ 300 ] exit '26. And obviously, the percentage will be less than 90%. But this is what will be funding the growth we'll have in 2027, which I predict to be at minimum 40% to 50% year-over-year, thanks to this. Deborah Choate: Just one point on Q1, we do tend to have a little bit of seasonality in. Georges Karam: I mean in that case, the average -- your number, you're right. I mean just to talk about the digital, I'm giving you the [ $45 million ] 3 years average, right? I mean all this is ramping. You imagine the shape because the new projects starting today is not going to yield that full revenue in the first quarter. It takes like 2 quarters or 3 quarters to go to the full revenue. So there is a ramp-up phase, obviously, with every project adding up. Scott Searle: And a couple of follow-ups, if I could then. Congrats on getting the tape-out on the RedCap front. I know that's a big milestone for the company. I think you've talked about licensing opportunities for RedCap. I wondered if you could elaborate on that in terms of what might be in the pipeline, kind of frame in terms of size and opportunities. And IRIS has been ramping up as well, I think, in terms of the potential opportunities. I'm wondering where that fits into the overall design win pipeline that you've talked about, the magnitude of those opportunities, particularly ramping into 2026. Georges Karam: Yes. I mean, obviously, in IPR licensing, we have some piece of this, which is established even in our revenue next year. We have already in the backlog revenue of royalty that we are collecting from a couple of customers to whom we did licensing with them, and we'll have other words of design win with licensing and now we're collecting a royalty in 2026. We collect even with one a little bit this year as well. But since we launched this IP strategy, we realized like at least we had more than a dozen of leads talking with us. It doesn't mean that they need the full RedCap -- the full eRedCap or RedCap solution from us. As you know, we have a very advanced radio transceiver technology. We have layer 2, layer 3 protocol that no one have it. And obviously, we have a lot of IP in the modem. And as well, we have the full solution. So you could have customers whether looking for a full solution of modem, mainly to adapt to move from a cellular to something else, if you want, like to satellite or defense application, other radio environment. And some other, they want just only a piece of the technology what we have. So we're talking about licensing deal that could be, I would say, $3 million to $5 million license. I'm not talking about royalty like upfront. Up to these, they could be equal to $15 million, $20 million and all those under discussion, and we have really nice number in discussion. And for sure, next year, we'll have something converging and helping to feed our IP licensing revenue next year. Scott Searle: Got you. And lastly, if I could, George, just to follow up on the strategic comments. Can you frame that a little bit more? Are you talking about more partnerships? Or are you talking about potential outright sale of the IoT business at the current time? Georges Karam: Yes. Scott, I don't want to comment much on this. Obviously, the question -- take the problem like this, like, okay, the company has a serious IoT business, which is extremely valuable, in my opinion. It has as well a nice Bitcoin holding, which is extremely valuable as well. And from there, we're moving as a company to hopefully succeed on both front, building more Bitcoin and building the treasury and buying more -- accumulating more Bitcoin. And on the other side, scale the revenue and the IP potential of the IoT. For the time being, they are not conflicting to each other. They are manageable. But if you project down the road, you could say maybe for shareholders, you can give more value by separating the tool, by doing something different, I would say that. And obviously, this take the factor as well discussing with other partners on the business front to do some strategic partnership and maybe more together. I cannot say more, Scott, I mean, allow me, but you have serious discussion there. And hopefully, when things will be close to sign or signed, we'll be able to announce it to market. Operator: And our next question comes from the line of Mike Grondahl from Northland. Mike Grondahl: George, talk a little bit about your confidence in $7 million of revenue in 4Q and this $45 million kind of annual run rate you're striving to? Georges Karam: Yes. Mike, obviously, for Q4, I mean, you never say I'm 100% sure, right? I mean we're giving a number that we believe it's in the backlog, if you want, and secure out of, I would say, extraordinary accident, we are very confident about it. If we talk about the annual revenue, I want just again to stress the math I did is I took 45% of the $300 million, which will be in production divided by 3, give you $45 million over 3 years. So this is the average. Obviously, this doesn't mean necessarily that it's flat first year, flat second year, flat third year. It's the reverse. It will start lower and it will go up over 3 years because you have the ramp of those products. And obviously, it's quite -- I'm quite comfortable with the number, even if the projection here, you're talking about longer program. You need to know that in our design win today, when I look, for example, to product shipping, I spoke, for example, about Honeywell. I can name even a smaller guy like Withings, like Coyote, like -- customer like this, that -- they are smaller, but very steady because they ship since more than 1 year. So we have history about their ramp. We know that they are -- how much they do, and we have extreme confidence in their future projection, forecast and so on. Obviously, we can -- we take our, I would say, optimization there. We -- maybe cut 10% for the risk things, but we are very confident. When you have a new project coming in, like even a Tier 1 customer saying, okay, now my product is shipping and I'm planning to ship like per year, let's say, to do 0.5 million units. Obviously, you are going to compute the ramp. First year, maybe 200, the second 350 and then we ramp up to 500. There is still some risk not factored in, which is related to the fact if this customer, we have, if you want, experience about his previous shipment, previous forecast and so on. So in other words, in this number, already more than half of those 4%, 5% are already in production. I'm extremely confident about them. The other half are ramping now like Q3 and Q4. There will be a little bit of risk, but measurable risk. That's why we're presenting this one. Mike Grondahl: Got it. And the cost reduction efforts, have you started those? Or do those start later this year? Georges Karam: We started many things. And again, cost reduction, we have a lot of stuff. We have -- even I can tell you, for example, our offices, we shave like -- we had the chance to renegotiate pieces of the OpEx, third party and so on. And obviously, some reduction here and there when it's needed. We started a little bit and some of it, not everything is implemented, but some is defined. As I'm speaking, I know what we are going to do if you want in Q4 and Q1. And all this is set without impacting, if you want our innovation and investment into the 5G R&D. A lot of this as well, like our 4G, if you want, product line is becoming fully, I would say, mature because we were still working on some development during the year, we finished it. So we have even some reduction of effort there. And more general, I would say, on the G&A and so on controlling the spend. Mike Grondahl: Got it. Got it. And then have you disclosed what you -- what price you got per Bitcoin for the 970 you sold? Georges Karam: We didn't. It will be on our -- it will be showing up on our website, but I can give it to you, it will be [ $108,600 ]. Unfortunately, we didn't have the best period to sell, started selling at [ $115,000 ] ended by selling at [ $106,000 ]. Operator: Our next question comes from the line of Fedor Shabalin from B. Riley Securities. Fedor Shabalin: Georges and Deborah, I completely understand the rationale behind the Bitcoin sale. You mentioned that this transaction enables our company to pursue a wider set of strategic initiatives to develop and grow the treasury. So could you provide more details on what additional initiatives you're considering beyond the ATM program and share buybacks? And any color on your strategic priorities here would be helpful. Georges Karam: Fedor, thanks for the question. I mean, essentially, and again, I want to stress one point. The company when -- one of the issues, if you want or the structure of the debt, there is -- it was not the risk even some people -- I don't know if people were -- because the collateral was fixed. We didn't have to readjust the price of the Bitcoin. It was just not the collateral is all the Bitcoin that we have and they are sitting there, we cannot do anything with them. If you cannot do anything with your Bitcoin, obviously, your -- the original plan was like the debt will convert at least over the first 6 months and so. And then by definition, some of those Bitcoin will be free and from there, we can use them. So we took this initiative really not under the pressure because we have interest rate to pay or because we are afraid about having the Bitcoin at $100 and have to face any issue. The company will not face any issue even if we stay on this Bitcoin longer. However, the company was stuck. In other words, I could not do anything. I cannot buy Bitcoin. I cannot generate yield on the Bitcoin. I cannot be aggressive on buyback because you can do a buyback, but at the end of the day, I have cash, but this cash needs as well to serve the operational business and the G&A even to manage the treasury. From this situation, we felt like even if it's not -- I will say, maybe we are the first treasury doing this, and we took the decision to act to be proactive. Maybe some people, they don't like it because no one sells Bitcoin in principle in the treasury. I mean, this is -- our aim was as well, but we felt it makes absolute sense now to change the ratio of debt, this often obviously preferred other structure of debt, which is today, I mean, it's not unusual topic for the company. But now they are possible because if your debt is around 30%, it's easy to have 10% preferred next to it. And if you reduce the debt further, you can do more. So this is one option. If we have free Bitcoin, those can be generating yield depending on the risk you want to take there. But if you want to take a very low risk, you can generate like 4% yield, and this will be nice cash that you can use to buy Bitcoin or to fund the G&A of serving the treasury. And obviously, the buyback that gives us -- that boosts the program because we don't need to sacrifice anything on the operation. If really the share stays low, the rational means sell Bitcoin and buy shares and support the shareholders staying with us. So that's the whole logic around it. This is really on the topic that we have. Now I know that there are other topic, if maybe you're raising for this, which is like consolidating and something with other treasury. I know that one happened in the market today and everybody saw this, I don't believe there is urgency on this. For me, honestly, there is not a clear idea currently what's the issue of the treasury strategy in general, why all this is trading below our NAV, which is not logical at the level where it is. And this is not for us, for all our peers. So we're trying to unlock it from where we are by taking -- put ourselves in a position where we are much stronger. And from there, we'll see how things will develop in the coming 6 months or so. Fedor Shabalin: That is helpful. And you already partially answered my follow-up question on debt-to-NAV ratio. But I just want to understand what will be different in the treasury approach going forward? I heard you plan to issue preferred, but if you can just throw some time line on this would be helpful. Georges Karam: Yes. I mean, Fedor, obviously, I mean, the first priority now is really the buyback program. This is what I have on my table, if you want to execute on this and see how things will develop there. And obviously, the second one will be the preferred and the yield on the Bitcoin. These are the 3 options. No time line. Honestly, the option is there, but I don't want to give more time line when we'll do something like this because it depends on negotiation and so on. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Georges Karam for any further remarks. Georges Karam: Thank you, Jonathan, for helping us with this. Thank you, everybody, staying on the call and for all your questions and looking forward to see you in the next opportunity. Thank you very much. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, ladies and gentlemen, and welcome to the Driven Brands' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Tuesday, November 4, 2025. I would now like to turn the conference over to Steve Alexander. Please go ahead. Steve Alexander: Good morning. Welcome to Driven Brands' Third Quarter 2025 Earnings Conference Call. The earnings release and net leverage ratio reconciliation are available for download on our website at investors.drivenbrands.com. On the call with me today are Danny Rivera, President and Chief Executive Officer; and Mike Diamond, Executive Vice President and Chief Financial Officer. In a moment, Danny and Mike will walk you through our financial and operating performance for the quarter and full year. Before we begin our remarks, I would like to remind you that management will refer to certain non-GAAP financial measures. You can find the reconciliations to the most directly comparable GAAP financial measures on the company's Investor Relations website and in its filings with the Securities and Exchange Commission. During this call, we may also make forward-looking statements regarding our current plans, beliefs and expectations. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties and other factors that could cause actual results and events to differ materially from results and events contemplated by these forward-looking statements. Please see our earnings release and our filings with the Securities and Exchange Commission for more information. Today's prepared remarks will be followed by a question-and-answer session. We ask you to limit yourself to 1 question and 1 follow-up. Now, I'll turn the call over to Danny. Daniel Rivera: Good morning, and thank you for joining us to discuss Driven Brands' Third Quarter 2025 financial results. We delivered a strong third quarter with top to bottom strength on all key financial metrics. Driven grew revenue by 7% and delivered adjusted EBITDA of $136 million. System-wide sales increased 5%, supported by 167 net new stores over the last 12 months, including 39 additions this quarter alone. Same-store sales rose 3%, marking our 19th consecutive quarter of positive same-store sales. We also continued to strengthen our balance sheet, reducing net leverage to 3.8x, as we progress toward our target of 3x by the end of 2026. We remain focused on our growth and cash strategy, driving strong consistent growth through Take 5 and generating reliable free cash flow from our franchise and car wash segments. Take 5, home of the stay-in-your-car 10-minute oil change, delivered its 21st consecutive quarter of same-store sales growth and continue to perform across every key metric. Through the third quarter, we opened 101 net new stores, including 38 in the third quarter. System-wide sales grew 18% year-over-year, and same-store sales grew 7%, driving adjusted EBITDA growth of 15%. Adjusted EBITDA margins expanded to 35%, up 40 basis points versus last year. These results reflect disciplined execution and a relentless focus on the customer, evidenced by our Net Promoter Score, which remained in the high 70s. We continue to see meaningful growth in non-oil change revenue, which accounted for more than 25% of Take 5 sales for the quarter. Over the past 24 months, we've added new services while simultaneously growing the attachment rates of non-oil change services from the mid-40s to the low-50s. We've now completed the rollout of our differential fluid service across the entire system. Early results have been positive. We've seen strong attachment rates, healthy margins, great customer feedback and no meaningful cannibalization of existing services. We expect to open approximately 170 new Take 5 locations in 2025, 90 company-owned and 80 franchised. We remain committed to opening 150 or more new units annually, supported by the strong performance of our 2023 and prior vintages, which ramped above $1 million in average unit volumes within 24 months. Our new unit pipeline remains robust with approximately 900 locations at the end of Q3, of which over 1/3 are sites secured or further along. Finally, we continue to innovate to drive traffic and efficiency across the system. We recently implemented a new media mix model to better allocate advertising dollars and maximize return on advertising spend. At the shop level, we're testing AI-driven camera technology that detects queuing issues in real-time, helping managers adjust staffing and workflow to move more cars more efficiently and ultimately serve more customers. Where Take 5 drives growth, our franchise and car wash segments anchor cash generation. Our franchise segment, built around some of the most trusted names in the industry, including Meineke, Maaco and CARSTAR, delivered same-store sales growth of 1% for the quarter versus prior year. That performance was driven by strength at Meineke and sequential improvements at Maaco and CARSTAR. The segment also delivered adjusted EBITDA margins of 66%, an improvement of 90 basis points versus the prior year. Turning to IMO, our international car wash business, growth remained solid but moderated as previously communicated, with worse weather conditions in Q3 versus the first half of the year. Same-store sales and revenue for the segment grew 4% versus the prior year, resulting in adjusted EBITDA margins of 28%. Now, turning to our expectations for the remainder of 2025. As we've discussed throughout the year, we continue to operate in a dynamic consumer environment. While the consumer faces ongoing pressure, our diversified portfolio has demonstrated resilience across varying market conditions. Q4 has been particularly choppy with several factors creating a higher degree of macroeconomic uncertainty, including the ongoing government shutdown and the potential disruption of funding for the military and social programs. Given this uncertainty, we believe it's prudent to take a more conservative stance as we close out the year. Accordingly, we're narrowing our full year guidance ranges to reflect both our strong third quarter performance and the evolving macro environment. Mike will provide more details on the outlook in a moment. I recently announced 2 important organizational changes that strengthen our foundation for the future. First, Mo Khalid has been named Chief Operating Officer of Driven Brands. In this role, Mo will lead the Take 5 and franchise segments. Mo is a seasoned executive, exceptional leader and a Driven Brands' veteran. He and I first worked together in 2015 when he led operations for me at Meineke. After several years with Driven, Mo went on to hold a series of senior roles at Great Wolf Lodge, culminating in his final role of Senior Vice President of Field Operations. He returned to Driven in 2023 as President of Take 5 Oil Change, where he and the team have grown the business to almost 1,300 locations with system-wide sales of $1.6 billion and adjusted EBITDA of over $400 million on a trailing 12-month basis. As COO, Mo will work across both segments to drive operational rigor, predictability and sustainable growth. Next, Tim Austin has been named President of Take 5 Oil Change. Tim most recently served as President of Take 5 Car Wash, where he did an outstanding job stabilizing the brand, culminating in our successful sale of the business in Q2 of this year. Tim is a fantastic leader and an exceptional operator. He began his career at Walmart, starting as an assistant store manager and rising to Vice President of Store Planning. Over the past 6 months, Tim has served as COO of Take 5 under Mo, experience that perfectly positions him for this role. These moves reflect the depth of talent we've built across the organization. Our meritocratic culture continues to identify, develop and promote talent from within, ensuring we have the right leaders in place to drive performance and deliver results. Let me close with a few key takeaways. First, we delivered a strong