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Operator: Good morning, and welcome, everyone, to the Primoris Services Corporation Third Quarter 2025 Earnings Conference Call and Webcast. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Blake Holcomb, Vice President of Investor Relations. Please go ahead. Blake Holcomb: Good morning and welcome to the Primoris Third Quarter 2025 Earnings Conference Call. Joining me today with prepared comments are David King, Chairman and Interim President and Chief Executive Officer; and Ken Dodgen, Chief Financial Officer. Before we begin, I would like to make everyone aware of certain language contained in our safe harbor statement. The company cautions that certain statements made during this call are forward-looking and are subject to various risks and uncertainties. Actual results may differ materially from our projections and expectations. These risks and uncertainties are discussed in our reports filed with the SEC. Our forward-looking statements represent our outlook only as of today, November 4, 2025. We disclaim any obligation to update these statements, except as may be required by law. In addition, during this conference call, we will make reference to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures are available on the Investors section of our website and in our third quarter 2025 earnings press release, which was issued yesterday. I would now like to turn the call over to David King. David King: Thank you, Blake. Good morning, and thank you for joining us today to discuss our third quarter 2025 operational and financial results. Primoris had another great quarter, once again delivering record revenue, operating income and earnings. I am proud of our employees and their ability to execute at a high level, while providing our customers with safe, reliable service and driving profitable growth. Operating cash flow was also a highlight in the third quarter and further demonstrates the hard work we have put in to improve in this area. As a result of this emphasis, we have been able to make tremendous progress in delevering the balance sheet and allowing us to invest in the business to be well prepared for the surge in demand we are currently seeing across our end markets. I am particularly proud of how we have generated free cash flow and set new highs on our return on invested capital since making these metrics a priority. We are a company focused on the development of quality people and delivering quality projects for our clients. We continue to allocate our time and resources to capitalize on what we believe is a generational opportunity for our infrastructure solutions that will drive value for our shareholders. Last quarter, I discussed the significant demand on the horizon for power generation and the growing prospect of providing more services, which support the development of data centers. I want to reiterate that these and other opportunities remain squarely in front of us. The ramp-up in revenue, combined with the delay of a couple of larger dollar value projects, led to a higher-than-anticipated backlog burn rate in the Energy segment. The timing of when projects are signed and placed into backlog can [be due to] a number of factors, including changes in scope and design and the shifting of supply chain schedules. We continue to direct our attention toward the things we can control during the process and providing our customers with the resources they need from us to get the projects built timely. I want to emphasize that our lower than forecasted bookings in Q3 were not a result of projects being canceled or awarded to other service providers, but are instead being impacted by other circumstances that can affect the timing of executed contracts. Because of this, we remain highly confident that we will sign several high-value Energy segment projects in the coming quarters that will set us up for another successful year in 2026. I'll now turn to our performance for the quarter by segment. In the Utility segment, third quarter revenue was up double digits from the prior year. We also had double-digit backlog growth in utilities as demand for power, gas and communication services continues to surge. Leading the revenue growth was gas operations, where activity and margins remain resilient. We are seeing increased customer spend on development programs in the Midwest, Southeast and Texas that have enabled us to step up and capitalize on these trends. In regions with more variable activity, we have controlled costs to maintain solid margins. While the fourth quarter can bring unpredictable weather that can impact work schedules, our gas utility business appears to be on track for a record year in 2025. Communications revenue and margins were also up from the prior year driven by broadband expansion and an increase in major project build-outs. We believe the emergence of larger EPC network bills tied to data centers will continue to support growth in our Communications business. We are targeting over $100 million of these projects over the next few quarters, which if successful, would complement our fiber-to-home new build and maintenance programs. We are also monitoring how states are managing the potential for federal funds to further build out networks in underserved areas, which could be a catalyst in the Communications business that we are not currently building into our plans. Power Delivery had its best revenue quarter in recent years as demand is rapidly increasing in key geographies. More clients are releasing work orders from engineering at a faster pace, which is leading to increased activity and more favorable mix of work. These trends and customer conversations on upcoming plans helped to drive Utility segment backlog up from the prior quarter to an all-time high of nearly $6.6 billion. Margins continue to trend in the right direction for Power Delivery but were lower compared to the prior year as we did not have the benefit of storm work we had in 2024. We have more progress to make to achieve our longer-term Power Delivery goals, but I am pleased with the accomplishments of our teams and leaders over the past two years. We're in a great position to benefit from the expansion and hardening of the electric grid in many of the regions where it is most needed. And I believe our safety culture, expertise and ability to invest in the business will open the door for further growth across transmission, substation and distribution. Turning to the Energy segment. The Renewables business had a record revenue quarter as Utility-scale EPC and battery storage continued to accelerate. The higher-than-expected revenue growth in Renewables has been a main driver of the decrease in backlog and an area that has seen project signings push out a quarter or two. However, as mentioned earlier, we remain highly confident that we will sign several high-value projects in the coming quarters that will set us up for another successful year in 2026. The signing of the One Big Beautiful Bill and the subsequent treasury department guidance has allowed our customers to have a substantial volume of projects safe harbored for the next several years. This has provided increased stability and visibility to this market. However, customers are still navigating some uncertainty on tariffs that has slowed down the process of pricing and therefore, the signing of certain projects. The funnel of projects remains very healthy and is expanding with new Tier 1 customers wanting to work with us on their high-value projects. Based on our conversation with customers, we view this as a near-term adjustment to the timing of bookings and believe we will see backlog begin to build over the next few quarters. The battery storage market outlook is also beginning to improve after a couple of quarters of uncertainty. We're seeing the increased adoption of battery storage on upcoming projects, adding storage to previously constructed projects and a growing number of stand-alone projects as well. This is giving us increased confidence that we can have continued success and an attractive market growth. Industrial Services also saw impressive revenue growth from the prior year as natural gas generation activity has risen to a level not seen in over a decade. Primoris' track record for successful execution on gas generation projects has helped us earn an excellent reputation in the market. This has put us in a position of being a leader in the construction of gas-fired power facilities where growth is driven by the further electrification of the industry and data centers. We continue to take a disciplined approach to growth in this market but expect to have some sizable awards in the fourth quarter and into 2026 that will set us up for meaningful growth and accretive margins with good execution. The Pipeline business has faced challenges this year as revenues and margins partially offset the strong results in the quarter. Despite the recent headwinds in the business, our leadership has done well in managing the costs and keeping crew members active as we anticipate what appears to be an emerging upcycle. Headwinds impacting pipeline services have quickly reversed, and we're beginning to see tailwinds develop in this business line. We are seeing bids materialize for several large projects, and we anticipate the trend to shift toward the positive with awards as soon as this quarter. It would only take a few awards to see a revenue and margin benefit in the Energy segment and we are optimistic that 2026 will serve as the starting point. In summary, Primoris continues 2025's momentum with a record third quarter and we are energized about the future opportunities we have to take advantage of the significant tailwinds across our end markets. I'll now turn it over to Ken for more on our financial results. Ken Dodgen: Thanks, David, and good morning, everyone. Our Q3 revenue was nearly $2.2 billion, an increase of $529 million or 32% compared to the prior year, driven by double-digit growth in both the Energy and Utility segments. The Energy segment was up $475 million or 47% from the prior year, driven by increased renewables and industrial activity. In Renewables, project progress continues to accelerate resulting in revenue outpacing our expectations by over $400 million for the quarter and by over $900 million year-to-date. We have seen significant revenue pulled forward from Q4 and from 2026 driven by strong project execution and early delivery of major materials. We now expect Renewables revenue to be closer to $3 billion for the full year 2025, up from our previous estimate of $2.6 billion. Additionally, our Industrial business was up over $100 million compared to Q3 2024, driven by strong execution on gas power generation and other industrial work. The Utility segment was up over $70 million or 10.7% from the prior year, driven by higher activity across all service lines, led by Gas Operations and Power Delivery. Gross profit for the third quarter was $235.7 million, an increase of $37.2 million or 18.7% compared to the prior year. This was attributable to increased revenue partially offset by lower margins in both segments. As a result, gross margins were 10.8% for the quarter compared to 12% in the prior year. Looking at our segment results. The Utility segment gross profit was $86 million, essentially flat compared to the prior year, resulting in gross margins decreasing to 11.7% compared to 13.1% in the prior year. The lower gross margins were mainly due to a significant decrease in higher-margin storm work in the current quarter compared to the prior year. In fact, the benefit from storm work in Power Delivery is about a third of what we saw in Q3 of the prior year. Excluding storm work, utilities margins were comparable to the prior year. Despite not realizing this margin benefit, we are seeing quality performance in Power Delivery and the rest of Utility segment, including an increase in non-MSA work compared to the prior year, which is a strategic priority for us as we seek to improve margins in this segment. In the Energy segment, gross profit was $149.7 million for the quarter, an increase of $38.1 million or 34.2% from the prior year primarily due to higher revenue. Gross margins in the segment were 10.1%, down from 11% in the prior year. The decrease in margin was driven by fewer project closeouts in 2025 compared to the prior year. Pipeline margins were also a drag on margins during the quarter due to lower revenue and gross profit compared to Q3 of 2024. However, we are expecting to see some margin improvement in the segment as we close out the year and move into 2026. Looking at SG&A. Expenses in the third quarter were $97.7 million, which was in line with the prior year. As a percentage of revenue, SG&A declined 140 basis points from the prior year to 4.5%. This was driven by our record revenue and ongoing efforts to control administrative costs and improve our operating leverage. While SG&A could tick up slightly as we wrap up the year, we expect SG&A as a percent of revenue to be in the mid- to high 5% range for the full year. Net interest expense in the quarter was $7 million, down $10.9 million from the prior year, partly due to lower average debt balances and lower interest rates. Based on current trends and expectations, we are updating our guidance for interest expense to be between $30 million to $32 million for the full year, down from the $33 million to $37 million guidance we provided last quarter. This is due to our continued reduction in debt and lower interest rates. Our effective tax rate was down slightly because of some discrete tax impacts during the quarter. We now expect that our effective tax rate for the full year will be approximately 28.5%. Net income increased to $94.6 million or $1.73 per fully diluted share, both up around 61% from the prior year. Adjusted EPS increased by over 54% to $1.88 per fully diluted share, and adjusted EBITDA was $168.7 million, up 32% compared to the prior year, setting us on a course to achieve record earnings per share and adjusted EBITDA for the full year 2025. Transitioning to cash flow, Q3 cash from operations was a little over $180 million, bringing our year-to-date cash flow to more than $327 million. This represents a $117 million improvement in operating cash flow compared to the first 9 months of the year. The increase was driven by higher net income and a continued focus on working capital efficiency. Turning to the balance sheet. We closed Q3 with approximately $431 million of cash and total liquidity of $746 million. We also paid down $100 million on our term loan during the quarter, helping to lower our trailing 12-month net debt-to-EBITDA ratio to 0.1x EBITDA. Our balance sheet strength allows us to invest in the resources required to meet our increasing organic opportunities, while allowing flexibility to add scale or new services through M&A that meet our financial and strategic criteria. A disciplined approach to accretive M&A remains a focus for us, and we are encouraged by the quality of acquisition targets we are currently seeing in the market. Total backlog at the end of Q3 was around $11.1 billion, down around $430 million sequentially from Q2. Fixed backlog was lower by about $921 million due to a combination of higher revenue burn and the timing of Energy segment bookings. As David mentioned, we have seen the signing of some contracts pushed to the right about 3 to 6 months as our customers navigated through all of the volatility and change during the past 3 quarters. But our large funnel of high-quality opportunities is still very strong, and we view this backlog decline as temporary. Although bookings and our progress on work and backlog will vary quarter-to-quarter, we have a high degree of visibility to new awards in the coming quarters for the Energy segment across solar and natural gas generation and midstream pipeline. MSA backlog is up $492 million from Q2, driven by increased activity across our utilities businesses and particularly Power Delivery as customer investment in the power grid ramps. Before turning it back over to David, I'll close with our updated guidance. We are increasing EPS guidance to $4.75 to $4.95 per fully diluted share and adjusted EPS guidance to $5.35 to $5.55 per fully diluted share. And even though we had about $10 million of adjusted EBITDA pulled forward from Q4 into Q3, we are also raising our adjusted EBITDA guidance to $510 million to $530 million for the full year 2025, with the opportunity to achieve the upper end of that range with good weather in Q4. Additionally, we are increasing the range of our gross capital expenditures by $10 million at the midpoint to $110 million to $130 million to support this continued growth. We have had an excellent first 3 quarters of the year generating cash flow, paying down debt and growing earnings. As we move to close out the year, we are confident that we will finish strong and carry positive momentum into 2026. I'll now turn it back over to David. David King: Thanks, Ken. Before we open the call for questions, I'd like to recap a couple of key points of the quarter. First, Primoris is operating at an extremely high level, and we are seeing the results. We have tailored our strategy to emphasize improved margins, earnings growth, cash flow generation and the efficient allocation of capital and we are experiencing success in each of these areas. This is a direct result of our company culture and the dedication of our people in the field and those who support them. Second, the outlook for Primoris remains as good as we have seen and we have the people and our customer relationships to take advantage of the opportunities ahead of us. In all areas of our business, we will continue to work with and on behalf of our customers to develop the solutions to meet the infrastructure needs of the communities we serve. There's a lot of work to be done, and we are in a prime position to be a major contributor to the growth and modernization of the utility and energy infrastructure in North America. Lastly, I want to thank the people at Primoris for their support and efforts during my time as interim CEO. It has been a privilege to work alongside them for these past few quarters, and I'm grateful to have had the opportunity to play a role in transitioning Primoris into its next chapter led by Koti Vadlamudi. Koti is a talented and tenured executive that meets all the criteria we are looking for in the next leader of Primoris. I and the rest of the Board are pleased to have him join us, and we look forward to supporting him. It is an exciting time to be in our industry and especially to be part of the Primoris team. I have a high degree of confidence that the best years of Primoris are in front of us. I want to encourage our teams to maintain the high standard of execution they have through the first 9 months of the year and close out 2025 strong with a look to the future. We will now open up the call for your questions. Operator: [Operator Instructions] We'll take our first question from Philip Shen at ROTH Capital Partners. Philip Shen: You guys had previously expected fiscal '25 order intake to be back-half weighted. Dave, you just shared in your prepared remarks that you expect Energy bookings to improve in the coming quarters. Can you provide some additional color on how bookings might look so far in this quarter, Q4? And then additional color on how they might trend? David King: Sure, Philip. Thanks for the question. Yes, we've indicated even in some of my opening remarks that some of the timing for some of the energy segment jobs were probably going to be pushed into this Q4 timeframe. And indeed, we've seen that. I'll let Ken kind of give you some rough numbers in a moment, but I would tell you that we're looking to have a very good book-to-bill in our Energy segment and possibly in other areas. Also in this Q4, we've already booked some pretty nice awards and currently doing some paperwork to continue firming up some additional awards in Q4. So just as [indiscernible] said, I'm pretty comfortable with where we're going to end up relative to Q4 bookings. So Ken? Ken Dodgen: Yes. Phil, the other thing I would add is while we definitely entered the year thinking that it would be back-half loaded, what we weren't anticipating is all the noise from tariffs and OB3 and everything else. So all that's done in this kind of as we mentioned in our opening comments, is kind of shift everything out a quarter to as much as 2 quarters in a few cases. But looking at Q4 already, just for the Energy segment alone, we've already booked over $600 million. We have another $600 million that should book within the next 30 days. And for the Energy segment, we're expecting a book-to-bill well north of 1 for Q4, maybe as high as 1.2 or 1.3, depending on how the rest of the quarter closes out. Philip Shen: Great. That color is very helpful. And shifting over to -- or staying with the Energy segment. Book-to-bill was 0.3x. You just talked about how that could be strong. How much of the $300 million Q3 revenue in the Energy segment was attributable to a pull forward of demand timing? And what do you think Q4 Energy revenue looks like? You talked about bookings, but let's talk about the revenue now. Ken Dodgen: Yes. The pull forward on revenue was at least $100 million. And I don't have the exact numbers in front of me right now, but I know there was comfortably $100-plus million of revenue that was pulled forward that led to the EBITDA pull forward as well. Revenue for Q4, I've got a ballpark number of about $1.2 billion for Energy in Q4. Operator: We'll take our next question from Sangita Jain at KeyBanc Capital Markets. Sangita Jain: So I know you have discussed a lot about the renewables bookings being pushed out. Can we talk about the gas generation bookings, maybe how the funnel of opportunities looks there? And if there were any delays in bookings in that subsegment? David King: Sure, Sangita. Thanks for the question again. Yes, there was a little bit that kept being pushed out. Remember, we're trying to work with our customers to get that price, that fixed price and some of the delays relative to some of the materials that needed in the project, getting firm pricing and things like that kind of pushed them a little bit to the right on us. But as Ken mentioned, we're seeing those now become bookings. And so again, I'm seeing that delay in some of those bookings getting behind us, especially in the Q4. And then we're still looking at fairly strong bookings in Q1 and Q2 also. Sangita Jain: Got it. And then on the comment in your press release about weather impacting some of your projects in 3Q. Are those projects all done? Or should we expect more kind of like margin leakage from those into 4Q? Ken Dodgen: Yes. So Sangita, I think the -- so the short answer is not all the projects are done. It was pretty heavily focused on the pipeline part of our business and just a couple of projects there. As those projects finish in Q4 and burn-off, we may have a little bit of margin drag in Q4, but that should be it. Operator: Next, we'll move to Lee Jagoda at CJS Securities. Lee Jagoda: I guess for starters, David, it was fun the second time around and if Koti listening, he's going to have to work on his southern accent a little bit. David King: I agree, Lee. I agree. Lee Jagoda: If we can start with the utility side of the business, you've had 4 straight quarters of double-digit top line organic growth. And obviously, the backlog both on a year-over-year basis and a sequential basis has improved somewhere between 10% and 20%, depending on which metrics you're looking at. If you're sitting here today, how sustainable is that double-digit organic growth on the utility side as we move, not just into Q4 but as we look out into 2026? David King: Well, let me start out, and then I'll let Ken add some more color as he sees fit. We did increase our range for those utilities between that 10% and 12% for the year, as you know, we mentioned that last time. I do think those are sustainable going in. The demand, as you've seen, Lee, has been pretty strong in our Utility segment. We're still seeing good build-outs on the communication side and the utilities, good build-outs on the gas side -- gas utility side of it. So I would say that I'm still feeling pretty comfortable that we can maintain those. Lee Jagoda: Well, that's just on the margin side, that 10% to 12%. I'm more talking on the revenue side. You've done 10% plus the last 4 quarters in a row -- no, no, no, topline growth. David King: Okay. On the top line. Yes, the revenue growth has been strongly aided by the gas and communication strength that we're seeing. And again, we're still seeing just on the revenue side, a tremendous demand out there for our services, continuing to build teams, continuing to train personnel. So I still see that as a pretty strong market for us to continue to grow in. Lee Jagoda: And then one more, and I'll hop back in the queue here. So Ken, I think you mentioned $1 million of pull forward year-to-date in Energy. And as we continue to pull forward, some of that's got to come from the future beyond 2025. So despite all these large bookings, and I guess, under the framework, we had been expecting $300-ish million of revenue improvement from Energy each of the next couple of years, how does that set up for revenue growth within the Energy segment and Renewables specifically in 2026? Ken Dodgen: Yes. Look, the vast majority of that is in the Renewables business. So as we started talking about last quarter, I think our revenue growth is going to be much less for Renewables going into '26, probably a couple of hundred million or something like that is my best guess right now. We're still firming up our '26 numbers. Where we see the revenue growth opportunity still remaining strong, though, going into '26 is in our Industrial part of our business, predominantly the gas generation that we've been talking about and in Pipeline. Despite some of the margin issues we experienced this quarter, Pipeline -- the pipeline opportunities for revenue growth are pretty significant right now. So we could see $100 million to $200 million of revenue growth just in Pipeline alone going into next year. David King: Yes. And Lee, I would add one more thing on Ken's comments. The kind of pipeline projects we're looking at now are really down the fairway for us through the larger diameter pipeline projects. So I feel like we'll perform better on those in the future than what we've been struggling with on some of the work that we've seen over this last year or so. Operator: We'll take our next question from Julien Dumoulin-Smith at Jefferies. Julien Dumoulin-Smith: Koti, welcome to the crew and it's been a pleasure otherwise. Look, let me -- if I can come back to what you were saying just there a second ago. I mean, what's like the rate of growth there on the Pipeline side of the business? I mean, it seems like what you just said a moment ago implies a pretty steep ramp versus where you're starting. And then also maybe to go back to another comment from earlier. Given some of the delay in just booking some of these Renewable projects, for instance, what does that say about the cadence of revenue growth here over the next few years on Renewables? Is it more back-end weighted to '27, '28 versus '26? Or how would you set expectations? I know you guys used to have those long-term Renewable revenue growth targets. Ken Dodgen: Yes. So I'll go in reverse order. On the -- on the Renewable side, look, I think the cadence is actually coming down for '26, as I mentioned. And then we're looking for kind of a return to normal going into '27 and '28. The softness in '26 is pretty heavily driven by the delay in bookings for renewals tied to all the noise that we've had this year. The good news is, as we've been talking about is, that funnel is as strong as ever, and our customer base is -- has a lot of projects they want us to build. Just switching back to your first question on Pipeline. Pipeline is right now in '25, a $300 million to $350 million revenue business for us. All it takes is one or two of those projects that David is talking about for it to jump $100 million to $150 million going into '26. Julien Dumoulin-Smith: And then just given the size of those businesses there, what does that do for operating for margins here in operating margins in terms of as you think about scaling up on that front, especially -- well, I'll leave it there. Ken Dodgen: Yes. I mean nothing really on the renewable side since it's already a fairly scaled business. On the Pipeline side, that's where there's some margin accretion opportunity going into '26 as we get that business back up to scale. David King: And Julien, my comment also add, and I've added it each time is on the pipeline side of the business, those book and burn very quickly. So they'll -- usually what you book in 1 quarter, you're going to burn over the next 3 to 4 quarters. So it burns very quickly. Julien Dumoulin-Smith: Yes. Absolutely. I hear you. Excellent. Actually, just to clarify your earlier comment, do you think it's the top of the cycle of '28? Are you seeing incremental interest in '29 and '30 given the safe harbor comments you made there? Does it stay at that '28 level or even compound? Ken Dodgen: I don't know if it compounds, but yes, we expect strong bookings and revenue kind of through the end of the safe harbor period. Julien Dumoulin-Smith: Okay. Excellent. I appreciate the forward-looking view. Operator: Next, we'll move to Joseph Osha at Guggenheim Partners. Joseph Osha: First, David, congratulations on your interim stewardship here. It's been great working with you. Two questions. Just following up a bit on Julien's question. Are you guys any -- or do you think you're going to see any attempt to surge solar completions in '27 as people try and get in under this place in service deadline? Or is there enough safe harbor that, that just doesn't matter? And then I have a follow-up. Ken Dodgen: Yes, Joe. On the safe harbor side, no, we've got -- all of our customers are telling us they've got enough safe harbor that they don't see any issues with that. Joseph Osha: All right. So no kind of '27 surge that you see, everybody is just plowing ahead because they've got enough safe harbor. David King: Correct. Ken Dodgen: Correct. Joseph Osha: And then you guys have talked a little bit about some of the single cycle gas business you've got in particular behind defense. I think you said Stargate, I'm just wondering, as you think about your single-cycle gas business going forward, how does that break down between kind of traditional front of the meter peak or and some of these opportunities sitting next to data centers inside defense? And how big could that get? David King: Well, we're currently working on about four projects, not all of them in data centers, but we all -- we obviously are working on Stargate. We've been awarded and it's been announced also that we're starting to do the Power Gen side on the FERMI project, the one went up there in the Amarillo, Texas area. And so that market for us on the simple cycle can continue to grow. In fact, we've built out several teams getting ready for that surge, and we see a tremendous funnel of opportunities in front of us. I'll let Ken kind of mention a number in a moment because we've looked at potentially how big we think that revenue could get in that market for us next year. Ken Dodgen: Yes. Joe, I think next year, we grow top line $100 million to $150 million easily, maybe with a little upside to that. And just to kind of firm up what David was saying, there's a lot of moving pieces right now, but I -- going forward, I think it's probably going to be about a third behind the meter. That's a ballpark number and two-thirds stand-alone more brownfield sites that are just either merchant or contracted. Joseph Osha: Okay. And guys, can I ask one very quick follow-up. I'm really sorry. As you look at turbine supply, are you finding you have to kind of go to sort of Cat or Atlas Copco or something? Or are you able to -- are your customers able to get turbines from the Big 3? Ken Dodgen: They're getting in from the Big 3 and from Cat and others. So it depends on the type of turbines and size of turbines they're getting and where they are in the stack. Operator: And next, we'll go to Brent Thielman at D.A. Davidson. Brent Thielman: I had a question on the Utility backlog growth has been pretty notable. It looks like Power Delivery a decent part of that this year. And I guess my question, Ken, is, as we think about that becoming potentially a bigger piece of the segment as you convert that business, why wouldn't it be accretive to the margin profile as we look out 12, 24-plus months? Ken Dodgen: Yes. It will be accretive to the margin profile, especially as we continue to build out our project capabilities that we've talked about. A big chunk of the backlog growth we've seen thus far has been really on the distribution side, which tends to be a little bit lower margin for us. But the project work is coming and it is growing. Some of it's going to be done within the MSAs and some of it's going to be done outside the MSAs. Brent Thielman: Got it. And David, since I think you commented on it, that the relationship with FERMI, is a portion of that already in the backlog? Is there more to come? If you could just expand on that, that would great. David King: No, it wasn't in the backlog. We were awarded on LNTP. It will be in Q4 backlog. So that was part of the projects I was mentioning that we just got awarded in Q4. Operator: We'll go next to Sean Milligan at Needham. Sean Milligan: Two questions. The first one real quick on the gas power side and margin expectations there. As you grow that business, do we think about margins being accretive to energy margins on the gross side? Ken Dodgen: They will be accretive. They're running upper end of that 10% to 12% range. Sean Milligan: Okay. Great. And then on the data center piece, I know last quarter, you kind of outlined some of the pipeline there and the bids you had outstanding. And you commented that, I guess, it's mostly outside the box work. Curious about as you transition '26, '27, are you looking at getting inside the box? Can you do that organically by maybe repositioning teams? Or do you need to do that inorganically? David King: To answer your question, yes, we are looking at getting inside the box. That was one of the strategic initiatives that we put underway that might be a nice type of an acquisition. But from an organic standpoint, we could limitedly get into that. That's probably not the most optimum route for us to get inside that box. And so that's why we're -- we've got that as a strategic from an acquisition perspective. Operator: We'll move next to Adam Thalhimer at Thompson Davis. Adam Thalhimer: Heck of a beat in Q3, congrats. I wanted to ask what you are seeing in the pipeline bidding market and what the potential for Primoris could be there in 2026? David King: Wow. Well, let me mention this way. I was looking at a sales information the other day, some marketing data and where we might have been seeing -- and I mentioned this on my call, where we might have been seeing $200 million type of opportunities for us for several quarters. If that thing has now went to well over $1 billion to $2 billion plus of types of opportunities in our funnel for the Pipeline side. We are optimistic that we might be able to close some pipeline projects as early as this Q4 and then also some additional ones coming in that Q1, Q2. So as I mentioned in the comments, what was a headwind has rapidly turned to a tailwind and we're being selective on which ones we actually want to go after to obviously produce the best margin performance we can. Adam Thalhimer: Sounds great. And then in the prepared comments, you also mentioned, I think it was a couple of hundred million of projects for the next couple of quarters, broadband expansion, major network build-outs. So I was hoping you could expand on that also. David King: Yes. We are seeing more of that. There's a lot of -- in the data center side, there's a lot of fiber in the data center and getting it to the fiber networks. The fiber-to-home is going to slow down a little bit, but we are seeing a tremendous ramp up in the other types of fiber network build outs. So that's looking positive for us to grow that business again next year. Ken Dodgen: Yes, Adam, that's the fiber loop we've been talking about, the day loops and then also the middle mile stuff that we started doing. Adam Thalhimer: Okay. And the last one for me was just like your traditional civil business. What kind of trends you're seeing there, demand trends? David King: I love that question because our groups have done a tremendous job in making that unit a very profitable business unit for us. We kept the revenue top line in that -- Ken, do you want to mention it? Ken Dodgen: Yes, Adam, the revenues have been just kind of gradually growing like $30 million a year. We'll do $550 million to $575 million this year. Next year, we'll probably do $600 million to $625 million or something like that. As we talked about, it's just a good solid cash cow for us. It's generating very good margins, and we just kind of let it run its thing. David King: The teams that we've got right now, Adam, are performing extremely well in the markets they're in. And like I say, we'll grow the top line a little bit each year and just making sure that, that teams can continue to handle and build out as necessary to keep those margins where we want them. So it's really controlling the margin level more than it is the top line. Operator: [Operator Instructions] Next, we'll go to Avi Jaroslawicz at UBS. Avinatan Jaroslawicz: So just in terms of the timing delays of signing awards in Energy, was that pretty even across the verticals? Or was there noise that led to more delays for renewables or pipelines? Is it just around the tariff cost uncertainty? Or were there other factors? David King: I'll start out and then anything Ken can add as he needs to. But I would tell you, it's more on the Renewables side. As we were looking -- as you know, all that noise that we were getting out there on the One Big Beautiful Bill and the tariffs, it was causing some of our customers to look at a lot of different supply chains, which meant that we had to redo some engineering and look at -- before we could really firm up our cost to them. And so it wasn't a matter, I think I said on my earnings call, that we lost any projects or any projects were delayed or not delayed, but any projects were canceled, it was a matter of we needed that extra timing and so did our customers to get the right supply chain in, so we could firm up the price and get ready to sign those projects. And then indeed, that's what we're talking about happening in Q4 and then also in Q1. Avinatan Jaroslawicz: Okay. Got it. And then, Ken, I think you noted that good weather in Q4 could allow you to hit the upper end of guidance. Is there anything that could push you above the upper end? How are you thinking about that? And also, do you have any storm restoration work in Q4 embedded in the guidance? Ken Dodgen: Yes. We never put storm restoration in any of our forecasts. So there's none in there. And then look, to the upside, it's going to be a weather issue. It's going to be project closeouts, other things like that, that will drive us to the upper end. Operator: And that concludes our Q&A session. I will now turn the conference back over to David King for closing remarks. David King: Thank you for your questions and interest in Primoris. We are pleased with our third quarter and year-to-date results and look forward to carrying this momentum in the remainder of the year and into 2026. Thank you, and we look forward to updating you next quarter. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for joining today's Capital Southwest Second Quarter Fiscal Year 2026 Earnings Call. Participating on the call today are Michael Sarner, Chief Executive Officer; Chris Rehberger, Chief Financial Officer; Josh Weinstein, Chief Investment Officer; and Amy Baker, Executive Vice President, Accounting. I will now turn the call over to Amy Baker. Amy L. Baker: Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information and management's expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other reason after the date of this press release, except as required by law. I will now hand the call over to our President and Chief Executive Officer, Michael Sarner. Michael Sarner: Thanks, Amy, and thank you, everyone, for joining us for our second quarter fiscal year 2026 earnings call. We're pleased to be with you today to discuss our second fiscal quarter as well as share our observations on the current market environment. During the second fiscal quarter, we generated pretax net investment income of $0.61 per share, Additionally, we were able to increase our undistributed taxable income balance to $1.13 per share from $1 per share as of the end of the prior quarter. Over the last 12 months, we've harvested $44.8 million in realized gains from equity exits, which is the main driver of our growth in UTI per share from $0.64 in September 2024 to $1.13 today. Furthermore, our Board of Directors has declared a total of $0.58 in regular dividends for the quarter, payable monthly in each of October, November and December 2025, and has also declared a quarterly supplemental dividend of $0.06 per share, bringing total dividends declared for the December quarter to $0.64 per share. On the capitalization front, we successfully raised $350 million in aggregate principal of 5.95% notes due 2030. Subsequent to quarter end, the proceeds from these notes were partially used to redeem in full our outstanding $150 million notes due October 2026 and our $71.9 million notes due August 2028. Importantly, the redemption of these notes did not require a make-whole premium to be paid in either case. We believe this new capital enhances the strength of our balance sheet and alleviates any concerns surrounding near-term bond maturities with our earliest unsecured maturity now in fiscal year 2030. Finally, we raised approximately $40 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $22.81 per share or 137% of the prevailing NAV per share. Deal flow in the lower middle market continued to be robust this quarter with $245 million in total new commitments to 7 new portfolio companies and 10 existing portfolio companies. Add-on financings continue to be an important source of originations for us as approximately 32% of the total capital commitments during the quarter were follow-on financings in performing portfolio companies. Over the last 12 months, add-ons as a percentage of total new commitments have been 39%. So this is clearly a strong source of origination volume in deals we know well and have experience with the management team and sponsor. Additionally, the weighted average spread on our new commitments this quarter was approximately 6.5%, which we view as strong in a tight spread environment. I will now hand the call over to Josh to review more specifics of our investment activity and the market environment. Josh Weinstein: Thanks, Michael. This quarter, we deployed a total of $166 million of new committed capital, including $162 million in first lien senior secured debt and $3 million of equity across 7 new portfolio companies. In addition, we closed add-on financings for 10 existing portfolio companies, consisting of $79 million in first lien senior secured debt and $1 million in equity. Our on-balance sheet credit portfolio ended the quarter at $1.7 billion, representing year-over-year growth of 24% from $1.4 billion as of September 2024. For the current quarter, 100% of the new portfolio company debt originations were first lien senior secured. And as of the end of the quarter, 99% of the credit portfolio was first lien senior secured with a weighted average exposure per company of only 0.9%. We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet. The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms. Currently, approximately 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies as well as the potential for junior capital support if needed. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies, pari passu with the private equity firm when we believe the equity thesis is compelling. As of the end of the quarter, our equity co-investment portfolio consisted of 83 investments with a total fair value of $172 million, representing 9% of our total portfolio at fair value. Our equity portfolio was marked at 126% of our cost, representing $35.8 million in embedded unrealized appreciation or $0.63 per share. Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, often resulting from the institutionalization of the businesses by experienced private equity firms as well as the significant value accretion potential from strategic add-on acquisitions. Equity co-investments across our portfolio provide our shareholders with the potential for asset value appreciation as well as equity distributions to Capital Southwest over time. Consistent with previous quarters, the lower middle market continues to be quite competitive as this segment of the market is highly attractive to both bank and nonbank lenders. While this has resulted in tight loan pricing for high-quality opportunities that are not exposed to the macroeconomic uncertainty, the depth and strength of the relationships our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk return profiles. As a point of reference, currently, there are 85 unique private equity firms represented across our investment portfolio. Additionally, in the last 12 months, we closed 17 new platforms with financial sponsors with which we had not previously closed the deal, demonstrating our continued penetration in the market. Since the launch of our credit strategy, we have completed transactions with over 120 different private equity firms across the country, including over 20% with which we have completed multiple transactions. Our portfolio currently consists of 126 portfolio companies weighted 89.9% to first lien senior secured debt, 0.9% to second lien senior secured debt and 9.1% to equity co-investments. The credit portfolio had a weighted average yield of 11.5% and weighted average leverage through our security of 3.5x EBITDA. We continue to be pleased with the operating performance across our loan portfolio. All our loans upon origination are initially assigned an investment rating of 2 on a 5-point scale, with 1 being the highest rating and 5 being the lowest rating. Overall, the portfolio remains healthy with approximately 91% of the portfolio at fair value rated in one of the top 2 categories, a 1 or 2. Cash flow coverage of debt service obligations has reached 3.6x, the strongest level in the past 3 years, reflecting an improvement from the 2.9x low observed during the peak of base rates. This enhanced coverage underscores the strength of our portfolio with our loans averaging approximately 43% of portfolio company enterprise value. Our portfolio continues to be broadly diversified across industries, and our average exposure per company is less than 1% of investment assets, which gives us great comfort in the overall risk profile of our portfolio. For the new platform deals we closed in the September quarter, the weighted average senior leverage level was 3.6x debt to EBITDA and the weighted average loan-to-value level was 36%, resulting in significant equity capital cushion below our debt. Over the past 12 months, new platform originations have averaged senior leverage of 3.5x debt to EBITDA and 38% loan-to-value, which highlights our consistent track record of conservative underwriting on new originations. As Michael mentioned earlier, we believe our balance sheet is well positioned with low leverage and significant liquidity, which allows us to continue to be active and opportunistic in all economic environments. I will now hand the call over to Chris to review the specifics of our financial performance for the quarter. Chris Rehberger: Thanks, Josh. Specific to our performance for the quarter, pretax net investment income was $34 million or $0.61 per share. For the quarter, total investment income increased to $56.9 million from $55.9 million in the prior quarter. The increase was driven primarily by a $1.3 million increase in fees and other income, which was offset by a decrease of approximately $500,000 in PIK income compared to the prior quarter. Importantly, PIK as a percentage of our total investment income decreased to 4.9% as compared to 5.8% in the prior quarter. Additionally, as of the end of the quarter, our loans on nonaccrual represented 1% of our investment portfolio at fair value. During the quarter, we paid out a $0.58 per share regular dividend and a $0.06 per share supplemental dividend. For the December 2025 quarter, our Board has declared a total of $0.58 per share in regular dividends payable monthly in each of October, November and December 2025, while also maintaining the supplemental dividend at $0.06 per share, bringing total dividends to $0.64 per share for the December 2025 quarter. We continued our consistent track record of regular dividend coverage with 104% coverage for the 12 months ended September 30, 2025, and 110% cumulative coverage since the launch of our credit strategy. We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current UTI balance of $1.13 per share and the expectation that we will continue to harvest gains over time from our sizable unrealized appreciation balance on the equity portfolio. LTM operating leverage ended the quarter at 1.6%, a slight decrease from the prior quarter. Our operating leverage is significantly better than the BDC industry average of approximately 2.7%, and we believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage a best-in-class BDC. The company's NAV per share at the end of the quarter was $16.62 per share, an increase from $16.59 per share in the prior quarter. The primary driver of the NAV per share increase was the accretion from the ATM equity program during the quarter. As Michael mentioned, during the quarter, we successfully raised $350 million in new 5.95% unsecured notes due September 23. Subsequent to quarter end, the proceeds from these notes were partially used to redeem in full our $71.9 million August 2028 notes and $150 million October 2026 notes with no make-whole payment required on either redemption. The cost of the $350 million notes at 5.95% fixed was approximately breakeven with the cost of the debt we subsequently paid off, inclusive of the secured credit facilities. We view this capital raise as a highly favorable outcome for both the company and its shareholders as it strengthens our balance sheet and positions us to thrive across a wide range of capital markets environments. We are pleased to report that our balance sheet liquidity is robust with approximately $719 million in cash and undrawn leverage commitments on our 2 credit facilities, which represents over 2x the $334 million of unfunded commitments we had across our portfolio as of the end of the quarter. Our regulatory leverage ended the quarter at a debt-to-equity ratio of 0.91:1, up from 0.82:1 as of the prior quarter. However, given that the $350 million bond issuance occurred during the September quarter and the bond redemptions occurred subsequent to quarter end, we ended the quarter with significant cash on the balance sheet. Net leverage, which assumes paying down outstanding debt liabilities with cash on hand as of 9/30 would result in pro forma regulatory leverage of 0.82x. While our optimal target leverage continues to be in the 0.8 to 0.95 range, we continue to weigh the impacts of the current macroeconomic landscape and intend to maintain a regulatory leverage cushion, which will mitigate capital markets volatility. We will continue to methodically and opportunistically raise secured and unsecured debt capital as well as equity capital through our ATM program to ensure we maintain significant liquidity and conservative balance sheet construction with adequate covenant cushions. I will now hand the call back to Michael for some final comments. Michael Sarner: Thank you, Chris, Josh and Amy and all the employees who help us tell the story each and every quarter. And thank you, everyone, for joining us today. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Brian McKenna of Citizens. Brian Mckenna: So it's clearly a strong quarter of origination activity. It does feel like industry-wide M&A has picked up pretty meaningfully even since the last earnings call. So what does the pipeline look like heading into year-end? And then is there a way to think about the size of the pipeline today relative to the last quarter or 2 or even a year ago? Michael Sarner: Yes. Look, we definitely have seen, at least in these 4 walls, a significant uptick just in the size of the pipeline, top of the funnel. I think we did $248 million this past quarter and had 7 platform companies and 10 add-ons. I think the add-ons has been a steady drip, and that's been pretty consistent. I think we'll continue to see 8 to 12 transactions a quarter. From the new origination side, I think this coming quarter, the 12/31 is probably going to look based on what we're seeing today, similar volume to what we saw in the 9/30 quarter. And then looking ahead, it just feels like the -- our principals, MDs, we've made significant headway with sponsor activity, and we continue to see a lot of their quality deals. And so we don't really see any reason for the growth to slow down. So I think where we used to originate $100 million to $125 million a quarter, I think we're doing something closer to $150 million to $200 million on a normal quarter. Brian Mckenna: Okay. That's helpful. And then just for my follow-up, Michael, you've been CEO for a few quarters now. Can you just remind us of your top priorities for the firm heading into calendar 2026? You've also made some early changes like moving to a monthly regular dividend. But is there anything else you can do that ultimately benefit shareholders? Michael Sarner: Yes. We've mentioned on previous calls that we're looking to monetize our investment platform to enhance our competitive position in the market as well as potentially bring in fees and additional economics for what we do. So certainly, that -- we spent quite a bit of time on the road. We think that -- I think I said in the previous call that we have potential opportunities in front of us that could be closing in the near time. So that's something that we're looking at. We since we -- in the last 8 months, we've grown a portfolio operations group internally. That's something that was -- I thought was an important part of the process to scalability. And we continue to look to add originators to the platform. So I think it's just building for growth because coupling -- taking these 2 questions together, we've seen really remarkable growth on deal volume, which doesn't always portend to deals that are closed, but getting that funnel larger leads to better quality deals. So we're definitely -- there's a focus internally. Our operating leverage is quite low in the market, but we are looking to continually add to our staff so that we can be ready for the growth that comes. Operator: Our next question comes from the line of Doug Harter of UBS. Douglas Harter: I'm hoping you could just talk a little bit more about credit quality and kind of what you're seeing in the underlying portfolio companies. Any change in kind of their growth or profitability and just kind of how you're thinking about the credit outlook over the coming quarters? Michael Sarner: Yes, I'll give my remarks, and I think, Josh, you should as well. But I mean we just looked at it over the last 12 months, the growth in EBITDA and revenue of our existing portfolio company has been about 10% growth annually, which is still very healthy. If you look back maybe 18 months, 24 months ago, it might have been something closer to 15%. So it slowed a bit. But when we're looking at our individual portfolio companies, there they're performing extremely well. We're not really seeing any one particular industry that has issues. The one thing that's gotten more difficult, I think, in the boardroom is just the changing environment in terms of what's coming out of the White House and how it impacts potential industries on a go-forward basis, right? Things -- nothing has stayed the same. I feel like we've got our nose buried in the news more today than we ever have to make certain that we understand the impact on our portfolio, but also what's investable going forward. Josh, do you have anything? Josh Weinstein: Yes. I mean, look, we have over 100 portfolio companies in the lower middle market. So obviously, not all of them are going to perform really well or as expected. But we have created a very diversified by industry and granular by company portfolio. So feel pretty comfortable with where we sit today. Michael Sarner: And the other thing I'd add is like when we look at the deals we're doing, as competitive as the environment has been, which has led to spread compression, the loan-to-value and the leverage of these deals has stayed very conservative and consistent. I mean we look at it, I think, over the last 9 months, we've seen, I think it was 36% loan-to-value and 3.4x leverage. So companies aren't stretching. They're just basically the portfolio -- the borrowers are getting lower spreads for sort of the same amount of debt. So that's -- for us, that also in a market where there was certainly a feeding frenzy over the last 12 months, the fact that, that discipline maintained is a strong -- project strong going forward. Operator: Our next question comes from the line of Mickey Schleien of Clear Street. Mickey Schleien: In your internal ratings, you're showing about 9% of the debt portfolio performing below expectations. It looks like those are names like Bradner, Apple Roofing, [ Monster Script ], LL Flex, U.S. Telepacific and Everest. How do you describe the trends overall affecting those companies and their outlook? Michael Sarner: Well, let me -- I want to say one thing. When we look at our watch list and you compare us to the upper middle market, one thing to note is the leverage levels that we get in at are much lower than others. So they're 2.5 or 3x, and they have covenant cushions of 30%. So when we have a default in our portfolio, these credits are defaulting somewhere between 4 and 6x. So I'd say that to sort of frame that these companies aren't in dire situations when they show up on our watch list. They are obviously having issues, but they have private equity sponsors that are supporting the deals. In terms of the individual. Josh Weinstein: I kind of consistent with what I was just talking about, it's obviously a diversified portfolio, and we obviously keep track on the industry breakouts of the underperforming assets, but we don't see any real consistency or correlation. There's a lot of idiosyncratic issues that have happened at some of these lower middle market companies, which candidly is unexpected into which ones we're going to see them, but we know in a -- a large broad portfolio that we're going to see them. So we monitor them by industry, but we don't see sort of correlations in our underperforming assets. Mickey Schleien: Yes, that's what I was getting at actually. And on the flip side, you have about 20% of the portfolio performing above expectations, which is great, but that could imply meaningful prepayment risk. What is your gauge of that risk? And how much could that impact the portfolio's yield, obviously, excluding the fees that you could collect on those prepayments? Michael Sarner: So I think this goes back to our discipline on granularity. When we were $500 million fund of assets, we were originating $12 million or $13 million per asset. Today, we're $2 billion, and we're still originating around $15 million, $16 million per hold. So really, we -- I don't -- I think that cuts from both prepayment risk as well as nonaccrual risk, the portfolio is granular enough that no one credit is going to have a material impact. And in fact, in the 6/3 quarter, we had -- I can't remember what company it was, but we got repaid, I think it was in the tune of what, $50 million came back. And we still posted $0.61 this quarter. So we don't live in fear of that. Our top 5 is not significantly larger than the rest of the portfolio, and that's by design. Chris Rehberger: Yes, Mickey, if you look back in history, the other thing I would add is we've sort of had over the past 2 to 3 years, consistently 15% to 20% of the portfolio in that investment rating 1 bucket for outperformance. And that is not correlated directly to sort of 20% of prepayment per year. Our prepayment is more like 10% to 12% per year as a percentage of the portfolio. So it's an indication of performance, but it doesn't necessarily indicate that all of those are going to prepay in the near term. Mickey Schleien: No, I understand. It's just that you also mentioned the tight spread environment, which I clearly agree with, and we're seeing that across not only your lower middle market, but as well in the middle market and the upper middle market. So I was trying to gauge if that was a consideration. Michael Sarner: Well, kind of given a breakdown, by the way. So over the last 6 months, our spread has actually stayed pretty constant. And give you an indication for this quarter, we had 7 new portfolio companies. The range of yield or spread was 5.50% at the lowest and 7.25% at the highest. The add-on activity was at 6.7%, so blended 6.5%. So I don't think it's meaningfully off of our pace. The other part I would notice that so one of our -- probably our top performing portfolio company, our largest hold is due to its equity appreciation. So if that exit, the debt hold is small, the equity is non-yielding for the most part, right? So you'll redeploy that capital into debt yields. So that could actually be an uptick as well as obviously an increase to our UTI bucket. Mickey Schleien: I understand. And in terms of the change of the portfolio's weighted average yield during the quarter, which fell about 30 basis points in a quarter where SOFR was stable. Was that due to the spread environment that you're talking about? Or was it due to maybe going up market a little bit toward higher quality names with lower spreads? Or could you give us some insight into that? Michael Sarner: Sure, sure. I actually would go back in time. If you look at the 3/31 quarter, our spread was -- our total yield was 11.68%. It went up to 11.83% in the 6/30 quarter, primarily because we had one large exit that I just mentioned that had 16 basis points of accelerated OID. So it was actually a bit juice. So this quarter, it came back to the same 11.68%, but then we did see 8 basis points reduction due to nonaccruals and just 5 basis points based on compression. Mickey Schleien: Okay. And lastly for me, could you give us some guidance on stock-based compensation and salary expense for the fourth calendar quarter, the quarter we're in right now, given that there's some seasonality that would be helpful for us. Chris Rehberger: So there won't be seasonality on the RSU expense. So that should be consistent with the current quarter. For the cash compensation, that is really going to be dependent on our performance during the quarter. I would say that it's somewhere between flat with 9/30 and maybe slightly elevated based on some of the staffing initiatives that Michael laid out. So that's -- but it's really dependent on where we -- how we perform for the quarter and how much bonus accrual we end up taking. Operator: Our next question comes from the line of Erik Zwick of Lucid Capital Markets. Erik Zwick: I wanted to follow up with a kind of a question on the credit outlook you provided. And just curious, you mentioned that the top of the funnel for originations has continued to expand, and there are maybe a couple of pockets of the economy that are showing some weakness now. So as you evaluate these new opportunities, are there any industries or segments that you're maybe kind of looking at a little bit more with a more kind of discerning eye or staying away from that maybe you weren't 12 months ago? Michael Sarner: Well, I'd start off by saying the area that -- and it's a very diverse is health care that there's just with the big beautiful bill that came out before, not quite understanding where Medicare and Medicaid reimbursement might come. That is something that historically we liked quite a bit. And now it's not that it's on a no-fly list, but it requires a deep dive to understand how that's going to play out. I'm not sure there's any other like industries that we're just staying away from completely, Josh? Josh Weinstein: I mean government-funded companies, sponsored companies. Those are tough for us right now. But we're -- look, I mean, we're generalists. That being said, when we look at dynamic industries like health care or government, we like to partner with private equity groups that have a lot of expertise, so we can piggyback off that expertise. And so when we do deals in more dynamic industries, Typically, we're doing them with guys that were -- that have been investing in that space for years, given our generalist at til. So that -- and then we also structure around those types of risks. We may -- like you talked about being more discerning, we'll do that with -- in regards to adding spread and then also probably more importantly, reducing leverage and tightening up structure on deals to do deals in industries that we're a little bit more concerned about. Michael Sarner: Another thing to notice is that with our operating leverage has come down, obviously, we've grown our portfolio and our funnel has gotten larger. So we can be just generally speaking, more discerning. We've started -- we have the ability now with our cost of capital to originate deals that are $550 million, $575 million. And I always say to these guys, like 4 years ago, our deals needed to be $750 million and above, and it was $650 million. So today, we can see sort of the whole gamut of investments in our space. And we can opt out of the ones that have hair on and originate the ones that are just -- when we're forced ranking deals that are in the same industry that we feel have the most competitive advantages. Erik Zwick: I appreciate the color. And just one more for me. Mike, when you're talking about building for growth and continuing to add new originators, can you just kind of remind me about your kind of strategy for bringing in new originators? Do you typically look for someone -- people that have multiple years of experience or you prefer to bring people fresh in out of maybe collagen and then train them yourself kind of to fit in with Capital Southwest police? Or how do you approach that? Michael Sarner: So we've done it both ways. I would tell you right now, we are sort of aimed to do all of the above. We're certainly looking on the originator side to bring in another resource to cover one of the coasts that we don't cover quite as strong as we'd like to. We're bringing in several people on the analyst side to start supporting the pyramid. And we're also looking for another Operations VP. I kind of noticed earlier, that's a department that we feel like adds a lot of value. And when we say that, we -- the operations group works alongside our deal team. So we get basically 2 opinions when we come into the boardroom to make better decisions before we put good money after bad. So I actually think it's sort of up and down the organization. I think what we're seeing today, we have enough staff to support it. But where we're going, it's going to require just a more scalable infrastructure. Operator: Our next question comes from the line of John Hecht of Jefferies. John Hecht: The first one is you guys have on the margin, made some -- you've added the bond, you've used your ATM, you've got your SBIC. So you've got a diverse set of sourcing. Anything we should think about kind of as we go into 2020 -- well, calendar year 2026 about the mix of your capital structure and about how that might be influenced by interest rate changes? Chris Rehberger: So I don't think so. If you look at -- we obviously, as we mentioned, we did the $350 million unsecured. We redeemed those prior 2 bonds. We're in a really good situation from a liquidity perspective. I think we'll continue to use the SBIC. That will be a main source of sort of new capital for calendar year 2026 and continue to create flexibility under our secured credit facilities to make sure that we have adequate liquidity. But I don't think that you'll see a major shift from sort of where we sit today in our philosophy on the mix of unsecured debt, secured debt and SBIC. John Hecht: Okay. And then a follow-up question. You guys mentioned at the beginning of the call that seeing a lot of competition from both banks and nonbanks. I'm wondering, has that changed just in light of some of these idiosyncratic events in the bond market over the last few weeks? Josh Weinstein: It's hard to tell in real time because we propose on deals consistently. But like -- yes, I mean, there's been a little bit of firming up in the market, but I don't think it's a little early to say it's widespread. Operator: Our next question comes from the line of Robert Dodd of Raymond James. Robert Dodd: In your prepared remarks, no, I think obviously looking to monetize the investment platform via asset management. Correct me if I'm wrong, it seems like you're indicating there could be something on the table on that front within the next 12 months or something like that. So maybe I was reading too much into your wording, but if you could give us any more color there. And I mean, obviously, that would be an excellent low capital miss given you'd just be using the predominantly the staffing you already have -- would there be any -- yes, sorry, go ahead. Michael Sarner: Look, yes, look, these processes tend to take a lot longer than you hope or you think going in. Yes, it definitely answers like we have a direction. I think backing up, we've been seeking out partners to help grow and I said monetize on our investment platform that we've built over the last 10 years. And I think been on the road 3 years doing it, and I think we finally sort of to hone on the right structure and found potentially a partner that is someone that's like-minded. I don't have anything to announce right now, but we're hopeful as we keep pushing along that, that will be something that we can make an announcement, and it would be net helpful to this organization going forward. Robert Dodd: Got it. Got it. Then just another -- any -- has there been any changes in thought on -- you mentioned the equity co-invest where you've got a really good track record and unrealized appreciation in the portfolio. I mean, at the margin as spreads come in a little bit, within your end markets. Is there any appetite to maybe tweak the amount that goes into equity up a little bit? I mean if the spreads tighter and it's a good equity story, does it make sense to allocate a little bit more to that side of the book to kind of improve the total return or IRR over the life of an asset if you're giving up a little bit on a spread for a high-quality business? Michael Sarner: Yes. It's a good question, and it's something that we grapple with internally. As our hold sizes get larger, but we're still playing in the same bailiwick. Our debt check will probably be a larger percentage of the total invested capital with equity still being in the usually $0.5 million to $1.5 million. We do have an interest in doing so. I think that the way you get that accomplished is potentially seeing more non-sponsored deals, which we do see a pipeline of non-sponsored deals, which require usually it's a smaller debt check and a larger equity check. But a lot of those deals have a lot of hair. And so I think the old saying we got to kiss a lot of frogs there. So I think we -- that is -- when I talked about scalability, that is an area we may add some more resources to be able to do so. It does fit nicely in our business strategy because we are our SBA, right? Those are usually going to be the small to smaller businesses. And so the answer is yes, we're around 9% equity today. I would like to see it grow. I don't think that's going to happen in the next 6 to 12 months. But I think over the next 24 to 36 months, that's something that we are geared toward working towards. Operator: Our next question comes from the line of [ Dylan Hynes ] of B. Riley Securities. Unknown Analyst: I was just wondering, so while rate cuts are slowing, if your commitments growth maintains moving forward, do you expect the yield dilution to be roughly the same quarter-over-quarter as it was from last quarter to this quarter? Michael Sarner: It's a tough question to answer. I mean we are -- over the last 3 quarters, as we noted, we haven't seen that degradation. The deals that we are seeing in our pipeline for this quarter and maybe we're working on for the subsequent quarter, probably similar yield profiles. So I don't see the yields coming down. I think also some of the activity we're working on might allow us to continue to either hold or improve our spreads going forward, some of the kind of the other activities we're working on. So yes, I don't think -- I'm not expecting over the -- from a spread perspective. On the base rate, right, obviously, with SOFR, that's coming down. That's out of our control. But we built a portfolio on an income statement, we think that's positioned well, both with our regular dividend as well as our UTI bucket. Operator: Thank you I'm showing no further questions at this time. I would now like to turn it back to Michael Sarner for closing remarks. Michael Sarner: Well, we appreciate everybody joining us today. We look forward to speaking to you in 3 months. Have a good weekend. Operator: All right. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Hamilton Lane Fiscal Second Quarter 2026 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 John Oh, Head of Shareholder Relations. Please go ahead. John Oh: Thank you, Danny. Good morning, and welcome to the Hamilton Lane Q2 Fiscal 2026 Earnings Call. Today, I will be joined by Erik Hirsch, Co-Chief Executive Officer; and Jeff Armbrister, Chief Financial Officer. Earlier this morning, we issued a press release and a slide presentation, which are available on our website. Before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. These forward-looking statements do not guarantee future events or performance and are subject to risks and uncertainties that may cause our actual results to differ materially from those projected. For a discussion of these risks, please review the cautionary statements and risk factors included in the Hamilton Lane fiscal 2025 10-K and subsequent reports we file with the SEC. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them. We will also be referring to non-GAAP measures that we view as important in assessing the performance of our business. Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials made available on the Shareholders section of the Hamilton Lane website. Our full financial statements will be made available when our 10-Q is filed. Please note that nothing on this call represents an offer to sell or a solicitation of an offer to purchase interest in any of Hamilton Lane's products. Let's begin with the highlights, and I'll start with our total asset footprint. At quarter end, our total asset footprint stood at just over $1 trillion and represents a 6% increase to our footprint year-over-year. While this number can and will swing quarter-to-quarter due to our AUA, it is worth noting that this is the first time the firm has crossed over the $1 trillion mark. AUM stood at $145 billion and grew $14 billion or 11% compared to the prior year period. The growth came from both our specialized funds and customized separate accounts. AUA came in at $860 billion and grew $44 billion or 5% relative to the prior year period. This stemmed primarily from market value growth and the addition of a variety of technology solutions and back-office mandates. Total management and advisory fees for the year-to-date period were up 6% year-over-year. This year-over-year change includes the impact of $20.7 million of retro fees in the prior year period versus $800,000 in the current year period. Total fee-related revenue for the period, which is the sum of management fees and fee-related performance revenue was $321.6 million and represents 23% growth year-over-year. Fee-related earnings were $160.7 million year-to-date and represent 34% growth year-over-year. We generated fiscal year-to-date GAAP EPS of $2.98 based on $124.6 million of GAAP net income and non-GAAP EPS of $2.86 based on $155.7 million of adjusted net income. We have also declared a dividend of $0.54 per share this quarter, which keeps us on track for the 10% increase over last fiscal year, equating to the targeted $2.16 per share for fiscal year 2026. With that, I'll now turn the call over to Erik. Erik Hirsch: Thank you, John, and good morning, everyone. We have had another very strong quarter. Our job is difficult but not complicated. Take care of the customer, build thoughtfully constructed portfolios, deliver strong risk-adjusted returns. We did all of those things this quarter, and the reward for that is being entrusted with more clients and more capital. Let me start here by recognizing the hard work and dedication of the entire team at Hamilton Lane. Our unrelenting focus on delivering for our clients has continued to fuel our growth and success. As I said before, we're building Hamilton Lane for the long term. Every decision we make is about positioning ourselves for sustainable growth and success well into the future. This quarter was another great example of that approach. We extended our product offerings, including the launch of additional Evergreen products. And just yesterday, we announced a significant new strategic partnership. Let me dive into some initial details on that now. Guardian Life Insurance Company of America has partnered with Hamilton Lane to be their core strategic partner within the private equity markets. Guardian is one of the nation's largest life insurers and a leading provider of employee benefits. With this partnership, Hamilton Lane will take on the management of Guardian's current and future private equity portfolio. Hamilton Lane will oversee Guardian's existing private equity portfolio of nearly $5 billion, and Guardian will also commit to invest approximately $500 million per year for the next 10 years with Hamilton Lane. This commitment maintains Guardian's typical annual contribution to the asset class and supports its general account target allocation goals. This capital will be managed by Hamilton Lane through a separately managed account and like most of our current SMAs, will include meaningful capital into our various investment funds. Part of the earlier capital deployment will be $250 million being used as seed and investment capital to help further expand and accelerate our growing global Evergreen platform. To support the partnership's shared goals of accelerating growth and driving value creation, Guardian will receive HLNE equity warrants and additional financial incentives. We will also partner with Guardian's registered broker-dealer and registered investment adviser, Park Avenue Securities, and look to deliver investment solutions for their clients and provide strategic support and education on the private equity markets for their 2,400 advisers who collectively cover approximately $58.5 billion of client assets as of December 31, 2024. In addition, the Guardian investment professionals currently supporting the private equity portfolio are expected to join Hamilton Lane after the transaction closes. Overall, we believe this partnership is a testament to our ability to provide customized solutions to the world's leading institutions. In recent years, the convergence of private market asset management and the insurance industry have taken on a variety of partnership forms. This evolving and growing opportunity set has been a focus for us as we have been scaling our insurance solutions platform to over $119 billion. In 2024, we formalized this focus when we announced the forming of a dedicated insurance solutions team. Our aim was straightforward, bring greater intentionality to how we serve insurers, deepen our expertise and relationships and elevate our ability to execute at a strategic level for this sophisticated client set. We believe the partnership with Guardian is a proof statement to these efforts. We are thrilled to have been selected by Guardian with this critical task of delivering for their policyholders with the goal that their private equity portfolio will continue to thrive. Jeff will provide some more specifics on the expected financial impact in his section shortly. Before I turn to our results, I'd like to share my perspective on the current popular narrative, that being that the industry is on some verge of a broader credit crisis. Today, we see no data to support this notion, particularly within the context of private credit. In fact, we are seeing a further reduction of what was already a very low bankruptcy rate. What we do see happening is simple. There have been a tiny number of high-profile bankruptcy filings and the broader public market has extrapolated this to believe a credit crisis is looming. I will note with some irony that some of the parties were warning about the impending doom are some of the exact same parties with losses stemming from these recent bankruptcies, seemingly saying, well, yes, I have a problem, and I'm taking a large charge-off, but I'm likely not alone. I bet others also have problems. Coming back to the data. Credit fundamentals are strong and defaults are low. Today, leverage levels remain prudent around 5x and are down a full turn from 2022. Interest coverage also remains healthy at 2.8x, having moved up 0.5 turn over the past 2 years. Today, the default rate sits at around 1%, below the historical average of 2.5% and well below the levels seen during the global financial crisis, where overall default rates peaked to near 10%. But even that statistic is noteworthy. In the midst of the global financial crisis, total bankruptcies and credit losses grew to 10%, but most of our managers were in the low single digits and still generated positive performance during that period. In fact, private credit as a whole posted positive annual returns each of the years from 2007 through 2010 at approximately 9% to 10% per annum. Top quartile private equity -- private credit managers were doing even better with returns over 12%. Private credit outperformed the S&P Leveraged Loan Index in each of those years. When we peer inside our own direct credit portfolio, we see more of the same, growing top line and cash flows, prudent leverage levels and near 0 losses on investments. This is the power of having actual data on a large segment of the industry and not living and prognosticating via anecdotes. Our database covers nearly 65,000 funds and 165,000 total private companies. We have great insight as to what is happening inside these entities. We have the visibility and we know the reality. This remains one of our strengths to customers, the ability to provide more clarity and transparency in an opaque world. Let me turn now to a few business highlights, and I'll start with fee-earning AUM. Total fee-earning AUM stood at $76.4 billion and grew $6.7 billion or 10% relative to prior year period. Net quarter-over-quarter growth was $2 billion or 3%. Fee-earning AUM growth continues to be largely driven by our specialized fund platform. Specifically, our semi-liquid Evergreen products continue to experience strong momentum. The combination of our fundraising, new product additions and strong performance has driven the growth of total fund net asset value. Our blended fee rate also continues to benefit from the shift of fee-earning AUM towards higher fee rate specialized funds, most notably our Evergreen products. Today, our blended fee rate stands at 65 basis points. This is up 8 basis points or 14% since we went public in 2017. At quarter end, customized separate account fee-earning AUM stood at $40.8 billion and grew $1.4 billion or 4% over the last 12 months. Net quarter-over-quarter growth was $517 million or 1% with the gross contribution stemming from a mix of new client wins, free-up activity from existing clients and contributions for investment activity. This was offset by returns of capital from exit activity and the timing mismatch of existing client legacy tranches rolling off and new tranches yet to come on. That said, we continue to maintain large amounts of committed and contractual dry powder to deploy, along with a strong backlog of business that has been won and is now in the contracting phase. As we've mentioned in the past, the scale and contracting dynamic in our SMA business can lead to some unpredictability as to when these dollars come on, but we simply remain focused on winning new business. And further, these quarter end numbers do not reflect the impact of the Guardian partnership I discussed earlier. Let's move now to Specialized Funds, and I'll spend a few moments and provide some updates on our closed-end fundraises and Evergreen platform. Specialized funds fee-earning AUM ended fiscal Q2 at $35.6 billion, having grown $5.3 billion over the last 12 months. This represents an increase of 17%. Quarter-over-quarter net growth was $1.5 billion or 4%. Specialized fund fee-earning AUM growth continues to be largely driven by our Evergreen platform, both in net inflows and net asset value growth, closes for certain closed-end funds in market and continued robust investment activity for those closed-end funds that derive their management fees on an invested capital basis. On the closed-end side of our lineup, we remain in market with our 6 equity opportunities funds. As a current reminder, this fund focuses on direct equity investments alongside leading general partners and offers 2 fee arrangements that either charge management fees on a committed capital basis and a 10% carry or on a net invested basis with a 12.5% -- prior direct -- the same arrangement and raised $2.1 billion. During the quarter, we held additional closes that totaled $246 million [indiscernible] and brought the total amount raised to nearly $1.6 billion. Of the $246 million [indiscernible] came in on a committed capital basis and $158 million came in on a net invested basis, which brings the total mix of capital raised to nearly 30% on committed and 70% on net invested. We have clear visibility into near-term expected closes that we expect will bring the total capital raise to over $2 billion, and we have a strong line of sight to exceed the prior fund over the coming months. Moving to our second infrastructure fund. We continue to make great progress with the second fund and have nearly doubled what was raised for our first fund. This is a good example of us launching a product, starting small, demonstrating strong performance, gaining trust from investors to support a larger product. As a quick refresher, the strategy for this product centers around direct equity and secondaries in the real assets and infrastructure space, and the fund generates management fees on a net invested basis. During the quarter, we held additional closes that totaled $270 million of LP commitments, which now brings the total raise to over $1.1 billion in and alongside the fund. Again, at this point, we have nearly doubled the size of our first infrastructure fund, which speaks to our ability to execute new product launches and scale them effectively. Capital continues to flow in, and we will look to wrap up fundraising for this fund in the coming months. This fund has also deployed meaningful capital, and we expect to be back in market sometime in late 2026 or early calendar 2027. Before I move on to Evergreen, a quick word on the secondaries front. We have just launched the fundraising effort for our next flagship secondaries fund, and we expect to have a first close in the first half of calendar 2026. We have a demonstrated track record of growing this platform by raising larger successive funds. We believe we are well positioned to continue this trend given the continued secular growth dynamics in the secondary market, underpinned by active portfolio management by both LPs and GPs and our strong investment track record with our current vintage secondaries fund having generated a net multiple of 1.4x and a net IRR of 44.1% for our investors as of June 30, 2025. We look forward to providing you with future updates on that front. Turning now to the Evergreen platform. For the quarter ending September 30, 2025, we took in over $1.6 billion in net inflows across our entire suite of Evergreen products. This was our largest quarter ever. This success came from a combination of 3 things: expanded product offerings, robust fundraising and strong performance. The $1.6 billion figure includes initial subscriptions to our newly launched Global Secondaries, Global Venture and Asia funds, all of which began accepting capital during the third calendar quarter. At quarter end, total Evergreen AUM reached $14.3 billion. At our 2024 Shareholder Day, we laid out a straightforward strategy to drive continued growth in our Evergreen platform, plan focused on expanding our then existing lineup of 3 funds and maintaining conviction in our ability to launch scalable new products. 18 months later, that vision has materialized. Our Evergreen suite has grown from 3 funds to 11 and AUM has nearly doubled to over $14 billion. We've also become more agile in bringing products to market, leveraging our scale to accelerate both launch and growth. While our initial 3 funds each took nearly 2 years to reach $500 million in AUM, our newer global infrastructure and secondary offers have already surpassed or on track to hit that milestone in under 12 months. I will also reiterate, we continue to see strong support from institutional investors for these products. Due to some of the structural advantages of Evergreen funds, we continue to see some migration away from drawdown funds and into this product line. Before I move on from Evergreen, currently, there remains over $1 billion of Evergreen AUM that is not yet earning management fees due to the timing of initial subscriptions and fee holidays that were put in place with the launch of several of our new funds over the last 12 months. And while these funds are not earning management fees yet, we are still eligible to generate performance fees for those funds that have a performance fee element. We expect that over half of that current $1 billion will move into specialized fund fee-earning AUM during the calendar fourth quarter of 2025 and the remainder to move over during calendar 2026 as the fee holidays lap for those respective funds. Now moving on to some technology updates. This quarter saw 3 recent announcements around our strategic technology balance sheet portfolio and our proprietary Hamilton Lane Private Market indices. First up is an exciting partnership regarding our proprietary private market indices and benchmarks. We are proud to announce a partnership with Bloomberg, where users now have access to a suite of Hamilton Lane Private Market indices and benchmarks via the Bloomberg Terminal and Bloomberg data license. While the revenue opportunity is in the early stages will be modest, more importantly, we now have a unique opportunity to reach a wider and increasingly growing private market audience, leveraging Bloomberg's global reach and scale. We see this as a large brand enhancer, particularly with the RIA community. Bloomberg remains a clear leader in financial news, data and analytics. Bloomberg terminals are found in nearly every corner of financial services and investment management. Bloomberg's clients range from the very largest global institutions to individuals and their advisers. The latter has served as a key segment of growth for private markets, and this partnership will now embed Hamilton Lane's brand and our indices into their workflows. They will demand better tools to measure performance across strategies, vintages and geographies. This new partnership will now be able to deliver on those demands and will raise the bar for how private markets are now benchmarked. And it will put the Hamilton Lane name and logo in front of thousands of terminal users around the globe. This marks an important and significant step in making Hamilton Lane benchmarks broadly available to this growing population of private market investors, expanding access to data and driving even greater transparency across the asset class. Let's now move on to news regarding Securitize. On October 28, Securitize announced that it had entered into a definitive business combination agreement with Cantor Equity Partners II, a special purpose acquisition company. On closing of the transaction, which is expected in the first half of 2026, Securitize will become a publicly traded company. As a refresher, Securitize builds trusted regulated technology that turns traditional financial assets into digital tokens to be issued, traded and serviced on chain. Hamilton Lane has cultivated a deep relationship with Securitize, having partnered initially in 2022 to tokenize several of our own offerings and then subsequently participating in a strategic fundraise in May of 2024 that was led by BlackRock. Together, we've shared in the vision of making the private markets more accessible to a broader set of investors. Securitize has established itself as a leader in tokenizing real-world assets, and we are proud to deepen our strategic partnership as they embark on this exciting new chapter. At the proposed pre-money valuation of the business combination, we expect to see a mark of more than 2x our initial investment. This outcome further demonstrates our ability to partner with and successfully invest our balance sheet capital into companies that we believe will transform our asset class for continued growth and scale. Wrapping up this section with an exciting announcement regarding Novata. On October 7, Novata announced a key strategic acquisition of Atlas Metrics, which expands Novata's global reach and unites 2 complementary companies to meet the growing demand from investors and corporates for trusted, efficient and scalable sustainability data solutions. The combined entity will now support more than 400 clients and over 13,000 private companies worldwide, equipping investors, banks and corporates with the tools they need to collect, report and act on sustainability data. As part of this acquisition, Hamilton Lane was proud to invest additional capital in a fundraising round in support of the acquisition and continued strategic initiatives, and we did this alongside of S&P Global, Modiv Ventures and the Ford Foundation. We continue to support efforts that increase both data transparency and analytic capabilities for our asset class and are proud to support Novata in their mission to empower private market sustainability. Novata has achieved tremendous growth since our initial investment in partnership back in 2021. The shared vision and focused execution, we believe Novata can continue to grow and scale, and we are excited for the opportunities ahead. And with that, I'll now pass the call to Jeff to cover the financials. Jeffrey Armbrister: Thank you, Erik, and good morning, everyone. I'll begin with some commentary on our business during the first half of fiscal 2026, and then I'll provide some additional details on the Guardian Life partnership and the potential impacts for our business. For the first half of fiscal 2026, management and advisory fees were up 6% from the prior year period. However, this includes the impact of $20.7 million of retro fees from specialized funds, namely the final close for our sixth secondary fund in the prior year period versus $800,000 of retro fees in this quarter stemming from our latest direct equity fund. Total fee-related revenue was up 23%, largely driven by fee-related performance revenue recognized in the first half of fiscal 2026 versus a minimal amount during the first half of fiscal 2025. Specialized funds revenue increased by $12 million or 8% compared to the prior year period. Growth in specialized fund revenue was driven by continued growth in our Evergreen platform, which continues to be a key driver of specialized fund fee-earning AUM. Again, the year-over-year growth here was impacted by the retro fee element that I just alluded to. Moving on to customized separate accounts. Revenue increased $2 million or 3% compared to the prior year period due to the addition of new accounts, re-ups from existing clients and continued investment activity. Revenue from our reporting, monitoring, data and analytics offerings increased by over $3 million or 21% compared to the prior year period as we continue to produce strong growth in our technology solutions offering. Lastly, the final component of our revenue is incentive fees, which totaled $91 million for the period. This amount includes fee-related performance revenues, or FRPR, stemming primarily from the quarterly crystallization of performance fees from our U.S. private assets Evergreen fund with additional contributions coming from our more recently launched evergreen funds. Let's turn now to our unrealized carry balance. The balance is up 14% from the prior year period, even while having recognized $102 million of incentive fees, excluding fee-related performance revenues during the last 12 months. The unrealized carry balance now stands at approximately $1.4 billion. Moving to expenses. Fiscal year-to-date total expenses increased $20 million or 11% compared with the prior year period. Total compensation and benefits increased $13 million or 10% due primarily to an increase in headcount and equity-based compensation. This was offset with lower incentive fee compensation due to a decrease in non-FRPR incentive fee revenue compared to the prior year period. G&A increased by $7 million. We continue to see growth in revenue-related expenses, including the third-party commissions related to our U.S. Evergreen product being offered on wirehouses that we've discussed on prior calls. We will continue to emphasize that while overall G&A expense has increased over time, the bulk of the increase stems from these revenue-related expenses, which is a good thing and can be an indicator of growth to come. We continue to successfully offset this with cost savings and expense discipline in other parts of the business where we have discretion. Let's move now to FRE. And just a quick reminder, FRE will now include the fee-related performance revenues and exclude the impact of equity-based compensation in the calculation of FRE. With that, fiscal year-to-date FRE came in at $161 million and was up 34% relative to the prior year period. FRE margin for the quarter came in at 50% compared to 46% for the prior year period and benefited from strong fee-related performance revenues in the period. Before I wrap up, I want to end with some balance sheet commentary -- before I wrap up and end with some balance sheet commentary, I wanted to take this opportunity to provide some additional detail on the Guardian Life partnership that Erik discussed earlier on. First, I'll reiterate that this partnership is a testament to our capabilities as a trusted private equity solutions provider, and we are excited to work with Guardian. As Erik highlighted, in exchange for the capital that we will be managing on behalf of Guardian, Guardian will receive HLNE equity warrants and additional financial incentives, which will primarily be revenue share arrangements related to their seed capital to advance shared objectives of growth and value creation. The revenue associated with the partnership will come in 2 forms. First, we expect to generate management fees from the capital that will be invested in our Evergreen funds more immediately, and this will get captured in specialized funds. Second, the separate account that we will manage going forward will generally mirror that of a standard institutional separate account by way of portfolio construction and fee schedule and will be captured in separate account management fees. We expect this will scale as the portfolio gets deployed over time. In both cases, we have the ability to generate performance fees commensurate with the associated strategies. As for the warrants, based on our current fully diluted share count as of September 30, 2025, the total dilution expected from the Guardian warrants is less than 1%. The warrant package will be governed by both a vesting schedule that aligns with the term of the partnership and tiered exercise prices that are based off of a reference price that was set by the HLNE 20-day volume-weighted average price as of the closing price on October 31, 2025. Additional information regarding the warrant package will be included in our 10-Q filing. I'll wrap up now with some commentary on our balance sheet. Our largest asset continues to be our investment alongside our clients in our customized separate accounts and specialized funds. Over the long term, we view these investments as an important component of our continued growth, and we expect that we will continue to invest our balance sheet capital alongside our clients. In regard to our liabilities, we continue to be modestly levered and we'll continue to evaluate utilizing our strong balance sheet in support of continued growth for the firm. With that, we will now open up the call for questions. Operator: [Operator Instructions] Your first question comes from Alex Blostein from Goldman Sachs. Alexander Blostein: On the Guardian announcement. Maybe we could start there. I heard your comments around just the structure of the arrangements, but maybe you could help us with the actual fees that are likely to hit P&L. I heard the geography of different line items. But as you sort of think about the $5 billion that's going to come over, maybe help us with the fee structure there and also with the $500 million a year that's going to get allocated over time. So maybe we can start there. Erik Hirsch: Thanks, Alex. It's Erik. I think you should expect that the vast majority of the revenue that we're generating is on the $5 billion that will be coming in over the next 10 years because the existing $5 billion is basically a monitoring assignment. That -- those are dollars already in the ground in a variety of partnerships. And so if you look at the $5 billion that will be coming over, we clearly called out the $250 million going into Evergreen. And then the SMA portion, I think, again, hard to predict exactly what the next decade looks like. But that's going to be a mix of primary funds and a bunch of our specialized funds at whatever the prevailing fee rate is for those vehicles. Operator: Your next question comes from Michael Cyprys of Morgan Stanley. Michael Cyprys: I wanted to ask about the Bloomberg partnership and more broadly partnerships on the data side. I was hoping you could elaborate a bit around that. What's the scope for more broadly enhanced monetization of your data sets as you look out from here as well as indices? And what's the scope for creating investable index products as you think about looking at over time? Erik Hirsch: Yes. Thanks, Mike. It's Erik. So the Bloomberg arrangement is going to be a revenue share model where that will grow over time as that installed base continues to grow and usage grows. I think we've been very tactical and selective at where we've been partnering. We view our data to be valuable. And so simply just running out and licensing it here, there and everywhere has not been part of our strategy. I think we've been thoughtful about where we see both chances for revenue and as I mentioned in my script, real chance for brand enhancement. And I think for us, this was a big opportunity for brand just given the number of RIAs who are regularly daily, minute by minute using Bloomberg terminals and Bloomberg data. And as we think about that world increasingly needing and wanting more private market benchmarks and information, we're going to be the provider of that. And we think that is a huge brand enhancer for us. I think investable indices, I don't see that as a focus. I know some have spoken of that. I haven't seen traction for that. I think trying to sort of synthetically replicate what happens inside of private market portfolios using publicly listed securities has been tried by many smart people, and generally, they've all failed. And so I don't see that as our focus today. I think it's really around data as an education tool, data as a brand enhancer and data for making better investment in portfolio selections. Operator: Next question comes from Ken Worthington of JPMorgan. Kenneth Worthington: Erik, I wanted to dig a bit further into the SMA business. Can you talk about how the pipeline is developing and at what rate that pipeline is growing? And then if we think about your sales force and the sales effort, to what extent do you have as many resources today sort of allocated to SMAs versus what you've had in the past, given the superior economics you see in Evergreen and the customized funds part of the business? Erik Hirsch: Thanks, Ken. So none of our sales team are organized by -- around SMAs, in particular, specialized funds. Think of the vast majority of the sales organization organized in geographic territories where they're owning that geography, getting to know all the respective players in that geography and figuring out what problem that customer is struggling with and then how we can be the solutions provider for that. I think what we've been finding is that given the multitude of products that we have in the market, those have been, in many cases, better solutions for a lot of customers. And so that's why you've seen such strong growth coming from that specialized funds. That said, the pipeline and even what you sort of see in kind of one but not contracted is billions of dollars. And so that will all just flow in over time as we get through contracting phase and the pipeline is robust. But from a relative market positioning today, if you think about where we were with SMAs 5 or 10 years ago, we had very few specialized funds. Today, we have a lot more specialized funds, and we're finding that those are able to meet the needs for the customer base, which, as you know, is a good thing for the business model given the superior fee model on those funds. Kenneth Worthington: Okay. Great. And I don't know if I'm allowed to do a follow-up, but I'll take a shot at it. In terms of Guardian, the warrants, you mentioned that the commitments will come over the next decade. Are the warrants being awarded over the next decade? Or are they more front-end loaded? And you mentioned like a rev share. Are the warrants attached to the rev share? Or was that separate? Jeffrey Armbrister: Ken, this is Jeff Armbrister. So the warrants are front-end loaded, but there is some period of time for additional warrants to be provided. The rev share is not tied to the warrants. They are 2 separate pieces. So that's how you should think about it. Operator: Your next question comes from Brandon (sic) [ Brennan ] Hawken of EMO (sic) [ BMO ]. Brennan Hawken: The core fee rate on specialized funds ex retro ticked up nicely quarter-over-quarter, likely benefited from the scaling of the Evergreen funds. But were there any other factors that impacted the fee rate? And how should we be thinking about that specialized fee rate going forward? Erik Hirsch: Yes, Brennan, it's Erik. I think this is just what we've been saying, which is as the mix of assets is changing and coming heavier into specialized funds, particularly Evergreen, given that, that comes at a higher fee rate, you're going to see that overall rate continue to blend up. We believe that, that will continue over time. So if you just look at relative flows and relative fee rates, stronger flows in specialized funds, both drawdown and Evergreen continues to be robust. All of those are charging at a higher fee rate than the current blended overall rate that we're showing. And so to the extent that those flows continue, that will continue to lift the overall fee rate. Operator: [Operator Instructions] And your next question comes from Alex Bond of KBW. Alexander Bond: Just wanted to ask about how you're thinking about sales incentives or fee holidays on a forward basis for both your more tenured evergreen funds as well as the newer funds. Curious how often this is something you all revisit and then also how this may evolve as more competing Evergreen funds enter the market? And also if you think this is something you may need to extend or enhance as competition continues to increase there? Erik Hirsch: Alex, it's Erik. Thanks for the question. I would look at it through a different lens. I see this really as when you are launching a brand-new product that's just got some Hamilton Lane balance sheet, seed capital in it, and you are trying to attract that first round of adopters, enticing them is important. It's a fund that's going to have short -- relatively short history, relatively short performance history and getting the folks in for the first, say, 6 to 12 months, which is generally the time frame you're talking about, has become more normalized where you're giving them financial incentive, which is a management [indiscernible]. As Jeff said, where that -- those are still being calculated and paid, and that was part of the driver of the FRPR that you saw this quarter. So I'm not seeing anything on the horizon that would cause us to have to go back and do that with established funds. I'm not seeing anything on the horizon that would cause us to need to do that for longer periods of time than we're already doing. I think what's happening, normal market becoming a lot more standard for that, again, as I said, that first 6 or 12 months on a brand-new offering. Operator: Your next question is from Brennan Hawken of BMO. Brennan Hawken: It sounds like from the Guardian deal, there's also some folks from Guardian joining Hamilton Lane. Can you speak about the potential impact on the expense side from that? And then a little bit more broadly, it sounds like this deal is one where the overall economics are going to scale over time. Is that right? Is it right to think about this as probably a pretty modest impact initially? And then as you continue to build and deploy that $5 billion, things are going to scale? Erik Hirsch: Yes, Brennan, it's Erik again. So yes, to answer the second part of that question first, that's the way to think about it because we're going to be building that $500 million per year. The initial impact will be higher in that first year because a lot of that capital going into the Evergreen products and so again, higher fee rate. But yes, you're going to continue to see that stacking. And so we think that's beneficial. The team acquisition, I would say, is a de minimis add. And frankly, while we're in process of working through all the details with the team and with Guardian, I would expect and assume that really what's going to be happening is that those team members are coming over, and they're simply causing us to not need to go fulfill one of our open recs that is currently sitting on our website. So we're in growth mode. We continue to have a lot of open recs and open positions. And this is a talented group of people who are very experienced in the private markets. And so I think the more logical answer is they're coming over and taking positions that would have otherwise gone to a brand-new hire. Operator: There are no further questions at this time. I will now turn the call back over to Erik Hirsch. Please continue. Erik Hirsch: Again, thank you for the time. Thank you for the questions, and thank you for the support. Have a great day. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Kelsey, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SOPHiA GENETICS Third Quarter 2025 Earnings Conference Call. Kellen Sanger, SOPHiA GENETICS Head of Strategy, Investor Relations, you may begin. Kellen Sanger: Thank you, and good morning, everyone. Welcome to the SOPHiA GENETICS Third Quarter 2025 Earnings Conference Call. Joining me today to discuss the results are Dr. Jurgi Camblong, our Co-Founder and Chief Executive Officer; Ross Muken, our Company President; and George Cardoza, our Chief Financial Officer. I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities law. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties, and factors that could cause results to differ appears in the press release issued by SOPHiA GENETICS today and in the documents and reports filed by SOPHiA GENETICS from time to time with the Securities and Exchange Commission. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of IFRS to non-IFRS measures is included in today's earnings press release, which is available on our website. With that, I will now turn the call over to Jurgi. Jurgi Camblong: Thanks, Kellen, and good morning, everyone. I will start with a brief recap of Q3 performance and an update on major growth drivers. I will then turn the call over to Ross, who will provide a more detailed update on the business. George will close with a review of our Q3 financial performance before we take your questions. For the last several quarters, we've highlighted that the business momentum has been strong. New customer signings have been at record levels, and bookings have exceeded expectations. In Q3, these efforts continue to pay off as revenue growth accelerated for a third consecutive quarter. Revenue grew 23% year-over-year in Q3. Given the strong performance and the accelerating momentum we're seeing across the business, we are raising our 2025 revenue guidance to $75 million to $77 million. Our performance continues to be driven by the 3 growth drivers we outlined at the start of the year, implementing and expanding across new accounts, growing in the U.S. market, and capitalizing on new applications such as MSK-ACCESS. Starting with the first growth driver. In Q3, we signed 31 new customers. This brings our total new customers signed in 2025 to 94, surpassing the 92 customers we signed in all of last year. Our focus remains on implementing and expanding across these new accounts. From an expand perspective, we had an excellent quarter as we successfully encouraged many of our existing customers to adopt additional applications. In Q3, we expanded our footprint at several top-ranked institutions. Gustave Roussy in Paris is adding new solid tumor applications to the broad suite of SOPHiA apps they use today. Institut Paoli-Calmettes in Marseille signed a major expand deal to [indiscernible] hereditary cancer and solid tumor applications. In addition, New South Wales Pathology in Australia is adding a HemOnc application, and Tulane University in the U.S. is adding new applications in solid tumors. Congratulations to the team on this major expand as well as the 31 new customers landed in the quarter. I look forward to this customer implementing SOPHiA DDM and beginning to generate revenue over the next few months. On implementations, we were happy to see 15 sizable new customers move to routine in Q3. We also implemented an abnormally large number of expand opportunities during the quarter. Between both land and expand, total new business implemented in Q3 was strong. The second growth driver I will highlight is our continued growth in the U.S. market. In Q3, U.S. revenue grew an impressive 30% year-over-year on top of an increasingly larger base. We also signed a strong cohort of new customers to fuel growth. In Q3, we landed Geisinger Health System in Pennsylvania, who is adopting SOPHiA DDM for pharmacogenomics, Baylor Scott & White Health in Texas, who is adopting SOPHiA DDM for HemOnc, and Thermo Fisher Lights Labs, who is adopting solid tumor liquid biopsy and rare disorders applications. Welcome all to the SOPHiA community. The third growth driver I will cover is the continued success of our liquid biopsy application, MSK-ACCESS. As part of the update today, I will take a moment to reflect on liquid biopsy business overall, the progress we have made, and what the future holds. Two years ago, we partnered with Memorial Sloan Kettering to industrialize their world-renowned test and make liquid biopsy testing accessible to every lab in the world. This presented a series of challenges, not only due to the very small amount of circulating tumor DNA in the blood sample, but also because of workflow heterogeneity from lab to lab. In other words, reliably decentralizing liquid biopsy is complex and many variables are at play. To solve for this complexity, we leveraged decades of experience in our diverse data network to build proprietary AI agents that standardize, harmonize and analyze liquid biopsy data. These agents, which power MSK-ACCESS and other SOPHiA applications, apply AI to find signal in the noise and deliver actionable insights to our customers. Thanks to these AI capabilities, MSK-ACCESS is now available to labs across the globe. Since its launch last year, we have now signed more than 60 liquid biopsy customers worldwide. As our liquid biopsy network has grown, biopharma companies have recognized the value of such a network. Several months ago, we announced that AstraZeneca would sponsor the global deployment of MSK-ACCESS. For AZ, high-quality and affordable liquid biopsy testing is critical for expanding market access. In addition, the data generated from the network offers immense value for drug development and commercialization. During the quarter, we announced the next phase of our liquid biopsy strategy. In September, we announced a partnership with Myriad Genetics to develop MSK-ACCESS into a regulated companion diagnostic in the U.S. And then in October, we announced a collaboration with A.D.A.M. Innovations to do the same in Japan. Together, along with SOPHiA's robust regulated footprint in Europe, SOPHiA and its partners will offer biopharma a first-of-its-kind hybrid global CDx assay fit for purpose, depending on the needs of the local market. This innovative CDx will provide biopharma companies with a unique and cost-effective offering to potentially expedite drug development and approval. Post approval, it will also enable more patients to gain access to tumor profiling benefits from liquid biopsy. As we continue our mission to expand access to best-in-class cancer care, I would like to take a moment to look towards the future. Last month, at ESMO, we announced a breakthrough technology called SOPHiA DDM Digital Twins. Digital Twins goes beyond genomics by leveraging multimodal data to help oncologists make better treatment decisions. The AI-powered research tool creates dynamic virtual representations of individual patients to simulate potential outcomes and help oncologists select the best treatment. Starting with noncancer, oncologists can now generate Digital Twins for genomic patients analyzed with SOPHiA DDM, including MSK-ACCESS. This revolutionary tool takes SOPHiA's mission of data-driven medicine to the new age by leveraging AI and the collective intelligence for our community to provide oncologists with real-time real-world decision support based on multimodal data. Please stay tuned for more updates on the development of Digital Twins and the expansion of this exciting technology. Before I hand it over to Ross, I would like to recognize the SOPHiA team for their continued ability to deliver amazing new products like Digital Twins and drive revenue growth without increasing costs. In Q3, we held gross margin strong at 73.1% on an adjusted basis despite the data processed by our platform growing over 40% year-over-year. This performance was driven by innovation from our tech and data sales teams who continue to engineer new ways to optimize the data compute and processing power of SOPHiA DDM. I was also proud that we carried growth down to the bottom line. In Q3, we improved adjusted EBITDA 13% year-over-year after excluding the impact of elevated Swiss social charges on stock-based compensation. Excluding these charges, operating expenses remained mostly flat on a constant currency basis, a testament to the natural operating leverage in our business and strong expense control across our teams. In conclusion, Q3 was an excellent quarter for SOPHiA. Revenue accelerated once again and cost performance improved. We have built an expansive global network of customers who use SOPHiA DDM each day to generate insights for their patients. In Q3 alone, SOPHiA DDM analyzed over 99,000 patients across 70 countries worldwide. Thank you again to the team for an excellent quarter and for the impact you're making. With that, I will now turn the call over to Ross, who will provide a more detailed update on Q3 business performance. Ross Muken: Thanks, Jurgi. The go-to-market teams share your excitement and confirm there is broad and growing demand for the SOPHiA offering. Along those lines, I'll start today by giving a brief update on our third-quarter performance as 2025 continues to be a strong year across both new and existing business. I'll then cover broader market dynamics before closing with a look at what we are seeing in the pipeline. First, we delivered 23% revenue growth in the third quarter as biopharma headwinds subsided and the continued strength of the core business was able to shine. From a regional perspective, EMEA returned to historic growth levels with 24% revenue growth in the period. Major markets such as the United Kingdom and Belgium contributed significantly to regional growth as the countries grew 120% and 70% in the period, respectively. As Jurgi mentioned, North America continued to outperform in the third quarter with 29% revenue growth year-over-year. Asia Pacific also continued to outperform in Q3 as analysis volume grew 35%, driven by Australia and Taiwan. Of note, we also saw the first revenue from Japan come online as our partnership with A.D.A.M. Innovation begins to ramp. In Latin America, we continue to experience softness, but recent booking momentum gives us confidence that the region will return to meaningful growth in the medium term. From an application standpoint, we continue to establish ourselves as a global leader in hemato-oncology testing. HemOnc analysis volumes grew 18% year-over-year in the third quarter off an increasingly large base. Beyond HemOnc, we saw an initial wave of liquid biopsy testing coming online as we passed 2,000 liquid biopsy analysis in the quarter. As a reminder, more sophisticated applications like MSK-ACCESS carry a substantially higher ASP than other product lines. We will look to the fourth quarter and into 2026 for MSK-ACCESS to meaningfully drive overall growth as customers complete implementations and ramp up usage. With biopharma headwinds now behind us, revenue from biopharma returned to positive growth in the third quarter and is no longer a drag on our overall performance. We view biopharma as an additive contributor going forward as we deliver on recently signed biopharma wins, including the multiple projects signed with AstraZeneca this quarter. Moving to the new business side of clinical. I'm happy to share that we continue to book new business at record levels. We landed 31 new customers in the quarter, up from 22 signed in Q3 last year. As Jurgi mentioned, the expand engine was also exceptionally strong. We will continue updating you on the expansions going forward, as this will be a major strategic focus for us as we move into 2026. In North America, Jurgi highlighted our incredible momentum in the U.S. Beyond the U.S., we also expanded our partnership with Sunnybrook Health Sciences Center in Toronto. Sunnybrook is adding a sixth DDM application, now adopting MSK-ACCESS. Our expansion to 1 to 6 applications with Sunnybrook over a short period of time is a great example of our land and expand strategy in action. In EMEA, MSK-ACCESS continued to attract major interest. In the third quarter, we signed the University Hospital of Nice in France and HSL in the United Kingdom to the application, amongst others. We also signed the American University of Beirut to our newly launched solid tumor application, MSK-IMPACT Flex. In Latin America, we continued our expansion in the South and signed Clinica MEDS in Chile to our whole exome solution. We also continue to see new business momentum in Brazil and signed the Carlo Chagas Institute who will be adopting SOPHiA DDM to support HemOnc testing. We look forward to LatAm picking up growth in quarters to come as we implement the recently signed new business. In Asia Pacific, we were proud to announce the developments of our entry into Japan. A.D.A.M. Innovations is currently working on implementing a full suite of SOPHiA applications, including solid tumor, hereditary cancer, rare disorders, and liquid biopsy. As mentioned earlier by Jurgi, A.D.A.M. will also play an important role in the global CDx offering we are developing. I'm happy to say we are already seeing strong demand across Japan on both clinical and biopharma sides. On that note, I'll take a second to highlight our refreshed momentum with biopharma. As discussed in detail last quarter, we signed the largest contract in SOPHiA's history with AstraZeneca in August, kicking off a multiyear project to improve outcomes for breast cancer patients. In addition, in September, we signed a separate deal with AZ to enhance detection of breast and prostate cancer. As part of the partnership, AZ tapped SOPHiA to leverage our AI algorithms to develop an application which detects mutations in the P10 pathway, a key molecular signaling network linked to the development of breast and prostate cancer. The pathway is also notoriously complex from a variant calling perspective, and we were proud that AZ chose SOPHiA as its partner on this project. This project should also serve as yet another proof point of the value of SOPHiA's AI and our reputation as a leading data science and tech player in the space. Broadly across markets in the business, customers are increasingly turning to SOPHiA to help them make sense of complex data. Over the past 3 years, we've seen an explosion of data production in healthcare. Sequencers and other multimodal equipment are becoming cheaper, and capabilities are becoming more advanced. Illumina, Ultima, MGI, Element, and now Roche have all deployed products that are producing increasingly larger, deeper, and more complex data. In addition, as data capabilities increase, more sophisticated therapies and tests are emerging. Among other indicators, ctDNA is increasingly recognized as a valuable way to follow patients longitudinally and determine proper treatment. Further, sophisticated tests like liquid biopsy, MRD, ENHANZE exomes, and HRD are all in high demand. Broadly, these trends mean one thing, hospitals, labs, and health systems are increasingly looking for partners like SOPHiA to help them analyze processes that make sense of complex data. As a company that has invested more than $450 million in bringing an AI platform to help clinicians analyze complex health data, SOPHiA is perfectly positioned to take advantage of these trends. At ESMO last month, we constantly heard these dynamics echoed by our customers. Data is exploding. Data complexity is rising, and these new sophisticated tests continue to excite. In addition, it has become clear that the decentralized approach like SOPHiA are reaching an inflection point. Biopharma companies clearly prefer a decentralized testing landscape over one that is controlled by a few larger players. In addition, large hospitals and health systems, especially in the U.S. and U.K., are waking up to the benefits of in-house testing. It enables them to get closer to the patient, build local expertise, and make better use of valuable patient data. In-house testing also drives operational efficiencies by reducing test turnaround times, making better use of labor resources, and keeping testing profits in-house instead of giving them up to a centralized player. Combining all of these trends, what does it mean for SOPHiA? In short, it means that demand is higher than ever. Pipeline in the third quarter is up substantially since last year. Bookings in the first 3 quarters of 2025 are more than double those of 2024. Not only are we landing more customers than ever, but our customers are getting larger. Average contract value of the 31 customers in Q3 was up over 180% year-on-year. Additionally, the number of $1 million opportunities in our pipeline has expanded materially. I continue to be pleased with our positioning as well as the growth of our pipeline and of our end markets. And I look forward to updating you on these items in the coming months. With that, I will now turn the call over to George, who will provide a more detailed look at our third-quarter financial results. George Cardoza: Thanks, Ross, and good morning, everyone. As Jurgi and Ross highlighted, Q3 results came in ahead of expectations as the influx of new business begins to come online. Total revenue for the third quarter was $19.5 million compared to $15.9 million for the third quarter of 2024, representing year-over-year growth of 23%. As a reminder, revenue grew by 13% in the first quarter and 16% in the second quarter, so the growth momentum continues to build. Platform analysis volume was approximately 99,000 during the quarter, compared to 91,000 in the third quarter of 2024, representing year-over-year growth of 9%. Core genomic customers were 488 as of September 30, up from 462 in the prior year period, but down 2 customers relative to Q2 2025. As Ross mentioned, we have intentionally focused our sales team on winning larger accounts. While we moved 15 new customers into routine this quarter, we also churned out small accounts. The average revenue across all churn customers in Q3 was less than $8,000. Going forward, we will continue to focus our sales team on larger accounts, and the favorable results are showing. Net dollar retention for the quarter was 108% with strong performance in Europe, Asia Pac, and North America, partially offset by a decline in growth in Latin America. Annualized revenue churn remains at approximately 4%. Gross profit for the quarter was $12.9 million compared to $10.7 million in the prior year period, representing year-over-year growth of 21%. Gross margin was 66.3% for the third quarter compared with 67.2% for the third quarter of 2024. Adjusted gross profit was $14.2 million in Q3, an increase of 23% compared to adjusted gross profit of $11.6 million in the prior year period. Adjusted gross margin was 73.1% for the third quarter, remaining flat year-over-year despite the substantial increase in volume of data computed by the platform. As Jurgi mentioned, targeted platform improvements have driven cloud compute and storage costs lower throughout 2025, an achievement we remain proud of and expect to continue going forward. Total operating expenses for Q3 were $30.8 million compared to $26 million in the third quarter of 2025. However, Q3 results were adversely affected by a series of items during the quarter, which temporarily impacted results but do not reflect the company's underlying operating performance. I will take a moment to walk through each item. First, share price depreciation of 54% at the end of the third quarter resulted in higher Swiss social charges on share-based compensation, as these are remeasured with the company's share price under local regulations. These elevated social charges accounted for a $1.3 million increase to OpEx this quarter as compared to a $700,000 benefit last year in Q3. These costs are not reflected as an adjustment in our adjusted EBITDA table per SEC guidelines. Second, adverse foreign exchange movements at the end of the quarter negatively impacted reported OpEx by approximately $700,000, primarily due to the strengthening of the Swiss franc. The Swiss franc has appreciated by 14% since the start of the year, which means that our payroll and rent expenses in Switzerland are translating 14% higher when viewed in U.S. dollars. Third, Guardant Health filed suit against us in Europe and the United Kingdom, alleging patent infringement in the MSK-ACCESS application, which we believe to be without merit. This resulted in higher legal expenses in the quarter of approximately $600,000, which is reflected as an adjustment for litigation in our adjusted EBITDA table. Fourth, during the quarter, we completed an at-the-market facility with TD Cowen, along with completing a shelf offering that the SEC declared effective on August 8. There were $445,000 of costs associated with the A.D.A.M. facility and the shelf that we have adjusted for in our adjusted EBITDA table, as they are not expected to recur in 2026. After adjusting for these items and other standard IFRS adjustments, operating expenses grew only 1%, driven by sales and marketing investments, which continue to deliver high returns. Despite these temporary charges, we remain proud of our ability to grow revenue 23% without substantially increasing headcount or OpEx. Moving down the P&L., Operating loss for the quarter was $17.9 million compared to $15.4 million in the prior year period. EBITDA loss for the third quarter was $15.4 million compared to $13.2 million in the prior year period. Adjusted EBITDA loss was $10.2 million, up 8% from the prior year loss of $9.4 million. Excluding Swiss social charges and share-based compensation for both years, adjusted operating loss and adjusted EBITDA would have improved 13%, demonstrating our ability to deliver operating leverage. As with previous quarters, we remain laser-focused on driving efficiency gains across the business and reducing costs down the P&L. Lastly, total cash burn, which we define as the change in cash and cash equivalents for the third quarter of 2025, was $13.1 million compared to $9.6 million in the prior year quarter, representing a year-over-year increase of 36.5%. The cash outflows in the third quarter of 2025 include $500,000 invested in ATM Innovations in Japan, a $1.7 million reduction in our accounts payable balance as some large vendor payments were processed, and interest expense, which increased by $1.1 million from the prior year due to increased borrowings under the Perceptive credit agreement. We finished the quarter with cash and cash equivalents of $81.6 million as of September 30. We remain confident in our current capital position with respect to the achievement of our long-term goals. I'll now turn to our 2025 outlook. Given the promising reacceleration of revenue growth we've had in the last 3 quarters, SOPHiA GENETICS is updating our full-year revenue guidance for 2025. We are raising our full-year revenue guidance range as revenue is now expected to be in the range of $75 million to $77 million, representing growth of 15% to 18%. This compares to the previous range of $72 million to $76 million. Adjusted EBITDA loss guidance has been revised to a loss of $39 million to $41 million compared to $40.2 million in fiscal year 2024. The primary drivers of the change are the Swiss social taxes on our stock-based compensation, along with the appreciation of the Swiss franc and the euro, and the impact that they have on our European-based expenses, such as payroll and rent when translated over into U.S. dollars. On a constant currency basis, our expenses remain as expected, excluding the social taxes. Despite these impacts, we expect we'll be able to continue to show operating leverage for future revenue growth. We continue to make targeted investments in our platform and optimize cloud compute and storage costs, and expect to have modest gross margin expansion beyond current levels. We expect to continue to hold the line on operating expenses in local currencies and excluding social charges as we currently have the correct team size to support our medium-term growth objectives. This excludes some high ROI investments we will continue to make related to marketing activities, as well as certain investments in the commercial team, including commission payments for overperformance. We also expect a modest increase in our implementation teams to handle the increased volumes of new accounts. Our growth has been accelerating, and we believe these investments will pay off in 2026 and beyond. Finally, we will continue to revisit our discretionary expenses and execute on identified savings in systems, professional services, and certain public company costs throughout 2025. We continue to believe that we are on track to be approaching adjusted EBITDA breakeven by the end of 2026 and crossing over to positive adjusted EBITDA in the second half of 2027. With that, I would like to turn the call back over to Jurgi for closing remarks before we take your questions. Jurgi Camblong: Thank you, George. To close, this quarter marked another period of accelerated revenue growth with 23% year-over-year revenue growth, reflecting strong execution of our teams and the growing impact of our platform. Forward-looking indicators remain strong across the business as we continue to see a steady stream of new customer signings, substantial new biopharma partnerships, rising average contract size, and a healthy expansion in pipeline across regions and applications. On top of this, we continue to be laser-focused on optimizing costs and delivering sustainable growth. I am confident as ever in our long-term trajectory, and momentum in our business is building. I look forward to continuing to update you all on our progress in the future. With that, thank you to the SOPHiA team, customers, partners, and investors for joining us on our mission to transform patient care by expanding access to data-driven medicine globally. Operator, you may now open the line for questions. Operator: [Operator Instructions] And your first question comes from Bill Bonello from Craig-Hallum. William Bonello: So just a couple of things I'd love to follow up on. So first of all, in terms of the guide, and I think I get what you're doing here and appreciate it, but I just want to make sure. The midpoint of the guide sort of implies a mid-teens growth for Q4 versus the 23% growth that you had this quarter. Is there any particular reason that we would expect growth to decelerate next quarter? Or is this just kind of prudence? Jurgi Camblong: Thanks, Phil, and good question. I would say, obviously, all year, we've been generally conservative with our approach to guidance, right? Coming off of 2024, we wanted to make sure we were set up well to be able to continue to overachieve. And obviously, you see us do that this quarter and raise our guidance. I think in general, the business has fantastic momentum. We had another tremendous quarter of bookings. We're bringing quite a lot of business online. I think we wanted to just be prudent, right, heading into the year-end. But frankly, though, we don't see any change in kind of the key drivers of the business and feel very confident that our growth overall will continue to perform in line with our expectations and/or continue to accelerate. William Bonello: And then MSK, you talked about 60 customers now signed up. Can you give us a sense of how many of those customers are already performing analysis or generating revenue, and how many are yet to go live? And then maybe -- I know you talked about it a little bit, but maybe a little more color or commentary on the pipeline of potential customers that you might be able to add going forward? Jurgi Camblong: Yes, sure. I will start, Bill, and then Ross Christos. But I will start by telling that indeed to your point on the pipeline, the demand in liquid biopsy is growing, right? ctDNA is becoming more and more adopted clinically, more and more important for diagnosis, for monitoring, but eventually, as well for mRNA testing. So definitely, this is a platform where we see a lot of demand. When it comes to the numbers, we highlighted that this quarter, we did over 2,000 analyses on MSK-ACCESS. So basically, this gives you a sense as well of our numbers are ramping up. We grew more than triple digit on more than 100% basically on liquid biopsy, actually over 300% year-on-year. So again, there is a lot of demand there. And when it comes to the number of sites that were implemented, it's still a minority. So Ross, maybe you want to give us some more color to give. Ross Muken: Yes. Thanks, Bill. So obviously, as Jurgi said, liquid biopsy remains, I would say, a super hot area for diagnostics in general and one where we're seeing a lot of demand. Certainly, we're very happy with the rate of adoption over the last 12 months in terms of the 60 signed logos. So assume about 20% of those have started to enter routine, although still based on the numbers we shared in terms of the monthly cadence, it's still quite modest. We expect that to ramp pretty materially over the next 1 to 2 quarters. We have some very large accounts coming online in the fourth quarter and into the first quarter of next year. And so we're quite confident that that trajectory will continue to inflect. And then for 2026, we will see very strong growth from this product and one as well, as we think about CDx and our announcements there, and we can touch on that we continue to see a multiyear trajectory that's going to be driving this business for the foreseeable future. William Bonello: And if you'll allow me, just one last question. You mentioned Thermo Fisher as a customer. Can you just talk a little bit more about what they'll be doing, how they're using the product? Ross Muken: So Thermo is using it in one of their laboratories. I would say we're probably not at liberty to share a ton more. But certainly, as you think about many of the typical vendors and they are one who does CDx, you tend to do orthogonal studies and work, and also tend to use other technologies of other competitors, of which you do not have sort of applications and/or bioinformatic capabilities. And so I would say, think about it in that vein, we're very excited to have them as a customer. Obviously, we already serve quite a lot of thermal instruments as well in the field. And so I would say in this vein, this is sort of a new avenue for us and an important one. But unfortunately, I can't give you a ton more detail on the project just because of its confidential nature. Operator: And your next question comes from Subbu Nambi from Guggenheim. Subhalaxmi Nambi: What is your outlook for biopharma R&D spending and overall funding for 2026? Jurgi Camblong: Subbu, we have been speaking a bit about the biopharma penalizing in the past, right, and us changing the strategy, being focusing on things that were very well, I would say, defined around data, around diagnostics. And as we've been highlighting in the previous quarter, this strategy has been taking off. We announced last quarter as well a deal we made with AstraZeneca on the data side, which we qualified as being the bigger deal in the biopharma historically. But beyond that on '26, Ross, what can we share? Ross Muken: Yes. So I would say, Subu, coming out of ESMO, I was super encouraged. So if you think about a lot of where we're positioned relative to pharma pipelines as well as where pharma is allocating dollars, we're in a very favorable position, right? Pharma is increasingly, I would say, looking to support a hybrid centralized, centralized approach for CDx, and us with our partner, Myriad, have fantastic, I would say, capabilities in that front and also to do CDx and other sponsored testing. Additionally, I would say, if you look at what they're doing with AI, we have really unique capabilities in terms of algorithm development and unique data sets that we have access to that, as you saw in the breast example, garner a lot of interest, and we would expect to see more of that. Additionally, again, being well positioned in liquid biopsy, which is an area that's inflecting at the moment. I would say also, we're having quite a lot of conversations and discussions around a myriad of different opportunities there. And so across the board for us at least, biopharma year-on-year and certainly on a 2-year running basis is materially healthier. Our pipeline is in fantastic shape. Again, we still need to execute and drive some of these large deals home. But I would say for us right now, the positioning is quite good and the budgets are there. And we're seeing not only heightened activity level, but for us, and again, this -- I'm not sure as a read on the market, but more specific to us, we're engaged with most of the top 20, right? And so if you think about many of the large names that have had a lot of pipeline success, obviously, AstraZeneca being at the foremost, but many of the other large names are ones that we have active dialogue and very, I would say, concrete potential deals in the pipeline with. And so we're quite encouraged about what that could contribute in '26 and beyond. Subhalaxmi Nambi: How did customers' onboarding setup times trend in 3Q? Did you notice the macro environment elongating this in any way? Or do you have concerns about this? Any U.S. government shutdown impacts? Jurgi Camblong: So first, as you know, Subbu, for us, signing deals is great, and we have been highlighting that actually bookings and ACVs of bookings have been very good, but then we don't generate revenue until our platform is being implemented, given we're being paid on usage, right? So more color on the implementations and the impact of the macro. Ross Muken: Yes. So in general, we're actually seeing healthy activities across the entire funnel. So pipeline remains robust. Bookings were very good in the quarter, and implementation, certainly on a dollar basis, continue to accelerate. So this quarter, we had a bit more expand applications come live than new logos, but I would expect Q4 to be quite strong. We actually just had a record October, and so on that level, activity levels, again, and this is across multiple geographies, continue to be quite good. So for us, on the macro side, the environment is super healthy. And I think you've heard this from some of the sequencing providers as well. We've talked about clinical volumes being strong. And so obviously, with that and the increased data production on those volumes, for us at the moment, things are continuing to be quite strong. Yes. So no impact from the government shutdown so far, at least on our side. Operator: And your next question comes from Mark Massaro from BTIG. Mark Massaro: Congrats on the strong quarter. I wanted to ask a little bit about the large pharma customer you have in AstraZeneca. How much -- was there a benefit in Q3? And if not, should we -- I think we're expecting that to pick up here in Q4. I was hoping if you could just sort of walk me through that. And then related to that, can you just speak to the strength in biopharma if you exclude AstraZeneca? Jurgi Camblong: Yes. So Mark, George will start on your question regarding the financial side, and then Ross will give you some more color on the recent activities we have. George Cardoza: Yes, there was a fairly small amount of pharma in Q3, and we had said that last quarter that pharma was really going to ramp up in the fourth quarter. Again, typically, these type of contracts take a couple of months to get projects going, and the revenue is typically recognized when milestones are hit. So -- but we do expect to hit some of those milestones in the fourth quarter. And as Jurgi said, really, the thing that we're excited about with the pharma side is really when you start to look out in 2026 and 2027, we're still very bullish on this business and what it can become. And it's exciting to see the projects that we've already won, and the pipeline is not -- you think you signed a lot of contracts, maybe your pipeline to be down. The exact opposite has happened. The pipeline has actually even gotten stronger at the same time. So we're -- we remain very bullish about the pharma business. We've talked about the Myriad partnership, what we're doing in Japan, and we believe wholeheartedly, there's a great business here. Ross Muken: Yes. So Mark, I would say, obviously, AstraZeneca is a fantastic partner, particularly given the health of their pipelines, right? So being tied to one of the large pharmas that has a ton of new product introductions is obviously as a diagnostic and data player, incredibly beneficial. But to your point, obviously, we've been super focused on broadening out the pipeline, as I was mentioning before, that has expanded pretty materially, not just in size, but also in the sheer number of pharmas in the pipeline. I can also confirm we won other deals outside of AstraZeneca, some that are quite significant. But I would say for various reasons, you can't always press release depending on where the drug is or where the project is in its stage sort of the wins. But I would say, overall, we're quite happy with that momentum, and we would expect, again, to see further adds on that side over the upcoming quarters and into 2026 as the business continues its recovery. Mark Massaro: And between Myriad Genetics and the customer formerly known as Genesis Healthcare, I think you've got companion diagnostics with both. Can you just give us a sense on timing, how you're thinking about regulatory, and when you think these might start contributing to your business? Jurgi Camblong: Yes. So as you understand, right, depending on the regions, regulatory basically frameworks are different. So the partner we have in Japan is to fulfill basically the regulatory authorities in Japan, and the one we have in the U.S. is to fulfill as well regulatory duties and opportunities in the U.S. market, right? And the why we've been expanding our offering. As you know, Mark, we've been very successful with our decentralized model. But in some instances, premarket, pharma wants to do that in a single site P&L. So hence, like the inception of this partnership. Anything else you would like to add? Ross Muken: Yes. So I'd say, Mark, again, coming out of ESMO and even more so than ASCO, we heard consistently at drumbeat of huge interest in MSK-ACCESS as kind of a global CDx tool. And again, if you think about the existing environment, typically today, if you hire one of the current vendors who are centralized, you're normally having to hire probably another 5 to 7 vendors to cover the diagnostics globally through commercialization, whereas now with a strong partner at Myriad is obviously very well known in this space, having delivered really strong results with myChoice and other products in the past. So they have great regulatory experience for the U.S. market. We have Genesis or now A.D.A.M. Innovations, who's generating quite a lot of interest, honestly, in Japan as well, and obviously, our ability to sort of deliver applications for the rest of the world. I think that's garnered quite a lot of kind of curiosity of pharma that's now turning into real opportunities. We actually already have several opportunities we're involved in, in the market. Again, it doesn't mean we will win. But certainly, we're already engaged. So that should give you a sense of our preparation and timing of when we expect this to be able to be available as certainly we're already in sort of that process. But I would say, certainly, we want to take our time. We obviously work with our partners closely on bringing these tools to market. But again, I would say on a multiyear basis, this has the potential to be a really significant driver for SOPHiA going forward. Mark Massaro: And just one last one for me. You made some really good progress signing new customers, including the MSK-ACCESS on SOPHiA DDM. You talked about the majority are expected to complete implementation and begin generating revenue in the next 3 to 6 months. I'm just trying to get a sense, as we think out to 2026, is there -- in your view, do you think you'll continue to onboard new MSK-ACCESS customers each quarter? Or do you think there's a big bolus sort of like Q4 into Q1, and then that will start to level off? I'm just trying to get a sense for the business in '26. Ross Muken: Yes. So I would say, in general, Mark, we're obviously quite enthusiastic about this product ramp. As we've said, these will come online, as you mentioned. I would say it's never perfectly linear, as you would expect. So there will be some step function changes. But ultimately, the potential here with the existing signed accounts is quite significant to contribute to our business, and then obviously, CDx as well. And so we remain very confident in that contribution to the '26 growth rate and beyond. Jurgi Camblong: And Mark, if I may add, I know you're interested in knowing what our plans for MRD as well. In a decentralized world, what would be the MRD applications, both clinically and technologically? But typically, MSK-ACCESS, which enables as well to measure ctDNA could become an MRD application. Operator: And your last question comes from Dan Brennan from TD Cowen. Kyle Boucher: This is Kyle on for Dan. Just wanted to build off the last question a little bit on the customer implementation. You added over 30 customers this quarter. And I believe exiting Q2, you had somewhere around 100 customers in the backlog waiting to be implemented. Can you discuss what this backlog is today? Ross Muken: Yes. So the backlog remains for better or worse at the highest levels in our history. Certainly, I would say we did a good job in the third quarter of continuing to make progress and accelerate go-lives in terms of accounts coming online in the third and fourth quarter and into Q1 of next year. And we have some, as I mentioned, quite significant ones coming online over the next 2 months. Certainly, you can always improve and get better. And so we're spending a lot of time and effort to optimize the end-to-end process. Some of that also at times, is outside of our control, whether it's someone needing a regulatory approval or something on the reimbursement side. But generally, I would say the trend is favorable. The backlog is substantial. It gives us a lot of forward visibility. And again, it's why we remain confident in continuing in our path to kind of growth acceleration in the fourth quarter and into 2026. Kyle Boucher: And then maybe on that then, maybe it's too early to tell, but looking at where consensus is for '26 right now, I think it implies somewhere around mid-teens growth. And I mean, if you add the clinical momentum, pharma getting better, not being a headwind next year, is there any reason to think that growth couldn't be better than that next year? Jurgi Camblong: George? George Cardoza: We've always tried to guide conservatively. And I think, as Ross said, sometimes things aren't always linear. You kind of have a bit of the trends going one way or another. So I think we want to put out guidance that is reasonable. And then certainly, yes, I think you've just seen this past quarter where we put up a very nice number, and we're going to continue to try to overachieve. But I think in terms of the 2026 expectations, where the consensus is, is probably reasonable, and we're going to do everything we can to overperform. Ross Muken: Yes. And so Kyle, I would say, certainly, we're several quarters into a reacceleration. There's no reason to think that there's anything changing in that trajectory in our business. Obviously, we've talked about strong new business momentum all year. And this quarter, we're talking a bit as well around the pharma reacceleration and recovery. But as George said, obviously, we want to be prudent. But at the moment, we're obviously feeling quite confident on our trajectory. And again, our long-term goal is to get back to more historical growth rates that you saw from us in the past. And so that's the ambition. And so we're going to continue to push towards that. Operator: There are no further questions at this time. You may proceed. Jurgi Camblong: Thank you very much for joining us today, and please continue following up. And once again, congrats to the SOPHiA team who delivered a fantastic quarter. Operator: Ladies and gentlemen, this concludes today's conference call. We thank you very much for your participation, and you may now disconnect. Have a great day.
Douglas Constantine: Good morning, and thank you for joining us today for Progressive's third quarter investor event. I'm Doug Constantine, Treasury Controller and I'll be moderator for today's event. The company will not make detailed comments related to its results in addition to those provided in its annual report on Form 10-K, quarterly reports on Form 10-Q and the letter to shareholders, which have been posted to the company's website. Although our quarterly Investor Relations events often include a presentation on a specific portion of our business, we will instead use the 60 minutes scheduled for today's event for introductory comments by our CFO and a question-and-answer session with members of our leadership team. Introductory comments by our CFO were previously recorded. Upon completion of the previously recorded remarks, we will use the balance of the 60 minutes scheduled for this event for live questions and answers with members of our leadership team. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's event. Additional information concerning those risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31, 2024, as supplemented by our Form 10-Q for the first, second and third quarters of 2025, where you will find discussions of the risk factors affecting our business, safe harbor statements related to the forward-looking statements and other discussions of the challenges we face. These documents can be found via the Investor Relations section of our website at investors.progressive.com. To begin today, I'm pleased to introduce our CFO, John Sauerland, who will kick us with some introductory comments. John? John Sauerland: Good morning, and thank you for joining Progressive's Third Quarter 2025 Investor Relations Call. We had an excellent quarter with an 89.5 combined ratio, 10% premium growth and policies in force growth of 12% versus a year ago. That policies in force growth equates to 4.2 million more policyholders or almost 7 million more vehicles in force than a year ago. While growth is lower than in recent years, we are still gaining significant market share in capitalizing on the opportunities for growth through robust media spend and competitive rates. Year-to-date, our combined ratio is 87.3%, with 13% premium growth and comprehensive income of $10 billion, which is over 30% ahead of 2024. Rounding out our key performance metrics, our trailing 12-month comprehensive return on equity stands at 37.1%. Before moving to questions, we'd like to take a moment to offer more commentary on the $950 million estimate for policyholder credit expense for Personal Auto customers in Florida that we recognized in September. Florida is Progressive's largest market, and we are the leading provider of Personal Auto insurance in Florida. In 2023, Florida legislators responded to rapidly rising insurance rates by passing House Bill 837, which, among other things, move Florida to a modified comparative negligent system, meaning drivers who are more than 50% at fault for an accident could no longer sue for damages, and this allowed one-way attorney fees. Since House Bill 837 took effect, our average loss cost or pure premiums for Florida injury claims are down between 10% and 20%, and the percentage of Florida personal injury protection or PIP claims, for which we receive lawsuits is down around 60%. While we have been responsive in reflecting these changes in our loss costs through 2 rate reductions for Florida consumers in the past year and another plan for December, the drop in loss cost was more pronounced than we expected. Additionally, obviously, there was significant risk of very costly storms in Florida, and we have seen virtually none in 2025. The Florida excess profits law calls for the return of profits in excess of 500 basis points better than our filed and approved underwriting profit margin over a 3 accident year period. And at quarter end, we estimated that liability at $950 million. For perspective, in 2022 alone, inclusive of Hurricane Ian, our Personal Auto combined ratio was over 100, and those results translated to around $750 million decrease to the excess profits equation for the periods that included 2022. Our Florida auto business is more than 50% bigger now than in 2022. We applaud the legislative changes in House Bill 837 and resulting in more affordable personal auto insurance premiums for consumers, and desire to continue to grow our presence in Florida. Our loss reserves will continue to develop as we handle more claims into the new system, and our estimate for the policyholder credit expense for the 2023 to 2025 period will develop accordingly, with monthly adjustments showing up in the expense line on our income statement. Naturally, going forward, our intent is to manage profitability in Florida to avoid excess profits. And finally, in response to questions we received, while a few other states have statutes covering excess profits, we don't currently foresee other similar exposures. Thank you again for joining us, and we'll now take your questions. Douglas Constantine: This concludes the previously recorded portion of today's event. We now have members of our management team available live to answer questions. [Operator Instructions] Operator: The first question is from the line of Bob Huang with Morgan Stanley. Jian Huang: My first question is on advertising spend. Ad spending this quarter in terms of dollar amount is fairly similar to the last quarter. Just given the increased competition policy in force growth has decelerated, specifically in Personal Auto. Curious if there's a way to think about ad spending going forward. Clearly, these policies are very profitable. Do you need to maintain the current level of ad spending in an increasingly competitive environment? Just curious how you should think about ad spending going forward? Susan Griffith: Yes, Bob, we monitor that every month on an ongoing basis and monitor most importantly, efficiency. So we want to make sure our cost per sale is lower than our targeted acquisition cost, and that remains to be the case. So Pat Callahan and his team, we do a lot of our buying of advertising internally. They look at it overall for a year, with things you have to buy in advance. But ongoing, we have the lever to increase or decrease depend on competition. That's what we'll continue to do. Again, our operating goal is to continue to grow as fast as we can and advertising is a great lever to reach that goal. Jian Huang: Okay. Maybe just clarifying that point a little bit. When you say that you kind of have -- you're buying ads 12 months in advance. Does that mean that essentially for the next 12 months your ad spending is more or less set already? Or are there some levers around that? Or is it just that most of it still is kind of not so certain? I just want to see if there's a clarification on that point. Susan Griffith: We'll do some buys in advance to get some discounted buys, but -- a big majority, a big majority of the ads that we buy are in the auction, and we can -- that's where we can have the levers to pull back or go forward that you've seen in the last several years. Operator: The next question is from the line of Elyse Greenspan with Wells Fargo. Elyse Greenspan: My first question, I was hoping you could just comment just on the competitive environment in general and what you observed in the Q3, and I guess, like a forward view, right, we've seen others pivot to growth as we move through the year? And just how has that impacted that combined, right, with the fact that we're in this environment where you guys said in the Q, you don't need that much rate right now? How does that help you formulate your view about growth, right, both in the near term, like in the fourth quarter, but then also as we think about 2026? Susan Griffith: Thanks, Elyse, and thanks for acknowledging your report last night that we had strong growth in Q3 of '24 because I've been comparing the growth and the fact that we've slowed is sort of funny to me because of how much we've grown on such a big base. So I appreciate you acknowledging that. So yes, the competitive environment has gotten stronger, which we knew would happen. That's why we got out in advance of rates to capture all the growth that we did, and we did. This is when the fun starts. So competition is great. It's great for customers and consumers. And so we'll continue to find ways with which to grow. We have a lot out there in terms of as we look at each state, each channel, different factors in terms of Sams, Wrights, Robinsons, and we have a strategy to grow all of the above. And probably, the biggest growth point for us, Elyse, is when we think of Robinsons. So we have -- we want to grow in every single persona. So we love Sams as long as we can make our calendar year profitable. But we want to grow Robinsons because that market is about a $230 billion addressable market, and we have a low percentage of that share. So there's a lot of opportunity. I'll probably go into a little bit more detail than you need. But I think as you think about not just fourth quarter, but especially as we get into '26 and '27. And the area of our focus will be more Robinsons because we're in such a different position than we were a few years ago. So as you know, we needed rate increases, we needed better segmentation, we needed some cost sharing to go into the policies, we needed to exit DP3. There's a lot of things that we did that I referred to a couple of different times of our 5-point blueprint to get to where we need to go to. We did just that. We increased rates from 22% to 24%, about 55% and continue, but on a much more moderate level because we're in such a different position. Our calendar year combined ratio now on property is about 78%, and granted some of that is favorable reserve development as well as we haven't had many storms at all in 2025, but that is a great position to be in. And so as we think about our growth, we think about -- we have a framework that we're using called a new business readiness growth. And we look at the assessment of adequate rate level, segmentation, so which product is in the market, cost sharing, interstate diversification, regulation and market conditions. And when we look at all those factors, what we look at state by state is where do we want to grow and where we think we can grow and how are we positioned in those states. So currently, there's about 30 states -- 33 states where we want to -- we're going to spur on growth. And about 20 of those are in our growth states that we've called growth states and 13 are more volatile. We'll be a little bit more conservative in the volatile state, but that really opens us up broadly for more Robinsons, for more growth. And as you can imagine, in John's opening statement, he talked about VIF, Vehicles in Force, which we don't publicly talk about. We talk about PIF. But when you compare the $4.2 million PIF growth year-over-year, that equates to about $7 million VIF growth. You can imagine that this growth with more Robinsons is much higher because they're multicar and multiproduct households. So competition is there. We have a lot on the horizon to spur on growth, and we're pretty excited about it. Elyse Greenspan: And then my follow-up is just, I guess, on margins and tariffs. It seems like from the Q commentary that you guys really have not seen an impact yet. So I just want to make sure I'm reading the comments correctly. And then, do you guys still expect that perhaps we could see an impact on loss trend in margins as we move through the balance of the year? Susan Griffith: Yes, you read that exactly correct. We haven't seen much on that. It might be because there's inventory and of course, the tariff schematic has changed along the way. But we're still -- we're looking at low single digits, and we have the margins to be able to absorb that. So we're not too worried about tariffs at this point. Of course, that could change. But at this point, we're not too worried about it. Operator: The next question is from the line of Mike Zaremski with BMO. Michael Zaremski: My first question is on, hopefully, teasing out premiums per policy when we just kind of prudently divide premiums by PIF, and this is for Personal Auto. It's been slightly negative for a while now, which appears to be different from the kind of the flattish pricing you've been speaking to. So trying to tease out whether the negativity is coming from just some of the Florida rate reductions? Is the December one going to be a large one if you want to preview that? Or is it coming from just other actions you're talking about policyholders switching to lower-cost policies, et cetera? Susan Griffith: Yes. I think, Mike, there's a lot of things happening. Our average written premium is affected by our rate decreases. And obviously, it went up tremendously in '23 into '24 with all of the increases that we took based on inflation. I think the reaction might be a little bit on growth, although 12% PIF growth on a 14% PIF growth to me is really unheard of. And any time we're in anywhere near that double-digit growth, we're pretty darn excited, at an 89.5% with the $950 million accrual. So the Florida situation is just that. And we're going to tell you what we know when we know it. So as John said, we'll continue to revise our accrual as the year plays out. So in a couple of weeks, you'll know if the accrual has gone up or down for October and then there are sometimes late year storms, I think in 2024, Helene and Milton were both in September and October. So we'll watch those. But I feel really good about where we're at. I mean if we had a crystal ball in Florida, we might have done things differently. But I think we have handled that really well. We're very large. They're the largest. And as John said in his opening statements, I -- and I've said this before, I'm going to commend Governor DeSantis and Commissioner Yaworsky for this legislative change with House Bill 837. It really has had a profound and a momentous effect on the state of Florida's insurance market. And I've been in this business about 38 years. I would never imagine these changes and how great they are for the benefit of Florida consumers. So we'll continue to watch that. But I think from a premium per policy, we're always going to be competitive and segments change, and that kind of all goes into the math. Michael Zaremski: Okay. Got it. Maybe pivoting to, Tricia, your remarks about share buybacks potentially being a bigger lever than historically. Can you talk about just the framework there? Should we -- are you alluding to the special dividend being put into buybacks instead at current valuations or for both? Or anything -- any color would be helpful. Susan Griffith: Yes. When we have excess capital, we think of it in 3 ways. And obviously, we're -- I just talked a little bit when I answered Elyse's questions about our desire to continue to grow and our actions around that. And then, of course, we look at share buybacks if we believe it's under our intrinsic value. Of course, we always buy enough shares to dilute the stock compensation in any given year. We have the ability to do that. And you'll see in our monthly release the actual number of shares we buy back each month as well as the average price. And so you'll see that in a few weeks as well. We have a company-wide 10b5-1 that we file with certain price points to buy back stock if we think it's under our value. And so you'll see our actions that we took in October in a few weeks. And then we've been in party discussions with the Board of Directors in the last couple of meetings on what we think could be a dividend. And of course, that will ultimately be their choice, and we'll have another conversation in December. And with that, we'll kind of be watching our ability to buy back more as well as what we think if we have a dividend, what it will be. But those are conversations that are constantly happening within our walls and with our Board of Directors. Michael Zaremski: So just, Tricia, just to be clear, were you signaling a change in capital management tone by stating the buyback language? Or are you saying this is just business as usual discussion with the Board? Susan Griffith: All I was saying was that we're very cognizant when the shares -- when we believe the shares are under our intrinsic value, and we typically, if we have the capital, take action when that happens. Operator: The next question is from the line of Tracy Benguigui with Wolfe Research. Tracy Benguigui: I have a question about your Florida excess profit statute. When you perform the same exercise next year, let's call it, September for accident years '24 to '26 to see if you owe any excess profits in early '27. Is there a scenario where you'll be paying another Florida excess profit statute given all the favorable reserve development you experienced in the state in recent years? Or do the excess credits you're paying in '26 basically neutralize a lot of those excess profits that you could owe in '27? Susan Griffith: Well, we don't know. And we're going to -- as I said earlier, we're going to continue to refine our accrual as each month goes by for this 3-year trailing period. It's -- and at that point at the end of this year, we'll know the sort of fully like you said, neutralized amount for that. And so the hard part, and we've tried to signal this about Florida is the storm season is typically at the end of the year. So we're putting another decrease in, in December. We'll watch that closely. I think John said, we'll do what we can to avoid a similar situation in '27 for calendar year '26, '25, '24, but we feel good about where we're at right now with the accrual and we'll continue to revise that. Tracy Benguigui: Okay. And you saw that Florida auto business is more than 50% bigger now than in '22, and you're managing the profitability in Florida to avoid those excess profits and you took two rate cuts and you're going to take another one. So my question is on bundling. Can you share how much of your homeowner policies have grown in Florida? And how you're thinking about your property exposure relative to your risk appetite? Susan Griffith: Yes. Our property growth in Florida has been minimal. Several years ago, we reviewed our policies in Florida to get to where we -- where we are in terms of our readiness growth. We had a lot of DP-3. We had a lot of coastal properties. And so we had a lot of nonrenewals that we gave to another company to be able to write. We will write a little bit in Florida now, mostly new construction. That's a place where like we say, when we talk about volatile states that we will not be -- have huge aggressive growth, but we'll grow where we think we can and make our target profit margins. But the growth in the property book has not been huge. Operator: The next question is from the line of Jimmy Bhullar with JPMorgan. Jamminder Bhullar: I had a question just on competition in Personal Auto. Most competitors have been increasing marketing spending in recent months. Many have alluded to potential price reductions as well just given strong margins. So your comments on competition, is that what they reflect? Or are you seeing competitors get more aggressive with pricing and writing business either with sort of implied losses or very low margins, so just whether its exactly rationale? Susan Griffith: Yes, I just want to say, I think we're seeing all of the above. I think we're seeing a lot of -- we saw a lot of price decreases. We've seen more increase in advertising, and I think that all goes to competitiveness. So I think we think that's good for consumers. And when we think of -- when we think of the strategic pillars, that's one big piece of it but you have to have a really great brand, and our brand has continued to evolve and will continue to evolve to get us on that short list. You have to have for us broad coverage where, when and how customers want to shop. And we have that across the board from our independent agent channel, our direct channel and then we have multiple different areas with which to buy our products or the products of our unaffiliated partners. And then we have -- and this is sometimes underestimated because part of what's been Progressive's success is our people and our culture. That's really hard to put on the spreadsheet for an analyst. We just finished our Gallup survey, we're in the 99% of culture and engagement. That's really important because when you have times where you want to get something done, whether it's growth or decrease expenses or roll out a new product, execution is the name of the game and you have to have a great culture to be able to do that because people want to be able to rally around a singular goal. So those four things we think about all the time. But as far as competitive prices, we're seeing increased advertising and much more competitive pricing out there. Jamminder Bhullar: Okay. And then maybe on a different topic, if I think about your commercial lines business, I would have thought that it would be growing at a fairly fast clip since you were expanding your target markets, broadening coverage, adding new types of coverages, policies. And if we look at the numbers the last couple of years, they've been high single digits, which is decent, but high single-digit premium growth the last couple of quarters. I think premium growth has actually been negative off of modest comp. So how do you think about like maybe talk about your aspirations or growth potential of your Commercial Lines business over the longer term? Susan Griffith: Yes. I think longer term, we have great aspirations. Clearly, FHT has been a headwind, those are -- that was -- it's higher margin business, but we have slowed growth there, a lot due to both rate and non-rate actions. And we've increased our growth in business owners and contractors which are a lower premium, and we've done some 6-month policy. So there -- so what you're seeing is real in the data. However, I think you're correct. We have a couple of areas that we have grown over the years and really wanted to understand them more deeply. And we have pretty complex plans to spur on growth in a couple of different areas. I'm not going to talk about those today. I'll talk about those maybe as we get into them. More specifically, I don't want to show my cards. But yes, we believe that the runway in Commercial Lines continues to be really strong. Operator: The next question is from the line of Gregory Peters with Raymond James. Charles Peters: In your letter in previous comments, you've talked about new products, your Personal Auto product, 8.9 and 9.0 and then in the property area, your next-gen product, 5.0. So as we're sitting here on the outside watching these developments, trying to understand what does Personal Auto product 9.0 mean versus product 8.9 and is the difference that material? And the same question would be applied to the property next-generation product, too? Susan Griffith: Yes. That's a great question. First, I would say we're not very creative when we name our new product model. So I'm going to give you that because you'll see on 5 -- we're 5.0 and 5.1 in property, 8.9, 9.1. I'm going to let Pat take that. But what I would say is years ago, probably around 2016 maybe, we decided that we really wanted to have the pace of our models increase to get more and more variables out there that are predictive of either loss cost or if we wanted to increase a certain segment like the Robinsons. And that's why we end up doing that. But -- and we -- I don't think we're going to go into the specific variables. But I'll let Pat talk about that a little bit more because we have very large R&D groups that work on these product models constantly. Pat, do you want to add anything? Patrick Callahan: Sure. So from a product perspective, we try to do a couple of things every time we roll out a new product. And the first is primarily to match rate to risk better than we did in the prior product. And insurance is a scale game. We have more data than most competitors, and our product is more complex. So we have more segmented or finite data than virtually all competitors in market. So that data enables us to solve what predicts and fits losses more precisely or more accurately than others can. So the first and foremost is to match rate to risk. Second, though is to introduce differentiating coverages that meet consumers' needs to transfer risk to us as the carrier to smooth household cash flows. So a couple of examples of that between 8.9 and 9.0. So 8.9, we introduced Progressive vehicle protection. Think of it as a mechanical breakdown coverage for vehicles that supplements a new car warranty and provides things like lost key fob and dent and ding repair as well as supplementing the OEM warranty as the powertrain warranty or bumper-to-bumper warranty kind of runs off on a new car. And 9.0, similarly, we come out with new segmentation where we solve all the math and the factors to fit the loss curve more precisely while also introducing with 9.0 embedded renters. So now you can embed and buy a renter's insurance coverage as part of your progressive auto policy. So we recognize that renters insurance is a potential gateway product for us in the property space, and we want to make sure that we are attracting multiline customers early in their insurance shopping and buying journey, and we want to protect their household goods as part of a renter's product and allow them to move them into a home or a condo as they change their living situation. So really, a couple of things we do with every product, but primarily it's solved the math to make sure we're as accurate as we can, leveraging our massive scale; and secondarily, get that product to market, as Tricia mentioned, as quick as possible. Charles Peters: As a follow-up question, I'm going to focus pivot to technology and autonomous driving. The new cars coming out have a lot of embedded technologies. Some of them actually can drive themselves to locations, the new Tesla I'm thinking about, in particular. So I think it's appropriate for us to -- as we think about Progressive, what's your view on this technology, emerging technology? And in that moment in time, maybe 15 years from now when we get to a fully autonomous type of environment. Can you talk about how the company is thinking about that? And any color there would be helpful. Susan Griffith: Yes. We've been watching this for many, many years. I think we first did our first, what we call runway model, in 2012 and to try to understand, okay, the implications of cars that are safer. First of all, safer cars are better for the world. So we think that's a great thing. And I think we build that into our product as we think about vehicles that have safer components. Just like you would have at any time with seat belts or backup cameras, those sorts of things. So we're continuing to revise our model. In fact, we're in the midst of doing it right now to try to understand when that will impact us. And we see a lot -- we gather a lot of data. We see a lot of data even when you compare like the Waymo cars in Austin, and we look at our relationships with TNC, we've not seen too much of a change and the changes there with pretty heavy Waymo use has not muted TNC miles. So we're continuing to watch that getting as granular as we can. But at a higher level, what we did years ago is we constructed the 3 horizons to really understand how we can grow across the board, not just in where we've typically grown in our private Passenger Auto and our Commercial Auto, which we're still going to continue to do. But that's when we really built our Commercial Lines product models out. So think of BOP fleet, our relationships with our TNC partners and many other things. And then, of course, our Horizon 3, which are smaller now, but we believe will be bigger in the future. We're going to continue to look at that, we call it, execute, expand, explore to make sure that we have a really robust model as cars get safer and as frequency goes down, and we'll watch that and make a determination of what we need to do to continue to grow. And we talk about this all the time because it's important for society, but it's also important for us to know areas where we can grow, where we can leverage our people, our data, our scale to grow in different ways, and that's what we talk about as we think about autonomous vehicles. It's -- the time frame is always sort of the big question mark. Because if you look at articles in 2012, it would have said everyone is driving around playing bridge in the back of their car. In 2019, that hasn't been the case. So we still think there's a lot to go again. We don't have our heads in the sand, and we'll continue to think about growth in different areas. Operator: The next question is from the line of Alex Scott with Barclays. Taylor Scott: First one I had is on shopping and retention. I was just interested if you could compare sort of the time period where you're taking bigger increases or the industry is taking bigger increases in the shopping activity that was going on then in sort of reaction to higher prices as opposed to maybe what you're expecting over the next 12 months on retention related more to well, you could shop and go get a lower price potentially somewhere. Are you seeing different kinds of sensitivity to that related to up in pricing versus potential for down? Susan Griffith: Yes. I mean I think we're seeing a lot of shopping, which means all customers are going to shop including ours, and you see that in our PLE. Our feeling is just as we talked about in the Q, oftentimes, our customers will reach out to us and we can do a policy review with our cancer preservation team to see if there's something we can do to help them out from a price perspective. If we end up writing a brand-new policy that starts the clock ticking. So that is a little bit of a headwind to PLE, but not when we think about our consumer life expectancy, our household life expectancy. When you look at that, we don't share that data externally. We share PLE. But if you look at our, say, household life expectancy of having a product with Progressive, that's relatively flat. So we feel decent about that. Now if you shop and you end up leaving us, we believe that is just adverse selection because we believe we have the most current up-to-date price, as Pat talked about and I talked about briefly. Our models are constantly changing and revising them to make them more specific to rate versus risk. And if you end up leaving, we believe that we have more data than wherever that customer is going to in terms of profitability. Taylor Scott: Got it. That's helpful. And then going back to the capital discussion. I mean, M&A was something you didn't mention as much relative to like the buyback and variable dividend conversation. And just in light of that conversation you had on autonomous and potentially expanding into other products and so forth. I mean, how does M&A fit into that? How do you think about M&A over a little bit longer time period? And why wouldn't you use a really strong capital position now to explore that? Susan Griffith: I mean M&A is really complicated. We've done a couple of acquisitions in the last 10 or so years, and they were very specific. So we bought ASI, which is now Progressive Home because we wanted that bundled customer and access to that customer, especially in the agency channel. We bought Protective a few years ago to increase our fleet capacity and we'll continue to kind of close the gap on that on the Commercial Lines part. But acquisitions can be tough and integrations can be tough. So we want to make sure it's the right company, the right culture and something that can be additive. . So if we think we want to grow, and there's a company that has a bunch of private passenger auto that we believe we can get anyway, I'm not sure you want to pay the premium on that. That said, we have a group of corporate development group that's always scanning to look to see if something makes sense. And we always want to have dry powder in case something comes up. But again, that's something that I think every company does, including us in terms of just making sure we're on the growth trajectory. Do you want to -- John, do you want to reiterate sort of our capital structure and how we think about regulatory contingent in excess? John Sauerland: Sure. So M&A would be one deployment of excess capital in our minds. Reinvesting capital in the core business is always the first option that we pursue is obviously our returns in that space have been very good. We also obviously considered previous discussions here, the dividend and buyback. And as Tricia noted earlier, as we believe the stock is below what we view as fair market. We will be in market buying back shares when we have the capital to do so. And obviously, right now, our capital position is robust. So we -- as Tricia noted, we have a corporate development team. They are constantly looking at opportunities. And as she said, those opportunities would be focused on expanding the breadth of offerings for Progressive and less so around adding to our core products is our market share growth has shown pretty consistently that we can acquire that business efficiently and effectively in the marketplace, and we think that's a better way to go. Operator: The next question is from the line of Josh Shanker with Bank of America. Joshua Shanker: A couple of things. I'm looking at the Travelers numbers and the Allstate numbers and Hartford's and I have some guesses around GEICO's numbers looking at what they've done. And it doesn't seem like they're growing very quickly as Progressive's on net policy count growth has decelerated. I'm not looking for you to name names, maybe you have some thoughts on where the business is churning to, whether it's mutual, whether it's smaller competitors who are stronger than they've been in the past, whether it's direct business that's going to agencies. Where do you think the churn is moving towards? Susan Griffith: Well, I think that -- and I won't talk specifically about competitors either, but there have been competitors that were all captive and now have access to a nonstandard in the independent agent channel. There's competitors that were only direct that are trying to get into the agency channel. We've always been broad. So that's really the beautiful part about our growth and trajectory, and that's an important part to make sure we are where customers are. And so I won't talk about where things are coming from. But again, I have to reiterate, our growth is substantial based on the best year in the history of Progressive. So much of that growth comes to us. And so we feel great about that, and we'll continue to grow. And I think I've said this the last couple of calls that I want to make sure as we compare ourselves to the best year in the history of Progressive, that we're that were pragmatic about the fact that we still grew PIFs 4.2 million year-over-year, which is substantial, especially at the margins that we have. So that gives us the opportunity to continue to spur on growth, especially with our efficiency around our media spend. Joshua Shanker: And then changing gears a little bit and following up on some other questions. From 2007 to 2019, the dividend program at Progressive is pretty formulaic. We could play at home using gain share month-to-month to figure it out. And then I think in '19, you said there were so many opportunities for investment that you don't want to be forced into that paradigm and it became less possible for us to follow along. And now while you said when the stock is attractive to us, we would also be repurchasers of that, if that were the right thing to do. Is there any formula or way that investors can think about the transparency of capital return the way it was prior to the 2020 year? Susan Griffith: Probably not. That was pretty formulaic, and we were -- one of the reasons we changed that to go from the gain share was that we were experiencing high growth, and we needed that capital to grow. And so we didn't want to have something that we needed to pay out when the better use of that capital was to grow the firm, which is what we were doing over those years. But that program worked well during that time frame, but no longer served us. I mean how you can think about it is we have a lot of capital right now. The Board will make a decision as we do in our 10b5-1 for stock buybacks. The Board will make a decision to make sure that we think about that and the best use of it and the best use of any capital returns to our shareholders. And I can't give you a formula because, again, we do want to have dry powder. We want to make sure that we thought of a bunch of contingencies. But I think that's -- and that's sort of what I tried to say in my letter is that we feel like we have excess capital at this juncture. John Sauerland: I might add a bit on that, Josh. So you all recognize our regulatory capital needs. So historically, we've been in the 3:1 range for our Personal Lines businesses -- Personal Auto business, excuse me, and about half that for home. You might have noted in the Q that we now have approval in a couple of key markets to move to 3.5:1 predominantly for our Personal Auto businesses, but a fairly broad approval so we can move operating leverage higher. So you can do the math around what required surplus is necessary. And when we do that math, we look forward, of course, and we expect to grow. And then we have that contingency capital layer that doesn't change based on that regulatory layer, and that is intended to ensure that we, on a modeled basis, have a very low percentage chance of needing additional surplus. Capital in excess of that, again, we first want to reinvest. But secondly, we look to dividends and buybacks to the extent we feel our stock is undervalued. But you can come to a pretty close estimate of what we consider capital in excess of regulatory and contingency and that would be the capital from which a variable dividend would come. Now what portion of that is up to ultimately the board. But that is a good way to frame what a variable dividend or first excess capital would be, but secondly, what a variable dividend would be. Operator: The next question is from the line of Paul Newsome with Piper Sandler. Jon Paul Newsome: I was hoping you could give us a little bit more thought on and information on the severity trends for auto, both the private passenger and Commercial Auto businesses. It looks like severity is accelerating a little bit in Personal Auto and a little bit more about why that may or may not be happening. And similarly, in Commercial Auto, you've got some peers who have had some pretty significant troubles in that line. Any thoughts on where you may or may not be experiencing similar trends for them? Susan Griffith: Yes, Paul, that's a good question. Just as a reminder, when we look at severity trends, we report out incurred and a lot of our competitors report out in paid. So as an example, when you look at our PD from quarter 3 '24 to '25, it appears to be about 7%. We had a large decrease in reserves in quarter 3 '24, about 2.5 points. So that would be about 4.5 points versus the 7. So that's where it might be a little bit different comparison. BI continues to be specials are outpacing attorney rep, meds are up. So -- and actually some states that minimum limits have gone up. So we feel like industry severity where we're pretty close to the industry on the private passenger auto side. On the commercial line side, I feel like we are in a better position than most of our competitors. We got ahead of rate. The severity is up. But again, same sort of thing with you've got high limits, you've got attorney reps. And -- but we feel good about where we're at from a margin perspective and our ability to grow perspective as well. Jon Paul Newsome: Maybe a second question and a different one. Could you talk a little bit about the level of telematics and whether or not we're getting to at least closer to a point where that is a more mature part of what it does in terms of usage and the ability to slice and dice? Susan Griffith: Yes. I mean telematics has always been a key part of us understanding. I threw out some specific data that we have on our OBD device, I think I did, at least on -- I guess maybe I didn't. It was on frequency. We know from our OBD device that vehicle miles traveled have been down to about 4% in the quarter. So those are kind of things we can point to as we try to dissect and attribute frequency and severity changes. It's -- we have our mobile device, which is the majority of what people choose now in 47 states. So we feel like it's a really powerful part of our variables. And more importantly, for customers that drive safely, it is really an ability to lower your insurance rates pretty substantially. And so that's really the main component of it. And we learn a lot. We have many, many, many miles. How many miles do we have now, do you think? Some billions -- yes lot of miles, a lot of data. And so it will continue to be a big part of it. I'm not sure if that answered your question. Jon Paul Newsome: No, I was just trying to get a sense of whether or not we're getting to a point where the amount of folks that are using the telematics is where you can sort of a maximum given how a certain percentage will never use it, right? So just whether or not we're getting towards the maturity of the product itself. Susan Griffith: I think we have an opportunity to increase that specifically on the agency channel is what I would say. Patrick Callahan: Yes. What I would add to that is Telematics is a really predictive rating variable but it's not one size fits all. So we continue to collect data. We continue to innovate and we continue to refine how we use that data against what you would expect to see from similar drivers and similar vehicles to rate more accurately. So Telematics is a broad brush. And while we're seeing strong consumer adoption, and I think your intuition there is that consumers are getting more comfortable with monitoring on a continuous basis, which, as Tricia mentioned, is just a great way to modify their own behavior to control their insurance costs. But we are not standing still by any means. We have an entire team that leverages larger and larger data sets on a continuous basis to refine how accurately we can use it to ensure that people are getting the most competitive price that's personalized for them and how they drive. Susan Griffith: And one thing I'll mention, which is a little bit further field, but important because it's important for consumer safety is we have the ability for -- to understand that people have been in accidents. And whether the tow-truck or ambulance, I think is really a key important part of feeling like you're cared for as a customer with our Snapshot devices or mobile devices. Operator: The next question is from the line of Ryan Tunis with Cantor Fitzgerald. Ryan Tunis: I just had a follow-up on what's going on in Florida and I wanted to know if I'm thinking about something right. But clearly, that's been an important market for Progressive. I think you guys have top market share there by a mile. I guess my perception has always been an important reason for that is it's a tricky market to underwrite. But talking about the listing of some of the tort reforms, it sounds like it's become a more insurable market. So I guess my concern would be, just like any state where you have meaningful amounts of tort reform kind of creates a lever for competition to come in. So I'm wondering if I'm thinking about that right or if it's something maybe that's unique to Florida that we wouldn't necessarily see in some random state like Minnesota? Susan Griffith: Yes. I think every state has a little nuance, right? You said Minnesota, I went to their high PIP coverage. So I have like all of my thoughts of every state. I think the fact is that it will be more -- there will be more competition because of the tort reform. I think that's good. But again, we are so well ahead of it because it's been our biggest state for a long time, and we feel really good about it, and we feel great about serving the consumers of Florida, and we want to grow there. So we're going to continue to grow and having the right rates and the right legislative changes is going to make that, I think, better for everybody, but most importantly, consumers. Ryan Tunis: Got it. I better shore up my knowledge on Minnesota, sorry about that, Tricia. But the follow-up is -- you mentioned in the 10-Q, there's this dynamic of customers replacing existing policies with new progressive policies. I was just curious if that had a meaningful impact on the new issued app number? Susan Griffith: Yes, I think it does and had a meaningful on the PLE numbers because this is a very unusual dynamic that's been happening. And I think I've heard in other calls, it's happening in some of our competitors. So yes, I don't have the specifics for you. But I think customers are super sensitive right now. We get it. We're doing our best to keep rates stable, lowering rates when it makes sense and we believe that we can grow in certain demographics. But I think it's meaningful kind of across the board. John Sauerland: Yes. I think the ultimate metric, Ryan, is PIF growth. So yes, you're right. To the extent we are rewriting more customers. Those we do report as new customers. But at the end of the day, the PIF count and VIF count to previous conversations, I think, is what you should look at in terms of our growth and our market share. Operator: The next question is from the line of David Motemaden with Evercore ISI. David Motemaden: I was hoping just to touch a little bit on pricing. And I was a little surprised the stable pricing that you put through in the third quarter, just given how strong the margins are even if we put in sort of like a normal catastrophe loss level for the auto business. Is this something that you guys are considering? Is there something on the horizon that would prevent you from doing this? It didn't sound like you were concerned really about tariffs. But just trying to get you just a sense for how you're thinking about potentially lowering price to accelerate growth and also improve retention. Susan Griffith: Yes, we absolutely have been thinking about that. We were more conservative, I think, when the tariffs came out. And so now that, that seems today to be more certain, we are a little bit less concerned. Of course, that could change. I think we decreased rates in about 10 states in this quarter, increased rates in about 6. So we're very surgical on channel, product, state, but we do want to grow. And so we will look to that for both growth and retention in terms of reducing rates. We just want to make sure because of the competitive environment that if we -- we get something for that. So that you don't want to reduce your margins and not get growth. So we're trying to be, like I said, really surgical in each state of when we think we can get growth and that unit growth is important. And so we know we have some margin to play with, and that's really what we're talking about now at every individual state and DMA level. David Motemaden: Got it. And then maybe sort of a higher-level question. Just as we think about the impact of collision avoidance systems and ADAS as it penetrates the fleet more and more. I don't think -- I'm sort of looking at ISO data. I think for 10 years up until 2019, industry frequency was pretty flat. And now when I sort of look since 2019, we obviously had COVID in there, but it's a pretty substantial decrease. So I'm wondering if you can think of -- like just maybe just talk about unpacking some of that decline and improvement in frequency that looks like it's still continuing and sort of how we can think about that as impacting the longer-term growth of the business? Susan Griffith: Yes. I can't predict the future, but take aways that kind of couple of years during COVID because things were so strange with driving. Frequency has been going down for the last 50 years. And as vehicles get safer, as laws around DUIs and other things get more stringent and have gotten more stringent, I think that's a really good thing. Now it's been offset and then some by severity. And that's been where when you look at the models, we have -- when we do our models for our runway, we look at that and severity has increased well more than frequency. And so we'll continue to see what happens in terms of parts, the ability to repair vehicles, the ability to have talent that can actually repair those vehicles as they get more complex, and those are things that we can't predict, but we look at those all the time, and we're deeply looking at those right now as we think about our next 3-year strategy. John Sauerland: The number of cars on the road -- I'm sorry. I was just going to add that the number of cars on the road has also increased. The average age of those vehicles has increased. So all those factors, in addition to the pure premiums or the frequency and severity, affect the size of the marketplace. And the marketplace actually has grown faster than we had anticipated when we first started assessing the long-term runway or market size of the Personal Auto marketplace. David Motemaden: Got it. That's interesting. Yes, it definitely feels like -- I mean, I think it's like '07 until 2019 industry frequency was flat. So like if we look at it over a 50-year time frame to this point, it's definitely still down, but like there is definitely an air pocket in there where the industry was benefiting from like flattish frequency. And so yes, just something I'm sort of thinking about, but I appreciate the -- I appreciate the answers there. Operator: The next question is from the line of Brian Meredith with UBS. Brian Meredith: The first one, and this is I know it seems like it comes up every quarter, but on the PLE drop, can you talk maybe a little bit, is it mix driven this quarter that's kind of dropping everything? Or is it kind of across all the cohorts that you're seeing the drops in PLE? Susan Griffith: I think it's probably more pronounced than Sams. I'm not quite sure, but I think it's mainly across the board. I think everyone's shopping. And when we look at our mix of business just in terms of even growth as you look through our Q and think about just our prospects and conversion, you can see that -- even though that's relating to consumers coming in, we think that has an impact. Do you have anything to add, Pat? Patrick Callahan: Yes, it's pretty much across the board, but driven by different aspects and that Sams are obviously more price-sensitive and household costs are rising. On the Robinsons side, we certainly have taken some action to redistribute our book and to limit access to our property product at some agencies, which has an effect on where they place that business and whether it retains with us. So we are seeing it more broadly. But -- yes, more broadly. Brian Meredith: Great. That's helpful. And just a second question, if I look at where your pure premium was in the third quarter, and granted, I understand it's calendar year, so it's not exact here. And versus average written premium per policy, there's a pretty meaningful kind of spread difference, which would imply some pretty meaningful margin compression here going forward, granted from very attractive margins you're seeing right now. As you think about kind of going forward and what you're looking at, is that something you're anticipating? Is that your margins will compress here in personal auto insurance going forward here closer to the target level? Susan Griffith: I mean I think it depends on if we can get the growth for that. So our operating goal is to grow as fast as we can at a 96 or lower. We're obviously well in advance of that. We've had some conservativeness baked in because of tariffs and some other things. But yes, we could see it compress if we believe we can get that growth, and we're always kind of managing that trade-off. But I believe that's an accurate statement going forward because our ultimate measure of growth is units. So PIFs and VIFs, as we talked about today, and we'll do what we can to continue that growth because, again, if we have a plan around our property, the more auto we can get in there, the more bundles we can get in sort of a nice circle. So we're going to do what we can to grow as long as it serves us in terms of our target profit margins and our operating goal that has been in place for decades. Douglas Constantine: We've exhausted our scheduled time. And so that concludes our event. Those left in the queue can direct their questions directly to me. Alissa, I will hand the call back over to you for closing scripts. Operator: That concludes the Progressive Corporation's third quarter investor event. Information about a replay of the event will be available on the Investor Relations section of Progressive's website for the next year. You may now disconnect.