third quarter across same-store sales, revenue, adjusted EBITDA and adjusted EPS. Second, Take 5 continued to deliver industry-leading growth. Third, our franchise and car wash segments grew same-store sales in the quarter and remains reliable cash-generating engines. And finally, we've reduced our net leverage to 3.8x and remain on track to reach 3x by the end of 2026. I want to thank our more than 7,500 Driven Brands' team members and hundreds of franchise partners who rally every day around our mission and our customers. Your hard work, focus and execution are what drives our results and our continued success. With that, I'll turn it over to my partner and Driven's CFO, Mike? Michael Diamond: Thank you, Danny, and good morning, everyone. Q3 2025 demonstrated Driven's consistent execution, led by another quarter of strong growth in our Take 5 Oil Change business, improved performance in our Franchise Brands segment and the continued reduction of our net debt to adjusted EBITDA ratio. These results demonstrate the power of our diversified platform with Take 5 driving continued growth, and our disciplined capital allocation moving us closer to our 3x net leverage target by the end of 2026. As a reminder, with the divestiture of our U.S. car wash business, the results for that business are included in discontinued operations and are not included in financial details provided today, unless otherwise noted. Driven recorded its 19th consecutive quarter of same-store sales growth, increasing 2.8% in Q3. We added 39 net units in the quarter, led by continued expansion in our Take 5 segment. System-wide sales for the company grew 4.7% in Q3 to $1.6 billion. Total revenue for Q3 was $535.7 million, an increase of 6.6% year-over-year. Q3 operating expenses increased $21 million year-over-year, including an increase in company and independently operated store expenses of $16.4 million, driven by higher sales volumes and additional stores in Q3 of 2025 versus Q3 of 2024. Operating income for Q3 was $61.9 million, an increase of $12.3 million. Adjusted EBITDA for Q3 was $136.3 million, roughly $4.3 million above Q3 last year. As a reminder, Q3 of this year comes without the benefit of PH Vitres, which we divested in August 2024, but 2 months of which are still included in Q3 2024 results. Adjusted EBITDA margin for Q3 was 25.4%, a decrease of roughly 85 basis points versus Q3 last year as sales growth was offset primarily by the aforementioned increase in store expenses and investments in growth initiatives. Net interest expense for Q3 was $23.6 million, down $20.1 million from Q3 last year, led by lower debt balances, including the payoff of our term loan balance and the benefit of the acceleration of our interest rate hedge on our 2022 notes. Income tax was a benefit for the quarter of $21.7 million, driven by a discrete change during Q3 in our tax valuation allowances related to the One Big Beautiful Bill Act, which increased the company's interest deduction. Of note, this positive valuation adjustment is excluded from adjusted EPS in the quarter. Net income from continuing operations for the quarter was $60.9 million, adjusted net income from continuing operations for the quarter was $56.2 million. Adjusted diluted EPS from continuing operations for Q3 was $0.34, an increase of $0.11 versus Q3 last year, driven by higher operating income on increased sales and lower interest expense. Q3 performance for each of our segments include Take 5 Oil Change, which represents more than 75% of Driven's overall adjusted EBITDA, had another strong quarter with same-store sales increasing 6.8% and revenue growth of 13.5%. Danny mentioned earlier the ongoing advancements we're making to the Take 5 business model, including better marketing efficiency, technology-led operational improvements and additional service offerings. Take 5 continues to build on its strong operational foundation by driving attachment of non-oil change services, now over 25% of Take 5's total system-wide sales and continued growth in the penetration of our most premium synthetic offerings. Adjusted EBITDA for the quarter was $107.3 million, reflecting growth of 15% compared to Q3 2024. Adjusted EBITDA margin was 35%. We opened 38 net new units in the quarter, of which 21 were company-operated stores and 17 were franchise-operated. Franchise Brands reported a 0.7% increase in same-store sales despite ongoing headwinds in Maaco, our most discretionary business. Segment revenue declined $1.8 million or 2.3% in the quarter due to a decline in weighted average royalty rate in the quarter. The segment continued its strategic role as a cash generator in our growth in cash portfolio, delivering an adjusted EBITDA margin of 66% in the quarter. Adjusted EBITDA was $49.7 million, down $0.5 million from the prior year due to the decline in revenue. During the quarter, we added 3 net new units. Our car wash segment, representing our international car wash business, grew again in Q3 with a 3.9% increase in same-store sales. The segment continued to benefit from improved operations and expanded service offerings, while experiencing more normalized weather that resulted in moderated growth as compared to the previous 2 quarters. Adjusted EBITDA decreased $1 million to $15 million or 27.8% of sales, driven by higher independent operator commissions due to higher sales and higher utility and rent costs. We closed 1 store in the quarter. Turning to our liquidity, leverage and cash flow performance for Q3. Our cash flow statement shows a consolidated view of cash flows for Q3, inclusive of discontinued operations. Net capital expenditures for the quarter were $27.3 million, consisting of $39.8 million in gross CapEx, offset by $12.5 million in sale-leaseback proceeds. Free cash flow for the quarter, defined as operating cash flow less net capital expenditures, was $51.9 million, driven by strong operating performance. As we discussed last quarter, on July 25, we monetized the seller note received from our divestiture of our U.S. car wash business for $113 million. We used the net proceeds to fully retire our term loan and pay down our revolving credit facility. Strong free cash flow, combined with the proceeds from the sale of the seller note, helped us reduce debt by approximately $171 million during the quarter. At the end of the quarter, our net leverage stood at 3.8x net debt to adjusted EBITDA as compared to 4.1x at the end of Q2 2025. On October 20, after the third quarter closed, we issued $500 million of new 5-year securitized notes combined with the draw on our revolver of approximately $130 million to prepay and retire in full our Class 2019-1 and Class 2022-1 securitized notes. This leverage-neutral transaction simplifies and extends our maturity wall, while reducing our annualized interest expense. We used our revolver as part of the transaction to permit us to deploy future free cash flow to continue delevering our balance sheet in a capital-efficient manner. As of the close of the transaction, our revolving credit facility had a balance of $187 million and represents the only nonsecuritized debt we have outstanding. Following the refinancing, our debt is now 92% fixed rate with a weighted average rate of 4.4%. Year-to-date through the end of Q3, we have repaid approximately $486 million of debt. As a reminder, you will see on our balance sheet an increase in current portion of long-term debt related to our Class 2019-1 securitized notes that were addressed as part of this recent refinancing. We continue to make progress on our goal of achieving net leverage of 3x net debt to adjusted EBITDA by the end of 2026. We are actively assessing how our capital allocation priorities will change once we achieve this important milestone, but for now, our focus remains on executing on our deleverage commitment, while investing in the Take 5 business, which generates a predictable high return on capital spend. I'd now like to provide an update on our full-year outlook. As we enter the fourth quarter, we are narrowing our fiscal 2025 outlook ranges to reflect our year-to-date performance and current expectations for the remainder of the year. As Danny mentioned earlier, we have seen additional choppiness across our portfolio, beginning in Q4 as recent macroeconomic factors weigh on the consumer. Our revised ranges reflect an appropriate caution for the current economic climate despite the strong third quarter for Take 5 and despite the sequential Q3 improvement in Franchise Brands. For the full year, we now expect revenue of $2.1 billion to $2.12 billion, driven by new unit growth and Take 5 strong performance through Q3, combined with a more measured Q4 outlook. Adjusted EBITDA of $525 million to $535 million, balancing Take 5's strong execution throughout the year with a more conservative view for the portfolio in Q4. Adjusted diluted EPS from continuing operations of $1.23 to $1.28, supported by our operational efficiencies and lower interest and income tax expense. Same-store sales at the low end of our original 1% to 3% range, reflecting the current consumer environment and ongoing dynamics in Maaco and collision. As for other important operating metrics, we reiterate net store growth between 175 and 200 units. Net capital expenditures near the high end of our original range of 6.5% to 7.5% of revenue, driven by opportunistic builds in our Take 5 segment. For interest, we now expect full year interest expense of approximately $120 million. In closing, Q3 was another strong quarter for Driven's diversified, growth-focused business model. We combined same-store sales growth across each of our segments with strong cash flow generation that enabled us to continue our progress toward achieving 3x net leverage by the end of 2026. With that, I will turn it over to the operator for Q&A, and we are happy to take your questions. Operator: [Operator Instructions] Your first question comes from Justin Kleber of Baird. Justin Kleber: Just was hoping you could share a bit more color on maybe on how the comps progressed across the quarter, what the exit rate looked like? And then Mike, you alluded to the choppy start here in the fourth quarter. Is that fairly broad-based across your business -- your various segments? And then just the math would seem to suggest you could see a negative comp in 4Q. I just want to ask if that's within a reasonable range of outcomes as you sit here today. Michael Diamond: Yes. So I'll unpack those questions. Justin, good to hear from you. So starting from the top, I would say Q3, in general, performance was consistent within the quarter. Obviously, we're happy with those results that we saw in Q3 and think that it demonstrated broad-based consistency and strength across most of the brands that we have. I think turning to Q4, as Danny and I both mentioned, we did see some choppiness as it relates to really the broader consumer environment, which did impact all of our brands. It's inconsistent, hence the word choppy, right? There are some good days, there are some bad days. And we felt it appropriate to demonstrate an appropriate amount of caution, as we sit here only 1 month into Q4. In terms of your question on negative comp for Q4, I'd answer it a couple of different ways. I think, one, it's important to start with our Take 5 brand, overall continues to be healthy. And so we expect that brand to grow in Q4 kind of -- regardless of where we ultimately end up for the quarter and the full year within that lower end of the range. Mathematically, yes, it is possible if we hit the very low end of that 1%. Given the strength we've seen in Q1 through Q3, it could be a negative Q4 from the consolidated. That will likely largely be driven by Franchise Brands, given the overweighting Collision can play in our same-store sales growth calculation. But I think, in general, the takeaway for Q4 is we're seeing some uncertainty. There is a little bit of choppiness across the entire consumer, as it relates to our brands. But overall, we think Take 5 is healthy. And that despite an incredibly strong Q4 '24, we'll be lapping. We expect that business to grow this quarter. Justin Kleber: Okay. Perfect. And then a question for you, Mike, just on kind of free cash flow conversion. It looks like you've converted about 70% of your adjusted EBITDA year-to-date in the free cash flow. Is that a good benchmark in terms of how we should think about this business on a go-forward basis? Could it actually get better to the extent CapEx maybe declines in '26? Just would love to hear your perspective on that topic. Daniel Rivera: Yes. I'm not sure I'm going to get into specifics of 2026 yet, as that's something Danny and I are still working through. I think we've demonstrated in all of 2025, our focus on delevering the balance sheet and achieving our commitment of 3x net leverage by the end of 2026. I mean, I think we pair that with the fact that our Take 5 business, because it is so strong, because we have such a good pipeline of both franchise and cost units, those corporate stores give us such an ability for a predictable high rate of return that we want to be opportunistic. Yes, Danny mentioned in his remarks, the 170-ish total units, a little bit more corporate owned this year. That's largely driven by the opportunism we see. When a good location comes about, we want to take advantage of that. So I think at a high level, yes, we will continue to be focused on driving EBITDA to free cash flow, making sure we return that cash to our stakeholders, which right now is focused on debt. But we want to leave ourselves a little bit of flexibility so that as we see good opportunities to build Take 5 corporate stores, we have the ability to do that. Justin Kleber: Okay. Makes sense. Operator: Your next question comes from Simeon Gutman of Morgan Stanley. Unknown Analyst: This is [ Zach ] on for Simeon. Take 5 has been among the fastest unit growers in the industry since 2019. At the same time, it looks like units for this year 2025 will end a tad below original expectations. So what are your unit growth expectations over the next few years given competition is increasing and new units are slowing more broadly across the industry? Michael Diamond: Yes. I'd have to go back and check expectations specifically related to Take 5 in 2025, because I would tell you that we feel very good with the numbers we're going to put up around 170, I think. Obviously, as we've discussed over previous calls, there's always going to be a little bit of fluctuation on the mix between franchise and corporate, not because the franchisees don't want to build, but because they deliver such high returns for us, we lean in when we find good opportunities that give us such strong returns. We mentioned on the call, we see a pipeline across the entire Driven portfolio, of which a large part is Take 5 of over -- almost 900 locations, of which about 1/3 are sites secured or better, which means we actually have the lease and moving forward. To the extent what you're talking about is the fact that Q1 through Q3 is a little bit light relative to the full year, that's just a natural nature of a franchise business. Danny and I have been experienced with many of them, and you'll always see additional growth in Q4. I wish there was a way to make that not the case, but that's just the nature of the game. And so we feel really good with the pipeline. And I think longer term, as we've talked about, we see 150 or more Take 5 for the next several years given the strong franchise relationships we have and the additional pipeline of company-owned stores we can build to deliver a consistent, predictable high return. Daniel Rivera: Yes. [ Zach ], this is Danny. I'd just underscore what Michael has said. I mean, I think everything was spot on. But we've committed for a while now to be 150-plus locations a year. Nothing's changed with that. The pipeline is quite strong. And just to give you 1 data point, the franchise side of the business is incredibly healthy. We've got about 40% of our franchisees on that side of the business that are either on their second area development agreement or their third, so that is probably the best data point I can put out there in terms of the health of the franchise side of that business. Unknown Analyst: That's helpful. And then just as a quick follow-up, in what ways does the Take 5's value proposition make it more likely to succeed as it continues to scale those units because it does seem like there will continue to be industry growth in units over the next few years. So what differentiates the Take 5 model? Michael Diamond: Yes. I mean, I think it's a great question. I mean, at the end of the day, Take 5 is the home of the stay-in-your-car 10-minute oil change. And we're the only national provider that provides a 10-minute oil change experience stay-in-your-car with NPS scores in the high 70s. So at the end of the day, it comes back to the consumer and what is it that the consumer values, but what we've seen and where we've won historically is there's a consumer out there that wants a high-quality oil change and 10 minutes stay-in-your-car. That's an amazing experience. And the consumer that wants that that's where we win. Operator: Next question comes from Chris O'Cull of Stifel. Christopher O'Cull: Danny, you mentioned a new media mix model being used at Take 5. Could you just elaborate on the changes that were made and why you expect them to kind of benefit brand awareness? Daniel Rivera: Sure. Yes, happy to. I mean, at the end of the day, just to be clear, so we've had media mix models for time -- for some time now in Take 5. We just introduced a new partner, and we have, let's say, big aspirations for what the tool can do for us. At the end of the day, the media mix model kind of does 2 things for you, and we're in our first iteration of it with the new media mix model that we're using right now. But number one, it helps you just optimize spend across channels and geographies, so it really lets you get pinpoint accuracy in terms of what channels are working in specific parts of the country and how should you optimize that spend. And then the second thing it does for you is it helps you understand should you be investing more or less at the macro level, right? So is there room on the curve -- kind of your return curve to actually invest more money into marketing? And what's the incremental return you're going to get on that investment? So we are leveraging both sides of that tool. Again, it's kind of early going. We just deployed it now, the new tool, anyway for the first quarter here. But we think that over time, it's going to improve our return on advertising spend, and we think that it's going to inform just the level of investment that we're making. Christopher O'Cull: Okay. Are there any specific spending milestones that could open up access to maybe new marketing channels as the ad fund grows and the system just has more units and better concentration? Daniel Rivera: Yes. I mean, look, we're a national company today talking about Take 5, but there are obviously pockets where we have more concentration, let's say, in some areas that we're a little bit more sparse. As we fill out the map, we talked about getting to 2,500 locations. We still think that that's the North Star, and that's very doable. As we fill in the map and we get more concentration across the country, it does open up some upper funnel mass media where you can do, let's say, national TV or national radio buys that you're hitting a lot of eyeballs and per eyeball you're getting a good return, and it's a good -- very efficient buy, so to speak. So I think the short answer, Chris, is yes. As we continue to put dots on the map, it does open up more channels for us. Christopher O'Cull: Okay. And just one last one, and I apologize if I missed this, but how have sales trends among lower-income consumers at Take 5 shifted in the current quarter, maybe compared to the first half of the year? Daniel Rivera: Yes. I mean, I'll answer maybe at the higher level. Just in terms of Driven, I mean, we've been saying all year long, and there's been pressure, right, on that lower income consumer. That's been true the entire year. That hasn't really changed in Q4. What we've seen in Q4, as we talked about in our prepared remarks and as Mike highlighted, a bit of choppiness. Some days are up, some days are down. It's been choppier than it's been the rest of the year. There's some new variables here in Q4 that haven't existed. We mentioned them also in the prepared remarks. You've got government shutdown, you've got furloughed employees. You have at least the potential for millions of Americans to have their income disrupted as military or government programs may go unfunded. So there's some uncertainty out there. I think the thing that makes us feel good