Operator: Good morning. Welcome to Norwegian Cruise Line Holdings Third Quarter 2025 Earnings Conference Call. My name is Sherry, and I will be your operator. [Operator Instructions]. As a reminder, all participants, this conference is being recorded. I would now like to turn the conference over to your host, Sarah Inmon. Ms. Inmon, please proceed. Sarah Inmon: Thank you, Sherry, and good morning, everyone. Thanks for joining us for our third quarter 2025 earnings call. I'm joined today by Harry Sommer, President and CEO of Norwegian Cruise Line Holdings; and Mark Kempa, Executive Vice President and Chief Financial Officer. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website. We will be referring to a slide presentation during the call, which can also be found on our website. Both the conference call and presentation will be available for replay for 30 days following today's call. Before we begin, I would like to cover a few items. Our press release with third quarter 2025 results was issued this morning and is also available on our IR website. This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statement contained in our earnings release. Our comments may also reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and presentation. Unless otherwise noted, all references to 2025 net yields and adjusted net cruise costs excluding fuel per capacity day are on a constant currency basis and comparisons are to the same period in 2024. With that, I'd like to turn the call over to our CEO, Harry Sommer. Harry? Harry Sommer: Well, thank you, Sarah, and good morning, everyone. Welcome to our third quarter 2025 earnings call. I'll begin my remarks today with a discussion of the third quarter results and recent booking pace, and we'll then get into some recent highlights on our 3 brands and strategy. I'll then provide some brief comments on how 2026 is shaping up before handing the call over to Mark, who will provide a deeper dive into our financial performance and outlook. So to dive right in, I am pleased to report another record quarter with the results that met or exceeded guidance across all metrics. As a result, we are reiterating our full year adjusted EBITDA guidance and raising our guidance for adjusted EPS. Our performance this quarter was driven by solid customer demand which drove load factors higher, reflecting the continued strength of our brands and the execution of our charting the course strategy. As previously stated, we remain committed to balancing return on investment with return on experience, delivering exceptional vacations, driving sustainable financial performance and strengthening our balance sheet. Now delving a bit more into the details of our third quarter results shown on Slide 4, we achieved another quarter of strong performance and solid execution across the business. We met or exceeded guidance we provided in July and delivered the highest quarterly revenue in our company's history. Load Factor finished ahead of expectations at 106.4% driven by stronger-than-anticipated demand from families, particularly at the NCL brand, resulting in net yield growth of 1.5%. Costs were essentially flat year-over-year, which resulted in adjusted EBITDA of approximately $1 billion, a milestone achieved for the first time in company history. As a result, our trailing 12-month adjusted operational EBITDA margin reached 36.7%, an improvement of 220 basis points from last year and another meaningful step towards achieving our charting the course margin target. Finally, adjusted EPS came in at $1.20, exceeded guidance by $0.06. Turning now to recent demand. Bookings in the third quarter marked the strongest third quarter bookings in company history with bookings up over 20% from last year. With this trend continuing into October, all collectively driven by strong demand, not only for short Caribbean sailings this winter, but also for our luxury brands. These results not only underscore the strength of today's demand but also provides a solid foundation for growth in the quarters ahead. Of course, there are other highlights in this eventful quarter that I would like to share. First, on the financial side, which Mark will cover in more detail, we completed a multifaceted capital market transaction that, among other benefits, reduced our share outstanding on a fully diluted basis by more than $38 million or over 7%, materially improving our adjusted EPS. On the guest experience side, we introduced several enhancements, including our new tri-branded loyalty recognition program, which I'll discuss later, and the launch of an enhanced website for the NCL brand. The new site is already delivering results with faster performance, better guest experience and higher conversion rates, resulting in increased bookings. We have also made it easier for guests to personalize their vacation with more targeted pre-cruise offerings. For example, we are now promoting high-value onboard products such as Vibe Beach Club passes, drinks and dining packages, streaming WiFi, spa treatments and short excursions through personalized e-mails and push notifications. Pre-cruise sales at our all-time high levels, which drives higher onboard revenue and higher guest satisfaction and repeat rates. On the sustainability front, we recently announced a landmark agreement with Spain's Repsol for supplying renewable marine fuels at the Port of Barcelona. This 8-year agreement starts this upcoming European season and is a first-of-a-kind partnership in the industry, underscoring our sale and sustained commitment. This agreement is a great example of cross-industry collaboration that could unlock meaningful progress and secure long-term access to renewable marine fuel in Europe. Now I'd like to take a few minutes to discuss the high-level strategies we're executing across our 3 brands, which are summarized on Slide 5. These strategies are designed to ensure we continue delivering exceptional experiences for our guests while advancing our charting the course targets and creating long-term value for our shareholders. At Norwegian Cruise Line, our focus is enhancing the family appeal and experience. At Oceania Cruises, we're working to firmly position the brand within the luxury sector. And at Regent Seven Seas Cruises, we're focused on maintaining its well-earned reputation as the pinnacle of ultra-luxury cruising. Moving to Slide 6. I'll dive into the strategic evolution underway at Norwegian Cruise Line. This is a transformation that has been underway for several months and is now accelerating with sharpened focus under the brand's new leadership including a new Chief Commercial Officer and a new Chief Marketing Officer with a robust search for a world-class leader to head the NCL brand well underway. As part of this evolution, the brand is executing a focused 3-part commercial strategy to drive yields and profitability higher over the next year and into the future. First, we're focusing more on families as a core demographic. We're building brand familiarity through our short Caribbean sailings, which give guests -- which give more guests, particularly families, a chance to experience our amazing product. That exposure helps build loyalty and creates a pipeline of repeat guests for the future. Over time, this will increasingly support one of our key priorities, boosting Load Factors. We are working diligently to attract more families to the brand to experience everything Norwegian has to offer, both onboard and other destinations, particularly our upgraded private island Great Stirrup Cay and through enhanced onboard offering geared towards families. Second, we're strengthening our brand positioning and marketing. To reach the broader family market, NCL is developing a refreshed brand campaign designed to elevate awareness and strengthen emotional connection, which we should launch in early 2026. Alongside that, we're optimizing our marketing mix and spend to ensure we're getting the best possible return on every marketing dollar, creating efficiencies throughout 2026. Lastly, we're elevating the guest experience. We are pleased to reiterate that our previously announced enhancements at Great Stirrup Cay are all on track to open around the holidays, including the new multi-ship pier, welcome center, tram system, an expansive 28,000 square-foot heated pool, the size of an entire cruise ship with a swim-up bar, kids flash zones, 5 shore club, new dining and beverage outlet and dozens of new cabanas. The upcoming summer '26 launch of the Great Tides Water Park will mark another milestone moment for the brand, spanning nearly 6 acres, the water park will feature 19 thrilling water slides, a dynamic river, a huge kids splash zone, a 10- and 15-foot tall cliff jump and an innovative jet karts attraction. It will be the perfect family-friendly addition to our already exceptional island amenities, which includes Silver Cove, and exclusive retreat offering magnificent villas and a beach club. And that's just the additions at Great Stirrup Cay. We're also looking ahead to enhancements across other destinations in our portfolio. In addition, we are expanding our kids and family programming with improved activities and entertainment, ensuring engaging experiences for guests of all ages. At the core of this approach is our ambition to be the brand of choice in the contemporary space for both seasoned travelers and premium families while maximizing profitability. Future travel intent, current bookings, guest satisfaction scores and future onboard cruise sales are all at or near record levels, clear signs that our strategy is working. We continue to actively balance between load factor and price with the goal of optimizing net yield, margins and most importantly, profitability. Now turning to Slide 7. This strategy is already leading to tangible results. Our increased Caribbean presence, additional short sailings, which capitalize on demand for closer to home family vacations and continued investment in our private island destinations are already driving higher Load Factors. The fourth quarter marks the first period where we're truly seeing the shift in strategy come to fruition. In Q4 of this year, we will have the highest mix of short sailings since 2019, reflecting our deliberate move to rebalance Norwegian's deployment towards closer to home itineraries. This approach expands our reach, appealing to a broader mix of guests, particularly premium families and unit cruise travelers, while allowing us to better leverage our private island investments. In Q4, short sailings capacity is increasing over 80% versus prior year. And our Caribbean deployment is moving to over 50% of our total capacity. As a result, we now expect Load Factors to improve over 100 basis points year-over-year to nearly 102%. Now I know many of you will probably ask why our fourth quarter yield guidance has changed from our prior implied guide to growth of 3.5% to 4%. So let me get ahead of that question. As mentioned earlier, we are very focused on Load Factor and increasing brand visibility through our Caribbean product. It has been quite some time since we've had this level of short sailings in our deployment and demand has exceeded our expectations. In the fourth quarter, our Caribbean short sailings are performing quite well, particularly among our targeted family demographic, driving Load Factors higher than we had forecasted. On our Caribbean sailings, we are seeing more families, which means more children in each cabin. We expect core pricing for the first and seconds to be well up. The addition of child as third and fourth in the cabin, however, will naturally dilute blended pricing. The end result remains strong yield growth and strong margin expansion. This is an intentional planned trade-off to drive margins and profitability higher in both the short- and long-term. These early results from our increased short sailing Caribbean deployment are encouraging and reinforce our confidence in the strategy. Now looking ahead, we expect this dynamic to accelerate in the first quarter of 2026 with Load Factor projected to be 200 to 300 basis points higher year-over-year, driven by a meaningful 40% increase in short sailings. Additionally, this will coincide with the soft opening of Great Stirrup Cay new amenities around the holidays, while the more meaningful enhancements will be coming when Great Tides Water Park opens later in summer 2026. When we return next winter, we'll have the full benefit of the new amenities at Great Stirrup Cay and the word of mouth from thousands and thousands of satisfied guests, which will further strengthen performance. Moving on to Slide 8. We're confident this positive momentum will continue throughout 2026 with Load Factors building on 2025 levels and returning to, if not exceeding, 2024 levels, reaching at least 105%. This is sustained progress driven by this new deployment strategy. Now I've spoken a bit about the Norwegian brand, and now I want to turn to our luxury portfolio, Oceania Cruises and Regent Seven Seas Cruises on Slide 9. The opportunity we're seeing in luxury cruising has never been stronger. Global luxury spending continues to expand with experiences ranking as the fastest-growing segment in 2024. Both Oceania and Regent are perfectly positioned to capture this demand. Oceania delivers luxury by choice, offering guests elevated personalized experiences with exceptional culinary offerings, while Regent is the pinnacle of the ultra-luxury all-inclusive luxury segment. To fully capitalize on this opportunity, we brought back Jason Montague earlier this year to lead both brands and drive the next phase of growth. Turning to Slide 10, you can see the tangible progress already underway. The first thing Jason did was optimize the organization, ensuring we have the right leadership structure and the right people in the right roles to support long-term growth. Next, he's been deeply engaged in our fleet management program, including our pipeline of 6 luxury ships, overseeing the design and launch of Oceania Allura and Regent Seven Seas Prestige, both of which will set new standards for design, experience and efficiency. He has also been very focused on elevating our existing fleet and Seven Seas Mariner is the latest example of that commitment. The ship entered dry dock just yesterday, where we're undertaking a full transformation, refreshing suites, reimagining public spaces and introducing an enhanced pool grill featuring a new wood-fired pizzeria concept for relaxed alfresco dining. Seven Seas Voyager will be undergoing a similar revitalization when she enters dry dock next year. Coupled with our 3 new vessels and the upcoming Prestige delivering in 2026, we truly will have the world's most luxurious fleet. Finally, Jason has been laser-focused on enhancing brand positioning and marketing across both brands, ensuring that Oceania is fully recognized in the luxury space, while Regent maintains its place as the pinnacle of ultra-luxury cruising. We know we have 2 extraordinary luxury products. Now it's about telling these brand stories more powerfully and consistently in the market. I want to take a moment to recognize Jason and the entire luxury team, they're doing an outstanding job executing on this strategy, elevating both Regent and Oceania and positioning our luxury portfolio as a key growth driver for 2026 and beyond. Finally, moving to our loyalty program on Slide 11. I'm thrilled to share how we're taking guest recognition to the next level. We recently launched our new loyalty status honoring program, allowing members of Latitudes Rewards, Oceania Club and the Seven Seas Society to have their tier status honored across all 3 of our award-winning brands. Our guests will now be able to enjoy the loyalty perks they've earned, no matter which of our brands they choose to sail. It's a major step forward that makes it easier than ever to explore the world within our NCLH family. This change will also encourage our top guests to try our other brands. It's really about deepening our connection with our most loyal guests, rewarding their commitments and giving them even more ways to vacation better and experience more. And while it's early, the preliminary results of this program have well exceeded our expectations, proving again the power of our brands. And with that, I'll be happy to turn the call over to Mark. Mark Kempa: Thank you, Harry, and good morning, everyone. Let me start with our third quarter results highlighted on Slide 12. We delivered another strong quarter, exceeding or meeting guidance across all metrics. Occupancy came in at 106.4%, nearly 100 basis points above guidance, driven by strong family demand across all itineraries. Net yields grew 1.5%, in line with guidance, fueled by strong pricing growth of over 3%. On the cost side, adjusted net cruise cost ex fuel was down 0.1 point, coming in slightly better than expected as our cost control efforts continue to bear fruit. As a result of better-than-expected fuel consumption, adjusted EBITDA for the quarter was $1.019 billion, above our guidance of $1.015 billion. Adjusted net income came in at $596 million. Adjusted EPS came in $0.06 ahead of guidance at $1.20. Overall, this was a solid quarter, consistent with our expectations. Moving on to fourth quarter and full year guidance on Slide 13. We expect occupancy to be approximately 101.9% in the quarter, roughly 100 basis points above the prior year and our previous implied guidance. As Harry mentioned, we are very focused on Load Factor and brand visibility at the Norwegian brand, and we are encouraged by the progress we have made this quarter as family demand surpassed our initial expectations driving occupancy higher. I want to reiterate that we continue to balance Load Factor and price recognizing the natural give and take between the two. As we attract more families, we are seeing more third and fourth guests in a cabin. And naturally, those guests come in at a lower price point which has a modest impact on overall pricing. As a result of this dynamic in the fourth quarter, we expect net yield to grow approximately 3.5% to 4% reflecting our deliberate decision to welcome more families while taking a slight trade-off on price, which remains healthy at nearly 3% growth. As a result, full year net yield growth expectations have been adjusted slightly to 2.4% to 2.5% for the year. Turning to cost in the fourth quarter. Adjusted net cruise cost ex fuel is expected to be essentially flat, up only 50 basis points year-over-year. This is slightly higher than our prior implied guidance for the quarter, primarily due to the timing of certain expenses. As a result, for the full year, we now expect cost to increase 75 basis points, well below inflation. The second year in a row, we have been able to achieve this strong cost control, all while achieving record guest satisfaction scores and repeat rates. We expect fourth quarter adjusted EBITDA to be approximately $555 million and adjusted EPS to be $0.27. As a result, we are reiterating our full year adjusted EBITDA guidance at $2.72 billion and increasing our full year adjusted EPS guidance to $2.10, which represents almost a 19% increase year-over-year. Moving on to Slide 14. I want to take a moment to highlight the strong progress we've made on our cost savings program. Back at our Investor Day in May 2024, we set a bold goal to achieve more than $300 million in savings and we remain fully on track to deliver on that commitment. In 2024, we realized over $100 million in savings, and we're on pace for another $100 million plus in 2025 which has allowed us to limit net cruise cost growth to only about 3/4 of 1%. We are carrying this culture of cost discipline into 2026 and we have full line of sight to achieving at least another $100 million in savings next year, keeping our unit cost growth well below the rate of inflation while continuing to deliver an exceptional guest experience. These cost savings have been a major driver of our continued margin expansion, as you can see on Slide 15. Our adjusted operational EBITDA margin has increased by roughly 600 basis points since year-end 2023, and we remain on track to reach approximately 37% by the end of this year. Looking ahead to 2026, we expect this positive momentum to continue supported by our proven algorithm of low- to mid-single-digit yield growth and sub-inflationary cost growth. The strategic initiatives Harry outlined earlier are central to this plan, from bringing more families to the Norwegian brand and increasing Load Factor, to refreshing our brand and marketing and the launching of new amenities at Great Stirrup Cay this year around the holidays and the new water park next year. At the same time, our luxury brands continue to benefit from strong demand trends and their truly best-in-class offerings. Oceania is building momentum as we position it squarely in the luxury space, and Regent remains the clear leader in ultra-luxury cruising, delivering an unmatched product and service experience. I'm confident that all of these efforts driving both the top and bottom line will enable us to further expand margins and achieve our approximately 39% target next year. Turning to Slide 16. You can see our debt maturity profile, which has been extended and strengthened following our recent capital markets activity. In September, we successfully completed a series of strategic transactions that significantly enhanced our financial flexibility. We refinanced the majority of our 2027 exchangeable notes extending our maturity profile, and reduced our shares outstanding on a fully diluted basis by approximately 38 million shares, all while remaining essentially net leverage neutral. In addition, we refinanced approximately $2 billion of debt, including the replacement of about $1.8 billion of secured debt to unsecured. As a result, we have now fully eliminated all secured notes from our capital structure. These actions underscore our continued focus on optimizing our balance sheet, improving collateral utilization and positioning the company for sustainable long-term growth. Turning to net leverage on Slide 17. I want to emphasize that reducing leverage remains our top financial priority. In the third quarter, net leverage increased slightly from the second quarter to 5.4x from 5.3x. This modest uptick reflects the delivery of Oceania Allura where we took on the associated debt but have not yet annualized the EBITDA contribution from the ship. We now expect to end the year at approximately 5.3x. And excluding the impact of noncash foreign exchange revaluation on our euro-denominated debt related to Norwegian Aqua and Allura -- and Oceania Allura, our leverage would end the year at approximately 5.2x. In a year when we've taken delivery of 2 new vessels, keeping leverage flat is a notable accomplishment and positions us well to achieve our 2026 target of reaching the mid-4x range. Wrapping up, our solid performance so far this year and the ongoing benefits from our cost initiatives reflect meaningful progress on our top financial priorities, deleveraging, expanding margins and fortifying the balance sheet. I'll hand the call back over to Harry to close out the call. Harry Sommer: Well, thank you, Mark. Now looking at Slide 18, I'd like to once again highlight the significant progress we're making towards our key charting the course financial targets. By year-end 2025, we expect adjusted operational EBITDA margin to expand by more than 600 basis points versus 2023. Adjusted EPS to grow nearly threefold, net leverage to decline by 2 full turns and adjusted ROIC to continue its upward trajectory. I'm incredibly proud of what we've accomplished so far in 2025. Looking ahead, 2026 is shaping up to be another outstanding year with capacity set to grow approximately 7% as the Regent Luna and Seven Seas Prestige join the fleet, we expect to see continued strength across all 3 brands. At Norwegian, we anticipate even more families sailing with us further lifting Load Factor and driving margin expansion. Our strong capacity growth, combined with low- to mid-single-digit yield gains and sub-inflationary cost growth is expected to drive meaningful margin expansion and continued deleveraging in 2026. I'm confident in our trajectory and excited about with the last months of 2025 and the year ahead will bring as we continue charting our course to our sustainable, long-term value creation. With that, I'll hand the call back to Sherry to begin the question-and-answer session. Operator: [Operator Instructions] Our first question comes from Brandt Montour with Barclays. Brandt Montour: So heard loud and clear '26 high-level targets are reiterated here. But guys, with a little bit of pressure from mix in the fourth quarter, based on the shift to families as well as it looks like incremental confidence in the occupancy lift for next year, can you give us some sort of additional insights into how that mix shift would affect yields for next year, all else equal? Mark Kempa: Good morning, Brandt, this is Mark. So first and foremost, our job is to maximize yield margins and, of course, earnings growth. And I think that we've been telegraphing consistent with our strategy, we aim to grow yields next year in the low- to mid-single digits. But going back to in line with our strategy, we've been clear that we continue to expand the Norwegian brand into the family segment. As we do that, that obviously brings higher Load Factors, which we have clearly seen both in the third and more importantly, into the fourth quarter, we will see that a significant benefit from that in the first quarter of about a 200 to 300 basis point improvement year-over-year. With that, families and children often bring slightly lower pricing in the overall mix. But importantly, our core customer, that first and second customer, we are seeing meaningful growth in pricing. So we expect to continue to grow yields in that low- to mid-single-digit algorithm. And again, this is in line with our strategy, and we're executing as planned. Brandt Montour: Really helpful color. A second question I have would be on the bookings comment. Harry, you said bookings were up 20%. And maybe clarify if that was in the quarter or the month, I think it was the quarter. But either way, and I don't think that was adjusted for capacity growth, but either way, that's still a really strong figure. Could you kind of square that with the commentary in the release that you're still within the optimal range? I would think that this would sort of push you up toward -- well, at least would push you up within that range, but also the mix is going more Caribbean, you -- that's more shorter in. So again, all else equal, I would think that you're moving away from longer lead time bookings, and it would be something that would be a counter for us there. So maybe square those -- sorry, that's a lot, but could you square those things and what you're kind of seeing with that with that bookings? What's driving that booking acceleration? Harry Sommer: Sure, Brandt. So just to -- there's a lot there. I'll try to cover as much of it as I can, or at least as I can remember. So first off, bookings were up 20%. That was for the entire quarter, not for a specific month. And then I also mentioned that, that increase went into October as well. So both for the quarter, the third quarter, and for the month of October, and I'll just provide further color that it applied to all 3 brands, NCL, Oceania and Regent, all saw that growth. So the growth was broad-based. And of course, while Oceania and Regent don't play much in the Caribbean, the growth on the Oceania and Regent have nothing to do with the Caribbean, but more about the progress that the brand is making from a consumer demand perspective. So on NCL, yes, there are some unique tailwinds, if you will, on bookings. You mentioned capacity. There's also a shift to shorter cruises, which would require us to have more bookings. But fundamentally, we are just seeing a stronger consumer in this Q3 than we saw in last Q3. Operator: Our next question is from Lizzie Dove with Goldman Sachs. Elizabeth Dove: I appreciate what you've said about the kind of dilution from families totally get that. But at the same time, there has been a lot of focus on the Caribbean and whether there is kind of more of a promotional environment there with so much kind of competition, everybody kind of moving the ships there. So curious what you're seeing and whether that has kind of impacted you at all or you expect it to going forward? Harry Sommer: So Lizzie thanks for the question. We're not really seeing anything unusual in the promotional landscape, at least within the competitive set that we play in. What we're seeing this year is normal from both a price and promotional perspective, which is one of the reasons that it will allow us to have this 3.5% to 4% yield increase in Q4 that we've discussed. So no, nothing unusual. Elizabeth Dove: Okay. Got it. And then, I guess, thinking about longer term, your Caribbean capacity is growing, what is the kind of strategy to kind of absorb that capacity in Caribbean? I know you've got the GSC development, but I'm curious if you feel like there's a need to kind of push marketing or how we should think about costs from those kind of private island investments? Just anything like we should consider as we move to 2026. Harry Sommer: So listen, I think it starts with consumer demand, right? And our goal is to create both a brand construct and specific marketing vehicles that will appeal to the demographics that we think would find the Caribbean of interest. We've talked about the shift in both our branding and our marketing communications in my prepared remarks, so I won't repeat them again here. But between the new CMO and the new Chief Commercial Officer that we onboard over the last few months, we're definitely making progress along those fronts. I think things like the build-out of GSC is absolutely going to help. I'll mention that about 1/3 of our guests next year on the NCL brand will visit GSC. It will be our most -- what sort I'm looking for, the destination we go to the most of any destination of the world. So clearly, our investments there are important. I think I mentioned that everything that we're hoping to launch over the holiday period, which is just about a month away is on track. I just personally visited the island about a week ago, and it really looks spectacular. I remind the analyst community that the footprint that we have on GSC is far greater and some of the competitive set, and we plan to utilize it. I think the next phase with the water park coming in the summer of next year, should be a second milestone and an additional game changer in terms of demand. But I think ultimately, between the brand, the marketing vehicle and then the thousands, the tens of thousands of guests that will be visiting at least the initial set of amenities that come online in the holiday period we expect to get pretty good word of mouth. I want to address the second question you asked about marketing. So we have increased marketing spend this year. I want to get the analyst comfort that this flat cost year-over-year was not at the expense of cutting marketing. If anything, we've increased marketing by well over the 75 basis points that our overall cost structure increase, and we were able to save money through efficiencies elsewhere to fund that, and we plan to continue spending on marketing. Marketing is an important part of driving consumer demand. We think we're spending about the right amount now relative to our revenue generation and our goals for next year, and we will continue to spend at these levels into next year, while having strong cost control throughout the P&L, which will enable us to continue the tremendous margin expansion, the 600 basis points we've seen over last year, an additional 200 basis points that we're planning to do margin expansion next year will all be possible even with this increased marketing spend. Operator: Our next question is from Steve Wieczynski with Stifel. Steven Wieczynski: Okay, Mark, you'll probably hit this question. But if we think about next year, you basically just said you expect to grow yields kind of in that low- to mid-single-digit range. And if I look at Slide 14 and I get my handy dandy ruler out to kind of gauge where costs are projected based on that bar chart. They look like they're going to be higher, but not anything crazy. So if we put all that together, it seems like there would be maybe a good bit of upside to your charting the course EPS targets, I'd say, especially now also including your recent capital market transaction. So I'm not sure what you can say or not say about that, but any comments there would be super helpful. Mark Kempa: So first, I love all questions from you. Second, yes, when you get your ruler out on that chart, I want to reiterate through the broader constituency that our target, as we've been maintaining is to deliver sub-inflationary or better unit cost growth. And we've been very successful at doing that now for 2 years in a row. And we certainly maintain and have a clear line of sight on that for 2026. Look, I think when it comes to the charting the course targets as you've heard today, we are reiterating our confidence in hitting those targets. We are executing on our strategy. Of course, it's early in the year. We do have a lot more Caribbean sailings. So bookings are naturally a little bit closer in. But everything we're seeing today indicates that we're well on our way. So we have confidence on our path. We have confidence in executing our strategy, and that's what we're maintaining. And we'll continue to deliver on that path. Steven Wieczynski: Okay. Got you. And then second question, if we think about the fourth quarter yield guide, Harry and Mark, you kind of -- you obviously called out the yield headwind from adding the third and the fourth and the higher Load Factors. But did you guys embed any impact from things like -- obviously, we've seen an uptick in weather in the fourth quarter or things like the government shutdown? I'm just trying to figure out maybe what that like-for-like yield would look like, excluding the Load Factor lift. Harry Sommer: It's hard to sort of break things down into their components. So I'll start out by saying that we believe a 3.5% to 4% yield growth on a year-over-year basis is strong, and we're very happy with it. If you're asking whether they were modest impacts by the government shutdown, hard not to believe that, that's a modest headwind to the business. I wouldn't necessarily say the weather was a big deal. It was actually a relatively a modest hurricane season as these go, we only had an impact to a handful of Bermuda cruises and 1 or 2 now to Jamaica, none of which had to be canceled, just re-routed. But maybe on the government shut down a little bit. But the macro environment continues to be strong, economy continues to grow, unemployment rates continue to be low. The things that we measure, cruise intent, future cruise sales onboard to ship are all at or near record levels. So we're pleased. And of course, the proof is in the pudding, I've gone out not just for Q3, but for the actual month of October, the month that just ended, that bookings were up over 20% year-over-year across all 3 brands. We think that's a pretty good setup, but we'll continue to move forward. Operator: Our next question is from Robin Farley with UBS. Harry Sommer: I think we lost Robin. Sorry. Operator: Our next question will now be from Matthew Boss with JPMorgan. Matthew Boss: So Harry, maybe a 2-part question. If you could elaborate on the progression of booking trends that you saw through the third quarter and into October. And then if you parse through the mix impact that you cited in the Caribbean, could you speak to underlying pricing trends across itineraries that you're seeing across both family and luxury? Harry Sommer: Well, I don't think there's been a material change. If you're asking whether we saw an acceleration July, August, September, October, they were all 4 of them were good months. I wouldn't necessarily say that one of them stood up or that things have decelerated in any way, maybe a modest acceleration coming into October, but nothing that material. All 4 months were very good months for us. And on the pricing side, I'd make a similar comment. There's nothing that stands out, if you will. I think across the board, we've seen strength. I just want to echo Mark's comments on pricing, you just have to think about NCL a little bit different. We're seeing good pricing increases on the first and second in the cabin as we increase third and fourth, that naturally is a modest headwind to overall average price but still a benefit to yield margin and profitability. So I just want to emphasize that point. But across the board, nothing that stands out one way or another, we're seeing good strength everywhere. Matthew Boss: And then maybe, Mark, as a follow-up, could you help break down the drivers of Load Factors in 2026 that you're expecting to exceed 2024. What you're embedding for the Caribbean relative to opportunity you see year-over-year in Europe? Mark Kempa: Look, thanks, Matt. I think it's a couple of things. Obviously, when we look at '26, we've said we've clearly stated today that we expect to be at least 105% or better. That's clearly being driven by the increased family dynamic, which we have been very clear that we continue to go after. So I think you'll see some significant tailwinds in the first quarter, where we called out at least a 200 to 300 basis point improvement. And then I think as we transition into the latter part of the year, when GSC launch comes online fully, you're going to start to see that accelerate in the latter part of Q3 and Q4 of next year. That, combined with, I think, some further opportunity in Q3, all should contribute to a healthy increase in Load Factor year-over-year. We've said, we've committed, we want to get back to historical Load Factors better. We're doing that not only organically but by expanding our segment into the premium families, and we're starting to see evidence of that. Harry Sommer: And I just want to provide just a little bit more color because while the Caribbean is certainly the headline of the story for Q4 and Q1, when you go into the rest of the year, there are a few other modest tailwinds that will be helping us. On the NCL brand, we shifted from longer European itineraries to shorter European itineraries, primarily 7 nights in the Med, which should allow for a slightly larger family market as well, which is consistent, of course, with the brand strategy. And we're also focused on, if you will, minimizing the number of single cabins that we take across all 3 brands, not just for NCL, but Oceania and Regent. I think '26 will certainly be a year where the entire cycle of the booking curve was booked under what we consider to be good booking conditions. And I think we're just going to -- we're looking for modest benefits in every single aspect of the business. So again, while the Caribbean certainly the headline for Q4 and Q1, it is not the only initiative we're working on to improve occupancy Load Factor for next year. Operator: Our next question is from Conor Cunningham with Melius Research. Conor Cunningham: Maybe to just follow up on that a little bit more. So I understand that the customer dynamic kind of lingers into the first half of 2026. But it seems like the mix headwind becomes a tailwind when Great Stirrup Cay comes online, like the Water Park comes online. So one, is that even right? And then two, can you just talk about the ramp around Great Stirrup Cay as all the new investments start to come online in general? Mark Kempa: Yes. Look, Conor, I think you're absolutely right. When we look at the second half, as we bring on GSC fully, we absolutely believe that's going to be a tailwind. And as a reminder, we -- in our last call -- prepared remarks on our last call, I think we had said that GSC was going to be at least around a 25-point tailwind to yield next year, in part and at a full point on 2027. Recall that although we're passing about 1/3 of our overall system-wide customers through the island next year, by the time the water park gets on, about 2/3 of that base will have already gone through the island. So we're not getting the full benefit in 2026, but we will certainly start to see that ramp up in the latter half. I think when you look -- when you think about Great Stirrup Cay and the announcements about the new amenities in the park, we have certainly seen and -- seen a heightened level of interest from the consumer. We've seen more website bookings, more intent to travel. I think that in part is why we've seen the 20% bookings increase as well. So it's creating excitement. That said, we view what's happening in the latter part of December as the first soft opening. Certainly, we're opening great amenities with one of the largest pools. In fact, I think it's about as large as an entire cruise ship, if I recall correctly. So we are getting buzz. We're getting momentum. And I think as Harry said, as we start to see more word of mouth, on that to the latter part of this year into early next year, I think we're going to continue to see strength and momentum build out of that. Conor Cunningham: Okay. And then maybe I can ask a question on the cost side of the mix dynamics. So it seems like that as occupancy moves up, you get economies of scale, I mean, that naturally makes sense to me. But like are you seeing the cost offset that you would expect? Because at the end of the day, I think you really got -- you're out your whole thought process is around the spread between unit costs and in net yield. So just are you seeing the cost offset as yields are kind of partially -- there's a modest headwind from the ship, the mix dynamic? Mark Kempa: Yes, Conor. I think it's across the board. We continue to see margin expansion. We've expanded margin this year by more than 150 basis points or 200 points of 600 basis points in 2023. That's in part to almost everything we're doing. It's not only the mix, the better and more efficient, closer to home itineraries. But more importantly, it's also the muscle and the scale that we continue to get that we've been demonstrating over the last 2 years. So I think when you put all that together, we continue to flex that muscle. We continue to improve. And of course, in part to some of that is the mix, but that's starting to come into play now. When you look at the last 18 to 24 months, that has not been a mix issue. That just means we've simply been better at delivering a better unit cost overall system-wide. So we certainly are seeing the fruits of that. We're bearing fruit, and we expect to continue to see that into 2026 and beyond. Harry Sommer: And I just want to emphasize, not cost at the extensive product, our guest satisfaction scores and our future onboard bookings continue at record levels that it is super critical to get that message across. Operator: [Operator Instructions] Our question is from Ben Chaiken with Mizuho Securities. Benjamin Chaiken: Maybe the first question is maybe a 3-parter. Maybe remind us to refresh us. You mentioned '26 costs are sub-inflation. What are -- I guess, part one, what are some of the specific opportunities you see next year. I remember at one point during the Investor Day, you went through a couple of kind of like critical examples, I'm not sure if there's anything you can share next year. Part 2, is higher Caribbean exposure on net benefit to cost? Or how should we think about it? And then part 3, how should we think about the impact of occupancy as there should be around, I think it's like 200, 250 basis points of growth. I guess, mechanically, is there any rule of thumb you have on the translation between occupancy to net cruise cost? Mark Kempa: All right. And I'm going to see if I can get all 3 of these. I think the first was on the 2026 detail larger and the larger opportunity. Look, Ben, we've been clear. In this business, there is no silver bullet to just snap your fingers and find a large cost. It is a deliberate and methodical way of looking at the business from the entire process -- development process to the product delivery. So we are focused on a lot of little things and over time, that flywheel starts to turn, and we find more efficiencies across the board. So it's -- we're focused on everything. But again, we've been doing this in a very disciplined and methodical manner. I think when you said -- when you talked about Caribbean capacity, is that a tailwind to cost? Absolutely, sailing closer to home -- sailing closer to home, obviously, gives you some benefits in terms of the ability to deliver the product at a better scale and at a better unit cost. But again, that's all just part of the broader mix. And I think on the last part in terms of the occupancy, when we think about increased occupancy from thirds and fourth, that's typically children or some or the teenage set, there's very little marginal cost related to that. Obviously, that brings in a higher revenue. But I think even when you look at our third quarter, where increased -- were occupant increased by 1 point, fourth quarter, our occupancy is increasing by 1 point, we're not seeing any significant shifts in the cost base for that. So I think that's just another benefit in overall tailwind as we bring more of that third and fourth guest to our mix, we'll continue to improve on our overall unit cost. Benjamin Chaiken: Okay. Got it. That's very helpful. And then just for '26, a quick one. Obviously, capacity growth is higher in '26 than '25. Is there anything abnormal on the D&A side specific to the island investments we should consider? Mark Kempa: No. I think when you look at D&A, and I think when you look at it historically, whether you're doing it on a gross or a net percentage of revenue, I think it's going to be pretty consistent. We've been very clear that our investments in Great Stirrup Cay generally have been modest. Our largest investment, obviously, is the pier where that was around $150 million plus, and I think that gets depreciated probably over at least 30 to 40 years, I don't have the exact number on. So I don't think you would expect to see any sort of uptick in D&A as a result of the Island investments. I will remind you, we do take on -- we do have 7% capacity growth next year. So we will be taking on 2 new ships, Luna in March, April and then Prestige in the latter part of December of '26. Operator: Our next question is from Vince Ciepiel with Cleveland Research. Vince Ciepiel: I wanted to dig into the yield set up a little bit more for next year. And there's been a lot of helpful commentary so far. But I guess I wanted to take it in parts. First, I imagine you have close to half of next year booked a good amount of the first half. Like the core trend line that you're seeing in like-for-like, any way to describe it? And then the second part, there's obviously some moving pieces. You already laid out GSC should be accretive, which is great and helpful. But the 2 other ones I just wanted to clarify. The first new hardware, like accretive, dilutive or probably somewhat neutral -- and then finally, the shift to the Caribbean, a lot of helpful commentary on occupancy should benefit, maybe some cosmetic dilutive impact to per diem. But at the end of the day, like does the shift to the Caribbean a tailwind, a headwind or neutral to yield in '26 as you sit here today? Harry Sommer: So try to get through all 3 parts, if I remember everything, Vince. And by the way, good morning, thanks for joining us today. So you are right. We are about half booked for next year. That's about where we would be at the cycle at this time. When you ask about core trends, we have come out with our algorithm that on this type of measured capacity growth, we're looking for low- to mid-single-digit yield growth, and I believe that our book position right now confirms that, that will be attainable, which, of course, we need to attain in order to hit our target in the core targets, which we forcefully reiterate again today that we'll obtain. In terms of the accretiveness of new hardware, listen, any time a new ship comes on board, we saw it with Aqua this year. We're seeing it with Luna next year on the NCL fleet, we absolutely see a modest tailwind. But keep in mind, it's one ship in a 34 ship fleet. So it's not going to be a tremendous tailwind at the NCLH level. Certainly, on the Oceania and Regent side. We have a new ship for Oceania this year Allura, a new ship for Regent coming on the very end of next year won't really impact 26 months -- 26 months, excuse me, those also function as a modest tailwind. So overall, yes, new ships are accretive. But again, it's just 1 ship in the overall fleet. On Caribbean, we absolutely view this. When you say a tailwind or headwind to yield, I'll make the question a bit broader. We viewed it a tailwind to margin, which is more important to us than a tailwind to yield. So yes, we believe Caribbean are good yielding cruises, but the more important thing is that we can deliver Caribbean at a higher margin than we can deliver some of the exotic itineraries in places like Africa and South America and Asia that these ships have replaced, especially the shorter 3- and 4-day cruises. Vince Ciepiel: It's a really helpful overview there. And then maybe one final one. Just as you shift more Caribbean in the business, probably looks a little bit closer in, I would imagine. And when you watch that trend line in close-in bookings over the last 60, 90 days. How would you characterize it? Harry Sommer: So yes, these Caribbean cruises both in general and certainly the 3- and 4-day cruises, do book closer in. And I think that was one of the factors why we've seen record bookings in Q3 in October, clearly not the only factor, but one of the factors. I'd say the bookings have been nothing short of incredible. I mean, the demand we're seeing for close-in up until a week of sailing even has been unprecedented from at least recent history. So we're very, very pleased with the strength of the consumer and their ability to book across the entire length of the booking curve, including up to the day before cruise. Operator: Our next question is from Patrick Scholes with Truist Securities. Charles Scholes: Two questions. One, can you give us an update on the progress of finding a new Brand President? And then secondly, can you talk a little bit about the changes in selling strategy with the Oceania brand, specifically recent unbundlings. Harry Sommer: Yes. Thank you, Patrick, and listen, on the Brand President, we are conducting an extensive search. We have been very pleased with the caliber of world-class talent. We've been able to attract for the search, I'll say we're pretty deep into it now. No announcement today or probably the next week or two. But I hope we're going to be able to see someone soon. The most important thing for us is to attract a world-class leader that can continue on with the brand promise as we've been evolving it certainly over the last few quarters. On top of the other wonderful talent we have with our new CMO, new Chief Commercial Officer, new Head of Technology and other excellent internal and external candidates that we've brought into the brand to help evolve and make things -- make NCL even greater in the future. In terms of the promo strategy for Oceania, it was a -- I saw a lot of write-ups on it, but honestly, it was a relatively modest change. We've run a series, let's -- I'll call them different promotions over the last year. And we've gotten very good data on what it is that customers value and are willing to pay for, which is one of the core strategies to provide guests with things they value and are willing to pay for. So the promotion we aligned with on Oceania, not really different that much in nature to what we've been doing recently, but really allows us to optimize the construct for our guests and maximize yields and margins. I will say, I've been incredibly pleased both with the level of bookings and the consistency we've been seeing on Oceania. I mean it's become almost like clockwork, that in the Regent brand in terms of their weekly bookings and revenue. So I find that as encouraging as anything else. Operator: Our next question is from Andrew Didora with Bank of America. Andrew Didora: Maybe Harry thinking about these brand changes a little bit more strategically. When you think about -- how do you think about the time line for repositioning these brands? I guess I think about particularly for Norwegian, how long do you think it takes to change that the way you describe it the brand familiarity with families? How long until you reach your targeted run rate? Harry Sommer: So I think with Regent, we're already there. I think -- because the brand changes there were relatively minor. I'd say with Oceania, we're probably about 2/3 along the journey with the evolution of the Oceania brand to luxury and to focus not just on food, but on destination service experiences things that our guests truly value. I think it still is a slightly longer runway. I think I mentioned in my prepared remarks that we're going to be launching some new brand campaigns in Q1 that will certainly help us along. Clearly, the shift to families and the reliance or the focus, I should say, on GSC has already come forward as witnessed [Audio Gap] by our Q4 in '26 occupancy. So it's already beginning to take hold. My guess is on NCL by the middle of next year, I think we would have reached the... Mark Kempa: Andrew, first and foremost, what we've been -- what we've said is reducing leverage is our #1 priority. And we continue to look for ways to do that. Of course, margin expansion is the #1 driver of that, which results in a significant free cash flow. And we continue to see that -- expect to see that to ramp up over the course of the next 24 months. So of course, as we look at the remainder of our capital structure in terms of what's left on the debt side, we're always looking to be opportunistic and we'll continue to do so and we'll continue to strategically make opportunistic trades where it makes sense and improves our overall structure and ratings. Harry Sommer: All right. So with that, I want to thank everyone for today's earnings call. For those of you listening, for those of you who have participated, particularly pleased with our record earnings, our record revenue, our record EBITDA, our record future book position, in terms of new bookings, and all the other wonderful tailwinds that the brand is undertaking. We look forward to sharing the journey ahead with all of you. Thank you all very much. Have a great day. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Good morning and welcome to the Diversified Healthcare Trust Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead. Matt Murphy: Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President. Today's call includes a presentation by management, followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, November 4, 2025. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, or SEC. In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, net operating income or NOI and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website at www.dhcreit.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And finally, we will be providing guidance on this call, including NOI. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate. With that, I would now like to turn the call over to Chris. Christopher Bilotto: Thank you, Matt and good morning, everyone. Thank you for joining our call today. I will begin by providing a high-level review of DHC's third quarter results and an update on the progress we are making toward our key strategic objectives, including an update to the previously announced transition of our AlerisLife-managed communities. Then Anthony will provide more details regarding our quarterly financials and capital spending. And finally, Matt will review our financing activity and liquidity before discussing our outlook for the remainder of the year. After the market closed yesterday, DHC reported third quarter results that highlight continued momentum across our operating segments and steady execution on our initiatives to strengthen DHC's financial position. Total revenue for the quarter was $388.7 million, an increase of 4% year-over-year. Adjusted EBITDAre was $62.9 million and normalized FFO was $9.7 million or $0.04 per share. During the quarter, we took a significant step forward in repositioning our senior housing operating portfolio with the announced sale by AlerisLife of its management contracts and our results reflect a temporary decline in NOI due to elevated labor costs as we transition the 116 AlerisLife communities to new operators. For the transitioning portfolio, compensation expense as a percent of revenue was approximately 240 basis points above the portfolio average for prior periods, representing an incremental cost of roughly $5.1 million for the quarter. These elevated labor costs are primarily driven by required investments in operational support, including payroll allocation for property tours, community reviews, training and onboarding to support incoming operators. Additionally, temporary employee overlap necessary to meet required notice periods prior to terminations has contributed to the increase. As previously communicated, these transitions are part of AlerisLife's planned wind down of its business, which included a broadly marketed process for the sale of the management contracts for the DHC-owned communities to 7 operators and the sale of 17 Aleris-owned communities to unique buyers. 21 of the 116 communities were transitioned to new operators as of quarter end and a total of 85 communities have transitioned as of today's call. We are tracking all 116 communities to transition by year-end. As a 34% owner of AlerisLife, we expect to receive approximately $25 million to $40 million of net proceeds upon the completion of the wind down in 2026. Importantly, this transition -- transaction advances our strategy to establish a more efficient and geographically aligned operating model in line with broader industry trends favoring regional densification. The new DHC operating agreements include a 10-year term and incorporate performance-based incentive and termination structures that enhance accountability and align operator interest with DHC's objectives reinforced by the operators' purchase of these contracts. As part of the diligence and selection of the 7 operators, 5 of whom are new to DHC, our asset management team developed specific criteria to evaluate each operator's capabilities and market expertise. We expect these measures will result in occupancy rates and NOI margins that are more consistent with industry averages. During the third quarter, SHOP occupancy increased 210 basis points year-over-year to 81.5%, marking the fourth consecutive quarter of occupancy growth and RevPOR rose 5.3%, reflecting annual rate increases, gains in care level pricing and reduced discounts and concessions at higher occupied communities. ExpensePOR for the same period increased by 5.1%, driven primarily by temporary labor cost increases associated with the community transitions, wage adjustments and filling of previously opened positions. Collectively, these trends resulted in a 6.9% year-over-year increase in SHOP revenues and a 7.8% increase in consolidated SHOP NOI to $29.6 million. Sequentially, the decline in SHOP NOI is primarily attributable to higher seasonal utility costs, favorable onetime adjustments in Q2 and the noted temporary labor costs related to the community transitions, which are expected to moderate through Q4. Initial feedback from the new operators has been encouraging with feedback complementing opportunities to drive top line revenue with the introduction of additional care levels, above-market rent increases, the opportunity to reduce expenses through rightsizing services with meal offerings, equipment leases and procurement of recurring services and the ability to improve leads to move-in conversion across the portfolio through the integration of each operator's broader CRM tools. We expect to see these initiatives complement our performance over the next several quarters. Based on year-to-date performance and current trends, we are maintaining our full year SHOP NOI guidance range of $132 million to $142 million. Turning to our Medical Office and Life Science portfolio. During the quarter, we completed approximately 86,000 square feet of leasing at weighted average rents of 9% above prior rents for the same space with an average term of nearly 7 years. Consolidated occupancy increased 370 basis points sequentially to 86.6%, primarily driven by the asset sales of vacant or low occupancy properties and leasing during the quarter. Same-property cash basis NOI increased 1.6% year-over-year with margins improving 100 basis points to 58.9%. Looking ahead, 1.5% of annualized revenue in our Medical Office and Life Science portfolio is scheduled to expire through year-end 2025, of which 22,000 square feet or approximately 30 basis points of annualized revenue is expected to vacate. We maintain an active leasing pipeline totaling 717,000 square feet, including approximately 103,000 square feet of new absorption, providing momentum toward higher portfolio occupancy and continued rent growth with average lease terms of 7.6 years and GAAP rent spreads averaging more than 8%. Turning to our capital markets and balance sheet initiatives. In August, our Seaport Innovation joint venture completed a $1 billion refinancing of the Vertex Pharmaceuticals' headquarters in Boston. As part of this transaction, DHC received a $28 million cash distribution, reflecting our 10% share of the proceeds. Following our September issuance of $375 million of senior secured notes in 2030 and with the expected payoff of our remaining 2026 zero coupon bond notes as early as the fourth quarter, DHC will have no debt maturities until 2028. We continue to make significant progress with our noncore asset sales. Year-to-date, DHC has sold 44 properties for $396 million. And as of November 3, we are under agreements or letters of intent to sell 38 properties for $237 million. We are also tracking close -- to close on 25 of these properties in Q4 for total proceeds of $211 million with the remaining balance planned for Q1 2026. These asset sales will reduce capital spending in 2026 and beyond, improve overall occupancy and margins and will contribute to the portfolio's cash flow growth. Looking ahead to 2026, the company is positioned to have its strongest liquidity maturity profile in several years. We believe our share price does not reflect the underlying value of our portfolio or the initiatives management has undertaken this year. With a fully transitioned SHOP portfolio, we believe DHC is well positioned to drive margin expansion, cash flow growth and continued balance sheet improvement, all of which are clear catalysts to drive shareholder value. With that, I will turn the call over to Anthony. Anthony Paula: Thank you, Chris and good morning, everyone. During the third quarter, our same-property cash basis NOI was $62.6 million, representing a 70 basis point increase year-over-year and 9.5% decrease sequentially. Our third quarter SHOP same-property results include improvements in both occupancy and average monthly rate. Same-property occupancy increased 140 basis points year-over-year and 100 basis points sequentially. We also continue to see positive momentum with pricing and achieved an increase in same-property SHOP average monthly rate of 5.3% year-over-year and 60 basis points sequentially. These increases resulted in year-over-year same-property SHOP revenue growth of 6.6%. Excluding the $5.1 million of temporary compensation expense increases related to the transition of management contracts from AlerisLife, adjusted SHOP NOI for the quarter would have been $34.8 million and SHOP NOI margin would have been 10.4%, an increase of 150 basis points from the reported margin of 8.9%. Turning to G&A expense. The third quarter amount includes $5.7 million of business management incentive fee. This incentive fee is driven in part by an increase in DHC's stock price of approximately 90% year-to-date. Any incentive management fee incurred would not be due until January 2026. Excluding the impact of the incentive management fee, G&A expense would have been $7.1 million for the quarter. During the quarter, we invested approximately $43 million of capital, including $35 million in our SHOP communities and $7 million in our Medical Office and Life Science portfolio. We are pleased with our recently completed refreshes and redevelopments as we achieved incremental NOI of $2.8 million during the quarter when compared to prerenovation NOI. These returns are in line with our expectations of delivering a mid-teens ROI. We believe there's continued upside in NOI and occupancy growth at these communities. Based on our current expectations for the fourth quarter, we are reaffirming our 2025 CapEx guidance of $140 million to $160 million. Now I'll turn the call over to Matt. Matthew Brown: Thanks, Anthony and good morning, everyone. We ended the quarter with approximately $351 million of liquidity, including $201 million of unrestricted cash and $150 million available under our undrawn revolving credit facility. In September, we advanced the repayment of our January 2026 zero coupon bonds by issuing $375 million of 5-year secured bonds at a fixed coupon of 7.25%. We used $307 million of the proceeds to partially redeem our January 2026 bonds. The offering was several times oversubscribed, allowing us to improve pricing. This bond is secured by equity pledges on 36 properties, including 21 SHOP communities with an implied valuation of $226,000 per unit. The remaining balance on our 2026 bond is $324 million after a $10.2 million paydown from an encumbered property sale. In addition to this October property sale, subsequent to quarter end, we also sold 11 properties for aggregate gross proceeds of $31 million. As of November 1, we had a total of 38 properties under agreement or LOI for aggregate proceeds of $237 million, with the majority of these closings expected before year-end. We expect to use cash on hand, our undrawn credit facility and proceeds from our pending dispositions to repay all amounts on our January 2026 bonds as early as year-end. After this repayment, we estimate the weighted average interest rate on our remaining debt to be approximately 5.7% with no maturities until 2028. As of September 30, our net debt-to-adjusted EBITDAre was 10x, primarily reflecting the temporary compensation expense increases from our SHOP segment. Excluding these $5.1 million of elevated compensation expenses, leverage would have been 9.3x, an improvement of 70 basis points from the as-reported number. We remain confident in our strategies to reduce leverage by executing on our pending asset sales to repay debt and to drive stronger performance in our SHOP segment. Looking ahead, we expect improvements in adjusted EBITDAre with a full year 2025 range of $275 million to $285 million and trending towards positive cash flow as SHOP operations stabilize and leverage declines. In closing, based on our current liquidity and asset sales, we are confident that January 2026 bonds will be repaid in full as early as year-end. With our next scheduled maturity in 2028, our near-term focus is on ensuring a smooth transition of the remaining communities from AlerisLife to our new managers. While the transition of these communities presents a temporary increase in cost, we are reaffirming our 2025 SHOP NOI guidance of $132 million to $142 million. Looking ahead, we are optimistic about the long-term performance of our SHOP segment. We believe our strategic initiatives will continue to drive improvements in NOI, margins and occupancy across our portfolio. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from John Massocca with B. Riley Securities. John Massocca: Maybe looking towards 4Q '25 and in light of the unchanged GAAP NOI guidance, what impact are you expecting from operator transition OpEx costs in 4Q, especially relative to what you experienced in 3Q? Matthew Brown: John, thanks for the question. So as we noted in prepared remarks, approximately $5.1 million of costs in the quarter related to the transitions. As of today, the majority of our communities have now transitioned. So I would say maybe somewhere around $1.5 million to $2 million of impact in the fourth quarter. As it relates to the overall NOI guide, we do expect to continue seeing increases in occupancy and some reductions in expenses, mainly utilities that support the overall guidance being unchanged at $132 million to $142 million for the year. John Massocca: Okay. And then in the prepared remarks, you mentioned you had 10.1% margin ex the transition labor compensation expense. Was that a same-store number? Or was that just for the consolidated portfolio? Matthew Brown: That's a consolidated number. John Massocca: Okay. And then continuing with kind of the operator transition costs, is that something that was kind of contemplated when you put out guidance -- your adjusted guidance in October or even earlier this year? And maybe kind of why -- I understand there are other parties involved but why now for the transition from the AlerisLife assets to third-party operators? Christopher Bilotto: We'll answer that in parts. So with respect to the guidance, we hadn't necessarily contemplated specific interruption or quantified that with respect to the AlerisLife management contracts. But I think the real kind of opportunity is for us to kind of meet the needs and going through the process. And we understood that there was going to be some disruption and quantifying that -- it's variable. And so I think we've done the best we can to kind of help monitor that and mitigate it where appropriate and understand it's kind of a necessary temporary commitment to a broader strategy to bolster the overall performance for the company through the change in relationship to, again, to the 7 new operators and kind of the information that we provided supporting the benefit of that. I think the latter part of your question was why now? I mean, this was really a decision through AlerisLife and its business needs. And I think kind of looking at various option supporting a go forward. Management on that side has done an amazing job turning around performance. And I think that's reflected in kind of the multiyear improvement for DHC. When you look at Aleris-managed communities relative to the other operators, they've outperformed. And given where SHOP is today, they felt like strategically, it was the best benefit and value proposition for the company. And then certainly, with DHC being a 34% owner, there's inherent benefits for that and we've talked about what a lot of those things are, including the diversification of operators. It cleans up the story for DHC without an affiliation. And I think strategically, it positions us to be kind of a better partner with the new operators and to grow our overall performance as we head into 2026 and future years. John Massocca: Okay. Sticking with the SHOP portfolio, I know you kind of gave the updated guidance on the NOI. But are you still expecting occupancy to be in the 82% to 83% range by year-end? Christopher Bilotto: Yes. John Massocca: And then any kind of, I guess, maybe pull on the revenue side you've seen from the transition, just any kind of temporary disruption there? Or has that largely been unaffected by these operator transitions? Christopher Bilotto: Look, it's difficult to kind of quantify the top line with respect to where there may have been disruption or not in the sales process. I mean, certainly, you're seeing in our results that top line performance is trending favorably and really the impact to the quarterly performance is on the expense side. But there's likely some disruption and we think going forward as the transitions are complete, and as Matt noted, we're largely through those in October and I think all but a handful will wrap up towards mid-November. That clearly will provide a lot of -- a better runway, if you will, to avoid any other noise with respect to a transition and focus solely on operations. So again, hard to quantify, probably some impact as we get to mid-November, that will be behind us. John Massocca: Okay. And then anything else to call out on the SHOP operating expense side that was maybe unrelated to these transitions that increased in the quarter versus in 2Q or 1Q? Matthew Brown: No. The major headline was clearly the $5.1 million of elevated comp costs. We did have about a $2.5 million increase sequentially on utilities that was expected and we highlighted that on our Q2 earnings call. But those are the major drivers. John Massocca: Okay. And then switching gears to the disposition activity. Can you maybe provide a little more color on the items in the pipeline today? How close are those to closing? Do you expect that entire pipeline to close by year-end? And I guess maybe what are the variables that could cause some of those to slip into 2026 or maybe fall out of the pipeline, if at all? Christopher Bilotto: Yes. We do expect a small portion of the highlighted dispositions will close in Q1 2026. That's primarily on the SHOP side. There's about 13 communities as part of kind of a portfolio transaction. But just over $200 million is expected to close for the balance of this quarter. And that's a combination of MOB and kind of select SHOP assets. I think the risk with that, I think, is minimal at this stage. I think a lot of what we see today are the -- the closing periods are within the year for the most part. And so we feel pretty good about being in a position to achieve a lion's share of that number this year. So again, close to $200 million for the balance of this year. And then again, there will be some dispositions that will fall into next year. John Massocca: Okay. And then I think with the disposition activity as it seems to be closing, you would have maybe a little bit of excess capital but I guess it depends on how much kind of cash you want to leave on hand. I mean, is there any potential to pay down additional debt with disposition activity completed in '25 beyond those -- that debt maturing in 2026? Or is that more likely to stay as kind of dry powder to deal with whatever comes next in 2026? Matthew Brown: Yes, that would be left on the balance sheet as dry powder as we kind of turn our focus to offense. Our next debt maturity after the '26 is in 2028 and the interest rate on that is 4.75%. So we're better off leaving that debt on the balance sheet and increasing our cash position. Operator: [Operator Instructions] Since there are no more questions, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto for any closing remarks. Please go ahead. Christopher Bilotto: Thank you. We would like to thank you all for joining our call today and we look forward to meeting with many of you at the Nareit conference in Dallas in December. At that time, we will have substantially completed the SHOP operator transitions and we plan to publish an updated investor presentation for the conference with additional color on our transition progress and supporting performance. Please reach out to Investor Relations if you're interested in scheduling a call with DHC or meeting at Nareit. Operator, that concludes our call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the InfuSystem Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Dorame of Lytham Partners. Please go ahead. Joe Dorame: Good morning, and thank you for joining us today to review InfuSystem's Third Quarter 2025 Financial Results ended September 30, 2025. With us today on the call are Carrie Lachance, Chief Executive Officer; and Barry Steele, Chief Financial Officer. After the conclusion of today's prepared remarks, we'll open the call to questions. Before we begin with prepared remarks, I would like to remind everyone certain statements made by the management team of InfuSystem during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed under Risk Factors in documents filed by the company with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2024. Forward-looking statements speak only as of the date the statements were made. The company can give no assurance that such forward-looking statements will prove to be correct. InfuSystem does not undertake and specifically disclaims any obligation to update any forward-looking statements, except as required by law. Now I'd like to turn the call over to Carrie Lachance, Chief Executive Officer of InfuSystem. Carrie? Carrie Lachance: Thank you, Joe, and good morning, everyone. Welcome to InfuSystem's Third Quarter Fiscal Year 2025 Earnings Call. Thank you all for joining us today. I will provide a third quarter overview, highlighting key successes, addressing notable challenges and outlining our strategic priorities as we wrap up 2025 and look forward to 2026. Then Barry will provide a detailed summary of our financial results. I will then come back to some closing comments before opening the line to questions. This morning, we published our third quarter earnings report, which illustrated another strong quarter of financial performance, marked by continued revenue growth, margin expansion, robust cash flow, debt reduction and returning capital to our shareholders. In the report, we shared examples of the activities and initiatives we have underway that have contributed to these improved financial metrics. I'll take a few minutes now to walk through some of them. I'll start by discussing some very important projects driving our Wound Care initiatives. We see an opportunity to leverage strategic competencies present in our Patient Solutions segment beyond our existing therapies of oncology and pain management. A key driver for long-term success in this initiative has been taking steps that will lower the processing cost for each patient referral. This is why we acquired Apollo in May of this year. Integrating this company and its systems not only brought us Wound Care customers, but more importantly, presented a quick and low-cost means to upgrade to a more streamlined billing software that will allow us to process upfront paperwork and insurance claims more quickly and efficiently. During the third quarter, we completed key integration tasks, including connecting the new RCM application to our insurance billing clearinghouse, which effectively plugs in our large portfolio of insurance payers. We are now focused on additional system and process improvements, particularly building out the AI and automation enhancements that, that new tool allows and completing the transition of our existing Wound Care volume into the new system. While it's still too early to measure the exact cost reduction benefit, we believe the new system will allow us to process the highly complex Wound Care claims on a cost-efficient basis. The ongoing progress also brings us a few steps closer to onboarding our Oncology and Pain Management billing volume onto the application, further leveraging the investment and improving our overall RCM efficiency. Also in the third quarter, we began accepting patient referrals and booking revenue for pneumatic compression devices, or PCDs, through a new relationship with the device manufacturer. Although the amount of revenue was relatively small, the quickness to launch illustrates not only the strength of our payer portfolio when we bring it to bear on new products, but the significant improvements that the team has made to accelerate the speed at which we bring new products online. For now, we are classifying these revenues in Wound Care category with hopes they will grow large enough in the future to report them separately. Next, I'd like to note 3 developments positively impacting our business beyond Wound Care. First, in addition to the new billing system acquired and integrated via the Apollo acquisition during the third quarter, we went live with a machine learning tool focused on our front-end intake process, which is another complicated and time-consuming manual task. This was done even while continuing the implementation of our ERP level software system upgrade that we began in 2024. Second, we secured a significant new contract with a large hospital system for our Oncology business. Our sales team has had tremendous activity, and this win, along with others, increases our market share and will help us to continue to report Oncology revenue growth at levels exceeding expectations, a challenge given our high market share. The contract win resulting in higher volume will, of course, require us to spend capital on pumps, a fair trade, given Oncology is our most accretive revenue source. In addition, I'll note that Oncology revenue for the third quarter reached an all-time record, which is a common accolade for the business. Finally, we secured a multiyear contract extension with one of our largest national insurance payers. This type of event is not normally newsworthy since we routinely extend existing contracts and add new payers to our very extensive portfolio. However, this one stands out as particularly exciting because it provides enhanced service coverage in product areas we are focused on, such as negative pressure wound therapy devices and PCDs. The extension also contains a much appreciated price increase. The accomplishment demonstrates the depth of our contract relationships as a whole and the value our payers see in our capabilities. Before I turn the call over to Barry, I need to provide an update on developments in our biomedical services business. As we mentioned in our last quarterly call, we've been working with our largest biomedical services customer to modify the contract to reflect changes in market economics and developments in the relationship. During the third quarter, we signed a contract amendment that will improve pricing and shift the relationship to reduce device volume and lower service levels on most of the devices remaining on the contract. These changes will result in a reduction in revenue under the contract by an estimate $6 million to $7 million annually starting in December of this year. However, it is important to note these changes will also result in an expansion of our operating income by reducing costs and expenses in an amount greater than the revenue decline. We are now focused on resizing and relocating our field-based biomedical technician team to conform to the changes. While we are always disappointed by changes that reduced our revenue, we believe that profitability is a key driver of shareholder value and that these strategic adjustments are essential to our continued progress and will leave us with a very solid core field-based biomedical service business from which to build upon. Now I'll turn it over to Barry for a detailed review of the third quarter financial results. Barry? Barry Steele: Thank you, Carrie, and thank you, everyone, on the call for joining us today. I'm going to focus on the main drivers for the current quarter's results, and I'll update you on our current financial position and how it changed during the quarter. And let me start with our financial results for the period. During the third quarter of 2025, our net revenue totaled $36.2 sic [ $36.5 ] million. This was another record, and it represented a $1.2 million or 3.3% increase from the prior year third quarter. The improvement was applicable to increased net revenue for the Patient Services segment, partially offset by lower revenue from Device Solutions. Patient Services net revenue increased by $1.6 million or 7.6% and included increased patient treatment volumes in Oncology and Wound Care. Oncology net revenue increased by nearly $700,000 or 3.6%, and Wound Care revenue was up by 116%, totaling $2 million, which was mainly driven by volume increases in negative pressure wound therapy treatments related to the Smith & Nephew partnership, increased volume from the Apollo acquisition and first-time revenue for pneumatic compression devices. Device Solutions net revenue decreased by $400,000 or 2.9%. This decrease was primarily attributable to about $400,000 in lower revenue volume in biomedical services and a standout large equipment sale during the prior year to a large rental customer that bought out $1 million in lost pumps from their contract. Partially offsetting these declines was a $600,000 nonrecurring benefit to adjust the contract asset related to our largest biomedical services customer. The lower revenue from the biomedical services mainly relates to a remediation contract that benefited the prior year but was nearly completed prior to the current year period. Gross profit for the third quarter of 2025 was $20.8 million, which was also a quarterly record and a $1.8 million or 9.3% increase over the prior year third quarter. Our gross margin percentage at just over 57% increased by 3.1% from the prior year's amount, which was a significant improvement even without the onetime 1.7% boost that received from the contract asset adjustment. The remaining increase was mainly driven by improved labor efficiency and pricing in biomedical services, improved revenue mix favoring higher-margin revenue such as Oncology, lower procurement costs and lower pump disposal expenses. Selling, general and administrative expenses for the third quarter of 2025 totaled $17 million and was $1.2 million or 7.8% higher than the prior year third quarter amount. More than half of this increase was attributable to $773,000 in expenses associated with our project to upgrade our main enterprise resource planning software. Other increases were related to additional headcount and revenue cycle and other personnel needed to support the higher revenue volume and a higher accrual for short-term incentive compensation. Partially offsetting these increases was a lower sales commissions rate related to shifts in revenue mix. Adjusted EBITDA during the 2025 third quarter was $8.3 million, which represented an increase of just over $400,000 or 5.6% from the prior year third quarter adjusted EBITDA. This represented 22.8% of net revenue for 2025, which was slightly above the prior year rate of 22.3% despite a $500,000 increase in spending on the ERP project. On a trailing 12-month basis, adjusted EBITDA totaled $30.2 million, representing a margin of 21.4%. This demonstrates that our focus on profitable revenue growth and operational efficiency is yielding meaningful results. Now a few points on our financial position and capital reserves. On a year-to-date basis, for the first 9 months, we generated operating cash flow totaling over $17 million. This amount was $4.8 million higher than the amount realized during the prior year-to-date period. This increase was due to the higher adjusted EBITDA, which on a year-to-date basis was also up by $4.8 million. Our net capital expenditures were $3.1 million so far in 2025, which represented a significant decrease from $10 million spent during the first 9 months of last year. The amount during the prior period was focused on infusion pumps needed to support increased volume in the Device Solutions rental business, which grew more significantly during that period. Although we anticipate an increased amount of medical equipment purchases during the next quarter to support some new customers in Oncology, we continue to anticipate that our overall capital spending requirements will remain at moderate levels as compared to amounts in prior years as the sources of our future revenue growth will continue to be more weighted towards less capital-intensive revenue sources. We continue to be positioned well to fund continued net revenue growth with the growing cash flow from operations backed by significant liquidity reserves available from our revolving line of credit and manageable leverage and debt service requirements. Our net debt decreased by $5.7 million during the third quarter. We were able to do this despite purchasing $2.2 million of our common stock during the quarter under our $20 million stock repurchase authorization. This brings total shareholder capital return under the plan so far this year to $8.6 million. Our available liquidity continues to be strong and totaled nearly $65 million as of September 30, 2025. At that time, our ratio of net debt to adjusted EBITDA was modest at 0.66x. Our debt consists of borrowings on our revolving line of credit with no term payment requirements. Early in the third quarter, we amended our credit agreement, extending the facility for 2 additional years. The facility now expires in July 2030. We continue to benefit from an outstanding interest rate swap, which fixes our interest rate on $20 million of the outstanding borrowings at a below market rate of 3.8% until April 2028. I'll now turn the call back over to Carrie. Carrie Lachance: Thanks, Barry. As we close out the year with strong momentum, we are reaffirming our full year outlook, targeting adjusted EBITDA margin to be 20% or greater and revenue growth between 6% to 8%. We are entering 2026 as a stronger and more focused company, well positioned to build on this progress. As I reflect back on the efforts we made during the third quarter, the updates that we've shared with you today and what we are currently focusing on as we close out 2025, I hope you will agree that we've been diligent in pursuing the strategic priorities we laid out for you in early August when we reported the second quarter. Those priorities are to execute with discipline, deliver profitable growth and drive long-term value creation for our shareholders. Operator, we are ready for the Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from Kyle Bauser with ROTH Capital Partners. Kyle Bauser: Carrie and Barry, glad to see the very nice progress around prioritizing profitable growth and sort of improving the processes to lower cost here. It sounds like you've made some nice strides across the business in relation to this, particularly in Wound Care and Oncology. It seems like Oncology is probably much more streamlined than kind of the growing Wound Care business. Can you maybe talk a little bit more, Carrie, about the additional enhancements you want to make in the Wound Care business kind of around AI and automation enhancements? Carrie Lachance: Yes, sure. From an AI perspective or an automation perspective, we have our new system that we implemented for the revenue cycle aspect over the past few months. That's working tremendously well. We have a good portion of our business that we're starting to put into that. Our older system didn't have any AI or automation technology that it allowed for. So we're looking forward to plugging even more of the business in, but we can see some efficiencies starting already in those lines of business. Kyle Bauser: Okay. Got it. And regarding the largest biomedical service contract changes, of course, it sounds like it will be much more profitable moving forward, which is great. Can you speak a little bit more about the level of reduction in this contract from a sales perspective? And then I think you mentioned kind of being able to recoup that in profit. So just any more color there would be appreciated. Barry Steele: I'll jump in on that. So it is a pretty significant adjustment for the amount of revenue we'll see from that contract. It's -- we're estimating between $6 million and $7 million for 2 reasons. One, although we increased our price, there are certain locations in certain areas that we were just not working well for us or for the customer. And so our volume will go down about 40%. And the remaining volume will have a decrease in the service level. So we'll only be doing preventive maintenance services and not doing the stand-ready repairs, although we do have an opportunity to get some of those repairs back into our buildings from a depot perspective, they'll ship them into us. We're not sure exactly how much revenue we'll see in that, but we expect that some of the device we've been repairing in the field, we'll see in our depots. The good thing, though, is that helps us to adjust our cost structure significantly. And the economics on the program will now be -- should be pretty good. So it's unfortunate that we have to get back a little revenue, but we'll definitely start from a very good base to build out from. In fact, we've already won some other business with other customers that allows us to start building it back at a much more favorable margin to us. Kyle Bauser: Got it. Appreciate that. And maybe just lastly, kind of related to that, so the 6% to 8% sales growth rate reiterated, which is great. How should we think about kind of the growth profile of Patient Services versus Device Solutions, either for this year or going forward? I guess I'm trying to get at the Device Solutions, what sort of growth profile can we envision there kind of moving forward with the change in this big contract? Barry Steele: Yes. So obviously, that's a pretty big headwind for us for next year just from that one contract adjustment. As you're aware, we do see our growth continuing where we're focused on is in the Wound Care, the Patient Services side with a bunch of different potential therapies and things that we'll look at bringing online. And so I think that will be a little bit slower on the growth side for the Device Solutions side where you see more growth being driven by the Patient Services side as we proceed through the year. The good thing is that the change that we're talking about don't take effect until December. And so there'll be a small impact on the current year for the adjustment to the large biomedical services contract. Kyle Bauser: Okay. Got it. That makes sense. Appreciate that. A great uptake. I think it's great to be prioritizing the profitable growth. Operator: Our next question comes from Matt Hewitt with Craig-Hallum Capital Group. Tollef Kohrman: This is Tollef on for Matt. Given your focus on profitable growth, how do you balance margin improvement with maintaining revenue momentum across your key segments? Barry Steele: Yes, I'll jump in on that one. So clearly, our businesses has a fairly sizable difference from one revenue source to the other in terms of how much margin we get and more specifically, how much capital we have to spend to grow. So we have been focusing on correcting some of the areas where we're a little bit less cash flow or lower margins and making some improvements, and that's what we saw with the significant shift in the large biomedical services contract and focusing where we can grow with our core competencies in areas that we can be more profitable and specifically where we don't have to spend as much capital to grow. So that's -- in order to be able to balance out those decisions about where we focus, we're thinking about return on invested capital. So we have a smaller requirement to get into a market or to grow an area and we can see a good return and good cash flow from that. That's where we've been prioritizing ourselves. So it's not just about the margins we can see, it's about our ability to actually successfully operate in a particular product segment and the quickness of how fast we get cash flow from it. Tollef Kohrman: Okay. And then are there any additional opportunities in Oncology or other therapeutic areas to replicate the success of the hospital system partnership? Carrie Lachance: Yes. [ Tom, ] I do -- we mentioned the PCDs, which -- we were into PCDs a few years ago, and it was -- we struggled in that area a little bit. I think, again, the back-end systems that we're improving, automating some of those areas being a little bit more streamlined there has allowed us to continue that growth and get back into the PCD area. So that, along with Wound Care are 2 areas that we're focused on, and we see a lot of opportunity there. Operator: Your next question comes from Jim Sidoti with Sidoti & Co. James Sidoti: So Barry, I think I heard you say that the ERP expenses in the quarter was about $733,000. Is that right? Barry Steele: $770,000. James Sidoti: $770,000. Barry Steele: Yes. That's an increase -- last year, it was a couple of hundred thousand. So we're $500,000 higher year-over-year. James Sidoti: Okay. And you think that will be gone by 2026, right? Barry Steele: No, we'll have spend in the first quarter. We'll be going live during the first quarter. So it will taper off after that. Keep in mind, though, our overall maintenance cost on the new system versus the old system is a little bit higher. So it doesn't all completely go away, but a very large portion of it goes away starting in the second quarter of next year. James Sidoti: Okay. And that's more than the gain you got from renegotiating the pricing on the contract then? Barry Steele: Well, I think -- I thought you're talking about the ERP and now that we're talking about the medical... James Sidoti: I'm just trying to figure out if this $0.11 if it's a clean EPS number. But it sounds like the onetime benefit was offset by the onetime expense because of the ERP. Barry Steele: That's a good way to look at it. We also had some adjustments to our short-term compensation incentives. So one thing that I think I said in my remarks, and it's probably true is if you back out the impact of the contract adjustments, so part of the price increase we got to account for prior periods because it related to prior services we already completed. That was about $600,000. If you take that out, we still had growth in our gross margin. We still had growth in our EBITDA margin. So -- but you're correct, there is offset expenses in there that you could -- they're unrelated somewhat. But yes, there will be -- if you took those things out, it would be better. James Sidoti: Okay. All right. And then in terms of the new service agreement, so it sounds like that business went from around $11 million to about $6 million to $7 million in terms of revenue. Is that right? Barry Steele: Well, yes, we think we're giving back somewhere between $6 million and $7 million. We don't know exactly because the volume on the repairs that we do in the building. So that -- the sort of in -- the field biomedical services business was around $10 million to $12 million business. It will be quite a bit lower. But keep in mind that we have won some other business that will make up for some of that. James Sidoti: Okay. And on that -- with the $12 million business, can you give us a sense on what the operating profit or the -- yes, the operating profit was for that and what it will be on the small... Barry Steele: I think the way I want to illustrate that is clearly, we were not making margins that we thought we needed to make under the contract. And with the new structure with a higher price and the different -- we're servicing in a way that we're more able to, there's going to be a distinctive improvement in our margins even at -- and I'm not talking about margin percentage, actual margin dollars under the new structure. So maybe going back to... James Sidoti: The impact of the change -- so the operating dollars under this new agreement, when it's down to maybe a $5 million level, you're saying that you'll have more operating profit than you had when you had a $12 million business. Barry Steele: That's correct. James Sidoti: That's correct. Okay. So... Barry Steele: Our top line will be negatively impacted and yet the bottom line will be positively impacted. James Sidoti: And I assume now that some of that excess capacity, you'll try and use that for new customers? Barry Steele: I don't think that we'll look at it as excess capacity. We won't have regional team members. We'll be sending people out from -- we'll be a little bit more concentrated with far as our footprint where we have team members closer to those devices. So some of our operating costs to get people on site will decrease. The nice thing, though, is that I think that as we build it, we'll probably not have a big concentration in one customer, right, that's kind of got the loss leader kind of contract. We do -- since we're winning other contracts, we think that we're going to be able to continue to build out in a smart way with smaller contracts that are much more favorable to us. James Sidoti: In terms of cash, you bought back a couple of million in stock. You paid off, I think, about $3 million in debt this year. Do you think that's going to be the trend for uses of cash going forward? Barry Steele: Yes. I think so. I mean there's other opportunities that from time to time, we'll consider that are M&A possibilities, but you'll hear about those when -- if we get something going. So we're kind of left with -- since we have positive cash flow and the business is becoming less capital intensive, we're left with excess cash to -- and so we'll have to return that to investors in the way that we have or pay down our debt, which is pretty low. So yes, it'll probably be very similar. In the fourth quarter, we definitely -- we have some new customers in Oncology that we'll need to have pumps for. So we'll be increasing the capital spend in the fourth quarter. James Sidoti: But it sounds like with this new strategy that the operating cash flow is going to go up, not going to go down over the next couple of years. Barry Steele: That's a big problem. James Sidoti: Yes. Operator: Our next question comes from Ben Haynor with Lake Street Capital Markets. Benjamin Haynor: Just a couple for me. First off, on the biomedical services contract, are there going to be any sort of onetime expenses to kind of the transition here, moving team members around? Anything related to that? Or that just kind of they get reallocated relatively easily and not any real expenses associated with the change to the contract? Barry Steele: Yes, there's definitely some costs. They're fairly low, both in some severance conditions and some relocations. But it will be in the fourth quarter, very small, very manageable amount. Benjamin Haynor: Okay. And even with that, you would expect the operating profit dollars to go up? Barry Steele: Yes. Keep in mind, the real impact to the revenue and the adjustment in the cost structure will be in early part of next year because we're still servicing the contract at the current level through the end of November. And so there's just a small -- and in December, we don't usually have as much revenue anyway because of preventive maintenance services that occur in the holiday time frame. So really not a big impact in the current year. A small additional expense for some restructuring [indiscernible] through. But again, it's more of an impact to next year where we see less revenue, but even more -- a bigger number reducing some of those costs. Benjamin Haynor: Okay. Makes sense. And then secondly, and I guess lastly for me, on the multiyear extension within the national insurer, you got the pricing improvement, obviously, good there. Can you maybe characterize how much of a boost you got there? And then on the enhanced service coverage, kind of what goes into that? What's the opportunity on that front? Barry Steele: Yes, the price increase is what we -- we do see price increases in other contracts as well. This one will be good for us. And yes, you must -- most of our contracts are -- there's no real concentration. So we'd have to get price increase on all of our contracts for it to be very extremely visible. But it's important for us to be able to indicate that we don't see price decreases in these contracts. Operator: Our next question comes from Matt Hewitt with Craig-Hallum Capital Group. Matthew Hewitt: Is there any updates on the pricing negotiations with ChemoMouthpiece? Carrie Lachance: So from a ChemoMouthpiece, we do actually have some good news from -- we don't have anything back from CMP as far as their approval for a code, a rate for a code. So that should come by the end of this year. However, we have seen some increased placement in the market. So from a sales perspective, we have started to see the uptake into facilities for placement of the device, which has been a really great start. So again, that approval accreditation kind of code will come up by the end of the year. We're waiting for CMP to announce that. And then the rate for that code should be out midyear next year. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Carrie Lachance for any closing remarks. Carrie Lachance: Thank you. I want to thank everyone for participating on today's call, and we look forward to our fourth quarter call when we will update on our results and progress. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Thomson Reuters Third Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Gary Bisbee, Head of Investor Relations. Please go ahead. Gary Bisbee: Thanks, Jenny. Good morning, and thank you for joining us today for our third quarter 2025 earnings call. I'm joined today by our CEO, Steve Hasker; and our CFO, Mike Eastwood, each of whom will discuss our results and take your questions following their remarks. [Operator Instructions]. Throughout today's presentation, when we compare performance period-on-period, we discuss revenue growth rates before currency as well as on an organic basis. We believe this provides the best basis to measure the underlying performance of the business. Today's presentation contains forward-looking statements and non-IFRS and other supplemental financial measures, which are discussed on this special note slide. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You may access these documents on our website or by contacting our Investor Relations department. Let me now turn it over to Steve Hasker. Stephen Hasker: Thank you, Gary, and thanks to all of you for joining us today. Momentum continued in the third quarter with revenue in line and margins modestly ahead of our expectations. Total company organic revenues rose 7% with the Big 3 segments growing by 9%. In addition, healthy revenue flow-through, beneficial revenue mix and good cost discipline boosted margins, driving profit ahead of expectations. We are reaffirming our full year 2025 revenue and profit outlook, including our expectation for approximately 9% organic revenue growth for the Big 3 segments. For the full year, our total and organic revenue growth is trending closer to 3% and 7%, respectively, rather than the higher end of the ranges at 3.5% and 7.5% for 3 reasons that are unrelated to our AI innovation momentum. First, a slower ramp of commercial print volumes; secondly, several recent U.S. federal government cancellations and downgrades; and third, slightly softer bookings trends at corporates following internal sales organizational changes aimed at improving future cross-selling. We see these as temporary factors not related to our growing innovation and AI-driven momentum, which continues to build. This is best illustrated by our Legal Professionals segment accelerating to 9% organic revenue growth in the quarter, up from 8% in the first half of 2025 and 7% last year. And this is driven by continued Westlaw momentum and strong double-digit growth from both CoCounsel and Cocounsel drafting. Outside of legal, we continue to see double-digit growth from a number of key franchises, including SafeSend, Confirmation, Pagero, Indirect Tax and our international businesses to name a few. Looking to next year, we're updating our 2026 financial framework. We continue to expect organic revenue of 7.5% to 8%, including approximately 9.5% for the Big 3. And we now see larger year-over-year margin expansion and higher free cash flow than in our prior outlook. On the product front, customer feedback on the Agentic AI launches over the summer has been very positive and initial sales trends are encouraging, especially for the CoCounsel legal integrated offer, Westlaw advantage and CoCounsel for tax, audit and accounting. The competitive dynamics for our core content-enabled technology offerings for Westlaw, Practical Law and our tax engines remains stable. We see incremental competition in the AI assistant space, which is an exciting white space growth opportunity in which CoCounsel remains a clear market leader. Our capital capacity and liquidity remain an asset that we are focused on deploying to create shareholder value. We recently completed the $1 billion share repurchase program announced in mid-August, and we remain extremely well capitalized with a net leverage of only 0.6x at quarter end. We remain committed to a balanced capital allocation approach, and we continue to assess additional inorganic opportunities. With our estimated $9 billion of capital capacity through 2027 after the completion of the buyback, we are positioned to be both aggressive and opportunistic. Now to the results for the quarter. Third quarter organic revenues grew 7%, in line with our expectations. Organic recurring and transactional revenue grew at 9% and 4%, respectively, while print revenue declined 4%. Adjusted EBITDA increased 10% to $672 million, reflecting a 240 basis point margin increase to 37.7%, higher than anticipated due to healthy operating leverage and good cost discipline. Turning to the third quarter results by segment. The Big 3 segments delivered 9% organic revenue growth. Legal organic revenue grew 9%, improving from 8% in the first half of 2025 and 7% for all of last year. Continued momentum from Westlaw and CoCounsel were key drivers. Organic revenues in corporates grew 7%, driven by offerings in our legal, tax and risk portfolios and the segment's international businesses. Tax & Accounting organic revenues grew 10%, driven by our Latin American and U.S. businesses. Reuters News organic revenues rose 3%, driven by growth in the agency business and our contract with LSEG. And lastly, Global Print organic revenues declined 4% year-on-year. In summary, we're pleased with our Q3 results. I'll now comment briefly on questions that we've heard in recent months about the value of our content, specifically Westlaw in an AI environment and whether it could be replicated by large language models or newer AI competitors. We remain very confident in Westlaw's differentiation, which we believe has increased significantly with the development of Deep Research and Agentic AI and the recent launch of Westlaw Advantage. It is very important to understand that litigation is high stakes work with no room for error and significant consequences for being wrong. As a result, professional-grade legal research and workforce tools -- workflow tools need to deliver comprehensive, accurate and up-to-date outputs through trusted solutions with robust data privacy commitments. This is a very high bar, particularly given the scale, complexity and constant change of the legal ecosystem. In the United States, there are hundreds of court systems and tens of millions of annual rulings. We collect content from more than 3,500 sources in multiple formats, and it is completely unstructured. On an annual basis, we process more than 300 million documents into Westlaw. In addition, we have valuable and proprietary second source content, including practical law. Collection of source content is just step 1. Our more than 1,500 attorney editors armed with cutting-edge technologies turn the massive volume of unstructured data into structured proprietary content and intelligence. This includes linking cases, codifying statutes and regulations, authoring head notes and increasingly creating new content for our AI offerings. In total, our team delivers more than 1.6 million editorial enhancements per year. Primary law content, including case law, statutes and regulations is a significant majority of what users search in Westlaw and 85%, I repeat, 85% of this content has been editorially enhanced. So 85% is editorially enhanced. These enhancements are proprietary to Westlaw and make the source content far more valuable. Let me provide a few brief examples. First, the West Key Number System is our proprietary taxonomy or subject classification of the law. It covers more than 140,000 precise legal topic categories, capturing the law at an extremely granular level. The organization of case law, statutes and regulations against this taxonomy is key to the delivery of comprehensive and accurate results, allowing Westlaw users to zero in on very specific points of law. Second, KeyCite, our proprietary citation network has more than 1.4 billion connections linking legal matter with the taxonomy. KeyCite verifies whether a case, statute or regulation is still good law and finds accurate citing references to support legal arguments. And lastly, Headnotes are summaries of the important issues of law within a case and are indexed against the key number system. This allows users to efficiently and accurately pinpoint the cases that best match their facts and desired outcome. To illustrate how the Westlaw content and editorial capabilities deliver value in an AI world, this slide outlines the key steps in our Agentic approach for Westlaw Advantage. As you can see, our AI agents leverage Westlaw's breadth and depth of content. And critically, the extensive expertise of our editorial teams and the significant editorial enhancements that we create differentiates our agents, the output of which is delivered as professional-grade research that lawyers can trust. This graphic highlights another important differentiator for Westlaw. When doing legal research, validating research results is a key final step in the process. This is doubly important with any AI outputs, which need to be checked for inaccuracies and hallucinations. In Westlaw, we have the leading tool set to deliver these validations, bringing confidence to our users that their citations are accurate and their legal arguments are correctly characterizing the law. The validation process leverages several tools I've already mentioned, including Key Number System, KeyCite and Headnotes. In addition, litigation document analyzer reviews legal briefs before they are submitted to the court, identifying inaccurate citations and misstatements of law. Combined with the industry's most robust editorial curated content set, the Westlaw tools provide lawyers with assurance that their legal arguments are on point, and they have done all that they can to prepare for court. While general purpose models can find cases to potentially make a legal argument, delivering against the industry's need for comprehensive, accurate and current research is an extremely high bar. Our market-leading content, our editorial enhancement and our sophisticated tool set have been built over decades to consistently deliver this standard while meeting the industry's data privacy and security needs. Looking forward, we see the evolution of AI from information retrieval and summarization to more complex Agentic workflows as an opportunity for Thomson Reuters that reinforces the value and critical importance of our content and editorial expertise. In complex multistep work, quality content to ground the outputs and subject matter expertise to train and fine-tune the AI are critical to delivering professional-grade results. Our innovation focus is squarely on leveraging these assets leading content and the deepest bench of domain experts in our end markets to deliver agentic solutions that are difficult, if not impossible, to replicate. I'll now turn it over to Mike to review our financial performance. Michael Eastwood: Thanks, Steve. Thanks again for joining us today. As a reminder, I will talk through revenue growth before currency and on an organic basis. Let me start by discussing the third quarter revenue performance for our Big 3 segments. Organic revenue grew 9% in the third quarter, continuing the strong trend from recent periods. Legal Professionals organic revenue grew 9%, improving from 8% in the first half, driven primarily by Westlaw, CoCounsel, CoCounsel Drafting and our international businesses. Government grew 9% in the quarter. In our Corporate segment, organic revenues grew 9%. Recurring revenue grew 9%, while transactional rose 5%. Direct and Indirect Tax, Pagero, Practical Law and our international businesses were key contributors. Looking forward, the Corporate segment growth rate is likely to moderate in the fourth quarter due to the softer-than-planned bookings growth Steve mentioned. Tax & Accounting delivered another strong quarter with organic growth of 10%. Recurring and transactional revenues grew 9% and 12%, respectively. Our Latin America business, SafeSend, UltraTax and the Cloud Audit family of products were key drivers. Moving to Reuters News. Organic revenue rose 3% for the quarter, driven primarily by growth at the agency business and from the news agreement with the data and analytics business of LSEG. Reuters revenue included approximately $7 million of transactional generative AI content licensing revenue in the quarter compared to $8 million in the prior year quarter. Finally, Global Print revenues decreased 4% on an organic basis. On a consolidated basis, third quarter organic revenues increased 7%. At the end of Q3, the percent of our annualized contract value or ACV from products that are Gen AI-enabled was 24%, up from 22% last quarter. Turning to our profitability. Adjusted EBITDA for the Big 3 segments was $606 million, up 9% from the prior year period, with the margin rising 220 basis points to 41.7%. Moving to Reuters News. Adjusted EBITDA was $42 million with a margin of 19.9%. Global Print's adjusted EBITDA was $46 million with a margin of 37.1%. In aggregate, total company adjusted EBITDA was $672 million, a 10% increase versus Q3 2024, reflecting a 240 basis point margin increase to 37.7%. Turning to earnings per share. Adjusted EPS was $0.85 for the quarter versus $0.80 in the prior year period. Currency had a $0.01 positive impact on adjusted EPS in the quarter. Let me now turn to our free cash flow. For the first 9 months of 2025, our free cash flow was approximately $1.4 billion, down 3% from the prior year. Changes in working capital, which are largely timing related, were the largest driver of the decrease. I will also provide a quick update on our capital allocation. In late October, we completed the $1 billion NCIB or share repurchase program we announced in mid-August, acquiring approximately 6 million of our shares. I will conclude with a discussion of our 2025 outlook and 2026 financial framework. As Steve outlined, we are reaffirming our 2025 outlook across all metrics. Our total and organic revenue growth is trending closer to 3% and 7%, respectively, rather than the higher end of the ranges at 3.5% and 7.5% for 3 reasons unrelated to our AI innovation momentum, as Steve mentioned. I will provide a bit more color. First, our Global Print segment has seen a slower-than-expected ramp in commercial print volumes thus far in 2025, which we believe will impact total organic revenue growth by approximately 25 basis points for the year. As a reminder, 10% of our print revenues from commercial where we print books for third-party publishers. Second, our government business, while holding up well overall, has faced a handful of recent downgrades and losses related to the federal efficiency programs that we believe will be an approximate 20 basis point drag to full year organic revenue growth. Third, as I mentioned earlier, we have seen softer bookings trends at our Corporate segment, reflecting the impact of internal sales organizational changes aimed at supporting an increasingly integrated product proposition and driving improved future cross-selling. While these changes have contributed to a slower sales build in 2025 versus our initial expectations, we remain confident in our corporate product portfolio and the segment's growth potential. Note, these organizational changes were only made at our Corporate segment and do not impact our Legal Professionals or Tax & Accounting segments, which have separate sales organizations. Despite these headwinds, we remain confident in achieving our 9% Big 3 organic revenue growth outlook for the year with strong innovation-led momentum continuing in our Legal Professionals and Tax & Accounting Professionals businesses and from our international markets. Turning to the fourth quarter. We expect organic revenue growth of approximately 7%, including approximately 9% for the Big 3. Legal Professionals is likely to again deliver 9% organic revenue growth, assuming no incremental government headwinds materialize. We expect the Q4 adjusted EBITDA margin to be approximately 39%, which includes select onetime investments we are making to transform and increasingly automate how we work. Looking beyond 2025, we are updating our 2026 financial framework to incorporate a more positive margin expansion and free cash flow outlook. We reiterate our outlook for 7.5% to 8% organic revenue growth, driven by approximately 9.5% growth at the Big 3 segments. We are confident in delivering the revenue acceleration this implies driven by positive underlying momentum, the execution of our innovation road maps and to a lesser extent, easier comparisons in several areas, including at Reuters News and Corporates. We now expect to deliver approximately 100 basis points of adjusted EBITDA margin expansion, up from our prior view of 50 or more basis points. Healthy operating leverage, combined with early benefits from using AI and technology to reengineer how we work, provide confidence in this outlook. We are also raising our free cash flow outlook for 2026 to approximately $2.1 billion, which is the upper end of the prior range of $2 billion to $2.1 billion. Our expectations for capital intensity and tax rate remain unchanged. We are currently in our 2026 planning cycle, and we'll provide more detailed 2026 guidance on our Q4 conference call in February. I will now turn it back to Gary for any questions. Gary Bisbee: Thanks. Jenny, we're ready to start the Q&A. Operator: [Operator Instructions] And our first question is going to come from Drew McReynolds from RBC. Drew McReynolds: Appreciate all the detail as usual. Two questions for me. I guess, first on the government and corporate headwinds. I guess the question is ultimately, what's kind of recurring into next year? And for corporates, I believe the organic revenue growth target is 9% to 11%. Just wondering how comfortable you still are with that? And then secondly, Steve, great kind of rundown essentially of the moat within Westlaw. I know it's early days on Agentic AI. Can you comment on the customer kind of reaction to what Agentic is doing from their perspective? And are they able in these first iterations to notice the difference between what you're offering and maybe some others that don't have the deep content access? Stephen Hasker: Yes. Drew, great questions. Let me start with Corporates, and then I'll ask Mike to supplement that. Then I'll go to government, then I'll go to Westlaw. So please be patient, but we'll work our way through these questions. So look, the Corporates sales softness is a bit frustrating because it's temporary and it's self-inflicted. So 2 points. One, we remain even more confident in the end market opportunity. We've said for a while that the TAM is the biggest opportunity for us in Corporates relative to the other segments. And it's the area in which we have the lowest penetration of our legal, tax and risk products. So we think it's our biggest opportunity. And our product set is, we think, pristine and well received by customers. And so we started to see glimpses of this promise last year, as you'll remember, with 10% growth. And underpinning that, we've seen a really nice escalation in our NPS scores across the segments and including in Corporates. But what we haven't seen is an uptick in cross-sell. So at the start of this year, we expanded our global account footprint, and we asked our salespeople to sell more than one product grouping. And I think in retrospect, we got a little ahead of our sort of commercial systems and our infrastructure in doing that. So we've left some of our salespeople, I think, a little disorganized relative to the opportunities and relative to where they were last year. So not up to our high standards. We're through this. We'll learn from it, and we'll be better for it. We've got no more changes in the pipeline and very confident in the 9% to 11% for next year. So that's on the Corporates side. Mike, what would you add to that before we go to government? Michael Eastwood: Terrific summary, Steve. Stephen Hasker: Okay. All right. So government -- so I'd say a couple of things. Our solutions in government, whether they be related to the legal side or the sort of law enforcement and risk side are very well aligned with the administration's agenda around efficiency and law enforcement. And we've seen good growth in state and local. And on a federal level, I think the teams have done a very good job this year in asserting the must-have status of our solutions. And so I think up until the end of the third quarter was so far so good. We had a couple of downgrades and cancellations at the end of the third quarter, which I think has us watching this one vigilantly. In the medium to long term, Drew, we are very confident in the value proposition, both the federal, state and local because tools like Westlaw Advantage and CoCounsel and our various tax solutions drive efficiencies for the government agencies. And of course, our law enforcement work through CLEAR and TRSS is very well aligned with the agenda of this administration, as I said. So medium to long term, we're confident about government, but it is a turbulent environment, and we just wanted to signal that. Unclear as to what it will look like for the next 12 months. But medium to longer term, we're very confident. So let me turn to Westlaw. So as you know, we put in the marketplace Westlaw Advantage, which is the first Deep Research and Agentic research product. The reaction has been very, very strong from customers as it has been to CoCounsel legal and the integration of those products. I'll give you the example of one customer that I've spent some time with that I think is emblematic of the broader environment. He is the managing partner of a major firm in New York City. He spent his career as a litigator and is well known as such. And he was describing how his career has been spent in conference rooms going back and forth with his colleagues and his partners, refining his arguments. Since he's had access to Westlaw Advantage, he is doing much more of that back and forth with our tool than he is with his partners. And so in the early going, there is a change to his behavior in terms of getting to the best, most refined arguments, anticipating the opponent's rebuttals and arguments and anticipating the likely judge's reaction. So we're very excited by the work that Mike Dane and Omar and others have done in developing this product, and we're going to keep investing behind it so that the verification and validation tools that I alluded to get better and better and the product itself gets richer and deeper. Mike, would you add anything there? Michael Eastwood: Nothing to add, Steve. Stephen Hasker: All right. Thanks, Drew. I hope that addresses the questions. . Operator: And our next question is going to come from Vince Valentini from TD Cowen. Vince Valentini: Can I just go back to the government for a second? I just want to make sure I'm clear on what the driver is. Is the government shutdown having an impact or these cancellations happened before that? And can you clarify, do you do work for ICE? Michael Eastwood: Vince, in regards to the first question, the downgrades, cancellations occurred prior to the shutdown. The shutdown has very minimal impact on our monthly -- quarterly revenue based on what we know today. So this occurred prior to the government shutdown. Steve, do you want to address the ICE question? Stephen Hasker: Yes. I mean we -- Vince, I won't go into the specifics of the work we do with various government agencies because it's subject to confidentiality clauses. But we do work with a number of departments on a range of law enforcement matters, and we do that consistent with our trust principles at all time. Vince Valentini: Can I maybe rephrase it? Maybe I shouldn't have been so specific. Is there any chance that the government spending is being temporarily redirected and that's impacting some of the contracts with you and that will ebb and flow over time, but should come back? . Stephen Hasker: It's a little -- I mean, I definitely think that this administration is putting much more emphasis on some things rather than others. And there is a sort of a process of adjustment to that, Vince. But as I said, in response to Drew's question, our tools achieve 2 things for government agencies. One is efficiency and the other is they are essential tools for law enforcement. So we're confident that our must-have status will be maintained and enhanced over time. But there is a level of turbulence as some programs get cut in this adjustment. Michael Eastwood: Yes, Vince, we're continuing -- we'll continue to work with our federal customers on kind of 3 big areas: Efficiency, national security and fraud prevention. We are confident our tools and offerings will be able to support them midterm, long term. Vince Valentini: I'm going to count that as one, Gary, I apologize, but it was 1a and 1b. Just the second question, you got a nice call out on the Amazon call last week on being one of their key customers for their transform product, they call it, they say Thomson Reuters has been able to manipulate 1.5 million lines of code per month 4x faster than they could with previous systems. I'm wondering, is this part of an initial effort to automate more of your internal cost structure and processes? And is there more of this to come over the next couple of years? And what could that potentially mean for future margins? Stephen Hasker: Yes. Thanks, Vince. So we're determined to be on the forefront of this AI transformation in 2 ways. One, in terms of our product development, particularly in and around Agentic AI and Deep Research. And that's an example in the -- first example in the legal space with the launches back at ILTACON in August. Second example, ready to review and then in December, January, ready to advise in our Tax & Accounting, and we're excited about those. We were pleased to see the reference from Amazon. This relates to the internal application of AI and automation tools. So we are applying our own tools, so CoCounsel Legal and CoCounsel for Tax, Accounting and Audit to Norie Campbell's General Counsel team and also to Mike's finance, audit and accounting teams, and we're seeing really promising results from the application of our own tools. We're also, as Amazon alluded to, working with the best tools available to drive automation. I'll defer to Mike as to the sort of financial implications of this, Vince. But rest assured, we're going to be at the forefront in terms of automating everything we do with a singular goal of being able to scale faster and more efficiently and deliver better products and services to our customers. Michael Eastwood: Yes, Vince, a few thoughts. As noted in my prepared remarks, we do anticipate some onetime investment in Q4 2025 to help us transform and increasingly automate how we work. To Steve's point, as we look into 2026, certainly, we view the example that you questioned and Steve addressed as opportunities to help us expand our EBITDA margin. It's one of the reasons why we were able today to expand our EBITDA margin expectations for 2026 by 100 basis points. We're not discussing guidance today beyond 2026, but I think these developments certainly are encouraging for the long term. Vince, while we have the mic, it might be helpful for everyone if I just clarify, when we say for 2026, increasing margin by 100 basis points, that will be 100 basis points off the actual result for fiscal year 2025. Just wanted to clarify that point. Operator: And our next question is going to come from Jason Haas from Wells Fargo. Jason Haas: In the prepared remarks, you made a comment about seeing some incremental competition in AI assistant space. So I was curious if you could just unpack that comment a little bit more. What was meant by that exactly? Stephen Hasker: Yes. Jason, thanks for the question. So the point that I'm trying to make is that we are not seeing any additional competition in our core franchises. So that's legal research and legal know-how and the tax calculation engines, whether that's UltraTax, GoSystem tax or ONESOURCE. So those core franchises have the same competitive dynamics today as they did 12 months ago or 3 years ago. Where we have seen the entrance of new players is in the AI assistant space. Now that is a greenfield sort of white space opportunity for us. And it was the reason that we went out and acquired Casetext and then added Materia and the fantastic team from Materia on the top of that. So that's a white space opportunity for us around CoCounsel, and that's where we see the entry of new players. We're happy with where we sit in that marketplace. We've got some very aggressive product development plans. And I think most importantly, customers are responding well to CoCounsel and its various offerings. So I hope that clarifies. Jason Haas: That's very helpful. And then I wanted to follow up on the Tax & Accounting business. It looks like the organic constant currency growth decels from 11% to 10%. I know these are rounded numbers. But I was curious if you could comment on that. And then can you just talk about your confidence in that accelerating to the 11% to 13% organic growth that you expect in 2026. Michael Eastwood: Yes, Jason, we do have some fluctuations quarter-by-quarter within the Tax & Accounting professional business. We remain confident in delivering 11% for calendar year 2025. And then for 2026, as a reminder, our guidance is 11% to 13%. We work very closely with Elizabeth Beastrom and her team there. We have very strong confidence in delivering 11% to 13% for 2026. We referenced SafeSend in our prepared remarks, which was the acquisition in January of this year, which is performing incredibly well. We expect that to continue into 2026. Steve mentioned Materia, they're additive, which is the recent acquisitions that we did. So we remain quite confident, Jason, with Tax & Accounting professionals. Stephen Hasker: Yes. I would just supplement that the end market is a very healthy one. We start our synergy customer conferences down in Florida tomorrow. We're very much looking forward to that and getting excited about getting together with thousands of our customers in person. The Tax & Accounting and Audit spaces remain a very robust end market with a critical need, and that's shortages of talent. And so Jason, as we develop Ready to Review and Ready to Advise and continue to refine those propositions, we think that, that is going to meet or even exceed the needs of our customers, and that gives us confidence around the 11% to 13% going forward. Operator: And our next question is going to come from Manav Patnaik from Barclays. Manav Patnaik: Steve, I appreciate the slide with the data and the moats there because I think we've heard that as well. But to your earlier answer on the competition is more on the workflow side, and that's why you acquired Casetext, et cetera. Can you help us with any sense of sizing of workflow for you guys and the growth rates there? Because obviously, a lot of these legal tech companies are raising a lot of money at high valuations, citing higher growth rates. So just trying to get a sense of your business there. Stephen Hasker: Yes. Manav, I mean, it's all a bit squishy at the moment, right? We sort of probably monitor the same source as you in terms of how competitors are performing and what sort of growth rates they're seeing, what their ARR levels are at the moment. And what I would tell you is that CoCounsel is at least on par or outpacing everybody else in terms of its size and its growth rate. So it is a competitive landscape insofar as there are lots of promises being made by lots of different new entrants. Where we differentiate ourselves is in the integration of our content and our expertise. So it's not only the content Westlaw, Practical Law and so forth, Checkpoint on the Tax & Accounting side. It's the expertise that 1,500 reference attorneys bring that are able to train the behaviors of an agent to produce a more accurate, more reliable outcome that is supported by pristine data privacy and protection. So a long way of saying, in the early going, we're at or outpacing the newer competitors. And we're very confident -- I hope not arrogant, but we're very confident about the sort of medium- to longer-term prospects given the assets that we bring to this competition. Mike, what would you add? Michael Eastwood: That's a good summary. Stephen Hasker: Okay. All right. I hope that helps. Manav Patnaik: Yes, that was helpful. And I guess just on -- I just had one question on M&A. So I think we all get a sense of all the tuck-in type of deals that you guys are doing and probably that continues. But in the past, Steve, you've talked about potentially larger ones. So just trying to get an update on where the market is at. Is it valuation, timing, like just some more thoughts there. Stephen Hasker: Yes. We're sort of happy -- we're very happy with the tuck-ins that we've done over the last couple of years. Each and every one of them in different ways has performed and been additive to the experience that we're providing in the Big 3. So we'll continue to look for those opportunities centered around our Big 3 segments. If we were to do something larger, it would be in the areas where we really see great promise. So areas like risk, fraud and compliance, building on CLEAR, the CLEAR data set and areas like IDT, Indirect Tax, and e-invoicing where Pagero is showing really good growth and growth that looks to be pretty considerably above some of the market comparables. And so those are the areas where we'd be prepared to go a bit bigger. I think at the moment, the assets that are of interest are still fully valued in the sort of portfolios in which they sit. So the question is, do we see a bit of an adjustment and some price that would allow us to create value for our shareholders, not just the exiting shareholders. And that's what we'll just continue to monitor and stay rigorous and disciplined around. Michael Eastwood: Steve, in addition to indirect tax, risk, fraud and compliance, I would just add international. Certainly, we'll be very selective there as we've discussed in the past. But Adrian Fognini, who leads our international business, we are looking at a few potential assets internationally. Operator: Our next question is going to come from George Tong from Goldman Sachs. Keen Fai Tong: You're continuing to target 9% to 11% organic growth in Corporates next year. Can you elaborate on how achievable that growth is without any additional changes to the sales organization or the pace of cross-selling? Michael Eastwood: Sure, George. Happy to start there. I think we've discussed with you and others in the past that Q4 is our largest quota period for a given year. That applies to Q4 2025 for Corporates. October net sales and bookings were quite encouraging, George. And if we look at our sales pipeline, coverage ratio for both the remainder of Q4 and also Q1 2026, once again, encouraging. Given that those changes have now been solidified and the focus is on execution, the way I think about it, George, a very simple formula. If you have great products and you have strong customer demand and you have a growing TAM, the likelihood of success is pretty damn good if you execute and have the right talent. I think you can check the boxes on each of those variables in the formula that I just mentioned there. So that gives me quite confidence. But if you look very tangibly, the October net sales and bookings, secondly, again, the November, December pipeline coverage and then also the Q1 pipeline coverage gives us confidence in achieving that 9% to 11% as we go into 2026, George. Keen Fai Tong: Got it. Very helpful. And then can you talk a bit about your pricing strategy in light of the increasing value that you're providing with your AI products? So do you have plans for accelerated pricing increases, for example, in your multiyear contracts? And how overall do you expect pricing to evolve going forward? Stephen Hasker: Yes, George, look, it's a great question, and it's one that we are very focused on, and we have some fairly vigorous debates amongst ourselves, particularly between the product folks and the commercial excellence folks and our salespeople. Our principle is price to value. So the extent to which we're driving significant efficiencies in the practice of law or in the practice of audit, tax & accounting, we want to make sure that our products and services are aligned to that. Just a reminder, we do not price on a per seat basis. So to the extent to which work is able to be done by fewer people, we will be a beneficiary of that, not a victim of that, if you like. And so it's a work in progress. I think in the early going, our pricing has proven to be competitive and is driving growth for us. It is profitable growth. I would say so far, so good. But this is one of those ones where we're just constantly looking for signals from the market and refining our approaches. Michael Eastwood: Yes, George, I would just supplement. As we go into '26, I'm somewhat optimistic that we could have some additional opportunity over the spectrum. Operator: Our next question is going to come from Aravinda Galappatthige from Canaccord Genuity. Aravinda Galappatthige: I wanted to discuss sort of the -- where we are in terms of the rate of innovation and product intensity. Obviously, we've seen a lot of activity from Thomson and even the industry in general. Is it fair to sort of characterize the present sort of position as sort of getting close to peak in terms of new product launches and so forth and sort of the next phase will be more about penetration. I mean, I'm trying to sort of connect that with sort of the underlying tone of margin expansion you're talking about. I know that you've been -- I think last disclosed number was about $200 million in incremental investments to sort of drive these growth opportunities. I'm trying to sort of assess whether we may be at sort of the crest of that. Any thoughts that you care to share on that front? Stephen Hasker: Yes, Aravinda. I'll start, and Mike may want to add. I obviously stay very close to David Wong and Joel Hron's product innovation plans and also our TR Ventures fund, who are looking across the landscape at different start-ups and also the sort of everything that our partners are doing. I would say -- you're going to see our rate of innovation accelerate and improve over the next few quarters and well into '26 and '27 based on that which we've previously invested in and that which is coming through the pipeline. What I think, though, will happen in the broader landscape, and it's hard to tell. So this is looking at a crystal ball, is that the rate of innovation for the highly specialized tools like ours that are trained on reservoirs of content and thousands of expertise will continue to improve. I think where things might flatten out is in the sort of general purpose horizontal tools. And certainly, our customers are starting to understand the difference. And so that, I think, will be one change in the sort of landscape. But again, I think anyone who will tell you they know exactly what's going to happen in this environment is probably slightly deluded. Michael Eastwood: Yes. Aravinda, a couple of points there. Please, please do not correlate our confidence in expanding our margin in 2026 with us investing less. We will invest over $200 million this calendar year '25 in AI, Gen AI. That will continue into 2026. We're able to expand our margins in 2026. One, you're aware of our operating leverage, but we have opportunity back to the prior questions to automate how we work. I think it was Vince who asked the question illustratively about the AWS reference. So we will continue to invest. And to Steve's point, the rate of innovation and intensity will continue. That $200 million plus will continue into 2026. Aravinda Galappatthige: And maybe my follow-up for Mike. I mean, on the last call, Mike, I think you talked about sort of your framework for capital allocation and how that potentially leaves $400 million to $500 million for buybacks. Obviously, given the movement in the stock, you've sort of shown the flexibility to step up beyond that. Should we sort of take that forward even in the -- going into '26 that notwithstanding that framework, you have the ability and the willingness to sort of step up in terms of your repurchase program? Michael Eastwood: Yes. I think, Aravinda, I would maintain the framework when you think about mid- to long term. But I think the key there is when we see the opportunity to step up, we will, which I think -- that was very tangible with our decision in mid-August to announce the $1 billion NCIB share buyback, which we completed at the end of October. We constantly discuss capital strategy, capital allocation with our Board. In our next Board meeting, we'll have the next discussion in regards to capital strategy, capital allocation. Could we step up? Again, possibly, no decision has been made there. So I would maintain the framework of the $400 million to $500 million. But also, I would kind of supplement that framework with our ability and willingness to step up when we deem appropriate. On the topic of capital allocation, I would just remind you, Aravinda, and others that as we go into the January board meeting, we will propose another 10% increase in our common dividend, which would be the fifth year consecutively on that. Operator: And our next question is going to come from Maher Yaghi from Scotiabank. Maher Yaghi: Great. Steve, you have very well articulated why Westlaw has a strong standing to benefit from AI. But can you tackle maybe how you see AI advances affecting your tax business? Do you believe that business has similar defensive capabilities to continue to gain market share as well as you're doing in legal? And the second question is the revenue acceleration you're expecting in 2026 versus 2025. I know it's maybe too early, but can you maybe just let us know which segment of the Big 3 you're expecting to see most of the acceleration coming from? Stephen Hasker: I'll defer the second question to Mike. On the first one, yes, we're sort of equally excited about the application of AI, Agentic AI, Deep Research to our tax business as we are legal for a couple of reasons. So in terms of the end market, the tax & accounting profession does not need to undertake the same sort of magnitude of change management. So for example, many tax & accounting and audit engagements are not priced on a per hour basis and not on a billable hour. They are value-based. And so there's not that same business model hurdle to overcome that the legal profession is currently working its way through, firstly. Secondly, there is, as I said before, a pretty acute talent shortage that technology needs to address. So we actually think our tax & accounting customers are even more receptive to AI and technology in terms of improving their outputs and work and enabling, for example, tax professionals to automate the tax return process and move to more value-added advisory services for their clients and the technology enables that. So that's the first part. As we think about applying AI, particularly Agentic AI to our product set, the sort of narrative up until now is that generative AI doesn't do math. Well, our tax calculation engines do the math. And what the agents enable us to do is automate all of the shoulder activities. So the document ingestion, all of the preparation and then they work with the tax calculation engine, whether it's UltraTax, GoSystem Tax on ONESOURCE. And then they're able to do the follow-up, all of the calculation checks and the e-filing. And so that's really what Ready to Advise is. It's the addition of agents to our pre-existing tax calculation engine. And then Ready to Advise is the use of agents to find all of the opportunities for a tax & accounting professional to provide advisory services on more efficient tax strategies for their clients. And so we think that the AI will enable us to expand the role that we play in the success of the tax & accounting profession, enable them to get into more advisory services and achieve growth on that basis, while at the same time, overcoming this talent shortage. Mike, the question on revenue. Michael Eastwood: Sure. In regards to 2026, just to remind everyone, we do have ranges for 2026 for each of our Big 3 segments. Legal for 2026 is 8% to 9%. Corporates is 9% to 11%. Tax & Accounting, 11% to 13%. Part of your question, Maher, is in regards to which segment would have the largest absolute growth. Tax & Accounting Professional, I believe, will have the largest absolute increase in organic growth rate for 2026 versus 2025. Just to reiterate those reasons; number one, the recent acquisitions of SafeSend, Additive and Materia will continue to scale for us. Next, Steve has mentioned Ready to Advise and Ready to Review, which are new launches for us. We consistently talk about our Latin America business, Domínio, which we remain quite optimistic about. Over the last 11 years, it's grown 20% CAGR over that time horizon. We expect that to continue. And then lastly, kind of underpinning UltraTax continues to perform well. Operator: Our next question is going to come from Kevin McVeigh from UBS. Kevin McVeigh: Great. I think in the slide deck, you talked about AI-driven innovation, the momentum continuing. On the legal side, I guess, just the timing, like the Agentic launches you did over the summer of '25, are they already starting to kind of permeate the base? Or is that something that continues to scale over the back half of '25 and into '26. I guess I'm just trying to understand the sequencing of maybe things that have already been launched as opposed to things that were launched over the summer. Michael Eastwood: Yes, Kevin, really good question. Great timing there. For everyone's benefit, we launched those in mid-late August as part of ILTACON. We're already seeing the benefit, and we'll just see more penetration, Kevin, in Q4 and throughout 2026. I would call out each of our general managers within legal professionals that are really driving hard, which is indicative of the 9%. Aaron Rademacher, who is driving the small law firm; Liz Zimick in Mid-Law, Steve [indiscernible] with our largest firms. And then we have John Shatwell in Europe, which I think each of these segments, we're seeing progression already with the launches. And with the momentum we have with the launches of CoCounsel Legal, Westlaw Advantage, that will continue. October, we had another great month of sales. With these new product launches, we expect that to continue for the remainder of Q4 and then throughout 2026. So we're already reaping the benefits, Kevin. Kevin McVeigh: That's super helpful. And then just the comments on the Tax & Accounting. Is there any way to think about the experiences of maybe the Big 4 as opposed to maybe the top 10 and maybe mid-market as you think about the go-to-market motion with the enhanced product from a Gen AI perspective? Michael Eastwood: Yes. Kevin, just to remind everyone, the Big 4 and the next 3 largest firms, we call it the Global 7, they are included within our Corporates segment, not Tax & Accounting Professionals. But Steve, you may want to comment in regards to the different motion as you think about those G7 versus the remainder of Elizabeth's Tax & Accounting. Stephen Hasker: Yes. I mean what I would say is there's increasing similarity across the G7, as we call them, relative to the big 4. In other words, firms 5, 6 and 7 are very sophisticated, increasingly global and investing heavily in technology, and we think we'll be a beneficiary of that going forward. I think though the mix does change a little bit as you get to the sort of top of the ladder there in that they're more likely to take an API from us and build on the top of it versus take the sort of full end-to-end product. So the kinds of work we do in the go-to-market motion is slightly different, Kevin. But the opportunity, I think, is equally weighted across that customer base. And if you go all the way into the smaller firms, which Brian Wilson serves from a go-to-market perspective, he and his teams. They're ready for turnkey solutions that work, that are reliable and that build upon their existing tax calculation engine. And so there's a lot of receptivity at that end as well. Operator: And our next question is going to come from Andrew Steinerman from JPMorgan. Unknown Analyst: This is [indiscernible] on for Andrew. Most of my questions have been answered. So maybe I'll circle back on the government headwinds just to clarify. Am I correct in saying your updated guidance only contemplates cancellations that you saw at the end of the third quarter? And I guess maybe just to give us a little bit more comfort on the go forward. Could you maybe talk a little bit more about if those cancellations were driven by reductions in spending at certain departments you serve? Or was it layoffs? Just any color there would be great. Michael Eastwood: Certainly, in regards to our forecast, we always contemplate what has occurred, plus we always look at the upcoming pipeline. So we have contemplated within our forecast any other activity that might transpire in Q4. So we believe that has been reflected already. And then in regards to the reasons for it, there's been a reduction in the actual spending levels in these agencies, which was the main driver. Operator: And our next question is going to come from Stephanie Price from CIBC. Stephanie Price: Just a few quick clarifications for me. Mike, I think you've kind of alluded to it for a few times in the call, but can you talk about the drivers that are causing the increase to the fiscal '26 EBITDA guide to 100 basis points versus 50 basis points prior. I think you mentioned some efficiencies, but anything else you wanted to add on there? Michael Eastwood: I would say 2 -- Stephanie, 2 primary drivers. One is the operating leverage at roughly 7%, 7.5%. We generate about 110 basis points of natural operating leverage, which is sustained in our business. The second key factor is our focus on transforming and automate how we work. So if you take those 2, that would be more than 100 basis points, but leads to a third key factor, which relates to a question earlier, is we're continuing to make investments, and we'll continue to make investments wherever we see the returns are sufficient there. But the 2 key drivers of margin expansion, operating leverage and then our internal initiative to transform and automate how we work. Stephanie Price: Perfect. And then for the Legal segment, organic growth accelerating quarter-over-quarter to 9%. I think in the prior question, you mentioned some new product launches. Just curious if there was anything else you wanted to call out there in terms of shifts in demand or adoption rates within Legal. Michael Eastwood: I think the new product launches certainly help us significantly there. Retention rates continue to be very good within that business. Pricing is relatively stable there. Certainly, Stephanie, we always add talent as part of our operating mechanism. So I think those are the key drivers for us. Steve, you may want to add... Stephen Hasker: The only thing I'd add is way back at our Investor Day a couple of years ago, where we started to talk about this AI journey, we did, at that time, speculate that the TAM in Legal would grow, and it would grow on a sustained basis. I think we're starting to see that. What we're starting to see is law firms wrestle with the idea of spending more on technology and potentially less on real estate and still trying to sort of work their way through the headcount implications. I think it's too early to sort of call that one way or another. But we're starting to see that TAM expand. And we think that, that's going to be a multiyear phenomenon and one that we plan to have the products and the propositions to fully benefit from. Operator: Our next question is going to come from Doug Arthur from Huber Research. Douglas Arthur: Yes. I think most things have been covered. Steve, you mentioned the acute talent shortage issues in some of the big accounting firms. Is there a similar narrative in legal or not so much? Stephen Hasker: Not so much, Doug. It's -- as someone who started my career at PW as it was called then, Mike did the same. Kids are just not as enamored of the profession as they were in our day. And so whether it's the big accounting firms or the midsize or even the smaller shops, they're just having a really hard time getting talent in the door at the entry level and then going through the apprenticeship that's required. And it's an acute problem, and it's been growing for a number of years. If you look at the number of people who are getting qualified as CPAs, it has fallen dramatically in recent years. And all the while, the number of audits goes up, the complexity of audits goes up, the number of tax returns goes up, the complexity of those returns go up. And the advice that, that small, medium and large businesses need from their tax & accounting professionals intensifies. So the demand characteristics are really healthy. It's the supply of talent that's the problem. And that's where the technology has a really, I think, exciting and important role to play. And that's why we're investing heavily to meet or exceed those demands. Operator: And our next question is going to come from Toni Kaplan from Morgan Stanley. Toni Kaplan: Your large competitor in legal has talked about one of the benefits of its partnership with Harvey is increasing distribution. I was hoping you could talk about, Steve, how you're thinking about partnerships right now. You have the content, you have the AI capabilities. So it doesn't seem like you need to partner with others. But is there an advantage to doing that because of increasing distribution? Or is there a disadvantage of going that route? Stephen Hasker: Toni, I won't comment on their approach. But what I will say is that we're very confident in our position of having CoCounsel for Legal, which is now fully integrated with our content and editorial expertise. So we don't see the need for partnerships, the likes of which one of our competitors has entered into or 2 of our competitors have entered into together. Where we are partnering is where there are point solutions, AI-driven point solutions, for example, in sort of the debt capital markets and its application to legal profession or in very, very specific area of the law, where we think an innovative team has developed a solution that can work in with CoCounsel. So we're keen to explore that ecosystem. But in terms of distribution, we obviously have the leading distribution in the industry at the moment. So we don't see a need there. But thanks for the question, Toni. Gary Bisbee: All right. I think that brings us to the end of our time. So thanks, everybody. Have a good day. Stephen Hasker: Thank you. Michael Eastwood: Thank you. Operator: And this concludes today's call. We appreciate your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. Third Quarter Earnings Conference Call occurring today, November 4, 2025, at 8:00 AM Eastern Time. [Operator Instructions] This call will be archived and available for replay at investors.firstwatch.com under the News & Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch. Please go ahead. Steven Marotta: Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the third quarter of fiscal 2025 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the conditions of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our Annual Report on Form 10-K and quarterly reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. Any reference to percentage growth when discussing the third quarter performance is a comparison to the third quarter of 2024, unless otherwise indicated. And with that, I will turn the call over to Chris. Christopher Tomasso: Good morning, everyone. We appreciate you joining us to discuss our third quarter performance. We're pleased to report strong financial results with same-restaurant traffic growth and same-restaurant sales growth sequentially higher for the fourth consecutive quarter and restaurant-level operating profit margin materially improving from earlier this year. These results are made possible by our more than 16,000 employees nationwide, and we are truly grateful for their commitment. Total revenue increased 25.6% compared to the third quarter of last year, fueled by three growth drivers: strong new restaurant opening performance, positive same-restaurant sales of 7.1% and accretive strategic franchise acquisitions. Restaurant-level operating profit margins expanded, reflecting solid operational execution across our entire organization. Notably, sales at our newly opened restaurants continue to be very strong across all geographies with some of our newest locations setting first week sales records. Simply put, despite an increasingly difficult environment, First Watch delivered solid top- and bottom-line results, and we continue to strengthen our leadership position in daytime dining, placing us among casual dining's strongest performers. Our third quarter financial results are representative of our long-standing approach to growth. Total revenue increasing more than 25% [ crown's ] nearly 5 years of double-digit percentage quarterly growth. Our aggressive unit expansion, anchored as always, by a very clear set of underwriting standards continues to drive our success with 21 system-wide restaurants opened across 14 states during the third quarter. We are on pace to meet our target of 63 to 64 new restaurant openings for the year, representing nearly 11% system-wide growth in 2025. At First Watch, we are constantly evolving to ensure long-term relevancy and meet the needs of both the consumer and our employees. We are focused on delivering steady, thoughtful enterprise-wide progress built on a solid operational foundation, giving us the confidence in our ability to continue delivering on our high-growth algorithm. We prioritize our long-term market position and traffic growth over short-term margin protection. This is particularly evident in menu pricing. With a volatile commodity environment in early 2025, we quickly evaluated the prospects of short- and long-term commodity inflation and carefully considered our competitive value proposition. As a result, we chose not to implement pricing actions that would have offset what we view as transitory increases in commodity costs. The positive results we reported last quarter and today reinforce our confidence in those pricing decisions. There aren't many metrics where we lag, but we're pleased to be laggard when it comes to pricing. The result of a steadfast pricing strategy is that our long-term margin profile is and always has been secure. We may experience variances from time-to-time or in any given quarter, but we're confident in our ability to deliver annual restaurant level margins of 18% to 20% over the long-term. Our sustained high-return capital investments continue to deliver, and we are opening restaurants that meet or exceed our underwriting targets. This is a compelling way to use our capital with average cash-on-cash returns of approximately 35%. In addition to those superior returns, our aggressive unit growth is increasing our market share by expanding our brand presence and overall awareness, thereby widening our competitive moat. As I mentioned, our new restaurants are opening stronger than ever in both new and existing markets. In fact, 9 of our 10 highest opening week sales in company history were achieved in restaurants opened within the last 12 months. In new markets, too, like Boston, Las Vegas and Memphis, we've opened stronger than anticipated, and it's clear that our brand and our unique offering has enviable broad appeal and proven affordability. One of the many strengths of our business is that unlike some other restaurant concepts, our new restaurant openings in both new and emerging markets are performing exceptionally well. I spoke last quarter about the strategy of converting second-generation sites into highly productive First Watch restaurants. Of the 21 restaurants we opened in Q3, 13 were second-generation sites. Of the 10 highest opening week sales, NROs in 2025, 9 have been second generation. For reference purposes, some of these restaurants are opening at volumes that are more than 190% of our average unit volume, which is a powerful proof point for the benefits of this approach and in our ability to operate higher and higher AUVs, powering the brand forward. I want to highlight one particular NRO that exemplifies the ongoing strength of our brand and our disciplined execution. Our new First Watch location in Dover, Delaware, situated in the state capital and the state's second largest city opened during the final week of the third quarter. This location had opening week sales that exceeded 185% of our comp base average, underscoring the strong demand for our concept and the strategic value of the site. We signed a lease for this restaurant in January of 2025 and advanced it through our standard construction timeline without delay. The fact that we successfully opened a short 8 months after lease signing reflects the operational rigor and efficiency of our entire team and demonstrates one of the many benefits of these second-generation sites. These historic opening week sales performances are a result of the alignment of our real estate, construction, talent and development teams, bolstered by the heightened preopening consumer interest and demand generated by our efficient NRO-related marketing initiatives. In short, our teams collaborate well to ensure that our restaurants are go for launch and that we enter markets, trade areas and neighborhoods in a way that establishes a high baseline that we can build upon for many years to come. Across the organization, our teams are now even more skillful at opening new locations in core emerging and new markets, and we remain highly confident in our expansion strategy for 2026 and beyond. No full-service restaurant company is opening at anything close to our pace, making it daunting for segment competitors to enter markets where we have an established presence. Furthermore, even in markets that we have yet to penetrate, our eventual entry often positions them in short order. We are targeting between 63 to 64 gross new locations for 2025 and the breadth of our new restaurant opening successes can be seen in the first three quarters of 2025, where we opened 51 new restaurants in 30 markets across 21 states. I've shared this before, but I think it bears repeating that our top decile restaurants span 14 states and 22 DMAs with consistent AUVs across all 32 states, giving us confidence in our ability to grow to a total addressable market of 2,200 locations within the continental United States. Our people platform continues to reach new heights as well. Restaurant-level employee turnover, a critical industry metric, has improved for 10 consecutive quarters and continues to outperform industry benchmarks. We recently completed our annual W.H.Y. Tour and the feedback was overwhelmingly positive with employee satisfaction tying directly to our culture, the quality of life offered and the extensive benefits available to them. There's no question that our daytime dining single-shift scheduling model remains a standout feature. Our distinctive benefits such as backup childcare and elder care, complementary personal and professional coaching and free telemedicine services also mean a tremendous amount to our team, and we believe differentiates us from other foodservice employers. Team members consistently share that working at First Watch enhances their mental and physical well-being. Among all of the numerous advantages already cited, the opportunity for career growth most often tops the list. As the fastest-growing full-service restaurant concept in the United States, we believe we provide career paths that are simply unmatched anywhere else in the industry. So where have our efforts led? Well, First Watch was just recently named America's #1 Most Loved Workplace by the Best Practice Institute for 2025, a recognition we also achieved in 2024. Achieving top honors in any year is a significant accomplishment. Earning this distinction two years consecutively is unprecedented. I'd like to extend my gratitude to our entire organization for their efforts in making this possible and modeling our You First culture day in and day out. By prioritizing our employees and creating an environment that attracts the best and brightest in our industry, we are proud to provide a wide array of personal and professional growth opportunities. This is a remarkable achievement of which we are all extremely proud of. The performance of our enhanced marketing investments in 2025 has been highly encouraging. This marks the third consecutive quarter of increased marketing spend versus last year, providing us with three full quarters of compelling evidence. Our integrated campaigns spanning connected TV, paid search, social media and other channels are intentionally coordinated, driving higher aided and unaided brand awareness. Notably, the markets we targeted for investment in 2025 represent less than one-third of our overall restaurant portfolio, providing us an opportunity to significantly expand our reach in the future. Building on the insights gained from this year's activities, we are optimistic about expanding marketing programs in 2026. We're also in the midst of a comprehensive relaunch of our digital platform, encompassing both consumer-facing enhancements and back-of-house improvements. As an example, our newly relaunched app introduced in the second quarter has already garnered thousands of positive ratings and reviews and currently maintains a 5-star ranking, supporting favorable customer response to the new interface. We're in the very early innings of capitalizing on our digital platform. Behind the scenes, we're collecting valuable data on a granular level. We are also making significant upgrades to our customer data platform, geolocation capabilities, order experience and CRM systems. Our database of identified customers now sits at around 7 million, the majority of which are connected to various social media and online presence platforms, enabling us to better execute targeted micro marketing campaigns. Technology advancements across our marketing department contributed to the exceptional performance of a targeted digital campaign launched in September, which, despite hitting less than half of last year's recipients, delivered more than 2x the response rate and engagement to last year's campaign. Depending on where you live or which of our restaurants you may have visited recently, you may have seen our new core menu that's been in test for some time. This new menu has been redesigned and reengineered to improve readability, broaden appeal, optimize mix and streamline operations. It features high-performing previous seasonal menu specials, which replaced some lower mix items. The qualitative and quantitative metrics thus far have been encouraging, and we are expecting to roll this menu out system-wide early next year. We're acutely aware of recent headlines across the restaurant sector regarding a slowdown in consumer activity, specifically tied to discrete demographics. Our brand continues to be over-indexed to a more affluent consumer, and we remain underexposed to current demographic pressures. First Watch's menu innovation, consistency and value proposition provide for an unparalleled customer experience. In short, our platform has supported quarterly double-digit total revenue growth for the better part of the last 5 years. During that same time period we've opened more than 230 restaurants, delivering on our stated goal of low double-digit percentage annual unit growth. Our 3-year NRO AUV targets have risen from $1.6 million to $2.7 million, and we were recognized as America's Most Loved Workplace twice. Our expansion from a little known regional restaurant brand just 10 short years ago to a national chain with dominant segment market share was accomplished by an organization focused on and dedicated to consistent, reliable and quality growth. Considering our proven track record and abilities across the entire enterprise, combined with a total addressable market that is over 3x our current size, we remain committed to that same consistent, reliable and quality growth for years to come. And now I'd like to turn it over to Mel. Mel Hope: Thank you, Chris, and good morning. Total third quarter revenues were $316 million, an increase of 25.6%. Our third quarter revenue growth was driven by positive same-restaurant sales growth of 7.1%, including positive traffic of 2.6% and the contribution of 167 non-comp restaurants, including 66 company-owned new restaurant openings and 19 locations we've acquired since the second quarter of 2024. Our same-restaurant traffic growth and same-restaurant sales growth in the third quarter represent our best quarterly result for both metrics in over two years. Our in-restaurant traffic improved once again, marking the strongest performance in 7 quarters. Traffic growth in the third-party delivery channel increased substantially during the third quarter, a continuation of recent trends and a direct result of the changes we made to that program earlier this year. The month of September represented our highest rate of same-restaurant sales growth of the entire year. Concurrent with the launch of our fall seasonal menu in late August, we instituted a price increase of 1.1%, bringing our full year carry pricing to around 3.5%. We again experienced positive sales mix during the quarter. Food and beverage expense in the third quarter was 22.2%, a decrease of 20 basis points from the third quarter last year, benefiting from carry pricing, partially offset by 3% commodity inflation in the quarter. Bacon and coffee were the primary drivers of commodity inflation. Labor and other related expenses in the third quarter were 32.6% of sales, a 100 basis point decrease from the third quarter of 2024. Restaurant level labor inflation was 3.6%, a combination of carry pricing outstripping labor inflation and marginal labor efficiency contributed to the improvement as a percent of sales. Restaurant level operating profit margin was 19.7% in the third quarter, an 80 basis point improvement from the third quarter last year. General and administrative expenses increased to $33.7 million from $27.7 million in the third quarter of 2024. As a percentage of total revenue, these expenses decreased to 10.7%, representing 30 basis points of leverage when compared to the same quarter last year. The income from operations margin was 3.2%. Adjusted EBITDA was $34.1 million, $8.5 million higher than last year, with adjusted EBITDA margin increasing to 10.8% from 10.2%, a 60 basis point improvement from the third quarter last year. We reported net income of $3 million. We opened 21 new system-wide restaurants during the third quarter of which 18 were company-owned and three were franchise-owned, and we ended the quarter with 620 system-wide restaurants. The effect of our franchise acquisitions, which includes only the impact of purchases made within the last 12 months, increased our third quarter revenue by about $9.1 million and adjusted EBITDA by about $1.6 million. For further details on the third quarter, please review our supplemental materials deck on our Investor Relations website beneath the webcast link. Based on our quarter-to-date trends and plan for the balance of the year, I'd now like to provide our updated outlook for 2025. We are updating our guidance for same-restaurant sales growth to approximately 4% from positive low single digits in our prior guidance. We estimate same-restaurant traffic of approximately 1% from flat to slightly positive in our prior guidance. We expect total revenue growth in the range of 20% to 21% with a net 400 basis point impact from completed acquisitions. We expect 63 to 64 new system-wide restaurants, including 55 new company-owned restaurants and 8 to 9 new franchise-owned restaurants with three planned company-owned restaurant closures. We took advantage of the opportunity to pull forward a few openings into the third quarter and at the same time, push a couple of projects into the new year. We're now guiding fiscal year 2025 commodity cost inflation to be approximately 6% from a range of 5% to 7% in our prior guidance and restaurant level labor cost inflation to be approximately 4% from a prior range of 3% to 4%. Our annual adjusted EBITDA projection is now approximately $123 million, the high end of our prior guidance range of $119 million to $123 million. This includes the expected net contribution of approximately $7 million from acquired restaurants. In an effort to assist you in your near-term modeling of our G&A, our annual leadership conference will be held in the first quarter of 2026 compared to our previous conference, which was held in the fourth quarter of 2024. This is equivalent to just under 100 basis points in quarterly G&A expenses as a percent of sales. Please note, our initial fiscal year 2025 guidance contemplated this timing shift. We expect a blended income tax rate of approximately 45%. We are narrowing our expectations for capital expenditures to approximately $150 million from $148 million to $152 million in our prior guidance. This does not include the capital allocated to franchise acquisitions. Since our initial public offering four years ago, we've expanded the total of system-wide restaurants from 428 locations to 620 at the end of the third quarter. In that same period of time, our adjusted EBITDA has more than doubled. We're proud of the many growth milestones we've surpassed and are similarly excited to close out a strong 2025. Both our real estate and our people pipelines have never been healthier, providing a high degree of confidence in our ability to execute our near-term and long-term growth strategies. And with that, operator, would you please open the line for questions? Operator: [Operator Instructions] Our first question comes from the line of Jim Salera with Stephens Inc. James Salera: I wanted to ask if you guys might help us deconstruct the traffic results given the strength you're seeing relative to the rest of the industry, which has seen pretty muted trends on the traffic side. Can you just give us a sense for how much of the incremental traffic is coming in restaurant versus through the off-prem channel? And then maybe if you could give us some commentary around how much of the traffic is increased frequency with kind of First Watch loyalists versus maybe bringing in some new folks that have a newfound appreciation for your value proposition? Mel Hope: Sure. Okay. So with regard to the second part of the question first, the full-service restaurants generally had a frequency that would suggest that we probably need a longer period of time to really read what the response to marketing has been regarding whether or not we've got repeat visits versus new customers. Our marketing programs have been targeted at increasing occasions without regard to whether or not there are new visits or recurring visits. So I don't have a lot of data on that for you yet. We may over time, but we just need a larger cohort. Christopher Tomasso: And Jim, once again, we did see improvement in in-restaurant dining. It's continued to improve quarter-over-quarter. And obviously, we have the benefit of the third-party traffic increases as well. So I would say both channels contributed to the growth. James Salera: Great. And then as a follow-up, if you could just speak to what's helping bolster the results at some of these new openings. You mentioned Dover significantly ahead of the overall kind of fleet average. Is it just that these are really primo locations that real estate partners are coming to you with? Are you doing some extra work kind of on the front end to make sure there's a lot of fanfare around the restaurant opening? Just anything you can kind of give us there to explain the strength? Christopher Tomasso: Yes. We -- this is -- our new restaurants outperforming the core has been a trend for us for a number of years now. But we talked this quarter about some record-setting locations. And we talk constantly about how we're evolving our real estate site selection process, evolving the facility itself. So yeah, some of these second-generation sites specifically are -- they're larger. They're right upfront on the road. We're really making the patio a significant feature that is inviting from the road. And so we benefited from that. That said, we have some restaurants that aren't bigger and are more maybe end caps that we've done that are achieving high volumes, too. So I think it's also a confluence of our brand recognition expanding, the site themselves acting as billboards. I think our -- the work our marketing team has done on the social and digital channels to create that buzz before we open. I used the term in the prepared remarks of go for launch, like I just feel like in every aspect of these new restaurants, we're set up really well to A, build that preopening demand and then from an operational perspective, really deliver when they come in the restaurant. And it's really important when you're doing those kinds of outsized volumes to Wow people. Those first reviews are really, really important. And our teams have done just an amazing job of all that. So yeah, this is -- this comes from many years of opening a lot of restaurants. We talk about it as being one of our strongest muscles, and we just continue to flex it and it continues to drive value for us. Operator: Our next question comes from the line of Jeff Bernstein with Barclays. Anisha Datt: This is Anisha Datt on for Jeff Bernstein. I wanted to ask a question on marketing. What are your plans to expand marketing efforts in 2026? And can you share specifics on the strategy? Do you need to reach greater scale in some of your newer markets before rolling out broader marketing initiatives given that about 1/3 of stores benefited from your initial efforts this year? Mel Hope: We haven't done any indication about 2026 with regard to the overall plans for the company. So probably need to steer clear of that one for the time being. But the marketing, obviously, the more density you have in markets and in more markets, the marketing can become more efficient in some types of marketing. But our focus has been very much on social and digital type marketing, which is very targeted. And our team is very accomplished at making sure that we're efficient even in markets where we don't have a lot of density. Christopher Tomasso: I think the big takeaway from the -- our marketing efforts and therefore, the results is that it's been successful. We're very pleased with it. We've only deployed it to a minority of our markets. And so the opportunity for us to invest and expand that in 2026 and beyond is very encouraging to us and something we're really excited about. Operator: Our next question comes from the line of Andy Barish with Jefferies. Andrew Barish: Nice results. And I just wanted to go back to that as well. I think September was your toughest lap and you still hurdled that, as you mentioned, with the best quarter. How does the -- and I think the marketing in the 3Q was a little bit lower because of AUVs. Can you just kind of let us know what the fourth quarter plan on that is a little bit more of sort of the near-term look? Christopher Tomasso: Yeah. Actually, that comment about the lower spend really had more to do with Q4 because of the seasonality of our business when we talked about it last quarter. But Q3 was pretty consistent with the first two quarters. So no step-up or step down there. Andrew Barish: Got you. Okay. And then -- on the operations side, I mean, a lot of things were put in place kind of going back over the last few years. What's sort of really showing through that you would highlight as more demand is now generated and you're obviously handling it with one of the best comps in the industry? Christopher Tomasso: Certainly, the KDS, the implementation of the KDS system. But I also don't want to shortchange the consumer-facing investments we made around the app and waitlist management and some operational things we did. So Andy, you've heard us talk about this since we first announced that we were rolling out KDS. We don't look at -- I mean, we look at each one individually from a return standpoint. But as far as what's driving the business, we think it's all of those things, whether it goes back to touches like the complementary coffee, our pricing strategy, the way we've increased portion sizes over this time and that type of thing. So we're really trying to just make it so that everywhere the consumer and specifically our customer looks, our value gets better and better, whether it's the time it takes for their food to get to the table, the visibility they have into the weight process, opening the front door, just efficiency and execution and consistency. And we think in turbulent times like this, those are the things that the consumers really value and then turn to, specifically the consistency part. They just don't want to put their dollars at risk. Mel Hope: And our operators really have focused a great deal on I'd call it, blocking and tackling in terms of the labor management and focusing on execution in the restaurants. And when you see rising transactions, the labor really benefits from that in a growth company like ours where that transaction growth trickles down to more efficient labor. Andrew Barish: Yeah. And just finally, what was actual menu price in the 3Q? And then does that look like about 4% in the 4Q? Mel Hope: So in Q3, the carry pricing of all pricing events carried about 5% overall, and we're 3.5% or roughly for the full year. Christopher Tomasso: And about 5% in the fourth quarter. Mel Hope: And about 5% in the fourth quarter. Okay. Operator: Our next question comes from the line of Todd Brooks with Benchmark StoneX. Todd Brooks: Congrats on some real positive outlier results here in the quarter. I wanted to, Chris, dig in a little bit more on the second-generation sites. If you look at the class of '25, what was the mix of second gen? And then if we start to look out to the pipeline for '26, are we inflecting second-gen openings higher if you look at the mix of total openings? Christopher Tomasso: Yeah. So as I mentioned on the last call, we're looking more and more at the second-generation sites. About 50% of what we opened in '25 were second gen, and we expect that to be a similar percentage for '26. Todd Brooks: Okay. And is the competition -- I'm hearing other concepts try to talk about second generation as well. Does the benefits to the -- that First Watch has as a brand as far as landlord desire for First Watch to be a tenant, are you getting first looks at these type of locations versus kind of new development where they want you in the center or is it more competitive to land these sites in this environment? Mel Hope: I think we're -- as a national credit now in our performance, we're probably on the Rolodex of every commercial developer, if Rolodexes still exist. So I do think we get first calls. Todd Brooks: Okay, great. And then just wanted to loop back on the marketing. I know we're not going to get detailed '26 plans yet but is there a -- you guys are very thoughtful in what you've done to drive the growth of the brand. Is there a thought of this is 1/3, 1/3, 1/3 type of process as far as how much of the base gets touched or how do we iterate out of kind of the -- I think it was Florida plus the Southeastern markets. I guess, tactically, how do we iterate this in '26 if we don't want to talk about how we spend against it in '26? Christopher Tomasso: Yeah. I think we'll take the learnings that we've gotten from this year's efforts and look at next year, look at the markets. Obviously, still efficiency and density is a factor, seasonality and other things. So it's not necessarily 1/3, 1/3, 1/3. We're not approaching it that way. We're really just looking at it from an ROI perspective and where we can make the most impact, get the returns we want and drive the traffic. So it's -- the best thing I can tell you is that it's fluid, but it's going to all be based on the learnings that we've received so far. Todd Brooks: Okay. And just a quick follow-up there, Chris, or I don't know if Matt's there as well. But the biggest kind of surprises out of the first real three quarters of leaning into this effort, if you're looking at where the efficacy of the program has been. Christopher Tomasso: The biggest positive surprises. Matt Eisenacher: The biggest surprise -- this is Matt, Chief Brand Officer. So the biggest surprises, I think we have seen a lot of success in targeting our media within the category and using transactions to identify people that are already active in the category and may have lapsed or has not been to a First Watch in a while. So when you ask about kind of the momentum, I think we've built a playbook on not trying to convince people to necessarily build a new occasion within this daypart. But I think there's a lot of low-hanging fruit by being the leader in the category and simply being top of mind for those that are already going out to full service and especially full-service breakfast. So it's very database and gives us a lot of confidence. I think as you thought about strategies to go into next year, I think we think we've built a playbook over the last three quarters, and that's given us confidence. So we don't see a lot of derivation in the short-term on changing those strategies. The opportunity is really taking it into more geographies. And I think we'll talk about that over the next few quarters. Mel Hope: And Todd, you might remember that we piloted these last year. So in terms of surprises, I think the reason we piloted them was to -- so that we could select those things that would perform predictably. And I think they've been predictably positive. Operator: Our next question comes from the line of Brian M. Vaccaro with Raymond James. Brian Vaccaro: Just on the third quarter comps, can you elaborate a little bit on the impact? You talked a lot about the new marketing efforts, but just elaborate a little bit more on the impact you think the marketing is having on your sales trends. And I heard you say that it covered about 1/3 of your footprint, if I heard correctly. So I was thinking maybe some more color on sort of the regional trends that you're seeing or what that scatter plot might look like kind of mapped against the new advertising initiatives. Matt Eisenacher: So this is Matt again. We haven't really seen much variation. I think the results have been very consistent across geographies. I mean we've talked in the past how important the state of Florida is for us. And our results have been pretty consistent. And that's, frankly, why it gives us confidence. It's not like we're seeing particular markets succeed and others not respond. I think for us we know our awareness is low. And so simply by being top of mind, being consistently top of mind for category users, we've seen very consistent results, and that will inform how we think ahead in 2026. Brian Vaccaro: All right. That's helpful. And I want to ask on commodity inflation as well. I think it was around 3% you said in the third quarter, and the guidance implies that that kind of steps back up maybe into the mid-single-digit range in 4Q. Am I reading that right? And maybe you could just walk through some of the puts and takes within your basket moving through the rest of the year? Mel Hope: So it does step up a little bit in the fourth quarter. Kind of the general trend, Brian, this year has been that we started with our four largest commodities all being at historic highs, and we've seen some moderation in most of those, less so in bacon and coffee, but a great deal in terms of the cost we were paying for our [ shell in ] eggs and for our avocados. And that trend has held pretty steady through the year. The moderating commodities that continue to moderate and then coffee and the bacon have continued to be high. Operator: Our next question comes from the line of Jon Tower with Citi. Jon Tower: I'm going to go back to the marketing because why not. I'm just curious, in terms of what you're seeing with these new customers that are coming in, in response to the marketing so far, are they using the brand differently than how you've seen other customers come in, say, the first time when they are introduced to the brand? So for example, are they coming in and say you're marketing in these over social channels a certain piece of the menu, whether it's value-centric or a seasonal piece, are they coming in response to that and ordering that immediately when they come in first time or are they choosing different pieces of the menu versus what you normally see? So I'm curious to see if it's kind of you're pushing one thing and they're going after that or they're just getting introduced to the brand and coming because they're seeing the brand for the first time and utilizing it differently than what you normally see in the past from other consumers that aren't getting -- haven't been marketed to? Christopher Tomasso: Yeah. I'd say it's more of the latter, but with a clarification that we're not seeing any difference in behavior. It's more of a reminder of top-of-mind brand awareness, getting them in the door. But our mix hasn't changed much at all. As a matter of fact, we're still seeing positive mix like we have for a while now, no signs of check management, all healthy signs for us. It's just that we're raising our awareness and getting more customers in the door. Matt, I don't know if you want to add something there. Matt Eisenacher: Yeah, Jon. So Chris is right. We don't see much of a difference in mix. But what I'll go back to the strategy of we're tracking people and staying top of mind for category users. So if you're someone who hasn't been the First Watch in a while, we're not necessarily speaking to you about our seasonal menu. We're establishing that we are breakfast. We try to communicate breakfast. And then as we see you transact and you moved into our owned audiences, then we start to talk to you about our seasonal menus. So I just wanted to make sure it was clear. It's not necessarily that we're trying to drive new users in behind the seasonal menu, and that might be why we're not seeing a large fluctuation in mix. Jon Tower: Okay. I appreciate that. And -- then maybe on the new stores, and I appreciate all the color around the second-gen locations. Are you guys doing anything differently as you're moving into these new markets and you're building out, I believe somebody in the past, you've spoken to having slightly bigger footprints on these locations. The back of the house, are you doing anything differently with respect to the kitchen to handle perhaps more capacity with seating in the front of the house or maybe new equipment or anything like that in these new stores, particularly as you maybe move into markets that are slightly denser than what you've had in the past? Christopher Tomasso: I think one of the most encouraging things about these volumes that we're seeing is that our line, which is where the food comes right out of and goes to the customer is and has been the same for a long time, save some adjustments here and there as part of our ongoing evolution. But no. I mean, so the encouraging part is we realize now and know that these lines can do very high volumes, really high sales hours. But when we're taking over these spaces, to be honest with you, most of the time, they have much larger back of houses than we're accustomed to, but we put our standard line in there. But what it does afford us is a larger walk-in cooler, a bigger dish area, more prep area. So just not as congested perhaps as if we were building our 3,800 square foot restaurant. But no, the line itself being able to handle these types of volumes gives us a lot of encouragement about our ability to do these high unit volumes for a long time to come. Jon Tower: Cool. And then just lastly, you've ticked off a bunch of stuff with respect to technology in the past several years, whether it's the KDS, whether it's consumer-facing technology on the wait list or the app. Is there anything else that we should be thinking about in the next several -- maybe in the next 12 months or 24 months that you guys are tackling to either improve the guest experience or the employee experience? Christopher Tomasso: I feel like you're leading me to say AI. So I'm just going to say AI, it's not, okay. Look, we're constantly innovating, looking at every aspect of our business. And some things are big, some things seem small but have great impact. And so we'll just continue to evolve. We don't have anything teed up that we're ready to talk about right now. Our focus, as we teased last time was on a new menu, and we talked about it a little bit here. So optimizing the menu and is a big focus for us for 2026. Operator: Our next question comes from the line of Sara Senatore with Bank of America. Unknown Analyst: This is [ Isaiah Austin ] on for Sarah. Just a broad question about the breakfast daypart. I think earlier, we saw signs that it was stabilizing this year. Is that something that you guys continue to see? And kind of in the same vein, I think previously, we had heard from you all that you guys weren't seeing the same kind of trade-down benefit from dinner to breakfast and brunch that you guys experienced during the Great Financial Crisis. Do you feel like you're starting to see signs of that now? And then I have a quick follow-up after. Christopher Tomasso: Actually for us, weekday breakfast was the standout daypart in our growth in Q3. It was the best traffic of all our -- all three of our dayparts, which, as a reminder, we look at weekday breakfast, weekday lunch and then weekends, we just call brunch. So we've been very encouraged by what we saw at weekday breakfast. Unknown Analyst: Got it. And anything on the trade down just that you guys were experiencing like a couple of decades ago versus now? Do you see similar trends? Mel Hope: I don't think we have evidence of that. Don't really know. I mean some of that -- some of the direct data associated with that, I don't think we see the same thing today. Unknown Analyst: Perfect. And then just in light of the great quarter, is there anything that you all are seeing as far as your customer metrics, like higher frequency or improved value scores? Maybe if you have any measure of awareness, just kind of thinking about the drivers behind this quarter and where it can go from here? Matt Eisenacher: This is Matt Eisenacher again. You asked about awareness. We have encouragingly seen a steady increase in awareness, which is, again, encouraging for us given our known low awareness. So every quarter, we've seen sequential improvement in awareness and moderation and improvement in our value scores as well. I mean, Mel mentioned it earlier, we are a little more cautious in reporting on frequency in full service I think if you want a longer time horizon. But we have been able to test the post period in a variety of the channels and tactics we've been employing, and we've seen some indications of positive lift following those, which would tell us that there's likely a resulting in improved frequencies. But again, I think it takes more time to be definitive in that. But we've seen a lot of encouraging signs across all those metrics. Operator: Our next question comes from the line of Greg Francfort with Guggenheim. Arian Razai: This is Ari Razai for Greg. Congrats on a great quarter. I think delivery contributed just over 3% to the same-store sales in the quarter. And it looks like it accelerated from the last quarter. Can you talk about how demand has grown in that channel since you made that pricing adjustment, maybe like any other changes in promotional activity in that channel? Christopher Tomasso: Sure. Just to clarify, did you say how demand is affected in that channel? Arian Razai: Correct. Christopher Tomasso: Yes. We've seen demand increase significantly over the past, call it, [indiscernible] three quarters, and that trend has held. So we keep -- we talk about the positive impact of the changes we made to that program. And again, that's continued. Matt Eisenacher: This is Matt. Chris has made a good point that we did see improvement once we made the changes to the program earlier in the year, but the results have been fairly consistent. There wasn't a meaningful increase in that channel in the third quarter that might have outsized driven the rest of the comp. Arian Razai: Got it. Understood. Super helpful. And a quick follow-up. I know it's too early to talk about guidance in 2026, but maybe if you can touch directionally on labor and commodity inflation, that would be super helpful. Mel Hope: I can tell you that at present, we're talking with suppliers about our costing for some key commodities for next year. And so we'll probably have more information on that later in terms of labor inflation, I expect it to be -- or I'm hoping that it's a little bit more normal than maybe we've seen in the last few years. We have some built-in inflation as the regulatory minimum wages are increasing in some of our large markets by another $1 or so. So there'll be -- there's certainly some labor inflation, but I'm not ready to really guide to what we're building into our models for 2026 yet. Operator: [Operator Instructions] Our next question comes from the line of Andrew Charles with TD Cowen. Andrew Charles: Typically, you guys visit pricing around January, around July, give or take. But I guess I'm curious, what drove the decision to take that incremental 1.1% price increase that you mentioned in August following the 2.8% in July? Christopher Tomasso: Yeah, Andrew, that 1% was contemplated in our pricing strategy early in the year. However, it affected some items that had a relation to the seasonal menu that we were rolling out. So we needed to time it with that so that we maintain those relationships if that makes sense. There were some items. We look for certain spreads between a seasonal item and a core menu item. And we had that particular situation here. So we just held back 1% so that we could time it with the launch of the seasonal menu. Andrew Charles: Okay. I got you. And then separately, Mel, the third-party delivery AUV, if we look at the Q, looked to be up about 40% in the quarter. Can you speak to the flow-through that you're seeing on that profitability and the impact that's having in driving profitability as well? Mel Hope: So the profitability on third-party delivery would be -- we generally view it as a transaction just like any other transaction with a different top line. And so as a result of the fact that oftentimes we have fewer beverage deliveries than we do in the restaurants. I think the profitability, at least [indiscernible] level probably runs pretty close to the standard. If you're fully loaded, maybe it's a little bit more, little bit profitable, a little less. Okay. A little bit less. Christopher Tomasso: But in that it's -- we view it as an incremental occasion. I think it's important to keep that in perspective that majority of those transactions we consider to be incremental. Mel Hope: The truth is I don't know that we've ever publicly talked about the RLOP on the different types of different sales channels. Christopher Tomasso: But it is a big contributor to our adjusted EBITDA. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to Chris Tomasso for closing comments. Christopher Tomasso: Great. Thank you. Thanks, everybody, for joining us on the call this morning. We really appreciate it. We're looking forward to connecting with most of you in the coming days and weeks. And as always, we are grateful for the dedication shown by our entire team, many of whom I know are listening today. So a sincere thank you from all of us here. We look forward to building on our strong foundation throughout the balance of this year and are excited about our prospects for 2026. Have a great day, everyone. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the ADT Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Now I would like to turn the call over to Elizabeth Landers, Vice President, Investor Relations. Please go ahead. Elizabeth Landers: Good morning, and thank you for joining us to discuss ADT's third quarter 2025 results. Today's speakers are Jim DeVries, ADT's Chairman, President and CEO; and Jeff Likosar, our CFO. After their prepared remarks, we'll open the call for analyst questions. This morning, we issued a press release and presentation summarizing our financial results. Those are available at investor.adt.com. We'll reference our non-GAAP financial measures today. Reconciliations to the most comparable GAAP measures are included in the earnings presentation on our website. Unless noted otherwise, all financials and metrics discussed reflect continuing operations. Non-GAAP cash flow measures include amounts related to our former solar business through 2Q 2024. Forward-looking statements included in today's remarks are subject to risks and uncertainties. Actual results may differ materially. Please refer to our SEC filings for more details. And now I'm happy to turn it over to Jim. James DeVries: Thank you, Elizabeth, and good morning, everyone. I'm very pleased to report that ADT delivered another quarter of solid revenue growth, robust cash flow and very strong earnings per share. Collectively reflecting the resilience of our business model and our team's continued execution of our 2025 strategy. Let me start with a few key financial highlights. Total revenue grew 4% to $1.3 billion. Adjusted EBITDA grew 3% to $676 million with adjusted earnings per diluted share of $0.23, up a strong 15% year-over-year. Cash flow continues to be a highlight with adjusted free cash flow, including interest rate swaps reaching $709 million year-to-date. Additionally, year-to-date, we have returned $746 million to ADT shareholders through share repurchases and dividends. We ended the third quarter with a recurring monthly revenue balance of $362 million, up 1% year-over-year. Turning to attrition. Earlier this year, ADT achieved record levels, and this quarter, we ticked up to 13%. While above our budget, our teams are focused on plans to continue improving customer retention and those actions are underway. As we've executed in prior quarters, during Q3, we completed a small bulk account purchase of 15,000 accounts for $24 million. Overall, consumer sentiment remains cautious and relocations continue at low levels. We have remained disciplined in our SAC spending which resulted in lower new subscriber and RMR adds. Jeff will provide more specific details about our results and full year outlook later in our call. I'd like to spend the next few minutes updating you on ADT's 2025 progress and strategic focus areas, which continue to build on the priorities we've shared throughout this year. ADT's commitment remains unchanged, delivering safety and peace of mind to our residential and small business customers. Our strategy is anchored in 3 core pillars unrivaled safety, innovative offerings and a premium best-in-class customer experience. Unrivaled safety is at the heart of everything we do at ADT. As it has been throughout our entire 150-year history. We are constantly strengthening the ways we protect ADT customers and provide them with confidence in their security delivering peace of mind. As we execute on our near-term financial goals, we're also investing in our product and experience ecosystem, expanding and enhancing our differentiated offerings. These efforts give customers even more reasons to choose ADT and to remain loyal to our brand. Our ADT+ platform continues to gain traction, enhancing the safety, convenience and experience we deliver to our customers. Our product and engineering teams are firing on all cylinders, in coordination with our strategic partners to drive a continued pipeline of innovative releases. Our product road map is robust, and we expect to continue expanding our suite of unrivaled offering every quarter to continue to gain share within the smart home. An increasing percentage of our new customers are now enjoying ADT+, and many of these customers are opting for larger, more comprehensive ADT systems, leading to increased installation revenue, and we anticipate contributing to even stronger retention over time. During 2025, approximately 25% of our new customer additions have been installed with the ADT+ platform, and we are continuing to expand to more categories of customers and channels. This quarter, we launched the ADT+ Alarm Range Extender further enhancing the capabilities, performance and dependability of the ADT+ platform. This device expands coverage between the ADT+ base and other connected devices in larger or more complex homes with a 24-hour battery backup and tamper alerts. We also introduced new automation and AI-driven testing capabilities to streamline app development, reduce the need for manual testing and deliver faster, high-quality releases. These innovations help ensure a smoother, more reliable experience for our ADT + customers. We are actively evaluating new features, use cases and economic models and we'll continue to share additional information as these come to market. I also have a few updates regarding our efforts to optimize our hardware portfolio. While we don't expect hardware savings to be material in 2025, we view this as a meaningful source of savings going into 2026. Beginning October 15, ADT refreshed our smart home security portfolio, and we now offer 5 new Google Nest camera models, reflecting the continued expansion of our partnership with Google. And we are working closely with our suppliers to mitigate our tariff exposure, which we do not expect to be material during 2025. On the customer service front, we remain pleased with our progress with ADT's remote assistance program, which has eliminated approximately half of our in-home service calls reducing truck rolls and field service costs. Our current AI efforts remain focused on our customer care operations with an emphasis on improving the customer service experience for both our customers and our employee agents while also improving overall efficiency. These AI initiatives continued to deliver positive results with an increasing number of customer service chats processed by AI agents, with nearly half of those successfully resolved without live agent intervention. We're also continuing to expand the rollout of AI agents for voice calls and early results are promising for both customer satisfaction and cost efficiency. AI-driven cost savings are beginning to materialize, particularly in our call center operations and we expect to provide more quantitative detail as these benefits scale. Turning for a moment to State Farm. As mentioned during our last call, we have pivoted away from the past selling program, and we're exploring new opportunities for a digital relocation focused approach to jointly pursue new customers. Despite some ongoing macroeconomic uncertainty, including tariff pressures and elevated interest rates, ADT's business model remains resilient and very well positioned for the future. In closing, we remain focused on execution, operational excellence and positioning ADT for long-term value creation. I remain confident in ADT's outlook and our ability to deliver on our commitments for 2025. I want to thank our employees, partners and customers for their dedication and trust in ADT I'm proud of our team's performance and excited for the opportunities ahead. With that, I'll turn the call over to Jeff. Jeffrey Likosar: Thanks, Jim, and good morning, everyone. I will take the next few minutes to share some additional details on our third quarter and year-to-date results and our outlook for the rest of the year. As Jim mentioned, cash flow remains a significant highlight. In the third quarter, we generated $208 million of adjusted free cash flow, including swaps, up 32%, and we have generated $709 million year-to-date, up 36%. Adjusted net income for the quarter was also very strong at $187 million or $0.23 per share. Year-to-date, we have generated adjusted earnings per share of $0.67, up 20%. Adjusted EBITDA for the quarter was $676 million, up 3% in the quarter and up 4% on a year-to-date basis. This strong performance is driven by revenue growth, the associated margins and our overall efficiency, enabling continued investments for the future while delivering these results. Adjusted earnings per share also benefited from our repurchases enabled by our strong cash generation and our efficient capital structure. On the top line, we delivered total revenue of $1.3 billion in the quarter, up 4%. Monitoring and services revenue was up 2% with an ending RMR balance of $362 million. Installation revenue was $200 million, up 21% and reflecting our continued mix shift to outright sales at higher average prices as more customers choose our ADT+ offerings. Gross subscriber additions were $210,000 in the quarter, adding $12.5 million in RMR. Our adds were down year-over-year, driven mainly by fewer bulk account purchases, approximately 49,000 accounts last year versus approximately 15,000 this year. I will note that our third quarter results still include the multifamily business, which we divested on October 1. This business is comprised of customers who own or operate residential rental housing facilities such as apartment complexes. Its characteristics are akin to the commercial business we divested in late 2023, generating meaningfully lower EBITDA and cash flow margins than our core residential subscriber base. We are consequently pleased with the $56 million sale price for this relatively small portfolio of approximately 200,000 subscribers and $2.6 million in RMR. We have also continued to return significant capital to shareholders while strengthening our balance sheet. As Jim mentioned, we have returned $746 million so far this year from the repurchase of 78 million shares and our quarterly dividend distribution. We remain very comfortable with our leverage at 2.8x adjusted EBITDA with net debt of $7.5 billion at the end of the third quarter. In October, we closed on a new 8-year $1 billion bond and a $300 million add-on to our 2032 Term Loan B. We used the proceeds to fully repay our $1.3 billion 2025 Second Lien Notes, which was our most expensive debt. We also closed on a new $325 million term loan A last week with those proceeds designated to repay some of our 2030 Term Loan B and our April 2026 notes. In all cases, we were able to price the new facilities below the rates of the debt they replaced. Together with transactions from earlier in the year, we have extended almost $2.5 billion of upcoming maturities and lowered our borrowing cost to 4.3%. We also enjoy a continued strong liquidity position with an undrawn $800 million revolving facility and $63 million of cash on hand at the end of the quarter. I'll close with a couple of comments on our outlook. With 2 months to go, we remain on track to deliver results consistent with the guidance we shared early this year. Reflecting this confidence, we have tightened and adjusted our guidance ranges, largely maintaining prior midpoint. We now expect total revenue of between $5.075 billion and $5.175 billion, with the midpoint consistent with our original guidance. Our refreshed ranges include slightly higher adjusted EPS midpoint with an offset to the adjusted EBITDA midpoint. This is in consideration of the mix between expense and capitalized SAC and other factors, including a delayed planned legal recovery. We now expect adjusted EPS in the range of $0.85 to $0.89, and we expect adjusted EBITDA to be in the range of $2.665 billion to $2.715 billion. Finally, we are maintaining our $800 million to $900 million range for adjusted free cash flow, including swaps, as we evaluate a handful of fourth quarter opportunities, including bulk account purchases. In summary, we are very pleased with our progress during the first 3 quarters of 2025. As we look towards the remainder of the year, we are confident in our ability to deliver on our commitments. We remain focused on driving operational efficiency, investing in innovation and generating long-term value for our stakeholders. Thank you for your continued support. Operator, please open the line for questions. Operator: [Operator Instructions] And your first question comes from the line of Peter Christiansen with Citigroup. Peter Christiansen: Great to see free cash flow growth really materialize this year, pretty impressive. Jeff, really 1 question for me, Jeff. I was just wondering, we obviously know next year, a full cash taxpayer, but on the other hand, you've been able to lower the borrowing cost for the company. So I mean, those are pretty important key inputs as we think about 2026 free cash flow. Are there any other areas that we should think about when -- in our modeling, as we look to 2026, any components to free cash flow growth that stand out in your view? Jeffrey Likosar: Yes, you hit on the ones that have some dynamics that could cause them to change. So we've had some success managing our cash taxes will end up a little bit better on cash taxes, a couple of benefits from the recent legislation. We've done a really good job with a series of debt transactions, reducing our borrowing cost which makes that less of a challenge next year compared to what we once thought it would be. So we feel really good about our progress. In 2025, we're on track to achieve our original guidance because of our improvements, we have a lot more flexibility in capital deployment. So while we're not sharing any specific guidance beyond '25 today. This is, of course, the time of the year where we're working on strategic planning and budgeting for next year, ongoing conversation. With our Board evaluating several really interesting initiatives and opportunities for long-term growth. We continue to believe our stock is undervalued. So we've deployed capital there this year. And we plan to share more in the first part of next year in terms of a broader strategy and longer-range outlook along with our 2026 guidance. But I feel really, really good about where we are in 2025. Operator: And your next question comes from the line of Ashish Sabadra with RBC. Ashish Sabadra: So you mentioned efforts underway to improve retention, I believe, ADT+ and some of the AI initiatives are part of it. But I was just wondering if you could elaborate further on how should we think about some of these initiatives helping retentions going forward? James DeVries: Sure. Thanks for the question. It's Jim. I'll give a little bit of color on attrition overall and then talk about a couple of the improvement areas that we're focused on. As I said on the call, we ended the quarter rounding to 13%, up about 13 basis points from last quarter. As a reminder, we achieved record levels earlier this year and expect to drive attrition lower over time. Largely due to tailwinds on customer service and new offerings like ADT+, which should drive -- continue to drive more customer engagement and more usage. On the quarter itself, the pressure on the quarter came from a couple of areas nonpayment cancels were higher than last year. Voluntary losses were worse than last year and relocation losses were modestly lower than last year. A couple of areas to -- more specifically to your question, where I think there's cause for optimism. The team stability continues to improve, and more tenured employees perform at higher productivity rates, our customer experience metrics virtually across the board. NPS, customer sat, digital self-service, are all improving and going in the right direction. There's been some excellent improvement on life cycle management, which the team is advancing. And then from a hardware perspective, ADT+ things like Trusted Neighbor, increased penetration with video, all drive improved usage of our services. And to the extent that usage increases, we know historically that retention improves, the more a customer uses the system, the higher they value it, and the higher retention. So the quarter ended at 13%, we ticked up, but there's a number of initiatives underway that I think long term, bode well for us. Ashish Sabadra: That's great color. And maybe just on the RMR front, we saw some softness there from a growth perspective. How should we think about the puts and takes going forward? James DeVries: Sure. So at the intersection of attrition being 13 basis points higher and gross adds not being quite where we'd like them to be. RMR ended the quarter less than what we had anticipated. Our direct organic residential adds were actually up 1% year-over-year, dealer adds were down modestly. DIY, it's a small number, but DIY for us was up 13% year-over-year. The most significant impact on ending RMR for us this quarter from a comparison perspective is that we did a bulk of 15,000 this quarter comparing to 49,000 last year. So RMR -- ending RMR ended a little lower than anticipated. We have some bulk in the pipeline. We'll be disciplined about pursuing that bulk but that should continue to be a source of growth for us going forward. Thanks for the question. Jeffrey Likosar: And one thing I'd add to or just to emphasize is our continued focus on returns and discipline in capital deployment, SAC deployment, especially It's, of course, a very important measure, but we're also focused on profitability, SAC efficiency, cash generation. So really pleased to be still affirming our guidance that would have our adjusted free cash flow up 14% or 15% at the midpoint after 40%, I think it was a little bit above 40% last year. So as we're balancing all of these objectives, I want to emphasize the progress we made on cash generation. Ashish Sabadra: That's great color. And congrats on good solid top line. Operator: And your next question comes from the line of Manav Patnaik with Barclays. John Ronan Kennedy: This is Ronan Kennedy on for Manav. Can you talk about the portfolio hardware optimization efforts? I believe you indicated not material savings in '25, but a potentially meaningful source of savings into '26. If you could please provide some color of that on that and also the benefits of the remote assistance program and your early AI initiatives, please? James DeVries: Sure. Ronan, there's a lot packed into that question. I'll go tree tops on each of the 3, and we can go deeper in the after call, if you like. On the product side, we're working with our ODMs, essentially leveraging our scale and their expertise to drive lower cost manufacturing. And we've had some good progress with ADT+. That now represents something in the neighborhood of 25% of our new sales, we'll continue to expand that to new order types, new channels, but all of the work that our engineering teams are doing with the ODMs are focused on driving down prices. We'll have a little bit of tailwind. We've had a little bit of tailwind on that front this year. It's not material. But as we continue to expand ADT+ to more and more of our new installations, we'll see more progress on the savings front. AI continue to focus on customer service. We're now expanding into some sales applications, employee productivity. There, too, we've had savings in 2025 and expect that to begin to accelerate in '26 as well. Chat volumes now 100% AI containments right around 50%. Voice is we're probably in the neighborhood of half of our calls have virtual agent of our voice calls containments flat at just below 20%, but I feel good about what we're doing on the AI front as well. And then on remote servicing, that's maintained about -- at a level of about 50% of our service calls. And we've plateaued right about there for the last handful of quarters. I think there might be a little bit more improvement there, Ronan, but it's not -- shouldn't be meaningful. We're happy with where we are. The NPS and customer sat scores are very good with remote service. And I would expect that it will maintain right around half of our service costs. John Ronan Kennedy: Another, if I may, kind of multifaceted question, but more so on the macro and the strength of the consumer as you see it. I think you said our voluntary disconnects were up. I don't think you commented on nonpay. You also alluded to potential impacts of tariffs and a still higher interest rate environment. So could we just have your characterization of the macro and the strength of the consumer? And if and how those could potentially impact you achieving your guidance for 4Q are going into '26, please? James DeVries: Yes. We -- so absolutely. We -- so we reiterated on the guide. So I'd say overall, macro factors included -- we are confident with a couple of months to go that will be in the guide and therefore, reiterated. . I'll make -- I'll share a couple of comments on attrition and macro overall and then ask Jeff to touch on your question with regard to tariffs. I think generally, Ronan, we're seeing a cautious consumer delinquency is up a bit. Our nonpay cancels, as I mentioned, were higher than last year. it's not meaningfully higher, but it's a number we're paying a lot of attention to. I think that some of the process changes and collections that our team is making while early bode well for us, and we're definitely not seeing a continued erosion, those elevated nonpay cancels and delinquencies have stayed steady -- elevated but steady. Another thing worth mentioning, you're pretty familiar with our business when we have relocations down -- the downside is we get fewer bites at the apple from a gross adds perspective, but it is a tailwind for us on attrition. And relocation losses were a bit less Q3 this year than Q3 last year. So overall, taking macro all the macro variables into consideration, I continue to feel good. Jeff continues to feel good about Q4. Jeffrey Likosar: Yes. And I'd add on tariffs. The environment has come into a little bit sharper focus, but still not perfect focus, so we continue to work with our vendors to mitigate cost. In some cases, it's negotiations, it's consideration of country of origin shifts, in some cases, nearer term, some cases, longer term, places where we make may make pricing adjustments to our customers. And then I want to reiterate at the risk of repeating the point that we just feel really good about our ability to deliver our guidance from the beginning of the year. I recall in -- I think it was our first quarter call, noting that we expect the tariffs would put pressure on the midpoint of some of our guidance ranges, but we still would deliver the ranges and you're sitting here today in November, the tariffs have a bit of an effect on EBITDA. There's a couple of EBITDA things between hitting the P&L and hitting the balance sheet, but we're able to overcome those in a couple offset in EPS. So you took our EPS up a couple of points and -- or a couple of cents, I mean. And then already made the point that we feel really good about our cash generation. So despite some of these uncertainties, our teams have done a really good job managing the puts and takes this year. Operator: And your next question comes from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: I first wanted to ask about the lower SAC spend. Was that a deliberate strategy? It makes sense that you wanted to be more disciplined, but I guess, is there anything that sort of drove you to spend less this quarter? Or it just was that the customers that you saw weren't as high quality? Or was it sort of a deliberate you wanted to spend less? Jeffrey Likosar: Yes. I would say it's the combination of those things. Navigation of the point I was alluding to earlier, a variety of factors and offsetting directions and our commitment to deliver the guidance we put forth at the beginning of the year. And the point I mentioned about disciplined and returns oriented in our approach and then maybe worth also mentioning that we do still have a range around our adjusted free cash flow outlook for the full year, even with a couple of months left and part of that is a continued evaluation of SAC and the largest chunks of SAC tend to be bulk account purchases that we will evaluate in the last handful of weeks here. Toni Kaplan: Great. And then on State Farm, I know you had talked about sort of changing course on the program that was originally rolled out because of this low pace. This one seems more targeted but also sort of more limited. So I guess, like maybe just talk about how did you sort of pick this new target customer base? Were they seeing higher adoption of like higher take rate of the ADT product during the initial phase? Or was there something else? And I guess in terms of like your cost of this program, I imagine it's probably not that big, but I guess like how do you think about like what you're hoping to get for returns or things like that? And when do you sort of reevaluate on the new pilot. James DeVries: Thanks for the question, Toni. It's Jim. I'll give a little bit of context on State Farm and then speak to -- speak more directly to your question about the digital program that we're contemplating. . Our original agreement with State Farm was for a 3-year term. That concluded just this past October. As you know, and as I've mentioned on a few calls, volume has been below what we expected from the partnership. We didn't build meaningful adds into our 2025 budget program to date. We're at around 33,000 subscribers -- 32,000, 33,000 subscribers. And so we have pivoted to explore a digital solution. This is effectively directed at relocating consumers. We're in the very early days of design. It's not necessarily the last effort trying the traditional distribution with State Farm, but it's a fresh tactic, and we're going to lean in here and see if we can get some traction. An advantage is that it's in the potential buy flow. And so there's not a reliance on agent execution as there is in the traditional path. This is a digital process directed at relocating customers. I should also mention we're continuing our data sharing program with State Farm, where with customer consent, we share alarm activity at the customer's home with State Farm. And so we continue to kick tires on that front to see if there's a source of value. But back again on your original question about the advantage of the digital program, I would say, is that it's included in the buy flow, a more natural process and one we hope we get better traction with. Operator: And your next question comes from the line of George Tong with Goldman Sachs. Keen Fai Tong: You outlined various drivers to improve your attrition rates. Can you talk about how long you think it might take for those improvements to materialize and drive year-over-year improvements in attrition? James DeVries: Thanks for the question, George. I think that it's probably Q1, Q2 of next year. The -- It takes a little bit of time to bake on the NPS improvements. The digital self-service continues to get really good traction. We're better than ever at meeting customers where they choose to interact with us. So we're expanding the digital platforms. There are some really interesting work that we're doing, leveraging AI to drive satisfaction. But I think it's a quarter or 2 before we start to see some improvement. I think the voluntary losses -- I anticipate voluntary losses will be the first to improve. And I'd mentioned earlier on our nonpayment cancels, there's been some process improvement on collections, where we essentially are dialing up our contact rates with delinquent customers and having some success there. And I'd expect some nonpay improvement as well. That, of course, is pretty significantly influenced by the macro environment, so a little more difficult to predict. But I think our internal processes and the improvement we're making bode well for us, say, Q1, Q2. Jeffrey Likosar: And one other thing I'd add too is we made some adjustments and fine-tuning to our underwriting processes to whom we extend how much credit earlier in the year that we expect will have some benefit, but it also takes a few months to work its way through the system. Keen Fai Tong: Got it. That's helpful. And you mentioned earlier, continuing to opportunistically pursue bulk account purchases. Can you remind us what's embedded in the guide in the full year with respect to future bulk account purchases? And what current economics look like with purchases? James DeVries: Let's tag team on this one, Jeff. So I'll give you a little bit of color and Jeff will as well, George. So we've got some bulk in the pipeline now. We -- as you know, we'll stay disciplined. We won't chase these bulks. We don't want ads just for the sake of ads. So if we can't get to the economics that we target. We won't pursue them. But there's 2 or 3 sizable bulk opportunities available to us. We're evaluating those. We may end up executing one in the fourth quarter. And that, I think Jeff mentioned earlier, is largely the reason why we left the free cash flow guide wide. We tightened revenue, EBITDA and EPS, but left adjusted free cash flow at the $800 million to $900 million to in to -- principally to have the flexibility to pursue 1 of these bulks in Q4 if the economics work out. Jeffrey Likosar: Yes, I don't have a whole lot to add. Similar to Toni's question and even in the third quarter, as Jim had noted, one of the drivers that I noted also in the prepared remarks, that one of the drivers year-on-year was less bulk in the third quarter. So of course, that led to less SACs spanning on those bulks. We're evaluating these in the fourth quarter. I'll just be echoing Jim's point about that. That's why the range is a bit wider than some of the other ranges. Operator: And your next question comes from the line of Ashish Sabadra. Ashish Sabadra: Just 1 quick question on capital allocation. You've been very opportunistic with the share repurchases. Can you just remind us how much more authorization do you have in place? And also from a liquidity perspective, can you talk about your opportunity to continue to do more opportunistic share repurchases going forward? Jeffrey Likosar: Yes, sure. So the authorization from the beginning of this year, we have fully consumed. So that was $500 million authorization. We also had another a little bit more than $100 million of repurchases in January under the prior year's authorization. In terms of capacity, we have access to our revolving facility. As I noted, we feel really good about the debt transactions we've been able to undertake, including refinancing our most expensive debt just in the last couple of weeks. We also recently issued a term loan A. We used $200 million of those proceeds to repay our older, more expensive term loan B -- the 2030 Term Loan B. But we do have some of that cash still available. It's earmarked for debt repayment. But from a liquidity perspective, as we sit here today, we have liquidity available. And as I already alluded to, significant flexibility. Our next upcoming maturity is $300 million on our April 2026 notes and we feel very confident we can manage that maturity and have some capital available for share repurchases, if there's a good opportunity or M&A or SAC or any of the other capital allocation priorities we've talked about. Operator: There's no further questions at this time. I will now turn the call back over to Jim DeVries for closing remarks. Jim? James DeVries: Thank you, Mark, and thanks, everyone, for taking the time to join us today. We look forward to finishing the year strong. We remain confident in achieving our financial commitments for 2025. I'd like to extend my appreciation to our employees and our dealer partners. Thanks again, everyone, and have a great day. Operator: This concludes today's call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Vital Farms Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand it over to your host, Brian Shipman, Vice President of Investor Relations. Please go ahead. Brian S. Shipman: Good morning, and welcome to Vital Farms Third Quarter 2025 Earnings Conference Call and Webcast. Joining me today are Russell Diez-Canseco, Vital Farms' President and Chief Executive Officer; and Thilo Wrede, the company's Chief Financial Officer. By now, everyone should have access to the company's third quarter 2025 earnings press release issued this morning. During today's call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and do involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release, the company's quarterly report on Form 10-Q for the fiscal quarter ended September 28, 2025, that was filed with the SEC today as well as the company's other SEC filings for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Note that on today's call, management will refer to certain non-GAAP financial measures. Please refer to the appendix in today's press release [indiscernible] presentation for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures. That presentation and today's press release are both available on the Investor Relations section of our website. After our prepared remarks, we'll open the line for questions. [Operator Instructions] Now I'll turn the call over to Russell. Russell Diez-Canseco: Thank you, Brian, and good morning, everyone. Before we get into results, I want to officially welcome you as our new Vice President of Investor Relations. We're excited to have you on the team. For those of you joining us today, I know you will all enjoy working with Brian. I'd also like to thank the entire Vital Farms crew. Over the past 3 months, we've delivered a very strong quarter with record financial results, advanced our supply chain and set the company up for continued growth in 2026 and beyond. All of these great accomplishments took every one of our crew to make happen from the team at Egg Central Station in Springfield to our farm support and remote workforce. I just came back from an all-hands meeting with our remote crew and the energy and commitment in that room was truly inspirational. Our crew is energized to drive strong growth into the future in service of our purpose to improve the lives of people, animals and the planet through food. And I'm honored to have the opportunity to lead this great organization. As we entered the back half of 2025, we told you our focus would be on rebuilding supply, meeting strong retail demand and positioning the business for sustainable growth into 2026. We've delivered on all 3. Let's start with this quarter's results. Net revenue was $198.9 million, a new record for any quarter and was up 37.2% from the prior-year period on the back of the incredible ramp-up in the supply of eggs our crew has been able to deliver. Gross margin came in at 37.7%, which remains above our long-term target of 35%. And adjusted EBITDA was $27.4 million, and increased 81.3% compared to the prior-year period as we benefited from price mix and scale efficiencies. Next, we made meaningful progress expanding supply, adding processing capacity at Egg Central Station and completing a major systems upgrade. We added approximately 75 new family farms during the last quarter, bringing our total to 575 family farms. That's approximately 150 new farms year-to-date. We now have more than 10 million hens under contract, which is a reflection of the trust and partnership we've built with farmers in the pasture belt. Our third production line at Egg Central Station in Springfield came online in October, expanding capacity to about $1.2 billion in annual egg revenue and positioning us to meet growing consumer demand. Our Seymour facility remains on track to open in early 2027. With 2 production lines, we estimate the Seymour facility will add $900 million in annual revenue capacity. Also, at the beginning of the fourth quarter, we went live with our digital transformation project, a critical milestone that enhances our operational capabilities and underpins our ability to scale efficiently. More on that from Thilo in a few minutes. Finally, we continue building our trusted brand and making progress on our long-term aspiration to grow Vital Farms into America's most trusted food company. This increases our confidence that we have positioned the business well for long-term growth. We added another 2 percentage points of aided brand awareness, which now stands at 33%. Brand awareness is now up 8 percentage points since the third quarter of last year, demonstrating that our message is clearly winning with consumers. Through compelling authentic work like our Good Eggs. No Shortcuts brand campaign and our ads that aired alongside FX's award-winning series, The Bear, our stories continue to attract strong interest from the media and the public. We also launched limited edition dog treats made with Vital Farms eggs in August. This fun brand moment was featured in top-tier media outlets like Good Morning America and generated over 550 million impressions across press, paid media and social media. In summary, this was another great quarter for Vital Farms. We're executing well in the near term while laying the foundation for long-term growth. The investments we're making will continue to set Vital Farms up for long-term success. Given the strong execution across our operations, our farm network and our brand, we're raising full year guidance for fiscal 2025, which Thilo will cover in detail. Thilo, over to you. Thilo Wrede: Thanks, Russell, and hello, everyone. I'll review our third quarter financial results and then discuss our updated full year outlook. Let me start, though, by also welcoming Brian to Vital Farms. Brian, it's great to have you here, and I'm excited about what you are bringing to the company. Now for the results. Net revenue for the third quarter of 2025 rose to $198.9 million, an increase of more than 37% compared to the prior-year period. Revenue growth was driven by continued volume growth and favorable price mix. Gross profit rose to $75.0 million or 37.7% of net revenue from $53.5 million or 36.9% of net revenue last year. The increase in gross profit dollars was primarily driven by revenue growth from higher volume and increased pricing across our shell egg portfolio and favorable mix benefits. Gross profit margin increased year-over-year primarily due to favorable price mix, partially offset by increased overhead costs. SG&A increased to $44.4 million or 22.3% of net revenue compared with $36.1 million or 24.9% of net revenue last year. Shipping and distribution expenses were $9.2 million or 4.6% of net revenue compared to $8.1 million or 5.6% of net revenue last year. The dollar increase was driven by higher ship volume. Net income for the third quarter of 2025 increased 121% to $16.4 million or $0.36 per diluted share compared to $7.4 million or $0.16 per diluted share for the third quarter of 2024. The increase in net income was driven by operating profit growth, partially offset by year-over-year increases in tax provisions. Adjusted EBITDA for the third quarter of 2025 was $27.4 million or 13.8% of net revenue compared to $15.2 million or 10.5% of net revenue for the third quarter of 2024. Turning now to our balance sheet. As of September 28, 2025, we had total cash, cash equivalents and marketable securities of $145.1 million with no debt outstanding. The sequential decline in cash, cash equivalents and marketable securities reflects ongoing growth investments, including the new ERP system, the third production line at ECS in Springfield, Missouri, the construction of our new egg processing facility in Seymour, Indiana and our investment in accelerator farms. This was partially offset by strong operating cash flow of $27.9 million for the quarter. Our balance sheet remains strong and provides significant flexibility as we execute our growth investments. Before discussing guidance, I'll provide a brief update on our internal control remediation. We continue to make good progress addressing the material weakness in our revenue recognition process identified in our 2024 annual report. Importantly, this was a design efficiency only with no impact on our financial statements, and we remain on track to complete remediation by year-end, subject to the ongoing enhancements of controls in the recently implemented ERP system. On to guidance. Given our strong performance in the third quarter, we are raising our full year 2025 net revenue guidance to at least $775 million, representing growth of at least 28% versus 2024. I would like to point out that we did see a small amount of revenue pull forward into the third quarter from the fourth quarter ahead of our planned ERP go-live date. We had announced the go-live date to the trade so that they could plan ahead for it. We're also raising our adjusted EBITDA guidance to at least $115 million for the full year 2025, an increase from our previous guidance of at least $110 million. As we move into the fourth quarter and have good visibility for the remainder of the year, we now expect a bit less margin pressure in the second half of the year from tariffs and promotion. While the tariff situation remains fluid, we are seeing more modest impacts than we had originally expected. Additionally, our increased promotional activity is going as planned now that supply constraints have largely been resolved. Finally, we now expect fiscal 2025 capital expenditures of $80 million to $100 million. We continue to construct both production lines at our Seymour facility simultaneously, along with on-site cold storage. The $10 million reduction versus previous guidance reflects some timing updates for the Seymour facility and some postponed projects at ECS in Springfield in order to focus on the digital transformation go-live. As previously indicated, we will have elevated CapEx spend in 2025 and 2026 because of construction of our new facility in Seymour, Indiana, the newly installed production line at ECS, Springfield, the construction of accelerator farms and our digital transformation project. We expect to fund our current plans with existing cash and operating cash flow and continue to project that every dollar of CapEx investment in the Seymour facility will generate $5 of annual revenue capacity. Let me also touch a bit more on the ERP implementation. We turned on our new ERP system at the beginning of the fourth quarter on September 29. As planned, the new system is working very well. We put a great internal team in place at a realistic time line with multiple test iterations and partner with the right implementation vendor. As is common with any system implementation of this complexity, we are now in a planned hypercare period in the fourth quarter. During this hypercare period, we budgeted additional resources to support operations at ECS and address any issues as they arise. That said, given that ECS had to learn to operate using new processes and software tools, the ERP start-up slowed down production for the first 2 weeks of the fourth quarter, but that was always part of our plan and therefore, has had no impact on our guidance for the full year. However, you can see the impact in the most recent scanner data. Following this expected temporary slowdown, the business has quickly bounced back, and we are now operating at pre-go-live shipment levels. Before I hand the call back to Russell, I would like to mention that we will hold an Investor Day on December 16 in Springfield, Missouri. In addition to an update from management, we will tour ECS, including the third production line and showcase the new cold storage facility. We hope that you can join us. And if you're interested in attending, please reach out to Brian Shipman. Now let me turn the call back to Russell. Russell Diez-Canseco: Thank you, Thilo. With strong fundamentals, a resilient supply chain and expanding brand reach, we're confident in our trajectory into 2026. As I mentioned at the start of the call, I just returned from an all-hands meeting, and I'm always so energized by being with the entire crew in person. The organization's values are as strong as ever, and our crew continues to raise the standards for the Vital Farms brand and to drive the organization forward. Looking ahead, we believe we remain structurally advantaged with significant long-term opportunity. Our brand of eggs still represent a small fraction of the total egg market, giving us substantial runway for growth. Consumer awareness of animal welfare and food sourcing continues to increase, and Vital Farms has established itself as the trusted leader in this space. The capacity investments we're making, the operational excellence we're demonstrating and the brand strength we're building create a powerful combination. We're building a durable, scalable business model that can deliver consistent results for the long term. Every decision we make and every investment we prioritize is in service of our mission to become America's most trusted food company. The progress we're making in 2025 represents meaningful steps toward that goal. Once again, we thank you for your time and your interest in Vital Farms and for the confidence you've placed in us with your investment. We look forward to seeing many of you at our Investor Day in December. With that, we're happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Robert Moskow from TD Cowen. Robert Moskow: Welcome to Brian. I wanted to know if you could get -- dive a little deeper, Thilo, into the volume in the quarter, up 19%. How much of that is from like filling up inventory at customers? And how much of that would you consider like sustainable demand growth from a consumer standpoint? And then also on the price/mix, which was a lot higher than I thought. Is there a mix component to that, that's unusual that you might want to dig into? Thilo Wrede: Yes. Rob, thanks for the question. So on the volume, I would argue this is all sustainable volume growth. This is not about filling retailer inventory. There might have been maybe a bit at the beginning of the quarter. But keep in mind that first half of the year, our volume growth was constrained just by our limited supply of eggs. And the demand was always there. Now we are in a much better position to fill the demand. And the way we've talked about growth progression sequentially throughout the year that every quarter, we would have higher growth in the previous quarter, higher volume than the previous quarter. We continue to see that. And so with that, this is all sustainable growth and driven by demand and not filling retailer channels. On the price/mix question, yes, it was slightly better than what we had initially planned for the quarter. It was really a function of channel mix, SKU mix for us. We dialed back promotions a bit in September. We didn't want to have a lot of promotions out in the market as we went into the ERP implementation at the end of September. We knew ECS would start up slowly afterwards. And so we were dialing back promotions that helped a bit. And so for -- looking forward next quarter, price/mix should probably play a slightly smaller role than it did this quarter, but volume growth will continue to improve. Robert Moskow: Okay. But just to clarify, volume up 19%. The retail tracking data doesn't show it quite so high. So as we look forward to 2026, is -- that's the reason I'm asking is like is high teens volume growth still conceivable in '26 based on what you see? Thilo Wrede: Yes. I don't want to get into guiding '26 already. But the growth algorithm that we have built for ourselves, it assumes continued healthy volume growth. Keep in mind, we are less than 3% of the volume of the entire egg industry in the U.S. I think we have plenty of room to continue to grow. We are putting the capacity in place. Russell talked about the number of farms that we recruited in the quarter, approximately 75 farms that we added. And so with that, we're putting all the pieces in place to continue volume growth at a very healthy level. I don't want to commit yet to a number, but I would argue third quarter was not an outlier. Operator: Your next question comes from the line of Jon Andersen, William Blair. Jon Andersen: Congratulations and welcome, Brian. I guess I wanted to ask about the additions in the -- farmer additions in the quarter. You kind of stepped up farmer adds sequentially through the year from 25 to 50 last quarter to 75. And I'm just trying to kind of get a sense for to what extent that is just kind of serendipity in terms of farmer availability versus deliberate as you kind of now have the third line installed in ECS and are looking to kind of enter '26 with increased supply capabilities? Russell Diez-Canseco: Jon, great question. So yes, we had a really strong quarter in terms of adding new farmers. And I think it speaks to the success that our network of farmers is having working with us, the strong reputation we have in the marketplace. And as we described earlier this year, sort of our increased capacity to vet and add great new farmers. The number is going to -- the number of farms we add each quarter will see some fluctuation quarter-to-quarter based on timing, various inputs to timing. But in general, we continue to scale over a long period of time relative to the growth that we anticipate in the months and years to come. Jon Andersen: Okay. And as a follow-up, we noticed that your TDP growth distribution growth picked up nicely in the September quarter. I'm assuming there are multiple factors, obviously, that go into that, your supply situation, ability to sell in more items to your retail customers. But it still looks like there's a long way for you to go to, let's say, establish an assortment at your big retail customers that's maybe comparable to some other brands in the category. Could you just talk a little bit about your selling efforts, what you experienced with resets this fall and how you're thinking about distribution opportunities in '26 as well given the better supply situation? Russell Diez-Canseco: Thanks, Jon. Yes, I think very consistent with our approach to so many things, we're really intentional and transparent in our relationship with our retail partners. And so as you mentioned, we have, for the last year or so, planned on this expanded level of egg production and processing capacity that we're now seeing come to fruition. And so that's enabled us to work with our retail partners about expanding distribution where it makes sense for them based on our increased availability of the products that they want for their sets. So it is gratifying to see that show up in expanding points of distribution. And we'll continue to be, I think, very measured in our approach so that we continue to do our best to match growing supply with growing placements and growing velocities. And as we continue to invest in the brand, there's strong pull-through, as you can see in our velocities, which continues to ensure that this is an important part of a retail exit. Operator: Your next question comes from the line of Megan Clapp at Morgan Stanley. Megan Christine Alexander: I wanted to follow up on Rob's question on the fourth quarter. So based on the guide and your comments, it does seem to imply that you're expecting just a bit of an underlying acceleration in volumes if we account for that pull forward, Thilo, you mentioned and your comments that price/mix maybe decelerate a bit. Obviously, the scanner data was helpful commentary in terms of what we've seen more recently. But could you just help us frame your expectations for volumes and what's driving that underlying acceleration implied in the fourth quarter? Thilo Wrede: Yes. Fair question, Megan. It really is a function of what Russell just talked about, right, great [indiscernible], great partnership with retailers, continued strong demand from consumers. And then on top of that, we just have better supply, the farm recruiting that we did last year at the beginning of this year that is now -- those eggs are now available to us to sell. The third line that came online at the beginning of October that increases the capacity that we have at ECS. And so we are now getting to a point where we have the egg supply, we have the processing capacity and the demand is there. So now we can fulfill more of that demand. And those are the conversations that we have with our retail partners that we see demand out there that we want to fulfill that demand, and that allows us to then have very constructive conversations about selling. Megan Christine Alexander: Awesome. Helpful. And then just a follow-up on pricing. I wondered if you could comment on what you're seeing in terms of price gaps and elasticity. I think last quarter, you said that price gaps had widened, but were within an acceptable range. It does seem like there's been some reports of avian flu, though it seems more contained and maybe gaps are widening a bit as that's kind of playing out. But as we look at the scanner data, your volume share gains are also accelerating. So just wondered if you could just talk about the dynamic and kind of what it's telling you about elasticity and consumer behavior. Thilo Wrede: Yes. We keep watching price gaps and this answer won't be very different from what we've said in the past, right? We keep watching price gaps. We want to make sure that we know where other players in the industry are. But ultimately, consumers who buy our products, they probably don't make much of a price decision. It's about the values that the brand stands for and that those consumers identify with. And so price gaps, yes, they have widened a bit probably even since we last talked a quarter ago. Yes, we are seeing signs of avian flu, especially in the northern parts of the country. I don't think so far, it has really impacted retail prices. We'll keep watching them. But ultimately, what drives our growth is not price gaps, but it is -- I think a big part of it is like the tailwinds with consumers caring more where their food comes from and how it's being produced. And that ultimately is a tailwind that benefits us, and it's not really driven by price gaps widening or narrowing. Operator: Your next question comes from the line of Scott Marks from Jefferies. Scott Marks: Congrats on a nice quarter. I wanted to just come back to the question of distribution that's been discussed already. I know in the past, you've talked about how the business is already in so many doors and you kind of see more of the growth from here coming from getting that extra item, that extra SKU on shelf. So just wondering if you can give us an update on how you're thinking about that as we head into '26 in terms of the split between new doors versus new items on shelf. Russell Diez-Canseco: Thanks. Great to be with you today. I think our stance is very consistent with where we've been throughout the year, which is we are in about 24,000 doors and are largely in some of the highest-performing retailers in the U.S. And our path to growing is largely with them, partnering with them and continuing to help them meet their goals for their consumers and for their brands. And you're right, there's still a lot of room to continue to add products to their doors, which we do at a judicious pace based on our expectations for the ability to service that business. So I wouldn't expect new doors to be the primary driver. I think it's additional items in each door that will be our growth opportunity as well as just general pull-through, the velocity from existing items. Scott Marks: Appreciate that. And then next question would be your shipping and distribution expense, although it came in a little bit higher year-over-year, I think still came in below what some folks were looking for. So just wondering if you can help us understand maybe what was the driver of that and how we should be thinking about that expense item moving forward? Russell Diez-Canseco: Yes. I think the biggest driver there is rates. So as we are all watching the macro environment and backdrop, and we're seeing some slowdown in some parts of the economy, that is creating a surplus of trucking availability, which is working to our benefit at least for the moment. Thilo Wrede: And Scott, let me just add to that, just a heads up that fourth quarter tends to be the highest unit cost for us for shipping and distribution simply because freight rates go up in the fourth quarter around the holidays. So sequentially, I would assume that there is an increase in distribution expenses. This year might be a bit of an outlier to what I just said that fourth quarter is the highest unit rate because of first quarter volume being unusually low for us. Shipping was a bit less efficient back then. So fourth quarter might come in higher than where we were Q3 on a per unit basis, but still better than what we had first quarter. Operator: Your next question comes from the line of John Baumgartner from Mizuho Securities. John Baumgartner: Russ, you noted in the past a very long conceivable runway for growth from the pool of potential new farmers that's out there. And I'm curious, given the volatility and uncertainty in the farming community year-to-date between tariffs, exports, low prices for row crops, I'm curious what you're seeing in terms of these conditions maybe enhancing the interest among farmers or accelerating the adoption of pasture raised production given better visibility into a domestic market, higher returns versus current operations. I mean has that been a factor at all in the year-to-date farmer pickups you're seeing? Or could it be a factor in 2026? Russell Diez-Canseco: Yes. It's always been important to us that we're creating meaningful economic opportunities for small family farmers in this country. And as you're alluding to, they often lose at the end of the movie. It's not -- it's definitely not easy to work and the economics of farming seem to be getting tougher every year. So we are really, I think, centered on that value proposition. It's really important to us that our farmers win when they work with us and they do their part. It continues to be an important part of the value proposition for them. I can't say that I'm seeing an acceleration of interest. We've talked in past about there being plenty of interest and a strong pipeline of prospective small family farmers, and that continues to be true. And our job is just to make sure that we have a pipeline of really great farmers in the right part of the country who really believe in what we're doing and want to be a part of it, and we continue to see strong interest. John Baumgartner: And then to follow up on the distribution growth and the velocities. The TDP growth has accelerated nicely throughout the year with the increase in supply. But I think more recently, the volume velocity has inflected positive since maybe like the middle of the summer. And I'm wondering if you could delve into that a bit more, this inflection in velocity. Is that largely reflective of a shift favoring more medium or heavy buyers? Is it more reflective of a change in business mix between retailers and channels? Just any thoughts there. Russell Diez-Canseco: Yes. The first thing I'd call out is, as we've been discussing, we've been bringing on meaningful expansion of both egg supply from farms and processing capacity at Egg Central Station. In Q3, we didn't just go live with our new ERP system as part of the broader digital transformation effort. We added a significant number of new farms, and we added and brought online the third production line at Egg Central Station. And so a lot of what you're seeing in the data is our increased ability to meet the existing needs of our consumers and retail partners. And that's an exciting place to be. Operator: Your next question comes from the line of Matt Smith from Stifel. Matthew Smith: Thilo, the fourth quarter guide or the implied fourth quarter guidance suggests margins still nicely above the 2027 target despite some hypercare spending as you called it. Is the level of promotional support and marketing at appropriate levels as you exit this year? Is there an opportunity to flex that higher as you see strong household penetration and awareness gains? And one other consideration, as you fill the new production line at Springfield, should that be a headwind to margin exiting the year? Or is that going to achieve a throughput that mitigates that? Thilo Wrede: Yes. Great questions, Matt. So on promotional and marketing spending, we have said, I think, for a few quarters now that promotional spend, meaning trade spend would be highest in Q4. That continues to be the case. That continues how we plan the year. And it's simply a function of fourth quarter, we don't worry about the ERP implementation anymore. The third line is online and so on. We have the supply to support promotions. And with that, we're really focusing promotions in Q4. Marketing spend, we're probably year-to-date at a very appropriate level for us. Year-to-date, marketing spend was about 5% of net sales. Maybe Q4 will take it up a little bit. But we have talked about that marketing spend for the full year will be roughly comparable to last year, where it was 5.3% for the full year. So that would imply that maybe marketing spend in Q4 is going to increase a bit compared to the first 3 quarters of the year, but not by any dramatic amount. And then the question on third production line, is it going to put pressure on margins or not? I would argue, Matt, that we have been staffing up for that line throughout Q2 and Q3. We wanted to bring people in early in order to make sure that by the time the line comes online, they're trained and they know what they are doing. So now we have the crew in place and now we can actually get the volume off the line. And so if anything, the third production line should be margin enhancing for us in the fourth quarter compared to what we have seen in the third quarter. Matthew Smith: And as a follow-up to your comments about incremental items in existing doors. In the past, you've talked about some of these incremental items being a mix tailwind as you get more premium items on the shelf. Is that still the case today? Or has the assortment changed as we think about some of the 6 counts of medium eggs and other items that you've introduced in the past? Russell Diez-Canseco: Yes. I think the biggest trend that continues to be true is that our organic products are growing faster. And that's, I think, largely driven by the fact that they are a more recent addition and therefore, earlier in the growth curve in so many of our mainstream retail partner shelves. So that's a nice tailwind, I think, from a mix perspective. It also increases our average item price, which is supportive of the revenue capacity from our infrastructure. Operator: Your next question comes from the line of Eric Des Lauriers from Craig-Hallum. Eric Des Lauriers: Congrats on another very impressive quarter here. Just one question for me, looking to drill down a bit more into consumer behavior these widening price gaps. So great to see the continued strength in demand. It's clear your existing customers are very loyal. The journey from trial to repeat to heavy user is consistent. But I'm wondering if you're seeing any impact on trial as a result of the widening price gaps? Russell Diez-Canseco: Thank you. At this point, no, although as we've said, we continue to bring on more capacity and more supply. And so I think that only enables more trial and enables us to kind of catch up to that continued increase in awareness that we're driving with our marketing efforts. But in general, what we've learned is that consumers don't just buy our eggs, they buy into what we stand for. And yes, there's some uncertainty in the broader environment and maybe with price gaps on the shelf, but our business is growing because people want to know where their food comes from and that trust and loyalty has kept our demand incredibly steady. Thilo Wrede: And Eric, I would add to that, we've always talked about that we use marketing dollars to drive brand awareness, and we have obviously seen some very great results there over the last 12 months with brand awareness improving by 8 points. And then we use promotional dollars to drive trial, right? We like that promotion on the shelf because we get that big yellow sticker on the shelf that then catches the consumer's eye. And that's often when the consumer tries us for the first time. So when I earlier talked about that we will increase promotional spend in the fourth quarter, that is really to drive trial. We now have the supply to Russell's point, we have the brand awareness. And now we want to use promotions to drive trial to get new households into the brand. So if over the next 3 months, you see an increase in our promotional spend, it's not a reaction to price gaps moving one way or the other. It really is a function of us having the supply and now the ability to get new consumers to try the brand for the first time and then turn them into repeat customers. Operator: Your next question comes from the line of Ben Mayhew from BMO Capital Markets. Benjamin Mayhew: Welcome, Brian. I guess I'll start with, can you talk about the impact of high competing protein prices? And do you see that driving more demand into eggs, which are relatively more affordable on a per serving basis? Russell Diez-Canseco: Yes. I think that's an open question, and we've certainly seen some reports that as consumers are looking for -- to stretch their grocery dollar, they're looking at more affordable sources of nutritious food. And eggs have always been a very affordable whole food that's packed with protein and the things that consumers want. That said, we don't have any unique insights into trade down, and we're not seeing strong evidence of that being an important driver of our growth at this moment. Benjamin Mayhew: Okay. That's fair. And then on Slide 12 in your deck, your average items sold has once again surpassed your average weekly dollars. Can you explain why this may be an important indicator of your volume-led strategy and ability to manage supply versus demand over time? Thilo Wrede: Sorry, Ben, I'm processing the question right now. I think the short answer there is we continue to drive distribution at retail by getting more SKUs on the shelf. And as we do that, we continue to increase the velocity of the items on the shelf, right? So we are not at the point yet where we're adding a marginal SKU that dilutes our velocity on the shelf. It's not a linear expansion on those metrics. There -- you'll see some peaks and bumps there. But over time, I think the statement I just made that we're driving both velocity and average items distributed, I think that holds true. So if you look at the chart in the deck, the page you referred to, third quarter average items sold maybe grew a bit faster than dollars per average items sold. But I would chalk that up to just -- as I said, it's not a linear path that we are on. But over time, both metrics grow at the same time. Sometimes one grows faster than the other. But I think the statement of we can grow both at the same time, we are not adding the marginal product yet, I think that holds true. Russell Diez-Canseco: And what I might add to that is that -- and we've talked about this on prior calls, in many of our retail partners, we are what we would describe as underspaced. We've got terrific high-performing products and often the amount of space we've got in their set is smaller -- we have a smaller share of space than we do share of revenue from their egg set. And so when we add an item, it is also an opportunity to provide more supply and presence of product on the shelf to meet the growing demand for our brand. And there's a lot of runway in that regard. Operator: Your next question comes from the line of Sarang Vora from Telsey Advisory Group. Joseph Feldman: It's actually Joe Feldman on for Sarang today. I had a quick question about CapEx. I think, Thilo, you mentioned that there would be a little bit of a -- I guess, because of timing, there would be a little lower this year. And I'm wondering, does that just get made up next year and how you guys are initially thinking about CapEx for 2026? Thilo Wrede: Yes, Joe, good to have you on the call. Yes, it is just a timing shift from this year into next year. We took the guidance down by $10 million. And what we talked about was that work in Seymour, there's a bit of groundwork that we have to do that is slowing down the construction phase by a few weeks. And then the other part is there's a project at ECS that we put on hold. We didn't want to overtax ECS with changes around the ERP go-live and the third line coming online. So we wanted to reduce the amount of change that we're doing at a single point of time at ECS. And so with that, we delayed this project at ECS into next year. In other words, the CapEx spend that we have planned over a 2-year period for '25 and '26 is unchanged. We're just moving a little bit more into next year. But it's not any reflection other than that. It's no reflection on how we think about projects or importance of projects. Joseph Feldman: Got it. That's helpful. And then this might be a little bit more of a technical question. But with the ECS, and I guess we may see it at the analyst event. But I'm just curious, how does the division of the work or the labor happen among the 3 lines? Like is one line dedicated to just, I don't know, regular eggs versus organic eggs? Or like how does -- I guess, how do you run the different lines? And how -- I understand how it increases capacity, but how does that all kind of happen, I guess, is my question? Russell Diez-Canseco: That's a great question, and we look forward to showing you it live at our Analyst Day. But the thing that's exciting about this third machine, it is a slightly smaller machine than the first 2, which is why our reported revenue capacity doesn't grow by 50%. And what that means is that, that machine is great for a shorter run time product. Essentially, it allows us to dedicate the first 2 machines to longer run time product lines, our main top 4 SKUs. And then we can use the new machine to focus primarily on our specialty SKUs, which have lower volumes. That really increases our efficiency, and we're excited to see that sort of productivity improvement over time as we work our way into having all 3 up and running. Operator: That concludes the question-and-answer session. I'd now like to turn the call back over to Brian Shipman for closing remarks. Brian S. Shipman: Thank you, and thanks again, everyone, for joining us today and for your continued support. Please reach out directly with any follow-ups or if you'd like to attend our Investor Day in December. With that, have a great day.
Operator: Good day, and welcome to the Solaris Energy Infrastructure's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead. Yvonne Fletcher: Thank you, operator. Good morning, and welcome to the Solaris Third Quarter 2025 Earnings Conference Call. Joining us today are our Chairman and Co-CEO, Bill Zartler; and our Co-CEO and Director, Amanda Brock; and our President and CFO, Kyle Ramachandran. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks. We also encourage you to refer to our earnings supplement slide deck, which was published last night on the Investor Relations section of our website under Events and Presentations. I would like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release, which is posted in the News section on our website. For more details on the company's earnings guidance, please refer to the earnings supplement slide deck published on our website. I'll now turn the call over to our Chairman and Co-CEO, Bill Zartler. William Zartler: Thank you, Yvonne, and thank you, everyone, for joining us this morning. Solaris had a great third quarter, achieving record levels of quarterly revenue and profit. Our strong results demonstrate that we are executing well and are also showing significant progress on our growth. Solaris is at the center of what appears to be a massive and growing market opportunity. Demand for reliable and efficient power generation is accelerating as data center investment and associated power demand continues to grow at a scale and pace that is providing significant attractive growth opportunities for Solaris. Many data centers now require more than 1 gigawatt of electricity demand per site, which, in some cases, represents only the initial phase of what is likely to evolve into a multi-gigawatt facility. Many of these key artificial intelligence players are now planning numerous locations of this size with multiyear development plans. Power is a key bottleneck for many of these projects. Grid delays, extended equipment lead times, regulatory mandates and surging demand are leading data center developers and hyperscalers to select locations where they can quickly secure significant power for multiple years. Over the course of the last 18 months, Solaris has positioned itself to provide critical infrastructure and services to support this massive investment cycle. In that short time, Solaris has quickly become recognized as a leading power solutions company. This is attributable to our successful track record of delivering a scalable, reliable and flexible power solutions offering. In order to continue our growth trajectory, we must execute well on all aspects of the business. This includes growing a capable team, while maintaining our culture, developing a strong balance sheet and creating power offerings that optimize capacity, timing, capital and flexibility. The optimal power solutions for our customers will likely vary based on the application, scale, location, capital efficiency and importantly, the timing needs of each unique project. Solaris is in a position to provide our customers with the most appropriate solution or solutions for their range of needs at any particular site. We can provide multiple generation sources to our customers as well as gas supply infrastructure, power distribution equipment and resiliency equipment such as battery energy storage systems or BESS. Our solutions can include a combination of natural gas turbines, natural gas reciprocating engines, grid power, BESS, fuel cells and other renewable technologies. It is quickly becoming apparent that an all-of-the-above generation approach could be necessary to meet the rapidly growing power demand. Since we updated you last in July, Solaris has achieved many strategic milestones that have positioned us for substantial growth. First, we continue to demonstrate strong execution. We operated approximately 760 megawatts during the third quarter, up from approximately 150 megawatts only a year ago. Our growing proprietary operational know-how and strong track record of uptime position us as a reliable provider of power. We began successfully providing primary power to a second data center during the third quarter, highlighting our ability to again rapidly deploy power solutions supported by effective collaboration between our employees, our supply chain partners and our customers. Second, we secured additional capacity to position our business to enable us to react swiftly and comprehensively to the numerous meaningful commercial opportunities we are pursuing. With the order of 80 megawatts announced a few weeks ago and an additional order of just over 400 megawatts, we now expect to have pro forma generation capacity of approximately 2,200 megawatts by early 2028, compared to our prior plan for 1,700 megawatts by the first half of 2027. Third, we raised significant capital in the form of a new convertible notes to pay off our existing term loan, providing us the financial and operational flexibility to continue our growth. Kyle will share more detail on this shortly. Fourth, our commercial pipeline is deep and growing, as we are currently evaluating a number of potential long-term opportunities. The combination of growing project size, tenor, timing and reliability has resulted in an increasing interest in solutions like ours. Our recognized track record of execution and investments we've made in capacity has positioned us at the forefront for many of these opportunities, and we are confident that the additional capacity we have on order will convert into long-term contracts. Fifth, we have expanded our capabilities and customer base through M&A. In the third quarter, we acquired and welcomed HVMVLV, provider of specialty voltage distribution and regulation equipment and engineering services. HVMVLV stands for high voltage, medium voltage, low voltage, just so you know. Bringing these capabilities in-house further strengthens our power solutions offering by giving us exposure to new high-growth end markets. Importantly, these balance-of-plant solutions are essential across all electricity use cases regardless of generation source. Our acquisition strategy demonstrates how we are strategically both vertically integrating and expanding our technology offering, further enabling us to offer a truly power-agnostic approach to meet our customers' power needs. Finally, we have welcomed additional talent to complement our existing team and drive further commercial and operational success. We've added high-impact team members to our engineering, operations, commercial and support functions. We've also enhanced our executive leadership team with the addition of Amanda Brock as my co-CEO. Amanda has been a trusted partner of mine for the last decade and brings a proven complementary skill set to the office of the CEO. She has an extensive background in building and managing infrastructure, including both water and power and in leading teams to success. These capabilities come to us at a critical time, as we rapidly scale our operations for the significant growth ahead. As I've been asked many times, I would like to make it clear that I have no current plans to retire. This co-CEO appointment is about covering more ground and accelerating our growth. Moving now to a discussion of our Logistics Solutions segment. I've often referred to our Logistics Solutions business as the engine that could. While less than 1/3 of our business today, we would not have the success we've had in Power Solutions without the stable cash flow provided by this business segment. This business also is a critical piece of the natural gas value chain required for the Power Solutions segment. We also continue to earn the operational and financial returns on the investments we've made in our logistics systems, which continue to help drive efficiencies for our customers. For example, we've increased our deployment of multiple Solaris systems on customer locations, which enables more efficient throughput of raw materials, and in turn, helps our customers accelerate their development schedules. Year-to-date, we've deployed multiple Solaris systems on 90% of our customers' locations, which compares to approximately 60% a year ago and 40% the year before that. We believe that our technology portfolio positions Solaris as the partner of choice for operators and service companies pursuing the industry's leading-edge completions designs. During the third quarter, Lower-48 oil and gas industry activity contracted to what we believe reflects a near-term trough as evidenced by early fourth quarter activity levels. We believe this segment will continue to generate significant free cash flow, while providing a highly reliable and efficient system for our customers. In summary, we are pleased with both the operational and commercial advancements achieved during the quarter. We are confident that the growing demand for our power services will continue, and we are demonstrating that confidence through our incremental generation orders as well as our continued inorganic investment. We're also taking deliberate steps to ensure that we have the right balance sheet and the right people in place to position Solaris for continued growth. As has been emphasized by our country's leaders, winning the AI race is an imperative strategic objective for the U.S. Solaris can play an important role in advancing this objective by using its technology to efficiently generate and deliver large-scale, reliable, clean energy. With that, I'll turn it over to Kyle. Kyle Ramachandran: Thanks, Bill, and good morning, everyone. Solaris' third quarter demonstrated another quarter of significant growth and solid execution in our Power Solutions segment as well as continued execution and strong free cash flow generation in our Logistics Solutions segment. This growth and execution were driven by the dedication and skills of our team, the continued support of our customers and the dependability and flexibility of our suppliers. During the third quarter, Power Solutions contributed more than 60% of our revenue and over 3/4 of our segment-level adjusted EBITDA. These results are attributable not only to a robust industry backdrop, but also to the value of the Solaris offering and the team's execution. As Bill highlighted, in addition to the previously announced 80 megawatts we recently ordered, we have also secured additional generation capacity for a total of approximately 500 megawatts. This brings our pro forma expected generation capacity to approximately 2.2 gigawatts by early 2028, which compares to our prior order book of approximately 1.7 gigawatts. As previously announced, concurrent with our recent convertible financing, we expect the first 80 megawatts of our new orders to be delivered by year-end. The remaining delivery schedule is concentrated around the second half of 2026 and the second half of 2027, with final deliveries of this most recent order occurring in early 2028. Capital expenditures associated with the 500 megawatts total approximately $450 million, consisting mostly of turbines and associated emissions control equipment. Once equipment is contracted at a particular site, we expect to add additional project scope to accommodate the unique specifications of any given location and customer need. This increased content would be expected to generate returns on invested capital comparable to the economics of our current Power Solutions offering. As a result of our recent financing and the ongoing cash flow generation ahead of these deliveries, we have sufficient cash to fund these incremental generation orders. In early October, Solaris raised approximately $748 million in the form of senior convertible notes due 2031 with a 0.25% coupon. The proceeds from this offering were used to repay our existing term loan and will be used to fund the 500-megawatt order. This financing also unlocks significant flexibility for Solaris, given the removal of restrictive covenants as well as the meaningful incremental near-term cash flow it unlocks. Over the next 4 quarters, we now expect to save approximately $45 million in the form of interest and amortization savings as compared to our prior capital structure. Turning now to a review of our third quarter results and our outlook for the next 2 quarters. During the third quarter, Solaris generated revenue of $167 million and adjusted EBITDA of $68 million on a consolidated basis. Our adjusted EBITDA grew 12% from the prior quarter and increased more than 3x as compared to the same quarter last year, driven by the acceleration of our Power Solutions segment. The primary driver of growth versus the prior quarter was continued activity growth in Power Solutions, which more than offset a modest decline in Logistics Solutions activity. We generated revenue from approximately 760 megawatts of capacity during the third quarter, which reflects an increase of more than 27% from the prior quarter. This increase in activity was driven by increased and accelerated demand from our customers, which we are meeting using a combination of new turbine deliveries as well as selective short-term sourcing of third-party generation capacity. Segment adjusted EBITDA for the Power Solutions segment was $58 million, a 27% increase from the second quarter. We expect segment adjusted EBITDA next quarter to be relatively flat as a full quarter's benefit from the ramp in operated megawatts and the HVMVLV acquisition is offset by a mix impact from lower spot utilization and commissioning work. While we expect the recent order of 80 megawatts to have a limited impact on fourth quarter results given the expected timing of deliveries, we expect this incremental capacity to drive first quarter 2026 segment adjusted EBITDA for Power Solutions higher sequentially relative to the fourth quarter of this year. In our Logistics Solutions segment, we averaged 84 fully utilized systems, a decline of 11% from the second quarter. We believe the third quarter represents a near-term bottom in drilling and completion activity and expect our segment adjusted EBITDA to improve slightly in the fourth quarter. Netting these factors and considering corporate and other expenses, total adjusted EBITDA guidance for the fourth quarter is now $65 million to $70 million, up from the prior guidance of $58 million to $63 million and relatively flat from the third quarter. We are also introducing our first quarter 2026 total adjusted EBITDA guidance of $70 million to $75 million. Accounting for expected longer-term tenor on our fully delivered 2,200 megawatt generation capacity and our recent acquisition, our new estimate of pro forma earnings of the company could be over $600 million before considering any additional scope or growth with our existing customers or new opportunities. We are excited about the accelerating growth of the industry and about the significant strategic steps we've taken to maximize our opportunity to continue to grow. Our priority remains to deliver strong returns on invested capital, as we continue to develop our Power Solutions business, while sustaining leading market share and strong cash flow generation from our Logistics Solutions operations. With that, we'd be happy to take your questions. Operator: [Operator Instructions] The first question is from Dave Anderson of Barclays. John Anderson: I was wondering if you could talk a little bit about how you see the supply chain today. You're placing orders now for 2028 deliveries. Is this going to get stretched out a bit more than, say, a year ago? And I would imagine the competition for OEM slots has become substantially tighter in the last few months. I was wondering if you could talk about some of those challenges that you're facing as you look to build out the power business. William Zartler: I think you surmised it well, David. The supply chain is growing out. We are lucky to get the slots we have with our relationships, and we're exploring other avenues for getting power. Hence, I think what we referred to as multiple sources of generation to power these things, especially in timing-wise. And we're spending a lot of time on the distribution side and the equipment side. We had a team over in Asia last week looking at a couple of OEM flexibility options around how we get ahead of transformers and switchgear and breakers and those kind of things on a portable basis as well as for permanent equipment. So I think that's a very important part. As I said, we need to execute on all phases of the business and supply chain is clearly one of those phases that's really driving a lot of things today. Kyle Ramachandran: And I think that's also coming at a time where the customers are recognizing the sort of opportunity of speed here to build behind-the-meter solutions in a way that provides the right levels of reliability, the right levels of generation in a way that really aligns well with their strategic goals. And I think that's informed in terms of how we're thinking about expanding the fleet at this stage. The size of the prize appears to be growing at a rate where the sort of cost of poker, i.e., how much capacity you have available is needing to go up. And so what we're sort of -- what we're indicating here is the size of each of these opportunities is growing. And so we've added capacity here sort of second half of '27. And as we look at making further orders beyond this, you're spot on, the delivery dates are extended, but we've got a tremendous track record, I think, of finding unique ways to find capacity. We continue to benefit from a team that's got tremendous experience and legacy in looking at generation over decades all over the world. And I think that really positions us somewhat differently than maybe others in the market that are kind of just getting into it. So we've got literally decades of experience, both on the generation side as well as on all the distribution side within the company now that we're really able to benefit from. John Anderson: So I think there's actually a big distinction about how you're actually already managing the megawatts today. And you've talked about the balance of plant and how kind of the challenge is to actually manage this power is more than just owning it. You made that acquisition over the summer -- the HVMVLV, I did it, of the acquisition in terms of the balance of plant. I also noticed this quarter, the megawatts or revenue per megawatts increased about 10% this quarter. Are we starting to already see the impact on the balance of plant? Or is that more about efficiency and utilization of the equipment? And could you tell me how we should be thinking about modeling that going forward? Is that a number we should be kind of steadily increasing over time? Kyle Ramachandran: It's -- there's a lot of puts and takes in that. And I think if we specifically look at the third quarter, what we were able to do was to deploy a significant amount of additional generation that was sort of beyond what we initially guided to. And so we are benefiting in the third quarter with some level of contribution from some of our commissioning efforts. I think the fundamental returns on the equipment are still sort of in line with where we've indicated in the past. The other kind of puts and takes on it align with duration. And as we think about different customer mix and different duration mix, there could be some different ways of looking at, at returns. Operator: The next question is from Derrick Whitfield, Texas Capital. Derrick Whitfield: Congrats on your update. And Amanda, congrats on your appointment. For my first question, I wanted to focus more on the competitive landscape. With this announcement, it's clear that you feel confident in your ability to place your power generation capacity. With that said, to what degree did the recent announcements from Halliburton and Liberty change your view on the size of the growth opportunity for Solaris? William Zartler: We're having our own discussions and what others do don't necessarily impact it. I don't think that -- this is a very, very large market, if you look at the numbers, and it's going to require multiple companies to perform to satisfy the needs of the growing power demand. So I think it's -- that has not changed our outlook at all in any way. Kyle Ramachandran: Yes. And I'd say just to put it in context, so the 2,200 megawatts we're talking about here, to satisfy the leading-edge sort of incremental data center. I'm not sure that satisfies even 2 at this stage. So the sizes of these infrastructure projects continue to grow, to Bill's point, such that it's just a large market. Derrick Whitfield: Yes, fair point. And maybe just to build on that, based on the flurry of recent power AI development announcements across West Texas and the amount of BTC miners that are converting to data centers, do you guys see an opportunity to co-bid these developments with those operators to meet reliability needs of the end client? William Zartler: I think that's one of the points on the flexible generation here is that the distribution equipment and the packaging up of multiple sources and the way that gets run is something that I think we're developing a pretty good expertise on. And I think that will be -- the way some of this gets executed is a combination of multiple sources, whether it's excess grid power that a Bitcoin miner may have been using, whether they've got some on-site backup generation that flexes or -- and we put some new kind of permanent power or bridge to backup kind of power on site. I think it's going to really be what the ultimate solution looks like to the size of this activity and the timing needs that the industry has. Kyle Ramachandran: And our fleet, if you think about just max flexibility with respect to in general, the mobility of the actual equipment, also the size. These are medium-sized gas turbines that are able to be moved and rigged up quite quickly relative to some of the other larger equipment that may be more permanent in nature. And so to your point, as the opportunities shift around in terms of geography, we really benefit from that. And that also ties into our legacy business. One of the real keys to success of the 10-plus years track record of the legacy Solaris business has been the fact that we've had equipment that can go anywhere at a moments times notice. And so that's allowed us to be very nimble. And I think that will continue to be a paramount sort of culture tenet to our business. William Zartler: And I would add to the engineering team that is associated with the legacy business and our ability to take a look at this power generation business and modify equipment to make it more mobile. I think the oilfield led the way in developing and partnering to make the mobile turbines to start with and then the addition of mobility around the catalytic reforming technology, we've modified and built our own -- with our own in-house engineering mobile SCRs that pair up quite quickly, quite easily and minimize downtime for the emission control system. So I think that combination of engineering know-how and the focus on mobility and quick execution has been paramount to the continued success in both businesses. Operator: The next question is from Don Crist of Johnson Rice. Donald Crist: Given that I'm one of the only analysts that covered both Aris and Solaris, I have kind of unique impact or relation to Amanda. Just a quick question on the co-CEO role. Is it expected to be kind of the Biden conquer? Or are you all going to make kind of decisions together? And kind of second part of that question, Amanda, I know you've only been there a week or so, but your initial impressions on kind of how the team has put together and your initial impressions as you kind of get to work? William Zartler: I'll let you start there. Amanda Brock: Certainly, and thanks, Don. So look, I'm very happy to be here with this team. I've known Kyle since, I think, 2017, and it's great to still be side-by-side with Bill. And anybody who knows Bill and I and knows that we are different, but have very sort of complementary skill sets. So some of it is, and Bill will talk about it, divide and conquer so we can cover more ground and of course, not getting each other's way and make decisions that are going to enhance the effectiveness and to use Kyle's word nimbleness of the company. In terms of observations, actually, this is the beginning of week 3 because there was no downtime, and it is really drinking from proverbial fire hose. The speed at which this market is moving is unprecedented. And there are huge tailwinds and opportunities for us, as we focus on delivering these power solutions into a market where power is emerging as a critical bottleneck. The deals we are engaging on and the deals that I've gone straight into work on are real and tangible with very credible counterparties. We have a distinct advantage to have already demonstrated our ability to deliver. I mean we've been out there. We've been operating, and that just gives you a real perspective. And as Bill has repeatedly emphasized, we've got this track record of executing on large scale and getting larger data center projects and have developed know-how, software, proprietary processes that we can apply on new projects, and that is an advantage. So high-quality opportunities for continued growth. I'm very optimistic. I'm happy to be here, and there's one incredible road ahead of us. So Bill? William Zartler: As a divide and conquer, you just covered it all. So no need to double up. Donald Crist: I appreciate that color. And a big question coming into this earnings cycle is going to be whether or not you announced a new contract or not. But I think you have said in past calls and whatnot that you wouldn't order any additional equipment if you weren't close on another contract signing for a data center or a large project. Is that still the case? And I know you don't want to give specific timing, but should we assume something in the next 90 to 180 days that could kind of soak up all that equipment you have on order today? William Zartler: That is still the case, and your assumptions are pretty good. Operator: The next question is from Derek Podhaizer at Piper Sandler. Derek Podhaizer: Maybe just a bigger picture question. I want to discuss the type of advantage HVMVLV gives you when you're bidding on these large data center projects, and we're talking a gigawatt plus here. So obviously, there's a lot of companies out there going for this behind-the-meter power market. It creates a lot of confusion for investors, who's best positioned and what's a differentiating factor. Maybe you could just help us understand your differentiating factor versus your peers, I mean, including this integrated solution, which has been bolstered by HVMVLV. Just help us and investors how we should really think about that. William Zartler: I think you think about it from actual operations and skill sets and then when we add on power -- what comes out of the generator isn't what feeds the data center or any other utility. You have to regulate that power. You have to convert it to the right voltage level. You have to get it to what the building needs. You have to control lots of elements of that with switchgears and you got to protect it with breakers and switchgears. So the notion that the rest of that stuff really does drive the generation source. And as we mentioned, there's going to be multiple sources of generation to supply this demand because it's too fast and too quick. And as that happens, it's more and more imperative that you pair up the right set of electrical distribution equipment downstream of that. And so as an edge and the ability to engineer, design and operate those systems, I think we have a pretty unique advantage with that with respect to the turbines. It's the modeling of these businesses, and I think we set a little bit of a trap up on megawatts times dollar equals this times the multiples of value. But there's a lot more to this around protecting that business, building the moat around the operating processes and technology and the pieces of electrical equipment that blew it all together. So a house -- a set of bricks doesn't really work without the mortar, and that's the mortar in this business. Derek Podhaizer: Got it. That's helpful. And then maybe back to your comments about your all of the above power approach. Historically, you've been heavy on the turbines, obviously, the 5.7, 16.5, 38. But it sounds like you'll be exploring battery systems, potentially recips. Just could you help us understand kind of that all of the above approach and then maybe just your latest, the additional 400 megawatts, was that all turbines? Was that a mix of a different type of kit? Just maybe a little bit more color around that. William Zartler: Yes. And I think we will -- the view forward is the turbine is going to be the workhorse of the power generation industry. It's no different than the way the utilities work. The gas turbine is driving our system in this country of power. So that will be our workhorse. As we complement things for timing and flexibility, the turbines have unique curves with heat and altitude that change their output. And so pairing that up with an engine that doesn't have quite the turndown in the heat like a large reciprocating generation -- generator, and we're running them as part of the kit today. So it's not unique. It's a small piece. Does it grow slightly? I think we'll see it growing as part of the generation piece slightly going forward. Batteries are an important part of this. It comes down to what is the reliability that you're looking for in data centers. There's an element of this that they have to have virtually 100% reliability when it hits the cooling system to keep the buildings cool and the chips for melting down. The investment is enormous. So thinking about how batteries both provide protection against the volatile loads coming out of the chips as well as very short-term bridges as you flex with your redundancy built into the power grid. And not every data center is the same. And so there's a -- not a standard design gigawatt data center. They're built in multiple data halls. The data halls can be powered independently. They can be powered together. They can power the cooling systems different from the chip systems. And so the notion that it's just kind of one size fits all is there, and that's why -- one of the other reasons why the distribution part of this is so important, so you can match up what the actual data center power needs look like with the generation equipment. Operator: The next question is from Scott Gruber, Citigroup. Scott Gruber: You know some growth CapEx in your '27 outlook. Curious about the Stateline JV, once the 900 megawatts is deployed. Is the JV expected to send cash back up to Solaris? Or do you pay down the term loan? Or does that cash get recycled back into expanding the JV? Just some thoughts on how to think about the JV and the JV cash flow once the 900 megawatts is deployed. Kyle Ramachandran: Yes. Good question, Scott. I think there is a -- there's debt down at the JV, and so that does need to be serviced with respect to interest and amortization. But there's a fair amount of flexibility within the constructs of that debt instrument that do allow us to send cash up to both ourselves as well as our partner in that JV. Options with respect to what to do with that cash, the Board of the JV, which is composed of both Solaris and our customer can choose to distribute the cash or to your point, we can make a choice of keeping cash there and continue to invest at that level to provide additional power to that customer, which obviously has ongoing and growing power needs and demands. So a lot of flexibility in that structure, and we were able to obviously finance that at a pretty attractive rate with respect to the advance rate on the equipment. So that structure, we feel is going to provide a lot of flexibility and ability to drive returns for us. Scott Gruber: And then just some color on how you see megawatts deployed over the next several quarters and how you see the transition from your third-party re-rents to wholly owned capacity based upon the delivery schedule and what seems to be greater -- obviously, greater demand from the customer. When do you see kind of fully -- getting to kind of fully owned capacity in the field? Kyle Ramachandran: Good question. Obviously, that's continued to change and extend as we've added capacity into the order book. As we look at next year, there's really 2 legs of growth as far as operated capacity. The first is the JV getting stood up with respect to its permanent generation. And we are supporting the power needs of our customers that will ultimately be funded with the JV vis-a-vis some of the re-rented assets today as well as some of our own assets. So next year, we'll see the construction of roughly 900 megawatts of permanent power for the JV. And then we'll also see delivery of about 400 megawatts that was placed back in March of this year. So those are the 2 avenues of growth for '26. And then as we look into '27, it's primarily the order that we just placed. One small additional note, we did pick up some capacity in the fourth quarter of this year, which will have a full impact beginning in the first quarter of next year. So as we look at the full stood-up fleet, it's sort of a second half of '28, is sort of how I would look at it. Operator: Next question is from Jeff LeBlanc, TPH. Jeffrey LeBlanc: Bill, in the prepared remarks, you mentioned locations evolving to multiple gigawatt sites over the next several years. Given this opportunity set, could you help frame the size of your customer pipeline? And is it safe to assume that by the end of the decade, your operating fleet will be larger than 2.2 gigawatts? William Zartler: I think that the pipeline is enormous, and that's a technical term. It's -- there's just so much activity. It's frightening. I've never seen anything like it in my life. It's probably fair to say that we'll be beyond what we have on order today operating in a couple of years. Operator: The next question is from Michael Dudas of Vertical Research. Michael Dudas: Two questions. One, Bill, could you maybe share some of the circumstances surrounding the second data center order that you cited in the press release? And secondly, as you are negotiating regarding contract tenor, any further confidence thoughts on length? Is that still a sticking point given where people are expecting grid connections out to the future or other BTM solutions? Just want to get a sense if that's still part of the negotiations. William Zartler: I think the second data center that we stood up during the second quarter was known and predicted and it's rolling into our joint venture, Stateline Power LLC. So we have it running on a temporary power with full emissions control. And then it's -- we're constructing the gigawatt plus power plant starting really in the next quarter, rolling into next year as we ramp up the deliveries of equipment to roll into the permanent site for that facility. So that's up and running. We got it up and running very quickly over the course of the quarter, and it's stable, and we'll be rolling it into the permanent site really beginning 1st of January or so thereafter. What was the second question? Kyle Ramachandran: Contract tenor... William Zartler: Contract tenor. It's clearly morphing to longer term. I think the grid delays -- the announcement of grid delays, the magnitude of the power, the SB6 approach from the government coming up, the recognition that these guys are going to need this power for a while is really morphing average contract tenors out significantly from where the thought was maybe a year ago about what this business needed to be. So it's morphing into more of a behind-the-meter permanent power or permanent power to a portion of it becomes back up if the grid gets there at a lower cost. But I think there's a heightened sensitivity within the regulatory framework and the public about power prices going up and the notion that the behind-the-meter helps defray some of that, I think, is an important element that our customers are evaluating. Michael Dudas: I appreciate it. Just a quick follow-up. When you talk about behind-the-meter and the -- all the above approach that you've talked about throughout this call, could you maybe rank where other approaches are in solutions relative to what Solaris on the gas -- on your core gas turbine side is and how that may incorporate your lead time or your ability to kind of secure these projects relative to other solutions in the market behind you? William Zartler: Well, the other solutions are finding a specific grid location where there may be excess power and pulling that down. Most of that at this point, with the size of the data centers need some element of either backup or complementary prime power. And so as those sites or nodes that have -- may have excess power on the grid, they're getting filled up and that is getting scarcer and scarcer. And those are now being complemented by power solutions like ours. I think the others in the market that are doing this, I think the Williams team is a very professional organization. They run a lot of equipment and assets around the country, and they're doing it similar to, I think, the approach we're taking with equipment and long-term tenor contracts. And I think the market is recognizing that it will be powered on the increment by natural gas, whether that's actually over the next 10 years, whether that's a backup behind-the-meter or whether that's an additional utility-based big turbine running on the grid. So it will all be fired by natural gas on the increment for the stable power that's needed to run these data centers. Kyle Ramachandran: And I think just one small piece to add. When we allude to other sources of generation to complement our turbine workhorse, as Bill referred to it as, that allows us to extend the turbine capacity that we have today. In other words, if we're able to complement with a larger size or amount of gas recips as well as potentially fuel cells, that allows us to extend the turbine capacity that we have today on balance sheet to a broader amount of megawatts from a total demand -- from a data center perspective. So in other words, we've got, I would say, the critical piece that's got the longest lead time associated with it secured with the gas turbines. And if we're able to complement that with additional sources of generation, whether it be combined cycle plant that's getting stood up either interconnected to the grid or in an islanded mode or its recips or something like fuel cells, it gives us optionality to continue to extend to grow the 2,200 megawatts with not necessarily adding specific turbines inside of the sort of time frame where we could be bringing on other sources of generation. Operator: The next question is from Bobby Brooks of Northland Capital Markets. Robert Brooks: Congrats Amanda, on the co-CEO role. I just wanted to do -- have a quick follow-up for Kyle, mentioning how adding new power generation can kind of extend the core turbine power that you have on the balance sheet. I'm just curious in your future contract negotiations, is that worked into the contract where it's like, hey, we'll provide you 400 megawatts of power, but it's not specific as to what type of asset is generating that power? Just curious on that. Kyle Ramachandran: Sort of a mix of all, I would say. So I think the key asset we have today to engage with customers is our order book, as it sits today. But as we discuss with them, here's what it is, generally speaking, the needs are greater than that. And so as we're looking at putting together contracts, it's sort of step one, lock in what we've got on balance sheet. And step 2 is their demands ultimately are larger, and we're giving them options and flexibility around different levers to pull to increase the total capacity. So it also could be a combination of other gas turbines that we just -- we haven't secured to date. So I think every opportunity we're discussing, we've got a great somewhat of a starter kit for the customers' needs and additional capacity can be met with additional gas turbines, reciprocating engines or other forms of generation. So we've got the optionality. Robert Brooks: Got it. That makes a lot of sense. And then I was just hoping to get a bit more insight of how you guys have been consistently able to secure more managed megawatts near term in the last few quarters. Obviously, I can appreciate that you want to keep the specifics close to the chest. But could you maybe just walk us through at a high level how these opportunities arise and ultimately how you execute on them? And then the second piece is, is it right to think that the 160-megawatt sequential step-up was -- the majority of that was re-rented capacity? Or were you able to secure any early deliveries? William Zartler: So I think Kyle kind of mentioned earlier, we've got the MER team and the HVMVLV team has decades and decades of experience in the market globally, and we've scoured the market, both in the U.S. and internationally to find equipment that we could put to work mostly on a rental basis. We've evaluated purchasing some of it, and we might, but we have not done that yet. But it is really about our ability to go find those pieces of the puzzle and put them to work and have the distribution equipment ready to go to make it all work together. Operator: This was the last question. I would like to turn the conference back to Mr. Zartler for any closing remarks. William Zartler: Thank you. Thank you, everyone, for joining us today. I'm excited about the continued growth we've achieved to date as well as the growth that's to come. We're excited to see the Solaris family continue to grow both organically and through acquisitions. Our success is a testament to the dedication and hard work of our employees, the trust of our customers and the strong partnerships with our suppliers. Thank you for being part of the Solaris team. We believe we are just getting started and continuing to meet the industry's growing and urgent needs for comprehensive power solutions. We look forward to sharing our progress with you in a few months. Thank you. Operator: Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Armada Hoffler AHH Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on November 4, 2025. I would now like to turn the conference over to Chelsea Forrest. Please go ahead. Chelsea Forrest: Good morning, and thank you for joining Armada Hoffler's Third Quarter 2025 Earnings Conference Call and Webcast. On the call this morning, in addition to myself, is Shawn Tibbetts, President and CEO; and Matthew Barnes-Smith. CFO. The press release announcing our third quarter earnings, along with our supplemental package were distributed yesterday afternoon. A replay of this call will be available shortly after the conclusion of the call through December 4, 2025. The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks are made herein as of today, November 4, 2025, and will not be updated subsequent to this initial earnings call. During this call, we may make forward-looking statements, including statements related to the future performance of our portfolio, out development pipeline, the impact of acquisitions and dispositions, our mezzanine program, our construction business, our liquidity position, our portfolio performance and financing activities as well as comments on our outlook. Listeners are cautioned that any forward-looking statements are based upon management's beliefs, assumptions and expectations taking into account information that is currently available. These beliefs, assumptions and expectations may change as a result of possible events or factors, not all of which are known and many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the forward-looking statement disclosure in our press release that we distributed this morning and the risk factors disclosed in documents we have filed with or furnished to the SEC. We will also discuss certain non-GAAP financial measures, including, but not limited to, FFO and normalized FFO. Definitions of these non-GAAP measures as well as reconciliations the most comparable GAAP measures are included in the quarterly supplemental package, which is available on our website at armadahoffler.com. I will now turn the call over to Shawn. Shawn Tibbetts: Good morning, and thank you for joining us as we review Armada Hoffler's third quarter results. Before getting into the results, I want to thank our Board of Directors for appointing me Chairman of the Board effective the beginning of the year. I appreciate their confidence in me and our leadership team. We've made meaningful progress this year and have completed much of the hard work required to position the company for a strong performance over the next several years. We are [Technical Difficulty] excellence across the platform. Our teams are laser-focused on strengthening systems, streamlining processes in leveraging technology for data-driven insights to enhance decision-making and portfolio performance. My priority is to ensure the market properly recognizes the unique value of our portfolio as we enter 2026 as a more focused, simpler, stronger REIT, for the balance sheet positioned for growth. Our progress includes aligning the dividend with property level cash flows, refreshing the leadership team, replacing a director and sharpening our focus on core operations. We also aligned our 2025 guidance with the planned reduction in fee income to better highlight the strength and stability of our recurring property earnings. We are confident in the strategic actions completed this year and remain focused on repositioning our model offer for sustained growth and long-term shareholder value creation. Our near-term objective is to demonstrate and unlock the value embedded in our real estate through continued consistent execution and transparent communication with investors. The Armada Hoffler portfolio continues to deliver consistent NOI growth, underscoring the quality of our assets and the consistency of our execution. At the same time, we are making progress enhancing the balance sheet quality and proactively managing our capital base including leveraging capital recycling opportunities that strengthen long-term growth and financial flexibility. Our strategic foundation remains centered on quality, a core value that guides how we operate and allocate capital. We remain focused on maintaining a high-performing portfolio, optimizing property level performance and delivering reliable results quarter after quarter. The third quarter results were solid across our portfolio. As outlined in our earnings release, we delivered normalized FFO of $0.29 per diluted share, supported by consistent outperformance across our commercial asset classes with overall portfolio occupancy averaging 96%, including 96.5% in office, 96% in retail and 94.2% in multifamily. These results underscore steady demand and durable performance across all segments. Property level income continues to outperform our 2025 guidance, which contributed to beating consensus for the quarter. As we outlined in previous quarters, we adjusted our outlook for construction activity this year and remain on track with those revised projections. Higher NOI, offsetting the construction adjustments has allowed us to maintain a 2025 normalized FFO guidance target range, consistent with the original 2025 guidance target range, which we are narrowing to $1.03 to $1.07 per diluted share. This reflects our continued execution of the strategic shift away from reliance on fee income into an earnings stream predominantly reliant on higher-quality recurring property level earnings. Now let me take a few minutes and walk through our key sectors. From a broader market perspective, fundamentals remain supportive for retail. Vacancy remains close to record lows. New supply is constrained and retailers continue to show strong preference for high-traffic, open-air centers and grocery-anchored formats. According to Green Street retail pricing per square foot posted double-digit annual growth in the second quarter, reinforcing our bullish view of this asset class. Our retail portfolio continues to demonstrate strength and resilience, supported by a focused strategy of owning properties located within submarkets where we can leverage or create a competitive advantage. Across these locations, we actively extract value through leasing, tenant reconfiguration and redevelopment initiatives, positioning our centers to benefit from broader national trends in retail. For the third quarter, our retail portfolio continued to exhibit these strong fundamentals. Renewal spreads averaged 6.5% on a cash basis, reflecting continued demand. Foot traffic across our centers, particularly at mixed-use destinations like Harbor Point and Southern Post rose 13% compared to the prior quarter, demonstrating the success of our leasing and place-making initiatives rooted in driving consistent consumer engagement and ultimately supporting rent growth. As we mentioned last quarter, we have filled all of our big box vacancies resulting from recent bankruptcies, including Conn's, Party City and Joann's with higher credit tenants. This includes downsizing Burlington and Southgate and Colonial Heights to make room for a national sporting goods retailer as well as backfilling Party City with Boot Barn and Joann with Burlington at Overlook Village in Asheville, strengthening the merchandising mix alongside anchors such as T.J. Maxx, HomeGoods and Ross. These transactions reflect broader retail market dynamics. Nationally, big box development has been limited with few new entrants targeting infill market. This constraint has elevated demand for existing well-located retail space. High-credit tenants are seeking locations with strong demographic, nearby residential density and complementary tenants that drive traffic. Our centers are meeting the criteria, allowing us to capture top of market rents on repositioned or retenanted space. At Columbus Village in Virginia Beach, we are nearing completion on reformatting the former Bed Bath & Beyond box to enhance the center with Trader Joe's and Golf Galaxy, both expected to open before the end of the year. This reconfiguration will increase rents by over 50% while enhancing the overall tenant mix and further strengthening the appeal of Town Center of Virginia Beach District. Overall, our retail strategy leverages market trends, tenant credit strength and experiential demand to position our portfolio for sustained outperformance. This knowledge-driven approach enables Armada Hoffler to proactively identify opportunities to optimize tenant mix, capture rent growth and maintain our centers as destination locations that attract customers and drive long-term value. On the office side, while the broader sector to navigate structural headwinds, the recovery is clearly bifurcating in favor of high-quality amenitized assets in desirable, well-located markets. Our holdings sit on the right side of that divide. We continue to see occupancy stability, leasing wins and renewal spreads that capture value for premium space. As supply constraints and tenant preferences tilt toward quality rather than square footage growth, we believe our positioning provides a distinct advantage. Our office portfolio is 96.5% occupied and few near-term expirations. Demand continues to favor office properties a walkable, amenity-rich, mixed-use environment where tenants benefit from retail, residential and dining access. We continue to see interest from firms relocating from older suburban parts to dynamic centralized locations, supporting the long-term value of our office assets. The former WeWork floor in One City Center is the largest contiguous vacant space in our portfolio, and we are seeing active interest. We recently announced a 12,000 square foot lease with Atlantic Union Bank at One Columbus and Town Center, bringing overall occupancy in Town Center to 99%. This stands in sharp contrast to the narrative seems in most major U.S. city, as office assets continue to demonstrate strong demand and sustained high occupancy, driven by their location within the region's premier mixed-use environment. Asking rents across Town Center assets now average nearly 30% above the broader Virginia Beach market across office, retail and multifamily, underscoring the effectiveness of our mixed-use strategy and the enduring strength of this district is a true live, work, play destination. Our multifamily portfolio continues to demonstrate resilience, supported by healthy leasing fundamentals and proactive management. During the third quarter, portfolio occupancy held at 94.2% in line with the second quarter. Effective lease trade-outs averaged 2.3% for the quarter with renewals averaging 4.3% trade out and new leases flat. These figures do not include the 22 units at Greenside that were offline during the quarter, up modestly from an average 19.7 units in the first and second quarters. Last quarter's reported occupancy included those units, so the current figures reflect a more accurate representation of stabilized performance. Multifamily projects starts to remain a critical factor in supporting fundamentals with construction lending down significantly compared to the 2020 to 2022 cycles, the market is moving towards improved balance. Elevated residential borrowing rights are also keeping renters in existing units, limiting turnover and maintaining occupancy stability across our portfolio. Year-over-year from September 2024 to September 2025, national average rents increased only 0.6%. Our stabilized multifamily properties outperformed this trend by approximately 50%, achieving 0.9% year-over-year rent growth, demonstrating the strength of our assets and the effectiveness of our proactive management approach. At Allied Harbor Point, leasing continues to progress well, and we are on track to stabilize mid-2026, earlier than projected. Prospects and residents are drawn to the building's premier waterfront location, best-in-market views and modern finishes. As the newest residential property within the Harbor Point District, Allied offers an unmatched living experience, it complements the surrounding retail office and entertainment uses, reinforcing its appeal as one of Baltimore's most desirable addresses. At Greenside in Charlotte, remediation and enhancement work to address water intrusion in several units is progressing in phases as we have previously disclosed. The effective units I mentioned a few minutes ago, are obviously an upside opportunity once we conclude this project. These improvements will further strengthen the property's quality and long-term value, supported by its prime location near major medical and innovation districts in Charlotte. Looking ahead, we see multiple avenues to drive FFO growth across our portfolio, guided by a disciplined capital allocation framework. Strong leasing momentum and a high return redevelopment pipeline allow us to capture rent growth and enhance property value through proactive renewals, backfills and targeted reconfiguration. At the same time, we pursue disciplined acquisitions through intentional capital recycling activity, focusing on projects to combine stabilized income with redevelopment potential where possible. By targeting markets where we can create a competitive advantage, including submarkets that exhibit very positive fundamentals beyond the typical Sunbelt trade areas where pricing is being good up, we leverage our leasing and operating expertise to unlock value, ensuring that each investment is accretive in the near term and drives long-term portfolio growth. On the capital front, we remain focused on enhancing flexibility and mitigating balance sheet growth. Our July debt private placement, raising $115 million reflects continued confidence in the quality of our portfolio, our management team, our strategic approach and the overall strength of the company. The proceeds bolstered our liquidity position, extended our weighted average debt maturity and were used in part to fully repay the construction revolver at Southern Post, further positioning us to navigate evolving market conditions with confidence. We continue to focus on generating an increasingly conservative balance sheet, targeting reduced leverage, ensuring ample liquidity to fund ongoing redevelopment and growth initiatives. This disciplined capital structure provides flexibility to act on attractive opportunities while preserving balance sheet strength and stability. We plan to continue expanding relationships with institutional credit investors, supporting long-term growth and maintaining financial optionality. We remain focused on value creation through disciplined execution and intentional capital allocation. From retail leasing to office occupancy stability and multifamily lease-ups, we are building a stronger, simpler and more resilient Armada Hoffler, capable of generating consistent, predictable earnings growth. I am proud of the momentum we have generated and confident in the team's ability to deliver sustained, reliable earnings growth while enhancing shareholder value. With that, I'll now turn the call over to Matt to provide additional detail on our financial results. Matthew Barnes: Good morning, and thank you, gentlemen. Armada Hoffler delivered a strong financial quarter as expected, underscoring the consistency of our operating platform, the quality of our diversified portfolio and the continued execution of our capital strategy. With our balance sheet repositioning well underway and fundamentals stabilizing across our commercial assets classes, we entered the final quarter of the year from a position of strength and operating flexibility. For the third quarter of 2025 normalized FFO attributable to common shareholders was $29.6 million or $0.29 per diluted share, slightly above our expectations and full year guidance. FFO attributable to common shareholders was $20.2 million or $0.20 per diluted share. AFFO came in at $19 million or $0.19 per diluted share, demonstrated continued alignment between our operating cash flows and the restructured dividend. Same-store NOI for the portfolio increased 1% on a GAAP basis. Our performance this quarter demonstrates the benefits of a simpler, more durable capital structure and disciplined execution by management across our portfolio. As of September 30, 2025, net debt to total adjusted EBITDA stood at 7.9x, stabilized portfolio debt to stabilize portfolio adjusted EBITDA stood at 5.5x. Total liquidity for the quarter is $141 million, including availability under our revolving credit facilities. AFFO payout ratio stands at 74.9%. And after adjusting for noncash interest income, the ratio was 93.9%. Our portfolio weighted average interest rate remained consistent at 4.3%. Our diversified portfolio continues to demonstrate meaningful strength, particularly across our retail and office holdings. Leasing pipelines remain active and collections and occupancy levels have remained resilient in each of our segments, respectively. As expected, our retail segment showed quarterly declines in same-store NOI, reflecting the temporary downtime resulting from tenant bankruptcies such as Conn's, Party City, Joann's and Bed Bath & Beyond. Same-store NOI decreased 0.9% on a GAAP basis and 2.5% on a cash basis. These near-term results are consistent with our strategy to create long-term value through tenant credit enhancements and capital upgrades where returns can be achieved. With over 85% of this space already under lease or LOI, we anticipate realizing initial returns on our backfill efforts beginning in Q4 of 2025, continuing into 2026 with full economics and over 20% rent growth achieved by mid-2027. Releasing spreads on renewed leases remained healthy at 5.7% on a GAAP basis and 6.5% on a cash basis, demonstrating continued tenant demand for retail space in a supply-constrained market. From a broader market advantage, fundamentals remain supportive for retail. In the office segment, we continue to see exceptional occupancy levels at 96.5%, a modest improvement from last quarter, strong renewal spreads at 21.6% on a GAAP basis and 8.9% on a cash basis, albeit on a small amount of space that reflects the value for our premium assets in desirable locations. Our office segment posted positive same-store NOI results at 4.5% on both a GAAP and cash basis. By focusing our capital and operational efforts on retail assets with dominant demographics, proven tendency and strong in-place cash flows combined with office assets to reflect the flight towards quality and the margins for renewal upside, we are well positioned to capture our residual growth as the broader market conditions normalize. In short, the intersection of internal execution that is asset level leasing, cost control and capital reinvestment and the external tailwinds of limited new supply in retail, improving select office fundamentals, investor capital returning to quality real estate gives us confidence in the durability of our cash flows going forward. Corporately, we continue to manage expenses tightly. G&A remains on track to be materially reduced year-over-year, reinforcing our focus on efficiency while maintaining the resources required to execute on managing our assets and redevelopment opportunities. As you all know, we have and are taking the appropriate steps to rightsize the construction entity, aligning its workforce with current backlog levels, making fiscally responsible decisions for shareholder value. Capital markets remain selective, and we are structuring our balance sheet to reflect that reality. With our debt private placement completed in July and our liquidity stabilized through prudent cash management, we have the ability to remain patient and disciplined as the cycle evolves. We are engaged with our lending partners and are looking ahead to the back half of 2026 and our respective pending maturities. Early indications are leading us to expect that once our 2026 outstanding debt has been refinanced, we will be able to achieve a portfolio weighted average interest rate slightly below 500 basis points. Reflecting the stability in our operating results and visibility into year-end performance, we are narrowing our full year normalized FFO guidance range to $1.03 to $1.07 per diluted share, reaffirming our confidence in the trajectory of the business. With that, I'll now turn the call back over to Shawn for his closing remarks. Shawn Tibbetts: Thank you, Matt. I want to thank our team for their continued dedication to our shareholders and for their trust and support. Operator, we are ready for the question-and-answer session. Operator: [Operator Instructions] Your first question comes from Viktor Fediv with Scotiabank. Viktor Fediv: So I'd like to ask about the acquisition of at least 1 real estate financing asset Solis Gainesville. Since the asset is across the street from the Everly, we can already see some negative effects on both occupancy, which is more than 200 basis points down year-over-year and monthly rent, which also declined more than 11% year-over-year. So can you provide some insights into the expected going-in cap rate on this asset and potential synergies for managing 2 assets altogether and as well as your expectation for same-store NOI growth for both assets over the next 2, 3 years? Shawn Tibbetts: Sure. Thank you for the question, Viktor. I think this -- the answer to the question starts about a year ago, we had signaled to the market that we would bring on to the balance sheet, not only Gainesville II but the Allure. So let's touch on Gainesville II first. Our strategy, our thesis there has always been, we want to run this asset combined with the Gainesville I asset, which is called The Everly or rebranded at The Everly. We think there are synergies there. We think it comes in to answer your question at or above our cost of capital, given that we are going to leverage synergies there, think head count reduction and a normal building as a result of running these together. I mean just rough, we think there's about 50 basis points of value there to be gained by us. In addition to that, as we see the new supply burned off, by the way, the new supply is ours. We'll see concessions burn off and therefore, we'll see some uplift, and we expect the positive same store to get there fairly soon after stabilization. So I think it's a good story. It's what we had intended to do for the past 12 months or so, and we're looking forward to it. Slightly different story for the Allure. We have seen some very strong bids in the market -- in that submarket as of late. And so we're in discussions with our partner about what's the best move given the kind of high bids for that type of asset, there could be a case where we either bring it on balance sheet, which we can do and would love to do or is the better opportunity cost equation to sell that in the open market and look for other deals with our partner there. So a little more to come there. That transaction essentially is going to be deferred until next year. So that's why you saw us pull that back from coming on the balance sheet here in the third or fourth quarter of this year. Viktor Fediv: As a quick follow-up, so if let's say, this Allure asset is sold to third-party and loan is repaid before maturity? Will you receive any additional fees on top of that principle and what has already accrued? Shawn Tibbetts: I think it's inappropriate for me to speak on that right now, Viktor. I think let's see what happens. We'll certainly recoup our capital and have a conversation with our partner about how to make the best deal there. But I think given where we are and what we're seeing in the market, we've still again, got an opportunity cost question here. The good news is we are very much in the black on that asset, which is great for both us and our partners. So more to come there. Operator: The next question comes from Rob Stevenson with Janney. Robert Stevenson: Shawn, just while you're talking about the real estate financing portfolio, how should we be thinking about the Kennesaw, Georgia loan in the asset as it gets closer to stabilization? Is that one also more likely to be sold in the loan repaid? Or is that one more likely to be brought in-house? Shawn Tibbetts: Yes, Rob, I think that's an asset that probably doesn't fit our core strategy. So in addition to that, I think you'll see that -- you won't see us pursuing that one, per se. I think that will be sold as the answer to the question. So yes, that's not one we intend to bring into the pulp. Robert Stevenson: Okay. And then beyond the $18 million or so in-progress redevelopments, any of the 10 or so other opportunities in the supplemental expected to start in the next couple of quarters? And how extensive are the costs associated with those opportunities? Shawn Tibbetts: It's interesting. We've seen some attractive kind of projects there. We -- I think let me start by saying this, we are continuing to see development deal flow. It just doesn't fit the risk-adjusted spread. So our thesis is, again, back to the opportunity cost, kind of long-term value creation. We think that the capital is best spent on some of these captive projects. That being said, I don't see anything starting like fourth quarter, probably not first quarter, but our team is doing quite a bit of diligence on a few of these. I mean think outparcel, think older kind of '90s, 2000s vintage assets with large parking lots. We're taking a look at how do we use the real estate kind of under our control and create opportunities there for lift in the short run. So a long way of saying, we're looking at it. Our development team is looking at it hard. We meet about it actually weekly. But I don't think we know enough now to say we're ready to fire off the next one. That said, as you can see with the Trader Joe's, we're very excited about those types of opportunities and the list that they create. Robert Stevenson: And then last one for me. How are you and the Board thinking about recycling assets and using the proceeds to reduce leverage and repurchase common stock. And when might be the right time to explore something with one or more of the Baltimore assets, et cetera? Shawn Tibbetts: Yes. I think the answer is we are constantly or consistently thinking about that. Our job as capital allocators, as you know, is to think about the opportunity cost of that capital. So we -- as you may know, thought about an asset sale in Charlotte. We've got some strong bids, Providence Plaza, the challenge became what is the best opportunity cost like kind of equation for that capital. We saw rent growth climbing down in Charlotte, so we said let's hold on to that asset. But we are thinking about those things. You see us renewing for long-term anchor leases, so on and so forth, to lock in the value in some of these assets. And at the right time, we'll strike on deals that make sense. I don't want to say we're going to get into buyback land, but certainly, there's an attractive accretive opportunity there. I'm not sure that we'll take that versus long-term property -- kind of income-producing property. But yes, that's what we are doing right now, especially given the price of the equity and how that's trading in today's market. So a long way of saying opportunity cost is our main focus, and we are looking at all of the assets that we have to determine where we can create some arbitrage in terms of what the markets valuing our real estate at and what the broader market would potentially buy at. Operator: The next question comes from [ Jamie Wise with CVU Capital ]. Unknown Analyst: First question is, could management discuss the annual cost of its interest rate swaps? And what are your plans going forward with the interest rate swap activity? Also, if you were to change your approach to buying the interest rate swaps and reducing your interest as a result of the swaps, how would that impact AFFO? Matthew Barnes: Jamie, thank you for the question. So interest rate swaps obviously changed the pricing with the market at that time. We look at that essentially as a prepaid interest when you're looking at paying that to essentially come into the total cost of the debt over the long run. We renewed back this quarter some maturing swaps that we had, we renewed them slightly early as we came within our strike rate, the price that we felt would fit in with the interest expense that we wanted, total cost for full guidance. As I've talked about many times before, we are looking over the long term a transition in this balance sheet to long-term fixed rate debt. So we would work through that cycle to reduce the reliance on derivatives as we get those long-term fixed rate debt in place. And that's what we're going to be looking for, as I mentioned in my remarks, for those financings that are maturing in 2020 -- 2026. Unknown Analyst: And one other question. Earlier in the year, you had mentioned that the dividend was stress tested for recessionary scenarios and also that you are expecting net debt to EBITDA to sort of end the year around the 7.4x area. I was curious if you could talk about that. Is this a dividend stress tested for 2026 and different sorts of interest rate scenarios as you look to do less hedging activity? And are those -- does management still hold by what it said earlier in the year? Matthew Barnes: Yes, certainly. So as you can recall, we rightsized the dividend to make sure that our cash flows from the properties covered the distribution, the cash distributed out the door in the dividend. So we did that back earlier in the year and made sure that there was enough buffer there to stress test that dividend through the whole of the year, not just from a cash flow perspective, but also from the REIT compliance tax perspective as well. As you can see, there is a number of charts in our supplemental that show the dividend distribution compared to AFFO and AFFO less noncash interest expense. So as close to a cash number as we can provide and be transparent there. Shawn Tibbetts: Jamie, this is Shawn. I think the answer to your question is yes. What we said in the earlier part of the year holds true. We stress tested that against many different scenarios as it relates to dividend. As it relates to the derivative positions, we are on a journey here. We've committed to the market that we want to continue to get into more pure fixed rate debt, hence, that kind of our placement of $115 million back in the middle of the year, back in the July time frame. And you're going to see us continue to navigate that journey. It won't happen overnight. But yes, I think the answer to the question is we want to move to a more pure fixed balance sheet over time, and we intend to hold that dividend and have the ability to do so plus or minus fluctuations in the market. I appreciate the question. Matthew Barnes: And then, Jamie, to touch on the last bit of the question as it relates to leverage, we still have the full debt from the development pipeline on our books. And as we lease up the Allied and Southern Post leverage will come down over the next or the coming quarters. Operator: The next question comes from Jon Petersen with Jefferies. Jonathan Petersen: Maybe I'll just stick on the dividend. I'm just curious how you think about growing the dividend, right? If we're modeling over the next few years, should dividend growth tie out with AFFO per share growth at these levels? Or -- are you going to kind of pause on raises for a while to give yourself more of a buffer? How do we think about that? Shawn Tibbetts: Jon, thank you for the question. I think -- we think about this in a conservative way, right? We just came off of a dividend restructure. And so we want to be prudent here. AFFO, as you know, for us, given the real estate financing platform is maybe not the best indicator sometimes in terms of dividends. So I think the short answer to the question is we'll raise it when we feel we responsibly can. To Matt's point, we don't want to go over dividend, and we also don't want to trip the taxability concerns on the downside. So we're looking at it. I don't know if we will grow as AFFO per se, depending on how big the real estate financing program is. But yes, we're looking at it. We will raise it responsibly, but certainly don't want to over-raise it too soon, especially given our recent journey. So I think you'll see it moving in the future. I don't think you're going to see us do anything in the next quarter or so just based on where we stand. Jonathan Petersen: That's helpful. And then the $95 million term loan that's coming due next May. Should we think about proceeds from these financings that might be repaid is what will be used to pay down that loan? Or would you refinance it? How should we think about your plans there? Matthew Barnes: Yes, certainly. So we have our primary credit facility, the revolving line of credit that matures the 1st of January '27, and the term loans associated with that primary credit facility the 1st of January 2028. So already engaged with the bank group, and we will look to both our side term loans to wrap them up in that primary credit facility. So we have a number of different options. We can always go back to the market and do another debt private placements, and get some long-term fixed-rate bonds there to replace that. We can wrap that into the primary credit facility or I'm sure our lending partner on that term loan that matures in May may want to reissue at those same levels. So many different options and yes, we've already reengaged with the partners to start working through that. Jonathan Petersen: All right. And then last question for me, just on Allied Harbor Point. You said stabilization by mid-next year. It's already 67.6% lease. So I'm just curious, is it fully built out like could it be 100% occupied today? Or is there still some work to do to be able to lease that up to stabilization? Shawn Tibbetts: So Jon, we're materially there. The challenge for us, and this is what we talked to the market about since -- since bringing this idea to fruition was balancing this equilibrium, not cannibalizing the 2 assets next door. So yes, it can be fully leased up. We're just very -- we're very mindful about not bottoming out our piece of the market there. So we said to the market back in September, we were looking at a roughly 24 months. Stabilization, to your point, we will probably hit that sooner. We just want to be conservative with what we're putting out there in case we need to hold rates, right? The economic equation is much better. We can hold the rates up and fill the building, take a couple of extra months and it would be kind of cannibalizing our own position in the other 2. Operator: Our next question -- there are no further questions at this time. I will now turn the call over to Shawn Tibbetts for closing remarks. Please go ahead, sir. Shawn Tibbetts: Thank you, and thank you all for joining us today. We appreciate our investors' partnership with us, both on the equity and the credit side, our partners who do businesses with us in these submarkets in each of our markets throughout the Southeast United States. Thank you to our team. Thank you to our Board. We appreciate your attention to our story. We look forward to continuing to create value for the long run. Thank you very much, and have a nice day. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Hi, and welcome to Xometry's Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to VP of Investor Relations, Shawn Milne. Shawn Milne: Good morning, and thank you for joining us on Xometry's Q3 2025 Earnings Call. Joining me are Randy Altschuler, our Chief Executive Officer; Sanjeev Singh Sahni, our President; and James Miln, our Chief Financial Officer. During today's call, we will review our financial results for the third quarter 2025 and discuss our guidance for the fourth quarter and full year 2025. During today's call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, long-term growth and overall future prospects. Such statements may be identified by terms such as believe, expect, intend and may. These statements are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed before the market opened today and in our filings with the U.S. Securities and Exchange Commission, including our Form 10-Q for the quarter ended September 30, 2025. We caution you not to place undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in our expectations. We'd also like to point out that on today's call, we will report GAAP and non-GAAP results. We use these non-GAAP financial measures internally for financial and operating decision-making purposes and as a means to evaluate period-to-period comparisons. Non-GAAP financial measures are presented in addition to and not as a substitute or superior to measures of financial performance prepared in accordance with U.S. GAAP. To see the reconciliation of these non-GAAP measures, please refer to our earnings press release distributed today and our investor presentation, both of which are available on the Investors section of our website at investors.xometry.com. A replay of today's call will also be posted on our website. With that, I'd like to turn the call over to Randy. Randolph Altschuler: Thanks, Shawn. Good morning, and thank you for joining our Q3 2025 earnings call. Our Q3 performance powerfully demonstrates the success of our purposely built marketplace model in this massive and highly fragmented custom manufacturing market. We are proving that a superior experience for both buyers and suppliers, fueled by the power of marketplace dynamics is delivering sustainable growth and value. Our marketplace structure is a key differentiator, powering our industry-leading growth and significant adoption amongst our customers and suppliers. Our marketplace sits at the intersection of manufacturing, AI and technology, and we are excited about digitizing custom manufacturing as we accelerate platform innovation. Q3 was a record quarter for Xometry across many fronts, including revenue, gross profit, marketplace gross margin and adjusted EBITDA. Q3 revenue growth accelerated, increasing 28% year-over-year to $181 million. Marketplace growth accelerated, increasing 31% year-over-year, driven by our rapidly expanding networks of buyers and suppliers and deepening enterprise engagement. We are delivering this level of growth in an ongoing manufacturing contraction, underscoring our significant market share gains. We're off to a strong start in Q4, and we're again raising our full year marketplace growth outlook, which James will discuss later in the call. Powered by improving AI pricing and selection algorithms, we drove a 210 basis points increase in marketplace gross margin year-over-year in Q3, driving 40% growth in marketplace gross profit, expanding marketplace gross margin underscores the value we're creating with our AI-powered marketplace. Our efficacy and competitive moat continues to increase as we grow our networks of buyers and suppliers and gain more data to continuously train our algorithms. This has driven significant and steady increases in our marketplace gross margins from the 25% level 4 years ago to 35.7% in Q3 of this year. Each quarter of growth and improvements in our technology helps to incrementally power the quarters that follow. Our results in Q3 and year-to-date marked strong progress on our mission to become the de facto digital rails in custom manufacturing. Alongside strong financial results, we are making investments that will pay off in years to come as we drive innovation across our global marketplaces and supplier networks. Our President, Sanjeev Singh Sahni, has accelerated our product development efforts to embed technology and an expanding suite of AI capabilities across the organization. We continue to win, especially with larger customers as we improve price, speed and selection on the marketplace. In early Q4, we launched auto-quote for injection molding services in the United States, following a launch earlier this year in Europe. Xometry's new auto-quoting capability simplifies the injection molding manufacturing process, providing a seamless digital experience to enable customers to move quickly from design to finished part. The platform enables a spectrum of injection molding options from prototype and low-volume bridge tooling to high-volume multi-cavity production tooling in over 35 different materials, colors and finishes. We advanced our AI-powered design for manufacturing capabilities, expanding our automated extraction engine that interprets technical drawings and CAD files. This enhancement improves the accuracy of our quotes and supplier matching, further reducing friction and improving the buyer experience. For our customers, we're increasing supply chain resilience and agility by offering access to a diverse expanding global manufacturing network of over 4,500 active suppliers. This allows buyers to instantly diversify their supplier base, reducing dependence on a single source or region and enhancing overall resilience. In Q3, we continue to expand our global network and our global sourcing efforts and flexible asset-light model are resonating with customers given the rapidly changing global trade environment. We're delivering a scalable enterprise offering through tools like Teamspace and ERP integrations to become more embedded in customer workflows, reducing buyer friction and expanding wallet share in these large accounts. Our technology initiatives, combined with our enterprise sales efforts are powering our land-and-expand strategy. In Q3, a U.S. aerospace company faced a major production challenge, needing complex tight tolerance components on an aggressive time line with limited supplier options. This company turned to the Xometry marketplace as a trusted partner capable of delivering precision, speed and reliability. Based on the success of this program, Xometry quickly expanded to other divisions within the company, becoming a preferred manufacturing partner for rapid production. In Europe, a medical device manufacturer partnered with Xometry to accelerate production of precision components for its next-generation surgical systems. What began with CNC machined and 3D printed parts evolved into multiple high-volume production programs, including injection molded assemblies for other advanced equipment. By leveraging the Xometry marketplace, the customer was able to innovate faster and drive scale in the competitive medical technology market. These are good examples of enterprise customers we believe can generate $10 million plus in annual revenue. For our suppliers, our marketplace is driving increasing value, enabling them to sell their capacity digitally, unlock access to global demand and increase asset utilization and profitability through our Workcenter platform. In early Q4, we launched the new Workcenter mobile app. The Workcenter platform is Xometry's proprietary all-in-one quote-to-cash solution, enabling its partners to source and consolidate work, manage operations, monitor performance and secure cash flow. This powerful new tool is designed to help suppliers within the Xometry partner network manage job offers, production workflows and shop performance anytime, anywhere. By providing easier access to the job board and job management, we expect to drive increasing supplier engagement. Additionally, the new app provides for better communication flow to ensure that partners are quickly informed of critical updates and job opportunities. The app also enables seamless data capture through photos, certifications and status updates to improve accuracy and get information flowing quickly, delivering greater quality, transparency and responsiveness to customers. We expect that the Workcenter app will deepen supplier engagement and enhance our data to further support marketplace gross margin expansion and improve the buyer and supplier experience. For Thomas, in Q3, we launched our new dynamic ad serving technology and began selling on a new platform for new customers. The new pay-for-performance platform enables advertisers to set budgets, better define their target audience, maximize ad effectiveness and improve ROI tracking. While still early, we are pleased how the platform is functioning, and we're pleased with the initial sales efforts. We expect the new technology will increase advertising penetration and engagement. In Q4, we will further integrate our new natural language search experience to improve buyer engagement as search results are more relevant. There's much more to come in the following months on the innovation front as we focus on further improving buyer and supplier experience and expanding our platforms. Our momentum remains strong in Q4. We're raising our 2025 revenue growth outlook given robust demand in our marketplace and the strong execution of our teams. We expect strong secular growth to continue in 2026 and in coming years as we rapidly scale to $1 billion plus. I will now turn the call over to James for a more detailed review of Q3 and our business outlook. James Miln: Thanks, Randy, and good morning, everyone. Q3 was a great quarter for Xometry, delivering accelerating revenue growth, robust expansion in marketplace gross margin and significant adjusted EBITDA leverage as our marketplace responds to customers' needs in real time. Xometry is becoming their digital rails in this massively fragmented and largely off-line custom manufacturing market. As we scale towards $1 billion of revenue, we expect to deliver improving profitability even as we continue to invest in our growth initiatives. Q3 revenue increased 28% year-over-year to $181 million, driven by strong marketplace growth. Q3 marketplace revenue was $167 million and supplier services revenue was $14.1 million. Q3 marketplace revenue increased 31% year-over-year, a 500 basis points acceleration from Q2, driven by strong execution, expansion of buyer and supplier networks and growth with larger accounts as we continue to capture significant market share. Marketplace growth was robust across many verticals, including semiconductors and energy, aerospace and defense and automotive. Q3 active buyers increased 21% year-over-year to 78,282 with a net addition of 3,505 active buyers. Q3 marketplace revenue per active buyer increased 9% year-over-year, primarily due to strong enterprise growth and efficient corporate marketing initiatives in the U.S. In Q3, the number of accounts with last 12-month spend of at least $50,000 on our platform increased 14% year-over-year to 1,724, an increase of 71 from Q2 of 2025. We view accounts with at least $50,000 spend at the top of the enterprise funnel. We expect to continue to grow this base of accounts over time. Enterprise investments continue to show returns with strong revenue growth in Q3 for marketplace accounts with last 12-month spend of at least $500,000. Our enterprise strategy focuses on our largest accounts, which we believe each have $10 million plus in potential annual account revenue. Supplier services revenue declined approximately 1% quarter-over-quarter as we have largely stabilized the core advertising business. We are focused on improving engagement and monetization on the platform, which remains a leader in industrial sourcing, supplier selection and digital marketing solutions. Q3 gross profit was $72 million, an increase of 29% year-over-year with gross margin of 39.9%. Q3 gross margin for Marketplace was 35.7%, an increase of 210 basis points year-over-year. Q3 gross profit dollars increased a robust 40% year-over-year. We are focused on driving marketplace gross profit dollar growth through the combination of top line growth and gross margin expansion. We continue to adjust our pricing to reflect changing tariffs and our AI cost algorithms update regularly to reflect changes in our supplier network. Moving on to Q3 operating costs. Q3 total non-GAAP operating expenses increased 17% year-over-year to $66.1 million, well below revenue growth. We are applying strong discipline and rigor to our capital and resource allocation across teams while investing in our growth initiatives. In Q3, sales and marketing decreased 140 basis points year-over-year to 15.9% of revenue. This reflects improving enterprise sales execution and disciplined advertising spend. Marketplace advertising spend was 5% of marketplace revenue, which was down 130 basis points year-over-year as we balance growth and profitability. In Q3, operations and support decreased 60 basis points year-over-year to 8.2% of revenue. We are focused on driving increasing automation with AI across operations and support. Q3 adjusted EBITDA was $6.1 million compared with a loss of $0.6 million in Q3 2024. Q3 adjusted EBITDA improved $6.8 million year-over-year, driven by strong growth in revenue, gross profit and operating efficiencies. Year-to-date, we have delivered approximately 21% incremental adjusted EBITDA margin, primarily driven by strong marketplace gross margin expansion. In Q3, our U.S. segment adjusted EBITDA was $10.3 million or 6.8% adjusted EBITDA margin, a $9 million improvement year-over-year, driven by expanding gross profit and strong operating expense leverage, particularly in sales and marketing. Our International segment adjusted EBITDA loss was $4.2 million in Q3 2025 compared with $2 million in Q3 2024, driven in part by our investments to drive further global scale. We expect improved International segment operating leverage in Q4. At the end of the third quarter, cash and cash equivalents and marketable securities were $225 million, decreasing approximately $1 million from Q2 2025. Driven by strong operating leverage and focus on working capital efficiency, we generated $5.8 million in operating cash flow in Q3. We invested $7.4 million in CapEx, primarily software related, reflecting our technology investments in the platform and accelerating product rollouts shared earlier by Randy. We are focused on improving working capital efficiency and cash flow conversion given our asset-light model and limited capital spending. We expect CapEx to be approximately $8 million to $9 million in Q4 2025. Q3 demonstrates the ability of our AI-powered marketplace to deliver strong revenue and gross profit growth and operating leverage as we remain disciplined in our execution. As we scale towards $1 billion of revenue, we expect approximately 20% plus incremental adjusted EBITDA leverage on an annual basis. Given our large market opportunity and low penetration rates, we will continue to balance investing in the future with driving operating leverage. Now moving on to guidance. For the fourth quarter, we expect revenue in the range of $182 million to $184 million or 23% to 24% growth year-over-year. We expect Q4 marketplace growth to be approximately 25% to 27% year-over-year. As Randy mentioned, trends remain strong in Q4 even as we are mindful of the uncertain macro environment. We expect Q4 supplier services revenue to decrease approximately 4% year-over-year as we work through the transition of the recently launched Thomas Ad serving platform. In Q4, we expect adjusted EBITDA of $6 million to $7 million compared to $1 million in Q4 2024. In Q4, we expect stock-based compensation expenses, including related payroll taxes, to be approximately $11 million or approximately 6% of revenue. For the full year 2025, we are raising our marketplace growth outlook from our previous guidance of at least 23% to 24% to 27% to 28% growth. We continue to expect the supplier services to be down approximately 5% year-over-year. This results in our revenue outlook for the full year rising to $676 million to $678 million. For the full year 2025, we are raising our adjusted EBITDA guidance to $16 million to $17 million. As we look ahead, we believe that our growth initiatives can continue to drive at least 20% total revenue growth in 2026, given the large fragmented market opportunity, our initiatives to expand wallet share with strategic accounts and further international expansion, while we remain mindful of the macro environment. I want to close by thanking our dedicated Xometry team members around the world. Their commitment to our buyers and suppliers is instrumental to our continued growth and core to our mission of making the world's manufacturing capacity accessible to all. With that, operator, can you please open up the call for questions? Operator: [Operator Instructions] Our first question comes from the line of Andrew Boone of Citizens. Andrew Boone: You guys just talked about the 20% growth for 2026. Can you help us by unpacking that a little bit? Can you talk about kind of the assumptions that are underlying that, whether there are any macro assumptions that are embedded within kind of the 20% growth overall or whether that's really idiosyncratic drivers that can power growth next year kind of regardless of the situation? James Miln: Andrew, it's James. Thanks for the question. We're really obviously very happy with the performance that we're seeing this year, Marketplace growth of 31% in the third quarter. That's really being driven by the growth initiatives that we've been very consistently driving across enterprise, across scaling our network of buyers and suppliers and improving the technology of the platform as well. So we're seeing it broad-based at the moment across multiple processes across our broad diversity of categories. So as we're working on our plans for 2026, we wanted to give some view as to -- of our confidence in the consistency of that growth at a 20% plus level. We'll clearly come back with the Q4 earnings with more details on guidance for 2026. So we just wanted to give you a bit of a framework of how to think about that for next year. Shawn Milne: Yes. And Andrew, it's Shawn. And if you just think about the underpinnings of your model heading into 2026, we continue to drive strong active buyer growth, and you see strong revenue per buyer growth, too. So those are some of the underpinnings of the model driving the 20% plus into '26. Randolph Altschuler: Yes. And I think also just to jump in, it's Randy. We are always mindful of the macro. So we didn't assume any improvement in that next year. This is really about Xometry continuing to gain market share and control our own faith. And that's what's driving our assumptions here. Andrew Boone: And then the Workcenter mobile app feels like a large unlock as you guys simplify kind of the process for kind of your stakeholders that are clearly the underneath driver of operations to drive the platform. Can you just double-click in terms of what the unlock is in terms of creating that mobile experience and how people are using it and helping to unlock kind of more demand across the platform? Sanjeev Sahni: This is Sanjeev Sahni. Let me start by talking about our AI efforts. As you know, we've been an AI-native company from the beginning. AI has been part of our DNA, whether it's data science, machine learning or deep learning models, we've always had those as core to our way of working and scaling the customer and partner experience. We launched the Workcenter mobile app in the U.S. for our large and expanding partner base truly to drive that customer and supplier experience because we really believe as partners adopt a more friendly way of giving us data about their orders, sharing updates on quality control, sharing updates on dispatch, sharing updates on which job they like, which job they don't. We get deeper into engagement with them and are able to help them manage their business, help them manage time lines and quality for our customers. This is just the beginning of a series of AI-enabled tools that we continue to launch and scale. As you know, our focus has been on deploying that towards pricing, speed and selection as a core theme on where our efforts go. And so this cycle, this was our effort in driving speed and continuing to scale that with our partners. Operator: Our next question comes from the line of Brian Drab of William Blair. Brian Drab: First, I was wondering if you could just talk a little bit more about some of the changes that you're making within the team, some of the additions, Sanjeev, I know you've talked a lot about adding talent and technical capabilities. Can you talk about the importance of that and how that's going to help you get to this $1 billion revenue level and beyond? Sanjeev Sahni: Thank you for the question. Again, I think we are seeing very strong success in attracting top talents from some of the best tech companies in the world. As part of our efforts, we want to make sure that we continue to deliver on the strong pipeline of tech outcomes for our customers and partners, like Randy already mentioned, this cycle, we launched auto-quoting for injection, molding, offering that we think will significantly expand our marketplace menu. Injection molding, as you know, is a very, very large category. And this is one where we've launched auto-quoting by building on our experience in the offline where we've now got a set of buyers, suppliers, we've got models that have been refined and now driving technology behind those models helps us bring it to the customer in an online platform, which they can easily adopt and help us drive significantly higher market share. But again, going back to what I was saying before, our AI efforts are truly around price selection speed. So if you think about price, we've been continuing to test behavior-based models. We've been trying to test various sortations on our site, which you can see when it comes to selection, I just mentioned injection molding and then speed, the Workcenter and mobile app. So across areas, including Thomasnet, where we've launched dynamic ad serving technology, this is becoming a truly product-led, product-driven organization with our CTO, Vaidy and his team now in their 6 months in the organization. Brian Drab: Okay. And then can I ask a much more near-term question. And looking at the guidance and the step function increase that you have from second quarter to third quarter, so you're up almost $20 million in revenue from second quarter to third quarter and then modeling just a couple of million increase sequentially into the fourth quarter. How are you thinking about that guidance? And what have you -- have you seen anything in the first 5 weeks of the quarter? Is there anything beyond kind of typical holiday seasonality that you're thinking about? James Miln: Yes. Thanks, Brian. So again, I think, as you know, really great performance in Q3 here on -- even despite an uneven manufacturing environment, Xometry is executing really well. Across enterprise, we're seeing a lot of strength, broad-based across the accounts. We're seeing, we believe, strong wallet share gains, revenue per buyer being up 9%. We've seen strong growth across processes from CNC to sheet to additive. I think as we look into the guide, as usual, we take into account those trends we're seeing in the business, which we're very pleased about as well as the risks given the uncertain manufacturing environment. And so with overall marketplace revenue growth over the year now at 27% to 28% plus on the basis of that strong active buyer growth as well, really pleased with what we're seeing. And just as I said, that all builds into the guidance that we give. Randolph Altschuler: Yes. And Brian, it's Randy. Just add a couple of things. We were very clear, both in my remarks and James' remarks, Q4 is off to a strong start. So as we talked about when we entered Q3, we had momentum there. We are seeing continued momentum here in Q4. And we -- that's -- I think our strongest guide this year in terms of year-over-year growth is the guide that we're giving for this fourth quarter. So we just continue to be mindful of the macro, but we have a lot of momentum. Operator: Our next question comes from the line of Matt Swanson of RBC Capital Markets. Unknown Analyst: This is Simran on for Matt Swanson. Congrats on a great quarter. To start, could you just double-click on the trends that you've been seeing in enterprise and Teamspace and how we should think about that opportunity continuing to grow throughout 2026? James Miln: Yes. Just to reiterate, enterprise are customers that we think have had more than $500,000 of spend, and that number grew rapidly last year in terms of their year-over-year in 2020. That number grew -- the revenue generated by them grew rapidly. So there's a couple of things. And in this quarter, you're also seeing our revenue per buyers increased 9% year-over-year. And in part, that is as our enterprise customers are leaning more and more in. There's a couple of technology things that are making that happen. First, widespread adoption of Teamspace by those enterprise customers, and we continue to enhance Teamspace, and that's giving us more traction. Our punchouts, so our integration with our enterprise customers' ERP systems that's also accelerating. So accelerating adoption of Teamspace, of our ERP punchouts. And then our enterprise sales motion, we've been talking about that. We've been investing in our enterprise sales team. So when you bring that all in, that's resulting in greater traction with those enterprise customers, which is in part reflected by that 9% growth in buyer spend quarter-over-quarter -- year-over-year, sorry, year-over-year. I would just add, I think we're really -- Xometry is purpose-built for sort of the industry trends that we're seeing now, the move towards supply chain resiliency, importance of getting agility and speed to market and really being able to access technology and supply chain. And I think that, that's what the team has built for many years and is behind our initiatives. And again, it's consistent in terms of how we'll be growing ahead into 2026. Unknown Analyst: That makes sense. That's really helpful. And then with the new product launches in the EU, can you just remind us how you're thinking about international expansion and those investments heading into next year? James Miln: This is James. I mean I'll kick off. I think international, we're very pleased with the performance that we've had there over the years, continuing to see that grow and scale. In the quarter, we're up 23% year-over-year. And we really think there's a lot of opportunity here given the large and highly fragmented markets that there are, not just in the U.S. but in Europe and in Asia. We had the recent launch of Teamspace that's been going well. We've also been expanding that marketplace more materials, more processes, more quoting possibilities. We're very pleased to see the injection molding order quoting coming to the U.S. after we were able to first launch that in Europe. So this combination of the market opportunity, again, with the Xometry solution and product road map gives us a lot of confidence and able to continue to see that grow. And as we said before, we believe that could be 30% to 40% of Xometry over time. Randolph Altschuler: Yes. And just to remind everybody, in 2020, our international revenue was approximately $1 million. We've grown that now to $120 million run rate. So just going back to what James said, we expect that to be eventually 30% to 40% of our marketplace revenue and all the trends are moving nicely in that direction. Operator: Our next comes from the line of Greg Palm of Craig-Hallum. Greg Palm: Just thinking back to Q2 and obviously, more so this quarter, but we're not really used to this sort of level of upside on the revenue line. So I'm just curious, like has your visibility changed at all? I'm just kind of curious, as you think back to when you provided guidance last quarter, what changed where you were basically able to outperform by this magnitude? Randolph Altschuler: We continue to see our customers leaning in more and more and adoption of technology tools that we've been investing now for a while, whether it's Teamspace, whether it's Workcenter, it's the punchout integrations, those adoptions are accelerating. And here's the great news, Greg. As we think about the fourth quarter next year, the injection molding and supporting launched this quarter, just launched. The mobile app for Workcenter is recent. So -- and we've got a product road map chockful of releases that are going to be coming not only in Q4, but also throughout 2026. So I think you'll have seen us continue to gain momentum. And a lot of that is, as we talked about, the investments we've made in AI and technology and that product adoption from our customers is accelerating. Greg Palm: Okay. Awesome. And then just as it relates to Q4, I think it implies an incremental margin for the full year around 20%, which I think is a little bit below what you provided last quarter. Is this just sort of maybe a more near-term expansion in some of these investments that you've alluded to? I mean, any reason why we wouldn't see incrementals sort of climbing back in the 20s and early '26? Or how are you sort of thinking about that cadence of incremental margins as we progress into next year? James Miln: Yes. Thanks, Greg. As we said, we're always about balancing the growth and the profitability. I think when we think about the opportunity ahead for Xometry, it's such a large market that we need to make the right choices to invest in product technology to be able to scale the business. But we also recognize the importance of delivering profitability and improvement on that along the way. And that's why overall, we've given this framework of 20% at least incremental margins to the bottom line. In the last couple of years, you've seen us do that. Year-to-date, we're at 21%. I think you're right, if you put in our guide, then we'd be around 20% for the full year. That is an increase in adjusted EBITDA dollars that we're delivering over what we had in the last update. So we're really pleased with that progression. And I think that that's what we're doing. We're going to continue to balance growth and profitability so that we can grow into this huge opportunity ahead of us. Randolph Altschuler: And here's the great news, Greg, as revenue is accelerating and we've gotten more growth than we've expected, that gives us some optionality to make some investments. We're obviously, as James said, very focused on profitability as well, but greater growth gives us some options, and we're going to make sure we're taking advantage of that and being smart on both sides of it. Operator: Our next question comes from the line of Ron Josey of Citi. Unknown Analyst: This is Robert on for Ron. Great to see the active buyers growth up 21% in the quarter. Question is, I guess, how much of this was driven by international expansion given all the improvements that you made with new materials and faster lead times versus an expansion within existing client base? James Miln: Robert, this is James. So really pleased with the active buyer growth. I think, in particular, what we're seeing is with a lot of the initiatives that we've been driving both with product and with our marketing teams over the last year, we continue to see success in attracting new buyers to the platform. I think U.S. enterprise actually has been very strong for us. You've seen that in -- we've called that out in terms of driving the revenue, but it's also been on the active buyer side. And the proposition that we have, again, with these macro trends going on and looking for supply chain resiliency and agility, Xometry is purpose-built for this. And I think we've been improving our messaging and improving the way that we've been deploying our marketing. So you've actually seen advertising only up modestly year-over-year, and yet we've been continuing to grow our revenue and our active buyers robustly. So it's been strong in U.S. enterprise, but we have a global opportunity as well. Randolph Altschuler: Yes. And just to double-click on what James said, it's Randy. It's really broad-based. So it's our existing accounts, those enterprise customers that are leaning in more and activating more, but it's also attracting new buyers, both here domestically and abroad. Unknown Analyst: And then on marketplace gross margins, they reached a record this quarter, and they're at 35.7%. And this is the second quarter that they're now well within your long-term target range. So should we consider this as the new sustainable baseline for the marketplace going forward, just given benefits from AI, et cetera? James Miln: Yes. I mean I think that what you're seeing is the result, as you said, of the overall continued improvements in our AI price prediction accuracy, the machine learning, the opportunity we have as we scale, we have more data, we have more suppliers, we have more sourcing. I continue to expect gross margin to be up year-over-year in Q4. We are in that range, 35% to 40%. And so it will always be linear every quarter up and to the right. But I think that we feel that the combination of improving our AI of more data and our sourcing keeps us in that 35% to 40% range. Randolph Altschuler: Yes. I think we're pretty excited that this quarter, not only do we have accelerated marketplace growth, but we actually grew our gross profit dollars in marketplace even faster. So that's a signal that our customers are valuing and our suppliers value the service that we're bringing to them.