is, number one, we're coming from a position of strength. Third quarter is quite strong for us. 7% comps for Take 5, 1% comps for the franchise segment. It was strong quarter. I'd say secondarily, we're nondiscretionary. So at the end of the day, if there's any disruption -- maybe you delay that oil change for a period of time, but at the end of the day, you're still going to need to change that oil, you're still going to need to get those brakes, you need to get your car back on the road. And so if there's any temporary dislocation, we tend to see a bounce back. And look, at the end of the day, all of the uncertainty when Mike and I reissued our outlook for the quarter and we narrowed our ranges, all of that uncertainty is baked into that. So we feel good about hitting our ranges here in the back half of the year. Operator: Your next question comes from Brian McNamara of Canaccord Genuity. Madison Callinan: This is Madison Callinan on for Brian. Going off with the low-income consumer question, are you seeing any evidence of oil change referrals? And how would you measure that by location? Daniel Rivera: Yes. I'd say, look, in general, we've just seen the low-income consumer pressured. As we look at the entire year, we've had a strong year quarters 1 through 3. We've reiterated our outlook for the fourth quarter. All we're seeing is just a bit of choppiness here in the fourth quarter. So we continue to see strength at Take 5 non-oil-change revenue, we talked about is 25% right now. We've continued to grow our attachment rates from the mid-40s. If we're going back about a year to 1.5 years now, we're sitting here today in the low 50s. We've rolled out a new service. That new rollout of the service differentials in this case has gone quite well. So the business has shown a lot of strength. All we're seeing is just a bit of choppiness. And again, there's some new variables in play here in Q4. So a bit of uncertainty in Q4. But again, we feel good about the ranges that we put out there from an outlook perspective. Madison Callinan: And then what do you think it will take for the collision industry to inflect as insurance premiums and deductibles don't appear to be going down anytime soon? Daniel Rivera: I'm sorry, you kind of broke up there at the beginning. Can you reask the question? Madison Callinan: Yes. What do you think it will take for the collision industry to inflect as insurance premiums and deductibles don't appear to be going down anytime soon? Daniel Rivera: Yes. Look, I think actually, as you've seen the year play out, right? So if we look at the insurance industry in general, Q1, Q2, we talked about estimates being down high single digits, call it, around 10%. There's 2 big drivers to that. Number one is claim avoidance. We've just seen as inflation has ticked up here in the last 24 months, it hit that part of the industry particularly hard. And so you've seen deductibles and premiums go up. The second reason is you've seen total loss rates historically high. And the combination of the 2 things has driven estimates to be down, call it, 10% or so percent first quarter, second quarter. The industry did rebound in Q3. It did improve sequentially from Q2 to Q3. If we look into the future, we think Q4 may look a little bit more like Q2. The positive thing for us is when we look at Driven collision, our specific businesses, we continue to take share. So in a world where the industry maybe had some headwinds, we've consistently outperformed the industry. That continued in Q3. We mentioned a really strong third quarter with 1% comps for the segment at large, our best quarter from a comp perspective for the year. And I'd say most importantly, and I keep kind of going back to this for our businesses, in particular, when you look at the franchise segment, ultimately, the role that, that plays in the portfolio is cash generation. So what I'm most interested in and what I'm most excited about is when I look at third quarter, and I see 66% EBITDA margins, that's exactly what we need from that part of the business, and that's what that part of the business has delivered for us. Operator: Next question comes from Mark Jordan of Goldman Sachs. Mark Jordan: On Take 5, same-store sales growth came in much better than expected for the quarter. And I know you don't break out traffic versus ticket, but just wondering if there's any commentary you can provide there about how the contribution was compared to maybe your initial expectations? Because I think looking back on the 2Q call, there was some discussion about trends potentially moderating in Take 5 for the second half of this year. So I guess on that note, how did the quarter trend relative to your initial expectations? Michael Diamond: Yes. So I'd say a couple of things, Mark. Good to talk to you. I think first of all, we've always said we believe the Take 5 business is a mid-single-digit grower over the long term in this quarter, no exception, obviously, a little bit higher. I think mathematically, there still is this issue that as the new stores ramp, that's a helpful tailwind for us both in terms of traffic and ticket. But as we grow over a larger base, the impact of that will continue to be less and less. And so over time, we expect that to contribute less to the overall story, although it's still a positive tailwind. I would say the other thing to your point, we don't break out the sales tree, but we feel good in terms of where we are from both a traffic perspective and an ARO perspective. We've obviously mentioned some of the various drivers we have in ARO around the ability to do more premiumization as well as the additional attach. And then, as you think about some of our commentary on Q4, in addition to the state of the consumer, which we've obviously covered, I'd also just remind you that Q4 of last year was an impressive comp at 9.2%, and so, there is a little bit of moderation we expect just given how we're going to be lapping that comp this year. But in general, the Take 5 system is healthy, we continue to grow. We feel good about the numbers we put up in Q3. And kind of regardless of where we land in the range for consolidated Driven in Q4, feel good about Take 5's growth prospects. Mark Jordan: Perfect. And then just one follow-on, if I could. Thinking about the differential service offering you rolled out. I know you might not go into detail about product-specific attachment rates. But it sounds like attachment is trending maybe above your initial expectations. Is that the right way to think about it? Daniel Rivera: I'd say, Mark, look, the way to think about it is we're really happy with the results we're seeing. So we're fully rolled out nationwide at this point, both company and franchise. The team is doing an amazing job executing. So we just building the muscle rolling out the new service has been quite good. We haven't seen NPS scores budge at all. So we're able to introduce a new service while continuing to deliver NPS scores in the high 70s, which is obviously fantastic. Margin profile is good. We're not seeing cannibalization. So I'd say check marks across the board. For me, the most exciting thing is it proves out another growth vector for Take 5, right? So we've shown historically that we can grow organically and we can take our attachment rates and grow the existing kind of basket of services, so to speak. But now, we're showing that we can add a new service to the mix that fits within the fast, friendly and simple model that we have and successfully execute that other growth vector. So for me, that's very exciting. Mark Jordan: Congrats on a great quarter. Michael Diamond: Thanks, Mark. Daniel Rivera: Thank you, Mark. Operator: Your next question comes from Robby Ohmes of Driven Brands (sic) [ BofA ]. Robert Ohmes: Mike, just a quick follow-up on choppiness. You guys have kind of been answering it, but maybe going to ask for a little more clarification. So on the Take 5 side, choppiness is a deferral traffic situation? Or -- and you would -- you're seeing no change kind of in attachment rates or premiumization trends? Or maybe some color on that. Daniel Rivera: Yes. So welcome to Driven Brands, Robby, by the way. Nice to have you on the team. So yes, choppiness -- look, choppiness at Take 5 is what we've kind of alluded to. It's just we're seeing up and down days. I'd say on the non-oil-change revenue side of the equation and attachment rates, we're not really seeing any changes there. So attachment rates continue to be strong. We talked about we've grown them now into the low 50s. We talked about differential and how that's a positive behind the business. As we come into Q4 though, we're just seeing a little bit of choppiness in terms of traffic here and there. And again, it's across the portfolio. And to Mike's point, I mean, he emphasized this earlier, it's choppiness, right? It's -- there's some really good days and then there are some days where it's not so good. So I'd say no changes to non-oil-change revenue, no changes to premiumization. We continue to see both of those be quite strong. But as we look across the portfolio, just a bit of uncertainty here in the fourth quarter and a bit of just up and down given any given day. Robert Ohmes: That's really helpful. And then just sort of taking choppiness over to Maaco and CARSTAR, et cetera, the -- there's -- is it similar choppiness in direct repair program trends? Or is that more stable? What are you seeing on the direct repair program trends? Daniel Rivera: Yes. I'd say it's choppiness across the portfolio right now as it relates to DRPs, right? So that's specifically in the collision business. I mentioned this a second ago, but if you look at what's been happening with that industry, call it, estimates down high single digits, Q1 and Q2, the overall industry had a bit of a recovery in the third quarter and improved sequentially Q2 to Q3. We think that Q4 is going to probably soften a little bit, and it's going to look more like Q2. So that's just the industry trends that we're seeing. And that it's obviously related to the DRP, that's all kind of related. But again, as I think about our collision business, we've been steadily taking share the entire year. That didn't change Q1 to Q3. We don't expect it's going to change in Q4. So even if the industry softens a little bit in Q4, we expect to continue to take share. Operator: Your next call comes from Peter Keith of Piper Sandler. Sarah Morin: This is Sarah on for Peter. Can you just break down the comp improvement within franchise a bit more, specifically in maintenance? And then, are you seeing underlying improvement in collision demand? Or are you seeing that improvement from Maaco's continuous improvement framework? And then just, when did you start to see these sequential improvements throughout the quarter? Michael Diamond: Sarah, yes, happy to take that. So I will start by saying, in general, we don't break out the full brand performance across our franchise brands. I would call it a couple of things, though, that we mentioned in the prepared remarks, Meineke continues to operate well. Maaco, which is our most discretionary brand, has been under pressure really for the entire year. And while that improved some in Q3, that continues to probably be our most pressured franchise brand. As Danny mentioned, we have -- we did see some improvement in Q3 in collision. That has an outsized impact on our same-store sales, if not our revenue, given the amount of system sales that run through our collision boxes. So I think, in general, we feel good about the Q3 performance. But as you probably heard on the call, cautious heading into Q4 for that section. The good news is it continues to do what it needs to in the portfolio, 66% margin for Q3, strong cash flow generator. So feel good about its role within the Driven portfolio to generate cash and help us pay down debt as we need it to. Operator: Your next question comes from Christian Carlino of JPMorgan. Christian Carlino: Could you maybe quantify your exposure to First Brands or lack thereof? And whether that's more Take 5 versus the Franchise Brands? I think within Take 5, it doesn't look like you source filters from them, but maybe source wiper blades from one of their brands. So could you quantify your exposure there? And then, any color you can provide around that. Michael Diamond: Yes. I mean, very limited impact. And to the extent there is, we've got various other suppliers, so not -- I don't believe it's a read-through on anything in the auto category and not really worried about the impact to us. Christian Carlino: Got it. That's helpful. And could you talk about trends by region? Any notable outperformers or underperformers? And then similarly, on the quarter-to-date, is the choppiness more apparent in any particular regions, maybe the D.C., Mid-Atlantic region, given the government shutdown or maybe some of your lower income markets? Any comments there? Daniel Rivera: Yes. Look, I'd say the general choppiness that we're seeing coming into Q4 is, I'd say, generally speaking, across the board. Yes, I could pick a data point here or there. If there happens to be a location that's in a particularly distressed neighborhood, maybe it's a little bit. But just -- I'd generalize it to choppiness across the portfolio coming into the fourth quarter. And as I think about just overall regional, Take 5, in particular, is a growing brand. So you're going to see differences more than anything else based on the maturity of the stores, right? So if we've got a market where the vast majority of the stores are less than 2 years old, well, that market is still ramping. If you talk about a market like New Orleans, where the brand originated and we've been in that market for 30 years, that's a completely different profile. So Take 5 is still a dynamic, growing new business. And if you're looking for regional trends, it's going to be more proportionate to just the maturity of the stores in that market than anything else. Operator: Your next question comes from Mike Albanese of Benchmark. Michael Albanese: Can you just comment on the labor market, and I guess, overall strength of the labor pool in terms of hiring and retention? Daniel Rivera: Yes. I mean -- specifically for Take 5, yes. Look, I'd say from our perspective at least, the team is having a fine job or doing a fine job hiring. It's not -- I'd say it's not any better or any worse than it's been trending kind of the entire year. We have a really strong and robust pipeline for bringing in employees at all levels of the organization, and it's something that we stay on top of. But I wouldn't say from a trend's perspective, it's any more or less worrisome than it's been the whole year. Operator: [Operator Instructions] Your next question comes from Marvin Fong of BTIG. Marvin Fong: Nice quarter here. Most of my questions have been asked here, but just thought I'd ask on like Take 5 specifically, are you seeing any changes to the unit economic story? Is there some opportunity given sort of the macro to kind of take advantage of or maybe from lower lease expenses? Or conversely, are you seeing any increase in equipment costs or anything like that? Just any insight there would be great. Daniel Rivera: Maybe I'll take kind of the first part of your question, and maybe Mike wants to take the second part. Generally speaking, we're really happy with the ramps that we're seeing across all of our vintages, right? I think some of the things that we've put out there, if you look at the vintages, 2023 and prior, they're all ramping -- well, on average, they're ramping to $1 million AUVs within 24 months. So that continues to be true. We're quite happy with that. We see nice returns on our new stores and consistent ramps. And I'll put the same data point out there that I mentioned a second ago, if you're looking for one of the best testaments to the growth of the system and to the steadiness of the ramps, I'd look to 40% of our franchisees are on their -- either their second or their third ADA. So the reality is that if the units weren't ramping consistently and predictably, you just wouldn't see that level of investment. So we continue to be quite happy with the ramps that we're seeing. Michael Diamond: To the other point, I'll answer it in a couple of different ways, which is, I mean, absolutely, always look forward to opportunity to take cost out of the box and make sure we're getting the best rates possible. I think given the relative youth of our footprint, we still have a lot of lease term left in a lot of these as well as the fact that a small box size means that the lease expense doesn't necessarily carry the same weight as it does in some other instances. That said, we never missed an opportunity to have a discussion around what a good partner we are. And so making sure that we have those conversations with our landlord. On the build cost, again, one of the advantages of the Take 5 model is a relatively low build cost to begin with, lower than some of our competitors in the industry, but that doesn't change our focus on making sure we continue to keep that advantage and find ways to make sure we are deploying money correctly to deliver the right experience, but not more than we need to. So it is absolutely an opportunity. We continue to take a look at it. But I would say it's probably more of an opportunistic opportunity than a big thing we need to focus on. Most importantly, like Danny said before, the unit level economics continue to be strong. We have a strong pipeline of both franchise builds and corporate stores going forward and feel really good about where Take 5 is positioned for future growth. Marvin Fong: Great. And maybe as a follow-up -- my follow-up, on the commentary that the insurance side of the collision business could be more like the second quarter, I'm acknowledging that there was a positive like trend here in the third quarter, but could you just kind of double click a little bit more on what you're seeing there? Is it the claims avoidance aspect of it? Or are you actually seeing something in the loss rates and the behavior of the insurance company that's also kind of driving kind of backpedaling in the trends there? Daniel Rivera: Yes. I think it's nothing new per se, right? So you're talking it's claim avoidance, it's total loss rates. And then, I think it's also just the uncertainty that we're talking about heading into the fourth quarter, right? So I think when you put those 3 things in the blender, it leads us to believe that the fourth quarter will look more like the second quarter. Operator: Ladies and gentlemen, there are no further questions at this time. That concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the Third Quarter 2025 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Vice President of Investor Relations, Michael Wherley. Mr. Wherley, you may begin. Michael Wherley: Thank you, Shannon. Good morning, everyone, and thanks for joining us for our third quarter call. With us today are Chris Nelson, President and CEO; and Pat Hallinan, EVP and CFO. Our earnings release, which was issued earlier this morning and a supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of today's webcast will also be available beginning around 11 a.m. Eastern time. This morning, Chris and Pat will review our third quarter results and various other matters, followed by a Q&A session. During today's call, we will be making some forward-looking statements based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we might make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent '34 Act filing. Additionally, we may also reference non-GAAP financial measures during the call. For applicable reconciliations to the related GAAP financial measure and additional information, please refer to the appendix of the supplemental presentation and the corresponding press release, which are available on our website under the IR section. I'll now turn the call over to our President and CEO, Chris Nelson. Christopher Nelson: Thank you, Michael, and good morning, everyone. I am honored and energized to be leading Stanley Black & Decker as we embark on our next chapter of growth. Since joining the team over 2 years ago, we have focused our businesses on where we want to compete, the end users we want to serve and the markets where we can be a leader. This work has been about being more selective so that we invest our resources in the places where we see the most significant opportunities and greatest ROI for our businesses. We show up every day for our customers and end users to deliver what they need when they need it. Through everything we do, this will continue to be our North Star. Over the last few years of transformation, Stanley Black & Decker has solidified our foundation and sharpened our focus. I am proud of the dedication and collective effort that our team of approximately 48,000 employees strong has contributed to get us here. Our ambition is to build a world-class branded industrial company by solving our end users' most pressing and complex challenges. We go to market with a portfolio of iconic brands and innovation is in our DNA. We have strong connections with customers and end users, and our brands open doors and afford access to opportunities in geographies around the world. These foundational attributes, combined with the renewed focus achieved through our transformation, have positioned us to win across industries poised for long-term growth. Stanley Black & Decker has made tremendous progress towards the objectives we established at the outset of our strategic transformation. We achieved these results despite a rapidly shifting operating environment, evolving consumer demand dynamics and trade policy fluctuations. With the operational proficiency and agility we have developed through our strategic transformation, we can now serve our customers and end users more effectively and efficiently. With a strong foundation firmly in place and with a significantly simplified and focused business, we believe our future success will now be determined by how effectively we execute our strategy. This presents us with the compelling opportunity to deliver attractive returns for our investors while benefiting all stakeholders. As we look forward, we are on track to successfully deliver the $2 billion cost reduction targeted when we began our transformation over 3 years ago by year-end 2025. Our next priority is to achieve 35% adjusted gross margin while further strengthening our balance sheet. We will build on our capabilities and strong financial foundation as we execute our 3 strategic imperatives: activating our brands with purpose, driving operational excellence and accelerating innovation. I want to spend a few minutes going into each of these focus areas to give you a better sense of what will drive our profitable organic growth going forward. The first imperative is activating our brands with purpose. We have pivoted from a product-led marketing approach to a brand-led market-backed approach to reinvigorate our organic growth. This included creating a closer feedback loop between our brands and end users and prioritizing innovations that will address end users' most pressing needs. Our core brands, DEWALT, STANLEY and CRAFTSMAN, each have a distinct identity, and we maintain this differentiation along with clearly defined target end users. This strategic segmentation informs how we prioritize resources and investment in key brands and focused trades. In addition, it enables broad coverage of the total addressable market with specific and productive solutions that uniquely address the needs of end users ranging from commercial and industrial professionals to residential construction contractors and ambitious DIY enthusiasts. Our organic growth strategy is anchored on accelerating DEWALT's performance while maintaining a strong focus on delivering consistent above-market results in STANLEY and CRAFTSMAN. DEWALT's mission is to serve the world's most demanding professionals. Supported by a more data-driven targeted approach, our commercial teams are executing locally and focusing on the most attractive growth opportunities with trade-specific initiatives. To amplify our presence with professional end users on and off the job site, we have added nearly 600 trade specialists and field resources to our team over the last 2 years. And these investments typically show a payback within 12 months of each hire. Our trade specialists visit job sites with DEWALT solutions, demonstrating and promoting our newest innovations. They also gather valuable end user insights to drive future product development priorities. In addition, as part of our Grow the Trades program, we are investing to support the training of new tradespeople and upskilling of established professionals. These initiatives are driving continued organic growth for DEWALT. Our results are informing and guiding future investments in real time and ensure our resources are deployed to the best prospects for accelerated growth. In addition, these initiatives are building DEWALT brand ambassadorship along the way. We rigorously track metrics from commercial activation to operational execution with all efforts laddering up to our strategic vision. As a result of these efforts, positive momentum is also beginning to emerge from the international STANLEY brand vitalization effort. In parallel, the CRAFTSMAN brand campaign and portfolio expansion is progressing with an improved margin profile and strategy to drive success with the ambitious DIY enthusiasts. Our next imperative is driving operational excellence. While it all starts with activating our brands with purpose, equally vital to our success is our commitment to operational excellence and continuous improvement. As we move beyond the transformation, we are executing with a lean-based operating system to deliver annual productivity gains, which we expect will contribute to both margin expansion and firepower for accelerated growth investments. Operational excellence also extends to our distribution network. Business process improvements, along with our redesigned distribution network, have helped our team to deliver the best global customer service levels in our company's recent history. As we build strategic partnerships and multiyear growth plans with our channel partners, this will continue to be a top priority. And finally is innovation, the lifeblood of Stanley Black & Decker's value proposition to our end users. We are accelerating innovation to advance and expand our end-to-end workflow solutions across DEWALT, STANLEY and CRAFTSMAN. By innovating faster, we will strengthen our position to provide preferred solutions for our end users and drive growth for our channel partners and for our brands. We know that our end users, particularly the professional trades, are seeking holistic solutions that make them more productive and safer in every task that they perform on the job site. Providing this comprehensive set of solutions tailored for the specific needs of each trade, all powered by our robust and well-established battery platforms is our opportunity. To enable this, we've centralized our engineering organization under one leader to unify our global strategy with investments in core capabilities, design processes and systems. Within this operating model, we are accelerating how we deploy the product platforming method, which is a comprehensive approach to modular design and governance. It empowers our engineers to dedicate more of their time and expertise towards addressing our end users most pressing and complex challenges. It also enables us to deliver highly specialized solutions to the market at greater speed. Year-to-date, our team has achieved 20% faster product development, and we believe there is runway for an additional 20% improvement by 2027. In addition, this approach is streamlining product development and production processes. This allows us to take full advantage of our scale to achieve cost leadership and drive further working capital efficiencies. Our aim is to implement platforming across roughly 2/3 of our product portfolio by 2027, enabling our 35% plus margin objective. Our entire organization is contributing to an organic growth-oriented culture, underpinned by operational excellence. We believe that by executing this strategy, we can deliver a compelling value creation opportunity. A year ago, we outlined long-term financial targets. And those levels of market-beating growth, earnings power, profitability and cash generation remain the appropriate long-term financial targets for our business. We expect our capital deployment priorities to focus on funding investment in the business, improving our balance sheet and supporting our long-standing dividend. Once these priorities have been satisfied and our leverage is sustained below 2.5x, our preference for excess capital will be opportunistic share repurchases. We are executing with purpose, leveraging our core strengths and deploying capital with discipline. While we continue to navigate a dynamic macro today, we believe we are taking the actions required to serve our end users and customers, protect the profitability of the business and make progress toward our long-term financial goals. By fully executing against the strategic imperatives that I outlined, we are confident in achieving strong long-term shareholder returns. Now turning to our third quarter 2025 performance. Our operational agility helped us deliver sales and adjusted EBITDA in line with our expectations. Furthermore, gross margin increased year-over-year, restoring progress towards our expansion trajectory and overcoming the tariff-driven interruption experienced during the second quarter. We accomplished these results despite the persistently challenging macroeconomic environment. Total revenue was $3.8 billion, flat with the prior year period and down 1 point organically, driven by pricing up 5% and volume down 6%. We continue to generate growth in our DEWALT brand in the third quarter, supported by relatively resilient professional demand. Consistent with prior quarters, the overall consumer backdrop remains soft. Our third quarter adjusted gross margin rate was 31.6%, up 110 basis points versus last year, predominantly driven by the benefits of our pricing strategies and the supply chain transformation efficiencies. This result is a testament to the dedication and collective focus of our teams around the company. It is even more noteworthy given it was achieved in a dynamic macroeconomic environment and with the ongoing production transitions. We expect to continue our trajectory of year-over-year adjusted gross margin improvement with expansion projected on a full year basis for 2025 and 2026. Third quarter adjusted EBITDA margin was 12.3%, reflecting a 150 basis point improvement year-over-year, mainly attributed to the gross margin expansion. Adjusted earnings per share was $1.43, which includes a $0.25 tax benefit that we had previously expected to land in the fourth quarter. Third quarter free cash flow was $155 million, a solid result as we effectively manage working capital while shifting an increasing percentage of our U.S. supply chain to North America. Turning to our operating performance by segment. I'll start with Tools & Outdoor. Third quarter revenue was approximately $3.3 billion, which was flat year-over-year. As with the total company revenue drivers, the drivers for Tools & Outdoor were in line with our expectations. Organic revenue declined by 2% as a 5% benefit from targeted pricing actions was more than offset by a 7% decrease in volume. Currency tailwinds and a small product line transfer from Engineered Fastening each contributed a 1% benefit in the quarter. The volume decrease was partially due to expected price elasticities and partially impacted by tariff-related promotional reductions within the retail channel. As we had indicated during our second quarter earnings call, price realization in the third quarter was consistent with our expectations based on the April price increase. Consistent with prior disclosure, we are implementing a second price increase during the fourth quarter to maintain our innovation and brand investments given the pressures resulting from tariff-related cost increases. DEWALT, our powerhouse professional brand, maintained strong momentum and continued to demonstrate top line growth. The brand delivered revenue expansion across all product lines and regions. This result reflects the positive impact of our ongoing targeted investments in innovation and market activation. Tools & Outdoor adjusted segment margin was 12%, up 90 basis points year-over-year. Margin expansion was driven by price realization and supply chain transformation efficiencies, partially offset by the impact of tariffs, lower volume and inflation. Shifting to performance by product line. Power tools organic revenue declined 2%, largely resulting from tariff-related promotional cancellations in North America and continued softness in consumer demand. Hand tools organic revenue was flat. Strength within the commercial and industrial channels was offset by softer retail channel performance. Outdoor organic revenue decreased 3% as we ended a subdued outdoor season, where the independent dealer channel partners focused on selling through their remaining inventory. We anticipate inventory will be rightsized heading into preseason ordering for 2026. Now Tools & Outdoor performance by region. In North America, organic revenue declined 2%, reflecting trends consistent with the overall segment performance. End user demand as measured by U.S. retail Tools & Outdoor POS, started the quarter strong, but moderated later in the quarter, with aggregate third quarter performance at a level that was relatively flat on a dollar basis. In Europe, organic revenue was flat. Growth in the U.K. and key investment markets, including Central and Eastern Europe, was offset by softer market conditions in France and Germany. The Rest of World organic revenue declined 1%, primarily due to pockets of market softness in Asia. Turning to Engineered Fastening. Third quarter revenue grew 3% on a reported basis and 5% organically as compared to the prior year. Revenue growth was comprised of a 4% volume increase, a 1% price benefit and a 1% contribution from currency. This was partially offset by a 3% headwind from the previously disclosed product line transfer to the Tools & Outdoor segment. The aerospace business continued its strong trajectory, achieving over 25% organic growth, propelled by robust demand for fasteners and fittings. This business maintained its exceptional year-over-year and sequential top line growth supported by a solid backlog. The automotive business delivered low single-digit organic growth, reflecting a stronger-than-anticipated automotive market during the quarter. General industrial fasteners organic revenue declined by mid-single digits. Adjusted segment margin for Engineered Fastening was 12.8%, which reflects elevated production costs in relation to a tough prior year comparable. On a sequential basis, adjusted segment margin expanded by 200 basis points versus the second quarter, reflecting improvements in the automotive market. Overall, our teams delivered results in line with expectations through disciplined execution, targeted pricing strategies and a continued optimization of our supply chain, a solid quarter in a trying environment with significant credit to the global Stanley Black & Decker team. Together, we all continue to make meaningful progress on what is within our control. Thank you to our team around the world for all your hard work and the dedication you display every day to our customers and end users. I will now pass the call to Pat to discuss progress we achieved on key performance metrics and to outline our latest 2025 planning assumptions. Patrick Hallinan: Thank you, Chris, and good morning to everyone joining us today. I'm going to start by diving deeper into our gross margin performance. In the third quarter, the company achieved adjusted gross margin of 31.6%, representing a 110 basis point increase over the same period last year. Our entire organization has prioritized margin expansion. And through the implementation of targeted initiatives, we have achieved tangible year-over-year margin improvement. The improvements have been primarily driven by our disciplined pricing strategies and enhanced supply chain efficiencies. Our targeted initiatives contributed meaningfully to our performance this quarter, though the benefits were partially offset by tariffs, reduced volume and inflation. Our gross margin trajectory remains firmly positive, reflecting the organization's steadfast dedication to operational excellence. The team's commitment and capability to deliver is exemplified by the fact that even with the significant tariff expenses hitting our P&L starting in April, we only had a single quarter of gross margin setback. Despite broader market volatility, our teams have demonstrated remarkable agility and focus, ensuring we sustain profitable growth even in uncertain environments. And looking forward to 2026, we foresee a strong opportunity for significant year-over-year adjusted gross margin expansion versus 2025, even if the macro conditions do not improve materially. We continue to target 35-plus percent adjusted gross margin. As a team, we continue to strive to achieve or be very close to this target by the fourth quarter of 2026. Turning now to our global cost reduction transformation program. In the third quarter, we continued to make substantial progress, delivering approximately $120 million in incremental pretax run rate cost savings. These actions are instrumental in supporting our ongoing margin improvement trajectory, which ultimately enables sustained investment in growth. Since its inception in mid-2022, the program has generated about $1.9 billion in pretax run rate cost savings, underscoring the scale and effectiveness of our transformation agenda. We are on track to meet our targets with consistent progress across all workstreams. We expect the transformation program to yield cost savings of $500 million in 2025 and $2 billion overall by the end of this year, marking the successful achievement of this initiative's original cost reduction goals. A key element of our tariff mitigation and gross margin improvement strategy centers on minimizing the amount of U.S. supply that comes from China. We are making substantial advancements in this area and systematically progressing along a clearly defined path. We have been rapidly moving cordless production from China to Mexico, while also rapidly increasing the levels of USMCA-compliant production in Mexico. We expect to continue to meet targeted reductions in U.S. goods from China. We plan to reduce from 2024 levels when approximately 15% of our U.S. supply was sourced from China to less than 10% by the middle of 2026 and to less than 5% by the end of 2026. These milestones are essential for achieving targeted gross margin objectives and for improving supply chain resiliency. By diversifying our supply chain, we are better positioning our business to navigate evolving trade dynamics, respond to regulatory changes and deliver operational excellence. Operational excellence via platforming, lean manufacturing and further fixed cost reductions will remain a top priority beyond 2025. We remain confident in our ability to sustain positive momentum as we move into 2026 and that our focus on disciplined execution will deliver sustainable productivity gains and cost leadership. Annual productivity improvements will serve as the engine to fund investments that drive top line growth and further our competitive position. The actions we are taking today are foundational to supporting ongoing margin improvement and achieving our long-term adjusted gross margin target of 35-plus percent. Now let's take a look at our planning assumption for 2025. Adjusted earnings per share is expected to be approximately $4.55, a reduction of $0.10 compared to the estimate from last quarter. This revision reflects higher-than-anticipated production costs resulting from tariff-related volume softness and supply chain changes. We will correct for these items during the fourth quarter to facilitate achievement of targeted 2026 gross margin improvement, making these headwinds temporary elements of our tariff mitigation response plan. Our earnings outlook for the year reflects an updated GAAP earnings per share range of $2.55 to $2.70. This revision from the previous planning assumption is primarily attributable to $169 million pretax noncash asset impairment charge recorded in the third quarter. Let me provide clarity on these impairment charges. First, updates to our brand prioritization strategy to focus more company resources and investment on DEWALT, CRAFTSMAN and STANLEY, which we have discussed many times over the past year, impacted 3 trade names, specifically LENOX, Troy-Bilt and IRWIN. This was the vast majority of the impairment charges. Going forward, we intend to focus on marketing of these specialty brands to specific product categories and regions where they hold their most meaningful market positions and value to end users. Second, we've made a strategic decision to exit most of our noncore legacy corporate venture investments, which resulted in the write-down of certain minority investments in the quarter. Total pretax non-GAAP adjustments for the year are estimated to range between $370 million to $400 million, primarily related to the supply chain transformation, noncash asset impairment charges