Operator: Good morning, and welcome to the Vornado Realty Trust Third Quarter of 2025 Earnings Call. My name is Joe, and I will be your operator on today's call. This call is being recorded for replay purposes [Operator Instructions]. I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporation Counsel. Please go ahead. Steven Borenstein: Welcome to Vornado Realty Trust Third Quarter Earnings Call. Yesterday afternoon, we issued our third quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplements. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2024; for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman and Chief Executive Officer; and Mike Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth. Steven Roth: Thank you, Steve, and good morning, everyone. Today is Election Day in America. The spectacle of our entire population all voting on a single day, the first Tuesday in November, has been somewhat diluted by early voting and voting by mail. Nonetheless, today is election day, a critical symbol of our great American democracy. And we all know elections matter. The election in New York City with the prospect of a Democrat socialist Mayor has attracted enormous attention. We almost admit that affordability has become a critical issue and even a lightning rod as is the cost and availability of housing. I'm an optimist and believe that everything will work out for the best. Importantly, with respect to the prospect of Mamdani mayoralty, we have not seen any pullback or hesitancy in space demand from our customers, in fact, the opposite, nor have we seen any canary in the coal mine indication from the stock market. Enough said. Now to the business. Here at Vornado, our business is good, really good and growing stronger. Our performance continues to lead both the national office pack and our New York peers. The market seems to have recognized this as our stock has doubled in the past 2 years. Why? One, we are in New York; two, our leasing stats and our mark-to-market stats lead the industry; three, as does our balance sheet stats. Our net debt-to-EBITDA ratio is down to 7.3x, and our immediate liquidity is $2.6 billion; four, we are focused. We are a stick to our knitting company; five, we have our PENN District, our city within a city; six, we have the 350 Park Avenue development, and it is in full swing; seven, we have a couple of hundred million dollars in the bag annual growth coming over the next few years; and finally, eight, we have a great portfolio of office and retail assets. We had another excellent quarter. Michael will cover our earnings shortly, and Glen is here to answer questions on our leasing activity. Now let me cover what we're seeing on the ground, along with some of our recent activity and accomplishments. As the noted journalist, Peter Grant, recently wrote, "New York City's office market is enjoying its biggest boom in nearly 2 decades, leaving the rest of the U.S. in the dust." The rotation from a tenant's market to a landlord's market in the 180 million square foot Class A better building submarket in which we compete, that we've been predicting is now happening and has even become accepted by our doubting [ Thomas analysts ] and the critical press. [ Cut off ] the press, [ CRB ] reports that Midtown core better building vacancy is now down to 6.2%. As I said in the past, we are 90% prime pitch Manhattan-centric company. Tenant demand is robust, companies are expanding. Demand is broad-based across all industries, and available space in the better buildings continues to evaporate quickly. Manhattan office leasing activity is on pace to exceed 40 million square feet for the year for the first time since 2019. Office demand is filling out to all submarkets, sublet availability is shrinking rapidly, and we are in the [ foothills ] of strong, maybe even surging rent growth. By foothills, I'm saying all the good stuff is just in the third inning, and the best stuff is yet to come. Obviously, deal activity and values will follow. Here is our industry-leading leasing scorecard. We expect our 2025 leasing volume for Manhattan office to be our highest in over a decade and our second highest year on record. Please take a look at our leasing and mark-to-market statistics. Our performance continues to be industry-leading. During the first 9 months of 2025, Vornado leased 3.7 million square feet overall, of which 2.8 million square feet was Manhattan office, leading the marketplace in not only leasing volume during that period, but also with the highest average starting rents in the city and with impressive mark-to-markets. Excluding the 1.1 million square foot master lease with NYU at 770 Broadway, the remaining 1.7 million square feet of leasing during the first 9 months was at $99 per square foot average starting rents with mark-to-markets of plus 11.9% GAAP and plus 8.3% cash. This includes over 1 million square feet of leasing in PENN 1 and in PENN 2. During the third quarter, we executed 21 New York office deals totaling 594,000 square feet at robust starting rent of $103 per square foot. Mark-to-markets for the quarter were plus 15.7% GAAP and 10.4% cash, and the average lease term was more than 12 years. Michael and Glen will cover specific tenants and deals in a few moments. In the PENN District, at PENN 2, our leasing this quarter included 325,000 square feet at average starting rent of $112 per foot. In October, after quarter end and not included in those leasing statistics, we completed 2 more large leases totaling 188,000 square feet. We have now leased over 1.3 million square feet at PENN 2 since project inception, putting us now at 78% occupancy and easily on track to hit and exceed our year-end guidance of 80%. Based on signed leases and activity that we are seeing for the remaining space, we plan to increase our published projected incremental cash yield of 10.2% at year-end. At PENN 1, we leased 37,000 square feet during the quarter at an average starting rent of $100 a foot. Since the start of physical redevelopment at PENN 1, we have leased 1.6 million square feet there at average starting rents of $94. At PENN, we are handily exceeding both of our initial underwriting and our increased underwriting. It's clear that the tipping point for the PENN District, our 3 block long city within the city, is now behind us. Tenants and brokers are wowed by our transformation, which is reflected in our leasing activity. We sit on top of the nexus of Pennsylvania Station and the New York City subway system, adjacent to our good neighbors to the West -- Manhattan West and Hudson Yards. The three of us combined represent the new booming West side of Manhattan. As I said before, the PENN District will be a growth engine for our company for years to come with rising rents and future development projects. At our PENN 15 site, we are now responding to requests for proposals for substantial blocks of space. We are now well along in the planning process for a 475-unit rental residential building on our own 34th Street site [ caddy-corner ] to Moynihan Train Hall. We plan to begin construction next year. It is time, and we will now transform the entire old, may I even say, junky retail on both sides of Seventh Avenue and along 34th Street that we inherited into attractive, modern and exciting retail offerings. This is the gateway to our PENN District, and a transformation year will have a big impact. We also continue to add to our already impressive food offerings in the district with our newest restaurant, Avra, at the 33rd Street and 9th Avenue corner of the Farley Building, which recently opened to crowds and great reviews. The space is spectacular, sits right in the heart of the new West Side and really ties us all together. Our New York City office leasing pipeline remains strong with more than 1.1 million square feet of leases in negotiation and various stages of proposal. We are growing in Manhattan and growing smartly. In September, we added to our prime fish portfolio with the acquisition of 623 Fifth Avenue. This building originally built to the highest standards by Swiss Bank Corporation sits on top of Saks Fifth Avenue flagship store, [ store ] like a trophy on top of a podium. So our lowest floor is the 11th, 175 feet off the ground with 25 column-free 15,000 square foot floors above. The location is pretty amazing being nearly a block west of both JPMorgan Chase's new heroic headquarters and our 280 Park Avenue. Our 623 Fifth Avenue has unique light and air and views, being setback from Fifth Avenue on the east side of the Saks landmark with the Cathedral to the north and the Channel Gardens and the skating rink of Rockefeller Center to the West. The best and unique part of this deal is that the building is 75% vacant, with the few remaining tenants on relatively short leases. Ironically, the vacant building is a big plus. Let me explain. We will not be penalized by a gaggle of low-rent, longer-term obsolete leases and will not have to wait 5 to 7 to 10 years for them to roll off. We will redevelop this building into the very best, elite boutique office building, sort of the 220 Central Park South of office. We will begin to deliver space by year-end 2027, so in 2 years, well less than half the time it would take for a new build and importantly, at half the cost. Here's the math. We acquired the building for $218 million, so $570 per foot. We will invest another $600 a foot in the development. So call it $1,200 a foot for the finished project, which will be every bit as good as a new build at half the cost. The team is budgeting 9% yield on cost for this project. I am pushing to crack double digits. There is high demand for and a shortage of this product, we couldn't be more excited. Our 1.8 million square foot 350 Park Avenue new build with Citadel as our anchor tenant and Ken Griffin as our 60% partner, continues right on schedule. The City Council unanimously approved the final [ year ], and I did say unanimously. We will commence demolition in March 2026. We remain very excited about the prospects for this new Forrester Partners-designed, best-in-class 1.8 million square foot tower, as is the brokerage and tenant communities. We are already getting incomings for spec space from clients seeking the very best and for whom our delivery date fits their needs. The Manhattan retail market also continues to show growing strength, and the best spaces are in high demand again. Tenants are recognizing that rents are moving up and availability is declining on the best streets and are beginning to approach landlords for early renewals to lock up their spaces. Importantly, we are achieving rents consistent with historical highs at our Times Square properties. We are the largest owner of signage in New York City with our unique cluster of premier [ signs ] in Times Square and in the PENN District, and that business continues to grow. Signage revenue for 2025 is projected to be our highest year ever. You should note that all of our sites are attached to buildings which we own, which gives us perpetual control, a unique competitive advantage and the highest margins in the business. There were some news a couple of weeks ago regarding the loan on 650 Madison Avenue going into default, which I should comment on. We were 20% of a group of institutional investors, who purchased the [ 600,000 ] square foot building in 2013 with an $800 million nonrecourse mortgage. The primary play was to capitalize on the below-market retail rents and upgrade the retail tenancy. What was the retail apocalypse? The fear that e-commerce would obliterate all physical retail and the pandemic just didn't work out. 3 years ago, in 2022, we recognized this asset impairment and wrote the asset off entirely to zero. Bad stuff happens every once in a while, even to us. Three days ago, the court came down with a ruling vacating the arbitration panel's 10/1 ground lease rent reset. We were surprised and disappointed. We are optimistic that this will be reversed on appeal. Lastly, turning to San Francisco. At our 555 California complex, arguably the best building in town, we continue to lead the market. During the quarter, we signed 224,000 square feet of leases at triple-digit average rents and 15% mark-to-market. This includes a lease with UPenn's Wharton School for the Cube. We said 2 or 3 years ago that San Francisco would recover, given that it is the capital city of the world's greatest tech and innovation centers, and that is what's happening. Thank you all. Now over to Michael. Michael Franco: Thank you, Steve, and good morning, everyone. We had a very strong quarter as office demand in New York City remains robust. Third quarter comparable FFO was $0.57 per share. compared to $0.52 per share for last year's third quarter, meeting analyst consensus by $0.02. This increase was primarily due to higher FFO resulting from the NYU master lease at 770 Broadway and higher NOI from our signage business, partially offset by lower NOI due to asset sales and capitalized interest beginning to burn off the PENN 2. We have provided a quarter-over-quarter bridge on Page 2 of our earnings release, and on Page 6 of our financial supplement. Same-store GAAP NOI for our New York business overall was up 9.1% for the quarter while same for cash NOI was down 7.4%. Let me explain. GAAP, which smooths everything, is more relevant to earnings given the cash number is hit by a free rent from a significant amount of leasing in recent quarters as well as the adjustment in cash rent related to the PENN 1 ground lease. Given all our activities to date this year, we now expect 2025 comparable FFO to be slightly higher compared to 2024 accountable FFO. While we are still in the process of finalizing our 2026 budget, as we've previously said, we expect 2026 comparable FFO to be flattish compared to 2025 as we are anticipating some noncore asset sales and taking income offline to effectuate the [ 34 and Seventh ] retail redevelopment. As we indicated on our previous calls, we expect 2027 to be the inflection year, and there will be significant earnings growth in 2027 as the full positive impact of PENN 1 and PENN 2 lease-up takes effect. New York office occupancy increased this quarter to 88.4% from 86.7% last quarter, primarily due to leasing activity at PENN 2, comprised of a 200,000 square foot headquarters leased with Verizon and new leases signed with FGS Global in [ Pernod Ricard ]. If you factor in the additional 188,000 square feet recently signed PENN 2, occupancy increases further. We continue to execute on our leasing pipeline and still anticipate that our occupancy will increase into the low 90s over the next year or so. While our retail occupancy also improved this quarter based on leases we signed, you will note a further jump in occupancy resulting from taking the retail in Manhattan Mall out of service this quarter. Turning to the capital markets. The financing markets for New York City assets are liquid, with CMBS spreads hovering at year-to-date lows, and even the banks are beginning to selectively return to lending on higher-quality assets. The unsecured bond market remains robust and has become much more constructive for office credits, with new issue spreads over 200 basis points tighter and all-in yields over 300 basis points lower than 2023. In the past quarter, we have been active in refinancing our near-term maturities, and we have several other deals in the works. The investment sales market has also heated up significantly in the past few months, as indicated by the many recent deal executions. The market is active for quality product, irrespective of size, and there is ample liquidity in the debt capital markets to facilitate deals getting done. Capital sources of all types are beginning to return to investing in New York City office, given the strong leasing fundamentals. As we have previously discussed, focusing on delevering the balance sheet has been a priority for us. Since the beginning of the year, we have generated $1.5 billion in net proceeds from sales, financings and the NYU deal, paid down $900 million in debt and increased our cash by $500 million. Our cash balances are now $1.15 billion. And together with our undrawn credit lines of $1.44 billion, we have immediate liquidity of $2.6 billion. Our net debt-to-EBITDA metric has improved to 7.3x from 8.6x at the start of the year, and our fixed charge coverage ratio, as expected, is steadily rising. We expect these ratios will continue to improve as income from PENN 1 and PENN 2 comes online. Please see Page 23 of our financial supplement for detail. With that, I'll turn it over to the operator for Q&A. Thank you. Operator: [Operator Instructions] And up first, Stephen Sakwa from Evercore ISI is on the line with the question. Please proceed. Steve Sakwa: I don't know, Glen, maybe you could just start. It obviously sounds very promising, given the activity levels at PENN 2. I guess I'm curious, how are you sort of changing kind of the leasing strategy with, I guess, only 20% of the building left? How are you thinking about tenants kind of in the pipeline? And maybe talk about how rents are maybe changing for the remaining space. Glen Weiss: Hi, Steve. So rents have changed. You heard the script, average rent is quarter over $112 a foot of PENN 2. So the rents keep moving up, up and up. We keep repricing the space almost on a daily basis. In terms of the remaining space, it's a lot of single floors, mainly in the tower. So we feel really good about that, confident in our approach. We have a lot of deals in the works right now. As we've said in the script, we expect to be at or above our 80% goal by the end of the year. And if you look at the tenant roster, the credit profile is excellent, the mix of industry sectors is really good. So we're pleased, and we expect to continue that strategically. Steve Sakwa: Okay. And then maybe as a follow-up, Steve, on your comments around 623, how do you sort of approach the leasing of that building? Is that something that you'd sort of start to pre-lease? Or do you kind of wait until early '27 until there's more of a product to show people? I mean, how do you sort of think about the timing of that and the rents for that building? Steven Roth: Steve, we're going to do that pretty much on the same as we did 220 Central Park South. At 220 Central Park, what we did was we had complete designs and they were spectacular, knockout designs, even as we started construction, and we did an awful amount of selling of 220 from those designs. We're going to do very much the same at 623 Fifth Avenue. So we're going to get it designed. Our objectives are to make it the most interesting, high-end boutique office in the city. And once we get that done, then we'll go into the market with very high aspirations. Operator: Next is Floris Gerbrand Van Dijkum with Ladenburg. Floris Gerbrand Van Dijkum: Michael, maybe this is for you. I was trying to get a sense of what is your current signed, not open pipeline in terms of basis points and then also in terms of dollar value, if you can give us a sense of the scope of rents that are going to come online over the next 2 years? Michael Franco: Floris, I don't know if I follow you on the basis points. I think Steve, in his opening remarks, sort of alluded to a couple of hundred million dollars sort of in the bag over the next couple of years or so. And I think we looked at our signed, not commenced number. That's what that is, right? So -- and we've talked about what the ramp is when the bulk of that comes in, in 2027. There will be a little bit next year. But the bulk is really 2027, and it'll slip over into 2028. But Steve's comment on a couple of hundred million dollars, I think, is a pretty good proxy. Floris Gerbrand Van Dijkum: Just to make sure, a couple of hundred million, is that $200 million? Or is that $300 million? Michael Franco: Floris, we're still finalizing. Let's use more than 200 right now, okay, in terms of the -- over the next 2 years or so. Floris Gerbrand Van Dijkum: Okay. Fair enough. But in terms of percentage, do you have the percent the difference between what's occupied and what's actually leased right now? Michael Franco: You're talking from a physical versus what's on the line, I mean, I think the occupancy numbers, we believe, what's reflective of actually what's been signed, right? So that's -- those are signed leases. Not all those tenants are in place yet. I can't tell you what the physical is relative to that. We have to come back to you on that. That [ GAAP ] rent has not started yet on many of those leases. Floris Gerbrand Van Dijkum: Right, right, right. And that's the more than $200 million that's coming online. My follow-up, if you don't mind, I was just curious on -- you talked a little bit about -- or Steve talked a little bit about the billboards business being at record high. Can you talk a little bit about the opportunity that you have in the PENN District. ?Because I don't -- I believe you own 100% of that as opposed to the Times Square, where you're in a JV. How much room do you see to expand that? Michael Franco: You're right, we do own 100% of all the signs in the PENN District. And I think what's unique about the PENN district relative to Time Square, which Time Square is still probably the most important signage marketplace in the country, maybe the world; is we own the dominant signs there too in that retail joint venture. But at PENN, because we basically control the district, other than I think one sign, we have all the signs, right? And so that allows us to market them in a variety of ways. We can -- we do -- and I think when you were over there recently, we can market one by one, we can market entire takeover where you can take over the district for a period of time, different slice of an hour or something more extended. So it allows us to optimize the income we can drive out of that. Historically, I think if you look over an extended period, the signage business kind of goes up 4% to 5% a year in terms of revenue. Some years are greater, some years are lesser, but I think it's a decent annual run rate. And when you put a new sign in, the payback period is pretty quick. 12, maybe 18 months max. So we continue to see organic growth just coming from revenue naturally going up every year as it's historically done. And there's probably a little bit of signage we can add as we -- there's definitely some signs we can add as we build additional buildings in the district over time, but that will take some time. So there'll be some signage that comes back online next year. And at the same time, we're going to rebuild the different signs, so that sort of cancel each other out. But as you said, very healthy business that tends to have pretty steady growth, if you look at it over a period of time. Steven Roth: What I tried to do in my remarks was to talk about the strategic benefit that we have in that business. So the first thing is that we own [ clusterings ] in exactly the right place for Time Square and the PENN Station area. The fact that we own the buildings and the signs are attached to us, we don't have leases, we don't have the expensive leases, we don't have the renewal risk of leases. So basically, we have perpetual control over this inventory. So that's the first thing. The second thing is that because of that, we have the highest margins. So we have the best signs and the best districts in quantity, and that creates a very important strategic business. At Times Square, we have our -- we have -- obviously, we have the best -- the 2 best blocks the bow tie, we have the best signs. And so that's fine. In PENN Station, I don't think that we scratched the service to the amount and quantity of signs that we can develop there. Operator: John Kim from BMO Capital Markets is up next with the next question. John Kim: I wanted to go on the commentary of flattish earnings in '26, which I think you foreshadowed a little bit last quarter, but it seems like it will be impacted by noncore asset sales. So I was wondering if you could talk about the timing and the dollar amount of the dispositions. And also what you think the trajectory of occupancy will be next year? I know, Steve, you mentioned in the past that it could go to the mid-90% range, and I was wondering, how next year shapes up? Michael Franco: John, hope you're well. Flattish '26 is like, I think we've been consistent last couple of quarters in terms of '26 and '27. In terms of magnitude of noncore sales, I can't be specific on that because there's a number of things that could drive that. But I would say it's at least in the $250 million, $300 million neighborhood, it could be more than that. And timing, just depending on when we execute on those. So I can't give you much more specificity just because you're dealing with counterparties and things take a little time and some things are still on the drawing board. But I think, by middle of the year, my guess is much of that is probably done. But again, we've got a track record of certain things we had it planned, we end up executing on, and that may well happen again. On the trajectory of occupancy, like -- I think as we look at Glen's pipeline, I think there's a reasonably good probability we're going to get to 90% in the next quarter or 2. And then beyond that, we'll continue to build occupancy. And we think over the next couple of years, we'll get that into the -- back to sort of the historical levels, whether that's 94, give or take, if not higher. So I think as we sit here today, that's probably as much specificity as I can give you. John Kim: Okay. And then my follow-up is, any insight you can provide on the PENN Station transformation project? How involved Vornado will be as part of it, if there's any impact to commercial development opportunities going forward? And any views on whether or not MSG will relocate? Steven Roth: So I think that it's highly unlikely to impossible that MSG is going to relocate. So that's that one. So with respect to the PENN Station project, we are absolutely in favor of anything that makes PENN Station and the PENN District better, more user-friendly, more transformational. And that's the -- the best thing for us is constant improvements. And the fact that the government is involved now with a large budget, that's a very good thing. We will be involved in the process with one of the bidding groups, primarily with respect to the retail that we dominate in the station and in the surround. Barry, do you have anything to add to that? Barry Langer: No. Steven Roth: Thank you. But we're on -- this process of improving PENN Station, we are the biggest rooters for that, that there are. Operator: Dylan Burzinski with Green Street is our next question. Dylan Burzinski: I guess just sort of given the significant demand backdrop that you guys are seeing, obviously, continuing to push rents across the PENN District. I know one of your peers, when they reported earnings, talked about, call it, a 20% to 25% cumulative net effective rent growth expectations over the next 4 to 5 years. So just wondering if you can sort of put any of your thoughts around that? I mean, are you guys expecting sort of significant rent spikes as space continues to get tight, especially for the quality of you guys in the portfolio? Michael Franco: I think 20% to 25% over 4 to 5 years, I think we'd be disappointed if it's not quite a bit more than that. You look at all the dynamics... Steven Roth: Agreed, agreed. Michael Franco: Okay, I mean you look at all the dynamics in the marketplace, and I think this is a favorable backdrop as we've had in decades, right? There is scant supply, the demand is broad-based and very strong, companies are expanding here. And there's just -- and the vacancy factor, I mean, it's -- I think Steve referenced in his opening remarks, the better buildings in Midtown, we're now talking about 6% vacancy. That's almost frictional, I think, particularly on large spaces. So I think it's going to result in two things. I think one, you're going to see renewal probabilities start to go up in the next 2, 3 years because there's just no place for a lot of those companies to move to. And then secondly, to rent space, it's become a landlord's market, as Steve said. So when these cycles happen, if you look at history, it can go up 15%, 20% in a year. And I'm not telling you that's going to happen, it could happen, it's not a 0%. But we think that the probability of the numbers you talked about is much higher on the upside than the alternative. Steven Roth: There's another way to look at this also, and that is the elasticity of demand on the part of the marketplace and our customers. So not that long ago, $100 was a top, top, top tick rent. Because of the increase in costs, because of the shrinkage of supply, because of the increase in interest rates, rents like overnight went into the mid hundreds of dollars a foot or something like that. Interestingly, we found that there was no pushback from the marketplace. If a growing, expanding, important client need in the space, they paid what it took to get the space. So what I'm saying is that the marketplace is able to pay for the space. And the dynamics in the marketplace will determine what the rents are. But clearly, the rents are going to go up. And we think they're going to go up. Obviously, we think they're going to go up more than you do. Dylan Burzinski: That's helpful commentary. I really appreciate that. Maybe just one more, if I could. You guys mentioned noncore asset sales. And I know you guys don't necessarily give a number. But as you guys sort of think about redeployment of that proceeds, I mean, is it likely to go into asset acquisitions? Are you going to hold it to delever? Just sort of curious, plans with that capital that you guys expect to come in next year. Michael Franco: Got it. I think it could go into a number of places, Dylan. Like if you look at what we've done to date, whether it's noncore, general asset sale, which has been quite significant; we've delevered the balance sheet meaningfully. At the same time, we made a, we think, a very attractive acquisition. And that's not something that we program, right? We don't sit around here in our counsel room saying we're going to buy x amount for a year. If we find the right opportunity, we'll act on it. If not, we're perfectly content to bide our time until the right thing comes along. So I would tell you that, as we look at capital, we're going to continue to strengthen the balance sheet. And if we find something compelling externally, obviously, we'll look at that. We have some internal capabilities or requirements in terms of we've talked about developing the residential. We've got 350 Park in the [ out ] year. So we have a number of users. And by the way, and I'll let Steve jump in here as well, I mean our stock still, we think, trades at a huge discount. So I think everything is on the table. Operator: And our next question will come from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: So two questions. You definitely piqued my interest in PENN 15 that their conversations ongoing. Would you say that the tenants that you're speaking to are willing to pay the rents necessary for you guys to go forward on an economic basis? Or are they not quite there at where rents would need to be? Steven Roth: Oh God, I don't know how to answer that. Clearly, there are a significant number of anchor-type tenants who are in the marketplace that are looking for new builds. We're not the only opportunity, there are other opportunities. All of us need approximately similar risks to have an economic new build. And the tenants that we're talking to, they understand the math, their advisers and brokers understand the math. So the rents are available, it's just a matter of making a deal, having the tenant select the site, et cetera. Alexander Goldfarb: Okay. And then the second question is... Steven Roth: What I'm saying is this is not just kicking the tires. This is serious business. Alexander Goldfarb: No, no. That I understand. It's just the size of the building, like these are big rent checks. It's not like at the Saks tower or some of the boutique buildings that are being undertaken. I mean 2 million-plus square feet, those are big rent checks. So that's why it's just impressive that tenants are willing to actually engage because that's a serious rent, as I say. The second question is on the litigation on the PENN, the courts can drag things out forever, people appeal, appeal, and lawyers love to run up the meter. So the two-part question on this is, one, are you guys booking the economic impact based on sort of the most punitive? And second is that when you say that the yields on the PENN District have improved is that at what you think the ground rent should be or at the sort of the worst-case scenario in the ground rent? Steven Roth: Well, the first thing is the PENN 2 yields have clearly increased dramatically. The PENN 1 yield, we're pretty happy with what we projected. With respect to the litigation, what had been a known number is now subject to some uncertainty. In our minds, we have parameters around that. We are booking a number which we think is a realistic number. And we will see. But with respect to this litigation, I don't really have a lot to say about it. Operator: And our next question will come from Jana Galan with Bank of America. Jana Galan: Maybe another one on dispositions. Following up on your prior comments on the willingness to maybe part with 555 California or the mark, anything you can share on the amount of incoming interest and/or valuation? Or given the improvements in San Francisco, are you thinking differently strategically about those assets? Steven Roth: Not really. I thought we were pretty clear in sort of, how would I say it, suddenly advertising those 2 assets last quarter. We don't have very much to talk about in terms of specific pricing or bad news or whatever. I can tell you that we think that the 555 California complex in California is the eighth wonder of the world. As you can see from our remarks and our documents, the leasing there is extraordinary. Even going back a year or 2 in a chaotic declining market, the rents that we were able to get for that unique best in the marketplace building were rising. So we think that, that's a great asset. We're delighted to own it. And for the right price, we're delighted to sell it. And I think I'm pretty well known as not being an easy seller. With respect to Chicago, that's a different story. The market there is not as strong. And opportunistically, we'll see what happens. Jana Galan: And then just in terms of developing future residential, just curious, your thoughts around for-sale versus for-rent components, given kind of different changes going on in New York City. Steven Roth: We have multiple land -- pieces of land that we could build either office or residential. We do the math and the analytics as to which is more favorable constantly. We are putting our big toe. Actually, we're putting our whole foot up to our ankles into doing a 475-unit rental project, rental project, not for-sale project; at the corner of 34th Street and eighth Avenue. We think it's a very good site. It's caddy-corner to the Moynihan Train Hall. And it also benefits for all of the renewal that we're doing in the neighborhood. So we're excited about that. And we'll see how that goes, and we'll make decisions going forward. Operator: And our next question will come from Seth Bergey with Citi. Seth Bergey: You mentioned in the opening script, easily exceed the 80% and the 1.1 million square foot leasing pipeline, I believe. How has that leasing pipeline kind of split between PENN 2 and other leasing? And kind of where do you think that 80% could kind of land by year-end? Glen Weiss: It's Glen. So the 80% is specific to PENN 2, just want to make sure you're clear on that. As it relates to the pipeline, it's generally 50-50 in PENN District versus others in our pipeline right now, which is generally the balance we've and able to achieve quarter-to-quarter as we've been on this big leasing run over the past bunch of quarters, so basically 50-50. Seth Bergey: Okay. And then as a follow-up, you mentioned that's highly unlikely or impossible for MSG to relocate. How do you kind of see the permitting process playing out just with your knowledge of kind of how that process works in New York? And then, do you see that kind of creating any additional opportunities for Vornado kind of outside of the PENN 2 station transformation? Michael Franco: Like -- I think Steve talked about this a bit, right, that the government is -- they've issued an RFP and they're going to run a process to select the group to redevelop and complete the remainder of PENN Station improvements. We expect there'll be a retail component in that, which is our interest. But our main interest is, as Steve said, being a cheerleader for something getting done because that inures to the benefit of our holdings there. So look, they've issued the RFP. We're being told that they'd like to start the project by the end of '27. And from there, I assume it will take a couple of years to get done. But we'll see whether the timeline sticks, but that's generally what we've been told. Operator: And our next question will come from Michael Lewis with Truist. Michael Lewis: So I apologize, I'm going to ask a question that was asked earlier, but ask it a little differently. The New York portfolio is 87.5% occupied. So I take that to mean there's a tenant in there paying rent. How much of the New York portfolio is leased? Is it close to 90% of the space that's leased? Is it less than that? Is it more than that? Michael Franco: No, the occupancy figure we gave you is what is leased. Michael Lewis: Okay. I understand that. So I guess that speaks to -- has there been any change in free rent period? So a lease least that's already signed but not paying rent until 2027 feels a little long to me. But you have -- you sometimes have very long leases, so maybe that's not long at all. Has there been any movement in free rent or other concessions? Glen Weiss: It's Glen. So there's a movement in two ways in that regard. One is downtime is less. So companies are making decisions much more quickly than they were previously, which is important. And then once that happens, the free rent periods are declining. So I would say, downtime is lower and free rent is lower. As it relates to your comment, you're right, a lot of our leasing has been 15 to 20-year deals, which is why you're seeing free rents longer than you might have otherwise on 5 to 10-year leasing. But certainly, on balance, downtime free rents coming down as the market improves. Michael Lewis: Okay. So good to see that moving in the right direction, as you might expect. And then lastly for me, this is a small one. But in going from NAREIT FFO to FFO as adjusted, I saw there was 6.7 million of other, looks like gains that were backed out. I was just curious, it's a few pennies, but I was wondering if there was any anything interesting or notable in that 6.7 million of other that was deducted and get into your core FFO? Steven Roth: Yes. It's made up of several items. I can get you to lift offline if that's something you want me to follow up on. Michael Lewis: No, that's okay. If there was nothing material that stood out. I was just curious. Operator: And our next question will come from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess just maybe, Michael, if you can just remind us, you've talked a lot about the flattish FFO, but do you mind just going over some of the big sort of building blocks you've shared in the latest on those just as we think about kind of the big puts and takes that get you to flat for next year? Michael Franco: Yes, yes. It's -- I think I referenced a couple of things, right? We've got some income we're taking offline. Steve referenced the retail redevelopment on 34th and 7th. We're going to take a little bit of signage off-line to rebuild one of the signs, which we think will produce greater returns once that's back online, but it will probably affect us [ for 4 ] months next year. We've got -- we talked about some asset sales that are producing FFO, but assuming those will get sold in the first half of the year, most likely or certainly for the end of the year. So all that has an impact on FFO. At the same time, we've got other items that are positive, which gets us sort of flattish. And the big growth is in '27 where we've got significant income. I mean like it's signed, right? We know everything that's talked about on PENN 2, that probably everything outside of MSG won't really start to a large extent until back -- or end of '26 and really in 27, right? So you're going to see significant growth in '27, but we don't really get the benefit from that on a GAAP basis in '26. And I think the same goes for a number of the other vacancies. We've had a lot of success back building, the 1290 and 280s and so forth. And some of that's hit, but a lot of that won't hit until the end of the year of '26 or '27. Vikram Malhotra: Okay. And then I just wanted to understand sort of the comment you made about rents, and, you've been happy about a lot more rent growth than was referenced. But we used to talk a decade ago about how many leases signed were $100 rents or more. Now in multiple pockets, we're talking $200 rents. And I want to take like that fifth revenue acquisition maybe as an example, but just your perspective on what are the pockets where you can -- and types of buildings where you can see those $200 rents? And then similar to the Fifth Avenue acquisition, like is there a pipeline of assets you're exploring with similar unique opportunities like that for Vornado? Glen Weiss: It's Glen. I think what Steve was referring to think about what's happening quarter-to-quarter, we have been printing on average $100 average rents across or activity, very strong. In the market, there are deals being printed in the newer stock at 150, 175, 200. So there's a lot of runway for us from here forward in our existing portfolio. So we think those $100 numbers are going to go up, up and up as the market continues to strengthen, which we're very confident it's going to strengthen. And we're already seeing that, as you can see from some of the things we've said this morning about our average rents. 623 is a great example of what we really believe is going to happen. That's a 5-star building. We're going to make it great, there will be nothing like it in the market. It is perfectly located to achieve rents higher into those ranges, for sure. We're already getting great tours, great responses from the marketplace. So that is that an example of where you'll see higher rent in our portfolio. Steven Roth: So the tightening of the market creates multiple benefits, as you can imagine. Rents will rise. And we're about going to greatly push rates, we just follow the market. We don't make the market. We're important in the market, but we don't make the market. So rents will rise, and then inducements will come in. So I don't know and I don't think Glen agrees or is projecting that tenant improvement allowances, which is money they use to build their space, is going to come in because the cost of building the space is not coming in. But for sure, free rent is going to come in. Free rent is very important, and it could come in a lot. So those are all -- very [ concerned ]. I want to spend a minute on 623 Fifth Avenue for a second. Think about the math. So I've already said that we're budgeting at least a 9% return on cost unleveraged on that asset and that we're going to deliver that as in the next 2 years to a waiting and prime marketplace. It's going to be the best asset in the best building, and there's a shortage of supply in that. We're already getting indications from the marketplace, and there's a shortage supply. So if you take $1,200 a foot times almost 400,000-foot building, that gives you the better part of $500 million of cost on that building. If we can achieve what I think, which is 10% returns, you can calculate what the income will be. Now what's the exit, what's the value? I believe an asset of that quality in this market will be -- will have an exit value, let's say, in a 5% cap rate. So if that math turns out to be, we will double our money on that asset in a very short period of time, and this is not that hard. The key to it is, is we have to turn that asset into something that's unique in the marketplace, which is exactly what we did with 220 Central Park South. Operator: And our next question will come from Nicholas Yulico with Scotiabank. Nicholas Yulico: Just I guess going back to the FFO flat commentary for next year, Michael, can you just maybe touch on interest expense and how to think about that trending next year and capitalized interest burn off? I don't that's also something we should be thinking about for next year. Michael Franco: I think a lot of the capitalized interest has -- will have burned off by next year. There might be a little bit left, but not a lot. And Tom, do you want to give specifics on that? Thomas Sanelli: Yes. So on the capitalized interest, as it relates to PENN 2, that's obviously going to burn off. So keep in mind, 623 Fifth Avenue and 350 Park, when that comes offline, both of those will have capitalized interest. So you won't really see '26 as we compare it to '25, but PENN 2 will obviously be burning off. Michael Franco: I don't think it's that meaningful in '26. So it affected 350, there's a difference relative to this year. 623 is obviously a new one. Nick, there was another part of your question? Nicholas Yulico: No. I mean just on a high level, if there's a way to think about capitalized interest as -- is it flat next year? Is it net, it comes down a bit and that weighs on interest expense next year? Michael Franco: Yes. I would say it's probably going to be higher principally because of 623, and that's shifting in the bond -- it's going to be higher because of the items that Tom mentioned. But net-net, I would say the principal difference will be from 623. The interest expense overall, I think we've generally hit, assuming the forward curve is accurate, I think it's peak or close to peak of where we're at. We absorbed some pain over the last couple of years ago, we're now rolling over a lot of debt. Generally, when you sort of blend it all together at same or lower rates, SOFR is coming down. We delevered. So even when there's higher coupons, we've got -- given the fact we've got less aggregate debt, the overall interest expense line item is certainly no worse than flat. So we'll see. It depends on how we deal with some of our upcoming maturities in '26, whether we pay those off, whether we pay them down, whether we just roll them over, all that will factor into what the interest expense is for '26. But I think just in terms of the impact from rates, I think it feels like the worst is behind us on that front. Nicholas Yulico: Okay. That's helpful. And then I just.... Steven Roth: While we're on the topic of balance sheet, I think you have to -- we all have to focus on the fact, first, I am unbelievably proud of what our organization has done over the recent past in terms of getting our debt ratio down from much higher into the 8s and now into the 7s heading into even lower. So that's number one. Number two is the -- I'm also extremely proud that we prefunded all of the massive development that we're doing at PENN and loaded in our balance sheet a couple of years ago, getting all the cash, so that we had the capital already on balance sheet to complete our massive development program. Number 3 is that we did all that keeping the major PENN assets unencumbered, so that we have a huge store of value there in the future. So I think that we -- I think Michael and his team and maybe me a little bit, Glen a little bit, even Barry a little bit; we get a gold star for how we've managed our balance sheet, and we're not done with that yet. Nicholas Yulico: Okay. And then just the second question is maybe any latest thoughts you can share on Farley. As you're thinking about as a source of capital, whether it's putting a loan on the asset or selling an interest in the building for -- to create some funds for some of the future development capital you're talking about? Steven Roth: Well, Farming is a unique, unbelievable interesting asset, It's a double block-wide space. It's one of the very few blocks in Manhattan that is double wide. It's -- we leased it in the middle of COVID to -- all of it, 730,000 feet, I think, to Meta. The feedback that we get from Meta is they think it's like the single best of their real estate installations in the country, probably just second to the Menlo Park headquarters. The lease has probably another 11, 12 years to go -- has 12 years to go. There's an option to renew at the market. So if we were to compare what the incumbent rent is to what we think market is now versus what we think market will be at the expiration of that lease, it's very, very, very significant. So that's a fact. Based upon that fact, we would not consider selling that asset or selling a piece of that asset. Now chronically, it's interesting, we did an analysis of this recently; we basically don't do lots of partner deals based upon capital. We do some partner deals based upon if somebody controls a site or do something together in real -- we do real estate partnerships, we don't really do capital partnerships. Although we think about it. So the -- one hand that you -- the Farley which you're referencing, we think it's substantially under market. We think the future of it is great. We think it's a unique piece of space. We would never -- we were not considered selling it, nor would we consider taking it apart. Financing it is a whole different story because you're basically just borrowing money on the credit and the tenant. Operator: Our next question will come from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Just two quick ones. Sticking on the 2026, if I can ask about same-store NOI, I mean, I think on the cash basis, it sounds like there was a reset this year, there's some free rent. Presumably, some of that burned off in '26, maybe a lot in '27. So just mechanically same-store NOI, is it somewhat positive next year and then really positive in '27? Or how do we think about that? Michael Franco: So you're talking about the cash front? Ronald Kamdem: On a cash basis, yes. Michael Franco: I think like GAAP, we still think of continuing positive cash, just given the timing of the free rent, whatnot, I think it towards the end of '26 that, that will turn positive and then obviously, significantly so in '27. Ronald Kamdem: Great. And then the -- my second one is just adding to the dispositions questions. Maybe can you talk about sort of the Hotel PENN land site at maybe even sort of more retail monetization? Just what's the interest and how are you guys thinking about those? Michael Franco: Hotel PENN site, we don't have any plans to dispose off that at the development that Steve mentioned in the script and talked about in terms of some of the incoming tenant interest. But that's a long-term hold and well unbelievably well located across from PENN 1 and PENN 2 core holding. On the retail side, we obviously sold UNIQLO, their store. And I would say the interest from retailers to purchase assets remains actually pretty strong. I would say, generally, we're seeing very good activity across the portfolio retail-wise. And Times Square feels like it's picked up quite a bit here recently. So good demand there, good demand Time Square. Obviously, we've been active in PENN. And tenants are really responding to everything we've done at PENN 1, PENN 2, which is going to lead into our redevelopment on 34th and Seventh. But retailers understand the dynamics, the market heartening as well, which is why they're approaching to renew early in many cases and I would say, in some cases, looking to potentially buy is a space they're in or look to buy another space. So I think you'll -- like it's been episodic. You can point to a few things a couple of years ago, you can point to a couple of major transactions recently on the retail side. I think we'll continue to see those. And we're open to being a participant in that to the extent that we get rewarded with the right value. So stay tuned and maybe something will occur there in the future. Steven Roth: While we're on the topic of retail on 34th Street, let me just say a little more color around it. So on 34th Street, both sides of Seventh Avenue and then down Seventh Avenue to 33rd Street is basically now populated with retail that we inherited, which is really, I used the word in my script, lovingly junk. We are in the process of canceling all those leases, and we will basically redevelop all of that space and to modern, exciting, sought-after retail offer, obviously [ trained ] at our office occupiers and the market. Now the 34th Street and Seventh Avenue corner has been historically the second or third most active subway station in the city -- in the whole city. 34th Street, not that many years ago, was the second best shopping street in the city. It has deteriorated over time. We intend to bring it back, and we think bringing it back is not a difficult thing to do. Macy's, which is across the street, fluctuated volume close to $1 billion, and it comes down, it goes up. But it is clearly the highest-volume department store in the United States. So we like the real estate. The real estate has deteriorated. We're going to rejuvenate the real estate. In addition, that's the gateway to our entire PENN district. So we think it's very important, and we think it will have an enormous effect on the PENN District overall values. Pardon me for advertising just a little bit. Operator: Our next question will come from Brendan Lynch with Barclays. Brendan Lynch: Just one question for me. A follow-up on the PENN axis project and bringing Metro North into to PENN specifically, it's been delayed. It seems there is a coordination issue between Amtrak and MTA. To what extent are you involved with the various government agencies? And is there any prospect of getting that project timeline back on track for completion prior to the current 2030 target or even preventing it from slipping further? Steven Roth: Barry and I will take that question. And then Michael and I will add it. Barry Langer: So as you can imagine, we're intimately involved with the MTA through all of the work around PENN Station, a great partnership there. If you speak directly to the MTA, what you'll hear is that they plan on running service on Metro North starting in 2027 utilizing the existing 2 tracks that already connect PENN Station straight up to Westchester to Boston. The part that was delayed is the construction of the 4 new stations in the Bronx and adding 2 new tracks, which allows them to run Express service. So we expect that service will begin in 2027 on the New Haven line in the PENN Station. Operator: At this time, there are no further questions remaining in queue. Steven Roth: Thank you, everybody. We actually are very proud of the results that we delivered this quarter in terms of the scale of our leasing and the price, the rental rates and the value creation. The occupancy is easily going to be over 80% this year in PENN 2, and we think we had a great quarter. We are very proud of our balance sheet activity, and we love the 623 Fifth Avenue acquisition. So with that advertisement, we'll sign off. And we are excited to talk to you again episodically and also in the fourth quarter. Thank you. Operator: Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect your lines.
Operator: Good morning, everyone. Welcome to the Core Molding Technologies Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will turn the call over to Sandy Martin, Three Part Advisors. Please go ahead. Sandra Martin: Thank you, and good morning, everyone. We appreciate you joining us for the Core Molding Technologies' conference call to review our third quarter 2025 results. Joining me on the call today are company's President and CEO, Dave Duvall; as well as COO, Eric Palomaki; and CFO, Alex Panda. This call is being webcast and can be accessed through coremt.com via an audio link on the Investor Relations Events and Presentations page. Today's conference call, including the Q&A session will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements or expectations or future events or future financial performance are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are uncertain and outside the company's control. Actual results may differ materially from those expressed or implied. Please refer to today's earnings release for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Core Molding Technologies assumes no obligation to update or revise any forward-looking statements publicly. Management will refer to non-GAAP measures, including adjusted EPS, adjusted EBITDA, the debt to trailing 12 months EBITDA ratio, free cash flow and return on capital employed. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. Our earnings release has been submitted to the SEC on Form 8-K. And now I would like to turn the call over to the company's President and CEO, Dave Duvall. David Duvall: Thank you, Sandy, and thank you all for joining us today. The positive momentum we've highlighted last quarter has continued to build and remains firmly in place. The only change from our Q2 update relates to the timing of our tooling revenue, which has shifted into the fourth quarter. As a reminder, tooling is an iterative process involving fabrication, testing and ultimately, customer final sign-off, making it inherently challenging to predict the exact timing of revenue recognition. Within the trucking industry, several projects remain on hold, pending greater clarity around the administration's policy direction. That said, we have continued to make significant progress this year and this quarter, across our next largest verticals. During the third quarter, sales in our power sports, building products, and industrial and utilities markets grew year-over-year, reflecting the continued traction of our investor growth initiatives and the gradual improvement in market conditions. Power sports, a major sales category for Core achieved its first year-over-year growth in 8 quarters, marking a return to growth after two full years of declines. We believe this momentum is being fueled by a combination of new product introductions and our continual wallet share growth. As an example, we are now in full production for the UTV skid plates. In the third quarter, we successfully launched the UTV skid plate program we've discussed on prior calls. We're seeing signs of recovery in demand for power sports helped by expectations for continued lower interest rates and new launches. That combination is creating a more active demand environment across both water and land power sports as we head into 2026. Regarding the skid plate program specifically, we expect it to generate approximately $8 million in annual run rate revenue once fully ramped. While this category remains somewhat seasonal, we believe power sports is positioned for a stronger rebound in 2026, particularly in a more favorable interest rate environment following recent cuts and new program launches. Last quarter, we highlighted $46.7 million in new business wins this year, 99% of which is incremental. This builds on the $45 million in wins from last year. We are pleased with the momentum and excited about our known future growth and continue to see additional opportunities and a robust sales pipeline of over $250 million. But we know we still have many opportunities to leverage the execution improvements we have made. And therefore, we are continuing to invest and aggressively refine our sales systems. This has always been the last phase of the Core Molding transformation, and it is our current must-win battle, as we drive to leverage all the business execution improvements and unlock the earnings potential of our improved capabilities. To accelerate growth further, we have implemented a value selling program, and we're adding three new business development roles that are focused on and incentivized to expand wallet-share with key partners and drive lead development for our new sheet molding compound opportunities. On last quarter's call, we discussed the completion of a market analysis to determine the total addressable market for SMC in North America. During the third quarter, we partnered with four potential customers who completed molding trials of our material and provided positive feedback. Based on the successful product trials with the initial customers, we are optimistic about our current market potential, as we've stated. Earlier, we see the quote-to-cash cycle for this product in the 6-month range versus our fully designed product being in the 12- to 18-month range. We're pleased with the level of end market diversification represented in these trials, which includes electrical boxes, multifamily commercial doors, buses and roofs and hoods for truck customers. We remain focused on broadening our sales and marketing work to promote Core's proprietary SMC product as raw material for key customers. We estimate the total addressable market for this product exceeds about $200 million. Our focus on operational improvements and key investments in our SMC operations has significantly improved our capacity, consistency and performance, which we are seeing as key value propositions as we engage with customers in this market. We have always viewed our advanced formulations as a deep competitive differentiator for Core and now working directly with SMC customers, we clearly see our product and service advantages versus their current suppliers. Specifically, Core has more consistent material, expertise in modifying SMC formulations to meet specific molded part requirements and Core has significantly shorter lead times. All of these factors create significant value for our customers, particularly for customers whose end products are built around Core's sheet molding compound as is always the case with SMC. Work continues on our strategic $25 million investment and layouts are complete for the Matamoros expansion and the new greenfield build in Monterrey, Mexico. Monterrey has been designed to provide additional capacity for future growth in low pressure injection molding and DCPD processes. Additionally, we are adding topcoat paint capabilities to this facility as customers has specifically asked for this capability, especially in the construction and agricultural machine market. We believe the Monterrey region will continue to grow and has significant long-term potential for us. We have also ordered two new state-of-the-art 4,500-ton compression molding presses, and we have completed the automation design and plant layout for a sleeper roof program in our Matamoros facility. The tooling revenue from these programs is anticipated to be approximately $35 million and is expected to be recognized in 2027. Organic growth remains our top priority in our capital allocation strategy, and this investment not only supports the launch of a major truck program, but also adds DCPD molding and topcoat paint capabilities to our Monterrey business, serving growing industries, including the con ag market. The addition of DCPD molding positions us closer to key customers that highly value this process. Additionally, our new topcoat paint capabilities enables us to deliver final topcoat paint products that are ready to install by our customers. This is a significant value add for our customers, which reduces overall cost and makes the process from order to finish product more efficient. Together, these investments expand our technical capabilities and create new durable revenue streams. We have good visibility into the truck and power sports industry recovery, which gives us confidence in the potential for over $300 million in total revenue in 2027. These long-term programs are expected to generate approximately $150 million in revenue over the next 7 to 10 years. Based on our current projections across truck power sports and other growing end markets, we expect annual product revenue to exceed $325 million within the next 2 years. Turning to our Q3 financial results. Revenue was $58.4 million, which is down 19.9% from the prior year, with over half of the sales decline coming from the known Volvo transition and the remaining due to declines in other truck demand. Gross margin was 17.4%, which is within our targeted range of 17% to 19%. Adjusted EBITDA margin of 11%, that's up 70 basis points from a year ago. Cash flow from operations for the first 9 months of the year of over $14 million, which continues to exceed our year-to-date net earnings. We again delivered stable gross margins this quarter within our projected range and positive year-to-date free cash flow. Sales declines in the third quarter were more than we expected, but the new business wins are there. And we continue to ramp up our investor growth efforts. We expect fourth quarter sales to be up year-over-year primarily due to significant increase in tooling sales. Regarding the ongoing succession plan execution, Eric and I are working closely in all facets of the role as we continue to progress towards the CEO succession plan for May of 2026. As I've discussed in the past, we have robust systems for organizational development and succession planning throughout all levels of our organization. In conjunction with our succession plan for Eric, we have developed a strong bench under Eric, including an Executive President of Mexico Operations, Arnold Alanis, who has worked for Core for over 13 years, and our Executive Vice President of U.S. and Canada Operations, Mike Gayford. Arnold and Mike had been a part of the entire leadership transition over the last year, and I appreciate their increased engagement in our business allowing Eric time to focus on transitioning to CEO. I believe that our culture is a competitive advantage and a key benefit of that strategy is our ability to develop and grow leaders from within Core Molding as demonstrated by our ability to promote new executive leaders from within the organization. I think, it's a testament to the effectiveness of our organizational development and succession process. Now, I'll hand the call over to Eric to share comments on our new production and operational efficiency efforts. Eric Palomaki: Thank you, Dave, and good morning. One of our newest program opportunities is a large Canadian rail infrastructure project. The cable railway containment trough system replaces concrete systems and its installations were labor-intensive, slow and costly. Under the traditional installation process, crews excavate a shallow trench and use a crane to lift and position each concrete section. The benefits of our proprietary polymer and composite troughing are that they are lightweight, non-conductive, easier to install and made from recycled materials, reducing both installation labor and lifetime maintenance costs. I'd also like to share an update on footprint optimization initiative launched at the end of the second quarter, which we expect to be completed by year-end. As part of our ongoing focus on product level profitability, the current softness in the truck demand created an opportunity to consolidate our RTM or Resin Transfer Molding process by purposefully relocating select programs to another one of our facilities. This strategic move will streamline operations at the originating site and is expected to deliver further margin improvement. Lastly, I wanted to call out our operational teams for their 99% on-time deliveries and excellent 62 PPM performance. PPM, which measures the number of defective parts per million produced is used by our customers to measure quality performance. The rate below 0.01% indicates a high level of quality and demonstrates the precision of our quality processes. We have also maintained industry low safety incident rates and employee turnover rates, which we take pride in. These favorably trending metrics reflect well on our culture and commitment to excellence across all our people and our plants. With that, I would like to turn the call over to Alex to run through the financials. Alex Panda: Thank you, Eric, and good morning, everyone. For the third quarter, net sales totaled $58.4 million. As Dave stated, product sales were primarily down due to the known Volvo transition. Excluding the Volvo transition, sales were down 8.7% from prior year due to lower demand primarily in the medium and heavy-duty truck verticals. This was partially offset by new product sales to customers in power sports, building products, and industrial and utilities markets. Despite the operating deleverage experienced in the third quarter, we maintained a gross margin of $10.1 million or 17.4% of sales. Over the past 12 months, we have executed a series of initiatives focused on improving operational efficiency, optimizing raw material costs and enhancing overall margin performance. These efforts have helped offset the fixed cost deleveraging associated with the planned Volvo transition. We continue to expect our gross margin to remain within our targeted range of 17% to 19% for the year. SG&A expenses for the third quarter were $7.6 million or 13% of sales compared to 12% in our prior year period. Excluding the $220,000 in footprint optimization costs, our SG&A rate would have been 12.6% for the quarter. As Eric discussed, our footprint optimization project is underway. We have invested $500,000 so far and plan to invest $1.5 million by the end of 2025. Again, this project involves relocating production to a different plant to generate cost savings of over $1 million each year, beginning in January of 2026. Operating income for the quarter was $2.6 million or 4.4% of sales, down from $3.6 million or 4.9% of sales in the same period in the prior year. The third quarter's interim effective tax rate was 29.3% compared to 18.7% in the prior year quarter. The increase was due to taxable income being generated in higher tax rate jurisdictions this quarter. Net income for the third quarter was $1.9 million or diluted income per share of $0.22 compared to net income of $3.2 million or diluted EPS of $0.36 in the comparable year period. Excluding the impact of footprint optimization costs, our third quarter diluted EPS would have been $0.24. Third quarter adjusted EBITDA was $6.4 million or 11% of sales. We generated $14.2 million in GAAP cash from operations. And after capital expenditures of $9.3 million, our free cash flow was $4.9 million for the first 9 months of 2025. We continue to expect the 2025 capital expenditures to be approximately $18 million to $22 million, including investments for the Mexico expansion. As we previously announced with the award of the Volvo Mexico business, the company will invest approximately $25 million over the next 18 months. As of September 30, our balance sheet was strong with a total liquidity position of $92.4 million, comprising of $42.4 million in cash plus $50 million available under the revolver and capital credit lines. The company's term debt was $20.3 million at the end of the quarter, and our debt-to-EBITDA ratio for the trailing 12 months remains less than 1x. Our return on capital employed was 6.5%. And excluding cash, the rate was 8.7%. As we continue to launch new business, we expect this metric to improve by better leveraging top line performance and driving better asset utilization. Both ROCE metrics are computed using the trailing 12 months of operating income and total capital employed, a pre-tax metric. Please see our earnings release for the GAAP to non-GAAP reconciliation tables. Our capital allocation strategy remains flexible with a significant focus on organic growth as well as disciplined management of debt and working capital and share repurchases. Year-to-date, we have spent $2.5 million on Mexico expansion projects and expect to spend a total of $7.5 million by the end of 2025 and $17.5 million in 2026. For the 3 months ended September 30, no shares were repurchased. And to date this year, we have repurchased 151,584 shares at an average price of $14.80. Our full year sales expectations are down 10% to 12%. However, we have forecasted fourth quarter sales to increase driven by new program launches and significantly higher tooling sales. As a reminder, regarding tariffs, our products in both Canada and Mexico are USMCA compliant and are currently exempt from tariffs. We will continue to closely monitor how changes in trade policies affect our customers and their end markets. And with that, I would like to turn it back to Dave. David Duvall: Thank you, Alex. We are excited about new and existing customers and end markets. As Eric mentioned, we are finalizing negotiations on a large Canadian project for the rail data line transmission troughs, called Trotrof, which is worth about $15 million in annual revenue starting in the second half of 2026. We continue to see a strong pipeline of opportunities with over $250 million in business development potential in our pipeline. We believe we can add over $40 million in new wins that would be awarded in the next 3 to 6 months. We're also excited about this year's wins, because they are in new and emerging markets for Core. These new markets, which we strategically targeted include new pickup box panels for small EV trucks, satellite tracking systems and the truck applications. We plan to expand our DCPD molding process for large OEMs in the areas we already serve and have added topcoat paint to our full-service partner model. We continue to invest in our sales organization, and we're driving like hell to develop new customers who trust us with their long-term business. Eric and I are highly focused on further scaling operations leveraging our fixed cost base and optimizing our portfolio footprint. Our commitment to continuous performance improvement, especially with the lower current demand, positions us to translate top line growth into bottom line results. We are excited about the future and look forward to leveraging all the improvements with the addition of the $65 million in incremental wins we have achieved in the last 20 months. We will continue to strengthen our operations and take the necessary actions to drive long-term business capability and profitability. We are pursuing the most promising opportunities in new markets and growing wallet-share with our current long-term customers. We are confident this is only beginning. New areas are emerging and we will continue to evolve in the construction sector, such as commercial windows and doors market. We focus on large, diverse sectors such as construction, energy, industrial, aerospace and medical markets, and we have proven we will win. We are driving to engage our sales and technical teams earlier in the design cycle to expand wallet-share and educate customers of our full range of value-added capabilities, including SMC formulation, large part molding and topcoat painting. Customers desire a strategic partner like Core Molding to handle design, fabrication and completion with the topcoat paint. Our teams are committed to maintaining our must-win battle excellence by: one, driving incremental sales growth into new markets; two, improving our margin profile through operational excellence and our innovation pipeline; and three, continually investing in growing a business that has proven it can execute well. Although the truck industry forecasts continue to look soft for Q4, ACT and customer forecasts indicate a truck build increase in the second half of 2026. As we discussed last quarter, the great pause as one customer put it, continues with delayed decisions in major markets still serving in a lower-than-expected demand environment. Tariff concerns have caused companies to pause and we've seen delays in demand and even more so in the decisions of launching new programs. However, recently, we have seen signs of stabilization and rebounding demand in several of our key end markets. We are finding ways to attract new customers and increase wallet-share with current customers. Our must-win battle of invest for growth continues, which is reflected in our confidence to make significant investments in future growth. Developing a world-class engineering and manufacturing solutions partner for large and ultra-large molded solutions is our goal. Again, I want to thank our team for their hard work and dedication to excellence which has enabled us to achieve successes throughout our transformation journey. I also want to thank our customers, investors and Board for their belief in what we do every day at Core Molding. Finally, we will present our investment story and host one-to-one meetings at the Southwest IDEAS Conference in Dallas on Wednesday, November 19. Please reach out if you would like to see us there in person or set up an investor call soon. With that, let's open up the line for questions. Operator? Operator: [Operator Instructions] Your first question for today is from Chip Moore with ROTH. Alfred Moore: I wanted to -- a lot of noise around tariffs for trucking specifically. I think, right there were some actions that get pushed October to November. Just your updated thoughts around those tariffs specifically, any potential impacts or what you're seeing from customers in regards to those? Alex Panda: Yes. I mean, all of our products are USMCA compliance. So right now, we still -- our understanding is, we are exempt. Our bigger concern is the impact that it could have on customer demand down the road. But right now, we're not seeing the impact on tariffs just yet. Alfred Moore: Got it. Okay. No, that's helpful. And I guess... David Duvall: I think, overall too -- Chip, I think, overall too from an operational standpoint, we have both operations in U.S. and Canada. And if need be, it's not a short change to move, but it's always possible to move. Alex Panda: Yes. And then, the only other thing I would add is, we have RMA raw material adjusters in our -- all of our contracts. And so, if we do get hit with the tariff and increased costs, we can pass that through to customers. Alfred Moore: Got it. That's helpful. And maybe to follow up on -- as you look out, it sounds like your line of sight to $300 million plus is quite strong. Just if you think about '27, I guess, biggest risks to that or upside to that? And then what do you have built in around trucking as we look out maybe to 2027? David Duvall: That's a great question. So, when I look at it from a high level, as we said, our quote-to-cash cycle time is 12 to 18 months. So, as we know, the Volvo program won't launch until '27, and we have $45 million of wins in prior year and $47 million of incremental wins this year that we see layering in over the next 18 months. So, that's where we're seeing it. As they ramp up, you start out with a ramp and maybe you're ramping for 6 to 7 months until you get into full volume. So, that's where we start seeing the sales coming together. So, we're pretty excited about that. When we talk with truck customers right now, there is -- and looking at ACT, we're seeing that we believe truck would -- or they believe truck would start coming back to the second half of next year, probably the biggest concern. We were talking with one customer yesterday and the rate of increase that they had going into the second half next year was significant. So, I would say after yesterday, our biggest concern was really how fast will the truck market come up because they can come up pretty quick, and being able to hire and meet all those demands on the upswing. As it goes up as fast as it comes down. And the further it goes down, probably more likely the more it's going to go up. Alfred Moore: Perfect. If I could ask another one. Just around, sort of, more near term, the tooling revenues getting bumped to Q4. Any any sense of how to think about tooling revenues maybe for Q4 and even over the next couple of quarters just with all the new programs you've got on the horizon? Alex Panda: Yes. So, for the full year of 2025, we anticipate tooling sales to be roughly 15% of our total sales in 2025. And then keep in mind, Chip, those sales will be at a lower margin than our product sales. And then in the future year, '26, I mean, we're not really giving any guidance from a number perspective for '26, but the Volvo Mexico tooling job will close. It will be closed at the end of '26 maybe slips into '27, but it'd be December of '26, maybe January of '27. Alfred Moore: Got it. Okay. So, a little negative mix impact Q4 on higher tooling revenues. Any way to think about -- yes, sorry. Alex Panda: Yes. So, margins will take a little bit of a hit, but we still are providing guidance that we'll be within that 17% to 19% target that we've put out there each quarter and for the full year. Alfred Moore: Yes. That's what I was going to ask. And I was going to follow up just sort of longer term as the tooling normalizes. Is 17% to 19% still the right way to think about it? Or do you think there's upside potential at some point on higher volumes? Alex Panda: Yes. I think, when we start getting back into the $300 million, there's going to definitely be some upside. I mean, we'll start getting back some fixed leverage will reverse favorably. And so, I think that will be worth anywhere, I would say, right around 200 basis points. If you go back and look at our previous quarters, and see the lost leverage each quarter. I think, if we go back 2 years, we're losing right around 200 basis points. So you could add 200 basis points, I think, is a good way to look at it. David Duvall: Also the part that we beat is that, on the new programs, the systems that we put in place and how we're quoting business, it's definitely incremental on the margin side. Alfred Moore: Excellent. Okay. Alex Panda: I don't want to give you a number on how much yet, though. Operator: [Operator Instructions] You have a follow-up question coming from Chip. Alfred Moore: I just want to make sure I wasn't hogging the line. I guess, just one more for me on the new business opportunities. The Canadian rail project, that's a nice win. Is there opportunity for similar type projects and then SMC, how is the traction there? It sounds like it's going pretty well, but any more detail you can provide? Eric Palomaki: Yes. Two parts to that, Chip. So, the first one on the rail Trojan troughs. We actually had that business in '22, '23. It tends to be a project-based when a city or a municipality does a section of rail. It's a big project for us for a couple of years. So, we've had a couple of years without any, and we have another one of those currently building a test track for next summer and that will turn into that bigger multiyear program. So, we're excited about it. I can't say that we've 100% won it, but we're certainly there in providing the test track and believe that we are in a good position to win the whole installation. Your second question was around SMC. We put some comments in there. We have -- since last quarter, four very specific customers that are trialing, actually molding parts, had some of our engineering teams working with them. And so, we made a lot of progress with 4 of the 10 customers that we had focused on. And so, we believe in the next quarter or so, we'll be having awards or agreements with some of those customers to announce in our next earnings. Alfred Moore: Perfect. Okay. And maybe just last on the buyback. You didn't do any this quarter, but can you just remind us what your authorization is there? Alex Panda: Yes. We have roughly about just over $2 million left in the buyback is -- it's still in place as of today. And so -- but yes, we plan on still utilizing that as a way to use our capital. Operator: Your next question is from Bill Dezellem with Tieton Capital. William Dezellem: A couple of questions. Would you please start by walking us through the tooling business that shifted to Q4 from the Q3, what the dynamics were behind that? Alex Panda: So tooling in general, Dave kind of walked through this on the call. But for us to recognize revenue, the customer has to accept tooling. So, there is all kinds of different tests. You have to do full production run test, you have to do quality tests. There's different specifications. And so working with a customer at times, those tests get delayed for one reason or another. One could be, because the customer decided to do engineering changes. And so, in this case, one of our bigger tooling jobs that we originally thought was going to close in Q3, got delayed into Q4. We are currently in the process of doing those tests. I don't see that job specifically being pushed out any further at this moment. But that -- it's just -- that's kind of the nature of the tooling. We don't have a ton of control. We can push our customers as hard as we can and work with them. But there is still a risk from a job being delayed from a quarter to a quarter. But at the end of the day, it's not lost revenue. It's just a timing issue. David Duvall: Bill, kind of way that we look at it as well. Usually, if it's -- a lot of times, it's not us. It's the entire product level is really what they're dealing with. And they're trying to really put everything together, what the ideal case for them would be every supplier, every validation test, everything works, and then they get full approval. When one of those things doesn't work, the entire supply base is not PPAP approved. So, once we get PPAP approved, we recognize the revenue, which is a signed off document. Now, if that PPAP is going to be pushed for a long period of time, we would certainly be in there talking with the customer saying, "Hey, we can't wait a quarter for this to be done. But if it's weeks, it's probably not worth pushing that hard." William Dezellem: That's helpful. And then, you referenced the footprint optimization that you were doing and that was going to have a nice cost savings. Would you please walk us through physically what's moving from where to where and why that's taking place besides just the money aspect and maybe it's just straightforward as the cost savings. Eric Palomaki: Sure, Bill. If you remember the term resin transfer molding or RTM parts, we used to have a business in Batavia, Ohio a number of years ago, that built almost only resin transfer products. We ultimately closed that plant and moved that product into our Matamoros facility and our Columbus facility. And ultimately, what we've decided is to move what was left in our Columbus facility down to our Matamoros facility. And our facility down there has employees with 20 and 30 years of experience doing resin transfer molding. Over 300 of our employees in Mexico are part of that business unit down there. And so they are just -- they're skilled, capable and engaged, and we've struggled in Ohio to produce those, I'll say, heavy manual labor, difficult parts, very hand working with fiberglass. And so ultimately, we're just leaning into where our strength and skills are, and there's some labor savings associated with it. But really, it's about the technical expertise and the employee base that we have is capable of it. William Dezellem: That is very helpful. And the math behind this, you said was you were going to spend about $1 million on the transfer, and it will save you about $1 million a year. Did I hear that correct earlier? Eric Palomaki: It will be about $1.5 million total investment, so cost side and then $1 million a year annual run rate ongoing. So... Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Dave Duvall for closing remarks. David Duvall: Thank you for your continued interest in our company. We look forward to providing an update on our progress when we report our fourth quarter results. Have a great day. Thank you. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Wingstop Inc.'s Fiscal Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, Tuesday, November 4, 2025. On the call today are Michael Skipworth, President and Chief Executive Officer; Alex Kaleida, Senior Vice President and Chief Financial Officer; and Sarah Niehaus, Senior Director of Investor Relations. I would now like to turn the conference over to Sarah. Please go ahead. Sarah Niehaus: Thank you, and welcome to the Fiscal Third Quarter 2025 Earnings Conference Call for Wingstop. Our results were published earlier this morning and are available on our Investor Relations website at ir.wingstop.com. Our discussion today includes forward-looking statements. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties that could cause our actual results to differ materially from what we currently expect. Our SEC filings describe various risks that could affect our future operating results and financial condition. We use certain non-GAAP financial measures that we believe can be useful in evaluating our performance. Presentation of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are contained in our earnings release. Lastly, for the Q&A session, we ask that each of you please keep to one question and a followup to allow us as many participants as possible to ask a question. With that, I would like to turn the call over to Michael. Michael Skipworth: Good morning, everyone. We appreciate you joining our call. Coming into 2025, our priorities were clear: accelerate our global footprint as we scale towards our goal of over 10,000 Wingstop restaurants, execute the national rollout of our new kitchen operating platform across our 2,500 domestic restaurants and delivered average unit volume growth as we scale towards our target of $3 million, following 2 industry-leading years of same-store sales growth, stacking comps of roughly 40%. Through the first 3 quarters of 2025, we have opened 369 net new restaurants, representing a 19% unit growth rate, well surpassing our expectations. And we are quickly approaching 3,000 restaurants globally, not even 1/3 of our potential. System-wide sales have grown by 13%. And on a trailing 12-month basis, system-wide sales exceeds well over $5 billion. The strength of our highly franchised asset-light model has delivered 17% adjusted EBITDA growth in the same time frame. And as of this past week, we have implemented our new kitchen operating platform in over 2,000 restaurants, keeping us on track to have the national rollout completed by prior to year-end. We shared earlier this year that certain regional pockets, which over-indexed to Hispanic and low-income consumers were experiencing some softness in sales as we lap 2 consecutive years of industry-leading same-store sales growth. During the third quarter, we saw this dynamic broaden across the industry and within our business to more geographies as well as to the middle-income consumer in some areas, resulting in a 5.6% decline in same-store sales in Q3 that was below our expectations. We believe this is only temporary and the current consumer environment will prove to be cyclical. While none of us can predict the duration, where I am focused is on the strategies we are executing that position Wingstop to return to same-store sales growth and further strengthen our already best-in-class unit economics. What gives me confidence is the underlying fundamentals and health of the brand that remains strong and the early results we're seeing from our strategies being implemented in 2025. Let me touch on each of these strategies we are investing in that we believe will scale AUVs towards our target of $3 million. First, our new kitchen operating platform, Wingstop's Smart Kitchen is truly a game changer. As I mentioned earlier, we are live in over 2,000 restaurants. We are seeing more and more restaurants that have been on the new kitchen operating platform start to consistently deliver a 10-minute speed of service, truly incredible to think about. That's over a 50% reduction from our prior speed of service levels. Our consumer research and early results in markets with the Wingstop Smart Kitchen show that speed and consistency are sizable opportunities for us to become more of the consumers' consideration set. Our brand partners are fully bought in, motivated to execute our new operating standards and maximize the investment they are making. Our Southwest region, which has the highest concentration and longest tenure with the new kitchen operating platform is consistently delivering these 10-minute speed of service levels with 100% of restaurants seeing improvements in guest satisfaction scores, particularly in areas such as accuracy and consistency. Additionally, during the last quarter, same-store sales growth in the Southwest region had a mid-single-digit delta versus the U.S. average. What we're learning is restaurants begin seeing measurable improvements in guest scores following 8 weeks of go-live and sustaining performance into a 3- to 6-month window from implementation where new guest retention rates and frequency strengthen, reinforcing that the benefits are consistent, repeatable and scalable across the system. As we enter 2026 and begin supporting this game-changing improvement in our speed of service levels with marketing, we anticipate this curve will start to accelerate and position us to win more share of occasions in our demand space. Second is our new marketing campaign. Let me first help explain our core demand space where Wingstop is best positioned to win and who we need to target to fully appreciate the significance of this new campaign. It starts -- it's a party size of 2 or more adults who prioritize a high-quality restaurant experience and access brands through off-premise occasions. These guests aren't anchored to a specific demographic, they are equally representative across ethnicity, income level or age. The fact is, today, we are only winning roughly 2% of this demand space, and we believe we have a runway to gain our fair share at 20% over the long term. It starts with filling the top of the funnel and attracting new guests into the brand. Our gap in awareness to larger, more mature national brands is more than 20%. And as consumers become aware of your brand, consideration becomes an unlock where we have an even larger gap to these same brands. This is where our new ad campaign comes into play. The tagline is Wingstop Is Here. Our new campaign will showcase how Wingstop fits into everyday life moments, a friend hosting dinner for game night, streaming a show with your plus one, a quick lunch with coworkers or that late-night indulgent craving only Wingstop can fulfill, insights and moments informed by our more frequent guests. It is equally centered on reminding our core fans of that indulgent Wingstop occasion they know and love and educating new guests on how Wingstop fits into everyday life. Our new campaign is centered around broadening the top of the funnel and bringing in guests and occasions we are best positioned to win. I am extremely excited to see the interplay of this new marketing campaign and our new kitchen operating platform, the Wingstop Smart Kitchen, come to life, and I believe it will be a powerful unlock for our business. The third strategic investment is loyalty. We have a best-in-class digital platform, representing over 70% of sales. And we have a master database of over 60 million users, all without a loyalty program. Our technology platform, which we refer to as My Wingstop has positioned us for that next natural extension of our digital journey with the launch of a loyalty program that we are branding as Club Wingstop. The addition of our loyalty program is just another tool in our digital flywheel that would allow us to drive behavior and win more of those occasions we are best positioned for. It will connect our rich first-party data with personalized offers and experiences to increase frequency and lifetime value. Club Wingstop will bring a hyper-personalized digital experience to life in a way that only Wingstop can, not through discounting, but through curated one-of-a-kind access to content, flavors, merchandise and experiences. We are currently in the pilot phase. Sign-up rates and guest engagement are ahead of our expectations. Based on early results, it's validating the extensive research and insights from our existing personalization strategies that informed the design of our program. It will truly be a differentiated loyalty program that we can bring to guests. We're on track for a national launch of our loyalty program by the end of the second quarter in 2026. As we look to 2026 and consider our Wingstop Smart Kitchen, our new ad campaign and loyalty all coming together, there is a lot to be excited about, and I believe positions Wingstop well for this next phase of growth. Just last month, we hosted our brand partners at our annual franchisee conference. You could really feel the energy and enthusiasm in the brand. And it was clear they share my excitement around these investments we are making to support this next phase of growth for Wingstop. The opportunity to scale Wingstop to over 10,000 restaurants globally remains significant. We are now opening more than 1 Wingstop per day. The demand from our brand partners is as strong as it's ever been. It holds true for a 5-restaurant brand partner or a 100-plus restaurant brand partner. We are executing our development strategy through our market-level playbooks that allow us to grow in the most sustainable way and maintain our industry-leading unit growth. In our most recent quarter, over 70 unique brand partners opened a Wingstop in over 100 different markets across the U.S., which really showcases the breadth and depth of demand for unit growth across our brand partners. Based on the strength of our pipeline, we now have line of sight into delivering a unit growth rate in the mid-teens range for 2026, well above our long-term algorithm of 10% plus unit growth. Outside of the U.S., we are making tremendous progress with new market openings, and our growth rate continues to accelerate. We've opened in several countries throughout the GCC, launched a brand-building site in the Netherlands, expanded in France with multiple flagships and are preparing to launch in Ireland, Thailand and Italy. We're proving that the world needs our flavor and brand partners need our best-in-class unit economics. And we're just getting started in bringing Wingstop to guests around the world. Most recently, we finalized a landmark agreement for Wingstop in India, a market with an opportunity of over 1,000 restaurants. Our international success shows the strength of the brand and the significant global runway still ahead. As of the end of Q3, our development pipeline yet again sits at a record level and just continues to build, a powerful signal that our brand partners see what we see, a runway for sustained profitable growth supported by industry-leading returns. As our business continues to scale, we believe our obligation to give back grows as well. About a year ago, we announced our partnership with St. Jude's Children's Research Hospital. The work that is happening at St. Jude's is remarkable, and our brand partners, team members and fans have embraced the opportunity to contribute to St. Jude's life-saving mission, finding a cure for childhood cancer. Since this partnership started a year ago, I'm thrilled to share that we have raised nearly $3.5 million as a system, and we're not going to stop there. We believe in St. Jude's cause and see this as a lasting partnership opportunity for our brand. There's a lot to be excited about at Wingstop. We are focused on executing against strategies that we believe will position Wingstop well for the next phase of growth, providing line of sight for continued AUV expansion and maintaining industry-leading unit economics as we continue to expand our global restaurant count towards our goal of over 10,000 restaurants. The progress we've made in rolling out the new Wingstop Smart Kitchen platform, building our loyalty program and opening over 350 net new restaurants globally in just 9 months is a testament to the people who are relentlessly focused on scaling Wingstop into a top 10 global restaurant brand. Our strategy is only as good as those executing, and I want to take a moment and thank our brand partners, supplier partners and team members across the globe for their efforts. With that, I'd like to turn the call over to Alex. Alex Kaleida: Thank you, Michael. Our third quarter performance is a testament to the continued strength and resiliency of our highly franchised asset-light model, delivering 10% system-wide sales growth, 19% unit growth and nearly 19% adjusted EBITDA growth. This performance reflects our disciplined focus on the long term, not reacting impulsively to the short term, but rather executing against our proven playbook. Our success in the last 3 years has been fueled by this playbook. And while we're navigating an evolving consumer backdrop, our unit economics continue to hold strong, driving an industry-leading unit growth outlook. By staying committed to our strategies, investing behind initiatives such as the Wingstop Smart Kitchen and our loyalty program, we believe this is positioning us to be able to win our fair share of our core demand space and continue driving sustainable best-in-class returns for our brand partners and shareholders alike. Our highly franchised model continues to generate durable capital-efficient growth. System-wide sales grew in the third quarter to $1.4 billion, fueled by 114 net new restaurant openings, marking our fifth consecutive quarter of adding more than 100 net new restaurants. Through the first 9 months of the year, we've opened 369 net new restaurants at a unit growth rate of 19%. The appetite for expansion across our brand partner base has never been stronger. We're experiencing record demand for new development with brand partners reinvesting behind the strength of our unit economics and returns. We expect to maintain this elevated pace of development into 2026 in the range of a mid-teens unit growth, well above our long-term algorithm of 10% plus unit growth. Total revenue increased 8.1% to $175.7 million versus the prior year. Royalty revenue, franchise fees and other increased $6.8 million, of which $10.6 million was due to net new franchise development, partially offset by a domestic same-store sales decline of 5.6%. When stacking 30.6% same-store sales growth over the last 3 years, this has translated to more than $500,000 in AUV growth. Domestic AUVs are now at $2.1 million with industry-leading unlevered cash-on-cash returns of 70% plus on an average upfront investment of $500,000. That's why our brand partners continue to lean in, which showcases the attractiveness of our unit economic model. Our company-owned restaurants continue to perform very well, delivering same-store sales growth of 3.8% in the quarter, outpacing the broader system. These restaurants serve as an early indicator of the impact we're seeing from the Wingstop Smart Kitchen that's translated into a meaningful operational and financial impact. The Wingstop Smart Kitchen continues to validate the long-term opportunity to drive both transaction growth and margin expansion. Our company-owned margins also continue to expand with company-owned restaurant cost of sales declining by 300 basis points versus the prior year in Q3 to 74.8% of sales, primarily due to lower bone-in wing costs and sales leverage on labor and operating expenses. Our supply chain strategy continues to serve us well, providing stability in food costs and visibility that allows our brand partners to plan with confidence, a key advantage in this environment. We have line of sight into food and packaging costs throughout 2026 at our targeted range in the mid-30%, which was shared recently at our brand partner conference, further generating their excitement in our unit economics. SG&A decreased $1.6 million to $30.7 million, driven by lower headcount-related expenses, primarily associated with lower short-term and stock-based incentive compensation, partially offset by system implementation costs associated with our new ERP, human capital and global development platform. Adjusted EBITDA, a non-GAAP measure, was $63.6 million in the third quarter, an increase of about 19% year-over-year. Adjusted EBITDA for Q3 was our highest single quarter on record. Adjusted earnings per diluted share was $1.09, a 15.6% increase compared to the prior year. This includes a $0.24 impact from the additional interest expense associated with our $500 million securitization transaction completed at the end of 2024. Both metrics reflect the strength and profitability of our asset-light operating model. It's this operating model that fuels our return of capital strategies centered upon enhancing shareholder returns. In recognition of our strong free cash flow generation and our commitment to returning capital to shareholders, on November 3, 2025, our Board of Directors authorized and declared a quarterly dividend of $0.30 per share of common stock, resulting in a total dividend of approximately $8.3 million. This dividend will be paid on December 12, 2025, to stockholders of record as of November 21, 2025. In addition, during the third quarter, we repurchased and retired 140,103 shares of common stock at an average price of $285.26. At the end of the quarter, $151.3 million remained available under our existing share repurchase authorization. Since the inception of our share repurchase program in August of 2023, we have repurchased and retired over 2.3 million shares of common stock at an average price of $260.45 per share. Turning to guidance for 2025. We are updating our full year outlook for domestic same-store sales to a decline of 3% to 4%. We believe our updated outlook is reflective of new data points on the consumer over the last couple of months and the broader softening of the macro environment. Importantly, however, the fundamentals of our brand remain strong. The combination of expansion at the top of the funnel to capture more of our demand space, execution of our new operating standards with the Wingstop Smart Kitchen and the late Q2 launch of Club Wingstop positions us for a return to same-store sales growth during 2026. And we believe our industry-leading momentum and unit growth will continue. As a result of the visibility we have into our development pipeline, we are increasing our global unit growth guidance to a range of 475 to 485 net new restaurants for 2025, a testament to the ongoing confidence our brand partners have in the model and the compelling returns they are realizing. Additionally, we are updating our SG&A guidance to a range of $131 million to $132 million, which includes approximately $26 million of stock-based compensation expense and $4.5 million for nonrecurring system implementation costs, both of which will be an add-back to adjusted EBITDA. As we look ahead, our focus remains on executing the long-term strategies that have driven Wingstop's success since becoming a public company 10 years ago. In this time frame, our AUVs have scaled from $1 million to $2 million. We have opened more than 2,100 restaurants globally. System-wide sales have grown from $800 million to north of $5 billion. We've enhanced unit economics and unlevered cash-on-cash returns increased from an industry-leading 50% to 70% plus. And we've returned over $1 billion of capital to shareholders alongside a TSR of over 1,200%. Yet when we reflect on our strategies and the opportunity in front of Wingstop, it feels like we're just getting started. We're continuing to execute with discipline, and we believe we're entering the next phase of growth that is centered on scaling AUVs to our $3 million target, maintaining best-in-class returns and expanding our footprint globally to more than 10,000 restaurants. Coming off our annual Brand Partner Conference last month, conviction in our long-term growth has never been stronger. Our brand partners believe deeply in this brand and are signing up to open more Wingstop. The energy and optimism across the system are powerful proof points of the health of the business. I, too, share that excitement and couldn't be more energized by this next phase of growth for Wingstop. With that, I'd like to now turn to Q&A. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from David Tarantino from Baird. David Tarantino: My question is on the comp outlook. I think if I look at your full year guidance, it would imply a pretty low number for Q4, maybe worse than what you reported for Q3. So I guess first question is, is that how you're running quarter-to-date? Or are you trying to leave yourself a little bit of room given the uncertainty in the environment? Any way to frame up how you're thinking about Q4? And then I have a follow-up on that. Michael Skipworth: David, thank you for the question. I think we obviously acknowledge that there's some near-term choppiness in the business and in the overall industry. I think as we take a step back and look at how the business trended during the third quarter, which we did, in fact, expect the third quarter to be negative, but the industry saw a consumer -- a change in the consumer trend, and we're not immune to that. And the reality is we over-index to this consumer that's under the most pressure. But I think similar to the trend that we saw as we exited Q3, we expect that trend to somewhat continue into Q4 just based on the current data that we have. I will tell you, we have seen that trend stabilize within the fourth quarter. But then I think most importantly, David, we take a look at kind of the data that we have and the visibility that we have into the business, and we're actually pretty encouraged by what we see despite the overall comp number for Q3. We see growth in our largest daypart as dinner as an example. The fastest-growing cohort within our database is that $75,000 household income and above. And so there's some really encouraging data points that we think put us in a unique position to really not feel like we have to solve for the near term, but really stay focused on the investments we're making to position the brand for this next phase of growth. David Tarantino: Great. And my follow-up is, Alex, I think you mentioned that you're confident or you expect comps to be positive in 2026. I guess maybe what would be helpful is just to kind of lay out the path you think the comps take as you move into next year and what some of the key drivers of returning to positive might be, whether it's easier comparisons or whether the Smart Kitchen rollout or the loyalty program, I guess, what is the catalyst that's going to get it positive? And then how are you thinking about the timing of that? Is it later in the year? Or is it earlier in the year? Anything you could offer would be helpful. Alex Kaleida: Yes, David, thanks for the question. Obviously, there's, as Michael mentioned, some near-term choppiness the industry is navigating right now. But I think for Wingstop specifically, there's unique drivers in our business. And as we commented on our outlook for '26, what we're seeing in early signs from the Wingstop Smart Kitchen, one of our largest regions is seeing -- saw a positive comp last quarter, a very large mid-single-digit delta versus the system average and performance. That region has the highest concentration, longest tenure on the Wingstop Smart Kitchen. Then we think about loyalty, which we're targeting to launch by the end of Q2, that coming together to complement our hyper-personalization strategies, really unlock this database of 60 million users that we have access to. We'll be rolling that out. And then this new advertising campaign that we're seeing that's really going to open up the top of the funnel. So we as we open the top of the funnel, we're bringing new guests into the brand, and we're now delivering on those opportunity areas that we've talked about over the last year plus on delivering against speed and consistency. And so as that comes together into 2026, we're confident in our ability to deliver that sustained same-store sales growth that we've guided to over the long term. Operator: Our next question comes from Danilo Gargiulo from Bernstein. Danilo Gargiulo: Michael, I have a question on the Smart Kitchen incrementality. You're mentioning that you're still seeing a mid-single-digit incrementality in the areas where you have the highest concentration of Smart Kitchen. And I was wondering if you can give an estimate of how long do you think the change management will take to see the benefits across the franchise stores? And perhaps also if you can comment on the biggest delta or what are some of the challenges that franchise stores might be seeing in delaying the implementation and following the change management that you're suggesting? Michael Skipworth: Thanks, Danilo, for the question. I think one of the things that I'm most excited about as it relates to the Wingstop Smart Kitchen is the fact that we're introducing a new operating standard for Wingstop. This is a transformational change for our business, and we unveiled that new operating standard to our brand partners at our business meeting we had with them last month, and they're bought in. And we think this new operating standard is going to position us to win more occasions that Alex talked about earlier, position us to deliver on quality, that indulge Wingstop occasion on a consistent basis. And as more and more restaurants are executing Wingstop Smart Kitchen and delivering on our new operating standard, we are actually seeing that show up in guest satisfaction scores. And as we mentioned in our prepared remarks, take a region like the Southwest region beyond the DFW market, where we're seeing a consistent delivery of that 10-minute speed of service, and we're seeing that market or that whole region actually deliver a mid-single-digit spread in comps to the overall country. And that's because that is the region that has the longest tenure and are demonstrating that consistent delivery of speed and consistency for our guests. And so as more and more restaurants deliver on these new standards, I think we're going to see that gap close over time. Danilo Gargiulo: Great. And then I wanted to ask a question on the net unit growth because you have a very strong pipeline. You've been accelerating for 2025. I was wondering if you can provide any context on the amount of cannibalization that you're seeing today and how that relates to the past. Obviously, the cash-on-cash returns have been very strong. I just want to understand also what it means from a same-store sales drag potentially going forward. Alex Kaleida: Dan, this is Alex. I can jump in here. The cannibalization we've seen, as we've talked about over the years, has really been concentrated on restaurants, as higher-volume restaurants that really kind of max out capacity in the box itself from a store standpoint. We operate out of this very small footprint, 1,400 to 1,700 square foot location typically. So that hasn't changed too much. It's typically been about a point in the comp that we've seen. What's been a little different, I think, as it relates to development in the last -- in the most recent quarter, specifically has been around lapping some openings that we had in a single market, a brand-new market where there was one restaurant. And last year, we saw some openings that the restaurants touched 6 figures in the first week of sales or in the first several weeks of sales. And so as we open more restaurants this year as part of our market playbooks to surround that restaurant, we're lapping a little bit of that honeymoon. So I'd say that part has come into play a little more recently. It is more of a near-term dynamic. The restaurants are settling in very well above, in fact, our system average on AUVs, but that's probably the most recent dynamic associated with development. Operator: Our next question comes from Andrew Charles from TD Cowen. Andrew Charles: I was hoping you can unpack the mid-single-digit outperformance from Smart Kitchens in the Southwest with the gap between company-operated same-store sales and franchise -- or I should say, system, excuse me, that widened to a 940 [indiscernible] outperformance in the Southwest is perhaps underrepresented just given the outsized Hispanic consumer penetration in this market? Or is it perhaps that we're seeing some other benefit to company-operated same-store sales in the third quarter? Michael Skipworth: Andrew, our comment as it relates to the overall Southwest region, I think it's important to appreciate that, that includes over 600 restaurants. And I think really demonstrates the progress we're making around operationalizing this new kitchen operating platform, this new operating standard for Wingstop as a brand that I just talked about. But I think if you look at the DFW market, specifically where the majority of our company-owned restaurants do operate, it's a really interesting business case, if you will. Obviously, that market is benefiting from the longest tenure on the Wingstop Smart Kitchen. But in addition to that, when you take a look at the DFW market, it is our most mature market, our first market. Brand awareness for Wingstop is a lot closer to that national brand awareness level of more mature national brands. If we look at the demographics within DFW, it actually looks a little bit different than we do nationally. We over-index a little bit higher income. We're a little bit less ethnically diverse. And quite frankly, it's a really good representation of that demand space we've been talking about and the opportunity we have. And so what you're seeing is the interplay of Wingstop Smart Kitchen, Wingstop's new operating standard, delivering on those guest expectations and then obviously leaning into that demand space that we're best positioned to win. So I think it's a really nice indication of the strategy we're executing and the opportunity that's in front of us. Andrew Charles: That's helpful. And then my follow-up question is just, obviously, the industry is trying to figure out ways to better emphasize value. And obviously, Wingstop has been very reticent in pricing, only taking about 1% to 2% per year in recent years. But I guess as you think about how to better pulse value to help traffic in this more challenging time for the industry, what place does the 20 for 20 promotion that you successfully ran in the May and June time frame have as we look forward? Michael Skipworth: Andrew, I think Wingstop is in a pretty unique position. Unlike most other brands in the industry, we've experienced some pretty incredible industry-leading years of growth over the past 2 years, putting us in a spot where we don't really feel like we have to get overly promotional or lean into discounting or solve for the near term. We're really focused on what's central to our strategy, which is protecting those unit economics, which today remain as strong as they have ever been. And you're seeing that show up in the pace of development that we're delivering, which 2025 is shaping up to be a record year of opening what we estimate to be between 475 and 485 units, a pretty remarkable number for the brand and for any brand out there, quite frankly. And so we're focused on that and then investing in these strategies that are going to position the brand for the long term and for this next phase of growth. Operator: Our next question comes from Christine Cho from Goldman Sachs. Hyun Jin Cho: So Michael, I think you mentioned earlier the importance of unlocking that under 30 minutes or fastest near new mechanism in 3PD and getting into kind of the guest consideration set. So I was wondering if you're tracking kind of the changes in the percentage of the stores that are now falling into this bucket along with the progress of the Smart Kitchen rollout and whether you're seeing any shifts in sales trends in this channel. Additionally, are you contemplating on any ways to better communicate that faster speed of service to your guests? Michael Skipworth: Christine, great question. We are relentlessly focused on most importantly and first, delivering on that 10-minute speed of service, but then a fast follow is ensuring that our restaurants are showing up in those categories on the DSP platforms. And what we're really learning is not only does it put Wingstop into the consideration set where we weren't previously considered or there before, but we're actually seeing and learning as we watch these consumers and we talk to our partners, the delivery providers that it actually drives repeat and drives behavior. And so as we look to 2026 and operationalize and complete the national rollout of Wingstop Smart Kitchen, this is going to be an area where we're definitely going to lean in and an area that we see an opportunity to drive growth. Hyun Jin Cho: Great. And also excited about the new Wingstop Is Here campaign. But you also have several very important messages to deliver to customers, including your value proposition, improved speed of service, all of that. So what are kind of the key messages that you will prioritize? And how do you plan to kind of allocate media spending to achieve these goals while kind of maximizing leverage on your NFL and NBA partnership? Michael Skipworth: Yes, Christine, that's what I love about Wingstop is here, is actually a campaign that can accomplish all of that. It's allowing us to showcase moments, moments that each and every person can find and relate with and showcase how Wingstop can play a role in their life and their dining occasions. In addition to that, we can showcase moments around speed. We can showcase occasions that hit on when the consumer is in a hurry, when they are in a rush. And we can do it under this broader umbrella and at the same time, showcasing quality, showcasing abundance, some of those tenants that really separate Wingstop from other brands that are out there. And we're excited to have a 30-second spot really for the first time that story tells to that new consumer about Wingstop, who we are, how they can engage with our brand and how we deliver on quality and abundance. And so while there is definitely an opportunity to impact the occasions that our current guests consider us for, the bigger opportunity and the huge prize out there, and it really shows up in that demand space where we're only winning 2% today, when benchmarking suggests we should be winning 20% to be at our fair share. The huge opportunity is really around all those guests who don't know of Wingstop or maybe Wingstop is just not in their consideration set. And so that's what we're going to be going after with this campaign as we operationalize Wingstop Smart Kitchen. And then just to think about in 2026, layering on something like loyalty in the second quarter to be able to add that to our digital flywheel. It gives us a ton of confidence in our ability to continue to scale AUVs towards our target of $3 million over time. Operator: The next question comes from Jeffrey Bernstein from Barclays. Jeffrey Bernstein: Great. Just looking at the near-term comps. It looks like you're assuming down 5% or more in the fourth quarter. That would be similar to or actually a little bit of easing from the third quarter. But as we've talked about all year long, the compares are easing. I know in the fourth quarter, they're easing 1,100 basis points from the third quarter. Therefore, I guess, that 2-year stack still seems to be slowing materially. I'm just wondering whether you're surprised the compares are not driving the inflection -- or said another way, it does seem like the business is slowing further from here. So just wondering whether or not the compares in and of itself are not enough or how you go about directly bringing back, like you said, you over-indexed to perhaps a little bit lower income or more minority consumers, how you go about more aggressively bringing them back to slow that decline? And then I had one follow-up. Michael Skipworth: Jeff, I appreciate the question. I think as we said earlier, we acknowledge that there's definitely some near-term choppiness. And while we have seen trends stabilize as we've entered the fourth quarter, obviously, we're not one, and I'm not sure who is to predict kind of the duration of this current environment and when it evolves. But what we're focused on, again, is not solving for the near term, but really focused on leaning into and ensuring that we operationalize this game-changing kitchen operating platform of Wingstop Smart Kitchen and ensure we're ready to really lean in and win our fair share as we look out into 2026 of that demand space and then doing loyalty right and launching it in a big way in 2026. Then obviously supporting all that with this ad campaign, while we opened a lot of restaurants at the same time and continue to expand on that opportunity. And we're going to remain focused on protecting the unit economics because that's really what it's about here at Wingstop and what's central to our strategy. When you think about it, yes, we've opened a lot of restaurants this year. We're almost at 3,000 restaurants as a brand, but yet it's not even 1/3 of our potential. So the white space we have in front of us, the growth in front of us is what we're really focused on. Jeffrey Bernstein: Understood. And then just following up on that. As you look back over the past few months, how much do you think of the deceleration with industry or consumer versus maybe anything that would be self-inflicted. I mean, obviously, this is hindsight, but what could have been done better to mitigate the choppiness that you could perhaps use as you think about potential risks of this type of choppiness in the future? Michael Skipworth: Yes, Jeff, I think that's a great question. And I think more than anything, it really just has to do about how we over-index to this consumer that's under the most pressure right now, more than anything else. But to the second part of your question, it really feeds into the strategy we're executing around winning our fair share of our core demand space. And as we look at who comprises this occasion that we're going after, and we look at the DFW, as I mentioned earlier, as a great example of that it is a little bit of an equal distribution as you cut the data, whether it's income level, ethnicity, ages. And so it's about continuing to win our fair share of that demand space. And we think this new creative is going to be an unlock to position our brand to start to win that. And so as you fast forward and think about any other future cycles similar to this one, we would expect our business to be in a different position than it is today. Operator: The next question comes from Andy Barish from Jefferies. Andrew Barish: Just following up on that. It kind of reminds me of '22 when you had a negative comp and obviously, the ad budget was going up, chicken sandwich in the Uber were rolled out. Are you kind of thinking about this in a similar way? It's just maybe going to take a little bit longer until all 3 of the current sort of drivers you laid out layer on top of one another? Michael Skipworth: Yes, Andy, I think that's a great point, and I think it's a good analogy to kind of compare to. I would say maybe what's different is, and we'll acknowledge that a lot of our success during that time was focused on our core, and we won a lot of share with that core. And as we look forward, it's really about broadening the top of the funnel, bringing in more new guests, new guests that maybe look a little bit different than our core and diversifying the business a bit. Operator: The next question comes from Sara Senatore from Bank of America. Sara Senatore: I wanted to go back to the comment, I think Alex made about a honeymoon period for restaurants. I don't think we've heard you talk about that in the past. And I was just curious, I guess, a couple of things. One is, do you see that across different types of markets? And do you think it signals anything about where brand awareness is? I guess, when I think of a big awareness gap, which has been a long-term opportunity, typically, I would not associate that with a honeymoon. Alex Kaleida: Yes, Sarah, I can jump in here. I think it really is a little more unique to the last 12-month dynamic for 2024 because we've attacked these white space opportunities. We're executing market-level playbooks. And we couldn't have predicted the strength of some of these openings in these, what we call kind of flavor deserts in a small town in Kentucky or Georgia or other parts of the country where we had no Wingstop available. So I think it was a little bit unique to something in the last year. I don't think it's playing out the exact same way -- it's not playing out the exact same way this year on how the pace of restaurant openings are and what we're seeing. I think they're kind of complementing well among each other as we execute these playbooks. Sara Senatore: And then the awareness piece, I guess that was the second part. Do you think that awareness kind of has reached a critical mass? Or do you still see a lot of opportunity there? Alex Kaleida: Yes. We still have a more than 20% gap in awareness to those larger, more mature QSR brands. And Michael talked about the opportunity in consideration is even larger. So as we're delivering against these expectations or opportunity areas on speed and consistency, I think we think the combination is just going to further strengthen our AUVs on our path to that $3 million target. Operator: Our next question comes from Chris O'Cull from Stifel. Christopher O'Cull: Michael, my question is about the new ad campaign. Have you conducted any testing to confirm how the message resonates with consumers, particularly new consumers? I would just like to understand what gives you confidence that it's going to be successful. Michael Skipworth: Yes, Chris, we are super encouraged by early feedback and results on the new campaign. We think it works hard for us and accomplishes really what we set out to accomplish, which is to showcase moments that really speak to a wide range of different consumers, different cohorts, but yet still showcase quality and abundance and tell a story. This is one of our first ads with a voice over. And so it's actually informing that new guest that doesn't know about Wingstop, a little bit about who we are. The fact that we are the #1 wing company in the U.S. and taking that bold claim and sharing that on national TV. And so early feedback, early testing, very positive, and we think it's working hard for us. Christopher O'Cull: Okay. And then my follow-up is you mentioned finalizing an agreement in India. Can you talk about the partner you selected, maybe the structure of the agreement for that market and why you believe this operator you've chosen is the right one for the market? Michael Skipworth: Yes, Chris, we're pretty excited about the opportunity in India, a market that we see over 1,000 Wingstop restaurants over time. And so obviously, a really big deal for our global growth story. And this partner is a proven operator, a multinational operator of brands that has a lot of experience in India. And so we'll have a lot more details to share as this comes together and as our plans finalize on exactly what our market entry will look like. But we're really excited to share that with you as we continue to progress towards that long-term opportunity of over 1,000 restaurants in India. Operator: Our next question comes from Jeff Farmer from Gordon Haskett. Jeffrey Farmer: Just wanted to drill down further on the lower income and Hispanic consumer cohorts. I know you guys don't share a lot, but anything that you can share as it relates to exposure to these cohorts even if it's just broad strokes? Michael Skipworth: Yes, Jeff, I would say broad strokes would maybe just be the overall comp trend you saw play out as you saw that dynamic broaden a little bit across the industry. But we're not overly focused or really overly thinking about that overall trend. And as I said earlier in our comments, as we look at the data we have and we look at the underlying health of our business, we're continuing to measure improvements in brand health metrics which is really encouraging for us to see and showcases that the overall underlying strength and health of the brand are strong. And again, this is a little bit of near-term choppiness. And again, our business clearly over-indexes to that consumer that's under the most pressure right now. Jeffrey Farmer: Okay. And then unrelated follow-up. The development guidance has been pretty crazy. It's jumped 100 units, I think, almost 30% over the last 9 months. I can't remember ever seeing anything of this magnitude for as many restaurants as you guys have. So really, the question is, how did that happen? And I know you talked about 2026 development, but in terms of just really sort of overperforming on your initial development guidance, what drove that? And why theoretically wouldn't that outperformance continue in coming years? Alex Kaleida: Jeff, it's a great point. It's really exciting to see how our unit growth played out for this year. And I think there's a couple of things that we've talked about in the past. One is given executing these market-level playbooks. And alongside of that, we're having conversations with our brand partners about scaling the infrastructure, building their teams or organizations to execute at an even greater number of openings than what they've had in the past. International is playing a bigger role. We've started -- we've talked about how we see that opportunity in front of us as we've opened as many as 5 new markets this year, and we have line of sight to 3 more in the horizon -- or 4 more on the horizon going into 2026. So it's -- international is starting to play a bigger role and their pace of openings is moving a little faster than maybe what we saw at the front end of the year. And then the last part is we thought about the guidance at the start of the year was related to our Smart Kitchen rollout. We have not undertaken that size of a technology rollout in our footprint for this year, and we knew that was something brand partners going to -- we're going to need to allocate capital to. And frankly, they've done a tremendous job with executing both the Smart Kitchen rollout and building their infrastructure and organization. And so we felt the need to kind of allow that just continued growth and pace that we're heading into for 2026. But it's a great point. It's incredibly exciting about what we have in front of us. And that's why it's so central to us is maintaining those best-in-class returns for our brand partners, so we continue to see this growth opportunity from a development standpoint. Operator: Our next question comes from Jim Salera from Stephens Inc. James Salera: I was hoping that you might help us deconstruct some of the frequency trends that you've talked about. You guys have highlighted between rewards and the Smart Kitchen uplift and some of the new marketing, those are all opportunities to drive better frequency. But maybe in kind of here and now, are you seeing any particular daypart or kind of specific consumer cohort that's seen a step down in frequency? And particularly maybe around some of your restaurants that are closer to the border, maybe there's just less cross-border trade. And so it's not even so much that a guest is choosing not to come to Wingstop, but just there is not that restaurant occasion available anymore because there's fewer people trading in that area. Just any color on that dynamic would be helpful. Michael Skipworth: Yes, Jim, it's a great question. And what I would say is we talked about a little bit of a change in the consumer trend as we progress through the third quarter. And I think where we really saw from a daypart perspective, maybe that show up a little bit in snack daypart. And with that could come a little bit of ticket management. But generally speaking, and I mentioned it earlier, our biggest daypart dinner, we actually saw growth during the third quarter, which I think really speaks to when you combine that with the strength in our brand health metrics, just speaks to the overall health -- underlying health of the brand. James Salera: Kind of keeping that in mind, are you able to disaggregate what we would think about as group occasion, which I would assume leans heavily dinner versus somebody going by themselves. Is that really where the frequency pressure is concentrated is in those occasions where the guest is buying food just for themselves versus kind of group occasion? Alex Kaleida: Jim, this is Alex. What I'd point to in the last quarter was really around where we saw a little bit more of a difference from our targeted group occasion was on tenders. We did continue to see more individual occasions come through on tenders as they're trying -- that's that nice entry point for the brand coming in for the first time, that high-quality tender experience. And specifically from a cohort standpoint, one of our highest acquisitions last quarter was in that 18 to 25 age demographic, which also associates with a higher propensity for tender purchases. Operator: Our next question comes from Dennis Geiger from UBS. Dennis Geiger: You touched on it some, but I wanted to ask a little bit more on Smart Kitchen, the franchisee feedback. And as it relates to sort of the rollout and if you'd say that the rollout so far across similar stores at various stages of the rollout process, if that's been largely consistent or if there's some variability there. If anything more there, obviously, the Southwest data is super helpful. But anything more just kind of on how that rollout has gone and sort of performance along the various stages, a couple of months in, 2 months in, 3 months in, et cetera, if you could get that granular. Michael Skipworth: Yes, Dennis, it's a great question. And I would say, just generally speaking, we're really encouraged by where we are today in over 2,000 restaurants with the Wingstop Smart Kitchen operating platform. It was a big step in our brand partner conference last month for us to unveil and be super clear around these new Wingstop operating standards. And obviously, as we transition into 2026 and get the entire platform launched across the system nationally, it will be really about driving those standards and holding our brand partners accountable because of the upside and opportunity we see associated with Wingstop Smart Kitchen. But we mentioned it in our prepared remarks. We are seeing times -- speed of service times experience a pretty significant reduction call it, in that 6- to 8-week time period in. And then as you think about our frequency, you're starting to see a little bit of traction as it relates to the consumer and how they engage with our brand showing up in that 3- to 6-month window. And this is all without any sort of marketing support, all happening organically. And so as you sit here and look at these early results we're seeing, the opportunity that's in front of us. And then again, when we look out into 2026 and think about this new ad campaign opening the top of the funnel and then our new Wingstop operating standards, delivering on those guest expectations in a consistent way, we get pretty excited about what's in front of us. Operator: Due to time constraints, this concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Black Rifle Coffee Company Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt McGinley, Vice President of Investor Relations. Thank you. You may begin. Matthew McGinley: Good morning, everyone, and thank you for joining Black Rifle Coffee Company's Third Quarter 2025 Financial Results Conference Call. We released our results yesterday, and the press release and related materials are available on our Investor Relations website at ir.blackriflecoffee.com. Before we begin, I would like to remind you of the company's safe harbor statement regarding forward-looking statements. During today's call, management may make forward-looking statements, including guidance and the underlying assumptions. These statements are based on expectations that involve risks and uncertainties, which could cause actual results to differ materially. For a further discussion of these risks, please refer to our previous filings with the SEC. Additionally, this call will include non-GAAP financial measures such as adjusted EBITDA. Whenever we refer to EBITDA, we mean adjusted EBITDA unless otherwise noted. Reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release, which was furnished to the SEC and is available on our Investor Relations website. Now please refer to the presentation on our Investor Relations website and turn to Slide 4. I would now like to turn the call over to Chris Mondzelewski, CEO of Black Rifle Coffee Company. Mondz? Chris Mondzelewski: Thanks, Matt. Good morning, everyone. Joining me today are Evan Hafer, our Executive Chairman; Matt Amigh, our Chief Financial Officer; and Matt McGinley, our Head of Investor Relations. The third quarter was another solid step forward for Black Rifle. Our team did an outstanding job executing against our priorities, driving strong commercial performance, maintaining cost discipline and positioning the business for sustainable profitable growth. We continue to see encouraging momentum across both the wholesale and direct-to-consumer channels as our brand gains traction with new customers and deepens its connections with existing ones. As we move to the fourth quarter and into 2026, our focus remains clear; driving strong on-shelf execution as we expand our physical presence, maintaining costs effectively to enable reinvestment in growth initiatives and continuing to build a scalable platform for long-term success. We're broadening distribution, driving stronger velocities with key retail partners and advancing our product lineup to keep the brand fresh and relevant. The team's execution this quarter reflects a company that's more agile, more focused and more confident in its ability to perform even in a challenging cost environment. We're proud of the progress we've made and optimistic about the opportunities ahead. Move to Slide 6, please. In the third quarter, Nielsen data showed continued strength in the U.S. coffee category within Food, Drug, Mass, growing 13.2% as higher shelf pricing to offset commodity inflation flowed through. Black Rifle once again outperformed the market with sales up 36.7% year-over-year, nearly triple the category's growth rate. Our land-and-expand strategy continues to prove effective. We start with a focused set of SKUs to demonstrate performance and earn additional shelf space as we build retailer confidence. In grocery, ACV increased 6 points year-over-year to 48% and total ACV across all tracked channels increased 9 points to 54%. Even with a 70% increase in average items carried, velocity in grocery improved more than 7%, highlighting the brand's strength with consumers. This combination of faster turns and expanding distribution is translating into stronger partnerships and continued shelf gains. Move to Slide 7. Across the category, most of the dollar growth is being driven by price increases. In contrast, Black Rifle's growth is coming from almost entirely unit gains, which are up more than 20% year-to-date. This reflects real consumer demand, not price inflation. The brand continues to win new households, drive repeat purchases and gain share at retail. As we expand distribution and sustain velocity, we're driving durable volume-led growth that supports long-term brand health. Slide 8. Our Direct-to-Consumer business remains an important part of our omnichannel strategy, deepening customer relationships, strengthening brand loyalty and providing valuable insights that guide how we engage with consumers across every channel. It also allows us to test new offerings, refine messaging and stay closely connected to our most engaged fans. Through both our own site and digital retail partners, Black Rifle products remain easily accessible to customers who prefer the convenience of home delivery. While most of our recent top line growth has come from retail distribution and velocity gains, we're encouraged by the continued stabilization of our digital channels this quarter. Sales in our Direct-to-Consumer segment declined 4% year-over-year in the third quarter. However, after adjusting for the prior year benefit related to our loyalty reserve and the timing shift of promotion, results were slightly positive compared to last year. We also saw meaningful gains through leading third-party marketplaces, where awareness of the brand and repeat rates continue to build. Beyond top line growth, we've made steady progress improving the overall customer experience. Website and mobile updates have enhanced navigation and checkout speed, while back-end improvements support smarter merchandising and more efficient SKU management. Within our subscription platform, we're adding new functionality and greater flexibility for members, including prepaid options, exclusive offers and a refreshed brand portal that highlights partner benefits and members-only gear. These ongoing upgrades reflect our focus on building a digital ecosystem that not only drives sales but deepens brand loyalty and supports the broader omnichannel strategy. Slide 9. The Ready-to-Drink coffee category continued to face headwinds in the third quarter. particularly within the convenience channel. While category sales declined 3.1%, our performance remained resilient, down just 0.6% overall, reflecting solid execution and strong brand loyalty. In grocery, sales grew 18%, partially offsetting the softness seen in C-stores. Even in a challenging environment, we're gaining ground. Black Rifle remains the third largest RTD coffee brand in the U.S., and we expanded our ACV by 7 points year-over-year to 53%. That growth underscores the confidence our retail partners have in the brand and our proven ability to perform on shelf. We're still in the early stages of unlocking the full RTD opportunity with roughly half the category yet to be reached. Slide 10. Black Rifle Energy continues to expand its footprint, now available in nearly 20,000 retail locations and reaching approximately 22% ACV. Distribution growth has been disciplined and targeted, guided by learnings from early markets. The energy drink category remains one of the largest and fastest-moving segments in beverages and roughly 2/3 of the category sales come from convenience stores. That channel remains a primary focus for expansion as Black Rifle Energy currently has its lowest penetration there and meaningful white space ahead. Our approach remains deliberate, focused on building awareness, driving new consumer trial and earning shelf space through performance rather than overextension. We're encouraged by the early traction and see meaningful opportunity for the brand to expand reach and contribution within our broader beverage portfolio in 2026. Before I hand it off to Matt, I want to pause and reflect on what makes this company special. I'm incredibly proud of the progress we're making across the business and just as proud of the way our team continues to live out our mission every day. As we approach Veterans Day, it's a time to honor the men and women who have served our country and to recognize the many ways our team continues to serve them in return. This year, we're working with Born Primitive and ForgiveCo to help forgive up to $25 million in medical debt for more than 10,000 veterans. 1 in 5 veterans carries medical debt in collections compared to about 13% of the general population. That burden often leads to financial stress in housing and security, and this effort is about lifting that weight and giving back to those who have served. Whether it's helping rebuild communities after a flood, supporting warriors in crisis or rallying around causes like suicide prevention, Black Rifle is driven by our mission to veterans. I'm proud of what this team has achieved and excited about the road ahead. Matthew Amigh: Thank you, Mondz. I'll begin my remarks on the quarter with Slide 12. Third quarter net revenue increased 3% year-over-year, driven primarily by growth in our Wholesale segment. We are cycling a $2.4 million net benefit recognized in the prior year related to barter transactions and a change in loyalty reward accruals. Excluding these items, revenue increased 5%. Our Wholesale segment, which primarily sells packaged coffee and ready-to-drink beverages to retailers grew 5% year-over-year. Adjusting for the net $2.1 million in nonrecurring revenue recognized in the prior year, sales in this segment increased 9% in the third quarter. Growth was driven by gains in velocity and distribution, including increases in the number of doors and items carried as well as continued growth in sales from Black Rifle Energy. Revenue in our Direct-to-Consumer segment was 4% lower in the third quarter. A high-volume promotional event occurred later in the quarter compared to prior year, which we estimate shifted approximately $1 million in revenue from the third quarter into the fourth. Excluding this timing impact and the prior year benefit from the loyalty reserve change, revenue would have been slightly positive year-over-year. Fans of the Black Rifle brand now have more ways to find our products as brick-and-mortar retail distribution expands and online sales through platforms such as Amazon and walmart.com continue to grow. This increased availability is critical to the brand's long-term growth and health, and we will continue investing in wholesale and other channels that we expect will drive the most sustainable long-term growth. Outpost segment revenue grew 6%, benefiting from higher franchise fees and continued progress in merchandising. Better bundling and in-store presentation helped drive the average order value. Turning to Slide 13. Gross margin was 36.9% in the third quarter, a decrease of 520 basis points compared to prior year. The decline was primarily driven by a 390 basis point impact from increased trade investment and a 300 basis point impact from green coffee inflation and tariffs, partially offset by pricing actions. These pressures were further mitigated by approximately 170 basis points of benefits, including productivity gains and more favorable product mix. Slide 14. Operating expenses declined by $3.6 million or 9% compared to the third quarter of last year. Marketing expenses decreased 14% on a dollar basis and improved 165 basis points as a percentage of sales, reflecting lower nonworking advertising spend and a reallocation of dollars towards programs more directly tied to revenue growth. Salaries, wages and benefits declined 13% on a dollar basis and improved by 255 basis points year-over-year. The quarter included approximately $800,000 of severance expense and total headcount was down 19% compared to the third quarter last year. General and administrative expenses increased 5%, primarily due to costs related to settled legal matters, partially offset by efficiency gained in our corporate infrastructure. Despite the gross margin pressure we faced, scale benefits from revenue growth and efficiency gains drove a 19% increase in adjusted EBITDA to 8.4% of sales, representing a 115 basis point improvement compared to the same quarter last year. Turning to capital and cash flow. We raised $40.25 million in gross proceeds through an equity offering in July, which enabled us to pay off the outstanding balance of our revolving credit facility and strengthen our cash position. We also generated $5.6 million of free cash flow in the quarter, further improving liquidity. Moving to the outlook on Slide 16. On last quarter's call, we discussed our expectations that results would be toward the lower end of the full year guidance range we provided at the start of the year. We expect to finish the year with at least $395 million in revenue and at least 35% gross margin and at least $20 million in adjusted EBITDA, each of which remain within the previously communicated ranges. We continue to expect a sequential step-up in revenue throughout the year, driven by ongoing distribution gains across both packaged coffee and ready-to-drink product lines. In the fourth quarter, this step-up should be slightly larger than the roughly $5 million quarterly increases seen earlier in the year, reflecting normal seasonality and a greater benefit from pricing actions. As a reminder, we are cycling $30.4 million of prior year revenue related to onetime items that are not expected to recur in 2025. This represents a $9.1 million headwind in the fourth quarter, which we expect will be the final quarter impacted by these prior year items. Turning to gross margin. While commodity pressures and tariffs have been a meaningful headwind to the gross margins this year, we delivered a solid sequential improvement in the third quarter, reaching 36.9% compared to 35% in the first half of the year. We expect to see additional pricing benefit in the fourth quarter. However, that period is typically more promotional, and we'll also see a slightly greater impact from tariffs as higher cost inventory flows through the P&L. As such, we expect the fourth quarter gross margins to be closer to the 35% level we saw in the first half of the year rather than the nearly 37% achieved in the third quarter. Our assumptions regarding the key drivers of the margin outlook compared to the prior year remain unchanged and include at least a 300 basis point headwind from green coffee inflation, net of pricing actions; a 250 basis point impact from increased trade investment behind the energy line and a more normalized promotional cadence; at least 100 basis point margin impact from recently implemented import duties with the full effect building through the second half of the year. These pressures are expected to be partially offset by at least 200 basis point benefit from productivity initiatives and a more favorable product mix. Green coffee prices have been volatile and remain elevated relative to historical levels. While movements in coffee and tariff costs are largely outside our control, we are not assuming any relief as we plan for 2026. Our focus remains on the elements we can control; executing productivity initiatives across the supply chain and refining our pricing architecture as needed. As part of our operational improvement plan launched in the second quarter, we continue to expect to deliver $8 million to $10 million in annualized cost savings in the second half of 2025. We remain disciplined in managing expenses while continuing to invest selectively in capabilities to support growth and margin expansion. Looking ahead, our priorities are clear; sharpen execution, drive efficiency and build a stronger, more resilient business. The opportunities ahead are substantial, and we're focused on converting that potential into measurable progress. I'm confident in our plan, our team and the momentum we're carrying into 2026. Operator, we are now ready for the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Michael Baker with D.A. Davidson. Michael Baker: Two-parter as it relates to the guidance. So there is a change in the language on that guidance. It feels to me as if it's a little bit more cautious than what you thought 3 months ago. Is that the correct interpretation? And then my second guidance-related question is, in the presentation, you're sticking with the 3-year targets using 2024 as the base, and I think growing out to 2027 requires a pretty big ramp in '26 and '27 versus 2025. Can you remind us why you have confidence in that? Matthew Amigh: Michael, this is Matt Amigh here. Yes, let me explain the language a little bit more about our guidance change. We didn't change guidance overall, but we're guiding to the lower end of the range for sure. And as we mentioned on the last call, we want to go towards the lower end of the range, but the underlying puts and takes haven't changed. We're still seeing coffee inflation, trade investment will be higher in the fourth quarter than it was in the third. We still see tariffs, and they'll be offset by the operational improvement plan that we spoke about. When it comes to the range, we use the words, at least, in that framework so that we don't -- so that the analysts don't anchor on like a midpoint. We want to be clear about the floor of our expectations. Now we're confident that we'll hit $395 million for the year. We're confident that we'll hit 35% gross margins for the year and at least $20 million in adjusted EBITDA. So Michael, what that means, though, that means we'll deliver about $110 million in revenue in Q4. Gross margins will be relatively the same as what we saw in the first half of the year, and we'll have about $8.4 million in EBITDA, which is about what we did in Q3. Now just as a reminder, that $110 million in net revenue, if you compare that against the Q4 from prior year and you exclude the onetime nonrecurring revenue related to the barter transaction, that will be a comparable base of $97 million in last year or about a 13% growth. Switching to the second part of your question, we are confident in our long-term guidance. And again, that's 10% to 15% CAGR on the top line, approaching 40% margins by 2027. And then on the bottom line, a little bit more aggressive at 15% to 25% CAGR over that time period. We will see growth, obviously, when we get into '26, but we'll see even more growth moving into '27 as we start to really get the distribution points that we gained in '26 and they pay out on a full year benefit. When it comes to margin, we do have a ways to go on margin. We've executed 2 rounds of pricing in 2025. One in Q3, we have another one that is being executed right now in Q4. That will pay dividends when it comes to 2026, but we're also seeing more inflation when it comes to green coffee. Green coffee, right now, is at all-time highs at $4 a pound in the nearby and the forward curve is roughly about $3.30 for the year. So we'll continue to see the tariffs and the green coffee inflation, but we will see that margin pick up as we exit 2026 and into 2027. Chris Mondzelewski: Let me just build a little bit on that, Michael. As we think about the second part of your question, the 3-year guidance that we gave for the business, we're feeling more confident than ever on that guidance. If you think about the fundamentals that we talked about in the opening remarks, we're growing share in every segment of the business. We are the strongest unit growth player right now in the U.S. in coffee and we still have significant distribution room. So on top of the unit growth we're driving and the velocity that we're driving, we still have significant room to continue to expand distribution on every segment of our business. So again, as we think about the 10% to 15% guidance range that we put out there through '27, we feel highly confident in that. Michael Baker: Okay, great. Very complete answer. If I could ask one more, just more -- I presume this will be more qualitative, but any color on the energy drink, how consumers are accepting it? I think it's still in 12 markets, correct me if I'm wrong, but yes, any color on how that's progressing relative to your expectations? Chris Mondzelewski: Yes. I'll start off, Michael. I think we're pleased with the overall performance. So to remind everyone, we had a very limited launch this year. We went into 12, what are called up and down the street markets in partnership with our distribution partners, KDP. And on top of that, we had 2 national customers, mass customer and C-store customer. That was all we wanted to bite off in the first year, and we're pleased with the results. We've seen improvements in those customers through the year as we've been able to track them. And as we think about '26, it's going to continue to be careful steps forward with that business. We have an incredible coffee business right now. We are growing every segment, as I just mentioned, and we want to be very careful that we continue to put as much investment as is necessary in continuing the momentum in coffee. We're excited about energy, and we're going to continue to take strategic steps to expand that on a more regional basis. So while I'm not in a position to talk specifically about our plan in '26, it will be a step forward from where we were, but still really managing that in a targeted way where we can build that business the right way. Operator: Our next question comes from the line of Sarang Vora with Telsey Advisory Group. Sarang Vora: So one of the words you used on the transcript was expansion of portfolio. I think it related to the energy category. So can you help us understand how the category is expanding as you look at stronger growth out here along with distribution on the energy side? Chris Mondzelewski: Yes. Sarang, let me start that one. So as far as energy specifically, we had some information, I think, in the pre-read around that. We are continuing to evolve our portfolio to what we believe are the most relevant flavor segments of the market. So we're launching grape. We're very excited about that. We're seeing great initial response from the customers who we have presented that with in concert with KDP. And then we're also going to have a limited item, the Tiger Strike, which we’re taking advantage of the 250th anniversary of America next year, and we're very excited about this item on a limited basis as we think about the summer season. So yes, it's an important category to evolve yourself and make sure you're staying relevant with your flavor profiles. So we'll continue to double down and use that as a way to be able to increase distribution with some of our existing customers and as a way to go get new distribution. We're driving innovation in the rest of our business as well. So we're very excited about the items we have going into coffee, pods, bags. And then we actually have a couple of our RTD items in the presentation as well, our cold brew items. These are 25 calorie, low sugar, exceptionally developed items that we, again, are already seeing a strong response from retailers on. And we look forward to -- we believe that we're at the point, as Black Rifle, where, yes, we participate in these categories. We need to be leaders in these categories. So you're going to continue to see us driving innovation into each of the segments that we compete in, in partnership with our retailers. And in the case with energy in partnership with KDP, and we're going to be doing things that we believe will drive leading growth in these categories, not just participating, but allowing us to continue to lead the growth and continue to drive share. Sarang Vora: That's great. We can't wait to drive new products. I had a follow-up question on marketing. Dollars were down in the quarter. You are very focused on marketing. There's new brands coming and these flavor profiles coming in. How should we think about marketing spend as you look out for like next year and just the broader role of marketing in leveraging the cost part of the business? Matthew Amigh: Sarang, this is Matt. Yes, the way we're thinking about marketing as we go into 2026 is maintaining a relative marketing as a percentage of net sales as we go forward. But what we'll see is we'll shift -- we'll see more of a shift that you're seeing now, which is a shift away from nonworking into working. So we'll continue on with that shift, reducing contractors, reducing agency fees and things of that nature and putting it towards tactics and strategies that have more of an immediate impact on sales. So you'll see that. And one of the key things that the months will talk about is how we're improving our activations against some of our key partnerships that we have. So it's really driving more with what we already have and converting that to sales quicker. Chris Mondzelewski: Just building on what Matt said, we're going to continue to do what we're doing at a higher level as we build the business and make the business bigger. As we generate more margin dollars in the business, we want to be able to reinvest those dollars into the marketing that already works so well for us. We're very fortunate. We have an exceptionally strong brand team. We have an exceptionally strong brand. We focus very heavily on top line -- or I should say, top of funnel brand awareness, and it works. We have grown awareness every quarter over the last 3 years. Nearly half the country is aware of Black Rifle at this point, and we're going to continue to drive that number through very strong owned media executions. As Matt said, partnerships, we have strong partnerships with the UFC, with the Dallas Cowboys. We will have some additional major partnerships that we'll announce as we get into the year. And then the part that we actually got very good at this year that we're going to continue to expand on is that execution in store. So we'll drive that money into our retailer partners, and we'll ensure that we are available at that point of purchase on display at the right price points. So again, we feel confident that we've got the right level of marketing in play as we go into '26. Evan Hafer: And Sarang, just one more point on that is we have a maniacal focus on returns. So when it comes to the digital spending, we are looking at the right metrics to make sure that the activities are working out and paying out and breakeven or better. So we're focused on that. Operator: Our next question comes from the line of Joseph Altobello with Raymond James. Martin Mitela: This is Martin on for Joe. I want to quickly touch on the energy distribution. You've previously given a goal of an ACV about 70%, 80% by end of next year. Is that still something you're targeting? Chris Mondzelewski: So in the case of energy, I'll just double down on what I said before. We're going to expand off of the existing targeted plan that we have this year. We've not given guidance at this point on what we think '26 is going to look like as we get deeper into our '26 overall guidance, we can consider doing that. But yes, I mean, it's going to be -- again, we've had success in many of the markets that we've gone into. Others, we have learned some valuable lessons as is true of any new brand launch. And then as I said, most importantly, with the 2 national customers we were in, 1 C-store, 1 mass, we've actually had very good results. We've seen expansion of items on shelf. And so, we're going to build off of those learnings, and we're going to take it into an expanded geography. But again, I don't, at this point, want to give guidance on specifically what that looks like. Martin Mitela: No, I understand. That's helpful. Would you just mind reminding us how much of your green coffee needs are already locked in for 2026? Matthew Amigh: Yes. Right now, we have approximately 50% of our coverage locked in '26. Operator: Our next question comes from the line of Daniel Biolsi with Hedgeye. Daniel Biolsi: Are you seeing a different demographic with your energy drinks versus the RTDs? And then do you envision the distribution to be the same between the RTDs and energy drinks when they mature? Chris Mondzelewski: As far as the demographics, it's similar. There are some differences as we look at it. It does tend to skew younger on the energy drinks. Our coffee portfolio is actually quite broad. So when you look at the total coffee portfolio as a whole, we actually hit a very, very wide range of demographics with that portfolio. When you start to talk about the cold canned beverages, the RTD coffee and the energy, the demographics are quite similar. It does tend to be a younger customer that skews towards that behavior. As far as energy ultimate distribution, we'll see. Ultimately, they're very different categories. And so we're going to build those categories very differently. It's important to us that when we take on a market with energy, we can be concentrated in that market and that we can really go and invest the right way to win there. In the case of RTD coffee, we're already the #3 player in America, and we are the fastest growing of all of the major brands in America. So we're in a different position scale-wise. It allows us to play that differently from a national basis at this point with different forms of national marketing versus on energy in '26, you're going to see us marketing very heavily against that business, but it's going to be targeted within the geographies that we choose to go and compete with them. Daniel Biolsi: Okay. And if you can sort of bracket how much of your distribution gains for RTDs and energy is between the coolers versus the center of store. How would you think about it in '25 versus '26? Are you sort of pursuing the same sort of goal to be in the coolers or is there more of an opportunity to maybe the center store or at some point, the club channel? Chris Mondzelewski: Well, it's a great point you're making. I'm not going to give specific numbers on cooler versus center store. We do track that, right? Our sales team, we're very fortunate to have a lot of deep RTD experience in our sales team. And one of their favorite sayings is cold is sold. So when you can get canned beverages into cold distribution, you see your sales increase dramatically. So that's a big part of the game. We have a lot of tactics that we operate down in our sales organization to ensure that we're not just getting distribution, but that we're getting that cold distribution, and that's a constant negotiation between us and our retailers. Some retail partners are exclusively in cold distribution, that's particularly true of the C-stores. A lot of times in grocery, you may have dual distribution, you may have center store ambient as well as the cold distribution. It can be harder to get that cold distribution in a grocery store simply because it's more limited, the amount of space they have available. But that is absolutely right, what you're saying. As we drive into '26, we will have internal goals to increase those percentages, in some cases, pretty dramatically, right, in areas where we've already had success with the brand, it allows us to go in and say, let's increase that percentage of cold distribution. So what you're describing is a very fundamental part of how we're going to build and drive that business. Matthew Amigh: And also keep in mind, like the growth in the business is going to be coming from our coffee business, our packaged coffee business. And when you look at our distribution we have right now, it's roughly 50%. So we have a lot of headroom in terms of growing that business out, great margins on that business. The business is not just growing in terms of distribution, but average number of items is increasing, velocities are increasing, and it's a real powerhouse for us. So that's a business that we'll be very, very much focused on as we exit the year and move into '26. Operator: And there are no further questions at this time. Therefore, I'd like to turn the floor back over to management for any additional or closing comments. Chris Mondzelewski: Yes. No, thanks very much. To close, I'll just say we're delivering disciplined profitable growth. We have a clear path forward. Our teams are executing well. We feel we have incredible brand momentum. We're going to continue to stay very focused on our customers, and we're going to balance that with our mission, as I talked about in the opening remarks. And we believe that, that combination will continue to drive stronger and stronger results for us. So we're grateful for your continued support, and we look forward to updating you over the next couple of quarters here as we continue to build on this momentum. Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Hello, everyone. Thank you for joining us today for the Yum! Brands 2025 Third Quarter Earnings Call. My name is Sammy, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to your host, Matt Morris, Head of Investor Relations, to begin. Please go ahead, Matt. Matthew Morris: Good morning, everyone, and thank you for joining us today. On our call are Chris Turner, our CEO; Ranjith Roy, our CFO; and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from Chris and Roy, we'll open the call to questions. Please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors discussed in our SEC filings. Please refer to today's release and filings with the SEC to find disclosures, definitions and reconciliations of non-GAAP financial measures. Please note that during today's call, system sales and operating profit growth will exclude the impact of foreign currency. For more information on our reporting calendar for each market, please visit the Financial Reports section of the IR website. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. We would like to make you aware that our fourth quarter earnings will be released on February 4 with the conference call on the same day. Finally, I want to express my appreciation to those investors who have willingly shared their perspectives on our strategy and communication. Your thoughts are important to us. I will make myself available to listen to your views as well as share those with our management teams. Now I'll turn the call over to our CEO, Chris Turner. Christopher Turner: Thank you, Matt, and good morning, everyone. With this being our first call since David's retirement, I want to recognize his exceptional leadership over the past 5 years as CEO and his many strategic contributions throughout his remarkable 36-year career at Yum!. David will continue to serve as a trusted adviser through next year. On behalf of our team members, employees and franchise partners, I want to sincerely thank David for the lasting impact and strong foundation he's built as we carry Yum! into the future. As I take on the role of CEO, I've spent the last few months meeting many of Yum! stakeholders, including many of our leaders, Board members and largest franchise partners to better understand where Yum! is leading the industry and where Yum! has even greater potential. I've spent time in our restaurants, serving our consumers and listening to team members and general managers. Finally, I've met with many of our top shareholders to hear how Yum! can unlock even more value. Speaking with our incredible team has reinforced how important a strong culture and performance mindset are to driving robust results. Yum! invests meaningfully in our talent and gives employees opportunities to work across functions and brands providing Yum! with the most experienced and tested leaders in the industry. Combining the best leaders with the world's most loved, trusted and connected restaurant brands is a winning formula. It's no surprise that few companies are executing at our level with Taco Bell delivering industry-leading 7% same-store sales growth and KFC on track to add nearly 3,000 new restaurants on a gross basis around the world, which would set a new record for annual gross development for the brand. It is also clear there is a consistent theme that success in our industry depends on anticipating and adapting to changing consumer needs. That's a tremendous opportunity for a company like Yum! that already benefits from scale, talent and the ability to innovate. With this in mind, I see 3 areas where I'll focus additional energy to raise the bar on our growth. First, we are a consumer-first business, and we must stay as relevant to the next generation of consumers as we are to our core. Second, franchisees are the lifeblood of our system, and we can do more to leverage our global scale to strengthen their store-level economics. Third, Yum! has pursued a differentiated technology strategy that gives us unmatched operational agility and control. I want to extend those advantages across more restaurants to benefit consumers, franchise partners and team members alike. To this end, I recently announced a series of leadership changes. These included expanding the role of Taco Bell's CEO, Sean Tresvant, to include that of Yum! Chief Consumer Officer, with responsibilities that will include oversight of Collider, Yum!'s in-house consumer insights agency. Jim Dausch, Global Chief Digital and Technology Officer of Pizza Hut, was promoted to Yum! Brands' Chief Digital and Technology Officer and President of Byte by Yum!. Ranjith Roy, who goes by Roy, Yum!'s Chief Strategy Officer and Treasurer, was promoted to Chief Financial Officer. Roy had previously spent more than 15 years with Goldman Sachs, leading investment banking relationships for restaurants, food and tech businesses. We also intend to add a Chief Scale Officer to Yum!'s leadership team, who will focus on leveraging Yum!'s scale to maximize franchise returns and drive stronger restaurant profitability. We also announced this morning that we have commenced a process to explore strategic options for the Pizza Hut brand. Our objective is to maximize value for Yum! and position Pizza Hut and its franchise partners for greater success. Pizza Hut holds key structural advantages, strong brand equity, experienced franchise partners and meaningful scale, which give it a unique opportunity to reclaim the leading position in the highly fragmented pizza market. We believe a different approach, including but not limited to, a sale of the business would allow Pizza Hut to realize its full potential. More broadly, I'm encouraging the brand teams to play more offense through bold actions, particularly when we see opportunities to accelerate development. In that spirit, we announced our plans to complete the acquisition of 128 Taco Bell restaurants located across the Southeast U.S. in the fourth quarter. Buyout opportunities of this scale are unusual to come by in the Taco Bell system. This acquisition provides our team with an opportunity to improve and accelerate Taco Bell profitability, expand strategic leadership within the Taco Bell system and unlock significant unit development in the region. Of course, this acquisition provides immediate and significant EBITDA growth at an attractive multiple in the context of the Taco Bell system. I want to reiterate that there is no change in strategy regarding our asset-light model. Now let me turn to our third quarter results. Yum! delivered another strong quarter with system sales up 5% and core operating profit up 7%. Between KFC and Taco Bell, we've delivered 5% unit growth, 7% system sales growth and 11% segment operating income growth. At KFC, which represents 53% of our divisional operating profit, we delivered 14% core operating profit growth, driven by 6% unit growth and 3% same-store sales growth. Several KFC international markets are delivering exceptional results, including the U.K. market with same-store sales up 9% on 6% transaction growth and South Africa delivering 7% same-store sales growth on record youth engagement. Several markets like South Korea and Brazil posted double-digit transaction growth within the quarter. Turning to the U.S., which represents 12% of our KFC Global system sales, we have taken bold steps over the last 18 months to reengineer our strategy, bolster our talent and pilot new approaches. The new President of KFC U.S., Catherine Tan-Gillespie, has been driving KFC's comeback plan with new marketing tactics and products focused on increasing consumer relevance, which have led to a 2% growth in same-store sales this quarter. There is still a long journey ahead, but we're pleased with Q3's momentum. As a separate plank in the strategy, we're excited about the continued progress to refine and thoughtfully expand the Saucy pilot in the Southeast region. Let me briefly touch on KFC's unit development, which remained broad-based and energized by strong franchise engagement. I recently made a trip to Italy to visit our new franchisee, where I saw firsthand how critical having the right 3C partner is in driving powerful change. Since joining our system in 2023, our franchisee, COB, has doubled the number of stores and improved AUVs to $2 million. I was pleased to be there when the team unveiled its Italian flagship restaurant featuring 2 floors in Rome with prime real estate between the Spanish steps and the Trevi Fountain. Similarly, our new franchise partner in South Korea is delivering unbelievable results. That team reported their third consecutive quarter of double-digit sales and traffic growth and is set to have 5x the net new unit growth they had in 2024. Our strongest partners are expanding into new and adjacent markets, as is the case in Brazil, one of KFC's largest underpenetrated growth markets. Our highly capable 850-unit Latin American partner, Juan Carlos Serrano, is building commissaries and piloting more efficient asset formats, laying the foundation for sustainable, scaled growth ahead. Finally, I recently returned from China, where our largest partner, Yum! China, runs the most efficient and advanced restaurant operation in the world, leading to significant market share wins over the competition. Overall, KFC's development pipeline remains robust. White space remains abundant and our well-capitalized, capable and committed franchise partners remain growth hungry. At Taco Bell, which represents 36% of our divisional operating profit, same-store sales grew 7%, reflecting continued progress on the journey laid out at the Taco Bell Consumer Day to drive $3 million U.S. average unit volumes by 2030. Innovation, distinctive value offerings and digital engagement drove this remarkable performance. In the U.S., Taco Bell introduced innovation-led buzz like the Tony Hawk and Bad Birdie collaborations, compelling value like the $3 Grilled Steak Burrito and expanded its beverage platform with the launch of Refrescas and Baja Blast Midnight. Digital mix hit another record and digital sales grew 28% year-over-year. Next year, the U.S. team will add more weeks of crispy chicken, fries and beverages to expand everyday occasions, balanced with a refreshed cravings value menu and elevated guest experience. Turning to Taco Bell International. Same-store sales growth accelerated again with momentum building as the team executes against its magic formula and strategic priorities laid out at the Taco Bell Consumer Day in March. This quarter, the team expanded to 2 new markets, Greece and Ireland. During my trip to Europe, I stopped to visit our largest international Taco Bell franchise partner, Ignacio Mora-Figueroa and his amazing Taco Bell Spain team. I saw firsthand how the team keeps building relevance and scale. Shifting now to our goal of building the world's most trusted brands, stepping into the role of CEO has been both humbling and energizing. I couldn't be more excited to start this next chapter of Yum!'s growth with a renewed focus on what makes us extraordinary, led by our people and our culture. Our commitment to trust and connection extends beyond our restaurants. It's reflected in how we show up in our communities. In September, we celebrated Community Impact Month. Employees at all 3 of our U.S. campuses volunteered to help more than 15,000 people in communities across the United States. Our teams fought childhood hunger, packing more than 6,000 weekend meals for kids who need the most, donated blood with the American Red Cross, prepared food with local food banks and packed hygiene and laundry kits for those in need. Hundreds of volunteers touch thousands of lives. That's the power of Yum!, serving up good everywhere there's a KFC, Pizza Hut, Taco Bell and a Habit Burger & Grill. One month in as CEO, and I'm inspired by the commitment to excellence across our system from our franchise partners to our restaurant teams and leaders. Together, we are building on Yum!'s solid foundation to continue delivering strong, sustainable growth. And going forward, we will be laser-focused on accelerating growth around the world, backed by our 2 biggest brands, KFC and Taco Bell. With the dedication of our people, power of our brands and a clear strategic vision, I am confident that we are entering an exciting new chapter of growth and long-term value creation for Yum! and our stakeholders around the world. With that, Roy, over to you. Ranjith Roy: Thanks, Chris, and good morning, everyone. I'm excited to share our results today and to connect with many of you in the months ahead. It is an honor to transition to the CFO role, having served as Yum!'s Chief Strategy Officer and Treasurer. My connection with Yum! goes back more than 15 years. I partnered with Chris during my time at Goldman Sachs, where I was Yum!'s strategic adviser. And prior to Chris, I partnered with David Gibbs, Greg Creed and David Novak during their tenures, giving me a deep appreciation for Yum!'s enduring brands, franchise partners and talent. Prior to joining Yum!, during my time as CFO at Goldbelly, I guided the company from being a tech start-up to being a capital-efficient high-growth retailer, reinforcing my belief in the power of evolution. It's an energizing time to step into this role as Yum! strengthens its position as the global franchisor of choice. The QSR industry is evolving rapidly. Scale and technology are defining success around the world, and these shifts play directly into Yum!'s strengths. I look forward to continue working with Chris to advance our strategic priorities and drive sustainable growth for our franchisees and shareholders. I'll start with third quarter results before discussing Yum!'s balance sheet and liquidity position, the Taco Bell store acquisition and guidance for the year. During the third quarter, we grew system sales 5% with 3% unit growth and 3% same-store sales growth. Digital sales are growing quickly across our markets with Yum! reaching $10 billion in digital sales and digital mix of approximately 60%. On restaurant level margins, Taco Bell U.S. delivered 23.9% margins, 50 basis points higher year-over-year despite a 1 percentage point headwind from double-digit beef inflation. Taco Bell's restaurant margins benefited from strong top line growth fueled by, among many factors, the expansion of Taco Bell's category entry points like Crispy Chicken and Refrescas. Beef inflation will remain a headwind through year-end, though we take some comfort in beef prices declining 10% since exiting the third quarter. For KFC, the team delivered 13.7% restaurant-level margins, 120 basis points higher year-over-year, driven by significant improvements in both KFC U.K. and KFC U.S. margins. Moving on to expenses. Ex special G&A was $268 million, up 7% year-over-year as we lapped lower incentive compensation accruals in the third quarter of last year. Reported G&A of $282 million included $14 million of special expenses. And finally, third quarter core operating profit grew 7%, leading to ex special EPS of $1.58, up 15% year-over-year. Moving to development. we opened 1,131 gross new units globally, a Q3 record with KFC opening 760 units or a store every 3 hours. KFC's momentum remained broad-based and energized by strong franchise engagement. China, India, Thailand, South Korea and Mexico led the way, each demonstrating the strength of our playbook and the scalability of our brand. Overall, KFC's development pipeline remains robust. White space remains abundant and our well-capitalized, capable and committed franchise partners remain growth hungry. At Taco Bell, development accelerated this quarter with 74 gross unit openings, well above Q3 levels of last year. Taco Bell International continued to build momentum, adding 27 gross new units and successfully launching 2 new markets, Greece and Ireland. On the back of accelerating sales, we remain on track to deliver 100 international net new units this year, reflecting energized franchise partners, compelling brand marketing and improving unit level economics around the world. Early development plans for next year offer promising signs of further unit growth. At Pizza Hut, we built 289 gross units this quarter. We delivered gross builds across 31 countries with strength in China, the U.S. and India. We've been pleased with Pizza Hut's gross unit openings as the brand is a leader in new builds within the pizza category globally in all but 1 quarter over the last 4 years. However, gross builds have been partially offset by elevated closures through Q3, largely isolated to a reduction in footprint in a small number of markets, including Turkey. These closures were largely tied to specific franchisee matters impacting operational execution. Turning to technology. As we continue to work on making our restaurants more connected to drive growth and operational excellence across the Yum! system, Jim Dausch, our new Chief Digital and Technology Officer, will help accelerate the next phase of our transformation, but our focus remains the same, building the industry's leading restaurant technology platform that enhances guest experience, simplifies operations and strengthens franchisee economics built around easy experiences, easy operations and easy insights. I'll provide a brief update on the progress across these 3 pillars. Within easy experiences, we're creating more frictionless, engaging consumer journeys across our brands. At KFC, global digital sales mix reached 63%, supported by kiosk adoption and aggregator partnerships. Byte Commerce, our scalable and global web and mobile app ordering platform, continued to unlock the creativity of our digital marketing teams by enabling viral promotions or daily drops that drive high transaction velocity, such as Pizza Hut's $2 Personal Pan, Tuesday offer this quarter. Byte Commerce expanded to Pizza Hut Canada, Kuwait and France this quarter, building on earlier launches in Pizza Hut U.K., Mexico and Peru. Finally, Byte Connect, a product that streamlines order and menu integration with third-party delivery partners has expanded to KFC U.S., Taco Bell U.S. will add this service next year. Under easy operations, we are simplifying restaurant operations and giving teams better tools to deliver fast, accurate and friendly service. Byte Coach, which delivers AI recommendations to our store managers, was deployed to an additional 4,000 KFC restaurants internationally this quarter, bringing the total to more than 28,000 restaurants across the Yum! system. Beginning next year, we'll add further AI capabilities to Byte Coach to provide restaurant general managers individualized guidance to help improve store-level performance based on inputs from a combination of operations, consumer feedback and store audit data. Within easy insights, our data and analytics capabilities are providing better visibility and faster, more actionable insights across brands. In addition to building more AI capabilities into the Byte ecosystem for our franchisees, consumers and restaurant general managers, we are also excited about using AI at the enterprise level to build Byte in a more efficient manner. Currently, 1/3 of our developers are regularly using AI developer tools and realizing significant productivity gains. By early 2026, substantially all of our Byte software developers will be using AI tools to write better, safer and more efficient code for the Byte platform. Next, I'll provide an update on our balance sheet and liquidity position. Our capital priorities remain unchanged: maximize shareholder value through strategic investments in our business, maintain a strong and flexible balance sheet, offer a competitive dividend and return excess cash to shareholders. Net capital expenditures for the quarter totaled $73 million, reflecting $21 million in refranchising proceeds and $94 million in gross capital expenditures. We expect our net leverage ratio to end the year at approximately 4x, consistent with our commitment to hold leverage at approximately 4x. As announced in September, we completed successfully a $1.5 billion issuance of Taco Bell senior secured notes with a weighted average coupon of just under 5%. Proceeds were used to repay 2026 debt maturities and to prefund our Taco Bell acquisition. During the quarter, we repurchased approximately 244,000 shares for a total of $36 million, bringing our year-to-date repurchases to $372 million. As Chris shared, similar to the successful KFC U.K. acquisition last year, we saw an exciting opportunity to invest in the business and acquire 128 Taco Bell U.S. stores in the fourth quarter. The total cash outlay is expected to be approximately $670 million, largely financed with cash on hand. In 2026, we expect the stores we're acquiring to contribute approximately $70 million in incremental EBITDA and add 1 point to Yum!'s operating profit growth after the impact of depreciation and amortization, including reacquired franchise rights. Due to timing and modest transition costs, we don't expect this deal to contribute to core operating profit in 2025. Additionally, the Taco Bell team can step up U.S. equity development in this market beginning in 2027. Over the long term, we anticipate profit growth for this estate to exceed Yum!'s long-term growth algorithm. As Chris mentioned, while retaining our asset-light strategy, we are investing where we see outsized strategic benefits and financial returns. Now let me share our latest outlook for the balance of the year. As you heard from Chris, both KFC and Taco Bell are taking share from our competition. We expect KFC to achieve record gross unit openings on a full year basis and Taco Bell to deliver strong international development. At Taco Bell U.S., despite the impact of beef inflation, we expect our full year restaurant level margins to fall within our guidance at 24%, with global reported margins landing slightly below the U.S. level. We expect Q4 ex special G&A to grow by a mid-single-digit percentage rate year-over-year, finishing the year in line with our full year guidance. To summarize, KFC and Taco Bell, which make up roughly 90% of our divisional operating profit, continue to perform exceptionally well with sales momentum that has continued into Q4. Together, we expect these brands to be on track or ahead of our original full year plan for unit growth, sales growth and core operating profit growth. This performance is further backed by a strong execution of Byte and disciplined G&A management across the enterprise. Below the line, we expect full year interest expense to land in the range of $505 million to $515 million, incorporating the impact of our recent debt issuance. Lastly, at current rates, we expect FX to represent approximately a $15 million tailwind to reported operating profit in Q4. Finally, turning to our Pizza Hut division. We remain focused on strengthening business performance. That said, as we prepare the business for a potential transaction, our Q4 results may see some impact from actions involving isolated franchisee situations. Taking this and Pizza Hut's year-to-date performance into account, full year 2025 Yum! performance may land slightly below our algorithm. We will record expenses tied to the strategic options review as a special item. Since this is an active process, we will not be providing further comments on the status of our review. In closing, we remain focused on continuing to deliver relevant value, distinctive innovation and rapid digital transformation, the combination that keeps us resilient regardless of macro conditions. We are confident in the strength of our strategies, the agility of our franchisees and the power of our business model to drive sustainable growth over the long term. With that, operator, we are ready to take questions. Operator: [Operator Instructions] Our first question comes from David Palmer from Evercore ISI. David Palmer: Great. Congrats to everybody on their promotions and appointments. It's cool to see Sean getting more responsibility in a way you're bringing back the band together with Sean and Scott, probably touching base more on the global KFC brand. I wonder how you're thinking about the opportunities and must get rights for KFC now that perhaps Pizza Hut may not, after this review, be the focus area or the problem area that it was for the company. KFC might be a focus area for Sean by default. And so I just wonder, maybe it's worth giving a little bit of a review of what he will be and Scott will be thinking about for that brand. The U.S. chicken market is competitive, but KFC's begin -- it looks like a bit of a turnaround. What can solidify that turnaround? And it looks like the U.K. is doing great. Canada slowed a bit. Any sort of review of KFC would be helpful. Christopher Turner: Yes. Thanks, David. Obviously, KFC, our largest global brand and an incredible powerhouse, in particular, outside of the U.S., where we've seen tremendous growth over many years, modern, vibrant, relevant QSR brand in so many markets, opening a new restaurant every 3 hours. That's the surest sign of health in a restaurant brand. And you talk about the leaders there. Scott was the President of Taco Bell U.S. working closely with Sean, right before our Taco Bell Investor Day earlier this year, Sean -- Scott made the move over to take the CEO position in KFC Global. So you can be assured that he is bringing many of the big ideas around brand relevance from Taco Bell, digital growth and relevance to consumers, food innovation. He is bringing many of those ideas over. Of course, that Taco Bell Investor Day highlighted how Taco Bell was focused on driving AUV growth. They laid out a plan from $2.2 million to $3 million in 2030, and Scott was part and parcel of building that plan. So you can imagine he's going to be thinking the same way in KFC globally, sustaining the unit development momentum and continually ensuring our brand is relevant to consumers. You saw the numbers in KFC U.K. this quarter, plus 9 same-store sales, really incredible results there. Turning to the U.S. We did a lot of work over the last couple of years. The KFC brand, we want to be on a better trajectory in the U.S. We really assess what it would take. We did a lot of testing and investigation. We think it starts with brand relevance. And that's why we put Catherine Tan, one of our biggest marketing thinkers, previously the Global Chief Marketing Officer for KFC into that role. Early days on the turnaround, but we're pleased with the green shoots. You saw them take a different approach to social marketing with the launch of Spicy Wings and Wedges. We got great engagement, brought a lot of new consumers who hadn't engaged with the brand in more than a year to KFC. So a long journey ahead, but we're pleased with the progress in KFC U.S. Operator: Our next question comes from Dennis Geiger from UBS. Dennis Geiger: Great. Congrats, Roy and to the others on well-deserved promotions. I wanted to ask a bit more about the sizable outperformance at Taco Bell, in particular, relative to the industry. And perhaps maybe sort of any early look into how you're thinking about how that momentum rolls into next year, given, I think, Chris, some of the comments you made about what sounds like more weeks of crispy chicken, fries, beverages. It seems like some news on the Cravings menu, maybe the guest experience. Any additional insights as we kind of look to next year at that momentum continuing? Christopher Turner: Yes. Look, the Taco Bell business continues to take share in the U.S. A lot has been written about the consumer. We're not seeing consumer pullback in the Taco Bell business. We do think the consumer in the U.S. is cautious, but incredibly resilient. And the consumer is telling us that in Taco Bell, they are looking for 3 things: First, craveable food; second, a convenient and easy experience; third, unbeatable value. And Taco Bell provides the combination of those 3 in a way that no other brand can. So if you look across Q3, you saw Crispy Chicken, you saw Nacho Fries, you saw beverages with Baja Blast Midnight. So you add those to the tremendous core that we have, the craveability is clear. Convenience, fastest drive-thru experience in QSR. Voice AI stores were up 14% from the previous quarter, continue to drive the digital journey at Taco Bell, which supports a convenient experience. And then, of course, Taco Bell has always provided the best value in QSR. Go to the Cravings value menu, you can find plenty of items below $2, $3, tremendous items or go to the Luxe Cravings Boxes, $9, it's the only value meal in QSR where you'll find strong innovation. So it's that combination, coupled with the Taco Bell buzzy brand that is resonating with consumers and delivering what they need. And as a result, we saw growth across all income bands, and we saw more younger consumers and more families coming into the brand during Q3. Looking forward to Q4 and beyond, it is really that broad-based set of strengths, all of those drivers and those factors that give us confidence as we look to 2026 for the brand. Again, we are on track or ahead of our plan that Sean laid out to get to $3 million AUVs by 2030, and you'll continue to see those layers come to life in 2026. Operator: Our next question comes from Danilo Gargiulo from Bernstein. Danilo Gargiulo: Chris, thank you so much for supporting the Italian economy. I wanted to ask you a question on your strategic priority. I mean you mentioned strengthening the franchisee store level economics. And in a moment, we were seeing the deterioration of 4-wall EBITDA in the restaurant space and potentially even more labor headwinds coming in with the tighter labor migration policies. I mean, it could be quite meaningful to see stabilization and improvement into the 4-wall economics for your own franchisees. Now usually, the best results are coming when incentives are aligned and responsibilities are shared. So I was wondering if you can share, first of all, what goals you have in mind in terms of like the hurdle EBITDA growth for your own franchisees, the time line for that and how you're planning to incentivize your teams along that? And then finally, what kind of levers do you see to strengthen the franchisee P&L? Christopher Turner: Yes. Thanks, Danilo. The lifeblood of our system and our unit development growth is franchisees and strong unit economics. We have a large number of markets where we have incredible paybacks. You'll hear our franchisees talk about 2- to 3-year paybacks in our biggest development markets. So we want to sustain the incredible returns that we see in those markets. But we've got other markets where there is white space, opportunity for unit growth that we can unlock by getting stronger unit economics. And we think the keys to doing that are leveraging Yum!'s global scale. Now look, we do a good job leveraging our scale in many places today. Our RSCS partners in the U.S. leverage our purchasing scale across all 4 of our brands in the U.S. But globally, we can do more to leverage our supply chain scale. That's why you see our Yum! global supply chain team coming together using that scale to help drop dollars to the bottom line for our franchise partners. Our Byte acceleration can be a part of this. We know we've got to get Byte into more international markets faster, that helps to drive both top line and bottom line growth for franchise partners through the productivity that Byte enables. And so those would be the kind of levers. And this is also in part why we announced the creation of the Chief Scale Officer role to give us a focused leader who is helping to make it easier for our franchisees to plug into that scale around the globe. So that's our focus, and the outcome should be strengthening or accelerating unit growth over the long term by unlocking those white space opportunities. Operator: Our next question comes from David Tarantino from Baird. David Tarantino: Chris, my question is about your strategic outlook. And I was curious to get your thoughts on how you envision the growth profile for Yum! if you were to sell the Pizza Hut business. Do you think this leads to a faster ongoing growth profile for the company? I know we can do the math on that looking backward, but just wanted to get your thoughts on how you think about it looking forward. And if you could also, as part of the answer, comment on whether you would be interested in making any other portfolio moves longer term, such as maybe adding another growth asset to the portfolio? Christopher Turner: Yes. Thanks, David. Look, Yum! is going to remain laser-focused on growth in all of our markets around the globe. Our 2 biggest brands, KFC and Taco Bell, nearly 90% of our global divisional operating profit. They are the ones that drive the bulk of our growth, and they will continue on the trajectory that they're on now. KFC will remain a strong unit developer. We think all of the scale initiatives that we just talked about will help us to unlock additional growth there. And then, of course, we talked earlier about Scott and his focus on driving AUVs and same-store sales growth using many of the levers that were employed at Taco Bell day in and day out in the U.S. Taco Bell U.S., we just talked about the drivers of its strength in Q3 and beyond. Taco Bell International, plus 6% same-store sales growth in Q3, you dig into some of those markets, we're seeing tremendous same-store sales strength in a number of Taco Bell international markets. And of course, I was on the ground in Spain just a few weeks ago, our largest Taco Bell international market, where we see the continued evolution and building scale in that brand outside of the U.S. So I think all of those things lead to that journey toward accelerating Taco Bell international unit growth. So those are all the factors underpinned by Byte that should allow us to continue to sustain or accelerate growth in those 2 big brands. From a portfolio standpoint, it's our job to constantly think about the portfolio. Obviously, we announced the strategic review today. No other changes at this time. We're going to be focused on completing that strategic review. Operator: Our next question comes from Andrew Charles from TD Cowen. Andrew Charles: Taco Bell obviously continues to be stellar performance this quarter. Just love an update on Live Más Café now you've integrated this into one of your stores. And in particular, what needs to happen for that to be rolled out more broadly? Christopher Turner: Yes. We're excited about the bold bets that we made across brands last year. A couple of those focused on the growing beverage space. Quench across 3 markets in KFC. We'll continue to add new markets there. But on Live Más Café, we think there's a big opportunity for Taco Bell to both strengthen its attachment on beverages, but through Live Más Café, add a new consumer use case, which is the destination beverage visit. we started with Live Más Café in San Diego. As of now, we have 13 that are open. We are headed toward about 30. That's our pilot group. We are seeing good consumer response in these stores. We're very pleased with how Live Más Café is performing. Of course, we want to see it at scale with those 30 units. But assuming we get the kind of results that we expect to see in that pilot, you could expect us to lean into Live Más Café growth around the system. That's one of the drivers of the long-term growth plan for Taco Bell. We are already getting benefit for the entire system from Live Más Café. So the Refrescas that we talked about in Q3 across the system, that was a lift and shift from the piloting that we did in the first Live Más Café. So we will also be working to bring benefit from the Live Más Café effort to the entire system even before the rollout of the cafe. Operator: Our next question comes from Christine Cho from Goldman Sachs. Hyun Jin Cho: Chris and Roy, congrats on your new roles. You did reiterate your long-term goals, but is 5% kind of still the right anchor as you think about the underlying unit growth ahead? What are some of the major factors that you're watching for that could impact the pace of expansion going forward? And where do you see kind of the most notable white space opportunities globally, both in a market and a brand perspective? Christopher Turner: Yes. From a development perspective, our development trajectory remains strong. So far this year, we've had 95 countries with development versus 90 at this point last year. KFC gross is ahead of where it was at Q3 last year. So gross development, I think, is the top sign of health in a franchise system, and we said we're on track for a record year this year in KFC gross development. Taco Bell net new units are up almost 30% versus last year. So it reflects the trajectory that we have in Taco Bell, both in the U.S. and internationally. Of course, we want to sustain and accelerate on both fronts. The lifeblood of this is strong unit economics. And as we shared earlier, we think through stronger unit economics in markets with white space, we can sustain and/or accelerate that path. We shared a couple of examples of where unlocks have occurred in KFC. We talked about Italy. This demonstrates when you get focused on having the right partner and focused on AUVs and unit economics, you can get an unlock. In that market, we got a couple of competitors that have significantly more locations than we do. But in the 2 years since we changed the partner, we've doubled the unit growth, on a great trajectory. We're now opening the flagship location, which will further sustain. Korea is another example. We shared the example in South Korea, where a change in partner has dramatically changed the pace of unit growth. When you step back, we shared, for example, at KFC, we think there can be at least 75,000 KFCs around the globe. Honestly, there's white space opportunity in just about every market for KFC. Ranjith Roy: I'll also add, Christine, on the -- we make a lot -- we talk a lot about KFC development. But on the Taco Bell side as well, if you look at what happened in the most recent quarter, acceleration in same-store sales growth globally which gives us a lot of faith in the pipeline that we see for Taco Bell International in 2026 and beyond. And you look at the acquisition we're making in the Southeast United States because we actually see opportunity for white space for Taco Bell in the U.S., and this is a step that we're making in that direction. Operator: Our next question comes from Brian Bittner from Oppenheimer & Co. Brian Bittner: Chris, I'd just like to go back to the announcement of Yum! initiating that the review of strategic options for Pizza Hut. I know you can't obviously speculate on the potential outcomes. But can you maybe walk us through the catalysts that culminated in the company making this announcement today? Is it as simple as you stepping into the CEO role and this being a part of your vision to unlock value? Or was this something in the works for a while? Just additional thoughts on the steps that got us to today's announcement on the formal review would be helpful. Christopher Turner: Yes, Brett. We are always evaluating what is best for each part of our business. Let me start by reiterating a few things about Pizza Hut. It is an iconic global brand that has incredible strength. It's got the best tasting pizza in QSR. It's got a global footprint, well north of 100 countries. It has an amazing set of franchise partners in markets around the globe. It's got meaningful scale. And that's translating to strong performance in a number of our Pizza Hut markets. In fact, if you look at gross development, if you go back over the last 4 years, Pizza Hut has had the highest gross unit development in the pizza QSR space in every quarter for the last 4 years, except for one. There's a lot of amazing strengths that Pizza Hut has. That said, we're always focused on what is best for the brand and what is best for our franchise partners. And in that spirit, we do think the business can be positioned for even greater success in the future. And in some markets, there may be a multiyear effort that is required to reposition it as the leading pizza brand in those markets. And it's possible that those efforts may best be done under a different structure, potentially under outside ownership. And so that's what we'll be testing as we go through the review of strategic options. And that's why we're initiating that now. It's obviously been a very thoughtful process that has led us to this announcement. We can't speculate on the exact timing of how this plays out. We'll evaluate all of the options and all of the paths, and we will share more as we have something definitive to share. I know there's going to be lots of questions about that process. But at this time, we just can't provide further comments. Operator: Our next question comes from John Ivankoe from JPMorgan. John Ivankoe: The purpose of the large Taco Bell franchisee in the Southeast and your specific mention of them being mature and having growth opportunity in the market, got me thinking about some of the large refranchising that happened 20, 25, even 30 years ago when you guys came out of PepsiCo way back when. And just a question of -- it's one thing to kind of have the best growing current franchisees over 20 to 30 years, but maybe thinking about some generational steps that could potentially happen for the next 5, 10, 20 years in terms of really restarting growth. We're driving growth in a number of your different businesses, not just around the U.S., but also around the world. So the question really is what kind of opportunity that we may have, maybe taking some of these very successful legacy businesses that have just been in business for so long, 20, 30 years, maybe finding some other partners that are committed not just to running a great business, but growing a great business from a unit perspective. Do we have opportunity to optimize? Christopher Turner: Yes. John, let me start. We remain an asset-light business that grows through franchise partners. Our franchisees are the lifeblood. They do an incredible job operating around the globe, 1,500 franchisees, the vast majority who are well capitalized, capable and committed to our brands. Let me just start with that context. What you've seen here is an opportunity in a geography where we thought -- our data would say there's an opportunity for a lot more Taco Bell stores. And so we thought this was an opportunity to make this acquisition. We can help to unlock unit development in the region. Of course, it comes with the immediate EBITDA lift as we look to 2026 and immediate operating profit growth as we go to 2026, and it solidifies our operational capability, which already is very strong in Taco Bell U.S. And of course, that's an important part of how the overall business operates. We do -- I'll just give one example, innovation testing in our equity estate is really, really strong and a really important part of our food innovation process at Taco Bell. So I think this is a unique opportunity. There are other instances where we are initiating some bold actions through our equity stores. In Saucy, we took on the first store, we'll be moving to a little over 10 units in Florida. We're making those investments because we think that's the right thing to do to understand and pilot that concept. And then, of course, as part of the Live Más Café journey, we're -- we've invested in a few of the Live Más Café expansion stores. So it's a very strategic use of that capability. But at the broadest level, we remain asset-light, and we will grow through our franchise partner. Matthew Morris: Operator, we have time for one more question. Operator: Our last question today will come from Jeffrey Bernstein from Barclays. Jeffrey Bernstein: Great. Roy, I just had a question for you. In a franchise model like this, a lot of the focus comes down to the G&A spend. I'm just wondering how you think about that line item. It's currently, I think, 1.7% of system sales, I think you're among the leaders in terms of managing it at a very low level. But I'm just wondering your thoughts on the biggest opportunity to either double down on certain investments, maybe spend a little bit more versus perhaps curtailing elsewhere. Just wondering how you think about that G&A line item. And I ask that just obviously, you're new to the role, but as we think about 2026, is there any reason why the long-term core operating profit growth target of 8% would not be reasonable as we think about it today? So just love to get your broader thoughts. Ranjith Roy: Jeff, that's a great question. 4 weeks into the role, I will admit that I don't know exactly where all the G&A is buried, but I will tell you my observations on how we've managed G&A in the past and the limited amount of change that we see from our strategy going forward on G&A. First of all, I'd observe our G&A growth overall in the past 2 years has been minimal and very disciplined. Second thing I'd observe is we're on track for mid-single-digit G&A growth this year, including incentive comp resets. So we've been very disciplined this year on G&A. Third, I think we'll continue to be disciplined as we navigate through the strategic review process. And as that process plays out, we'll come back with more guidance. But at this point, you should expect no change to our discipline on G&A, which we've been managing while making investments into the business in terms of growth. Christopher Turner: Great. Okay. Well, I think we're at the end of the call. So thanks, everyone, for joining. I'll just close with a couple of thoughts. I want to reinforce Yum! remains laser-focused on growth powered by our iconic global brand. Yum! provides our investors with exposure to KFC, the leading growth brand across international markets, which delivered 14% divisional operating profit growth this quarter, combined with Taco Bell, one of the most exceptional brands in the U.S., which is providing durable, defensive long-term growth via sustainable market share gains. We will continuously raise the bar. We want to keep our brands relevant. We want to elevate franchisee unit economics to unlock even more development, and we'll continue to deploy Byte. And all of that is underpinned by the best talent, the best franchise partners in the industry. In short, we're tremendously excited about our future. Thanks, everyone. Operator: This concludes today's call. We thank everyone for joining. You may now disconnect your lines.