and other cost actions that will benefit SG&A. We expect approximately 45% of these adjustments to be noncash as they pertain to the aforementioned trade name impairment charges and write-down of certain minority investments associated with legacy corporate ventures. Now in regards to the revenue outlook. For the full year, we anticipate total company sales to be flat to down 1% as compared to 2024, most likely at the lower end of this range. Organic revenue is projected to decline in the same zone as a total company, and price realization is expected to be offset by anticipated volume declines. Currency is expected to contribute a positive 1 percentage point, which will be offset by the first quarter comparable impact from the infrastructure divestiture. We expect adjusted gross margins to remain resilient. And based on our current trajectory, we expect to be approaching 31% adjusted gross margin for the full year 2025. To deliver profit and cash in a dynamic environment, we will continue to advance our tariff mitigation and gross margin expansion journeys, and we will manage SG&A thoughtfully relative to expected volumes while preserving growth investments. Looking forward to the fourth quarter, we expect continued year-over-year expansion of adjusted gross margin to around 33%, plus or minus 50 basis points. This outlook is supported by our second round of price increases, ongoing benefits from our supply chain transformation and additional tariff mitigation measures, partially pressured by tariff-related production costs. SG&A as a percentage of sales for both the year and the fourth quarter is planned to be 21% in a fraction, characterized by judicious cost management while protecting strategic growth investments. We remain committed to investing in high-growth, high-return opportunities with over $100 million being reinvested in 2025 to drive market activation, strengthen our brands and support commercial expansion, while managing SG&A costs down elsewhere in the business. For the full year and fourth quarter, adjusted EBITDA margins are also expected to expand year-over-year, supported by gross margin improvements and the cost actions we are implementing. Shifting to our segments. For the Tools & Outdoor segment, the full year organic revenue outlook is projected to decline approximately 1 percentage point. The Engineered Fastening segment is expected to achieve low single-digit organic revenue growth led by aerospace. Now turning to cash generation. We generated $155 million in free cash flow during the third quarter, making progress toward our full year 2025 free cash flow objective of $600 million, which remains unchanged from a quarter ago. As we advance through the last quarter of 2025 and into 2026, we remain committed to diligent inventory management, ensuring customer order fulfillment remains a top priority, even as we proactively navigate evolving supply chain dynamics and potential shifts in the external market environment. Our capital expenditure outlook for 2025 remains approximately $300 million, in line with previous planning assumptions. On capital allocation, we intend to allocate free cash flow in excess of our dividend toward debt reduction in the near term. Maintaining a strong and resilient balance sheet is a top priority, and we are committed to achieving a net debt to adjusted EBITDA ratio of less than or equal to 2.5x. Our strategy to reach this leverage objective is to be supported by the proceeds from an asset sale we are targeting within the next 12 months. We continue to anticipate our adjusted tax rate will be approximately 15% for the year. Other modeling assumptions for 2025, as shown here, are generally consistent with the assumption shared with you in July. For the fourth quarter, we anticipate organic revenue to be flat as price increases are offset by volume pressures stemming from a subdued consumer DIY market. In the fourth quarter, we expect continued pretax earnings growth and working capital efficiencies driven by the seasonal drawdown of receivables and a modest decrease in inventory to deliver our free cash flow target. Adjusted earnings per share for the fourth quarter is expected to be approximately $1.29. We remain optimistic about the long-term growth prospects for our industry and our business. The targets we laid out for you a year ago at our Capital Markets Day remain appropriate for the business and our focus, albeit delayed by roughly a year due to the impact of increased tariffs. Near term, we expect market conditions to remain dynamic and challenging. We will continue to respond decisively through targeted supply chain and SG&A adjustments, underscoring our commitment to meet the needs of our end users and customers while delivering financial result improvement. We continue to focus on enhancing the company's long-term earnings power and strengthening the balance sheet. Thank you. And I will now turn the call back to Chris. Christopher Nelson: Thank you, Pat. We are strengthening our operational resilience on a daily basis. Our disciplined data-driven approach empowers us to navigate evolving market conditions, seize emerging opportunities and consistently deliver value to our stakeholders. As Pat outlined, we are continuing to proactively manage factors within our control to facilitate the achievement and advancement of our goals. We believe our outlook for 2025 is balanced given the elevated levels of global uncertainty. We recognize the operating environment is challenging. And we are focused on creating significant value from our powerful brands and businesses to generate long-term revenue growth, margin expansion, cash generation and shareholder return. We remain committed to driving towards the goals outlined during our November 2024 Capital Markets Day. I am confident that with the collective dedication of our talented team and an unwavering commitment to supporting our customers and end users, Stanley Black & Decker will continue to set new standards for excellence in the years to come. We are now ready for Q&A, Michael. Michael Wherley: Thank you, Chris. Shannon, you can begin the Q&A now. Operator: [Operator Instructions] Our first question comes from Tim Wojs with Baird. Timothy Wojs: Just maybe on the volumes, I'm just curious how those performed relative to your expectations? And I guess if you could break down the volume between kind of what was impacted by tariffs and kind of what the, I guess, elasticity you saw in the quarter. And as you think about the next few quarters with price and volume, do you expect that kind of one-for-one trade-off to kind of continue with price and volume? Or do you think there could be some underlying improvement in that dynamic? Christopher Nelson: Tim, this is Chris. Thanks for joining us. Yes, I would say that our volumes were relatively in line with expectations. We started the quarter fairly strong, and there was a little bit of tapering towards the end of 3Q. But that really was more due, we believe, to, as we had referenced in earlier conversations, a nonstandard promotional window. And we're -- as we go into Q4, we actually will get back on a more normal promotional calendar. And we're actually very excited about the promotions we have for the holiday season, which, as you know, is important to our business. I'd say that we expect the environment to remain similar into Q4, and then we will continue to monitor and adjust as we go into the new year in 2026. But I'd say that while we see the environment, as Pat certainly mentioned, as challenging, it is relatively stable, and we're excited about the promotional calendar we have to close out the year, and it's going to be important for us to monitor. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Maybe just my question would be around dialing into some of the profit levers in a bit more detail. So I think for the fourth quarter, you're assuming operating profit up a few tens of millions of dollars sequentially with flattish sales. And is that all really coming from this extra price increase? And then as you're thinking about 2026 as it's only 8 weeks away now, it seems like you won't get much help from volumes based off the exit rate from this year. So maybe help us understand what are some of the main gross margin drivers you're most enthused about for 2026? Patrick Hallinan: Thanks, Julian. Yes. So operating profit for the fourth quarter is going to expand really 2 levers. We certainly expect to continue making progress on the gross margin front. We expect a fourth quarter gross margin around 33%, could bounce around plus or minus 50 basis points, but that's certainly what we're targeting and tracking towards. And then one of the things we've been talking about all year is judiciously managing SG&A expense relative to the volume environment while still protecting growth investments. So while we're still targeting around $100 million of growth investments, kind of elsewhere in the business, we're really reducing SG&A expense quite considerably, almost to an equal amount this year in our '25 full year income statement. And we'll probably, on a year-over-year basis, be down in SG&A, $40-or-so million versus the same quarter last year. So the profit expansion in the fourth quarter is a mix of gross margin expansion and SG&A reduction. Those are the primary drivers in a quarter where, overall, our net sales line is roughly flat. So that's where you're getting this year. I'd say as we work into next year on gross margin, we're still, as an organization, very focused on our long-term objective of 35-plus percent. And every day, we get up trying to solve the riddle of how to get there by the fourth quarter of next year, and that's still our objective. We'll be there or thereabouts working on that, assuming the macro environment is kind of in line with where we are or better. Obviously, if there was a big recession, we might need to revisit that. And the levers we're going to be pulling for next year, we're still going to be working strategic sourcing, in-plant continuous improvement, platforming is going to be starting to play a bigger role, and we still have some facility decisions ahead of us. So all of those levers are still in play for '26 and beyond. And they'll all be playing very significant roles. And as we mentioned, as we adjusted the outlook for the fourth quarter of this year, we went into the back half of this year with a bias to having some excess capacity in our plants to deal with the circumstances if elasticity ended up being more favorable and to accommodate some of the global transitions of supply, and we'll be having to kind of adjust for those types of costs, too, as we go into the early parts of '26. Operator: Our next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: And Chris, congratulations on -- I'm actually [ sitting ] on the phone right now, I guess, but congratulations. Maybe -- I think you mentioned going out with another price increase in the quarter. So can you just maybe mark-to-market somewhere you expect price to maybe come into the fourth quarter? And maybe just give us a quick mark-to-market on -- I know it changes a lot, but on the tariff inflation, how you see it right now? And are you down in this 10% [ sentinel tariff ] reduction? And does that have an impact on 4Q? Christopher Nelson: Thanks a lot, Nigel. Nice hearing from you. I'll start, and I'll let Pat wrap up. But I would say that the price increase, the second price increase, as I mentioned in my remarks, we're in process right now, and it's going to be in that low single-digit realm that we talked about in previous conversations, and we're on track to that. And we're working with all our channel partners constructively to get that in place because our goal collectively is to make sure that we do everything and anything we can to minimize what the stress would be on our end users. And therefore, where our real emphasis is, is driving our production moves and mitigation to reduce our reliance on China imports for U.S. consumption. And we've been making significant progress there. We remain on pace to be below 10% by the end of the year and below -- at or below 5% by the end of 2026. We're making great progress there. And that's really the emphasis. So as it relates to the second part of your question, which would be the tariff exposure based on latest information, it really has no material impact. It's still right about the same area based on the changes that have come in 232s, combined with the reduction in China, it's kind of netted out. So we're right in that same ballpark. And as it relates to what that means for our mitigation efforts, we were -- basically, as I mentioned earlier, we were planning in the not-too-distant future to be largely absent from China as a source of supply for the U.S. So it really has minimal impact on our medium- to long-term strategies there. So I don't know, Pat, if you had anything else to add there? Patrick Hallinan: Yes. No, I think you covered most of it, Chris. I'd say just to reiterate a few things Chris said is our end game plan kind of end of '26 forward is to be below 5% U.S. COGS from China. That's what drove our total mitigation strategy, both supply chain changes and pricing. And so given that, this reduction in 10% of -- 10 percentage points of the China tariffs doesn't meaningfully change that outcome. You asked a little bit of is there a fourth quarter benefit? It's probably in the ballpark of very low single-digit millions, given that it affects one quarter and then you pretty much only get the LIFO portion of that. So for the fourth quarter, it's a very small amount. It's a slight help, probably in the 5% to 10% range of each of the first 2 quarters of next year or thereabouts, but it's not a game changer long term. Certainly, any relief is welcome, but it's not a big magnitude item. Operator: Our next question comes from the line of Christopher Snyder with Morgan Stanley. Christopher Snyder: I wanted to ask about Tools & Outdoor top line. So price this quarter, I think you guys said 5%, but I thought the conversation on the Q2 conference call was for high single-digit price. Maybe that was more of a back half comment than a Q3 comment. So any color there would be appreciated. And then also, Tools & Outdoor is calling for a better Q4 mark. It seems like maybe flat organic. Q3 was negative 2%. And now we have a more difficult comp into Q4. So can you just maybe talk about why that 2-year stack will get better? I know price comes through, but we would think with the one-for-one offset that, that would be accounted for on lower volumes. Patrick Hallinan: Yes. So Chris, pricing can get confusing because obviously, it's a portion of all the work we're doing to mitigate tariffs. Obviously, there's a lot of supply changes in addition to that. But it's largely a United States Tools & Outdoor phenomena. So you're talking about taking considerable price on 60% of our business, not on 100% of our business. So you're accurate in understanding that our pricing, ultimately, when we get through the second round of price increases, but even the pricing we've already taken is in the high single-digit range. It's probably going to across our U.S. product lines be in that high single to maybe even in the low double digit depending on the SKU you're looking at. But again, when you take basically 60% of that, you're getting into a mid-single-digit global viewpoint on pricing, both global for T&O and global for total Stanley Black & Decker. So we -- if you look at our outlook and planning assumption information, we've been referencing on an enterprise-wide basis, expecting mid-single digits, U.S. T&O high single digits or above. And that's exactly what we're seeing. So it's a lot of hard work by our team and a lot of hard work with our channel partners to do it thoughtfully, but we're getting the price we expected. And you saw in the pricing reconciliation for the third quarter, it was 5 percentage points, and that's right in the ZIP code we expected. Obviously, we're taking a second round of pricing in the fourth quarter, but we're also going to be running back to kind of a more normal promotional cadence. So I would expect the reconciliation for the fourth quarter to be in a similar ZIP code. It can kind of move up or down from that 5% based on promotional mix to relative sales. In terms of the growth cadence for the quarter and the year, for the full year enterprise-wide, we're expecting net sales for the full year enterprise-wide on an organic basis to be flat to down 1%, probably more likely towards the lower end of that range. And for T&O for the quarter, we're also kind of expecting flat to down at 1-ish percent and again, probably towards the lower end of that range. So that's going to have an enterprise where T&O for the quarter and the year is down somewhere between 0 -- flat to down 1%, closer to that down 1% and you're going to have SEF up about 2 percentage points on the year, and that's what's going to drive the overall enterprise to the enterprise expectation. Operator: Our next question comes from the line of Michael Rehaut with JPMorgan. Michael Rehaut: I wanted to focus on -- without really getting into guidance for next year, focus on some of the actions you've taken this past year and how they might impact '26? And in particular, just thinking of, number one, the carryover impact kind of like from an annualized perspective on what the cost reduction that you're on track to do the $2 billion by the end of this year, what impact on a fully annualized basis would that have to benefit 2026 as well as the movement of supply chain with the China footprint reduction that would ostensibly -- as that comes down throughout the year, I would figure have some type of -- also some type of benefit to cost. Patrick Hallinan: Yes, Mike, it's a fair question. We certainly are going to be looking at how this quarter plays out from consumer confidence, consumer engagement and volume perspective before we're going to feel like talking about '26 guidance is appropriate. But anchor stones to '26, kind of no matter the macro are going to be making gross margin progression and managing SG&A thoughtfully. So we're working game plans for '26 that have us around 35-ish percent in the fourth quarter. We're going to be finishing this full year on like a 31-ish percent basis. So the full year '26, we're going to obviously be targeting something very much in between those 2 points of 31% and 35%. And as I mentioned to the questions Julian was asking, all the levers are still in play. We're going to need to be generating in terms of gross productivity next year, somewhere in the $350 million, $400 million range. That's going to be our rough focus point, again, irrespective of the macro to continue marching on that gross margin path. And then we're going to be working on a mitigation path of getting $200 million to $300 million of tariff expense out of the system via -- whether that's shifting product out of China and/or increasing USMCA compliance. So those are our focus areas. Those are levers that we're pulling, and we'll continue to kind of manage SG&A in that 21-ish in a fraction range, again, working to generate growth investments while tightening up the cost structure elsewhere. Operator: Our next question comes from the line of Adam Baumgarten with Vertical Research Partners. Adam Baumgarten: Just curious how you think your North America power and hand tools volumes compared to the market in the third quarter? Christopher Nelson: Adam, so I think we're relatively in line with market. I'd say a couple of things. We know DEWALT continues to grow year-over-year in the absolute terms, and I think that, that would be pacing the market. We've been seeing more signs of progress staying in line with market levels with our other 2 core brands. And I think the important thing to understand is that in the short term, with the amount of change that has happened with various responses to tariff policy, pricing as well as promotional calendars, there's just -- there's been a lot of volatility in the market. We're going to keep on monitoring and see how things progress, not only as we wrap this year, but going to the next year into 2026. But I'd say we have been relatively in line with what we think the market would be and I'd say, exceeding what we think the market is with our DEWALT brand. Operator: Our next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: There's a lot of moving pieces with housing policy for the current administration. I was hoping you could talk to how you see Stanley Black & Decker as a potential beneficiary of some of these proposals to catalyze and unlock dormant housing supply in the future. Christopher Nelson: Thanks a lot, Jonathan. Nice hearing from you. Let me start by just saying that we understand that -- and we would say that we don't see any real near-term catalyst right now for that market. So we're focused on making sure we control [ what ] we control. We're excited about what we're doing. We're excited the progress we're making in our margin expansion and our product line expansions. And we'll continue driving towards that. And for lack of a better term, we're going to continue to improve based on the actions that we take on the things that we control. And that's what we're concentrating on. And I think that I'm excited about the progress we've been making, and we expect to continue to make along those lines as we go into 2026. As it relates to any release of momentum in the housing market, whether it be new construction or repair and remodel, we certainly believe that we are very well positioned to be a beneficiary of that. We certainly serve those markets and serve those trades with very high share positions, and we have been using this time of what I would say is a little bit more of a retrenchment of that market to invest heavily to make sure that we are there with those end users, with those contractors and with that industry to be building the relationships and building the innovation so that as that does unlock, that we will be there to certainly be a beneficiary of it and probably more than our fair share. Operator: Our next question comes from the line of Joe O'Dea with Wells Fargo. Joseph O'Dea: You gave some helpful color on China and U.S. supply exposure there and what you expect on that trajectory. Any perspective on USMCA compliance and the path that you're on there? And then along with that, just on the 4Q pricing that you talked about being kind of in process, for how much of the quarter would you expect that price to be flowing through the P&L, the incremental price that you're in process on now? Christopher Nelson: I'll start with USMCA, and then I'll turn it over to Pat for the pricing question. So USMCA, and I think I stated this on our last call that we are making significant progress. It's a big part of our mitigation efforts. And as we've talked about our strategy from the very outset on managing the tariffs, we're going to support our customers, we are going to mitigate our operations, we're going to price where necessary and we're going to maintain our communications with the administration. We certainly priced for what we believe our end state mitigation was going to look like as we went out of 2026. So it's all hands on deck to get us towards that end because that's a big part of what our mitigation and margin journey is all a part of. As it relates specifically to USMCA, we're making progress, and we see no structural roadblocks to us being at or around what I would say is the average for industrials that look like us, and we'll be there over the medium term. So we're making great progress, and we see a good opportunity there to make sure that we can continue to have the products that our end users need at the prices that they can afford. Patrick Hallinan: Yes. And Joe, relative to fourth quarter pricing, a fair number of those discussions with channel partners have been completed, and those pricing actions are starting to go underway. We would expect the balance of them to be completed here in the early part of November. And so I kind of think of it as, for the most part, 2 of the 3 months of the quarter, and we feel like we're tracking on that. And with all the variables we're managing in this quarter within our planning assumption, we're comfortable with where we are on that front. Operator: Our last question comes from the line of Joe Ritchie with Goldman Sachs. Joseph Ritchie: Just my -- the only question I have right now is really around inventory levels. It looks like you've reduced your inventories over the past year and also sequentially. How far above do you still think you are from an inventory perspective? And what's your expectation for reduction in 2026? Patrick Hallinan: Yes. Good questions, Joe. I mean I think I'd raise it to the topic of cash and then come back to inventory because we still are in a delevering mode and very focused on generating cash. And obviously, we have work to do this quarter. And so we expect the gross margin improvement and the SG&A management I referenced earlier in the Q&A to drive profit expansion in the fourth quarter. And then we'll be pushing for over $500 million of working capital reduction in the quarter. That's both receivables and inventory. I'd say this whole year, at least to this point in the year, we're a little bit heavier on inventory than we'd like to be, but that is understandable relative to all the supply chain moves we're doing. I mean, obviously, we're taking 15 percentage points of our U.S. COGS and moving them out of China that ends up requiring some inventory slack in the system, and that's part of our challenge. I'd say for next year, we're probably targeting at least $200 million. We'd like to be better than that because I think our longer-term opportunity in a level at this revenue stage probably approaches $1 billion of working capital reduction. That's not just kind of on the margin thing. That's leveraging platforming and improving the way we do planning and a whole host of other things that drive inventory. But I still think that that's the opportunity that's out in front of us. But with some of the tariff mitigation that's going to consume the first half to 2/3 of next year, I think a target in the $200 million to $300 million range, closer to [ $200 million ] for next year is probably more appropriate. Operator: I would now like to turn the call back over to Michael Wherley for closing remarks. Michael Wherley: Thank you, Shannon. We'd like to thank everyone again for their time and participation on today's call. If you have any further questions, please reach out to me directly. Have a good day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is Van and I will be your conference operator today. At this time, I would like to welcome everyone to Black Stone Minerals Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mark Meaux, Director of Finance. You may now begin, sir. Mark Meaux: Thank you. Good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals Third Quarter 2025 Earnings Conference Call. Today's call is being recorded and will be available on our website along with the earnings release, which was issued last night. Before we start, I'd like to advise you that we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday and the Risk Factors section of our 2024 10-K. We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of those measures to the most directly comparable GAAP measure and other information about these non-GAAP metrics are described in our earnings press release from yesterday, which can be found on our website at www.blackstoneminerals.com. Joining me on the call from the company are Tom Carter, Chairman, CEO and President; Taylor DeWalch, Senior Vice President, Chief Financial Officer and Treasurer; Steve Putman, Senior Vice President and General Counsel; Fowler Carter, Senior Vice President, Corporate Development; and Chris Bonner, Vice President and Chief Accounting Officer. I'll now turn the call over to Tom. Tom Carter: Thank you very much, Mark. Good morning, and thank you all for joining us on the third quarter earnings call. Before we discuss our financial and operating results, I'd like to congratulate Fowler Carter, Taylor DeWalch; and Chris Bonner on their announced upcoming promotions. I'm excited for and confident in their leadership as we look to the continued growth and success of Black Stone for many years to come. Looking forward to my new role as Executive Chair as well and will continue to provide strategic guidance to the management and lead the board. Thank you to all of our employees who continue to work very hard day in and day out to drive Black Stone's success and position us for an exciting future. We continue to pursue acquisitions through the Haynesville expansion around Shelby Trough, and we're looking forward to Revenant's development getting underway in early 2026. We also continue to work towards solidifying another development agreement covering 220,000 gross acres in between Aethon's development in the Shelby Trough and expand's development in the Western Haynesville. Unscripted, I also add, we are working on yet another package that we hope to assemble and market in the not-too-distant future. The recently announced expand energy horizontal well and successful pilot well in addition to the ongoing development throughout the Western Haynesville provide even further confidence in the Haynesville expansion play and long runway of inventory. As mentioned previously, we expect these development agreements to ultimately drive over 50 wells drilled in the expanded Shelby trial per year providing significant gas growth for the partnership and a constructive outlook for demand in the region. And this is in conjunction with ongoing great opportunities coming up in other areas in our properties. We remain focused on the significant growth opportunity that result in the increasing production and distribution outlook for years ahead. With that, I'll hand it over to Fowler to walk through the operational updates. Fowler Carter: Thank you, Tom, [indiscernible], and good morning to everyone. During the quarter, we progressed our commercial initiatives across the expanded Shelby Trough, including working with Revenant Energy on their inaugural development program beginning early next year. Our marketing efforts on an additional 220,000 gross acres is progressing well with a framework agreement that would add the equivalent of 12 additional wells annually to our acreage by 2030. We expect these new developments, coupled with our existing agreements to more than double the current annual drilling rate in the expanded Shelby Trough in the next 5 years. There is also the opportunity for our operating partners to exceed their annual well commitments, and we are excited about the multiple decades of development inventory in this play. Our grass-roots acquisition program also continues to progress well. We added $20 million in mineral and royalty acquisitions during the quarter bringing our total acquisitions since September 2023 to roughly $193 million. We have line of sight to an additional accretive acquisition opportunities in the near term which we expect to enhance our existing asset position in the Shelby Trough and to add long-term value for our unitholders. While 2025 development activity has slowed across the U.S., we are optimistic looking ahead to 2026 given our existing and pending development agreements across our high-interest acreage in the Shelby Trough. Turning to the Permian. The large project we were monitoring remains on track to add meaningful oil volumes to our production base. We are also tracking several new projects on our high-interest acreage there that are expected to add additional liquids volumes in the next 12 to 18 months. We believe that these projects, in addition to our agreements in the Shelby Trough, provide Black Stone a path to increase production and, in turn, higher distributions. With all of that, I'll turn it over to Taylor to walk through the financial details of the quarter. Taylor DeWalch: Thanks, Fowler, and good morning, everyone. We had a successful third quarter with mineral and royalty production of 34,700 BOE per, an increase of 5% over the prior quarter. The increase in production quarter-over-quarter was driven by strong volumes in the Permian Basin. Total production volumes were 36, 300 BOE per day. While we currently sit here at the high end of the range, production guidance for 2025 is unchanged at 33,000 to 35,000 BOE per day. We continue to monitor activity levels and commodity price dynamics as we look towards the fourth quarter of 2025 and full year 2026 production and distributions. Net income was $91.7 million for the third quarter with adjusted EBITDA at $86.3 million. 57% oil and gas revenue in the quarter came from oil and condensate production. As previously announced, we declared a distribution of $0.30 per unit for the quarter, or $1.20 on an annualized basis. Distributable cash flow for the quarter was $76.8 million, which represents 1.21x coverage for the period. The excess coverage was used to partially fund acquisitions and maintain a solid financial and leverage position. As Tom mentioned earlier, the partnership's outlook remains strong, anchored by long-term contract development in our high-interest Shelby Trough acreage as well as our core legacy assets across the U.S. In addition, with increasing demand from LNG and power, the outlook for natural gas is increasingly constructive over the next decade. With significant assets in close proximity to LNG facilities, Black Stone is in a prime position to benefit from the looming call on gas supply. In conclusion, we had a solid quarter, bolstered by strong oil volumes from our Permian assets which ultimately produced robust coverage of the announced distribution. Going forward, we remain confident that our existing acreage positions, coupled with our commercial strategy and the expanded Shelby Trough will provide a strong foundation to deliver sustainable long-term value for unitholders. With that, we'd like to open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of John Annis from Texas Capital. John Annis: Congratulations to everyone on their new roles. For my first question, on the acreage currently being marketed in the KLX area, I think on the September update call, you mentioned that you were on the 1 yard line with getting a deal across. I was hoping if you could provide a quick update on where those discussions currently sit? And secondly, if you've seen any increased interest in potential commitment to the development following expand's entry into the Western Haynesville. And then maybe just building off of Tom's remarks that you're also working on assembling another package. Is there any additional color that you could share at this time? Fowler Carter: Well, I'll start with the 1 yard line comment. We were at the 1 yard line and now we're at the half yard line. So it's progressed, and we expect to hopefully have that wrapped up here in the next couple of weeks. But we'll let you all know how that goes, and we'll announce that information accordingly. Remind me your second part of your question before we go on to the expanded area that [indiscernible] mentioned. John Annis: Yes. Just if you've been seeing any increased interest in potential commitments just following expands announcement and their entry into the Western Haynesville? Fowler Carter: We say interest remains robust across this whole area and increased commitments. What I'm comfortable saying about that is that our operating partners have the ability to flex up above and beyond their minimum annual commitments. And so you can certainly see some relative outperformance there. John Annis: Terrific. Is there any color that you could offer on the package that you're working on assembling that you mentioned in the prepared remarks? Fowler Carter: I'm going to let [indiscernible] take that one because he's really excited about it. Tom Carter: If you look at the Shelby Trough in the Western Haynesville and now the expand well, the Yancey well, which is about 20% to 30% further to the east than any of the wells that have been drilled so far moving back into almost North Central Houston County. And then you go into Trinity County, Cherokee County, Angelina County, Polk County, Tyler County, San Augustine County, Sabine County. There is so much inventory potential out there that really hasn't even been scratched yet, and folks keep putting blocks together. And we've done a lot of homework on the subsurface all the way across to the Western Haynesville and everything that keeps happening thus far has been positive to more positive than what one could expect. We see some very, very interesting geologic things happening as you move further west from the traditional Shelby Trough, where there is significant expansion between the base of the Knowles Lime and the top of the Cotton Valley if I'm saying that -- Smackover -- excuse me, Cotton Valley also. Smackover and that phenomenon is what's been driving moving Eastward into the Western Haynesville. So I think I said this last time, these packages of shale that are commercial are thicker in that expanded area. And we have existing acreage that we think is deeper than the traditional work that's been done in the Shelby Trough, but that is not inconsistent with what's been going on in the Western Haynesville. And it's in our inventory, and we're working it hard and looking forward to taking it out to capital development in the future. John Annis: I appreciate all the color. For my follow-up, with the strong volume growth this quarter, how should we think about volumes trending in the fourth quarter and into 2026 with the wells that are expected to be turned in line from Aethon and the Permian development project? And then maybe more broadly, just how would you compare what you're seeing in terms of gas-directed activity across your acreage relative to earlier in the year. Taylor DeWalch: Yes. Thanks, John. So like I said in my prepared remarks, I mean, we didn't update full year guidance at this point. So we're still being pretty thoughtful about the activity that's going on across our assets, whether it's Aethon or larger developments out in the Permian, I'd say where we start to get excited is to see Aethon volumes coming online and then kind of throughout the fourth quarter into the beginning of next year, along with the large development in the Permian, which is Coterra and seeing their wells start to come online recently, but more completely as we think about kind of the beginning of next year. So overall, I think it's going to be an interesting several months kind of winter season to watch activity levels, especially in the natural gas-focused basins and to see how that plays into full year '26 volumes. Tom Carter: I would add also, recently, we put out a multiyear forecast, which is somewhat unusual for a publicly-traded company. And I would just encourage the marketplace to not focus so much on the next 6 to 12 months, but to focus on the next 5 years because as I said earlier, this is a massive reservoir, and it takes time to spool it up -- and evaluate it and spool it up. And we really are excited about the slow, methodic, thoughtful, early stages of some of these new transactions that we've done. But every one of those with success will grow in well counts by two to threefold as well as layering new projects in there. I just -- when you talk about share value and share activity, that's a real good question because I don't know how much the average person wants to get out in front of the market. But if what we're seeing is valid and as I said before, if the natural gas markets are as everybody seems to think they're going to be, i.e., less volatile and more secure in the future. The time to buy our shares is now not 2 years from now. Operator: Our next question comes from the line of Tim Rezvan from KeyBanc Capital Markets. Timothy Rezvan: Congrats everybody on the new roles and Tom, on your transition. Some of my questions were addressed by the prior analysts. But I wanted to ask, you mentioned more Permian production coming. As a 2-stream reporter, we've noticed that your natural gas differentials have weakened. I'm guessing that's due to exposure to Waha. And as you think about -- I know the Haynesville is sort of the longer-term story, but a lot of producers are getting beaten up by the challenges at Waha that may not resolve until 2027. So can you talk about anything you're doing? I know you've been plain vanilla hedges in the past. Do you intend to just sort of ride this out? Or is there anything you can do because gas is still over 70% of your production. Just curious on that. Taylor DeWalch: Yes. Thanks, Tim. This is Taylor. I'd say, like you said, I mean, our hedging strategy remains consistent the way that we've been thinking about it. And I think when you think about our natural gas volumes so much of that is coming from the Haynesville and from the Shelby Trough, where we've got good exposure to Henry Hub, I think relative to -- as you mentioned, kind of some of the dynamics that are going on with Waha and the Permian. I think when we think about Waha and we think about just general Permian production, really what gets us excited is to see the ongoing development on high-interest acreage and then ongoing development across the full suite of assets. I guess we touched on in the investor presentation in September, we're really well aligned with the top operators in the Permian. And so we continue to see robust activity from those folks. And then also just going back to some of these a little bit more bespoke high interest development that we have in the Permian. So excited to see those volumes come online. So overall, continuing to maintain our consistent strategy as we're thinking about pricing and activity levels. Timothy Rezvan: Okay. So from a modeling perspective, do you think that on a 2-stream basis being at a discount to the benchmark Henry Hub is that going to be the reality over the next year if Waha sort of stays where it is? That's what I'm trying to get at. Tom Carter: Yes. I mean that's -- like I said, that's what we're thinking about it, and that's what we've got a robust hedge strategy. Operator: [Operator Instructions] Tom Carter: All right. If there are no more questions, we sure thank you all for joining us today, and we look forward to speaking with you soon. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello, everyone, and welcome to the Centerspace Q3 2025 Earnings Call. My name is Ezra, and I will be your coordinator today. [Operator Instructions] I will now hand over the call to Josh Klaetsch from Centerspace to begin. Please go ahead. Joshua Klaetsch: Good morning, everyone. Centerspace's Form 10-Q for the quarter ended September 30, 2025, was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package have been posted to our website at centerspacehomes.com and filed on Form 8-K. It's important to note that today's remarks will include statements about our business outlook and other forward-looking statements that are based on management's current views and assumptions. These statements are subject to risks and uncertainties discussed in our filings under the section titled Risk Factors and in our other filings with the SEC. We cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Please refer to our earnings release for reconciliations of any non-GAAP information, which may be discussed on today's call. I'll now turn it over to Centerspace's President and CEO, Anne Olson for the company's prepared remarks. Anne Olson: Thank you for joining us today. I'm here with our SVP of Investments and Capital Markets, Grant Campbell, who will provide some comments on the transaction market; and our CFO, Bhairav Patel, who will discuss our guidance and balance sheet. Centerspace's third quarter and year-to-date results are a testament to the health of our smaller regional markets, our operating platform, which helped us drive exceptional expense control and the strength of our team, which has remained focused even in light of the significant sale and acquisition activity that we have undertaken. For the third quarter, we reported 4.5% year-over-year growth in NOI within our same-store portfolio. This is being driven by solid increases in revenue, coupled with excellent execution on expenses. That said, due to timing adjustments related to our planned strategic transactions and associated G&A costs, we are lowering the midpoint of our Core FFO guidance by $0.02 to $4.92. Bhairav will further discuss the impact of our capital recycling activities when he speaks to our outlook. In June, we announced strategic initiatives that included acquisitions in both Colorado and Utah and dispositions that reduced our portfolio concentration in Minnesota. We expect to close on the sale of 7 communities in the Minneapolis area yet this month, at which time we will have recycled approximately $212 million of capital and increase the quality and efficiency of our portfolio. While our current cost of capital has impeded our ability to execute on external growth opportunities, we are committed to enhancing our market position and value for our shareholders. We have many levers we can use to do that, and we will remain disciplined and flexible. Operationally, our portfolio continues to benefit from the stability of our Midwest markets. Like in 2024, lease rates peaked in mid-Q2 and remain positive for us, up 1.3% on a blended basis in the quarter and 1.6% year-to-date. Retention has exceeded our initial expectations, hitting 60% in both of our peak leasing quarters. In our largest market of Minneapolis, results benefited from the dual tailwinds of improved occupancy and increasing rental rates, where we saw improvement in both new and renewal leases in the quarter, leading to blended increases of 2.1%. In our other markets, North Dakota continues to be a standout with portfolio-leading blended increases of 5.2% in the quarter. Our Denver portfolio has been challenged by supply pressures, and Q3 blended lease rates were down 3.5%. Digging more into Denver, we believe our experience there is truly the result of supply. Based on absorption data, 2025 has been Denver's second best year ever. In our portfolio, we're seeing higher closing of lease with our Q3 lead to lease up 275 basis points year-over-year and higher tenant incomes, which are up 7% versus last year as well as a 70 basis point improvement in our occupancy over Q2. Some of that occupancy was driven by our decision to offer concessions in this market. We anticipate Denver will return to a more normal environment as we move through 2026, and we remain optimistic. I'll ask Grant to comment on the state of the transaction market. Grant Campbell: Thanks, Anne, and good morning, everyone. On a macro level, while we do not expect transaction volumes to return to 2021 and 2022 levels in the near term, this year has produced more transaction activity compared to the last 2 years. We are seeing investors display conviction in placing capital, and this dynamic should drive value for our shareholders. Our recent transaction initiatives position the portfolio well for continued long-term growth. In May, we closed the acquisition of Sugarmont in Salt Lake City. And in July, we expanded our Fort Collins presence with the acquisition of Railway Flats in Loveland, Colorado, both of which were discussed in detail on last quarter's call. In the case of Railway Flats, Fort Collins has been a target geography for us as evidenced by 2 of our recent investments occurring there. This market has displayed outperformance in annual rent growth, absorption and vacancy when compared to Metro Denver. Within our portfolio, Fort Collins retention is 800 basis points ahead of Denver in the quarter, and Fort Collins occupancy is our strongest year-over-year increase across our portfolio markets. To fund these acquisitions, we completed the sale of our St. Cloud, Minnesota portfolio in September for $124 million, exiting us from that market. Investor reception was strong with buyer interest ranging from individual community offers to portfolio offers. This portfolio transaction of lower growth prospect communities priced at a mid-6% cap rate well inside of the mid-7% implied portfolio cap rate our stock trades at today. In addition, this week, we anticipate closing the sale of 7 communities in Minneapolis for $88.1 million. These 7 assets are smaller communities, totaling 679 homes. This transaction will price at a high 5% cap rate, again, well inside the implied portfolio cap rate we trade at today. Upon completion of the sale, our remaining Minneapolis portfolio will be higher quality, increasingly suburban with 87% of NOI located in suburban submarkets and operationally more efficient with NOI margin for the Minneapolis portfolio increasing approximately 90 basis points as a result of the impending 7 community sale. Recent comparable trades support low 5% to 5.75% cap rates for our remaining Minneapolis portfolio. Lastly, on the capital allocation front, we repurchased 63,000 shares in the quarter at an average price of $54.86 per share, driven by the current disconnect between public and private market valuation. I'll now turn it over to Bhairav to discuss our financial results and guidance. Bhairav Patel: Thanks, Grant, and hello, everyone. Last night, we reported third quarter Core FFO of $1.19 per diluted share, driven by a 4.5% year-over-year increase in same-store NOI. This NOI growth was driven by a 2.4% increase in same-store revenues with revenue growth composed of a 20 basis point increase in occupancy and a 2.2% increase in average monthly revenue per occupied home. On the same-store expense side, Q3 numbers were down 80 basis points year-over-year with controllable expenses up 3.4% and noncontrollables down 7.6% due to favorability in both property taxes and insurance. Specifically on property taxes, we trued up our accrual based on recently received assessments of value for Colorado, which were much lower than initially anticipated. Turning to guidance. We now anticipate full year core FFO per diluted share of $4.88 to $4.96 per share with expectations for 2025 same-store NOI growth of 3% to 3.5%. Within NOI, we expect same-store revenues to grow by 2% to 2.5% for the year. This reduction is driven mainly by the impact of concessionary activity in Denver. As a reminder, concessions are amortized over the lease term, and as such, a portion of the noncash amortization will be realized in the fourth quarter and in 2026. Positive results and expenses are more than offsetting this with same-store expenses now expected to only increase by 75 basis points. Core FFO guidance is lower at the midpoint by $0.02 per share due to higher expectations for G&A and interest expense, offset by higher NOI with the timing of our dispositions playing a significant role in those differences. On our balance sheet, our recent acquisition of Railway Flats, which included the assumption of $76 million of long-dated low rate debt at 3.26% as well as the completed St. Cloud and planned Minneapolis dispositions has improved our debt profile. As these transactions conclude, we expect our net debt to EBITDA to move into a low 7x level by year-end with a pro forma debt profile with an average rate of 3.6% and average time to maturity of 7.2 years. To conclude, this was a good quarter for Centerspace with our results demonstrating our commitments to both operational excellence and financial discipline and setting us up for the fourth quarter and into 2026. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from Brad Heffern with RBC Capital Markets. Brad Heffern: On the repurchase, obviously, very attractive use of capital right now, just given where the stock is trading, but it does compete against your goals of reducing leverage and increasing the float. So I'm just wondering how you think about the balance. Anne Olson: Yes. Brad, thanks for the question. That's something we think about every day when we have the opportunity to buy back. And I think as you'll see in this quarter, it was a very small use of proceeds, just a few million dollars. Really, we outperformed on the St. Cloud sale from where we thought that, that would trade, having gross purchase price of $124 million. And so when we looked at the allocation of capital there, we took some of those excess proceeds. We agree that this is a good use of capital and really sends another signal about where we think the value of the company is and our conviction about what we think it's worth. Brad Heffern: Okay. Got it. And then for Minneapolis, you gave some numbers in the prepared comments. It seems like the market is showing some pretty strong signs of recovery. Can you just talk about your expectations going forward? Is that sort of a return to normalcy over the next couple of years? Or would you expect to see a period of above-average performance as sort of a catch-up? Anne Olson: I think we're seeing right now a return to normalcy in Minneapolis. And as we look towards next year, we are expecting that it's going to outperform its historical. It hit its peak deliveries. We've had excellent absorption. And if we look at third-party data, CoStar, RealPage, other, Minneapolis is really slated to be in that kind of top 5 of U.S. markets for rent growth headed into 2026. So we are expecting a little bit of outperformance there next year. We're optimistic that we're going to be able to capture that strong rent growth and hold our expenses in line to drive good NOI out of Minneapolis. Operator: Our next question comes from John Kim with BMO Capital Markets. Robin Haneland: This is Robin Haneland sitting in for John. It sounds like same-store revenue was mostly flat driven by Denver weakness. Could you maybe update us on what you're expecting for the earn-in for '26? Bhairav Patel: Yes, sure. From an earn-in perspective, we're sitting just a shade above 1% at the moment. And as you said, Robin, it captures some of the weakness in Denver, where we're seeing some heavy concessions. So at the moment, about 1%, maybe slightly above. Robin Haneland: Got it. And then specifically on Denver, could you just elaborate on the concession levels and how long you expect them to persist? Anne Olson: Yes, certainly. So I'd say concession levels in Denver within our portfolio range from no concessions at a couple of our properties where we have still seen strong occupancy and good absorption demand there to 6 weeks free, maybe some waiving of application fees. On the market as a whole, it varies pretty widely. We're seeing up to 2 months free, 8 weeks free, 10 in some pretty isolated instances. But I'd say with respect to our portfolio's concession relative to the market, we're either at or a little bit under what market concessions are. Robin Haneland: So the portfolio is taking a little bit of a -- doing quite a little bit of recycling for Collins, Loveland seems to be targeted markets today. Could you just maybe give us how new lease performed in those 2 markets and how they differ from Denver fundamentals? Anne Olson: Yes. So we are looking at Fort Collins, as you said, that is a target market for us. And what we're thinking about there is really just trying to get a little bit of scale in that market. We now have 2 assets in the Fort Collins area. And I'd say when we look at outperformance there relative to the Denver submarket, Grant commented a little on that, and I'm going to have him just take that and give you some stats on what the difference is there between Fort Collins and Denver. Grant Campbell: Yes. I think that outperformance is a result of the supply dynamic, deliveries peaked there in 2024, really concentrated in the second and third quarter. In terms of the total number of units delivered at the peak, it was measured at about 7% to 8% of total inventory. So a more overall more muted supply profile. And then when you look at really any time period kind of over the last 3 years, you'll see rent growth that has outpaced Denver to the tune of about 450 basis points. And then also absorption or demand as a percent of inventory has been pretty robust as well, outperforming to the tune of 600 to 700 basis points compared to Denver over that same time period. Robin Haneland: And lastly for me, how are you thinking about recycling the $88 million of sales expected across repurchases, acquisitions and debt? Anne Olson: Yes. Sorry, Robin, was that question about recycling with respect to the sales that are pending here in Minneapolis? Robin Haneland: Yes. Anne Olson: Yes. So we have already acquired that has already -- those proceeds have already been spoken for. And so that is part of the acquisitions that we did in Salt Lake City and Fort Collins. So these proceeds will be used solely to pay down the debt that we incurred when we undertook those transactions. Operator: Our next question comes from Jamie Feldman with Wells Fargo. James Feldman: So can you talk about your blended lease growth expectations for the fourth quarter? Where are you sending out new and renewal leases? And then also just as we think about -- we're in the slowest time of the year, what do you think January, February could look like before we get back to spring leasing season? Bhairav Patel: Yes. So for the fourth quarter, renewals are out for the rest of the year. October renewals still in the high 2% to low 3% range. So that's pretty strong. But the new lease trade-outs remain negative. So there's no real material change in trend relative to Q3 that we've seen so far. But from an occupancy standpoint, it remains stable and the exposure is trending in the right direction. So overall, for the portfolio, we are showing exposure in the low 5% range, which is a good place to be. As we think about Jan and Feb, it's hard to say. We still need to make it through the next couple of months from a concession standpoint in Denver. And if we see some reversal in concessions and stabilization in occupancy, which we are seeing, that will give us a better indication of where next year may start. James Feldman: Okay. And then can you talk on the expense side, can you talk about the drivers of the higher G&A expense for the year? And then also, just as we think about modeling '26, any specific line items that you think could be materially savings year-over-year or growth year-over-year? I know you mentioned the Colorado taxes. Just any onetime items we should be thinking about that could help or hurt? Bhairav Patel: Yes. So I'll take the G&A question first. There were some additional fees and legal expenses that we incurred in the quarter plus some true-ups, which had an impact on the Q3 numbers. More importantly, none of these are run rate items. So from a run rate perspective, our run rate remains in the $28 million range, in line with what we had previously disclosed. With respect to Q3, there was a true-up in taxes, specifically in Colorado, which drove the reduction in expense there. We still expect some true-ups in Q4 in other jurisdictions. But overall, that should just bring taxes in about the 2% range growth year-over-year, which is pretty normalized. When we think about 2026, there aren't really particularly onetime items that come to mind. One of the expense items that in recent years has driven some volatility is insurance. We should be renewing it in the next couple of weeks. And at this point, we don't really anticipate a big increase, which is a good outcome just given the 12% reduction we experienced last year. That has typically driven some volatility in year-over-year expense growth over the past couple of years, but that is expected to be a nonfactor when it comes to 2026. So there's no real particular items that come to mind with these updates to taxes. It just seems like taxes would be in a normalized year-over-year pattern. James Feldman: Okay. And since you mentioned insurance, are you able to ballpark or just give us a range on how they may look across the industry next year? I know you probably don't want to talk about years specifically yet. Bhairav Patel: Yes. No, I mean, I think a lot of it depends on when your renewal cycle falls. I mean we are in the process of having those discussions. And over the past couple of months, we've had several discussions with the hope that it remains in the low single digits, and that's where it's trending. It might be a little bit favorable, but too early to tell, even though it's just a couple of weeks away. But I think overall, it's a huge factor, the renewal cycle with us being at the fag end of the year, there might be some activity that drives losses, which we haven't really seen this year. So we're expecting a favorable outcome this year, which, as I said, is a good follow-up to last year's 12% reduction. Operator: Our next question comes from Connor Mitchell with Piper Sandler. Connor Mitchell: Anne, you mentioned you had some open commentary on Denver and the supply drag and then Grant on some of your kind of focus on the Boulder and Fort Collins and how that's kind of comparing in better rent growth to Denver. I guess just kind of drilling down on both of those. Could you guys maybe just give us an idea of when you really see Denver like turning the corner for supply, whether it's earlier in the year or later in the year, it seems like there's kind of more of a drag than we had expected earlier this year into '26. And then the demand around that as well, it sounds like the income is still growing for Denver and the Colorado markets. But maybe any other influences or factors that are really giving you guys some good conviction on Denver and then also the comparison to how you guys want to keep scaling up in Boulder and Fort Collins, how you kind of compare those 2 markets within the same state? Grant Campbell: Connor, on the supply front in Denver, obviously, it experienced its peak delivery levels later in the cycle relative to many institutional markets. When we look ahead, we really think demand will start to outpace supply in the back half of 2026 and that will certainly carry forward into 2027. So late '26 into '27 is when we expect demand to start to exceed supply. From a scaling perspective, obviously, Boulder and Fort Collins, that is a smaller geographic market relative to the size of Denver. We really like our position in that market with 3 assets now totaling about 980 homes. We do think there could be additional opportunity there, but we're going to be selective, and we're going to be targeted in our approach as it relates to that market. We do have desires to scale other regions within the portfolio, including Salt Lake City, which is a new market for us. So Fort Collins, certainly happy with the performance. We'll continue to look at opportunities there but we'll be targeted in that approach. And then supply in Fort Collins, as I touched on earlier, certainly a more muted supply profile peaked in second and third quarter of 2024. That continued demand and absorption that I alluded to earlier is really creating a strong backdrop for fundamentals right now. Connor Mitchell: Okay. And then maybe just following that line of thinking as well, you guys entered Salt Lake and you're scaling up in Fort Collins and Boulder in Loveland. And then I know that you guys have mentioned just thinking of other markets for new entries as well. Maybe if you could just stack rank that as those 3 options for the capital recycling program and then thinking of expanding presence in the current markets, the ones that you're expanding in Fort Collins, Boulder and then Salt Lake or even entering a new market that's been discussed. Grant Campbell: Our priority in that ranking, if you will, would be Salt Lake City. We do desire to scale that market. That is important to us, and we're highly focused on that. So that would be at the top of the list with the caveat that it has to be the right opportunity. We're not going to buy product there just to fill out the pie chart, if you will, it has to make sense, be the right opportunity, and we're going to continue to seek those. In terms of new markets, we're always thinking about markets internally. We're always having those discussions. We'll continue to do that and more to come from our perspective there. Connor Mitchell: Okay. I appreciate that. And then maybe just turning to the expense side. I think you guys are pretty well set up on RUBS. You've gone through that the past couple of years. And then just kind of following the line of questioning earlier, is there anything else that needs to be done in setting up RUBS or any other expenses as we kind of head into winter? Or should be thinking about with the winter months coming up? Anne Olson: Yes. I think we are really well set up. As you said, we had deployed RUBS across the portfolio. That's fully deployed. All of our assets are on RUBS to the extent they can. One thing to be thinking about, which isn't unique to us, but as an industry is that there has been some legislation in Colorado that will limit our ability to pass on RUBS. That will take effect January 1. And so that will have some negative impact, and we are working right now on what the steps we're going to take so that we can make sure that those are billed directly to tenants rather than through RUBS. So there may be some disruption there. I think that will be market-wide in Denver as we look towards 2026. Operator: Our next question comes from Rob Stevenson with Janney. Robert Stevenson: You guys lowered the value-add expenditure guidance by $2 million at the midpoint. Was that due to the Minnesota sales? Or did you pull back on redevelopment within the core portfolio? Bhairav Patel: Rob, no, I think that was more timing driven than anything else. It wasn't really truly driven by the Minneapolis portfolio because we hadn't really earmarked much capital to be deployed at those assets, knowing that we were going to dispose them. So it was -- it's more timing driven than anything else that's thematic. Robert Stevenson: Okay. How aggressive are you in starting new projects today given the status of your various markets operationally? Anne Olson: I'd say right now, we're very focused on things that can enhance the portfolio overall. So broad-based ways to save water, electricity, value-add enhancements that can drive operating expense reductions, such as our SmartRent implementation where we install leak detectors and keyless entries. But we're really trying to be mindful of our cost of capital that is driving up the return that we need to see on investments. And then also with the softer market, we really want to have conviction around getting the premiums that we need in order to get to the hurdles that we want to see given our cost of capital and the return expected. So we pulled back a little bit on things like unit renovations and common area renovations, but we are still looking at broader portfolio-wide initiatives that can drive, in particular, operating expense reduction. Robert Stevenson: Okay. And then last one for me. Bhairav, when does the $93 million of secured debt mature in 2026? Is that early in the year, late in the year? Bhairav Patel: I think it's in the first half, some in the first quarter and some in the second quarter. So it's all done in the first half or by June. Robert Stevenson: Okay. And what is your best option for debt today to refinance? And where is that pricing? Bhairav Patel: Yes. I mean what's maturing is secured debt. That's available in the low 5% range, can be driven a little bit lower based on leverage. So that's an option. The other option we have is following the paydown in the line of credit, once we close the dispositions, we'll have a lot of capacity on the line of credit. One of the reasons we extended the line of credit was to give us flexibility just given the disconnect between short-term rates and long-term rates. So that's another source of potential funding that allows us to keep the spread low and also pick up maybe a few basis points on the spread between short-term rates and long-term rates. Overall, the availability of debt capital, it's a pretty favorable environment from a debt capital standpoint for the sector. So there's multiple sources of debt, including bank debt if needed. So we have a range of options that we can utilize to refinance the upcoming maturities. Operator: Our next question comes from Ami Probandt with UBS. Ami Probandt: The revenue growth leaders have been Omaha and North Dakota. And while those remained strong in the quarter, the same-store revenue growth is decelerating. So I'm wondering if there's anything to point to there that's leading to a bit lower growth. Anne Olson: Yes. Ami, it's really Denver. It's really the offset from Denver having -- still decelerating a little bit and having negative new lease growth. So as strong as North Dakota and Omaha, they're smaller portions of our portfolio and really that deceleration overall in projected revenue growth for the year is because of Denver. Ami Probandt: Okay. And is there anything to call out for Omaha or North Dakota specifically that they're also decelerating? Anne Olson: No, I think just seasonality. We're getting into the winter months. We have fewer expirations. There is less demand as we move through the quarter. And we did see with that peak leasing has really moved from what was the end of June, July historically into May. So that seasonality comes down a little bit faster during the year. We see really strong renewals in both of those regions. So that is great to see and will help keep that revenue boosted. Ami Probandt: Got it. And then I guess on that note, are you doing any lease expiration management to try to shift more of your leases towards more of that May peak leasing season, especially as opposed to the winter where there's not a ton of demand in those upper Midwest markets? Anne Olson: Yes, always. So we are constantly watching that lease expiration profile. It's a very large part of our revenue management as we look to see what the most attractive lease term for us is as well as where we can drive pricing for those lease terms. So we have been consciously working on maintaining that. You may recall, Ami, several years ago, we kind of completely redid the lease expiration profile after not having managed it to match the demand cycle, and that's been a constant focus for us these past few years. Ami Probandt: Got it. And then last one for me. You've seen a pretty consistent trend of same-store revenue per home growth being above same-store rent growth. Is that mainly driven by RUBS? Or is there something else that's causing that spread to remain elevated? And do you think it's sustainable? Anne Olson: Yes, it is mostly driven by RUBS. We also have things like pet rents, and that is sustainable. That has grown over time where we see more and more people having that ancillary items on their lease. And then, Bhairav, do you want to comment on that as well? Bhairav Patel: Yes. And then you kind of think about it specifically on a quarter-to-quarter basis, there can be some timing-driven volatility. But overall, as Anne mentioned, it's really some of the other line items from a revenue standpoint. Operator: Our next question comes from Rich Anderson with Cantor Fitzgerald. Richard Anderson: Just a couple of really quick modeling questions first. So NAREIT FFO went up $0.02, Core FFO went down $0.02. Can you just -- what's the $0.04 swing factor in the normalized lines? Bhairav Patel: Yes. I mean I can look into it further. But overall, from a Core FFO standpoint, the key driver is really the G&A spike that we saw in Q3 that kind of stays with us in Q4. So that's really what's driving the Core FFO, and I can look into it further and tell you what the difference is between the two. Richard Anderson: Okay. And then in terms of expense growth, you talked a lot about tax true-ups and whatnot. But if I'm doing this right, the 4Q number is sort of very impressive from a year-over-year basis, something like 4% reduction in same-store expenses. Is that in the ballpark that what you're seeing? Or are we doing something wrong here? Bhairav Patel: Yes. So that's in the ballpark. One of the reasons is it's a favorable comp for us this quarter because we had some R&M expenses last year that were pushed into Q4 and some -- so that was really driving the R&M expense higher last year. So it is a favorable comp. There is some benefit from the valuations that we received in Colorado, plus we expect some additional benefit in some of the other jurisdictions. When you kind of put it all together, that is what's creating that year-over-year number that you're seeing is in the ballpark that we have as well. Richard Anderson: Okay. Great. All right. Now some real questions. So you've had some success in St. Cloud, as you mentioned, and you did better than you thought. Still the negative spread between sales and purchases is some 150, 200 basis points. Now as you look ahead into 2026, you're not going to give me guidance, I don't think. But do you think that, that spread will hold as you continue to pursue this trade strategy? Or is there something about the environment or where you might sell and where you might buy where that spread between buys and sells might change in one direction or another? Anne Olson: Yes, I'll start, and then I'll ask Grant to comment on where he thinks cap rates are and going into 2026 for the markets that we're targeting. I don't think there's going to be a big change. We haven't seen much volatility in cap rates overall, either in the regional markets where we may look to sell or the markets that we're buying in. With respect to the current portfolio and where we might target sales, where we may see some difference is if we do have the experience, particularly in Minneapolis that we're projecting into 2026, where they're well into the recovery, demand and absorption has been really strong, and we're expecting strong rent growth. We could see the cap rates on the sales -- on any sales in Minneapolis and even places like North Dakota, where we have had a really good experience and they've now had several years of very strong growth. We could see those come in a little bit. And then Grant, what do you think about any movement on target market cap rates? Grant Campbell: Yes. Target market cap rates have been pretty constant here recently, well-located core communities in Denver, pricing in the high 4s, Salt Lake City, mid- to high 4s. Core communities in Minneapolis pricing in the low 5s. And then when you slide into the Class B space, well-located Minneapolis or Denver B is generally, call it, 5.5% to 5.75%. We don't see, as we sit today, any significant change to that profile. I think one theme that we have seen as we've explored sales in markets like St. Cloud or talked to others is there really is a deep bid right now for the secondary and tertiary market products. So there's a lot of capital desiring to be in those locations. They can obtain financing that is attractive to them. So we've really seen a strong bid and strong pricing in those markets. So that's something we are monitoring as we think about our future actions and where would those cap rates settle. Anne Olson: Yes. We're clearly focused on what's that differential and what does it do to our earnings and the immediate future of our earnings. But we're really trying to balance that with what is the best growth profile for the company longer term and what provides us with the liquidity we need that's demanded by public market investors and where we can take the company from a growth perspective over a longer period of time. Richard Anderson: Great. Okay. And then on Denver, you mentioned maybe fortune to start to turn in 2027. It is a big market for you, of course. Have you given any thought to moving around within Denver? Or do you think that the exposure to Denver will change as your -- as the world around it changes? And the reason I ask is you could probably get some decent cap rates there if you were to sell some assets and reduce your exposure to Denver. I don't know that, that's your plan. But I'm just wondering if you're having any change of thought about your exposure to Denver and if there might be any transaction activity buys or sells, maybe you get in front of what will be a recovery eventually. I'm just curious if you have any change of heart around Denver and your process in the transaction market. Grant Campbell: We like our position in Denver. We like how our portfolio lays out geographically as well as the different product type offerings that we have within our portfolio. So I would say no concrete plans to significantly change that composition via transactions. With that said, we always pick up the phone if people reach out and have an idea or a thought, and we'll continue to do that. So if somebody reaches out regarding one of our Denver communities, we will listen to them. But overall, we like our position. I think more so, the exposure level that Denver provides within our portfolio will change as the world around it, as you alluded to, changes here over the course of 2026 and 2027. Richard Anderson: Great. And last for me, leverage ticks down to low 7s after you're done with everything that's on the plate right now. Do you foresee a 6 handle at some point in your future in 2026? Or should we be assuming kind of a 7-ish type of leverage number for you guys for now and for the foreseeable future? Bhairav Patel: Yes. I mean the 6 handle comes through some natural deleveraging as earnings grow. Obviously, as you know, there's some portfolio repositioning that we've been doing. So things may be volatile for a while, as you saw this year. But from our perspective, the focus always remains on managing it at -- in the low 7s at the moment and then letting it tick down with some natural deleveraging through earnings. Operator: Our next question comes from Mason Guell with Baird. Mason P. Guell: Which of your smaller markets do you expect to outperform next year? And then when do you expect your larger markets to take lead in the portfolio over your smaller markets? Anne Olson: Yes. I think we're really have a lot of confidence that North Dakota is going to continue to perform. It's been outperforming our other markets. We see that continuing into 2026. I think Minneapolis is going to be close on its tail next year with some really good tailwinds we have here, particularly with respect to how much demand we've seen in this market. And then I think it's 2027, as Grant kind of alluded to before, we're really seeing the dearth of new supply coming online that can impact that can impact growth rates overall. So next year, I'd keep a close eye on North Dakota again. And then into 2027, we might see Denver and Minneapolis really start to outpace that. Mason P. Guell: Great. And can you talk about what drove the lower disposition proceeds guidance? Anne Olson: I'm sorry, Mason. Can you repeat that question? Mason P. Guell: Yes. Just could you talk about what drove the lower disposition proceeds guidance? Bhairav Patel: Yes. Mason, overall, the disposition proceeds when you compare it for all the assets were in line. We outperformed in St. Cloud a little bit. Minneapolis came in a little bit below what we had initially expected. That is mostly driven by the fact that the portfolio in Minneapolis is a little disparate. It's a collection of different kind of assets, and we were prioritizing execution there through the sale to a single bidder, which helps us from a 1031 standpoint, which was an integral part of this overall recycling transaction. So a bunch of different factors led us to prioritize execution over just optimizing the proceeds given everything that was incorporated within the transaction. Operator: [Operator Instructions] Our next question comes from Buck Horne with Raymond James. Buck Horne: Just a couple of quick ones for me. It sounds like you're doing a great job on resident retention in this environment and managing through the supply and sounds like there's not a lot of movement from existing tenants. I'm just wondering, though, to what extent -- I mean, there's been a lot of talk about the weakening of the job market, particularly for young adults, recent college graduates, just kind of financial pressures that are building on kind of the younger cohort. Are you seeing any signs of that in your recent new lease traffic? Or any -- is there any degradation in the renter tenant profiles? Or what are you kind of seeing in terms of front door leasing demand? Anne Olson: Yes. This is a great question. We haven't seen anything. Now it's a little hard to bifurcate. So a couple of things that we have seen that we mentioned. Incomes continue to rise. So -- and rent-to-income ratios are staying pretty steady. I think we're at 22%. So our bad debt has held really low, which is great. So we feel great about the health of the renter. Retention is higher, as you mentioned. The average age of our resident has ticked up and the -- and also the average amount of time that their tenure with us overall is ticking up. So it's hard to say if you look at that age is going up. Is that an indication that we're not seeing as many younger renters coming to the market? Maybe. It could also just be a factor of the -- not as many people able to buy homes at the same age as they historically have. But we're not seeing any degradation in traffic overall other than just in Denver, the market -- the traffic has been a little softer in the market but no indication that we're -- there hasn't been a big spike in age of residents showing that we aren't getting that younger renters still in. We haven't seen a change in the average residents per household either. So there's really no evidence that people are starting to double up. If anything, Buck, it may bode well for us if they're moving home for their parents, that will create future demand for us. Buck Horne: Great. Great. I appreciate the color there. That's very helpful. And just last one, following up the value-add CapEx shift. I mean, would that -- it sounds like the hurdle rate is getting a little higher. Would you consider diverting some of those previously budgeted proceeds to share repurchases in the year-end? Anne Olson: Yes. I think when I -- the levers that we have to pull would be not only share repurchases, but debt reduction. So we're looking at every option. It's too small amount to really allocate in a meaningful way to new acquisitions, but definitely look at debt reduction and share repurchases as alternative uses of that capital. Operator: We currently have no further questions. So I'll hand back over to Anne for any closing remarks. Anne Olson: Yes. Thanks, everyone, for joining us today. We'd be remiss if we didn't acknowledge again our team who did such a great job this quarter. And we are going to continue into 2026, given the environment, we think we're putting up great results for our shareholders, and we're going to keep that at the forefront of everything we do. Have a great day. Operator: Thank you very much, Anne, and thank you, everyone, for joining. That concludes today's call. You may now disconnect your lines.